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Labour in times of rising foreign direct investment in developing countries

The disadvantaged position of labour is often seen as going hand in hand with the rise in foreign direct investment (FDI). But this situation, attributable to a 'race to the bottom' initiated by states, is anchored in the misleading notion that transnational capital inevitably embraces cheap labour.

Abhirup Bhunia
18 April 2013

Globalisation is said to have changed the very nature of labour, a key factor of production that has its own set of dimensions and dynamics. Over the decades globalisation has undergone multiple transmutations. Moving beyond just international trade, it is cross border capital flows that have come to dominate the dialogue on globalism. Indeed, globalisation today has less to do with imports and exports than it has to do with foreign direct investment (FDI) and the internationalisation of production. FDI as a stock of worldwide GDP has risen tremendously over the decades. For the year ending 2011, worldwide FDI was recorded at a massive $20.4 trillion. There has been an immense rise in FDI flowing in to developing countries in recent times. About 50% of global FDI in 2012 was targeted at China alone, with India and Brazil among the other investment hotspots.

Since FDI has strong implications for labour, it has become a political imperative for governments to engage with it. States have so far reacted to FDI in different ways. The instances of FDI being repelled are dwarfed by the many times countries have competed among themselves to attract FDI. In a bid to do so, changes to labour regulations – in most cases, a relaxation of rules – have ensued. There are examples where host countries have benefited in terms of employment as multinational corporations (MNCs) not only pay higher wages, but they also ensure better working conditions. There is also plenty of evidence to the contrary; indeed, in some cases the empirical evidence shows that MNCs do not have high wage standards. More fundamentally, FDI brings in enormous changes to the local economy.

While some view FDI as entirely anti-labour, a slightly more sophisticated perspective is that benefits to labour in the host country are often tilted in favour of skilled workers. Amidst the cacophony of firms strategising investments based on what is profitable, and the resultant rise of what is known as the ‘competition state,’ the position of labour has undergone significant changes. Advocates of neo-liberalism seem to be in favour of FDI. Others see merit in FDI that is calibrated and qualified to protect the interests of labour. For many others, the very nature of FDI is a political project to protect the interests of capital.

The dialogue can no longer, however, be merely reduced to a confrontation between capital and labour. Too often, proponents of the anti-globalisation school simply identify multinational corporations as the chief beneficiaries of globalisation (automatically implying that the working classes have not benefited). From this perspective, the issue is a conflict between capital and labour. Various oppositions to foreign capital, rooted in different ideologies, are oftentimes grouped under the single umbrella of anti-globalisation. The anathema to FDI is often vague, generalised and fails to take into account the environment, the institutions and the uniqueness of each case. The relatively underprivileged state of labour is, in fact, not so much a corollary of FDI as it is a condition created by the state, mistakenly hoping to encourage FDI even as it keeps engaging in unconstructive competition. It should be acknowledged that the disadvantaged position of labour is seen as going hand in hand with the rise in FDI. This situation, attributable to a “race to the bottom” initiated by states, is anchored in the misleading notion that transnational capital inevitably embraces cheap labour.

There is also a need to focus on the circumstances in host developing countries that lead to positive effects of FDI on that country’s labour force. Countries need to set up mechanisms to churn out a pool of skilled workers so that the benefits of FDI can be widespread because there is always a skill premium attached to FDI. A good educational background does not by itself attract FDI; rather it is a means, an institutional arrangement, to extract widespread benefits from FDI. As opposed to riding the ‘cheap labour’ bandwagon, states that can attain a minimum level of educational and infrastructural standards will benefit extensively from FDI. Most studies have a shown a clear-cut linkage between FDI and better wages in the labour market. However, there are also many cases to the contrary. The essential nuances, therefore, lie in the institutional context and cultural setting. For example, in a developing country that already has a good environment for entrepreneurship and consistently encourages new ideas and technology the incentive of transferring advanced know-how is not a sufficiently powerful incentive to offer low wages as compared to in a region acutely lagging indigenous innovation possibilities. Similarly, in a region where an inefficient state apparatus has failed to take care of its people, resulting in a surplus of unskilled workforce, labour is prone to oppression.

