The e¤ects of labour union on export market penetration Debasmita Basak

Arijit Mukherjee

University of Nottingham

University of York

and August 17, 2012

Abstract In a Cournot-Nash framework, we study the e¤ects of labour union on the incentive for export. Considering the case of no labour union as our benchmark, we show the e¤ects of two types of labour unionisation structure, viz., centralised union (industry-wide union) and decentralised unions (…rm-speci…c unions). We show that the presence of labour union limits the export market activity of the …rms compared to the situation with no labour union. However, while looking at the e¤ects of the labour unionisation structure, we …nd that the strategic incentive for exporting is higher under a centralised union and the non-strategic incentive for exporting is higher under decentralised unions.

Key Words: Centralised union; Decentralised union; Export cost

JEL Classi…cation: D43; J51; L13; O31

Correspondence to: Arijit Mukherjee, School of Economics, University of Nottingham, University Park, Nottingham, NG7 2RD, U.K. Email: [email protected] Fax: +44-115-951 4159

1

1

Introduction

The purpose of this paper is to show the e¤ects of the labour union and its structure on the …rms’incentive for export. Thus, we complement the recently growing literature analysing the e¤ects of …rm-productivity and the …xed costs of exporting on the …rms’decision on export (Melitz, 2003, Chaney, 2008, Eaton et al., 2008, Bernard et al., 2009 and 2010 and Brambilla, 2009, to name a few). Although this literature provide several important insights, they ignore stratgic wage determination by considering perfectly competitive labour markets. However, the real life sitution is often di¤erent. Labour markets in many countries are characterised by labour unions, and the wage seting behaviour of the labour union vary across countries. Wage bargaining has caught signi…cant attention in recent decades. This is, in part, due to the fact that, in most industrialised countries, a large part of the workers have their wages set either through collective bargaining (industry-wide or centralsied union) or through …rm-level bargaining (…rm-speci…c or decentralised union). While the centralised argument is egalitarian in nature and generally makes the workers better o¤ if the workers are su¢ ciently substitutable (Horn and Wolinsky (1988) and Davidson (1988)), the rigidity associated with this system is generally bad for overall economic performance (Nickell (1997) and Siebert (1997)). The rigidity associated with a centralised wage setting has been attacked in recent years and tendencies towards a more decentralised wage setting is gaining popularity in the policy circle. For example, countries such as Sweden, Australia, the former West Germany, Italy, the UK and the USA move towards a more decentralised unionisation structure, as documented in Katz (1993).1 The OECD Jobs Study recommends making the wages and labour costs more ‡exible to re‡ect local conditions (OECD (1996), p. 15).2 Given the diversity in the wage seting behaviour, we consider a simple model to show how the …rms’exporting behaviours are a¤ected by decenralised and centralised labour unions.3 Under decentralised unions, the …rms-speci…c unions set the respective wages, and under a centralised union, an industry-wide union sets the wages for all …rms. The case of no labour union acts as a benchmark for our analysis. We consider an economy with two quantity-setting …rms, each producing a single product which are imperfect substitutes to each other. Initially the …rms produce in the domestic market and compete like cournot oligopolists. However, each …rm has the option to export to a foreign market by incurring a …xed cost of exporting4 . We show in this framework that although the presence of labour union reduces 1

Also see Calmfors and Dri¢ ll (1988), Moene and Wallerstein (1997), Flanagan (1999) and

Wallerstein (1999). 2 The trend over the past decades towards more decentralized unions can also be found in OECD (2004). 3 See Iversen (1998) for an index of centralisation of wage bargaining in di¤erent countries. 4 This type of cost may arise due to the cost of gathering information about the foreign market. Das et al. (2001) econometircally measure the costs of exporting. As mentioned in Melitz (2003), the managersare often concerned more about the …xed costs of exporting than about the per-unit costs of exporting.

