Do Multinationals Influence Labor Standards? A Close Look at US Outward FDI

Courant Research Centre Discussion Paper No. 98

33 Pages Posted: 5 Oct 2011

See all articles by Konstantin M. Wacker

Konstantin M. Wacker

University of Groningen - Faculty of Economics and Business

Krishna Chaitanya Vadlamannati

University of Goettingen (Göttingen) - Department of Economics

Date Written: September 26, 2011

Abstract

This paper investigates the effects of multinational corporations on labor standards. We argue that the previous literature has failed to distinguish the different motives that encourage firms to become multinational. Therefore, we build a stylized model of segmented labor markets with equilibrium unemployment where parts of the labor force are willing to accept reductions in their labor standards to attract job-creating horizontal foreign direct investment. By disentangling US FDI data for 34 advanced host countries throughout the period 1997 to 2002 into vertically and horizontally motivated FDI, we show that this disaggregation provides much more significant results. Concretely, we find a statistically significant and economically considerable negative impact of horizontal US FDI on labor right practices in industrialized host countries by using a static OLS model and qualitatively similar results with dynamic GMM estimation. Our results do not imply that this effect leads to a decrease in welfare in the host economy but that in the welfare optimization process employment, income and job-quality serve as substitutes with an elasticity positively depending on equilibrium unemployment.

Keywords: Multinationals, FDI, Labor Rights, Labor Markets

JEL Classification: F2, J81, C23, M14

Suggested Citation

Wacker, Konstantin M. and Vadlamannati, Krishna Chaitanya, Do Multinationals Influence Labor Standards? A Close Look at US Outward FDI (September 26, 2011). Courant Research Centre Discussion Paper No. 98, Available at SSRN: https://ssrn.com/abstract=1938810 or http://dx.doi.org/10.2139/ssrn.1938810

Konstantin M. Wacker (Contact Author)

University of Groningen - Faculty of Economics and Business ( email )

Postbus 72
9700 AB Groningen
Netherlands

HOME PAGE: http://sites.google.com/rug.nl/kmwacker

Krishna Chaitanya Vadlamannati

University of Goettingen (Göttingen) - Department of Economics ( email )

Platz der Goettinger Sieben 3
Goettingen, 37073
Germany

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