Working Paper: CEPR ID: DP2260
Authors: Dermot Leahy; Catia Montagna
Abstract: This paper investigates the effects of different degrees of wage setting centralisation on (1) the incentive of a MNE to locate in a host country, (2) the optimal level of investment it decides to commit to its foreign operation, and (3) the host country's welfare. Decentralised and centralised wage bargaining are considered. The nature of product market competition between the MNE and domestic firms affects results that cast doubt on some of the conventional wisdom on FDI. In particular, we show that: (i) it is not always welfare improving to attract inward FDI, and (ii) the MNE may prefer centralised to decentralised wage setting regimes.
Keywords: FDI; unionization; strategic behaviour
JEL Codes: F17; F23
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| centralized wage-setting regimes (E64) | attractiveness of host country for MNEs (F23) |
| decentralized wage-setting regimes (J38) | attractiveness of host country for MNEs (F23) |
| FDI (F23) | welfare of host country (I30) |
| product market competition (L13) | welfare of host country (I30) |
| centralized wage-setting (E64) | domestic firms' profitability (F23) |
| MNE underinvests in capital (E22) | wages (J31) |