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; (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-mangement bargaining is firm-specific and unionization is industry-wide, then the above effects of FDI are substantially reduced.