Chains of Love? Global Production and the Firm‐Level Diffusion of Labor Standards

Author Summary by Eddy Malesky and Layna Mosley

Can participation in global supply chains lead to improvements in worker rights in low and middle income countries? Past studies have found evidence, at the country-level (and occasionally industry-level), for the globalization-based diffusion of labor and environmental standards. Actors in developing countries appear to improve their standards in response to actual or perceived demands of export market investors, firms and consumers.

The country-level focus, however, obscures the actual decision-making progress of business managers. As a result, we explore the possibility at the firm level. Participation in global production allows firms to expand their sales and revenue, and to access new production and management technologies. We predict that developing country firms will be willing to expend significant resources on labor-related upgrading if doing so offers access to global supply chains. We expect that firms will be particularly willing to invest in upgrading when exporting to mature markets: managers assume that labor-related concerns are greater among firms and consumers in developed countries. This promises higher payoffs for labor-related upgrading.

We survey foreign-owned firms in exportable sectors in Vietnam about their willingness to make labor-related improvements. These firms are typically small, employing 125 workers on average, and most are owned by firms elsewhere in Asia (Japan, South Korea, Taiwan and China are the most common). These firms, which participated in the broader Provincial Competitiveness Index survey, were asked to imagine a scenario in which they were contacted by an international consulting company, which wants to shortlist their firm (along with two others in the region) as potential suppliers to a European/Indian company that sells primarily to the European/Indian market.

The vignette also stated that, to be eligible for the shortlist, the firm would need to adopt a Labor Code of Conduct for Suppliers, covering items such as worker representation, health and safety and over time. We then asked the firms’ managers how much, as a percentage of their current operating costs, they’d be willing to spend to make such improvements. Our “contingent valuation” question also had an experimental component: some firms were asked the question with the multinational and consumer market described as “European.” Other firms were asked the same question, but the multinational partner and market was “Indian.” By randomly varying this element, we sought to understand how incentives for labor rights improvement might vary with destination market (and with opportunities for higher product markups).

From the point of view of improving labor conditions, our findings were encouraging: firms were willing to spend 6.5 percent of their operating costs, on average. And firms that received the “Europe” version of the question were willing to spend more (about half a percent, a statistically and substantively significant amount) than those with the “Indian” version. We also find that it is firms selling products with the greatest markup differential – the gap between the price for the same product in India versus in Europe – that were most sensitive to our experimental manipulation.

Activism related to worker rights also plays a role: civil society groups have made worker rights salient in some industries, such as apparel and footwear; firms producing such goods have even greater incentives to focus on labor conditions. For instance, the Europe-India difference was especially pronounced for the firms in our survey that produce apparel, compared with those that produce plastic carrier bags. While both products have similar Europe-India markup differentials, labor rights activists have paid little attention to conditions in the plastics sector. And European demand for their product has fallen, as governments outlaw or tax plastic bags. Indeed, Vietnamese firms in the plastics sector reported being willing to invest more in labor-related improvements when India, rather than Europe, was named as the destination market.

Our analyses also indicate that we have much more to learn about how global supply chain involvement might be consistent with improvements to labor rights. Such a process likely requires sustained attention from lead firms, shareholders, consumers, activists, intergovernmental institutions, or some combination of these. Finally, capturing gains from multinational production is not simply an economic process. It is also a political one: if workers do not have the rights to form unions or to bargain collectively, then it may be factory owners and other elites who capture the bulk of the benefits from multinational production.

About the Authors: Edmund J. Malesky is Professor in the Department of Political Science at Duke University. Layna Mosley is Professor in the Department of Political Science at the University of North Carolina at Chapel Hill. Their research, “Chains of Love? Global Production and the Firm‐Level Diffusion of Labor Standards”, is now available in Early View and will appear in a forthcoming issue of the American Journal of Political Science.