1. Over the last decade, global FDI has grown four times as fast as GDP, and three times as fast as trade. Whereas in the post-war era until the 1970s international trade drove the expansion of the world economy, since the 1980s FDI growth has become the dominant driving force. The recent economic upturn in much of the world economy has led to a rapid increase in FDI since 1993. According to UNCTAD (World Investment Report 1996), investment inflows in 1995 increased by 40 per cent to reach $315 billion; led by developed economies which invested $270 billion (an increase of 42 per cent over 1994), which in turn received some $203 billion (an increase of 52 per cent). In total, FDI flows doubled between 1980 and 1984 relative to both global gross fixed capital formation and world GDP. On the stock side, by 1995 parent firms had invested around $2.7 trillion in their affiliates. 1995 also saw rises in FDI flows into developing countries, which totalled $100 billion. Moreover, outward investment from developing countries reached $47 billion in that year.
   
   
2. Because of this the role of multinational enterprises (MNEs) is becoming more central in government policy making at both the national and international level. Their number has risen from 7,000 in the early 1970s to around 39,000 in 1995, with around 270,000 foreign affiliates. Just one per cent of firms account for 50 per cent of global FDI and 95 per cent originates in developed countries. 73 million people are now employed by multinationals worldwide. It is estimated by UNCTAD that one third of all trade consists of intra-firm transactions. MNEs, therefore, are a key mechanism through which national labour markets are affected by international capital flows and regional changes in goods and services markets. A significant development since 1992 has been the growth in FDI in non-OECD countries. The expected adoption of a new legally enforceable Multilateral Agreement on Investment (MAI) in 1997, and its opening up to non-OECD participants, will add momentum to this process.
   
   
3. Against this background of "globalisation" the OECD's programme of work on trade, investment and labour standards must be a continuing priority for the organisation as a whole, developing a dimension comparable to the work on trade and environment. The OECD Report on Trade, Employment and Labour Standards has now been published, and was given a cautious welcome by TUAC, as a significant contribution to the international debate on the social dimension of the world trading and investment system. TUAC welcomed the Report's findings with respect to FDI that, "host countries may be able to enforce core standards without risking negative repercussions on FDI flows. Observance may work as an incentive to raise productivity through investment in human and physical capital." However, more work needs to be done in this area, and this TUAC discussion paper has, therefore been prepared so as to stimulate a wider debate on this issue.
   
   
4. FDI can be a significant element in economic development strategies to raise working people's economic and social welfare. Evidence from the OECD and others also suggests that the respect of core labour standards is not a hindrance to either the growth of trade or long-term foreign direct investment. However, on a daily basis the international trade union movement is confronted by grave violations of core labour standards motivated by economic goals (ICFTU 1995 Survey of Violations of Trade Union Rights). This is particularly the case in Export Processing Zones in developing countries. There appears to be growing policy competition between governments in a misguided attempt to attract FDI, based in part on the suppression of core labour standards. This undermines social progress and distorts wider economic efficiency. It does not lay the foundation for sustainable growth which is beneficial for societies as a whole. It is for this reason that trade unions have supported calls for a Social Clause covering core labour standards in international trade agreements, and for the effective incorporation of the OECD Guidelines for Multinational Enterprises into the MAI.
   
   
5. The impact of regionalisation and globalisation on labour standards in general is an issue for workers and trade unions over and beyond the issue of a Social Clause. The development of a social dimension to the European Union and the labour side agreements in NAFTA are examples of different reactions to this fact. Firms and regions appear increasingly divided between those seeking to invest and compete on the basis of high labour standards and those competing on the basis of low standards. This is a process also evident in some regions of OECD countries.
   
   
6. TUAC affiliates will see the relevance of the OECD to them in the future in the light of its work on these issues and its ability to encourage global integration based on high not low standards. The OECD Guidelines for Multinational Enterprises could represent a key element if they were effectively applied.
   
   
7. Section II of this discussion paper recalls those ILO core standards which are relevant to trade agreements. Section III discusses the link between FDI and labour standards, specifically the reasons why companies invest abroad, plus government action to suppress labour standards, with a focus on Export Processing Zones (EPZs). Section IV raises broader issues affecting FDI and labour standards within OECD countries. Section V proposes the next steps for OECD work on FDI and labour standards; it also discusses the relationship between the MAI and the OECD Guidelines for Multinational Enterprises. Annex I attaches examples of promotional literature being used by some government authorities to promote investment in EPZ's.

