Outward Foreign Direct Investment in Unionized Oligopoly: Welfare and Policy 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 welfare effect of FDI is mostly non-monotonic: an asymmetric pattern of FDI, where only one firm undertakes FDI in the duopolistic case, is socially desirable for a wide range of parameter values in the presence of strong unions. This amounts to a critical policy implication that there are indeed such things as “excessive FDI” and any form of government intervention to encourage outward FDI can be beneficial only up to some point. We also show that, when FDI reduces welfare, 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 paper points out that welfare effects of outward FDI hinges crucially on the nature of domestic competition, and policymakers must carefully take this aspect into consideration. JEL classification numbers: F21, J31, L13.