The “Social Europe” effect: Does southern foreign direct investment in Europe improve labor rights in the Global South?

Abstract

Trade and foreign direct investment (FDI) relations between developing and developed countries can lead to ratcheting-up of labor standards. Past research, however, has relegated developing countries to a passive role in the global economy while simultaneously largely ignoring variation between developed countries’ degree of protection of labor rights. In this study, we consider FDI by developing countries into Europe and how it can lead to labor upgrading. We argue that the obligations to upgrade implied by Europe’s regulatory environment will pressure developing country firms with strategic asset-seeking FDI to upgrade their practices which can subsequently diffuse in their home countries. We tease out this specific mechanism from others through a comparative research design juxtaposing FDI into high standard social Europe and the relatively low standard United States for a panel of 122 developing countries in the period 2001–2010. Our analysis compares how FDI into each location affects both collective and individual labor rights, finding that FDI into “Social Europe" leads to the improvement of labor standards, particularly trade union rights and substantive rights relating to working conditions, while there is no such upgrading effect for FDI into the United States. These findings are robust to multiple specifications, including an innovative application of the measurement strategy in studies on trading-/investing-up effects. This research helps us to understand two underappreciated facets of this latest phase of globalization: the rise of developing countries as agents of global integration and how regulatory disparities between potential economic partners can affect labor upgrading in those same developing countries. Any weakening of the European social model should consider its external consequences.

Las relaciones, tanto a nivel comercial como de Inversión Extranjera Directa (IED), entre los países en desarrollo y los países desarrollados pueden conllevar un endurecimiento de las normas laborales. Sin embargo, existen investigaciones anteriores que han relegado a los países en desarrollo a un papel pasivo dentro de la economía mundial y, al mismo tiempo, han ignorado, en gran medida, la variación existente en el grado de protección de los derechos laborales entre los países desarrollados. En este artículo, consideramos la IED en Europa por parte de los países en desarrollo y cómo puede esta conducir a una mejora laboral. Argumentamos que las obligaciones de mejora, que están implícitas en el entorno regulatorio europeo, presionarán a las empresas de los países en desarrollo que cuentan con IED estratégica de búsqueda de activos para mejorar sus prácticas, las cuales pueden difundirse en sus países de origen posteriormente. Distinguimos este mecanismo específico de otros a través de un diseño de investigación comparativa que yuxtapone la IED en la Europa de alto nivel social y en los Estados Unidos, de nivel relativamente bajo, para un panel de 122 países en desarrollo en el período entre 2001 y 2010. Nuestro análisis compara cómo la IED que se lleva a cabo en cada lugar afecta tanto a los derechos laborales colectivos como a los individuales, encontrando que la IED en la «Europa social» conlleva una mejora de los estándares laborales, en particular de los derechos sindicales y de los derechos sustantivos relacionados con las condiciones de trabajo, mientras que no existe tal efecto de mejora para la IED en los EE. UU. Estas conclusiones resultan importantes para su aplicación en múltiples especificaciones, incluyendo una aplicación innovadora de la estrategia de medición en Greenhill, Mosley y Prakash (2009). Esta investigación nos ayuda a comprender dos aspectos subestimados de esta última fase de la globalización: el ascenso de los países en desarrollo como agentes de integración global y cómo las disparidades regulatorias entre socios económicos potenciales pueden influir sobre la mejora laboral en esos mismos países en desarrollo. Cualquier debilitamiento del modelo social europeo debe tener en cuenta sus consecuencias externas.

