Labor Market Institutions and Outward Foreign Direct Investment in OECD Countries

Abstract

Concern among voters in the United States and elsewhere about jobs moving overseas has spurred significant research into outward foreign direct investment (OFDI), which can depress employment and economic growth. Recent research shows that labor market institutions play a prominent role in influencing inward foreign direct investment in developed economies, but little is known about how such institutions influence OFDI. We argue that increasing labor union density or centralized wage bargaining threatens firms’ profitability and thus leads to higher OFDI flows. Yet union density and coordination of wage setting moderate each other’s effect on OFDI since firms can expect wage moderation, fewer strikes, and labor skill protection that offset labor costs. Our tests using data on 27 Organization for Economic Cooperation and Development member countries between 1971 and 2013 suggest this is the case. The findings indicate that a highly stable and institutionalized labor market can lead firms to stay and to return if they have left.