Competing to Outsource in the South

This paper analyzes foreign direct investment (FDI) competition in a three-country framework: two Northern countries and one Southern country. We have in mind the competition of Airbus and Boeing in a developing country. The host-country government endogenizes tariffs, while Airbus and Boeing choose domestic output and FDI. Wages and employment in the home countries are negotiated. We find that in the unique equilibrium, both Airbus and Boeing compete to undertake FDI in the developing country. This arises because the host country can play off the multinationals, which in turn stems from three factors: (a) oligopolistic rivalry; (b) quid pro quo FDI; (c) strategic outsourcing-FDI drives down the union wages at home if the host-country wage is sufficiently low. However, if the host-country wage is sufficiently high, the union wage increases under FDI. In such cases, FDI competition benefits the multinationals, the labor unions, as well as the host country. Copyright © 2010 Blackwell Publishing Ltd.