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MNCS Impact On Labour Standarts In Developing Countries

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Globalization has increased the economic power of the multinational corporations (MNCs), especially in developing countries where MNCs have shaped the economy through foreign direct investment (FDI), knowledge transfer, influence on employment rates and strong competition within the domestic market. Additionally, MNCs have a direct impact on the economic, political, and social landscape of developing countries; their business activities continue to have considerable effect upon human rights and labour standards, both positively and negatively.


There is great debate about the role of MNC’s in developing countries. Some are optimistic arguing MNCs’ operations, fuelled by superior technical know-how and modern management practices, allow them to pay higher wages and raise labour standards, while others argue they exploit cheap labour and ignore poor working conditions. Evidence of MNCs disregarding labour abuse in developing economies has fostered the rise of activism for corporate social responsibility (CSR); there is now a strong push for greater international regulation and enforcement of minimum labour standards.

The MNCs’ power to control international investment and create jobs has had enormous bearing on the economies of developing countries. Critics have argued that, faced with pressures to attract such investments and lower unemployment rates, governments have had little or no alternative but to accept the terms of MNCs. Following this argument, it can be said that globalization and the activities of MNCs have simultaneously raised economic growth and inequity in developing countries. While their economies are booming because of massive FDI, the workers, especially unskilled ones, are suffering from degrading living conditions and very low wages. The level of inequality between developing and developed countries is growing, which raises the issue of balancing economic growth and social injustice. Critics argue that MNCs’ activity in the developing world has enhanced the unfairness of capitalist market and further widened the gap between the rich and the poor (Mahmood, Welch and Kennedy, 2003, p.966).


A specific study of the involvement of MNCs in the developing economy of Mexico exemplifies how MNC’s have both aided growth yet hindered labour standards. In particular, the lack of unionisation in the maquiladora sector of Mexican international business.

Maquiladoras are ‘foreign owned assembly plants in Mexico…[where] companies import machinery and materials duty-free and export finished products around the world’ (CorpWatch 1999, p 1). These are situated on the Mexican/US border and have had both positive effects, such as the promotion of foreign investment, and negative effects, such as cheap wages and child labour (Black 2010, pg 217). Emerging in the mid 1960’s, the maquiladora factories of Mexico reflect the MNC’s impact in a host country; by particularly focusing on the industry, the labour standards in Mexico can be thoroughly investigated.

In the maquiladora’s of Mexico, MNC’s have little knowledge or persuasion in relation to the restricted unionisation of workers; which is currently diminishing labour standards in these factories. Unionising is mandatory to large scale factory workers as it provides them with defence against dominant managers and executives, allowing them to advocate for social and economic changes. In Mexico there is an official union, the Confederation of Mexican Worker (CTM) and the Conciliation and Arbitration Boards (CAB) to enforce labour laws in Mexico. The issue for MNC’s and of course the maquiladora workers, is these two organisations have strong ties to the government (Solidarity Centre 2003, p 14).

Unionisation in Mexico, a significant aspect of labour standards, is not currently adequate according to the UN’s International Labour Organisation (ILO). The ILO states that, although the ILO Convention No.87 (1948) has been ratified, and trade union rights are recognised by law, there are many limitations imposed by maquiladora heads and Mexican government officials on unionisation (ICFTU 1997). CAB’s constantly withhold legalisation of unions, strikes can be declared ‘legally nonexistent’, workers maybe blacklisted or ‘forcefully told to resign’ for union activities, and the rate of unionisation is as low as 10-20% (ICFTU 1997).

MNC’s are known to have the ability to ‘generate positive pressures for the adoption…of collective labour rights’ (Mosley 2011, p 51) and through direct investment can attempt to impose fewer violations of union rights (Mosley 2011, p 51). This can be observed in the example of Volkswagen in 2004; in collaboration with the ILO the company implemented actions to strengthen labour inspections and encourage acts of unionisation in Mexico. Unfortunately in the case of Mexico, due to strict control from the maquiladora heads and the government, this is not a familiar story. MNC’s have little control over labour rights and sparse knowledge of restricted unionisation, due to locality and governmental suppression (ICTFU 1997). It is widely believed that the Mexican government flaunts core labour standards to attract MNC’s; as reduced labour rights, such as unionisation and wages, strengthen relationships with international companies and increase global competitiveness as Mexico appears more financially attractive. MNC’s are thus said to attract labour abuses, rather than having much active involvement in eradicating any issues.

MNC’s of the Western world, majority owners of maquiladoras in Mexico, believe in an individualistic approach to workers, with unionisation not significantly high to MNC’s concerns (Levesque & Murray 2010, p 3). This leads to Western MNC’s, specifically, having a negative impact in the plight for union rights by ignoring Mexico’s anti-unionisation rhetoric. The US mega company, Wal-Mart, is a current example of an MNC in Mexico found to ignore workers union struggles, due to content with cheap labour and fast manufacturing (Mosley 2011, p 53). A final negative impact of MNC’s on labour standards in Mexico is the continual signing, through lack of investigation, of ‘pretend contracts’ created by maquiladoras (Solidarity Centre 2003, p 18). These hinder real unions from establishing, as the MNC’s place the control of unions and workers rights in the hands of the governments CAB’s.

