Abstract
Reflecting the growing importance of domestic labor market institution on FDI flow, many theoretical attempts have been conducted on the role of domestic labor market institution such as labor union’s bargaining power and unions’ relative preferences toward wages, as potential influences on the direction of FDI flow (Smith, Eur Econ Rev 31:89–96, 1987; Horstmann and Markusen, Int Econ Rev 28:109–121, 1987; Mezzetti and Dinopoulos, J Int Econ 31:79–100, 1991; Bughin and Vannini, Int J Indus Organ 13:127–145, 1995; Straume, Int J Indus Organ 20:631–652, 2002; Naylor and Santoni, J Int Trade Econ Dev 12:1–18, 2003; Lommerud et al., Econ J 113:782–800, 2003; Hur and Zhao, J Econ Behav Organ 71:259–272, 2009; Lee and Lee, Econ Model 54:479–489, 2016). It should be noted that since the above studies on strategic FDI incorporating domestic labor market institution, which normally uses international unionized oligopoly model, were limited to a simple two-country model, they could NOT appropriately capture more complexed FDI mode of these days. A prominent example of such complex FDI is the export-platform FDI. In this paper, we construct a locational model of unionized oligopoly, where export and export-platform FDI are alternative modes for serving a third-country market, and examine welfare effects of outward FDI induced by union activities. More specifically, by assuming that the government has the power to affect the bargaining power of the union through the legislation, we derive the optimal level of labor standard from the viewpoint of FDI source country.
This is a preview of subscription content, log in via an institution to check access.
Notes
- 1.
- 2.
That is, MNFs are establishing production subsidiaries within a trade bloc in order to serve the entire market as in horizontal investments, but a specific location within the region is chosen from the perspective of cost minimization, as in vertical investments. For example, FDI from the USA and other countries into Ireland belongs to this type; plants are established to serve the EU market, but Ireland is chosen as a location site for the production cost reasons.
- 3.
In the next section, we deal with the duopoly case.
- 4.
For simplicity we assume that the country-specific conflict payoffs to the firm (more correctly, the plant) and to the union are exogenous and set equal to zero.
- 5.
We obtain \({\partial \varDelta \varPi _{M} \over \partial \theta } ={ \beta (2-\theta )(a-\bar{w}-t)^{2} \over (2-\theta +\beta \theta )^{3}}> 0\) and \({ \partial \varDelta \varPi _{M} \over \partial (-t)} ={ \beta \theta (4-2\theta +\beta \theta )(a-\bar{w}-t) \over 2(2-\theta +\beta \theta )^{2}}> 0\) from Eq. (25.8).
- 6.
From Eq. (25.4.2), we have \({\partial r_{M}^{{\ast}} \over \partial \theta } ={ 2-\theta -\beta \theta \over 2-\theta } x_{M}^{{\ast}}{\partial w_{M}^{{\ast}} \over \partial \theta }.\) Since \({\partial w_{M}^{{\ast}} \over \partial \theta }> 0\) from Eq. (25.3), \({\partial r_{M}^{{\ast}} \over \partial \theta }> 0\) if β < 1 or \(\theta <{ 2 \over 1+\beta }\).
- 7.
From the first order condition of final good market, we have p − (w i + t) = x i.
- 8.
From Eq. (25.12), we have \(\frac{\partial w_{i}^{{\ast}}} {\partial \theta } = \frac{4\beta (a-\bar{w}-t)} {(4-2\theta +\beta \theta )^{2}}> 0\), \(\frac{\partial w_{A}^{{\ast}{\ast}}} {\partial \theta } = \frac{\beta (a-\bar{w}-t)} {(2-\theta +\beta \theta )^{2}}> 0\), \(\frac{\partial w_{i}^{{\ast}}} {\partial (-t)} = \frac{\beta \theta } {4-2\theta +\beta \theta }> 0\), and \(\frac{\partial w_{A}^{{\ast}{\ast}}} {\partial (-t)} = \frac{\beta \theta } {2(2-\theta +\beta \theta )}> 0\).
- 9.
This is because FDI of firm B results in the reduction of rival firm A’s profits and the loss of union rents, due to both a decrease in firm A’s profits and the extinction of firm B’s labor union, which are not taken into consideration when firm B chooses its production location.
- 10.
The proof is available upon request from the author.
- 11.
Here, we have suppressed the graphs on firms’ profit change in θ not only to economize the use of figures but also because it shows similar shape with that in Fig. 25.3.
- 12.
