The Effects of Core Workers Rights on Labour Costs and Foreign Direct Investment: Evaluating the "Conventional Wisdom"

Abstract

This paper addresses what has been referred to as the conventional wisdom that foreign investors favour countries with lower labour standards. The paper uses new country-level measures of worker rights (constructed from coding textual information and emphasizing de facto considerations) in econometric models of foreign direct investment (FDI) inflow s and manufacturing wages in samples of up to 127 countries. The wage model is used to address a key hypothesized mediating link between worker rights and FD I, but also considered are other possible causal channels through which worker rights might influence FDI, such as through enhancing political an d social stability and human capital development. Worker rights addressed are in regard to freedom of association and collective bargaining, child labour, and gender discrimination and inequality. Consistent with prior studies, no solid evidence is found in support of the conventional wisdom, with all evidence of statistical significance pointing in the opposite direction.