Academic journal article Journal of Global Business Issues

Foreign Direct Investment and Worker Rights

Academic journal article Journal of Global Business Issues

Foreign Direct Investment and Worker Rights

Article excerpt


This paper explores the relationship between foreign direct investment (FDI) and worker rights. The channels through which worker rights may influence FDI flows are discussed. It then provides an empirical examination of the relationship using secondary data for the period 2000-2004 for 145 countries and employing ordinary least squares regression techniques. Contrary to popular belief, worker rights found to be positively associated with higher FDI inflows. In other words, there is no systematic evidence that poorly protected worker rights attract FDI.


One of the most significant international economic developments of the postwar period is the emergence of multinational corporations (MNCs) as a major force in the global economy. MNCs are firms that engage in foreign direct investment (FDI) and own, control, or manage value-creating activities in more than one country (Dunning, 1993). According to the United Nations Conference on Trade and Development (UNCTAD, 2006, page 10), there are about 77,000 parent firms, with at least 770,000 foreign affiliates. Globally, at the end of 2005, the value of FDI outward stock at current prices was US$10,672 billion, while FDI inflows and outflows were $916 billion and $779 billion, respectively. In 2005, foreign affiliates accounted for about 10.1 percent of the world gross domestic product, 62 million employees, and $22.2 trillion sales (UNCTAD, 2006, page 9). According to the World Trade Organization (1996), intra-firm trade within MNCs account for about one-third of all world trade and exports from MNCs to non-affiliate account for another third, leaving only one-third of all trade to national firms.

Recently, MNCs' international activity has come under close scrutiny. One particular source of concern is that MNCs may encourage or take advantage of lax or inadequate worker rights in a foreign country. It is argued that since MNCs based in developed countries must adhere to strict labor laws, rights, and regulations, they are at a competitive disadvantage vis-à-vis their developing country competitors that do not have to comply with such regulations. MNCs based in developed countries respond to this cost disadvantage by either shutting down plants, demanding relaxation of labor laws and wage concession domestically, or moving production to developing countries. Once MNCs are in the developing country, they may be free to employ child laborers, deny basic rights to workers, and ignore workplace safety and health issues. Thus, low labor standards in developing countries may lead to a 'race-to- the-bottom" in developed countries. Anti-globalization activists have used this line of argument in recent years in attempting to derail regional and multilateral trade negotiations.

Supporters of MNCs have serious doubts about this scenario. They argue that stricter labor laws and rights go hand in hand with economic progress. In general, as countries become rich, they enact stricter labor laws. They think that the opponents of MNCs miss the essential point about the role of foreign firms in the domestic economy: MNCs bring in capital, technology, and management skills that would otherwise not be available and create jobs that would otherwise not be created there. Thus, MNCs can make positive contributions to economic progress of a host country, thereby indirectly furthering workers' welfare. According to Brown, Deardoff, and Stern (2003), MNCs regularly pay higher wages and provide better working conditions than their local counterparts in developing countries, and they are not, by and large, attracted to countries with lax or poor labor rights.

At the firm level, MNCs may not risk their operations and suppliers to be associated with lax or inadequate worker rights in poor countries. They have to worry about negative coverage in the media, orchestrated boycott of company products and stores, and divestment of stocks by investment managers (Sanyal, 2001). …

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