Race to the Bottom or Climb to the Top? FDI and 'Cash' vs 'Core' Labor Standards

• In Event: Political Implications of Foreign Direct Investment: Promising Trends & Methods

Abstract

Race to the Bottom or Climb to the Top? Foreign direct investment effects and 'Cash' versus 'Core' Labor Standards

Does foreign direct investment (FDI) lead to a 'race to the bottom' in labor standards, or a 'climb to the top'? We revisit this long-standing controversy by proposing that the answer depends on the particular labor right. We argue that governments are more likely to protect worker rights that are not immediately costly to firms, such as collective labor rights (core standards), and use this opportunity to boost their international reputation. In contrast, leaders may engage in a race to the bottom for rights that directly raise costs for foreign investors (cash standards) to avoid potential exit threats of foreign investors. We introduce a new labor rights index which distinguishes between core cash standards, specifically: the legal protection of (1) fair working contracts, (2) adequate working time, (3) fair dismissal, which are cash standards; and (4) collective worker representation, and (5) industrial action rights, which are core standards. Our panel data analysis for 158 non-OECD countries (1982-2010) shows that FDI is connected strongly and positively with the protection of core which are relatively cheap to grant. Surprisingly, FDI is also positively connected to cash standards, albeit to a much smaller degree. The findings are robust to a range of model specifications.

Authors

• Nicole Janz, University of Nottingham

• Luca Elias Messerschmidt, TUM School of Governance