Working Paper: CEPR ID: DP3989
Authors: Jan Haaland; Ian Wooton
Abstract: We study how the labour market and industry uncertainty affect the investment decisions of multinational enterprises (MNEs). In an uncertain business climate, MNEs must take account of the future in deciding where to locate a branch plant. When wages are endogenously determined, both the opportunity cost of labour and redundancy payments influence the MNE?s decision. When countries compete for foreign investment, different national characteristics determine the winners in different industries. Differences in risk may draw MNEs to different locations. Firm-specific bargaining always offers an advantage, as the mix of current and future pay fully reflects the firm?s risk profile.
Keywords: entry; exit; investment; subsidies; multinational firms; uncertainty
JEL Codes: D92; F12; F23
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| higher redundancy payments (J65) | deter MNE investment (F23) |
| deter MNE investment (F23) | increase expected closure costs (G33) |
| increase expected closure costs (G33) | affect overall expected wage costs for MNEs (F29) |
| lower redundancy payments (J65) | more attractive to MNEs (F23) |
| opportunity cost of labour (J39) | attractiveness of a host country for FDI (F23) |
| higher risks for MNEs (F23) | increase required redundancy payments (J32) |
| increase required redundancy payments (J32) | influence locational choices of MNEs (F23) |
| interaction between redundancy rates and risk profile of MNEs (F23) | understanding FDI dynamics (F23) |
| flexible labour markets and lower redundancy payments (J63) | attract MNEs (F23) |