The literature that analyses the effect of direct foreign investment has mainly studied the repercussions of the location of a new firm in a country on its social welfare. By contrast, in this article we analyze how the social welfare of countries with unionised labour forces is affected by the relocation of firms from those countries to others with lower labour costs. It is usually argued that the relocation of firms is harmful to the countries in which they were initially located, due to loss of employment. However, in this article, we show that the social welfare of a country can increase when firms relocate elsewhere, depending on the percentage of ownership of firms that is held by domestic investors and on the country in which the relocated firm was initially based.

Key words: relocation of firms, unions, social welfare, imperfect competition.
JEL classification: F16, D6, J51, L13.