- 13.
The proof is available upon request from the author.
- 14.
Here, we represent only the case θ V ∗ < θ R∗∗ < θ P < θ R∗. However, the main results obtained in the above case are still effective even when we assume that θ V ∗ < θ P < θ R∗∗ < θ R∗.
- 15.
Since ∑r i ∗is increasing inθ, [∑r i ∗]θ = θ R∗∗<[∑r i ∗]θ = θ P holds. And we obtain from Table 25.1 that \([\sum r_{i}^{{\ast}}]_{\theta =\theta ^{R{\ast}{\ast}}}- [r_{A}^{{\ast}{\ast}}]_{\theta =\theta ^{R{\ast}{\ast}}} ={ 4 \over 27}(a -\bar{ w} - t)^{2} -{ 1 \over 12}(a -\bar{ w} - t)^{2}> 0\). That is, \([r_{A}^{{\ast}{\ast}}]_{\theta =\theta ^{R{\ast}{\ast}}} <[\sum r_{i}^{{\ast}}]_{\theta =\theta ^{R{\ast}{\ast}}}\). Therefore, we have \([r_{A}^{{\ast}{\ast}}]_{\theta =\theta ^{R{\ast}{\ast}}} <[\sum r_{i}^{{\ast}}]_{\theta =\theta ^{P}}\).
References
Bughin, J., and S. Vannini. 1995. Strategic direct investment under unionized oligopoly. International Journal of Industrial Organization 13: 127–145.
Ekholm, K., R. Forslid, and J.R. Markusen. 2007. Export-platform foreign direct investment. Journal of the European Economic Association 5: 776–795.
Hanson, G.H., R.J. Mataloni, and M.J. Slaughter. 2001. Expansion strategies of U.S. multinational firms. In Susan M. Collins and D. Rodrick (eds), Brookings Trade Forum 2001, Washington, DC: Brookings Institution, pp. 245–282.
Horstmann, I.J., and J.R. Markusen. 1987. Strategic investments and the development of multinationals. International Economic Review 28: 109–121.
Hur, J., and L. Zhao. 2009. Labor standards, labor-management bargaining and international rivalry. Journal of Economic Behavior & Organization 71: 259–272.
Ishida, J., and N. Matsushima. 2009. Should civil servants be restricted in wage bargaining? A mixed-duopoly approach. Journal of Public Economics 93: 634–646.
Ito, T. 2013. Export platform foreign direct investment: Theory and evidence. The World Economy 36: 563–581.
Leahy, D., and C. Montagna. 2005. Union legislation and export platform FDI. Journal of International Trade & Economic Development 14: 437–452.
Lee, K.-D., and W. Lee. 2016. Export vs export-platform FDI with endogenous wage determination. Economic Modelling 54: 479–489.
Lommerud, K.E., F. Meland, and L. Sørgard. 2003. Unionized oligopoly, trade liberalization and location choice. Economic Journal 113: 782–800.
Mezzetti, C., and E. Dinopoulos. 1991. Domestic unionization and import competition. Journal of International Economics 31: 79–100.
Naylor, R., and M. Santoni. 2003. Foreign direct investment and wage bargaining. Journal of International Trade and Economic Development 12: 1–18.
Smith, A. 1987. Strategic investment, multinational corporations and trade policy. European Economic Review 31: 89–96.
Straume, O.R. 2002. Union collusion and intra-industry trade. International Journal of Industrial Organization 20: 631–652.
Acknowledgements
This research was supported by the National Research Foundation of Korea Grant funded by the Korean government (NRF-2014S1A3A2044643).
Author information
Authors and Affiliations
Corresponding author
Editor information
Editors and Affiliations
Rights and permissions
Copyright information
© 2017 Springer Nature Singapore Pte Ltd.
About this chapter
Cite this chapter
Lee, KD. (2017). Labor Standards and Export-Platform FDI in Unionized Oligopoly. In: Naito, T., Lee, W., Ouchida, Y. (eds) Applied Approaches to Societal Institutions and Economics. New Frontiers in Regional Science: Asian Perspectives, vol 18. Springer, Singapore. https://doi.org/10.1007/978-981-10-5663-5_25
Download citation
DOI: https://doi.org/10.1007/978-981-10-5663-5_25
Published:
Publisher Name: Springer, Singapore
Print ISBN: 978-981-10-5662-8
Online ISBN: 978-981-10-5663-5
eBook Packages: Economics and FinanceEconomics and Finance (R0)