MNCs impact on labour conditions in developing countries
MNCs impact on labour conditions in developing countries
With the rise of Globalization Multinational Companies have shaped economies in many developing countries through Foreign Direct Investment and Knowledge transfer. In this Assignment Nizar Beran, Marie-Christine Amberge and Timo ReiĂmann demonstrate MNCs influence on labour conditions in developing countries.
Multinational Companies are placed all over the world with subsidiaries or joint ventures to gain a competitive advantage on other companies. A multinational company is a company with a global strategy with production bases all over the world to achieve cost advantages through economies of scale and low labour costs. Normally MNCs have a home country which supported the company in the beginning and sometimes these big companies where even build by governments to create a national champion through tax and other cost benefits. Toyota is a good example for a MNC, which was build by the Japanese government as a national champion for the car industry and is now the biggest automotive producer in the world. There are different reasons for a company to go into another country, for example the home market is saturated and growth potential is declining, other reasons are that in other countries resources like labour are cheaper and therefore the company could get more cost efficient. Sometimes MNCs enter into another market because their competitors are entering the market and they do not want to loose their competitive advantage. All these reasons are symptomatic for the development in the last 50 years, in the beginning MNCs were largely operating in the US and Europe and expanded only in already developed countries because they found everything there what they needed (UN Committee on Trade and Development, 2002). Infrastructure and a good labour force were already there and the growth potential especially for American and European companies in new markets was enormous. For the last decade MNCs changed their strategy and entered developing countries like China and India, because of huge growth potential and lower costs. The goals of MNCs are the same now as they were 50 years ago, to generate huge profits by driving down costs through economies of scale and the usage of synergies between different countries.
In developing countries MNCs are influencing the shape of the economy in many different ways, through knowledge transfer but also building of infrastructure and directly labour conditions through their subsidiaries and joint ventures. Especially with the global recession it is interesting to see how MNCs contribute to economic growth in their host countries and if protectionist measures by their host countries to keep for example local jobs will hurt global economic growth.
This essay will illustrate the MNCsâ impact on labour conditions in developing countries whether they are good or bad.
"The rules of the global economy should be aimed at improving the rights, livelihoods, security, and opportunities of people, families and communities around the world" (International Labor Organization, 2004, p. 143)
International labor standards can be seen as an equal right for women and men to work under conditions of freedom, security and dignity. Those standards are mainly set for governments as an agreement with employees and workers as an implement for law and social responsibility which is international accepted. The international labor organization has developed a âwork agendaâ which contains a lot of those challenges organizations have to face at the beginning. (International Labor Organization, 2004, p. 19)
Due to Raymond Robertsonâs (Robertson, Raymond, 2007, p. 4) research on the impact of globalization on working conditions in developing countries, labor conditions are divided into wages and non-wages working conditions. Non-wages working conditions are working hours, benefits like retirement and vacation, risk e.g. the employment insecurity and working climate. The wages can be split into absolute wages or purchasing power (welfare) and relative wages (The World Bank, March 2008). According to the Fair Labor association wages and benefits âare essential to meeting employeesâ basic needs. Employers shall pay employees, as a floor, at least the minimum wage required by local law or the prevailing industry wage, whichever is higher, and shall provide legally mandated benefitsâ (Fair Labor Association, 2008).
Companies such as Reebok, Nike, and Levi Strauss have exploited and are exploiting the human labor in developing countries massively (UN Committee on Trade and Development, 2002, p. 4). Therefore these companies are called sweatshops. For example, workers in Indonesia live under inhumane circumstances and barely earn $39 a month for producing thousands of products worth a few hundred dollars. Developing countries like Indonesia are booming because of massive direct foreign investment while workers are suffering from degrading living conditions and really low wages.
On the other side having a closer look at empirical data it gets clear that foreign-owned and subcontracting manufacturing companies in developing countries tend to pay higher wages than the local firms. Furthermore export oriented companies pay higher wages the non exporting ones (Lozaday, Carlos, 2001). In Mexico, for example, exporting firms (i.e. 80% of all sales are for export) paid wages at least 58 percent higher than non export oriented firms. In 2001 a study found that foreign-owned plants, mostly MNCs, âin Indonesia paid 33 percent more for blue-collar workers and 70 percent more for white-collar workers than locally owned firmsâ (Lozaday, Carlos, 2001).
