DEPARTMENT OF ECONOMICS UNIVERSITY OF CRETE. Optimal Labour Market Institutions and inward FDI

Transcription

1 DEPARTMENT OF ECONOMICS UNIVERSITY OF CRETE BE.NE.TeC. Working Paper Series Working Paper: Optimal Labour Market Institutions and inward FDI Minas Vlassis Business Eonomis & NEw TeCnologies Laboratory

2 Optimal Labour Market Institutions and inward FDI Minas Vlassis * ** University of Crete and IMOP + Abstrat: Tis paper proposes labour market institutional arrangements as a strategi devie to optimally indue exports substituting inward FDI. In tis setting, te emergene of inward FDI is onsidered to be optimal insofar as it does not ensue negative effets on domesti employment relative to exports aommodation. In a union-oligopoly ontext we sow tat, if te FDI-assoiated unit osts (FC) are suffiiently low, inward FDI would optimally emerge, irrespetively to te struture of wage bargaining and te level of te unemployment benefit in te ost ountry. However, for intermediate values of te FC, inward FDI may optimally emerge only if te wage bargaining struture is entralized, a non-ompliane tax on union rents is in effet, and te unemployment benefit is suffiiently low. Yet, watever is te wage bargaining struture, so long as te FC are ig enoug inward FDI may emerge wit a negative effet on domesti employment. Te unemployment benefit sould be ten set ig enoug to deter FDI, and instead aommodate exports, in equilibrium. Keywords : Bargaining, Oligopoly, FDI. JEL Classifiation : L0, L5, J5, F. *Address for orrespondene : Department of Eonomis, University of Crete, University Campus at Gallos, Retimnon 74100, Greee. Tel: (+30) ; Fax: (+30) ; mvlassis@eon.so.uo.gr ** Te autor aknowledges benefit to te audiene of presentations of (earlier versions of) tis paper at te eonomis seminars of te University of Ioannina and te University of Crete, as well as to te partiipants of te C.R.E.T.E Conferene, at Syros (004). + Institute of Eonomi Poliy Studies, Atens, Greee. 1

3 1. Introdution Labour market institutions exibit substantial variability aross ountries, mainly regarding te type and struture of labour-management bargaining. In Nort Ameria and Japan, pay bargaining is typially deentralized aross firms and/or individuals. In Europe, owever, olletive ontrats over wages are typially struk among te representatives of firms and unions, wilst firm-union bargaining is often entralized at te setor-level. Like in Italy, Greee, Spain, Frane, Portugal, Belgium, Neterlands, Germany, and te Sandinavian ountries ( Layard et al., 1991; Hartog and Teeuwes, 199 ). On te oter and, te post-war experiene on foreign diret investments (FDI) suggests tat a persistently ig perentage of te global FDI materializes among USA and Europe, as well as witin a broad group of European ountries ( Hood and Young, 000). Tis evidene also sows inreasing rates of ross-border prodution, as a substitute to trade, along wit limited mobility of labour relative to apital. Given tese fats, it is rater surprising tat, wit te exeption of Bugin and Vannini (1995), te literature ad for long no paid attention on weter uionisation and olletive bargaining may ritially affet entrepreneurial oies regarding ome versus foreign prodution. Wilst, at te same time various ontributions ave been foused on te signifiant produt and labour market effets of FDI. 1 Quite reently, noneteless, few papers (see e.g. Leay and Montagna, 000, 003 ; Naylor and Santoni, 003) brougt some new ligt on te links tat may exist between te labour market institutional set-up and FDI. Yet, te latter studies abstain in ontext from te typial paradigm of transnational prodution and, more importantly, teir approa is rater ad o, in assuming instead of questioning te 1 See Zao (1998) and te referenes terein.

