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Unravelling the 'race to the bottom' argument: How does FDI affect different types of labour rights?

Author

Listed:
  • Luca Messerschmidt

    (Hochschule f¸r Politik at the Technical University of Munich (TUM) and the TUM School of Governance)

  • Nicole Janz

    (School of Politics and International Relations at the University of Nottingham)

Abstract

Does foreign direct investment (FDI) lead to better or worse labour standards in developing countries? We argue that it depends on the type of labour right, and how costly it is to protect it. Governments are likely to follow international pressure and 'climb to the top' of improved labour standards, but only for those rights that do not incur direct costs to foreign investors, such as collective bargaining rights. In contrast, governments engage in a 'race to the bottom' when it comes to rights that bear immediate costs for firms, such as overtime pay. To test our argument, we use novel data to distinguish between the legal protection of (1) fair working contracts, (2) adequate working time, (3) dismissal protections, which are more costly; versus (4) collective worker representation, and (5) industrial action rights, which are relatively cheaper to grant. Our panel data analysis for 138 developing countries (1982-2010) shows that higher FDI is indeed connected to an improvement of `cheap' rights, and to a decline in `expensive' rights protection. These results remain robust across a range of model specifications.

Suggested Citation

  • Luca Messerschmidt & Nicole Janz, 2020. "Unravelling the 'race to the bottom' argument: How does FDI affect different types of labour rights?," Munich Papers in Political Economy 05, Munich School of Politics and Public Policy and the School of Management at the Technical University of Munich.
    • Handle: RePEc:aiw:wpaper:05
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    References listed on IDEAS

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    More about this item

    Keywords

    Foreign direct investment; worker rights; developing countries; cash standards; outcome standards;
    All these keywords.

    JEL classification:

    • G38 - Financial Economics - - Corporate Finance and Governance - - - Government Policy and Regulation
    • J08 - Labor and Demographic Economics - - General - - - Labor Economics Policies
    • J50 - Labor and Demographic Economics - - Labor-Management Relations, Trade Unions, and Collective Bargaining - - - General
    • J80 - Labor and Demographic Economics - - Labor Standards - - - General
    • K31 - Law and Economics - - Other Substantive Areas of Law - - - Labor Law
    • K38 - Law and Economics - - Other Substantive Areas of Law - - - Human Rights Law; Gender Law; Animal Rights Law

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