Temporary social dumping, union legislation and FDI: a note on the strategic use of standards

This paper analyses the welfare implications for a developing country of using union legalisation as a policy instrument to attract inward foreign direct investment. While its presence may discourage a foreign multinational (MNE) from locating in the host country,unionisation is an important rent-extracting instrument for the host country. We show that if the MNE benefits from dynamic effects, the host country government may have an incentive to adopt temporary social dumping: banning the union in the short run to extract higher rents in the future. However, if the government can use a fiscal instrument in conjunction withunion legalisation, the former can circumvent the need to engage in social dumping.