How the EU’s Social Europe model influences global labour standards through inward Foreign Direct Investment (FDI).
In 2024, the EU adopted new regulations prohibiting goods made with forced and child labour. While the ban applies to exports from the EU and sales in the EU market, it primarily targets imports, demonstrating its normative power. The EU seeks to diffuse its norms but does so in a coercive manner, using the stick of economic sanctions. Can the EU export its values outside the EU in trade and investment relations by example?
We conducted two studies on investment linkages with Europe and social upgrading in developing countries. Our evidence strongly converges, suggesting that Foreign Direct Investment (FDI) from developing countries to European countries can serve as a transmission belt for the diffusion of better labour standards. That is to say, transference occurs unintentionally by way of the EU’s identity and principles, as embodied in its institutional make-up—the European social model—and of the social forces that sustain it.
Incentives for Southern multinationals to upgrade
Over the last 30 years, the familiar pattern of FDI from the Global North to the South has been met with parallel and reverse investment flows from the South to the North. Increasingly, Southern multinationals have sought out beneficial investments in Europe and the US, attracted by stable markets and assets such as human capital, advanced technology, and other intangible assets. These assets have great value because they allow Southern multinationals to compete more effectively with peer firms and continue to grow.
However, Southern multinationals face several challenges as they continue to expand abroad. First and foremost, they must learn to abide by stricter labour regulations than they encounter at home. In addition, the attention of labour unions, civil society, and the press will be drawn towards the operations of these multinationals because of the dual liabilities they bring with them: the liability of foreignness and the liability of backwardness. The combined effect of these liabilities is that stakeholders are concerned about the suitability of these firms to operate in host markets. Consequently, they look not only to the firms’ operations abroad but also at home, for example, in Brazil, China, or India.
To overcome their liabilities and ensure continued access to valuable assets in Northern host countries, Southern multinationals will upgrade their labour standards throughout their corporate network, including in their home countries. Avoiding the negative reputational effects of poor labour practices at home and the associated consequences for their “social licence” to operate in Northern countries shapes the firms’ decisions.
The distinctiveness of Social Europe
There is an important caveat. Europe and the US are dissimilar when it comes to labour standards. Regarding union rights, EU and EFTA countries—which we refer to collectively as “Social Europe”—are far superior to the US. European labour institutions reflect this greater practical respect for collective labour rights. Europe has strong unions, coordinated bargaining institutions, and EU- and country-level regulations mandating employee representation in corporate governance. The US, by contrast, does relatively little to protect collective labour rights.
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Conversely, the two locations are quite similar regarding substantive rights in practice when measured against an aggregate indicator of working conditions. If we consider components individually, however, differences become apparent. The US has the longest hours worked among high-income countries. In many European countries, weekly working hours decreased starting in 1980, continually driven down by supranational and national policies to address unemployment and, more recently, to improve work-life balance. EU legislation also mandates minimum standards for paid annual leave, occupational health and safety, and night work, which are generous relative to the US and other countries.
Accordingly, investment in Social Europe is more likely to induce labour upgrading in low-income countries than investment in the US. This is an important aspect of our research, as its comparative nature allows us to dismiss some potential alternative explanations for the expected positive correlation between South-to-North investment and labour standards, such as market size and opportunities, markups, or social clauses in trade agreements. Given the similarity of the two locations in these regards, one of the largest remaining differences is their institutions and the practical protection of labour standards.
The “Social Europe” effect
To test our hypotheses regarding this investing-up effect, we regress the two labour rights indices mentioned above, along with their sub-indices, on a rolling sum of developing countries’ FDI flows to Social Europe and the US. We find that FDI to Social Europe is associated with upgraded union but not substantive rights. When we unpack the indices into their component sub-indices, we find that the null effect of investment in Social Europe is due to contradictory trends in effect on sub-indices. While enforcement of regulations against forced and child labour appears to worsen over time, wages and working time largely improve, with no effect found on workplace safety regulations. These most egregious rights violations are some of the most intransigent, deeply embedded in socio-cultural norms (child labour) or so perverse (forced labour) that they are beyond indirect effects, such as the one we proposed in our study, to ameliorate.
In a parallel study, we find that Brazilian outward FDI linkages between municipalities and Europe improve decent working conditions at the sub-national level in Brazil.
Outlook
Paradoxically, by hosting incoming investment from the Global South, Social Europe can project its standards beyond its borders. We identify three implications from our work for EU policymaking. First, as Southern multinationals continue to grow and internationalise, the EU’s tightening of FDI screening will slow down the levelling up of standards. Second, the EU’s regulations on forced and child labour provide a welcome new (trade) governance tool. The EU should take seriously its renewed commitment to address forced and child labour within its borders, as this might well be the best way to combat these practices worldwide. Third, from the perspective of policy coherence for sustainable development, the EU’s latest investment and trade policy moves seem to be at odds with one another.
Damian Raess is a professor at the École supérieure en études internationales (ESEI), Université Laval, and the holder of the research chair Couche-Tard on global value chains. His research interests include, but are not limited to, the private and public governance of labour standards through international trade.
