Foreign direct investment and labour rights: a panel analysis of bilateral FDI flows

Abstract

The article analyses the impact of fundamental labour rights on bilateral Foreign Direct Investment (FDI) flows to 82 developing countries. The results indicate that investments by multinationals are significantly higher in countries that adhere to labour rights, thereby refuting the hypothesis that repression of these rights fosters FDI.

Notes

¹See Kucera (2002) for a detailed account. For our sample of countries, LabR has a mean of 22.3 and a (within) SD of 4.36 and ranges from 2.5 to 37.

²FDI data come from the UNCTAD database on bilateral FDI flows. Apart from BIT (Source: UNCTAD), RTA (WTO) and the political risk indicators (International Country Risk Guide), the data on the control variables come from the World Bank's World Development Indicators.

³For our preferred FDI variable, negative values are set to 0. We relax this assumption later as we introduce another FDI measure.

⁴All estimations pass the Sargan–Hansen–J statistic test for overidentifying restrictions, demonstrating that the instruments are valid. The exception is the last specification, which might be because of the significant decline in the sample size when including CentralBargaining. The Arellano–Bond test shows that the null hypothesis of no second-order serial correlation cannot be rejected.

⁵See Leahy and Montagna (2000) for a theoretical model suggesting that FDI is not necessarily attracted by decentralized wage bargaining.

⁶The long-run effect is calculated by dividing the coefficient of LabR by 1 minus the coefficient of the lagged dependent variable times the increase in LabR in per cent of the FDI measure. Note that the impact of LabR on FDI diminishes as we add further control variables.