Multinational firms face increasing pressure from and scrutiny by civil society, and the respect of human rights and the environment in emerging countries is a major concern. A 2017 French law concerning the vigilance of parent and contracting companies bears witness to this. It requires such firms “to identify risks and prevent serious infringements of human rights and fundamental liberties, and damage to personal health and safety and the environment.”
Two years after the adoption of this law, the first of its kind in the world, NGOs are lukewarm in their assessment of its results. They accuse the multinationals of not playing the game, pointing out that they do not adequately control the practices and behaviour of their international subsidiaries.
Everything is not black or white
Indeed, the practices and behaviour of multinationals in emerging countries can be highly controversial. On one hand, many economic studies highlight multinational corporations’ contributions to economic, social, and human development in countries where they invest, particularly via their efforts to transfer and spread technology, skills, and/or good practices. In this way, multinationals help to improve the living standards of local people.
On the other hand, studies and field observation by NGOs and academics indicate that multinationals can abuse their negotiating power. They profit from weak local authorities and flawed institutions by maintaining or establishing poor working conditions (low salaries, long working hours, use of informal work).
In a 2019 study published in the Multinational Business Review, we go beyond this black-and-white view of the social and human impact of multinationals, analysing the interactions between multinationals, local firms, and respect of the law in emerging countries. The study investigates whether companies respect human rights by giving local employees a contract of work and access to social security benefits. These features fall under the direct responsibility of the employer and appear in the 1948 Universal Declaration of Human Rights, according to which:
“Everyone […] has the right to social security.” (Article 22)
“Everyone has the right […] to just and favourable conditions of work.” (Article 23)
“Everyone has the right to rest and leisure, including reasonable limitation of working hours and periodic holidays with pay.” (Article 24)
Our empirical study is based on a survey of more than 120,000 workers in Mexico conducted annually between 2005 and 2014. One advantage of this survey data is that it was collected directly from local employees at their homes, and anonymously, which excludes the obvious bias generated in surveys conducted at the place of work or with the firms themselves.
The choice of Mexico for this type of study is appropriate for several reasons. Mexico, China, India and Brazil are benefitting from more foreign investment than any other emerging countries. Moreover, violations of human rights, particularly at work, are common in Mexico: more than half those working in manufacturing and agricultural service industries have no work contract or access to social security, and thus operate in the informal sector. Finally, Mexico comprises 32 regions whose institutions differ significantly.
Three major findings
Our study has three major findings:
Multinationals generally respect human rights more than local firms. The explanation could be that multinationals aim in this way to gain in legitimacy and protect their local and international reputation. Indeed, growing pressure from civil society (NGOs, activists, consumers) forces multinationals to discourage and control reprehensible practices by their subsidiaries, to maintain their reputation. Exemplary behaviour and good labour practices by high-profile multinationals can also exert pressure and encourage imitation. The adoption of global codes of conduct by a few multinationals often leads others to take the plunge. These two sources of pressure are of course much weaker for local firms, whose reputation is less important, and which may thus violate human rights more frequently.
Respect of human rights by local firms is influenced by the robustness of the institutions in the region where they operate. In other words, local firms violate human rights more often in regions where authorities struggle to maintain respect for the law. Surprisingly, this is not the case for multinationals: their human-rights practices are not influenced by the institutional frame in which they operate. This result confirms the notion that multinationals are highly concerned about their global reputation. They strictly control the practices of their subsidiaries to ensure they respect the human rights of their employees, even in regions where the law is only loosely applied.
The density of multinationals in a region has a negative impact on the respect of human rights by local firms. In other words, local firms infringe human rights more often in regions where a large number of multinationals are present. Thus, multinationals appear to have a negative impact on local firms.
There are two possible reasons for the last finding, which is paradoxical. First, a strong presence of multinationals might increase the competition between local subcontractors, particularly in terms of reducing costs. This increased competition might lead local firms to violate their employees’ human rights by depriving them of social benefits, for example. Second, multinationals might attract the most skilled workers, because of the better working conditions they offer. Local firms thus have to employ less qualified workers, who are also those on whom it is possible to impose poor working conditions.
Not so simple
In conclusion, our results show that the impact multinationals make on the emerging countries in which they invest is not as simple as the public debate might suggest. Undoubtedly, they respect their employees’ human rights more than local firms, whatever the institutional context in which they operate. But they contribute indirectly to the violation of human rights by leading local firms to adopt reprehensible labour practices.
The French law concerning the vigilance of parent and contracting companies is thus an appropriate legal tool insofar as it includes the activities of subcontractors and suppliers. The problem for multinationals lies in identifying and analysing the risk involved in extremely complex value chains. This duty requires strong resolve on their part, together with effective internal control and the deployment of appropriate resources. But they must take such measures, if they are to face up to their global social responsibilities.