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

Abstract

This document examines foreign direct investment (FDI) when multinationals and labourunions bargain over labour contracts and lobby the self-interested government for taxationand labour market regulation. We demonstrate that right-to-manage bargaining predictshigher returns for FDI than does non-unionization or efficient bargaining. This advantage isfurther 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 FDIthrough taxation or regulation. In the absence of credible contracts, unions have incentives toclaim a bigger share of the revenue of FDI.

Keywords: lobbying, labour market regulation, foreign direct investment

JEL Classification: F21, F23, J51, D78