2

the incentive for exporting compared to the situation no labour union, the e¤ects of di¤erent labour unionisation structure on the incentives for exporting are not straightforward. The strategic incentive for exporting is higher under a centralised labour union and the non-strategic incentive for exporting is higher under decentralised unions. There are several works showing the e¤ects of labour unions in open ecoonmies. Brander and Spencer (1988) discusses the consequences of labour union on the trade policies. Bandyopadhyay et al. (2000) show the optimality of export subsidy in the presence of labour union under price competition. Using a cournot game, Mezzetti and Dinopoulos (1991) investigate the e¤ects of tari¤ protection in the presence of albour union. They show that a credible threat to shift production abroad increases the domestic pro…t at the cost of lower wage rate. Andersen and Sørensen (1993) and Dri¢ ll and Van der Ploeg (1993, 1995) show how the pattern of wage bargaining is a¤ected by product market integration.5 Although these papers show the e¤ects of labour union in the presence of exporting, the …rms in those papers did not decide whether or not to take part in the export market. In other words, whether to export or not was not a choice variable of the …rms. In contrast, our purpose is to see how the presence of labour union and di¤erent unionisation structure a¤ects the …rms decision on export. The rest of the paper is organised as follows. In section 2, we outline the model and derive the equilibrium output for export market strategy and no export market strategy chosen by the …rms. Section 3 discusses the case where there is no labour union interventions. Section 4 and 5 demonstrates the case under …rmspeci…c unions and industry-wide union respectively. The e¤ects of union structure on export market penetration is alluded in Section 6 and, Section 7 closes the paper with conclusion and further extensions of our work.

2

The Model

We consider an economy comprising two …rms, indexed by k = A; B. Each of these …rms produce a single commodity, good 1 and good 2 respectively. The goods are assumed to be horizontally di¤erentiated. Initially the …rms compete in the domestic market denoted by D. However, each …rm has an outside option to export its commodity to an international market (foreign country), F . Firms incur a …xed cost f (> 0) if they want to sell their products abroad. For simplicity, we assume the market penetration cost (f ) to be equal across …rms. Each …rm regards each country as a separate market and chooses the pro…t-maximising quantity for each market separately and on the Cournot assumption that each …rm set its own output level taking into account the best response of its rival. The …rms use labour as the only factor of production. The technology is such that each …rm requires one unit of labour (Li ) to produce one unit of output (qi ) in both markets, meaning that the technology exhibits constant return to scale, i.e., Li = qi where i 2 [1; 2) indexes the number P of goods produced in the economy. The total labour demand per …rm is Lk = Li . We assume that the workers are 5

See also Danthine and Hunt (1994), and Naylor (1998, 1999) for a survey.

3

unionised and each …rm needs to hire workers from the labour unions, which can be either …rm-speci…c, called decentralised union, or industry-wide, called centralised union. We consider a "right-to-manage" model of labour union (see, e.g., Bughin and Vannini, 1995, López and Naylor, 2004, Calabuig and Gonzalez-Maestre, 2002 and Haucap and Wey, 2004 and Mukherjee and Pennings, 2011, where the …rms and the union(s) bargain for wages and the …rms hire workers according to their requirements. However, in order to capture the maximum e¤ect of labour union, following Calabuig and Gonzalez-Maestre (2002) and Haucap and Wey (2004), we assume that the labour unions have full bargaining power in wage determination. As our benchmark we assume a competitive labour market where the …rms and the workers take wages as given. This enables us to compare the …rms’ incentives to export under a labour market with distortions and without distortions respectively. We consider the following game structure. Prior to any action each …rm commits production in the domestic market. At stage one, the …rms decide whether to market their products in an international market in addition to the domestic market. At stage two, the equilibrium wages are determined through labour unions conditional on the export market activity of the …rms. At stage three, the …rms compete like cournot oligopolists and the respective pro…ts are realised. We solve the game by backward induction to work out the sub-game perfect equilibria.

2.1

Output game

As outlined above, we begin our analysis from stage 3 where the …rm chooses the output level that maximises its pro…t. We assume the inverse demand function6 for good i and j (i; j = 1; 2 and i 6= j) in the domestic market and foreign market are represented by: PiD = a qiD qjD (1) PiF = a

qiF

qjF

(2)

where, Pi and qi are price and output of product i, i 2 [1; 2) and the subscripts D and F are taken to denote the domestic market and foreign market respectively. The parameters 2 (0; 1) and 2 (0; 1) denote the degree of product substitution in the domestic market and international market respectively. If ; are close to zero, the goods are highly di¤erentiated and thus the …rms are close to being monopolists. The upper bound of ; a¢ rms that the goods are closer to homogeneous goods and thus the …rms face …ercer competition. For ; = 1 the goods are perfect substitutes. Since, we consider that the products (good 1 and good 2) are imperfect substitutes in both markets (domestic and international), we will mainly concentrate on ; 2 [0; 1]. For each of the market segments, the …rm produces in accordance with the inverse demand functions as given in expressions (1) and (2). We will next present 6

The inverse demand function is due to Bowley (1924) and is derived from the utility function:

