Unionization Structure and the Incentives for Foreign Direct Investment

Abstract

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.Labor Unionizations, Entry mode, Export, Merger, FDI