An unshakably negative view of capital does not take into account the constructive role that FDI plays in the labour markets of developing countries. FDI has in some cases played an instrumental role in transforming countries from being exporters of raw materials (a ‘periphery country’ characteristic) to exporters of manufactures, sometimes even relatively high-tech ones. In these cases, FDI has actually helped labour move up the ladder, with skills imparted and technology diffused without any additional institutional capacity building by the state during that time. The question to ask is not which of the two – labour or capital – benefits from FDI, but what are the circumstances under which labour can extract benefits from foreign capital in developing countries? While the profit motive of capital is too naive not to be acknowledged, FDI in fact should not be seen as necessarily anti-labour. Despite the view that FDI is class biased, FDI wages in fact have a significant skill premium attached to it, meaning that those that have the required skills receive higher wages. In developing countries that are commanding greater FDI by the day, these skills do not get equally or universally imparted, with the result that a level-playing field is being denied at the very outset. In such cases, the much criticized, rich-poor divide is only widened by foreign capital. To stem the negative impacts of FDI, states can step in by not only offering free lunches, as it were, but through the long term strengthening of its institutional environment. “In principle, under the right institutional circumstances, countries or regions could exert bargaining power over MNCs, and regulate them in such a way as to generate significant benefits for their communities.”

First, it is important to establish that FDI is not simply a single-minded hunt for low wages. A cursory look at the existing data shows that the cost of labour is seldom the decisive element in FDI decisions. The Philippines received $917mn in FDI in the first half of 2012, whereas FDI of $5.8bn was pumped into Brazil in June 2012 alone, a BRIC country and one of the fastest growing economies in the world. The price of labour in Philippines and Brazil are $2.01 and $11.65 per hour, respectively. As noted, even though labour costs in Brazil are more than five times that of the Philippines, the South American country has been much more attractive to foreign investors. The lack of FDI in the Philippines, a low-wage country, is explained by the fact that foreign investors are no longer principally concerned with utilising investment locations as platforms for cheap labour from which to export inexpensive manufactures to the affluent markets of the North. Brazil’s internal market growth is one of the reasons why FDI is attracted to that country. India, with its massive population, receives a fair share of FDI for its exceptionally large market size.

In addition, since FDI seeks relatively skilled labour, and the benefits of FDI accrue to those with a certain degree of educational background, education is a definite policy imperative for developing states. FDI has a direct negative effect on “less-schooled” workers. FDI, therefore, seems to offer a definite ‘return on education.’ FDI has also tended to focus on sectors that have more to do with the use of the brain. For example, in developing countries FDI has largely been in sectors like information technology, the services sector, hospitality business and so on, with the exception of the natural resources sector (solely ascribable to a region’s natural endowments). In China, manufacturing has had the lion’s share of FDI, but one must simultaneously note that the percentage of low skilled and unskilled jobs in manufacturing declined by 29% since the 1970s even as knowledge-intensive jobs (those commanding understanding of math, computer and science) have gone up and are predicted to continue to rise.

Foreign owned companies have offered higher salaries to managers, engineers and the like to retain them. The benefits of FDI have not seeped into the broader labour market where there are low literacy levels and high unemployment. That foreign owned firms tend to hire more educated and better qualified workers also partly explains why FDI wages are higher than domestic wages. In India, for instance, according to separate reports by McKinsey, the Confederation of Indian Industry and the Boston Consulting Group, most of India’s 1.2 billion young people are unemployable because they lack the necessary skills required to service a rapidly changing global market. Because of a crumbling educational infrastructure, these youth have not been taught the necessary skills. As OECD noted, “a level of technological, educational and infrastructure achievement in a developing country does, other things being equal, equip it better to benefit from a foreign presence in its markets.”

The disadvantageous position of labour in developing countries can thus be attributable in part to a deficient educational structure and an inefficient institutional setting, both domestic factors, rather than the mere presence of foreign capital. The quality of labour, therefore, is what states should focus on and use as an asset to attract FDI rather than offering cheap labour or fiscally unsound lower taxes as incentives to foreign capital. Any developing country resources should create efficient educational and vocational programmes and useful public bureaucracies to draw in foreign capital. It is therefore the policy context within which FDI occurs that determines whether it is going to work to the benefit of the developing countries or to its detriment.

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