10. Child labour has received increased international attention. From the fundamental labour standards' point of view Convention No. 138 has posed some problems, as its nature is more technical and not quite comparable to the others which are human rights Conventions. In any event, the Governing Body of the ILO has decided that a new Convention should be prepared in this decade, aimed at eliminating the exploitation of children in working life. This will run in parallel but not replace Convention No. 138.
    
    
11. An imbalance remains in the OECD Report on the treatment of core standards. Though Convention No. 111 which provides for non-discrimination in employment is identified as a core standard, Convention No. 100 concerning equal remuneration for work of equal value is omitted. However, the ILO groups Convention No. 100 among those covering fundamental human rights. It is insufficient for the OECD to argue that the principles behind Convention 100 are embodied in Convention 111; this should be rectified by the OECD, as it will not wish to invite criticism for being insensitive to the concerns of equality between men and women.
    
    
12. The ILO Convention on equal remuneration for work of equal value is aimed at discrimination against women. It is the third most ratified Convention, ratified by 120 States which is more than Convention 87 (109 ratifications). This omission by the OECD is all the more regrettable as the Convention on the elimination of all forms of discrimination is one of the United Nations' basic human rights Conventions. Article 11 of this Convention notes that governments shall ensure on a basis of equality for men and women the same rights, in particular: "The right to equal remuneration, including benefits, and to equal treatment in respect of work of equal value".

13. The reasons for which investors are attracted to foreign locations are wide ranging and also subject to considerable changes in firms' assessment over time. Business representatives usually give various and diverging motives for investing abroad. The overriding objective is to gain or keep a competitive edge and this is to be achieved through strategies of maintaining market access and penetrating new and promising markets. The transfer of know-how, economies of scale, pre-emption of potential competitors, the availability of a well-trained labour force, new networks of suppliers for global sourcing, and various cost advantages are cited as factors affecting location. Amongst these factors the question has arisen "whether international production with its increased scope for locational choice might result in a downward adjustment of social and labour standards as local policy environments, including labour market policies and practices, compete for a share of international production" (A. Parisotto, Recent trends in employment in transnational corporations, in: FDI, Trade and Employment, OECD (1995), p. 70).
    
    
14. One if not the most important factor in the global competitiveness strategy of enterprises is to gain the most out of existing differences between countries (B. Madeuf, Foreign Direct Investment, Trade and Employment: Delocalisation, OECD (1995) p. 41-65). These differences may consist of a broad range of direct incentives offered to investors, the avoidance of potentially unfavourable exchange rate fluctuations, less stringent environmental regulations, and in wage and non-wage labour cost related to employment, e.g. labour market and social policy institutions and regulations.
    
    
15. Enhanced public knowledge of good environmental standards, the ensuing environment policy response in many OECD countries, and greater corporate attention to environment issues have created a business climate in which so-called "three D's jobs" (dirty, dangerous and difficult) are becoming less prevalent in the OECD area. At the same time, however, the combination of lax environmental regulation and enforcement on the one hand and low labour standards in occupational health and safety as well as the suppression of freedom of association has become a factor affecting investment in the non-OECD area. The cases of EPZ's reported below are clear examples of competitive advantage being perceived to be achieved by OECD MNEs at the expense of global environmental concerns and core labour standards at the same time.
    
    
16. The competition amongst and between both OECD and non-OECD countries for FDI is intense and puts the process of global economic integration at risk. To attract multinational companies and their investment, non-OECD governments are increasingly offering incentive packages, including exemptions from domestic labour law provisions to attract inward investment. This is in part a response to their inability to match the financial incentives offered to inward investors by industrialised countries: a factor which is driving the "race to the bottom"in terms of labour standards. There are also plenty of examples of cut-throat competition undermining those developing countries in particular who have sought to follow the "high route" to development. Organising trade unions in many parts of the world remains a difficult and hazardous process. The establishment of "free trade" or "export processing zones" in which labour protection is minimal or simply outlawed is undermining further the limited labour rights which exist. Both new and old labour legislation in several countries allow labour rights to be suspended by administrative decree.