4 equilibrium prospets of alternative strutures of olletive bargaining in te ost labour market. In tis paper we address strategi interation among all agents (i.e. firms, unions and poliy makers) wi are expliitly or impliitly involved in ross-border prodution under labour market unionisation. By tat means, an optimal struture of key labour market institutions in te ost ountry is determined in equilibrium. Tis struture involves te level of wage bargaining (e.g. deentralised vs entralised), te value of te unemployment benefit, and non-ompliane taxes imposed on union rents. Our findings reonile wit onventional wisdom, insofar as tey suggest tat inward FDI may emerge irrespetively of te ost labour market institutional set-up; simply beause foreign firms may enjoy relative tenologial advantages over domesti firms, suffiient to outweig teir relative ost disadvantages arising from FDI. Noneteless, we take few steps forward as our findings moreover suggest tat: First, watever is te wage-bargaining struture in te ost labour market, so long as te unemployment benefit is suffiiently low, inward FDI may emerge even if te foreign firms unit osts arising from FDI are ig enoug. However, inward FDI would in tis instane ensue a negative effet on domesti employment, relative to exports aommodation. Seond, for intermediate values of te FDI-assoiated unit osts, wage bargaining entralization may enable foreign firms to profit from FDI, more tan from exports, wile te reverse ase arises under deentralized bargaining. Yet, unless a non-ompliane tax on union rents is in effet, te entralized wage-bargaining struture is not endogenously sustainable and, ene, it would not redibly indue FDI in equilibrium. Wile, if su a tax is provided, See Dunning, (1980, 1988), Pitelis and Sugden (1991). 3

5 for inward FDI to ensue non-negative effets on domesti employment te domesti unemployment benefit must also be suffiiently low. Aording to te above, we propose tat a poliy maker an strategially andle labour market institutions in order to indue inward FDI witout undermining te domesti employment prospets. To tis end, our most striking advie is tat te unemployment benefit sould oasionally be set ig enoug in order to protet employment. Te rest of te paper is organized as follows. In Setion we develop a simple unionoligopoly model of ross-border prodution/trade and provide argumentation about te game arising in its ontext. In Setion 3 we investigate te equilibrium prospets of alternative wage-bargaining strutures. In Setion 4 we propose optimal labour market institutional settlement. Our findings are onlusively evaluated in Setion 5.. Te Model Consider a -omogeneous good- setor in a ost ountry, were one ome ( -) firm and one foreign (f-) firm ompete by adjusting teir quantities. Te f-firm may eiter produe abroad and sell its output in te ost ountry, ten faing a unit ost of exports denoted by x, or produe and sell in te ost ountry, wit an FDI-assoiated unit ost of prodution denoted by. 3 Te -firm always produes and sells domestially. Assume tat prodution, werever, exibits onstant returns to sale and requires only labour input to produe te good. To rationalize tis, let ea firm possess a Leontief tenology, always provided tat te apital stok is suffiient to produe te good. Let, owever, te f-firm enjoy a tenologial advantage 3 formally represents oordination and ontrol osts, assumed to be onstant per unit of prodution, wi are inurred wen te f-firm runs loal prodution. Tese osts arise from ross-border differenes in (oter tan te labour market s) legislation, taxation, language, work etis, personnel proedures et. Wile, for reasons of fous and simpliity, te FDI sunk osts are assumed to be zero. Respetively, x represents (onstant ) export marketing osts per unit of sales, made up of transport, pakaging, insurane, tariffs, et. 4

