Data and Conceptualization

To investigate the relationship between labour standards, on one hand, and for-eign direct investment and export performance, on the other, I use as a measure of labour standards the ILO index of government respect for freedom of association

and collective bargaining rights (FACB). This index has already been described in detail in Section 3.3.1. ⁵⁴

For measuring FDI, I use the US direct investment position abroad collected by the Bureau of Economic of Economic Analysis (BEA) at the US Department of Commerce in the series of Benchmark Surveys of U.S. Direct Investment Abroad.

I feel that this measure is to a great extent more reliable than country’s total inward FDI. First, the BEA data on US outward FDI are very complete because reporting by US parents and their affiliates in the survey was made mandatory under the International Investment and Services Act.⁵⁵ These records on capi-tal flows between parents and their foreign affiliates are then the source of the official estimates of direct investment that enter the U.S. national income and product accounts (NIPAs) and the U.S. international position and international transactions (or ”balance of payments”) accounts (BEA 1999: M-1). Moreover, this data is compiled by only one agency, the BEA, which takes the responsibility for the data compatibility and accurateness, while using the inward FDI figures on a country-by-country basis in any case raises data comparability problems.

Second, total inward FDI contains records on a host country’s stock of FDI, which however, can come from several source countries. In such data one cannot trace what part of the country’s FDI stock is attributable to which source. This is however necessary in the context of the issue at hand because we want to study howstrategic investment is influenced by the level of prevailing labour standards.

Therefore, for the purposes of the present issue it is best to consider the outward FDI of one source country.

54More details on the construction and description of the index are available in Kucera (2002, 2004).

55The BEA (1999) makes a reference to the Public Law 472, 94^th Cong., 90 Stat. 2059, 22 U.S.C. 3101-3108, as amended.

The choice of the US as a source country is a natural one: the US is the biggest strategic investor in the world. Table 4.5.1 in the appendix reproduces BEA estimates of employment, capital expenditures and sales by non-bank US multi-nationals. In 2002 US multinationals employed 30.6 mln. workers worldwide, of which 8.2 mln. were employed abroad by their foreign affiliates (BEA (2004).

Besides, the US companies can be expected to have a particular bias against con-straints on management freedom to set the terms and conditions of employment as they are accustomed to a high level of labour regulation in their home coun-try; thus, if any, it is the US companies that are expected to perform ”regime shopping” (Traxler and Woitech 2000: 143). All this makes the analysis of US outward investment a very strong case.

Similar considerations were guiding the choice of the US imports as a measure of country’s export performance. Figure 4.2.1 below taken from Feenstra, Romalis and Schott (2002: 8) summarises total US manufacturing imports and exports for 1989 to 2001. Imports grew from $401 bln. to $961 bln. not including re-exports from the US, while exports grew from $291 bln. to $619 bln.

The measure of US imports has been taken from the NBER trade dataset. The basis for these data is customs import value⁵⁶, i.e. the value of imports as ap-praised by the US Customs Service. In addition to being very reliable, this data source has one critical advantage. It provides us with comparable data on US imports of highly disaggregated product categories (26 277 product codes) classified according to the 10-digit Harmonized System across a large number of countries (184 UN country codes) available to up the year 2001. Even after

ag-56This value is generally defined as the price actually paid or payable for merchandise when sold for exportation to the United States, excluding US import duties, freight, insurance and other charges incurred in bringing the merchandise to the United States. s. Feenstra, Romalis and Schott (2002), p. 15

Figure 4.2.1: US Manufacturing Imports and Exports, 1989 to 2001

Source: The figure is taken from Feenstra, Romalis and Schott (2002: 8), Figure 1.

gregating these 10-digit HS codes to 2-digit ones, we still have 99 distinct product categories⁵⁷. It is impossible to find such detail in any trade dataset compiled from the records of national agencies in other reporting countries. The most disaggregated category in the World Bank’s WDI database, for example, which covers approximately the same number of countries as the NBER, is ”exports of manufactures”. Disaggregated export data is however exactly what is needed in order to investigate whether low labour standards create a competitive advan-tage: we do not expect labour standards to affect the exports of, for example, oil nor those of other natural resources; we do not expect low labour standards to create a competitive advantage in agriculture either. Nor do we expect low labour standards to create a competitive advantage in high-tech manufacturing exports because it is intensive in high-skilled labour: high-skilled workers have natural bargaining power stemming from their skill, which allows them to avoid

57Links to the NBER data as well as to the data documentation are available at www.nber.org/data/. Furthermore, the updating of the dataset that has been made to the year 2001 is described in Feenstra, Romalis and Schott (2002).

bad working conditions even without legal protection. If low labour standards do create a competitive advantage, then we expect this to be in manufactured exports intensive in low skilled labour. And the trade database of the NBER allows us to capture exactly these effects.