Drusilla Brown, Alan Deardorff, and Robert Stern consider in their study that these wage premiums are most likely linked to labor productivity gains resulting from foreign ownership. Most of the time the given premiums to white-collar workers as well as foreign investment raise wages on average but produce a greater income inequality between skilled and unskilled workers in the host nation, the developing country.
There is no standard and international definition for child labor in general. A common meaning of child labor is when children under the year of 18 are getting exploited and negatively affected in their physical, mentally or educational development in order to work under hard conditions. Therefore, some social scientists have the opinion that it is necessary to distinguish between tolerable and unacceptable child work. For example children who are working a few hours a week and getting paid for it are even learning to assume responsibility and getting more self-contained. Unacceptable child labor as it is defined by international conventions, are soldiering and prostitution. Child labor is an international problem that has to be eliminated by laws and government. Child labor mainly occurs in emerging markets in developing countries. The total number of children who are forced to work was in the year 2000 estimated by the international labor organization (ILO) of "246 million child workers aged 5 and 17 were involved in child labor, of which 171 million were involved in work that by its nature is hazardous to their safety, physical or mental health, and moral development (Unicef, 2008).
Child labors mainly live in developing countries and its depending of the region were most children have to work in a country. Leading in child labor is Asia with a percentage rate of 61 % followed by Africa 32 % and 7 % in Latin America. A lot of those children are in danger of being hurt or even in danger to die. Reasons why child labor still takes place is as a result of poorness and limited choices for women. One major problem of child labor is that most often the parents of those children are unemployed or underemployed and desperate for secure employment and income.
Tue to the fact that globalization and leading economies even increased the number of child labors in poor countries, it is necessary to fight against child labor and poor working conditions. To eliminate child labor it is important to support organizations and offering direct help to those children.
Pic.1: A kid repairs a tyre in The Gambia
(Ikiwaner (2008), Child Labour, http://en.wikipedia.org/wiki/File:Tyre_shop_worker1.jpg)
MNCs changing labour conditions
In the last 20 years MNCs are contributing strongly to economic growth in developing countries through Foreign Direct Investment but also through knowledge transfer and raising productivity in domestic competitors and suppliers. Foreign Direct Investment which is normally used as an indicator for internationalisation of economies has grown from 10 percent of world GDP in 1990 to 25 percent in 2006 (Hijzen, Alexander, 2008).
FDI is not the only way MNCs influence economic growth and therefore labour conditions in developing countries, due to the introduction of modern management and production methods MNCs raise their productivity level compared to domestic competitors. Therefore higher wages and better working conditions can be promoted by MNCs, because overall costs go down due to higher productivity. Furthermore wages of skilled workers are more likely to increase in an industry with an MNC in it because of the competition for skilled labour between the MNC and domestic competitors. As a result productivity increases in those industries and especially wages of high skilled labour. A general figure about wages, which is given by the OECD report âDo Multinationals Promote Better Pay and Working Conditionsâ is, that MNCs pay 40 percent more than domestic competitors in developing countries. A reliable comparison is quite difficult because single wages such as for low skilled workers might not be higher in MNCs than in local firms. High skilled jobs are better paid by MNCs than domestic firms and therefore the comparison of general wages is not suitable in many aspects (Hijzen, Swaim, 2008).
Besides the direct improvement of wages and working conditions MNCs could improve them by stimulating local competitors, there are several ways MNCs can stimulate local competitors. Due to higher productivity and lower costs MNCs have a competitive advantage over their local competitors. As a result local competitors must improve their productivity and also working conditions, otherwise they will loose market share to the MNC.
Another aspect is a knowledge transfer between MNCs and local suppliers which are incorporated in their value chain. Sometimes MNCs provide âtechnical and training support to local firms incorporated into their supply chainsâ (Hijzen, Alexander, 2008). This aspect is also corresponding with Porters Theory of competitive advantage through clustering and is featured in Porters Diamond. By building clusters in developing countries suppliers are likely to get a knowledge transfer from MNCs to raise productivity and labour conditions by new management and production methods. MNCs demand from their suppliers higher standards for products, raising quality and productivity but also raising labour conditions. Especially labour conditions demanded by MNCs from their suppliers got more important over the recent years due to increased public awareness, which the Nike case of sweatshops is a good example for. Corporate Social Responsibility campaigns and public pressure increased the demand of MNCs for good working conditions not only at their own factories but also at their suppliers (Hijzen, Alexander, 2008).
