Media Briefings

Unionisation Triggers Tax Incentives To Attract Foreign Direct Investment

  • Published Date: June 2011

Countries and regions with strong trade unions and relatively high wages are often
surprisingly successful at attracting investment by multinational firms. Research by
Professor Andreas Haufler and Ferdinand Mittermaier, published in the June 2011 issue
of the Economic Journal, suggests that this happens because governments respond to
unionisation by offering substantial subsidies to attract foreign direct investment (FDI).
Their results do not imply that unionisation is ‘good’ for a country. In fact, the research
shows that the high-wage country is worse off than its lower-wage neighbour because of
the high subsidies it has to pay to attract FDI. The results do imply, however, that if wages
cannot be affected directly, then attracting multinational firms is an attractive solution for
governments to mitigate the effects of strong union power.
The researchers note that in recent decades, there has been a growing incidence of large
government subsidies being offered to multinational firms to attract them to a specific
country or region. The highest subsidies have typically been paid in regions with strong
union power, high unemployment and weak economic activity, such as eastern Germany or
southern Italy.
Multinational firms locating in these regions have often been able to receive subsidies worth
between a quarter and a third of the total value of the investment – and in some cases even
more. This raises the question of why governments are willing to offer such high levels of
subsidies to individual firms.
The answer given by these researchers is that the high subsidy payments can be a rational
policy for governments, as they give trade unions an incentive to exert wage restraint in
exchange for additional jobs that are created in the newly attracted firms.
A government that acts in the best interest of its citizens will therefore be willing to offer
multinational firms a subsidy that more than compensates the firm for the higher wage cost
in this region. The final result is that FDI flows to countries that have higher wages, relative
to productivity, than neighbouring countries with less union power.
These results are consistent with several empirical studies that show a surprising, positive
relationship between the degree of unionisation in a given region and the volume of FDI
This empirical finding stands in stark contrast to the previous theoretical literature on
unionisation and FDI, which has generally concluded that countries with stronger unions will
be at a disadvantage in the competition for FDI.
The research also shows that high-wage countries may still be able to win the competition
for FDI, even if they have additional locational disadvantages, such as a smaller home
market, in comparison with their lower-wage competitors.
Notes for editors: ‘Unionisation Triggers Tax Incentives to Attract Foreign Direct
Investment’ by Andreas Haufler and Ferdinand Mittermaier is published in the June 2011
issue of the Economic Journal.
Andreas Haufler is at the University of Munich. Ferdinand Mittermaier is at Allianz SE in
For further information: contact Andreas Haufler on +49 89 2180 3858 (email:; or Romesh Vaitilingam on +44-7768-661095