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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.

Suggested Citation

  • Palokangas, Tapio K., 2003. "Foreign Direct Investment, Labour Market Regulation and Self-Interested Governments," IZA Discussion Papers 793, Institute for the Study of Labor (IZA).
  • Handle: RePEc:iza:izadps:dp793
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    References listed on IDEAS

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    1. Chris Doyle & Sweder Wijnbergen, 1994. "Taxation of foreign multinationals: A sequential bargaining approach to tax holidays," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 1(3), pages 211-225, October.
    2. 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 357-379, May.
    3. Palokangas, Tapio, 2003. "The political economy of collective bargaining," Labour Economics, Elsevier, vol. 10(2), pages 253-264, April.
    4. Grossman, Gene M & Helpman, Elhanan, 1994. "Protection for Sale," American Economic Review, American Economic Association, vol. 84(4), pages 833-850, September.
    5. 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 752-769, August.
    6. 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.
    7. Haaparanta, Pertti, 1996. "Competition for foreign direct investments," Journal of Public Economics, Elsevier, vol. 63(1), pages 141-153, December.
    8. Bond, Eric W & Samuelson, Larry, 1986. "Tax Holidays as Signals," American Economic Review, American Economic Association, vol. 76(4), pages 820-826, September.
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    13. Manning, Alan, 1987. "An Integration of Trade Union Models in a Sequential Bargaining Framework," Economic Journal, Royal Economic Society, vol. 97(385), pages 121-139, March.
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    More about this item

    Keywords

    lobbying; labour market regulation; foreign direct investment;

    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 Formulation and Implementation

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