Government Partisanship, Unionization and the Structure of Investment Liberalization

Abstract

Governments in advanced industrial democracies generally regulate foreign direct investment (FDI) inflows with two types of policy measures: entry barriers and post-establishment restrictions. This article provides an integrated account for the two types of FDI restrictions, which is largely absent in the existing literature. We argue that the government's choice of FDI policies is shaped by a compound effect of the incumbent's ideological orientation and the political influence of unionized labour. Although inward FDI broadly benefits domestic workers, the entrance of multinational corporations (MNCs) adversely impacts the unionized interests of labour by transforming the labour market in ways detrimental to unions’ wage-bargaining leverage. Leftist governments, driven by the preferences of their labour constituency, tend to lift entry barriers to FDI in order to promote capital inflows. At the same time, leftist governments may also need to address unions’ concerns about inbound MNCs by tightening post-establishment restrictions on FDI, which impose constraints on the globalized business and operational model of MNCs. We argue that leftist incumbents generally liberalize entry barriers but tighten post-establishment restrictions when the level of labour unionization is high. We found evidence consistent with our argument from country-level and sector-level analysis of FDI restrictions, using a sample from the early 2000s to the mid-2010s of Organisation of Economic Co-operation and Development (OECD) countries.