U (q; ) =

P qi i

1P 2 qi 2 i

P

qi qj + , where

j i6=j

4

is a numeraire good.

the output levels under four possible combinations: (i) neither …rm exports, (ii) either …rm exports, and, (iii) both …rms export. First, we consider the case where neither …rm exports its product to the international market. In this situation, the …rms commits production in the domestic market only and the corresponding levels of output yield the following q1D = q2D =

(2 (2

) a 2wA + wB 2 4 ) a + wA 2wB 2 4

(3) (4)

Now, consider the case where …rm A exports its products to a foreign market whereas …rm B decides not to export. The resulting output levels are qb1D = qb1F

=

qb2D =

(2 1 (a 2 (2

) a 2wA + wB 2 4

(5)

wA )

(6)

) a + wA 2 4

2wB

(7)

Similarly, we consider a symmetric case, where …rm A does not involve in foreign market production, however, …rm B chooses to export its products to the international market, we obtain the following levels of output qe1D = qe2D = qe2F

=

(2 (2 1 (a 2

) a 2wA + wB 2 4 ) a + wA 2wB 2 4 wB )

(8) (9) (10)

Finally, there could be another possibility where both …rms engage in export market activities. Here, the equilibrium levels of output are q 1D = q 1F

=

q 2D = q 2F

3

=

(2 (2 (2 (2

) a 2wA + wB 2 4 ) a 2wA + wB 2 4 ) a + wA 2wB 2 4 ) a + wA 2wB 2 4

(11) (12) (13) (14)

No Union Case: The Benchmark

We now turn to stage 2 where we de…ne and solve the wage setting game. First we consider the no union case. In this case there is no labour market distortion meaning 5

that the workers earn a competitive wage rate c 2 [0; 1]. The idea is that workers, if not …nding employment in the sectors governed by labour unions are able to work in the rest of the economy which yields wA = wB = c. First, if neither …rm exports, the straightforward calculations give the following pro…t functions A

=

=

B

2

a c 2+

(15)

If …rm A decides to export and …rm B does not, the equilibrium pro…ts are " # 2 1 1 2 + f bA = (a c) 2+ 4 2

a c 2+

bB =

(16) (17)

In a likewise manner, when …rm A does not export and …rm B exports its product in a foreign land, the pro…t levels take the following forms a c 2+

eA =

c)2

eB = (a

2

(18) "

1 2+

2

1 + 4

#

f

(19)

Finally, when both …rms engage in export market operation, the pro…t levels are # " 2 2 1 1 1 2 (a c) + f (20) A = B = 4 2+ 1+ Table 1 summarises the payo¤s of the …rms conditional on their export decisions, when there is no union.

Table 1: NO UNION Firm 2 ! Firm 1 # Export

Export 1 4 1 4

a c 2+ a c 2+

2 2

+ + a c 2+

No Export (a

c)2

1 2+

No Export 2

a c 1+ a c 1+ 2 2

f ;

2

(a

c)2

a c 2+

f

; +

1 4

f

2

1 2+

a c 2+

2

;

+

1 4

f ;

2

a c 2+

2

The Nash equilibria of the above table are outlined in the following proposition.

6

Proposition 1 Assume that there is no labour union interventions (i.e., the …rms have full bargaining power over the wages) (a) Both …rms export when f < fL (b) Neither …rm exports when f > fH (c) Only one …rm exports when fL < f < fH a c 2+

where, fL =

2

and fH =

a c 2 2

Export market penetration creates two e¤ects on the pro…tability of the exporting …rm. First, it increases the pro…t of the exporting …rm by allowing it to penetrate an international market. Second, it imposes a …xed cost that an exporting …rm must incur while exporting its commodity. When the cost of export is negligible i.e., f < fL , the …rst e¤ect dominates the second e¤ect and both …rms …nd it pro…table to promote export market operation. Similarly, for a relatively high …xed cost, i.e., f > fH , the second e¤ect dominates the …rst one and hence, neither …rm exports its product to the international market. Finally, when the cost of export is moderate, i.e., fL < f < fH one …rm …nds it pro…table to export if the other does not export and the exporter’s gain from export is su¢ ciently large to cover the international market penetration cost. Following the work by Roy Chowdhury (2005) we can illustrate the strategic and non-strategic e¤ects from market penetration. From the subgame perfect strategies, two strategic e¤ects arise. We name the …rst e¤ect as the own wage e¤ ect, which is given by its pay-o¤ from export, net of its pay-o¤ from no export market operation, given that its rival penetrates the international market. Formally, the penetration cost cut-o¤ is de…ned as fL 6

a c 2+

1 4

2

+

a c 1+

2

a c 2+

2

.

