Wednesday 27 August 2014

The state and the enforcement of labor laws in Brazil

By Salo Coslovsky
image by S. Coslovsky
In a recent article in Oxford Development Studies, Salo Coslovsky examines how labour inspectors and prosecutors have addressed enforcement of labour regulation in four critical sectors in Brazil. This post summarises some of the findings.

The last decades have seen a trend of economic liberalisation, combined with an increase in international trade and foreign direct investment in many countries, including in Latin America. One might expect this to go hand in hand with a 'race to the bottom' in labour regulation, as (developing) countries compete for investment. But contrary to such expectations, domestic labour laws have been upheld in many developing countries, due to a variety of factors. Some of the reasons for this include social clauses in international trade agreements, for example between the US and developing countries, as well as an increase in voluntary private regulation, such as codes of conduct in which multinational companies commit to improve working conditions in their supply chains. Less attention has been paid to the roles of developing country governments in enforcing labour laws and promoting improvements in labour practices, as these are often portrayed as too weak or corrupt to take on such tasks.

However, the experience of Brazil shows that government actors in developing countries can play an important part in promoting labour standards in a context of economic liberalisation. Examples from four sectors in the Brazilian economy show how government officials have intervened successfully to improve working conditions, while preserving the economic competitiveness of companies. In all of these cases, labour inspectors and prosecutors have played key roles in monitoring, but also in promoting innovative solutions for compliance with national labour laws.

Charcoal production:
Slave-like working conditions were common among small charcoal producers in the Amazon that supplied larger iron smelters. These producers were difficult to grasp for labour inspectors because many were not officially registered as companies. Moreover, individual producer were under immense competitive pressure that made them unable to raise wages for workers.

In this context, labour inspectors and prosecutors found a creative solution, making use of the fact that the informal charcoal producers were supplying large iron smelters, and drawing on a provision in Brazilian law that made it possible to hold these to account for labour law violations in their supplier firms. As a result, iron smelters established long-term contracts with charcoal producers and created a separate organisation to monitor working conditions. Simultaneously, this resulted in improved outcomes for workers and in better quality of charcoal supplied to iron smelters.

image by S. Coslovsky
A similar situation with accusations of slave labour existed in the sugarcane industry. Harsh working conditions were particularly common in sugarcane harvest on small independent plantations, which relied on informal labour contractors to employ migrant workers during harvest times. As in the case of charcoal, labour inspectors made the larger sugar mills that bought sugarcane from these smaller producers legally responsible for violations of labour regulations in their supplier firms. This resulted in significant improvements in working conditions in the industry, even if some problems persist on small farms.

Short-term employment in agriculture:
Small farms producing a range of agricultural commodities throughout the country have a need for temporary workers during harvest season, but are unable to employ these on a permanent basis throughout the year. Again these farms often rely on labour contractors as intermediaries, who tend to disregard labour regulations to minimize costs.

An innovative way out of this dilemma was found through establishing employers' consortia among small farmers that would directly employ workers on a permanent basis. Labour inspectors played an important role in the emergence of these consortia, for example by convincing tax administrators not to prevent the economic feasibility of such arrangements by charging higher social security contributions to consortia than to individual farmers. Employed by various farmers collectively, these workers would switch workplaces across farms, but continued to have a stable contract in compliance with labour regulations throughout the year.

Firework production:
In the case of firework production, unsafe working practices were common and conditions worsened further as firework producers came under pressure from cheaper Chinese imports. In this case, labour inspectors and contractors enforced compliance by imposing fines, but government agencies also supported producers in upgrading to international quality standards. In addition, the government raised quality standards required in the Brazilian market for fireworks, which gave Brazilian producers temporary protection from Chinese imports unable to meet these technical standards. As a result, Brazilian fireworks producers improved both working conditions and quality of their products, resulting in higher export revenues.

Several insights emerge from these four case studies that may be relevant also for post-neoliberal states elsewhere that try to combine economic growth and export competitiveness with social welfare. First, outsourcing and subcontracting arrangements should be closely watched, as these often tend to be associated with circumventing or violating labour laws. Second, international pressures from buyers and governments in export markets are not the main drivers of improvements in working conditions, but they can nevertheless make important contributions to strengthening local efforts. Finally, labour inspectors and prosecutors, acting with a relatively high degree of autonomy and in cooperation with the judiciary, have made crucial contributions to the effective implementation of labour standards in Brazil. In doing so, they have combined threats of sanctions with support for innovative strategies to facilitate compliance for companies without putting them at a competitive disadvantage.