Going back to Porters Diamond we can definitely say MNCs put pressure on suppliers to lift productivity and quality but also labour conditions, otherwise they will not be incorporated in the supply chain of the MNC.
Another point raised by the OECD report is a knowledge transfer between MNCs and domestic competitors in developing countries due to the fact that managers which worked for and were trained by the MNC start to work for domestic competitors. They bring of course modern management and production methods to the domestic competitor, raising productivity and therefore also labour conditions (Hijzen, Swaim, 2008).
Furthermore other benefits apart from wages can be increased by MNCs in developing countries, such as insurance, holidays and training. As a result domestic competitors are forced to improve their working conditions in this case their benefits, otherwise they will loose skilled labour to the competition. This scenario is very likely especially for skilled workers, because they can demand better working conditions and benefits due to the fact that they are needed by local competitors. Low skilled workers do not have so much bargaining power over their employer even though MNCs raise benefits and working conditions also for them due to the fact that supply of low skilled workers is higher in developing countries than of high skilled workers (Robertson, Raymond, 2008).
On the other side the appearance of MNCs in developing countries rise much controversy and many social concerns. MNCs have a substantial amount of power that allows them to easily find large quantities of relatively cheap labor as well as influence governments (Close, Romero, 2004). Due to the great mobility of MNCs, they have quick access to cheap labor and are relatively free to leave a country at any time they want. Many times, the countryâs economy depends on the jobs given to its laborer by the MNC. If the MNC leaves, that country now has a great unemployment problem where many are suddenly left stranded (Hijzen, Alexander, 2008). Because of this fear governments of developing countries fail to enforce human and labor rights effectively, however MNCs have been accused of infringe workers either human or labor rights. To stop this helplessness of the host countries many OECD countries appealed to MNCs to respect international labor standards anywhere in the world, even if a country has no such norm.
The OECD report shows, that MNCs often adopt management style and labor conditions of their host countries, therefore exploiting developing countries, which have not high labor standards, due to the bargaining power of the MNC (Hijzen, Swaim, 2008). MNCs tend not to have a certain loyalty and social responsibility towards the developing country in which they are operating in. Therefore plants will be shut down rather in developing countries than in their home country, because of bad publicity and pressure from the home government.
Additionally there is a trend in the recent years that MNCs move from one developing country to another in search for cheap labor. If the labor conditions are getting too expensive to manufacture certain products, MNCs could move on to another developing country, where unskilled labor is cheaper(UN Committee on Trade and Development, 2002).
Corporate Social Responsibility
The European Commission defines corporate social responsibility in the following way: "A concept whereby companies integrate social and environmental concerns in their business operations and in their interaction with their stakeholders on a voluntary basis" (European Commission).
Since the 90s a lot of western companies that are involved in producing apparel and many other products have been set under pressure to implement a CSR-System in their daily business routine. For example giving their employees better working conditions and try to pressure their suppliers. An array of companies established standards in developing countries for their wages, child labour, overtime work, and working conditions (Vogel, D., 2005, p. 75).
A lot of companies in the sport sector made big mistakes in the past. Adidas, Nike, Fila, Puma, and some other sport brands worked with suppliers together which treated their labour badly. Employees where forced work overtime for example in Turkey, Indonesia, and Bulgaria. The suppliers paid the labours also only if they reached a defined target, so they where supposed to work quick and with less breaks. If they could not reach the target, they did not get any money from their employers. Many factories employed their workers without a proper contract and appropriate working conditions. Overtime was rarely paid by employers (Lawrence, F., 2004).
In the last 30 years the production of sport shoes changed a lot. The production costs in the United States and central Europe have risen for example in case of labour and real estate price. The global players in the sport sector Adidas and Nike where forced to look for new production opportunities in Asia to stay competitive with Asian manufacturers. Adidas and Nike started to benefit from these suppliers in every way, due to the fact that they did not control labour conditions at their suppliers and therefore a cheap procurement price was only possible (Asia Monitor Resource Centre and Hong Kong Christian Industrial Committee, 1997). Most of these companies in Asia with unhuman working conditions are called sweatshops.
