The eastern enlargement of the European Union has prompted heated debates about social dumping related to labour standards and industrial relations. Capital mobility is seen as a crucial social dumping mechanism. The article uses time-series-cross-section data for the years 1999–2008 to analyse the determinants of capital flows (FDI) to European countries. It compares German and US FDI in the automotive and chemical industry. The article shows that FDI is influenced by labour standards (in particular protection against dismissals) and industrial relations factors and can be a social dumping mechanism. There are, however, differences according to the industries and the home countries of the investors. US companies try to avoid coordinated collective bargaining, while German companies consider government intervention in collective bargaining negative. The degree of unionization shows no effect on attractiveness for FDI.
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