For more details, please refer to: 
Coslovsky, S.V. (2014) Flying Under the Radar? The State and the Enforcement of Labour Laws in BrazilOxford Development Studies, 42(2), pp. 190-216

Thursday 21 August 2014

Rising Powers' FDI in Europe: a threat or an opportunity?

By Elisa Giuliani, Sara Gorgoni, Christina Günther and Roberta Rabellotti

image by Stuart Miles/
In a recent paper in International Business Review, Elisa Giuliani, Sara Gorgoni, Christina Günther and Roberta Rabellotti explore the local impact of investment from Rising Power firms in Europe. This post summarises some of the findings.

As more and more firms from Rising Power countries invest in Europe, worries abound over the impact of such investment on the local economies. Some fear that Chinese, Indian or Brazilian companies will simply take over local companies, exploit their technology - and leave without creating lasting benefits for employment or economic growth in Europe. But are these concerns justified, or should foreign direct investment (FDI) from emerging economies be seen in a more positive light?

Looking at examples from Italy and Germany, we find that ‘predatory’ behaviour of Rising Power firms exists in some cases, but we also identify another type of FDI from these companies that creates mutual benefits for investors and for the economies they invest in. Moreover, multinational enterprises (MNEs) from emerging economies investing abroad are more likely to engage in local innovation networks and create win-win situations of mutual learning than MNEs from advanced economies.

Studying investment of emerging economy MNEs in Europe
The impact of investment from emerging economy MNEs in Europe is difficult to grasp within conventional analytical approaches in international business, which have focused on advanced economy MNEs investment in developing countries, assuming that multinationals investing abroad have superior technology. Therefore, the study develops a new typology of MNE subsidiaries, according to the direction of knowledge flows between headquarters and the subsidiary, and the extent to which subsidiaries participate in local innovation networks.

This typology is applied to 23 local subsidiaries of emerging economy MNEs in the industrial machinery and equipment sectors in Italy and Germany, comparing them to 24 subsidiaries of MNEs from advanced economies.

Three types of subsidiaries
Overall, we find that MNE subsidiaries can be divided into three main types, with significant differences between subsidiaries of advanced economy and emerging economy MNEs:

‘Passive subsidiaries’ of advanced economy MNEs 
‘Passive subsidiaries’ are mainly interested in accessing local markets. Decision-making tends to be centralized in the MNE’s headquarter and subsidiaries engage little in innovation activities. Within the sample studied, this category includes significantly more subsidiaries of advanced economy MNEs than subsidiaries of emerging economy MNEs.

‘Predatory subsidiaries’ vs. ‘dual subsidiaries’ of emerging economy MNEs
‘Predatory subsidiaries’ come close to the negative picture of emerging economy investment described earlier. Significantly more subsidiaries of emerging economy MNEs than advanced economy MNEs fall into this category. Put simply, they are seeking to acquire advanced technology by taking over companies in advanced economies, transferring knowledge to their headquarters without contributing much to innovation in the local economy. An important source of knowledge are local employees in the subsidiary, and learning takes place through personnel exchanges or joint product development projects between the subsidiary and the headquarter. While this seems to confirm some of the worries about Rising Powers’ investment in Europe, there is another type of FDI from emerging economies that has so far been overlooked in the debate.

‘Dual subsidiaries’ are similarly interested in acquiring advanced technology, and they are significantly more common among emerging economy MNEs than advanced economy MNEs. However, they differ from predatory subsidiaries because they actively engage in local innovation activities and cooperate in this with local firms and universities. These local networks allow mutual learning: On the one hand, local employees, supplier firms and universities are sources of knowledge for the MNE headquarters, but on the other hand, these local actors learn from new perspectives and experiences in emerging economy markets brought in by the investors. Hence, such cooperation is perceived as a win-win situation for the MNE and for local actors, rather than as an exploitation of local knowledge by the foreign investor in a ‘take and leave’ manner.

What impact does investment from Rising Powers' firms have?
To sum up, the results of the study show that FDI from emerging economy multinationals can be 'predatory', but it can equally have positive effects on the local economy, stimulating mutual knowledge exchange and local innovation. This sheds doubts on alarmist calls for caution about investors from these countries. To maximise benefits from emerging economy FDI, policy-makers in Europe should encourage networking among these investors and local actors involved in innovation, such as local companies and universities.

