Union Bargaining Power, Labour Standards and Foreign Direct Investment

This paper examines Foreign Direct Investment in the presence of labour unions. An oligopoly model is developed in which identical firms locate in a host country in order to export to a foreign country. These firms are unionised and compete with foreign firms on the foreign market. We consider the incentives for social dumping via restrictive labour legislation which we assume can be used by the host country government to affect the bargaining power of unions. We ask whether it is in the interest of the importing foreign country for the host country to relax or to tighten labour laws