Export Processing Zones (EPZ's)

The Case of China

24. FDI into China from the OECD and Asia is increasing at a fast rate, much of which is located in the Special Economic Zones (SEZs) and "open cities". In December 1992 the ILO estimated that, of the 6 million workers employed globally in EPZs, 3.5 million or over one-half were employed in four EPZs in China. This figure certainly is an underestimate. Other research (Asia Monitor Resource Centre - Hong Kong) suggests that up to 30 million workers are employed in China's five "special economic zones". Furthermore, the inclusion of the 14 "open cities" (which enjoy similar status) is said to increase the numbers of employees in Chinese forms of EPZs to over 60 million.
25. China claims that over six million workers in some 167,000 companies are partly or wholly dependant on foreign investment. The last few years have witnessed a "gold rush" of foreign investors into China, and private entrepreneurship is taking root there. However, for the workers concerned the situation is bleak. Migrants from other parts of China must obtain a border pass, work permit and temporary resident pass to work in the SEZs. China's first "comprehensive" labour law passed in July 1994 does not protect the right to organise, to bargain collectively and to strike. The other provisions are widely recognised to be cosmetic and enforcement is weak or non-existent in the SEZs. Moreover, regional labour laws (mostly in SEZs) have been endorsed that allow companies to sack and discriminate against workers who try to organise independently outside of the official All China Federation Trade Union (ACFTU). Unionisation is in any case weak: in 1993 only 10 per cent of workers in foreign owned/joint venture firms belonged to the ACFTU. The rights of workers are not generally supported by the ACFTU, whose Constitution states "The premise of the union is to carry out the tasks of the Party".
26. Around eighty per cent of SEZ workers are women, mostly between the ages of 16-25. By the age of 25, women are usually refused work and required to return to their province of origin; migrants cannot live in SEZs, even if they marry a local resident. Workers are usually housed in dormitories which are attached to the factory or warehouse. Safety regulations are abused and workers are frequently locked into the factories. Factory fires are common and workers unable to escape are burnt to death. Over 20,000 workers are reported to have died in industrial accidents in 1993. In the Guandong SEZ, the death rate is rising by 62 per cent a year.
27. Reports of the supply of prison labour to foreign owned firms are common. Many such "prisoners" are guilty of nothing more than attempting to set up independent trade unions. "Prisoners" are detained under the notorious Laogai system of "Re-education through labour" which allows for detention without trial, and which the ILO Committee on Freedom of Association has characterised as a form of forced labour. Official estimates of the number of independent trade union organisers detained in prisons and labour camps are not given, but the ICFTU puts the figure at several hundreds. The total number of prisoners in labour camps runs into millions, some of whom are working for foreign owned enterprises.

The Case of Malaysia

The Case of Sri Lanka

31. Sri Lanka's first EPZ was established in 1978, partly as a means to attract FDI, and as part of an economic liberalisation package, which was itself a condition for financial support by the World Bank and the IMF under the structural adjustment programme. Three EPZs are in existence today, and inward investing companies enjoy among other things, tax holidays, and exemption from controls and taxes on imports and exports. In theory, trade unions are covered by legislation covering the right to organise and bargain collectively. In practice, however, workers are barred from joining independent trade unions and are only allowed to participate in "joint consultative councils". Union officials cannot enter the heavily guarded EPZs without permission, and this is never granted. Other restrictions mean that all persons and vehicles entering and leaving the zones are subject to physical security checks and entry permits must be obtained for all visitors.
32. Around 80 per cent of the workforce in the EPZs are women, with more than 75 per cent classed as trainees, unskilled and semi-skilled. Promotion prospects are low, and training opportunities other than initial on the job training are few. A recent survey by the ILO produced contrasting views on the working conditions in the EPZs. Government officials and top-level management saw them as progressive, while the personnel managers and workers interviewed gave a different assessment. This suggested that the situation in the Sri Lankan EPZs differed little from other EPZs in other countries. Workers, and especially women, did not enjoy security of employment, wages were low, gender disparities existed, and women were subjected to sexual harassment and abuse. In addition working hours exceeded those laid down by law, and the available accommodation was of a low standard. Furthermore, occupational health and safety standards were low and poorly enforced.

The Case of Costa Rica

33. The ILO Committee on Freedom of Association (Case No. 1780) recently found in favour of a complaint brought by the Latin American Central of Workers Union (CLAT) on the grounds that ILO Conventions 87 and 98 had been breached in a Costa Rican EPZ. In this instance, within two to five days of the Trade Union of Construction, Metallurgical and Related Workers (SICMA) being set up in an enterprise in the Alajuela EPZ, a group of workers, including members of the Executive Board of the union were dismissed. Following the dismissals the CLAT requested the government to mediate between the parties with a view to reaching a solution in line with Costa Rica's Constitution and ILO Conventions 87 and 98, both of which guarantee the right to freedom of association and collective bargaining. In turn, and following a lengthy delay the government rejected the trade union complaint against the company. In finding against the government and ordering the reinstatement of the workers concerned and observance of their trade union rights, the ILO "deplored" ( Case No. 1780 § 141) the time taken to process the trade union complaint, and the nature of the government's response given that the employers actions were "all clear indications of the anti-union nature of the dismissals" (ibid § 141).

