The Impact of Foreign Direct Investment on Wages and Employment

This paper studies the impact of foreign direct investment (FDI) on wages and employment. When labor-management bargaining is industry-wide, two effects of FDI are identified: the collusion effect and the threat-point effect. It is shown that (i) FDI always reduces the negotiated wage, and (ii) FDI reduces union employment and the competitive wage if the union cares more about employment than wages or is equally concerned about employment and wages. However, if labor-management bargaining is firm-specific and unionization is industry-wide, then the above effects of FDI are substantially reduced