6 relative to its rival -firm. Terefore, te prodution funtion of te - firm (f-firm) an be defined as y =N (y f = kn f ; k>1). Were, y (N) denotes output (employment), and te produtivity of labour is normalized to unity. Tus, k is a measure of te relative effiieny of tenologies. Sine Cournot outomes remain robust for a variety of demand onditions, te inverse market demand an onveniently assumed to be linear, P(Y) = a -Y, were Y is te aggregate output (Y= y + y f ). Labour markets are unionised. Following Dillon and Petrakis (00) we an reasonably postulate tat te union struture is entralized in any separate labour market. Hene, we assume tat tere is always one union abroad and one union in te ost ountry. Let respetively all tem te ome and te foreign union. Given risk-neutral fixed membersip and immobile labour, let moreover adopt te utilitarian ypotesis (Oswald,198 ; Boot, 1995). Tat is, unions are assumed to maximize rents, U (w, N) = (w - b)n, were w and N are te wage and employment arguments, and b is a parameter defining te union s members alternative wage. 4 As furter regards labour market institutions, if te f-firm produes abroad wage-bargaining is de fato deentralized aross firms. In ase, owever, te f-firm loates prodution in te ost ountry, wage-bargaining may be deentralized, or entralized, aross firms, tis depending on te labour market legislation. If te latter imposes wage-bargaining entralization (CB), te union is obliged to arge te same wage per ea of its employed members in, eiter te -firm, or te f- firm. Oterwise, i.e. if te wage-bargaining struture in te ost ountry is deentralized bargaining (DB), te union is free to differentiate, or not, wages aross firms. In all instanes, unions are assumed to possess a power of one (zero) over te wage (employment) argument, during labour-management negotiations (monopoly unions). 4 Te latter is typially onsidered to be a weigted average of te ompetitive wage and te unemployment benefit wit weigts te probability of being employed, or not, in te ompetitive setor. Sine te setor under onsideration is small relative to te aggregate eonomy, wages are tougt to be real arguments. Moreover, 5

7 First priniples suggest tat wage differentiation is always optimal for a monopoly union. However, as regards te ome union su a oie is effetive only if te f-firm as definitely deided to settle prodution in te ost ountry. Naturally, noneteless, te latter deision is taken before any wage determination proess takes plae, anywere. Hene, unless a union ommitment meanism exists, FDI would rater prove to be time inonsistent under te CB regime. Terefore, a poliy maker andling labour market legislation in te ost ountry must always onsider tat, for CB to be an effetive institution, it as to be esorted by a unionompliane devie. On te oter and, it is not lear from te outset weter DB or CB is a superior arrangement, nor tat FDI aommodation is superior to foreign exports, as regards prodution and employment in te ost ountry. Wilst, at least in setors faing ig strutural unemployment, it seems tat in setting up labour market legislation a poliy maker s primary interest would be to maximise domesti employment prospets. As te evidene suggests, noneteless, te stimulation of pro-ompetitive attitudes and te dissemination of knowledge and tenology in te ost ountry may be better served wit inwards FDI tan wit exports aommodation 5. Hene, so long as FDI would at least seure te same level of domesti (aggregate) employment, a preferene (Pr) for export substituting inwards FDI an be reasonably attributed to te poliy maker s goal. Summarizing te above, a four-stage game an be formally addressed. Stage 1 A poliy maker settles, or reforms, labour market institutions in te ost ountry, aording to te following lexiograpi objetive: ç max{y + (y f /k)} (1a) stressing te unemployment issue in te ost ountry, it is assumed tat te domesti value of te alternative wage is losely approximated by te unemployment benefit. 5 See Dimelis and Louri (00) and te referenes terein. 6

8 æ ç FDI Pr Exports (1b) Were: - Domesti prodution-employment an be materialized, eiter by bot te -firm (y > 0) and te f-firm (y f > 0), or by te -firm only (y > 0, y f = 0). - Labour market institutions may be omprised of : te wage-bargaining struture (DB or CB). te level of te unemployment benefit. taxes (or subsidies) to te labour market agents. Stage Given te labour market institutional resolutions, te f-firm deides to serve te ome market, via eiter exports (y f = 0), or FDI (y f > 0). Stage 3 Wage Determination : given te f-firm s deision at Stage and te labour market set-up, optimal wages are determined as follows. Exports w fe : max [(w fe b f )(y fe /k)] ; w e : max [(w e b )y e ] () FDI under CB w : max{ (w b )[y + (y f /k)]} (3) FDI under DB (w, w f ) : max{ (w b )y + (w f b )(y f /k)} (4) Were in te FDI ases, w, w f, (w ) denote wages paid in te ost ountry, differentiated (or not) aross te ome and te foreign firm, and y, y f /k, ( y, y f /k ) respetively stand for te employment levels. In te Exports ase, w fe, w e, define de fato differentiated wages aross firms/ountries, and y fe /k, y e stand for te respetive employment levels. In all ases, b f ( b ) stands for te foreign (ost) ountry alternative wage (unemployment benefit). 7

