Unravelling the ‘race to the bottom’ argument: Foreign direct investment and different types of labour rights

Abstract

Does foreign direct investment (FDI) lead to better or worse labour standards in developing countries? We argue that it depends on the type of labour right, and how costly it is to protect it. We propose that governments are likely to follow international pressure and ‘climb to the top’ of improved labour standards, but only for those rights that do not incur direct costs to foreign investors, such as collective bargaining rights. In contrast, we expect that governments engage in a ’race to the bottom’ when it comes to rights that bear immediate costs for firms, such as overtime pay. To test our argument, we use novel data to distinguish between the legal protection of (1) fair working contracts, (2) adequate working time, (3) dismissal protections, which are more costly; versus (4) collective worker representation, and (5) industrial action rights, which are relatively cheaper to grant. Our panel data analysis for 75 developing countries (1982–2010) shows that higher FDI stock and flow is indeed connected to better protection of collective rights, while FDI flow is connected to a decline in relatively expensive outcome rights. These results remain robust across a range of model specifications.