Strategic trade and FDI policies in a unionized industry

Abstract

This paper analyzes the differences between strategic trade and the competition policies (in the form of inward Foreign Direct Investment) to regulate a unionized monopoly in the domestic country. With decentralized negotiations both policies reduce labour and product market distortions. However the fixed cost for the foreign entrant and the degree of product differentiation determine which policy should be implemented to maximize national welfare, and the cases in which the domestic government can intervene, to achieve a Pareto-improvement.