9 Stage 4 Cournot ompetition : given any output level of its rival firm, ea firm adjusts its output so tat to maximize its own profits: ( f ) ( f ) ( f ) ( f ) Π = P( Y ) y C ( y ) (5) Were, te osts funtions, ( f ) C, are expliitly defined aording to te outomes of te previous stages. 3. Equilibrium Wage - Bargaining Strutures and Inward FDI In tis setion te FDI ase is addressed as a prospetive equilibrium strategy for te f- firm, under alternative wage-bargaining strutures in te ost ountry. If it subsequently proves tat, neiter te f-firm, nor te ome union, ave an inentive to deviate from te suggested ontingeny, its institutional omponent (e.g. DB or CB) an be araterized as part of te Nas equilibrium, and it is only ten tat FDI would be aommodated in te ost ountry under te partiular wage-bargaining struture.oterwise, te Exports ase would emerge in equilibrium. To proeed along tese lines of reasoning, let first assume tat te wage-bargaining struture is DB and, using bakwards indution, let first onsider te 4 t Stage of te game: in te subgame perfet equilibrium (spe) ea firm ooses employment-output to maximize its own profits, given te wage deal resulting from Stage 3, and te f-firm s deision at Stage. Using ()-(4) to speify profits in (5), te derived output reation funtions appear to be as follows. FDI ase y ( w, w f f a + [ + ( w / k)] w ) = (6a) 3 8

10 y Exports ase y y ( w, w f a + w [( w / k) ] ) = (6b) 3 f f + e ( w ( w e, w, w fe fe e a + [ x + ( w / k)] w ) = (7a) 3 e fe a + w [( w / k) x] ) = (7b) 3 fe e fe + As expeted, in eiter te FDI or te Exports ase, unit osts are strategi substitutes from te rival firms point of view. In partiular note tat, sine Π ( f ) = ( y ( f ) ), te -firm s marginal profitability of a wage ut always dereases wit k. Tis implies tat te f-firm s relative tenologial advantage (k) renders it te neessary inentive to serve te ome market, despite te inurred extra osts, (or x), relative to its rival -firm. On te oter and, it depends on te f w ontrat weter te f-firm s ost, per effiient unit of labour: [w f (w fe ) /k + (x)], would derease so tat to make FDI (exports) te optimal strategy. Let, terefore, proeed to Stage 3. By virtue of (6) and (7), from te fos of () and (4) te following wage onfiguration is derived. FDI ase w w a + b = (8a) * k( a ) + b = (8b) f* Exports ase w (5a + x) + 8b ( b f / ) = (9a) 15 + k e * 9

11 w k(5a 7x) + 8b f + kb = (9b) 15 fe* Hene, te following inequalities arise. fe* e* (i) [( w / k) + x] w < 0 k b > b f x * * (ii) w f w > 0 k > a a f* * (iii) [( w / k) + ] w < 0 k b > b As it an be now onfirmed from (i) and (iii), te f-firm will find profitable to serve te ome market (wit eiter exports or FDI), so long as it enjoys a suffiiently ig tenologial advantage relative to te -firm (e.g. if k >>1). Furter, (ii) and (iii) suggest tat, sine b < a (e.g. te setoral produt market in te ost ountry exists ) b b > a a, in te FDI ase te f-firm will pay a iger wage tan te -firm ; as expeted, te ome (monopoly) union will find optimal to differentiate wages aross existing firms so tat to enjoy te same marginal revenue from employment everywere. More importantly, (i) and (iii) suggest tat, given k >1, te iger is b f (relative to b ), and te lower is (relative to x), te more probable is, at Stage, te f-firm to oose te FDI strategy in te spe. Let, ene, ompare f * Π versus Π fe*. Substituting (8) and (9) into (6) and (7) and squaring, te f-firm s profits onfiguration is as follows. ( y f * ) [ k( a ) b ( k)] = (10) 36k 10

