Divide and Rule: Geographical Diversification and the Multinational Firm

Dermot Leahy and Stephen Pavelin

Open Economies Review, 2004, vol. 15, issue 4, 363-374

Abstract: We develop a model to illustrate a motive for FDI that derives from a firm's overall locational strategy. A firm, that initially has a plant in its home country, may choose to also have a foreign plant in order to improve its bargaining position versus local labour unions. This permits the firm to reduce wages. Furthermore, the existence of a second foreign plant acts to discipline the demands of foreign workers. Thus, the firm is faced with a link between the wage and its degree of geographical diversification. This drives up the number of plants the firm has in equilibrium.

Date: 2004
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