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Unionised Labour Market and Strategic Production Decision of a Multinational*

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  • *

     I thank two anonymous referees of this Journal, the editor (Leonardo Felli), the seminar participants of the University of Nottingham and the conference participants of the conferences ‘Institutions, trade, industry and finance – some emerging issues in the developing world’ in India, ‘Scottish Economic Society Annual Conference’ at Perth and ‘Royal Economic Society Annual Conference’ at Swansea for stimulating discussions and helpful comments and suggestions on an earlier draft. I also thank Parantap Basu, David Collie, Nobuhiro Kiyotaki, Sugata Marjit and Sarbajit Sengupta for their helpful comments and suggestions, and Holger Görg for supplying me the references of some useful empirical evidences. I acknowledge the financial support from The Leverhulme Trust under Programme Grant F114/BF. The usual disclaimer applies.

Abstract

I show that a foreign firm may sell the same product through both foreign direct investment (FDI) and export, and this decision depends on the size of the product market. It happens irrespective of whether the labour market in the domestic country or in the foreign country is unionised. Unlike the existing works focusing on risk diversification in presence of demand or cost uncertainty, I explain the co-existence of FDI and export in a world with certainty. The endogenous determination of the wage rate plays an important role for my results. My analysis shows the effects of the fixed cost of FDI and competition in the product market on the production strategy of the foreign firm.

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