12 ( y 4[ k(5a + b ) 7( kx * + fe ) b f )] = (11) 05k Were, a 5a + b < ; [( b f / k) + x] <, for (non-trivial) interior solutions respetively to 7 exist. It an be ten eked tat Condition (I) arises. Π Π f * fe* ( y = ( y f * fe* ) ) > 1 < 1 1 = 8[( b f / k) + x] ( b 30 / k)(30 7k) 5a Note tat 1, and terefore te FDI prospet, beave as expeted wit b f, b and x. Wile, to interpret te negative sign of 1 / a, note (from (ii)) tat k >1 ( w f* w * ) / a > 0. Is, owever, < 1 suffiient so tat under DB te f-firm will oose te FDI strategy in equilbrium? Te answer would be learly positive if it proves tat te ome union as no inentive to deviate from DB, one te f-firm as loated prodution at ome. To ek for tat, te ome union s maximum rents under DB are first obtained by means of (11) and (8). * [ a b ][( a + ) ( b / k)(k 1)] + [( a ( b / k) ][( a ) ( b / k)( k)] U = 1 Set next, w f = w w, and substitute (8) into (3). Solving te latter expression s fo w.r.t w and substituting bak into (8), te following wage and output levels are derived. * k[ a( k + 1) ( k)] b w = + (15) 4[ k( + 1] y f * 3 k 1 a[5 ] [7 + ] ( b / k)[4 k] k( + 1 k( + 1 = (16) 1 11

13 3( 3k a[1 ] + [1 + ] ( b / k)[k 1] * ( k( + 1) ( k( + 1) y = (17) 6 Terefore, in ase of ex post deviation to CB (or wenever wages are entralized in te equilibrium), te ome union s maximum rents beome: U * {[ a( k + 1) ( k)] ( b / k)[ k( + 1]} = 4[ k( + 1] It an be ten eked tat te following rent differential arises. R * U * U = 3k [ a( k ] Sine a >, R is positive. Terfore, te ome union as no interest to entralize wages. Hene, provided tat < 1 (e.g. te f-firm would definitely loate prodution in te ost ountry), DB proves to be an equilibrium wage-bargaining struture sustaining inward FDI. Let, in turn, explore te FDI ase relative to te Exports one, under CB. By virtue of (16) and (13), Condition (II) is derived. Π Π f * fe* ( y = ( y f * fe* ) ) > 1 1 < < 56[( b = f / k) + x] ( b / k)(30 7k) + a[35 (45 /( k( + 1))] (45 /( k( + 1)) Tis ondition reveals tat, as te rival firms are paying te same wage, te f-firm fully enjoys its tenologial advantage relative to te -firm. Hene, even if exeeds 1, te f-firm may find profitable te FDI strategy relative to te exports one. Te reason is tat, via wage entralization, te f-firm is made apable to raise its rival firm s unit labour ost disadvantage, enoug to ompensate a iger FDI -assoiated unit ost of its own. Still, owever, FDI is not an equilibrium strategy for te f-firm under CB. As we saw already (reall (18)), in te absene of 1

14 a union-ompliane devie to wage-entralization te ome union would ex post differentiate wages. Terefore, 1 < < would not be enoug for te f-firm to seure te iger relative profitability of te FDI strategy (reall Condition (I)). Under tese irumstanes, it proves tat CB is not an equilibrium wage-bargaining struture sustaining inward FDI. Proposition 1 Our findings so far are summarized in te following proposition. a. Given k >1, if te f-firm loates prodution in te ost ountry under DB, it pays a iger wage tan te -firm. However, under eiter DB or CB, te f-firm firm faes a lower ost per effiient unit of labor relative to te -firm. Hene, so long as DB (CB) proves to be a Nas Equilibrium Wage-Bargaining Struture, inward FDI may emerge if is lower tan 1 ( ). b. DB (CB) always (never) proves to be a Nas Equilibrium Wage-Bargaining Struture. Terefore, and given tat 1 is always lower tan, unless a union - ompliane devie to CB exists inward FDI would emerge only if is lower tan Optimal Labor Market Institutions In tis setion attention is turned to Stage 1, were we onsider te oie of a poliy maker driven by te (1a)-(1b) lexiograpi objetive. Te latter effetively ditates tat te labour market institutions sould be settled (or reformed) to indue FDI, so long as teir aommodation would, at least, seure te same level of domesti (aggregate) employment wit te ase of exports. Oterwise, exports sould be better emerge in te ost ountry and, terefore, te labour market institutional resolutions sould target to deter FDI in equilibrium. Let, ene, first derive te domesti aggregate employment level in te FDI ase, under DB and CB. By means of (8a) - (11b) and (16), (17), it turns out tat: 13

