Outward Foreign Direct Investment in Unionized Oligopoly: Some Welfare Implications

It is often argued, though mostly informally, that outward foreign direct investment (FDI) is a synonym for the export of employment and thus detrimental to the home economy. To see whether and under what conditions this intuition indeed holds true, we construct a model of unionized duopoly and examine welfare implications of outward FDI on the home country. It is found that the presence of domestic competition gives rise to effects which have critical bearings on social welfare. There are two main findings. First, due to strategic interactions between the unions, the welfare effect of FDI can be negative, even when we disregard the fixed cost of FDI. Second, this negative effect arises more at the expense of consumers, rather than the unions: in fact, quite contrary to the popular belief, FDI may actually benefit the unions because it serves to soften price competition between them. The analysis reveals that the welfare effect of outward FDI hinges critically on the nature of domestic competition, especially among input suppliers, and their bargaining power against their respective downstream producers.