The second e¤ect we call the strategic wage e¤ ect, which is given by its payo¤ from export, net of its pay-o¤ from no export market operation, given that its rival does not export. Formally, the penetration cost cut-o¤ is de…ned as fH 6 (a

c)2

1 2+

2

+

1 4

a c 2+

2

.

In the following sections we consider the unionised wage settings. To this end we consider two scenarios: …rm-speci…c wage bargaining and industry-wide wage bargaining.

4

Firm-speci…c Union

Let us now consider the labour market with union interventions. We start with the decentralised union structure. In this case, each …rm-speci…c union chooses wage rate such that its own rent is maximised. Under decentralised wage structure, each …rm-speci…c union set the wage by maximising the utility function Uk = (wk c) Lk ; k = A; B; with respect to the wage, wk , where Lk is the labour demand of the k th …rm. Initially, we consider the case where neither …rm exports. The resulting output levels are demonstrated in expressions (3) and (4). The k th union determines the wage rate wk by maximising Uk = (wk c) qiD . Unions’ utility maximisation 7

problem leads to the equilibrium wage rate of …rms A and B as a (2

fs fs wA = wB =

) + 2c 4

(21)

2

And, the pro…t level of the k th …rm gives fs A

=

fs B

=

2 (a c) (2 + ) (4 )

2

(22)

Next, we consider the case where …rm A exports but …rm B does not. The corresponding output levels are shown in expressions (5)-(7). Firm A (…rm B) determines its …rm-speci…c wage rate wA (wB ) by maximising the objective function UA = (wA c) (q1D + q1F ) (UB = (wB c) q2D ). Maximisation leads to the following wage rates for …rm A and …rm B " # 2 a 16 2 3 2 + 2c 8 + fs wA = (23) 32 5 2 " # 2 2 a ( 2) 4 16 c ( + 4) 8 fs wB = (24) 2 (32 5 2 ) The corresponding pro…t levels are " (a c)2 5 6 + 20 5 48 4 320 3 96 fs = A 4 (2 + )2 (32 5 2 )2 " #2 2 (a c) 4 16 fs = B (2 + ) (32 5 2 )

2

+ 1536 + 2048

#

(f25)

(26)

Similarly, when …rm B chooses to export and …rm B does not, the output levels are equivalent to the expressions (8)-(10). In this case, …rm A (…rm B) maximises UA = (wA c) q1D (UB = (wB c) (q2D + q2F )) to determine its wage rate, which takes the following form " # a( 2) 2 4 16 c ( + 4) 2 8 fs wA = (27) 2 (32 5 2 ) " # 2 + 2c 8 + 2 a 16 2 3 fs wB = (28) 32 5 2 And, the equilibrium pro…ts are " #2 (a c) 2 4 16 fs = A (2 + ) (32 5 2 ) " (a c)2 5 6 + 20 5 48 4 320 3 96 fs = B 4 (2 + )2 (32 5 2 )2 8

(29) 2

+ 1536 + 2048

#

f(30)

Finally, when both …rms chooses to capture the international market, the output levels are equivalent to the expressions stated in equations (13)-(14). Firms determine the wage rate by maximising the expressions UA = (wA c) (q1D + q1F ) and UB = (wB c) (q2D + q2F ) respectively. The …rm-speci…c wage rates take the following forms " # a( 2) ( 2) (4 + + ) 2c 2 + 2 8 fs fs wA = wB = (31) 2 ( 4) + ( 2 4) 4 ( 2 + 8) And, the pro…t levels are " 2 (a c) fs fs A = B = 2 ( 4) + ( 2

2

+

2

8

4(

2

4)

8)2

+

#"

2

1 2+

+

2

1 2+

#

f

(32) The following pay-o¤ table summarises the resulting outcomes for di¤erent strategy combinations chosen by a …rm and its rival. Table 2: FIRM-SPECIFIC UNION Firm 2 ! Firm 1 #

Export

Export

[ "

No Export

f] ; [

1

2

=

1

(a c)

2

2

2+ 2

8)

2

4) 4(

2+

(5

(

4

3

96

4(2+ )2 (32 5

2 )2

4)+ (

6 +20 5

48

2

#

;

[

f] ;

2 2

(a c)( 4 16) (2+ )(32 5 2 )

2(a c) (2+ )(4 )

2

2

#

2(a c) (2+ )(4 )