15 [ y * f* * f * ~ + ( y / k)] = [ y + ( y / k)] L Were, ~ a( k + 1) ( k) (b / k)[ k( + 1] L =. 6k Interestingly, if bot CB and DB were sustainable FDI-aommodating wage bargaining strutures, te ensuing domesti aggregate employment would be of te same level ( L ~ ), under eiter struture. Te interpretation of tis result is tat, as it an be readily eked from (8) and (15), te entralized wage set by te ome union under CB averages te optimal deentralized wages of te DB regime (i.e., * w < * w < w f* ), so tat te employment gain from lowering te wage in te effiient f-firm to ompensate union rents for te employment loss from raising te wage in te ineffiient -firm. Is, owever, L ~ e* y? To find out, let first define a -upper bound, ~ 5a(3 k) + (b / k)[ k(15 k) 15] 8( b f + kx) =, 15( k) su tat if ~ L ~ e* y. Let furter define, a b -upper bound, b 34k( = b f [ 34k( + 8] + x{ + 8} 5ka[ k( + 4] k[9k( + 8], su tat if b b ~. Ten, te answer and reasoning of weter export substituting inward FDI may not ensue a negative effet on domesti employment is as follows. Assume for a moment tat CB as well as DB are sustainable wage bargaining strutures. Ten, as te labour-saving f-firm loates prodution in te ost ountry, domesti employment would not be negatively affeted if te f-firm s prodution is materialized at a suffiiently large 14

16 sale of output. For tat to appen, owever, te f-firm s unit ost arising from FDI must be suffiiently low (e.g. ~ ). On te oter and, in te FDI ase te f-firm s wage is always positively related wit te domesti unemployment benefit. Hene, as te latter dereases te upper value (e.g. ) for FDI being te f-firm s optimal strategy beomes less binding. In effet, wenever ~ and, ene, export substituting FDI would not ensue a negative effet on domesti employment, te unemployment benefit must be suffiiently low (e.g. b < b ) so tat ~ < and FDI to be indued in equilibrium. Yet, if 1 <, FDI would emerge only under CB. On te ontrary, in ase tat > ~ and, terefore, exports substituting FDI would bring a negative effet on domesti employment, it simply needs te unemployment benefit to be equal to its upper bound (e.g. b = under CB. b ), so tat = ~ < and FDI to be deterred in equilibrium, even Under tis ligt, our suggestions for optimal labour market institutional settlement (or reform) an be summarised in te following proposition. Proposition a. Wenever > ~, te optimal labour market institutional set-up in te ost ountry sould be saped in order to deter (aommodate) FDI (exports). For tat, simply, te unemployment benefit must be set at a level b = b. b. Wenever ~, if: (i). < < ~, FDI would optimally emerge, irrespetively of te struture of wage 1 bargaining and te level of te unemployment benefit in te ost ountry. (ii). 1 < < ~, or < < ~, te optimal labour market institutional set-up 1 in te ost ountry sould be saped to indue exports substituting inward FDI. For tat, 15

17 te unemployment benefit must be set at a level b < b 6. te offiial wage-bargaining struture must be CB. a legal provision must be issued, imposing a lump-sum tax T R on union rents wenever unions do not omply wit CB. 5. Conlusions Tis paper proposes setor-level labour market institutional arrangements tat may prove to be optimal for a poliy maker faing a trade-off between effiieny-enaning inward FDI and domesti employment prospets. As it is so far inerent in modelling unionoligopoly interation, our analysis is based on rater restritive funtional forms. Yet, in te future our findings may prove to sare more generality, wilst at te moment tey elp to better understand te endogenous links tat tey may exist among (various dimensions of) te labour market institutional set-up and inward FDI. In partiular, our findings sow tat, if te FDI-assoiated unit osts are low enoug ten, irrespetively of te struture of wage bargaining and te level of te unemployment benefit in te ost ountry, exports substituting FDI may emerge witout reduing domesti employment. Yet, even if tose osts are ig enoug, inward FDI may emerge ensuing a negative effet on domesti employment relative to exports aommodation. Tus, strikingly, an inrease in te domesti unemployment benefit may, troug FDI deterrene, protet domesti employment. Last, but not least, for intermediate values of teir intrinsi unit osts, 6 Te exat value of te unemployment benefit would of ourse be determined aording to additional riteria, wi are not onsidered in te present analysis. Yet, wat we argue is tat, in order to onform wit te poliy 16

