Multinational location decisions and the impact on labour markets

Abstract

Foreign direct investment (FDI) has grown far more rapidly than trade during the last two decades. As with the other prominent features of globalisation, FDI is controversial. The impact of FDI on labour markets has been of growing concern, particularly, for source countries. The deterioration of labour market conditions for unskilled workers in many OECD countries during the 1980’s and 1990’s was a primary catalyst for the concern. As for its impact on labour markets, FDI may have effects that, at least in the short- and medium-run, may well dwarf the effects of trade and immigration. In this paper, we present a simple partial equilibrium model that focusses on the location decisions of multinational firms. We use the model to analyse the effects of higher labour standards, a ‘race-to-the-bottom’ and capital market integration.