Accordingly, from the 99 two-digit product categories of the Harmonized Sys-tem, I choose two that appear to best fit this characteristic: apparel articles and accessories, knitted (product code 61) and apparel articles and accessories, not knitted (product code 62). Garment and leather manufacturing are often cited in the literature as the most notorious examples of industries where workers’ rights are being suppressed (cf. Rama, 2003: 20).

Because the main variable of interest, the level of government respect for the rights of FACB has no variation over time, I am bound to perform a cross-section analysis. I employ two main models. The first one explores the effects of gov-ernment respect for FACB on the level of US FDI per capita, while the second one investigates the effect of the FACB index on the level of US imports per capita. In both models I control for macroeconomic and demographic country characteristics such as the income level as measured by GDP per capita (GDP), inflation rate (INFL), level of urbanization as measured by the percentage of urban population (URB), stability of the financial system as measured by bank liquid reserves to bank assets (BANK). Their effects have been hypothesized in the literature (Cooke 1997, Traxler and Woitech 2000, Busse 2002, Harms and Ursprung 2002, Mah 1997). In a nutshell, we expect that macroeconomic sta-bility will attract more investors and stimulate exports since high inflation rates or unstable financial systems threaten to devaluate investors’ profits; more ur-banized societies are also expected to attract more investment since FDI has a limited importance in agriculture as compared to industry.

Furthermore, I control for bank credit extension policies as measured by the ratio of bank credits extended to the private sector (CRED). The extension of cred-its is an important source of financing production activities for investors and exporters. Next, I control for the government respect for environmental stan-dards as measured by the water pollution in the textile industry (ES). Here my strategy is as follows: assuming that local governors in developing countries are ready to create beneficial investment conditions to multinational firms, they will overlook not only the disrespect of labour standards but also the pollution these firms create. And as already conjectured, the industries most expected to be targeted are the low-skill intensive ones, such as textile manufacturing. For this reason I chose to use disaggregated data on pollution levels in the textile industry.

Furthermore, I control for the political regime as measured by the Freedom House index of political rights ranging from 1 to 7 with 1 indicating best respect for political rights (PR). The index rates 192 countries on three main groups of criteria: the electoral process, the level of political pluralism and participation, and the functioning of the government (e.g. corruption, accountability to the electorate, etc.).⁵⁸ There are different opinions on the conjectured effect of the political regime on investment and export performance. Some authors argue that multinationals have a special liking for autocratic countries because autocratic political leaders have direct control over the instruments of coercion and need little justification to use repression. Thus, if governments are corrupt or/and put under pressure from big multinational investors who want to obtain beneficial investment conditions, they may suppress wages, constrain labour activities, etc.

Empirical studies confirming this hypothesis include Poe, Tate and Camp-Keith (1994) and (1999), Henderson (1991), Hofferbert and Cingranelli (1996), Dav-enport (1995). Other studies find opposite results, namely, that multinationals

58More details on the construction of the index are available at the Freedom House homepage:

www.freedomhouse.org.

prefer to invest in countries with more democratic regimes. They explain this finding with the investors’ facing considerable risk of policy reversals under au-tocratic regimes (e.g. McGuire and Olson 1996, Harms and Ursprung 2002).

Lastly, given that the dependent variables are US outward investment and US imports, I further include a dummy for geographical proximity to the U.S. (GE-OGR).⁵⁹ This is a factor expected to be important in the export performance model, in particular, as transport costs, which are primarily driven by geographi-cal distance between the exporter and the importer, are still an important factor in commodity trade. A detailed description of all variables and their sources is given in the appendix.