18 exports substituting FDI may emerge witout reduing domesti employment, so long as te wage bargaining struture is entralised and te unemployment benefit is suffiiently low. However, in tis ase te labour market institutional set-up must also retain its redibility, via a lump-sum tax on union rents tat would subtrat all tat te union may gain by (ex post) deviating to deentralized bargaining. In effet, we suggest tat a poliy maker in a tenologially defiient ountry, possibly for tat reason opting for exports substituting inward FDI, may promote tis interest witout undermining domesti employment, eiter by manipulating te fators tat affet te FDIassoiated unit osts, or by properly adjusting te labour market institutional set-up. Given, bot, te limited possibilities for te former option, and te relative simpliity of te latter task, te value-added of our findings is signifiant. Several inquiries are still left open for furter resear. For instane, note tat we ave examined te equilibrium prospets of te entralised wage bargaining struture, owever, given a entralised union struture in te ost ountry. Still, noneteless, we ave ignored te possibility tat ome workers may ex post be organised into separate unions and, tus, be able to differentiate wages despite te existene of a non-ompliane tax on (a single) union rents. On te oter and, oalition formation and/or lobbying ativity among firms, unions and poliy makers may also signifiantly affet te labour market institutional resolutions. More interestingly, te ontext of our analysis an be broadened by onsidering relative bargaining, as well as tenologial, asymmetries aross ountries and, tus, exploring optimal labour market institutional settlement under te possibility of ross- sipping in FDI. maker s partiular objetive, tis value sould be lower tan b. 17

19 Referenes Boot, A. (1995): Te Eonomis of te Trade Union, Cambridge University Press. Bugin, J., and S. Vannini (1995): Strategi diret investment under unionized oligopoly, International Journal of Industrial Organization, 13, Dillon, A., and E. Petrakis (00): A generalized wage rigidity result, International Journal of Industrial Organization, 0, Dimelis, S., and H. Louri (00): Foreign Ownersip and Prodution Effiieny: A Quantile Regression Analysis, Oxford Eonomi Papers, 54(3), Dunning, J.H. (1980): Toward an Eleti Teory of International Prodution: Some Empirial Tests, Journal of International Business Studies, 11(1), Dunning, J.H. (1988): Te eleti paradigm of international prodution: a restatement of some possible extensions, Journal of International Business Studies, 19, 1-9. Hartog, J., and J. Teeuwes (199): Labour Market Contrats and Institutions: A Cross National Comparison, Nort Holland, Amsterdam. Hood, N., and S. Young, eds. (000): Te globalization of multinational enterprise ativity and eonomi development, Mamillan Press, London. 18

20 Layard, R., S.J. Nikell and R. Jakman (1991): Unemployment: Maroeonomi Performane and te Labour Market, Oxford University Press. Leay, D., and C. Montagna (000): Unionisation and Foreign Diret Investment: Callenging Convetional Wisdom?, Eonomi Journal, 110, C80-C9. Naylor, R., and M. Santoni (003): Foreign Diret Investment and Wage Bargaining, Journal of International Trade and Eonomi Development, 1(1), Oswald, A.J. (198): Te Miroeonomi Teory of te Trade Union, Eonomi Journal, 9, Pitelis, C., and R. Sugden, eds. (1991): Te nature of te transnational firm, Routledge, New York. Zao, L. (1998): Te impat of foreign diret investment on wages and employment, Oxford Eonomi Papers, 50,