Is worker repression risky? Foreign direct investment, labour rights and assessments of risk in developing countries

Abstract

ABSTRACT Quantitative assessments of ‘country risk’ produced by private rating agencies have become influential among multinational firms considering investment in the developing world. This article considers whether developing countries exhibiting more labour rights violations are associated with higher risk ratings. It draws from existing literature on the determinants of foreign direct investment (FDI) and the relationship between labour rights and FDI to illuminate the ways in which labour repression may indicate increased risk for potential investors. It implements a set of time series of cross-sections models for 95 developing countries, from 1985 to 2003. These models present predictors of a long-established risk index, plus an additional latent risk measure created through factor analysis of three separate and distinct risk ratings. Results indicate a consistent association between increased labour rights violations and increased risk ratings. The article extends the analysis to highlight the heterogeneous nature of FDI and possible sector-specific relationships between labour rights and risk ratings. The paper argues that the economic profile of a country may condition the relationship between labour rights and risk ratings.