Open AccessAttracting Investment: Governments' Strategic Role in Labor Rights Protection
Author(s) -
Payton Autumn Lockwood,
Woo Byungwon
Publication year - 2014
Publication title -
international studies quarterly
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.897
H-Index - 100
eISSN - 1468-2478
pISSN - 0020-8833
DOI - 10.1111/isqu.12138
Subject(s) - enforcement , foreign direct investment , incentive , investment (military) , labour economics , labor cost , economics , labor relations , business , face (sociological concept) , international economics , market economy , macroeconomics , law , political science , politics , mechanical engineering , social science , sociology , engineering
What is the relationship between respect for labor rights and foreign direct investment ( FDI )? This study explores this connection with an emphasis on the strategic role of governments in attracting FDI . We present a formal model demonstrating that governments can do so by setting the level of labor rights protection and, as a consequence, investors will choose to invest in the face of tough labor regulations or cease investing, anticipating that the costs of abiding by these regulations will be too high. The model also suggests that governments will have an incentive to implement labor regulations when enforcement costs are sufficiently low or the profits from investment are sufficiently high. Using data from developing countries across time, error correction models test the dynamic nature of these hypotheses and find support for them: strict labor laws tend to decrease inflow of FDI , but more FDI tends to encourage better labor practices.