An example was the emergence of an Adidas scandal because they used child labour for the production of sportswear in 2000. The German company was confronted with overtime work, sexual harassment, and also using child labour in Indonesia. They violated human rights, for example employees were forced to work more than 15 hours a day without a proper break and monthly wages were less than $ 65, which is less then the minimum wage demanded by the International Labour Organisation and many more violent treatments (Burke, J., 2000). Another employee from a factory in Bangkok, which produces products for Adidas, told that she has earned less then one pound a day by working twelve hours per day and seven days a week. She said that the working conditions were poor in the factory and the management acted determined to reach the quantity of orders within a limited time frame (Burke, J., 2000).
After all these scandals Adidas announced that they terminated their contracts with those suppliers and they have started to monitor their current suppliers. They gave following statement: âWe work closely with factory management and demand that they ensure good conditions for workers. We also have a team of our own people who go to factories to sort out problemsâ (Burke, J., 2000).
MNCs are committing to CSR as they see it as an value and marketing strategy for their company. A good Corporte Social Responsibility can help to grow up a companies business, because of good reputation and rising trust from their stakeholders. If companies in emerging markets have a commitment to corporate social responsibility it can help them to attract multinational companies to invest in their firms. ( International Finance Corporation, S.2)
Although MNCs help distribute Foreign Direct Investment and therefore catalyse economic growth in developing countries, they are particularly notorious for exploiting countries causing problems regarding aspects of human rights, environment and working conditions (UN Committee on Trade and Development, 2002, p. 6). As a result, workers are exposed to risky conditions, exhaustion and overall exploitation by MNCs. To oppose this issue the United Nations Conference on Trade and Development should create a council which regulates working conditions especially in developing countries.
Local governments in developing countries must be encouraged by the United Nations to apply international labour standards to MNCs and domestic competitors to raise working conditions and overall wages (Hijzen, Swaim, 2008). In addition international non-governmental organizations must monitor and create public awareness for the exploitation of human labour, to create an environment for MNCs and governments to act upon international labour standards. As a result real improvement on labour conditions and wages can only happen, if MNCs are closely monitored and the bargaining power towards local governments in developing countries is reduced to enforce higher labour standards (Hijzen, Swaim, 2008). The OECD created codes of conducts for various industries and also NGOs were created to monitor MNCs, a problem is of course that certain business data is confidential. For example the locations of plants or pay grades are normally not offered to the general public.
Another problem is the monitoring and auditing of MNCs taken out by business and auditing firms, which could find a conflict of interest towards their customers, because they profist from future company growth of their customers (Brown, Deardorff, Stern 2002). On the one hand there has been movement towards a voluntary monitoring and certifying system by many MNCs, because they see the impacts of bad publicity directly on their sales and profits. A good example is Nike which was accused of using sweatshops in Asia by the general public and as a reaction enforced a monitoring system through a Corporate Social Responsibility campaign (Hijzen, Swaim, 2008). On the other hand the monitoring system is far from perfect and it is not binding for the MNCs. Furthermore many suppliers of MNCs in developing countries are not monitored at all (Brown, Deardorff, Stern 2002). With the Nike incident there was a big discussion in the public if Nike is also responsible for working conditions at their suppliers in developing countries.
So far the international community has failed to take up the challenge to monitor and control the impact of MNCsâ activities efficiently. In addition many governments especially in developing countries claim that human rightsâ law does not apply to ânon-stateâ actors like MNCs (Close, Romero, 2004).
Only with the assistance of economic growth from globalisation true improvements in labour conditions are possible. Some opponents of core labour standards, mostly the developing countries, object that âsuch standards are merely another form of protectionism on the part of the developed worldâ (Global Trade Negotiation Summary, 2004). As exports of developing countries are almost always labour-intensive, due to the fact that labour costs are low, they think that the developed countries try to keep them away from the worldâs markets by restricting their trades due to high labour standards (Global Trade Negotiation Summary, 2004). This argument is even more controversial in the light of the ongoing economic crisis, where governments resolve in protectionist measures to keep jobs in their home country. These protectionist measures include raising tariffs in the WTO barriers and engaging in anti dumping-cases. Therefore governments see cheaper labor costs in developing countries as a thread for local jobs and there could be an enhancement of affords for better labor conditions in developing countries by governments of developed countries.
