A race to lower standards? Labor standards and location choice of outward FDI from the BRIC countries

• We find robust evidence that there is a tendency that BRIC MNCs locate their FDI in developed countries with lower standards across a wide range of labor standard indicators; this tendency is absent among developing countries.
• Location choice is highly path dependent upon previous trading relations between the home and the host country, which hampers BRIC MNCs’ ability to arbitrage. Conversely, capital mobility is found to intensify the race to lower standards.

Scholars argue that multinational corporations tend to locate their investment in countries with lower labor standards, but empirical results are highly inconsistent. In this paper, we investigate the effect of differential labor standards on the location choice of outward greenfield foreign direct investment (FDI) from Brazil, Russia, India and China (i.e. the BRIC countries). We find robust evidence that while there is a tendency toward the attraction of FDI by lower labor standards in developed countries, such a “race” is absent in FDI directed to developing countries. Location choice is highly path dependent upon previous trading relations between the home and the host country, which hampers the MNCs’ ability to arbitrage. Conversely, capital mobility at the industry level is found to intensify the race to lower standards.