;

2

f]

2

2(a c)(

=

"

f]

1

(a c)( 2 4 16) (2+ )(32 5 2 )

[ where,

No Export

320

2

2

1 2+

2 +1536

+2048)

8)

+

1 2+

2

The Nash equilibrium outcomes for the above pay-o¤ table are documented in the following proposition. Proposition 2 Assume that there are …rm-speci…c unions. (a) Both …rms export when f < fLf s fs (b) Neither …rm exports when f > fH fs fs (c) Either …rm exports when fL < f < fH 2 2 2(a c)( 2 + 2 8) 1 where, fLf s = 2 ( 4)+ ( 2 4) 4( 2 + 8)2 + 2+1 2+ fs and, fH =

(a c)2 (8192 3328

2 +256 3 +520 4

68

4)2 (32 5

2 )2

4( +2)(

5

30

6 +5 7

2

(a c)( 2 4 16) ( +2)(32 5 2 )

)

The intuition for the equilibrium market penetration strategies in Proposition 2 is similar to that of Proposition 1. 9

2

5

Industry-wide Union

Let us now elaborate the centralised wage bargaining. In this case, there is an industry-wide union that either charges a uniform wage rate or discriminatory wage rates to both …rms to maximise the utility of the industry-wide union. We model the wage setting in the P centralised union case in a way that the union maximises the utility U = (w c) Lk with respect to w, which yields a uniform wage rate across …rms. Secondly, the union could P set a discriminatory wage rate, where the industry-wide union maximises U = (wk c) Lk . Next, we derive the explicit solutions of the wage rates depending on the …rms’exporting strategies. We get that the equilibrium wages are wiw = 12 (a + c), irrespective of the export market penetration strategies of the …rms and whether or not the union charges a uniform wage or discriminatory wages. Hence, …rms’ decisions on whether to capture the international market do not a¤ect the equilibrium wage rate. The result follows from a theoretical …nding. As documented in Dhillon and Petrakis (2002), as long as the wage rate is negotiated at the centralised level, the wage rate is independent of the market parameters, such as, intensity of competition, degree of product di¤erentiation, type of competition (whether the …rms compete in prices or compete in quantities). A quick look at the …rms’pro…t levels under industry-wide union structure reveals the followings. If neither …rm exports, the equilibrium pro…ts are fs A

=

fs B

=

1 4

a c 2+

2

(33)

If only …rm A exports, the equilibrium pro…ts of …rms A and B are respectively " # 2 1 1 1 fs 2 bA = (a c) + f (34) 4 2+ 4 bfBs =

1 4

efAs

1 4

a c 2+

2

(35)

Similarly, if only …rm B exports, the equilibrium pro…ts of …rms 1 and 2 are respectively =

efBs =

a c 2+

1 (a 4

c)2

2

(36) "

1 2+

2

+

1 4

#

Finally, if both …rms innovate, the equilibrium pro…ts are " 2 1 1 1 fs fs 2 = = (a c) + A B 4 2+ 2+

f

2

(37)

#

f

(38)

As analogous to the previous sections the following pay-o¤ table captures the di¤erent strategy combinations chosen by the …rms.

10

Table 3: INDUSTRY-WIDE UNION Firm 2 ! Firm 1 #

Export

Export

2

a c 2+

1 4 1 4

2

a c 2+ 1 4

No Export 1 4

(a

c)2

+

2

a c 2+

+ a c 2+ 1 2+

No Export

2

a c 2+ 2 2

f ;

1 4

c)2

(a

; +

1 4

f

1 4

a c 2+

2

;

+

1 4

f ;

2

a c 2+

1 4

f

2

1 2+

1 4

a c 2+

2

The following proposition is immediate from the above pay-o¤ table. Proposition 3 Assume that there is an industry-wide union. (a) Both …rms export when f < fLiw iw (b) Neither …rm exports when f > fH iw iw (c) Either …rm exports when fL < f < fH where, fLiw =

1 4

a c 2+

2

iw = and, fH

a c 2 4

Once again, the intuition for Proposition 3 is analogous to Proposition 1. Like iw and f iw show a …rm’s gross non-strategic and gross strategic Proposition 1, fH L bene…ts from innovation respectively.