Although there are some positive effects of MNC’s presence in Mexico, labour standards, such as unionisations, have suffered many negative effects since the rise of FDI.


Another country which has suffered impacts on labour standards is India, which in the early 1990s began several economic reforms that led to economic liberalization; and thus a great increase of FDI and MNCs operating in the country during the last few decades (Bhalotra, 2002).

MNCs find Indian labour laws to be very restrictive on employers, thus a demand for greater relaxation in the laws has emerged. Laws relating to working conditions and wages were implemented in the 1930s and 1940s and are seen as dated, compared to how companies operate today (Suri and Dubey, 2008). The Indian government and organisations like the WTO have been unable to ignore demand for change from MNCs as they rely on the FDI of such firms. MNCs power to push for changes in Indian labour laws has had both positive and negative outcomes for the Indian workforce. For example, a shift towards temporary contracts instead of permanent employment has now emerged, weakening the effect on the collective bargaining power of employees.

The presence of MNCs has fostered an increase in female employees, an example of a positive push forward for India, which has developed into a more modern economy. Before MNCs entered India the workforce mainly consisted of men because of traditional beliefs, however, the corporations have consciously avoided laws which prevent women from working. This has thus increased wealth amongst females; allowing them to become more independent financially and personally, as dated inequalities and family structures in Indian households change. Not only are women provided with work, in some cases companies also provide them with transportation to work, day care and meals. Additionally, demand for women within the workforce has resulted in an increase in female education as new technology and a fast-paced work environment, demands highly educated workers. Victoria Secret, a well-recognised and very successful US company, has a factory with over 2600 employees in India, most of which are women. Furthermore, the computer service sector in India has also experienced a significant increase in women employment (Richards, 2007).

MNCs have been greatly criticised for exploiting child labour in, with around 55 million children work in factories in India (Emde, 1999). These children are exposed to shocking working conditions which constitute long hours, extremely low wages and various kinds of abuse. Monsanto, an U.S agriculture giant, and Gap, an American apparel company, are examples of MNCs that have exploited child labour in India. Monsanto employs Indian farmers who in turn employ children as they need cheap labour so as to gain even the smallest of profits (Emde, 1999) and children have been found working in sweatshop conditions to produce clothes for Gap (McDougall, 2007).

There has been increasing pressure on MNCs to stop child exploitation. The CLEG (Child Labour Elimination Group), which compromises of companies and NGOs, was established so as to monitor cottonseed farms, amongst other things. Although child labour is definitely condemned, many children in India work because it is the only way for their families to survive as education services are limited and families are dependent on the income.

While the development and investment of MNCs in India has resulted in an overall increase in employment and wage growth, it has been partnered with greater income inequalities (Coe, 2007).


Human rights groups and organizations have insisted that forces of free market are insufficient to promote fair standard of labour conditions, calling for greater corporate social responsibility and international regulation. They also note that MNCs are not equipped to deal with the questions of international ethics themselves, as they have other concerns, such as profits and obligations to shareholders that must be taken into account. Consequently, businesses need the help of human rights NGOs and international organizations to deal with various human rights concerns. It is important to make corporations realize the benefits and potential profits that social responsibility will bring to them. (Mahmood, Welch and Kennedy, 2003, p.970)

The debate over the establishment of regulation for corporation social responsibility has grown internationally, especially since the 1990s, when increasing international activism against corporate human rights abuses led the United Nations to address the issue in the form of the Global Compact. Outlined at the World Economic Forum on 31 January 1999, the Compact ‘provides a basis for structured dialogue between the UN, business, labor, and civil society on improving corporate practices in the social arena’ (Mahmood, Welch and Kennedy, 2003, pg. 979). Based on the principals of the International Labour Organization (ILO) and the Universal Declaration of Human Rights, the Compact sets out its guidelines for corporate practices, advocating fair labour conditions, safe workplace, freedom of association and right to unionize, an end to child labor and discrimination. The Compact suggests that following measures are more cost effective in the long run because it improves productivity and protects the corporation’s public image, however, it does not provide mandatory penalties or sanctions for the violation of these principals.

Advocators of mandatory regulation state that without the presence of mechanisms of enforcement, there is a great possibility that the guidelines will be misinterpreted, misapplied, or ignored. ‘That would result in corporations being given what they might claim is a UN Seal of Approval without having taken meaningful steps to implement the Compact’s standards’ (Mahmood, Welch and Kennedy, 2003, 980).


Critics aside, many argue that MNCs activities are very positive for developing countries as these large firms continually contribute strongly to economic growth in many developing economies through FDI and large expenditure, in turn creating jobs, introducing new technology and transferring knowledge.

