Unionisation Triggers Tax Incentives to Attract Foreign Direct Investment

This article analyses tax competition between a unionised and a non-unionised country for the location of an outside firm. We show that unionisation increases the incentive for the government to attract a foreign investor, in order to affect the behaviour of the domestic union. This results in the unionised country's government offering a tax discount (or a subsidy premium) to the outside firm in excess of what is needed to compensate the investor for the higher union wage. In equilibrium, therefore, the unionised country attracts the foreign investment, even if it has no other location advantages.