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Unionisation triggers tax incentives to attract foreign direct investment

  • Andreas Haufler
  • Ferdinand Mittermaier

This paper analyses tax competition between a unionised and a non-unionised country for the location of an outside firm. We show that unionisation offers an extra incentive for the government to attract a foreign competitor to a concen- trated domestic market, in order to affect the behaviour of the domestic union. This results in the unionised country's government offering a tax discount (or a subsidy premium) to the outside firm in excess of what is needed to compensate the investor for the higher union wage. In equilibrium, therefore, the unionised country can attract the outside firm even if it has other location disadvantages, such as a smaller home market.

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File URL: http://www.bgpe.de/texte/DP/052_haufler_mittermaier.pdf
File Function: First version, 2008
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Paper provided by Bavarian Graduate Program in Economics (BGPE) in its series Working Papers with number 052.

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Length: 35 pages
Date of creation: May 2008
Date of revision:
Handle: RePEc:bav:wpaper:052_haufler_mittermaier
Contact details of provider: Web page: http://www.bgpe.de/

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  1. Robin Naylor & Michele Santoni, 1999. "Foreign direct investment and wage bargaining," CSGR Working papers series 41/99, Centre for the Study of Globalisation and Regionalisation (CSGR), University of Warwick.
  2. James A. Brander & Paul Krugman, 1983. "A 'Reciprocal Dumping' Model of International Trade," NBER Working Papers 1194, National Bureau of Economic Research, Inc.
  3. Coughlin, Cletus C & Terza, Joseph V & Arromdee, Vachira, 1991. "State Characteristics and the Location of Foreign Direct Investment within the United States," The Review of Economics and Statistics, MIT Press, vol. 73(4), pages 675-83, November.
  4. Clemens Fuest & Bernd Huber, . "Tax Coordination and Unemployment," EPRU Working Paper Series 97-26, Economic Policy Research Unit (EPRU), University of Copenhagen. Department of Economics.
  5. Rainald Borck & Michael Pflüger, 2004. "Agglomeration and Tax Competition," Discussion Papers of DIW Berlin 408, DIW Berlin, German Institute for Economic Research.
  6. Naylor, Robin, 1998. "International trade and economic integration when labour markets are generally unionised," European Economic Review, Elsevier, vol. 42(7), pages 1251-1267, July.
  7. Ferrett, Ben & Wooton, Ian, 2005. "Competing for a Duopoly: International Trade and Tax Competition," CEPR Discussion Papers 5379, C.E.P.R. Discussion Papers.
  8. Davies, Ronald B., 2005. "State tax competition for foreign direct investment: a winnable war?," Journal of International Economics, Elsevier, vol. 67(2), pages 498-512, December.
  9. Oswald, Andrew J., 1993. "Efficient contracts are on the labour demand curve : Theory and facts," Labour Economics, Elsevier, vol. 1(1), pages 85-113, June.
  10. Mette Rose Skaksen, 2005. "Should Governments Subsidise Inward Foreign Direct Investment?," Scandinavian Journal of Economics, Wiley Blackwell, vol. 107(1), pages 123-140, 03.
  11. Andreas Haufler & Ian Wooton, . "Country Size and Tax Competition for Foreign Direct Investment," Working Papers 9702, Business School - Economics, University of Glasgow.
  12. Fuest, Clemens & Huber, Bernd, 2000. "Why do governments subsidise investment and not employment?," Munich Reprints in Economics 20295, University of Munich, Department of Economics.
  13. Huizinga, H.P., 1993. "International market integration and union wage bargaining," Other publications TiSEM 567712dd-8f03-40d8-8428-c, Tilburg University, School of Economics and Management.
  14. Kjell Erik Lommerud & Frode Meland & Lars Sørgard, 2002. "Unionized Oligopoly, Trade Liberalization and Location Choice," CESifo Working Paper Series 777, CESifo Group Munich.
  15. Brander, James A. & Spencer, Barbara J., 1988. "Unionized oligopoly and international trade policy," Journal of International Economics, Elsevier, vol. 24(3-4), pages 217-234, May.
  16. Arijit Mukherjee, 2008. "Unionised Labour Market and Strategic Production Decision of a Multinational," Economic Journal, Royal Economic Society, vol. 118(532), pages 1621-1639, October.
  17. Richard B. Freeman, 2007. "Labor Market Institutions Around the World," NBER Working Papers 13242, National Bureau of Economic Research, Inc.
  18. Arjan Lejour & Harrie Verbon, 1996. "Capital mobility, wage bargaining, and social insurance policies in an economic union," International Tax and Public Finance, Springer, vol. 3(4), pages 495-513, October.
  19. Kind, Hans Jarle & Schjelderup, Guttorm & Ulltveit-Moe, Karen-Helene, 1999. "Competing for Capital in a 'Lumpy' World," CEPR Discussion Papers 2188, C.E.P.R. Discussion Papers.
  20. Ignatius J. Horstmann & James R. Markusen, 1990. "Endogenous Market Structures in International Trade," NBER Working Papers 3283, National Bureau of Economic Research, Inc.
  21. Ottaviano, Gianmarco I.P. & van Ypersele, Tanguy, 2005. "Market size and tax competition," Journal of International Economics, Elsevier, vol. 67(1), pages 25-46, September.
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  23. Mezzetti, C. & Dinopoulos, E., 1989. "Domestic Unionization And Import Competition," Papers 337, California Davis - Institute of Governmental Affairs.
  24. Driffill, John & van der Ploeg, Frederick, 1995. " Trade Liberalization with Imperfect Competition in Goods and Labour Markets," Scandinavian Journal of Economics, Wiley Blackwell, vol. 97(2), pages 223-43, June.
  25. repec:ner:tilbur:urn:nbn:nl:ui:12-155144 is not listed on IDEAS
  26. Leahy, Dermot & Montagna, Catia, 1999. "Unionisation and Foreign Direct Investment," CEPR Discussion Papers 2260, C.E.P.R. Discussion Papers.
  27. Michael P. Devereux & Rachel Griffith & Alexander Klemm, 2002. "Corporate income tax reforms and international tax competition," Economic Policy, CEPR;CES;MSH, vol. 17(35), pages 449-495, October.
  28. Black, Dan A & Hoyt, William H, 1989. "Bidding for Firms," American Economic Review, American Economic Association, vol. 79(5), pages 1249-56, December.
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