Industrial Relations Systems and US Foreign Direct Investment Abroad

Five readily distinguishable industrial relations systems are identified based on differences in education levels, hourly compensation costs and various government and collective bargaining constraints placed on management’s freedom to set the terms and conditions of employment. A model of foreign direct investment (FDI) that incorporates these key industrial relations variables is then specified and tested against US FDI across a sample of nine industries and 33 industrialized and developing countries. The industrial relations system variables significantly influence US FDI abroad. In particular, education is negatively related to FDI across low skill–low wage countries but is positively related to FDI across high skill–high wage countries. Higher hourly compensation costs (apparently capturing higher productivity) are associated with greater FDI. Whereas government restrictions on layoffs, union penetration and centralized negotiation structures are negatively related to US FDI, the ratification of ILO standards and works council policies are positively related to US FDI. Based on these findings, the FDI attractiveness of industrial relations systems are compared and policy implications discussed.