To sum it up MNCs are very important for the economic growth and prosperity in developing countries, because of FDI, knowledge-transfer and modern management methods to enhance the productivity of suppliers, but also local competitors. Wages and overall labour conditions have improved in developing countries due to MNCs, however an international monitoring system run by NGOs is very important to impose international labour standards to MNCs operating in developing countries. Furthermore local governments in developing countries must engage in monitoring and imposing international labor standards to make sure that the workforce is not exploited by MNCs, but also by domestic competitors.
Asia Monitor Resource Centre and Hong Kong Christian Industrial Committee, 1997, âWorking Conditions in Sports Shoe Factories in Chinaâ, http://www.corpwatch.org/article.php?id=3031, 23.11.2009
Brown, D.K. and V.Deardorff, A. and Stern, R.M., 2002, "The Effects of Multinational Production on Wages and Working Conditions in Developing Countries", Discussion Paper No. 483, University of Michigan
Burke, J., 2000, "Child labour scandal hits Adidas", http://www.guardian.co.uk/uk/2000/nov/19/jasonburke.theobserver, 24.11.2009
Close, R., 2004, "Multinational Corporations" http://www.cafod.org.uk/var/storage/original/application/php185MId.pdf , 24.11.2009
European Commission, 2009, "Corporate Social Responsibility (CSR)", http://ec.europa.eu/enterprise/policies/sustainable-business/corporate-social-responsibility/index_en.htm, 19.11.2009
Fair Labor Organization, 2008, "Wages and Benefits", http://www.fairlabor.org, 23.11.2009
Global Trade Negotiation Summary, 2004, "Labor" http://www.cid.harvard.edu/cidtrade/issues/labor.html, 26.11.2009
Hijzen, A., 2008, "Working conditions in the foreign operations of multinational enterprises" http://www.voxeu.org/index.php?q=node/1505 , 17.11.2009
Hijzen, A. and Swaim, P., 2008, "Do multinationals promote better pay and and working conditions?", OECD Observer No. 269, http://www.oecdobserver.org/news/fullstory.php/aid/2767/Do_multinationals_promote_better_pay_and_working_conditions_.html, 15.11.2009
International Finance Corporation, "Promoting Corporate Social Responsibility in Emerging Markets", http://www.ifc.org/ifcext/enviro.nsf/AttachmentsByTitle/fly_SocRespBrochure/$FILE/SocResp_6pbrochure.pdf, 25.11.2009
International Labor Organization, 1998, "Labor Standards" http://www.ilo.org, 24.11.2009
International Labour Organization,2004: A Fair Globalization: Creating opportunities for all, Report of the World Commission on the Social Dimension of Globalization, p. 143. www.ilo.org/global/What_we_do/InternationalLabourStandards/Introduction/lang--en/index.htm, 10.11.2009
Lozaday, C., 2001, "Multinationals, Wages, and Working Conditions in Developing Countries", http://www.nber.org/digest/oct03/w9669.html, 24.11.2009
Lawrence, F., 2004, "Sportswear firms to investigate Oxfam sweatshop claims", http://www.guardian.co.uk/uk/2004/mar/04/shopping.sport, 20.11.2009
Robertson, R., 2008, "Globalization and Working Conditions. A Guideline for Country Studies". Macalester College, http://www.betterwork.org/public/global/public-files/news-and-press-releases/globalization-wages-and-working-conditions-in/files/20080523-globalisation.pdf, 18.11.2009
Robertson, R., 2007, "Globalization and Working Conditions: Evidence from Developing Countries", http://info.worldbank.org/etools/docs/library/243470/day8RaymondRGlobalizationWorkingApr9Session4.pdf, 28.11.2009
The World Bank, Employment Policy Primer, March 2008, "The effects of globalization on working conditions in developing countries", http://siteresources.worldbank.org/INTLM/214578-1103128720951/21692675/EPPNoteNo9_Eng.pdf, 26.11.2009
Unicef, 2008, "Child protection from violence, exploitation and abuse", p. 67, http://www.unicef.org/protection/index_childlabour.html, 28.12.2009
UN Committee on Trade and Development,2002, "Multinational Corporations in least Developed Countries", http://www.libertyparkusafd.org/lp/Hancock/reports/Multinational%20Corporations%20in%20LDCs.pdf, 14.11.2009
Vogel, D., 2005, "The Market for Virtue, The Potential and Limits of Corporate Social Responsibility", R. R. Donnelley, Harrisonburg, Virginia