Domestic labour markets and foreign direct investment

Abstract

We study how the labour market and industry uncertainty affect the investment decisions of multinational enterprises (MNEs). In an uncertain business climate, MNEs must take account of the future in deciding where to locate a branch plant. When wages are endogenously determined, both the opportunity cost of labour and redundancy payments influence the MNE’s decision. When countries compete for foreign investment, different national characteristics determine the winners in different industries. Differences in risk may draw MNEs to different locations. Firm-specific bargaining always offers an advantage, as the mix of current and future pay fully reflects the firm’s risk profile.