Brown, Deardorff and Stern (2004, p.321-322) refer to empirical data which suggests that MNCs in developing countries tend to pay higher wages than the local firms. They state that, there is no systematic evidence demonstrating that, as a generality, multinational firms adversely affect their workers, provide incentives to worsen working conditions, pay lower wages than in alternative employment, or repress worker rights. Rather there is a very large body of evidence indicating the exact opposite; foreign firms raise wages both by raising labor productivity and by expanding the scale of production and, in the process, improve the conditions of work. Additionally, foreign-owned firms make use of aspects of labor organisations and democratic institutions that improve the efficiency characteristics of their factory operations.

Surveys and statistic figures given a report published in 2008 by the Organization for Economic Cooperation and Development (OECD) with the title ‘Do Multinationals Promote Better Pay and Working Conditions’ confirm such arguments. The report compares and examines differences between foreign firms and local firms by looking at wages and conditions like working hours and training. It shows that MNCs do tend to pay more than local firms, though the difference lessens with local firms that compete in the same markets. In general, foreign multinationals pay 40% higher in average wages than local firms, and even more in low-income countries of Asia and Latin America. MNCs may offer higher pay than their local counterparts as it helps to minimise worker turnover and reduce monitoring costs, they also invest in capital-intensive sectors and rely on highly skilled employees.

The OECD states that MNCs have positive impacts on domestic industries through knowledge and technology transfer; they bring modern management and production methods to domestic competitors, which is likely to raise productivity and labour conditions. This occurs especially through supply chains, partnerships and skilled labour mobility. Additionally, due to increased competition, domestic firms can be forced to improve working conditions in order to avoid loosing labour. According to Hijzen and Swaim (2008) from OECD directorate for employment, labour and social affairs, by building clusters in developing countries MNCs can demand, from their suppliers and partners, higher standards for products and better labour conditions. For example Nike, due to increasing accusations of sweatshops and exploitation, formulated its first code of conduct in 1992 and in 2004, it employed 80 corporate social responsibility (CSR) and compliance managers. Factories were inspected daily/weekly.

It is argued the gap between developed and developing countries for the most part is not the result of suppression of labour standards or rights within MNCs but rather a reflection of low levels of human and physical capital, under-employment and pressure of population on physical resources (Manning, 1998). Therefore, activism for more corporate regulations from regulatory international bodies may adversely affect the very workers they are intended to benefit as punitive measures may push firms to alter production locations.


Many MNCs have already responded to criticisms of labour exploitation by adopting codes of conduct that are designed to guide their operations and increase their degree of CSR. This is not only essential for moral reasons but negative consumer reactions may be harmful to sales and profitability. However, while there have been some positive changes towards a better CSR system, the current mechanisms of global governance are still inadequate to enforce worldwide standard measures. Taking into consideration both positive and negative influences MNCs have had on the developing world, it cannot be disputed that on the whole, growth and wealth is on the incline for such economies.


American Centre for International Labour Solidarity 2003, ‘Chapter 2’ in _Justice for all: The Struggle for Workers Rights in Mexico,_ Washington, Solidarity Centre

Black K 2010, ‘What is the attitude of Maquiladora workers?’ in _Business Statistics: Contemporary Decision Making,_ Jefferson City, R. R. Donnelley

Brown, D.K., V. Deardorff, A. and Stern, R.M., ‘The Effects of Multinational Production on Wages and Working Conditions in Developing Countries’, in Baldwin, R. E. and Winters, A. L. (eds), _Challenges to Globalization: Analyzing the Economics_, Chicago, University of Chicago Press, 2004.

Fair Labor Organization, ‘Wages and Benefits’,, (accessed on 07 May, 2011), 2008.

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Manning, C.,’Does Globalisation Undermine Labour Standards? Lessons From East Asia’, in _Australian Journal of International Affairs,_ Vol. 52, No. 2, 1998.

Mahmood, M., Welch, C. E. and Kennedy, E. T., ‘Multinational Corporations and the Ethics of Global Responsibility: Problems and Possibilities’, in _Human Rights Quarterly,_ Vol. 25, No.4, Nov., 2003.

‘Maquiladora’s at a glance’ 1999, _CorpWatch_, viewed 1 May 2011,

Suri, P. and Dubey, N., 2008. Globalization and Labour Laws in India. _Asialaw Indiainvestor_. [online] Available at: www.psalegal.com/upload/publication/…/AprilIssue_1288776551.pdf _._ [Accessed 4 May 2011]

Organization for Economic Cooperation and Development, ‘Do multinationals Promote Better Pay and Working Conditions?’, in _OECD Employment Outlook_, Paris, 2008.

The World Bank, Employment Policy Primer, March 2008, ‘The effects of globalization on working conditions in developing countries’, , (accessed on 07 May, 2011), March, 2008.

Unicef, ‘Child protection from violence, exploitation and abuse’, , (accessed on 07 May, 2011), 2008.

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