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Foreign Direct Investment, Labour Market Regulation and Self-Interested Governments

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  • Palokangas, Tapio K.

    ()
    (University of Helsinki)

Abstract

This document examines foreign direct investment (FDI) when multinationals and labour unions bargain over labour contracts and lobby the self-interested government for taxation and labour market regulation. We demonstrate that right-to-manage bargaining predicts higher returns for FDI than does non-unionization or efficient bargaining. This advantage is further magnified in the presence of credible wage contracts. When the labour market is nonunionized, or there is a bargain over employment, the ruling elite reaps the surplus of FDI through taxation or regulation. In the absence of credible contracts, unions have incentives to claim a bigger share of the revenue of FDI.

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Bibliographic Info

Paper provided by Institute for the Study of Labor (IZA) in its series IZA Discussion Papers with number 793.

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Length: 27 pages
Date of creation: Jun 2003
Date of revision:
Handle: RePEc:iza:izadps:dp793

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Keywords: lobbying; labour market regulation; foreign direct investment;

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  1. Robin Naylor & Michele Santoni, 2003. "Foreign direct investment and wage bargaining," The Journal of International Trade & Economic Development, Taylor & Francis Journals, Taylor & Francis Journals, vol. 12(1), pages 1-18.
  2. Brander, James A. & Spencer, Barbara J., 1987. "Foreign direct investment with unemployment and endogenous taxes and tariffs," Journal of International Economics, Elsevier, Elsevier, vol. 22(3-4), pages 257-279, May.
  3. Ellingsen, Tore & Warneryd, Karl, 1999. "Foreign Direct Investment and the Political Economy of Protection," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 40(2), pages 357-79, May.
  4. Leahy, Dermot & Montagna, Catia, 1999. "Unionisation and Foreign Direct Investment," CEPR Discussion Papers, C.E.P.R. Discussion Papers 2260, C.E.P.R. Discussion Papers.
  5. Bond, Eric W & Samuelson, Larry, 1986. "Tax Holidays as Signals," American Economic Review, American Economic Association, American Economic Association, vol. 76(4), pages 820-26, September.
  6. Grossman, Gene & Helpman, Elhanan, 1993. "Protection for Sale," CEPR Discussion Papers, C.E.P.R. Discussion Papers 827, C.E.P.R. Discussion Papers.
  7. Manning, Alan, 1987. "An Integration of Trade Union Models in a Sequential Bargaining Framework," Economic Journal, Royal Economic Society, Royal Economic Society, vol. 97(385), pages 121-39, March.
  8. Choi, Yongjae & Esfahani, Hadi Salehi, 1998. "Direct foreign investment and expropriation incentives: A mitigating role for match-specific capital," The Quarterly Review of Economics and Finance, Elsevier, Elsevier, vol. 38(1), pages 47-59.
  9. Tapio Palokangas, 2002. "The Political Economy of Collective Bargaining," CESifo Working Paper Series 719, CESifo Group Munich.
  10. Doyle, Christopher & van Wijnbergen, Sweder, 1984. "Taxation of Foreign Multinationals: A Sequential Bargaining Approach to Tax Holidays," CEPR Discussion Papers, C.E.P.R. Discussion Papers 25, C.E.P.R. Discussion Papers.
  11. Haaparanta, Pertti, 1996. "Competition for foreign direct investments," Journal of Public Economics, Elsevier, Elsevier, vol. 63(1), pages 141-153, December.
  12. Dixit, Avinash & Grossman, Gene M & Helpman, Elhanan, 1997. "Common Agency and Coordination: General Theory and Application to Government Policy Making," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 105(4), pages 752-69, August.
  13. Bond, Eric W. & Samuelson, Larry, 1989. "Bargaining with commitment, choice of techniques, and direct foreign investment," Journal of International Economics, Elsevier, Elsevier, vol. 26(1-2), pages 77-97, February.
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