Labor Disputes and Direct Foreign Investment

Abstract

A theoretical model demonstrates how labor disputes exert pressure on the expected utility of a risk averse producer. The pressure from heightening uncertainty as well as increasing wage rates in production incurred by plaguing labor disputes forces domestic firms to reduce optimal domestic output levels (and profits) but does not necessarily reduce expected utility because utility is a function of variance as well as of profits and lower profits may be partly offset by reduced variance. The paper proves that the reduction of the output level is never sufficient to keep expected utility level from increasing uncertainty. Consequently, foreign countries with lower instability are more attractive, and outward DFI is accelerated.