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

Nicole Janz () and Luca Messerschmidt ()
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Nicole Janz: School of Politics and International Relations at the University of Nottingham
Luca Messerschmidt: Hochschule für Politik at the Technical University of Munich (TUM) and the TUM School of Governance

Munich Papers in Political Economy from TUM School of Governance at the Technical University of Munich

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.

Keywords: Foreign direct investment; worker rights; developing countries; cash standards; outcome standards (search for similar items in EconPapers)
JEL-codes: G38 J08 J50 J80 K31 K38 (search for similar items in EconPapers)
Pages: 46 pages
Date: 2020-10
New Economics Papers: this item is included in nep-int, nep-lab and nep-law
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Persistent link: https://EconPapers.repec.org/RePEc:aiw:wpaper:05

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