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.