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Authors that have written about the relationship between labor and capital in the
developing world discuss a privileging of MNE bargaining power over labor, yet have
not tested empirically the interaction effects between labor and the state. Additionally,
previous studies that focus on the determinants of FDI inflows to LDCs have failed to
consider the effect of interactions between labor and democracy on the relative
attractiveness of host economies to FDI inflows. These studies have considered the value
of both political and economic variables and determined that conditions in LDCs fail to
indicate a “race to the bottom” for labor, in terms of regulation or labor cost. In this
analysis, I suggest a theory that describes labor movements as a matter of investor
perceptions of stability, as FDI is based on a long- term relationship with a host economy
that is not conveniently mobile. The perception of stability affects states and business,
and both act according to incentives to develop host country economies. For states, this
means that political elites render their host economy hospitable for investment by
excluding groups from the political process. For firms, this means that selecting an
economy for investment is done on the basis of the stability of labor relations within that
host country.
This paper demonstrates that firm investment behavior is influenced by location-
specific factors, including labor mobilization. Businesses direct FDI flows away from
democracies where LDC labor mobilization exists within the political process, and these
conditions are also viewed as unattractive for firms to initiate investment in a location.
My findings contribute to the evidence in favor of the conventional understanding of a
“race to the bottom” for LDC labor conditions, suggesting that businesses contribute to
policy convergence within LDC governments seeking to attract investment. Excluding
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labor from the political process contributes positively to development, ceteris paribus,
and when additional location-specific factors are controlled for, nondemocracies
contribute to increasing rates of investment. This is demonstrated especially in contrast to
the volume of FDI inflows at different levels of democratic political arrangements in my
sample set.
Future research should to seek to disentangle what I code here as a dichotomous
relationship between democracies and non-democracies in LDCs. Such a study would
increase the model’s representation of reality and address the greater issues surroundng
heterogeneity within developing countries. Such research can also shed light on labor
effects on transitions to increased democracy that Resnick mentions as part of his
conclusions about democracy and FDI.
Policy Implications
LDC governments must find ways of incorporating labor’s bargaining activity
into development strategies. Doing so can help reduce the volume of disruption from
labor conflict and render host country economies more attractive to FDI inflows. In order
to attract increased FDI, host country governments that permit inclusive strategies for
labor must do so in a way that not only reduces the severity of labor activity, but
governments that increase dialogue between labor, firms, and states can create ways to
make host country economies more attractive. Pressure to increase dialogue can also
come from international organizations in order to alert firms and states to the mutual
gains available through increased dialogue. The ILO-initiated campaign to promote
“decent work,” considers labor as: “the most widespread need, shared by people, families
Convention