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Unionisation Triggers Tax Incentives to Attract Foreign Direct Investment

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  • Andreas Haufler
  • Ferdinand Mittermaier

Abstract

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 concentrated 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.

Suggested Citation

  • Andreas Haufler & Ferdinand Mittermaier, 2008. "Unionisation Triggers Tax Incentives to Attract Foreign Direct Investment," CESifo Working Paper Series 2312, CESifo.
  • Handle: RePEc:ces:ceswps:_2312
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    More about this item

    Keywords

    tax competition; trade unions; foreign direct investment;
    All these keywords.

    JEL classification:

    • F21 - International Economics - - International Factor Movements and International Business - - - International Investment; Long-Term Capital Movements
    • H25 - Public Economics - - Taxation, Subsidies, and Revenue - - - Business Taxes and Subsidies
    • H87 - Public Economics - - Miscellaneous Issues - - - International Fiscal Issues; International Public Goods
    • J58 - Labor and Demographic Economics - - Labor-Management Relations, Trade Unions, and Collective Bargaining - - - Public Policy

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