This paper investigates the effects of different degrees of wage setting ce
ntralisation on the incentive of a MNE to locate in a host country, and on
the host country's welfare. Decentralised and centralised wage bargaining a
re considered. The nature of product market competition between the MNE and
domestic firms proves crucial to results which cast doubt on some of the c
onventional wisdom on FDI. In particular, we show that: (i) it is not alway
s welfare improving to attract inward FDI, and (ii) the MNE may prefer cent
ralised to decentralised wage setting regimes.