Unionization Structure and the Incentives for Foreign Direct Investment


We examine the effects of unionization in the host country on a firm's choices of entry mode when serving a foreign market, i.e., its incentives for exporting, green-field FDI and merger. If, due to government regulations the merged firm must operate a plant in the host country, we find that the firm does green-field investment under decentralized unions, but chooses a merger under a centralized union. The firm's incentive for FDI (either green-field FDI or merger) compared to exporting is higher under decentralized unions than under a centralized union. In contrast, if the merged firm can use its plant from any country, a merger may occur even under decentralized unions, but in this case the merged firm uses the plant in the nonunionized country. Under a centralized union, merger always arises if the merged firm can produce in any country, but it chooses to produce in the host country if the market is small.

Keywords: Labor Unionizations
       Entry mode
JEL Classification: F21; F23

School of Economics, University of Nottingham, and The Leverhulme Centre for Research in Globalisation and Economic Policy

Laixun ZHAO
Research Institute for Economics and Business Administration
Kobe University
Rokkodai-cho, Nada-ku, Kobe
657-8501 Japan
Phone: (81) 78 803 7036
Fax: (81) 78 803 7059