For more details, please see:
Giuliani, E., Gorgoni, S, Günther, C. & Rabellotti, R. (2014) Emerging versus advanced country MNEs investing in Europe: A typology of subsidiary global–local connections. International Business Review, 23(4), 680-691.

Thursday 14 August 2014

Will consumers in the Rising Powers buy Fair Trade?

image by Stuart Miles/
By Alejandro Guarín and Peter Knorringa

In their recent article in Oxford Development Studies, Vol. 42, No. 2, Alejandro Guarín and Peter Knorringa ask how new middle-class consumers in the Rising Powers will influence ethical consumption patterns and private standards on socially and environmentally responsible production.

Responsible consumption—in other words the demand for products that are good for the environment and for workers, such as fair trade or organic— is booming in Western countries. As global demand shifts to new consumer groups in emerging economies, will these look out for similar social and environmental product labels?

This depends, first of all, on how we define these new middle class consumers. There is no universal definition of the new middle classes, but the income range of 10 to 100 US dollars per day is often used. In developing countries this is a heterogeneous group of people, and it includes many that are relatively poor by Western standards. Many of these so-called middle class consumers are barely not poor, and risk falling back into poverty in times of economic crisis. Nevertheless, examples from countries such as China, India and Brazil show that, even at low income levels, these consumers make sophisticated decisions about how to spend their discretionary income. They’re not just fulfilling basic necessities.

However, it’s not clear that this ability for discretionary spending will translate into responsible consumption. It has frequently been assumed that responsible consumption is a luxury that only wealthy consumers can afford. It makes intuitive sense to think that you must first secure basic needs like food or shelter before worrying about the environment or social justice. But reality is more complicated. First, social and environmental concerns do not belong exclusively to the wealthy; many poor people in developing countries know and care about these issues too. Second, having those concerns is no guarantee that you’ll act on them. There is a big gap between what people say and what they do. The point is, we don’t know enough about the preferences and behaviours of consumers in the developing world. And to assume that they will simply mirror those of Western consumers is simply wrong.

How, then, to study this relationship between income, consumer preferences and their social and environmental implications? Looking at standards can help. Standards refer simply to the rules that govern what is produced in an economy, and how. Usually governments set the standards—for example with regard to health or to pollution—but in many cases companies set their own, voluntary standards. These private standards (such as “Fair trade”) are very important because it is what firms use to differentiate their products from others. Through their purchases, customers play an important part in shaping what standards appear and which are successful. But is this true in rising powers too?

In the article we propose a simple model (illustrated below) to analyse these relationships. On the vertical axis is people’s ability to pay for responsibly consumption, in other words their income. On the horizontal axis is their inclination or desire to consume responsibly, in other words their preferences.

Most of what we know tends to concentrate on relatively wealthy people, that is, around the top part of this diagram. Where purchasing ability meets high demand for social and environmentally responsible products (quadrant III), firms will tend to differentiate their products through private standards. Mandatory public and private standards on minimum product quality apply at lower levels of ethical demand (quadrant II), with less scope for product differentiation based on voluntary private standards.

We know little about what happens in the lower part of the diagram. Generally, no formal standards would be expected if low desire for responsible consumption coincides with low incomes (quadrant I); here informality prevails and seller’s reputation is established by personal interactions. If consumers are concerned about ethical issues but lack the means to afford higher priced, ethically certified products, government regulation may come in to ensure a minimum level of socially responsible firm behaviour.

The new middle classes in Rising Powers are located in the inner circle, moving between these different quadrants. A big question mark represents the need for further research about what roles private and public standards are likely play in the future. We could expect public standards to be more prominent if consumers are very sensitive to price, and voluntary private standards to play a greater role if consumers have a strong desire for responsible consumption as well as the financial means to afford a higher price for ethical products. But, as we have seen, we don’t know enough about the motivations and behaviours of consumers in developing countries to test whether this is the case or not.

In Western countries civil society has been a major force putting pressure on companies to adopt voluntary social and environmental standards. Society’s mobilization has often been needed for governments to set the public standards needed to protect consumers. Can we expect similar movements and organisations by consumers in Rising Powers? Or will there be other drivers of responsible production and consumption? The landscape is varied. Civil society mobilization in China looks very different to what it does in Brazil or in India, and the outcomes are not likely to converge.

