Rethinking the Race to the Bottom: NGOs and the Regulation of Labor Practices
Year: 2012
Type: preprint
Abstract: The conventional wisdom in the political economy literature assumes that multinational firms gravitate toward regulatory havens with weak labor and environmental standards, but existing empirical research finds little support for this claim. I argue that these results are a function of an incomplete understanding of the regulatory environment governing foreign investment. Following the optimal penalty theory from the economics literature, I argue that regulations are best understood as the cost to firms of violating the law, which is a function both of the penalty assessed if caught and the probability that regulators observe and punish violations. Thus, the non-governmental organizations (NGOs) that monitor multinational firm behavior in the developing world are a critical component of law enforcement in a global economy. In this paper, I ask how ”effective regulation,” which is a function of both domestic law and the robustness of civil society in a host country, affects firm behavior. I test this question by examining how the interaction of NGOs and de jure labor laws affects firms’ employment decisions and perceptions of regulatory stringency. I find that while labor standards alone are positively associated with labor-intensive foreign investment, effective regulation is negatively associated with the depth of investment by foreign firms. Higher levels of NGO density also increase the likelihood that firms will view labor regulations as a significant obstacle to doing business, even when de jure standards are held constant.
Source: SSRN Electronic Journal
Author: Laura Seago
Institution: University of Michigan
Language: English
Subfield: Strategy and Management
Domain: Social Sciences
Open Access status: green
OpenAlex ID: W2204179123