6

Export market penetration

We now focus on the comparative e¤ects of the labour union structures on the …rms’ decisions to export. To this extent, the speci…c cut-o¤ values of the …xed export costs discussed in Propositions (1)-(3) allow us to rank the …rms’cut-o¤s under no union, decentralised union and centralised union depending on the export market operation taken by the …rms. The ranking of the …xed export cost cut-o¤s is fs iw fLf s < fLiw < fH < fH < fL < fH

which holds for ;

(39)

2 [0; 1].7

Proposition 4 (a) The presence of union reduces the incentive for export compared to no union, irrespective of the unionisation structure. (b) Given any unionised structure, (i) an industry-wide union provides a higher incentive for both …rms to export, and, (ii) …rm-speci…c unions provide a higher incentive for at least one …rm to export 7

The ranking is generated by using Mathematica 8.

11

The …rst part of the proposition is proved by considering the cut o¤s for no …rm fs exporting. For example, if fH < f < fL (see (39)), we get that neither …rm exports in the presence of union, irrespective of the unionisation structure, but both …rms export in the absence of union. Hence, this proves that labour union intervention always reduces the export activities.

Figure 1 The second part of the proposition follows from Figure 1 where we depict the export cost cut-o¤s under two unionised structures as stated in expression (39). The proof follows from considering the distance AB where both …rms export under …rm-speci…c unions and the distance AC where both …rms export under an industrywide union. Comparing the two distances (AC > AB) reveals that an industry-wide union provides higher incentives for both …rms to promote export market operation. Similarly, a comparison between the distances AE and AD which represent the cases of at least one …rm exporting under …rm-speci…c unions and industry-wide union respectively shows that …rm-speci…c unions o¤er stronger incentives for at least one …rm to promote export which completes the proof. Proposition 1 can be intuitively interpreted in the following terms. Unions’rent seeking behaviour always reduces the export incentives of the …rms. When …rms capture the international market, it increases the aggregate demand in the economy and in turn it raises the total industry pro…t that the unions can exploit. Hence, the presence of labour union in this case always limits …rms’export market activities. However, the decision to penetrate an international market under any given unionised structure is driven by the severity of the hold-up problems. A comparison between two alternative union structures reveals that for a relatively low market penetration cost, collective wage bargaining is more pro…table for both …rms to export, whereas …rm-speci…c wage bargaining is preferable for a high market penetration cost which induces at least one …rm to engage in export market activity. The argument can be articulated in the following way. Straight forward calculations show that the wage rate under industry-wide union is higher than under …rm-speci…c unions. Excessive wage claims under collective wage bargaining motivates both …rms to sell their products abroad to reap a higher industry pro…t provided that the exporters’gain from foreign activities is large enough to cover the market penetration cost. On the other hand, a relatively high market penetration cost renders export market activity of the …rms. In this case, workers maximise a lower wage bill under …rm-speci…c union structure and at least one …rm involves in foreign market sales in order to restall its competitiveness in the product market. 12

7

Conclusion

Building on the recent models of international trade, we investigate the e¤ects of labour union interventions on …rm’s export decision where the goods market is characterised by di¤erentiated products. Using a horizontally di¤erentiated cournot duopoly model we show the …rm’s incentive to export under unionised structure in the context of …xed export cost. In particular, our work focuses on rent-seeking behaviour of the unions and it examines how …rms’behaviour in the foreign market is in‡uenced by both product market and input (labour) market characteristics. We show that …rms’export success depends on the extent of wage bargaining as well as on the magnitude of market penetration costs. The results reveal that labour union intervention makes the export market operation unattractive. However, a comparison between two di¤erent types of union structure gives us a new insight that centralised wage bargaining provides an overall higher incentive for market penetration as compared to …rm-level wage bargaining. This provides a strong theoretical justi…cation on the present scenario of Chinese export market strategies, why the All China Federation of Trade Unions (ACFTU) is pushing for legislation that will establish the formal rules for mandatory collective wage bargaining in China. Our model can be extended further in several directions. First, in our work, we have assumed that the …rms are based locally. They produce in the domestic market and further decide whether to promote export depending on some parameter values such as, market penetration cost, degree of product substitutability and the structure of labour market. We have not considered the trade options in between …rms. Second, in order to show the strategic wage e¤ects on export market decisions of the …rms, we restrict our attention to single product …rms. However, one could frame the model with multiproduct …rms (MPFs). MPFs internalise the demand linkages between the varieties they produce which is traditionally known as "cannibalisation e¤ect". It would be interesting to capture the inter-relationship between the unions’ bargaining power and foreign market penetration in the context of MPFs. Another useful extension of this paper would be to investigate the impact of labour unions in the presence of variable trade costs which varies with the volume of export. We leave these issues for future research.

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