Les relations commerciales et d’IDE entre les pays en développement et pays développés peuvent engendrer un rehaussement des normes du travail. Or, des recherches antérieures ont relégué les pays en développement à un rôle passif au sein de l’économie mondiale tout en ignorant largement les variations de degrés de protection des droits du travail entre les pays développés. Dans cette étude, nous nous intéressons aux IDE des pays en développement en Europe et à leurs liens avec une amélioration des conditions de travail. Nous affirmons que l’obligation d’amélioration impliquée par l’environnement réglementaire de l’Europe appliquera une pression sur les entreprises des pays en développement qui effectuent des IDE stratégiques à la recherche d’actifs pour qu’elles améliorent leurs pratiques. Ces améliorations pourront par la suite se répercuter dans leurs pays d’origine. Nous extrayons ce mécanisme spécifique dans d’autres cas par le biais d’un travail de recherche comparatif qui juxtapose les IDE dans une Europe sociale aux normes élevées et ceux aux États-Unis, dont les normes sont faibles en comparaison, au sein d’un panel de 122 pays en développement entre 2001 et 2010. Notre analyse compare les effets des IDE à chaque emplacement sur les droits du travail à l’échelle individuelle et collective. Nous concluons que les IDE dans cette « Europe sociale » engendrent une amélioration des normes du travail, et notamment des droits des syndicats et des droits importants en lien avec les conditions de travail, alors que cette même amélioration est absente pour les IDE aux États-Unis. Ces conclusions sont corroborées sous de nombreuses spécifications, notamment une application innovante de la stratégie de mesure chez Greenhill, Mosley et Prakash (2009). Ce travail de recherche nous permet de comprendre deux facettes sous-estimées de cette phase récente de la mondialisation : la transformation des pays en développement en agents de l’intégration mondiale et les effets des disparités réglementaires entre les partenaires économiques potentiels sur l’amélioration des conditions de travail dans ces mêmes pays en développement. Tout affaiblissement du modèle social européen doit se soucier de ses conséquences externes.

Keywords:

• Developing countries
• European social model
• FDI-based diffusion of rights
• labor upgrading
• trade union rights

Acknowledgments

We thank Sarah Bauerle Danzman, Jennifer Tobin, and participants at the 2018 APSA Annual Meeting for their helpful comments on an earlier draft of the paper.

Notes

1 A major exception is our own study on the effect of Brazilian OFDI to Europe on working conditions in Brazil (Wagner and Raess 2023).

2 In her study on the impact of MNEs on labor rights in DCs, Mosley (2011) considers variation in corporate cultures/regulatory institutions in source countries, particularly differences between continental European vs. Anglo-American firms.

3 The study by Ahlquist and Mosley (2021) does not neatly fit into the trade-based diffusion literature.

4 Footnote 3.

5 The implication is disconnect between the theory and the operationalization of the causal mechanism. The measurement of the independent variable hinges on the level of protection of freedom of association and collective bargaining rights in exporting markets, which relates to the domestic regulatory regime rather than global production networks transmitting labor practices.

6 Compared to Greenhill, Mosley and Prakash (2009), Adolph, Quince, Prakash (2017) play up the role of trade unions in importing countries.

7 Higher scores represent better labor standards. The WorkR labor standard measures are derived from US State Department country reports on labor rights violations. For further explanation, see the “Data and Empirical Model” section.

8 http://www.pewresearch.org/fact-tank/2018/08/07/for-most-us-workers-real-wages-have-barely-budged-for-decades/ (accessed June 5, 2022).

9 http://ec.europa.eu/social/main.jsp?catId=706andlangId=enandintPageId=205 (accessed September 16, 2022).

10 We use individual and substantive labor rights interchangeably.

11 For the underlying rationale of the classification and reclassifications of (groups of) countries over time, see Hoffmeister (2020).

12 For more information, see Barry, Cingranelli, and Clay (2022).

13 While this approach improves data coverage, it does result in some negative values due to missing information on FDI flows prior to the period for which we have data. Accordingly, we cannot log transform the data without replacing these negative values with zeroes, essentially ignoring differing levels of disinvestment.

14 The data are drawn from the ILOSTAT and OECD/AIAS ICTWSS databases. Weights are determined using principal component analysis.

15 We thank Dora Sari for sharing the GSP data with us.

16 We thank Roshan Pandian and Evan Schofer for making the INGO data available to us.

17 HICs are the EU member states, Norway, Switzerland, United States, Canada, Japan, Australia, and New Zealand.

18 Results are unaffected if instead we use total trade.

19 We expect prospective investors to either understand the institutional context in which they invest or to take their cues from whether they view the EU and/or United States as credible promoters of international labor standards in their foreign relations. In that respect, the EU is far more credible since the United States is often accused of practicing “double standards,” requiring others to apply standards that it does not itself apply domestically. It is worth mentioning here that the United States has ratified only 2 of the 10 fundamental ILO Conventions.

20 Results are available upon request.

21 The colors identifying each region are consistent across all panels, with the top-right panel serving as the legend.

22 Authors’ own calculations.

23 The negative and significant effect of OFDI stock to Europe on in-law substantive rights is driven by forced labor.

Additional information

Funding

This work was supported by the Swiss National Science Foundation under Grant PP00P1_163745 to Damian Raess.