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.Instead of focusing on codes of conduct,monitoring, and compliance, society would be better served if effortswere directed by activist groups and universities/colleges to thereduction or removal of existing trade barriers and domestic impedi-ments to economic efficiency in both developed and developingcountries.III.Conceptual ConsiderationsThe preceding discussion was designed to focus on the sweatshop andrelated issues as a specific example of interest to many concernedabout the impact of multinational firms on wages and working con-ditions in developing countries.With this in mind, we now turn ourattention more broadly to a review of what economic theory has tosay about the effects of FDI and multinational firms on wages andworking conditions in host countries.We begin with a brief discussionb723_Chapter-17.qxd 7/15/2009 10:02 AM Page 647Effects of Multinational Production on Wages and Working Conditions 647of the motivations for FDI and multinational firm activity.One lessonof that is that multinationals exist for a variety of reasons and performa variety of functions, so that we cannot identify them with any singleactivity whose effects we should explore.Rather, we need to considerthem in several roles, each of which may have different implicationsfor wages and working conditions.We look broadly at four such roles.The first is as a conveyer ofadditional capital to the host country, either as an addition of theworld s capital stock or in place of capital that would otherwise be inthe source country.For this purpose we address the question in thecontext of the general equilibrium models with perfect competitionthat are familiar in international trade theory.Second, we consider thepossibility that FDI carries with it, instead of or in addition to capital,technologies that may be superior to those previously available, tech-nologies that may also  spill over to domestic workers and/or firmsin the host country.Again, FDI as a source of improved technologycan be analyzed in the context of perfectly competitive general equi-librium trade models.Third, we acknowledge that, even withunchanged capital and technology, multinational production mayinvolve different sets of production activities than simpler nationalfirms, and we look at how the choice of activities may matter for labormarkets.This may happen, for example, within multinationals thatuse their parent-firm location to provide headquarters support foractivities in subsidiaries abroad, or more generally it may involve pro-duction processes that are fragmented across countries, even to bedone in different unaffiliated firms through subcontracting.Fourthand finally, we note that, because of their size, multinationals mayhave the power to set prices and/or wages to a degree that perfectlycompetitive firms could not.We examine several ways that their price-setting behavior could matter for wages, including monopsonypricing of labor, efficiency wages, and rent sharing.Throughout this section we focus for convenience only on wages,rather than explicitly considering the full package of wages, othercompensation, and the hours and working conditions that firms askof and provide to their workers.In practice, of course, all of these aredetermined together, either in the competitive interactions of firmsb723_Chapter-17.qxd 7/15/2009 10:02 AM Page 648648 D.K.Brown, A.V.Deardorff & R.M.Sternand workers, or in negotiation between them.In general, therefore,when we say that an event such as FDI raises or lowers wages, oneshould think here of the whole package of wages and working condi-tions as improving or worsening to an extent that is determined bythese interactions.26Motivations for FDIFDI consists of the acquisition of physical capital in another, or  host,country, usually in the form of a production facility or a retail estab-lishment owned at least in part by a parent firm in the home, or source, country.27 When done among developed countries, FDIoften takes the form of acquisition of an existing facility, but most FDIinto developing countries is  greenfield investment  that is, newlyconstructed establishments  which therefore add to the physical cap-ital of the host country.28 Strictly speaking, such capital need not befinanced from the home country, and it therefore need not in any sensebe a movement of capital from the home country to the host country,although in practice it is often interpreted that way.For our purpose,however, of examining the effects of FDI on the host country, this dis-tinction is not important.What matters is primarily the fact of, and thenature of, the addition to capital in the host country.FDI also often carries with it a technology that may not have beenpreviously available in the host country.That, as well as the additional26Lim (2001, p.41) notes that  higher wages are usually correlated with better laborstandards.27It should be noted that FDI may span a variety of industries, including extractive,manufacturing, and service industries.The literature tends to focus especially on FDIin manufacturing, but our discussion is intended to encompass FDI covering therange of different industries.According to Kucera (2001, p.17):  As of 1997,50.1 percent of FDI flows into LDCs went to manufacturing (down from 66.8 percentin 1988), compared to 41.3 percent to services & and 4.6 percent to the primarysector. The remaining FDI was  unspecified.28See Graham (2000, p.85).Kucera (2001, p.4) notes that:  For less developedcountries, the value of M&As (mergers and acquisitions) in relation to total FDIinflows increased from about 15 to 30 percent from 1993 to 1999.& b723_Chapter-17.qxd 7/15/2009 10:02 AM Page 649Effects of Multinational Production on Wages and Working Conditions 649possibility that such technology may spread to workers and firms out-side the foreign-owned establishment, is something we will considerin a later subsection.To start, we will focus only on the role played inthe host country by the additional capital.To some extent, that role may depend on the motivation for theFDI itself.Broadly speaking, there are two types of FDI: thatintended to serve the host-country market and that intended to pro-duce for export.29 Obviously, there exists some FDI that serves bothpurposes, but if so, one purpose is usually dominant and the otherincidental.The distinction can be important because the firms thatengage in FDI usually have alternative means available for achievingeither of these objectives, and their choice of FDI is an indication ofmarket conditions that favor FDI over these other means.30In the case of serving the host-country market, the alternatives areto export the product from the home country or, especially in the caseof services, to franchise or otherwise license its production by a localfirm in the host country.Since the firm s competitive advantage orig-inated with production in its home country, the choice of FDI insteadof these alternatives indicates that there must be extra costs associatedwith them.For exports, these extra costs include transport costs, tar-iffs, and other trade barriers; for licensing, they include costs ofcontrolling quality or protecting technology [ Pobierz całość w formacie PDF ]