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

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Author Info
Palokangas, Tapio () (University of Helsinki and IZA Bonn)

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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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Publisher 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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Related research
Keywords: foreign direct investment; labour market regulation; lobbying;

Other versions of this item:

Find related papers by JEL classification:
F21 - International Economics - - International Factor Movements and International Business - - - International Investment; Long-Term Capital Movements
F23 - International Economics - - International Factor Movements and International Business - - - Multinational Firms; International Business
J51 - Labor and Demographic Economics - - Labor-Management Relations, Trade Unions, and Collective Bargaining - - - Trade Unions: Objectives, Structure, and Effects
D78 - Microeconomics - - Analysis of Collective Decision-Making - - - Positive Analysis of Policy-Making and Implementation

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  2. Grossman, Gene M & Helpman, Elhanan, 1994. "Protection for Sale," American Economic Review, American Economic Association, vol. 84(4), pages 833-50, September. [Downloadable!] (restricted)
    Other versions:
  3. Bond, Eric W. & Samuelson, Larry, 1989. "Bargaining with commitment, choice of techniques, and direct foreign investment," Journal of International Economics, Elsevier, vol. 26(1-2), pages 77-97, February. [Downloadable!] (restricted)
  4. Robin Naylor & Michele Santoni, 2003. "Foreign direct investment and wage bargaining," Journal of International Trade & Economic Development, Taylor and Francis Journals, vol. 12(1), pages 1-18, March. [Downloadable!] (restricted)
    Other versions:
  5. Brander, James A. & Spencer, Barbara J., 1987. "Foreign direct investment with unemployment and endogenous taxes and tariffs," Journal of International Economics, Elsevier, vol. 22(3-4), pages 257-279, May. [Downloadable!] (restricted)
  6. 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, vol. 40(2), pages 357-79, May.
  7. 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, vol. 38(1), pages 47-59. [Downloadable!] (restricted)
  8. repec:cup:cbooks:9780521663236 is not listed on IDEAS
  9. Haaparanta, Pertti, 1996. "Competition for foreign direct investments," Journal of Public Economics, Elsevier, vol. 63(1), pages 141-153, December. [Downloadable!] (restricted)
  10. Doyle, Christopher & van Wijnbergen, Sweder, 1984. "Taxation of Foreign Multinationals: A Sequential Bargaining Approach to Tax Holidays," CEPR Discussion Papers 25, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
  11. Palokangas, Tapio, 2003. "The political economy of collective bargaining," Labour Economics, Elsevier, vol. 10(2), pages 253-264, April. [Downloadable!] (restricted)
    Other versions:
  12. Leahy, Dermot & Montagna, Catia, 1999. "Unionisation and Foreign Direct Investment," CEPR Discussion Papers 2260, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
  13. Manning, Alan, 1987. "An Integration of Trade Union Models in a Sequential Bargaining Framework," Economic Journal, Royal Economic Society, vol. 97(385), pages 121-39, March. [Downloadable!] (restricted)
  14. 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, vol. 105(4), pages 752-69, August.
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