Abstract
This paper complements the recent game-theoretic literature on foreign direct investment by modelling the problem of strategic investment in a host economy with (equilibrium) unemployment. Specifically, the possibility of unemployment arises through the presence of unions which can be powerful enough to bargain over wages with the firms producing in the host market. Our major findings are the following. Concerning the labor market, unions are indifferent to the choice by a multinational enterprise (MNE) between exporting investing abroad, provided that the MNE becomes unionized when opening facilities in the host country; otherwise, unions prefer the MNE to serve only the host market by exports. Concerning the MNE, unionization deters foreign direct investment in the case of full unionization, while unionization is an incentive to foreign direct investment if the MNE is able to be non-unionized in the host country.
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