Rising incomes among the new middle classes have the potential to stimulate new demands for socially and environmentally responsible consumption. However, there is no reason to assume that these will result in the same kinds of consumption patterns and the same kinds of social and environmental standards that we have seen in the West. How companies, states and consumers will respond to these trends present an exciting and largely unexplored field of research.

The questions addressed above are explored more in detail in Guarín, A. and P. Knorringa (2014), New Middle-Class Consumers in Rising Powers: Responsible Consumption and Private Standards, Oxford Development Studies, Vol. 42, No. 2, pp. 151-171.

Wednesday 6 August 2014

Are Rising Power Firms changing the rules of international business?

By Rudolf Sinkovics, Mo Yamin, Khalid Nadvi and Yingying Zhang

image by sheelamohan/

A special section in International Business Review, Volume 23, Issue 4, features 'Rising Powers from Emerging Markets – The Changing Face of International Business'. In their editorial, Rudolf Sinkovics, Mo Yamin, Khalid Nadvi and Yingying Zhang ask whether MNEs from emerging economies are Rising Powers that will change the way 
international business works.

Within broader discussions around the geopolitical and economic rise of large emerging economies, an International Business perspective allows a closer look at the role of new multinational enterprises (MNEs) from these countries, such as Huawei, Tata Motors or Petrobras. These companies are clearly rising and going international: smartphones made by Huawei from China can now be found in countries around the world, Tata Motors from India took over Jaguar Land Rover in the UK, and examples can be continued.

But are these emerging multinationals rising powers in the world of international business? A key question is whether emerging MNEs are simply imitating and catching up with MNEs from more advanced economies, or whether they should be seen as Rising Powers in the sense of challenging established business models and ways of competing in the international markets.

While much of this debate in international business sees emerging MNEs merely as 'copycats' following established international business strategies, more and more findings are calling for a rethink. An example of how emerging MNEs may fundamentally challenge the rules of how companies become successful internationally is the 'fight for the middle'. Companies increasingly compete for large numbers of customers with medium or low income in emerging markets. To be successful in these markets, it may not be necessary - or even be counterproductive - for companies to imitate leading Western MNEs and strive to upgrade production capabilities to compete with high-end products. New business models may be needed to win the fight for the middle - and MNEs from emerging markets may have a leading edge here over their established competitors from advanced economies. In their home markets, many of these new players have become successful with new products that are functional and affordable, even if they may not have all the latest features fashionable in high-end markets. This experience can be a huge advantage in middle and low income markets internationally. In contrast, MNEs from advanced economies would actually need to downgrade their ususal products to appeal to this customer range - which has been observed only rarely so far. Hence, new successful business strategies might be dominated by rising powers from emerging markets.

The contributions to the special section of International Business Review highlight different ways in which emerging MNEs and their business models potentially challenge the rules of international business. For instance, FDI strategies pursued by MNEs from emerging economies investing in Europe can make a stronger contribution to local innovation than FDI from advanced economies, as shown by Giuliani et al. Further, Sinkovics et al explore business formation at the bottom of the pyramid in rural India and draw potential lessons for business models of MNEs entering bottom of the pyramid markets in emerging economies. Other contributions investigate the changing roles of emerging economy firms in global value chains and global production networks: Azmeh and Nadvi find that large Asian manufacturers gain power in global apparel value chains; Liu and Zhang analyse learning processes that enable Taiwanese technology firms to take on different positions in global production networks; and Jean examine factors contributing to functional upgrading of Chinese technology firms in global value chains. Focusing on Chinese outward FDI, Kubny and Voss find differences in the local impact FDI between Chinese firms and MNEs from advanced economies in Vietnam; while Wei Hu and Cui identify corporate governance factors within large Chinese firms that influence their FDI decisions. Taken together, the articles in this special issue point towards a number of ways in which emerging economy MNEs may be changing the face of international business.

For more details, please refer to:
Sinkovics, Rudolf R., Mo Yamin, Khalid Nadvi, and Yingying Zhang Zhang (2014), "Rising powers from emerging markets—the changing face of international business," International Business Review, 23 (4), 675-679. (DOI: 10.1016/j.ibusrev.2014.04.001).

Direct links to individual articles in the special section can be found at the publisher's website or on the Rising Powers and Interdependent Futures website.