The Case of South Korea

34. The first two EPZs in Korea were established in the early 1970s in Masan and Iri. Their history sheds light on how locational decisions of foreign investors have changed over time. In the early years of the Masan EPZ, low wages and tax exemptions were the main factors that attracted foreign investors to the Zone (Korea Institute for Economics and Technology (1990), Study on the Development Plan for the Masan EPZ). Under military rule, trade unions and industrial action in the Zones were prohibited by law in order to attract FDI. The investments showed no positive spill-overs to local subcontracting firms. This lack of support for local activities as well as largely adverse effects on the environment as a result of legal waivers for EPZ investors are the main features of the Masan EPZ. Labour standards are generally lower in the EPZ than outside, and very little training is provided. More than 70 per cent of the workers are young women employed in low- and semi-skilled jobs in the electronics and textile industries.
35. In the years after the announcement of democratisation in Korea in 1987, the Masan EPZ saw a sharp decline in investment and employment. Disputes on core labour rights (mainly freedom of association and collective bargaining) and wages alongside with changes in the exchange rate led several MNEs to relocate their production facilities, e.g. to EPZs in Malaysia, in most cases without prior notice to the employees. The resulting total loss of employment amounted to almost 50% of the workforce. In the early 1990s, the Masan EPZ has started to lose its relative importance for foreign investors compared to low-cost countries in East and South-East Asia.

General Trend of Suppressing Trade Union Rights

36. The cases cited above are only some of the many examples where governments have actively suppressed or permitted the suppression of labour standards to attract FDI into EPZs. Annexed to this report are several government sponsored advertisements that show the lengths to which some development authorities are going to attract inward investment. Hourly wage costs of US $1 in Mexico are being undercut by the Dominican Republic's offer of 56 cents per hour. The Bangladesh government actively promotes its EPZs by citing the fact that trade unions are forbidden by law and strikes are illegal.
37. Legislation also prohibits strikes and other trade union activities in EPZs in Pakistan. In El Salvador and Guatemala, workers rights which exist on paper are not respected in practice. OECD governments should also be aware that abuses of workers rights in these and other countries are not confined to EPZs. The use of the EPZ examples by TUAC merely highlights the worst excesses of some governments which pursue misguided economic development strategies at the expense of their workforce.
38. The EPZ experience raises questions for the OECD and the MAI, other than those relating to abuses of labour standards to attract FDI. These questions relate to the principle of National Treatment and Conflicting Requirements for MNEs. Government policy towards EPZs, where MNEs are at an advantage when compared to those MNEs operating outside of an EPZ but within the same country could be in breach of the requirements of the twin principles of National Treatment and Conflicting Requirements. The OECD should evaluate the country-wide economic distortions being generated and sustained by the use of EPZs as part of its wider work on trade, FDI and labour standards. Furthermore, these issues should also be on the agenda of the Negotiating Group on the MAI.

Corporate Employment Strategies

39. Over and above questions of the observation of core labour standards the employment strategies of MNEs appear to be in a state of change. The traditional factors affecting investment locations outlined in paragraph 12 may be undergoing significant modification with the combined effects of globalisation and technological change. There appear to be two divergent trends - on the one hand firms seeking to compete on the basis of high standards and high productivity and on the other those seeking to compete on the basis of ever lower labour costs.
40. Observance of the OECD Guidelines for Multinational Enterprises can be taken as a proxy for the pursuit of a positive employment strategy by firms. TUAC would accept that OECD home based MNEs operating in other OECD countries usually comply with the labour standards of the OECD Guidelines. However, there have been over 30 occasions when TUAC and governments have had to raise questions within the CIME, or seek clarifications under the Guidelines when the principles of the Guidelines have been breached.
41. The accelerated spread of new technologies, especially the new micro-electronics-based information and communications technologies, has lead to new patterns of international division of labour between both countries and affiliates of MNEs at global level. Recent OECD work has found that technology has increasingly become skill-biased (Interim Report on Technology, Productivity and Job Creation to the 1995 OECD Council at Ministerial level). In the framework of globalisation with new competitors in Asia and Latin America one conclusion that could be drawn from this is that low-skilled low-wage production is shifted to countries with low labour cost while the deriving loss of employment would be compensated for with a move towards more specialised, high-skilled and thus high productivity based production in advanced OECD countries.
42. While this may be true in the context of standardised "taylorist" manufacturing there are also new trends in firms which have embarked on flexible, "post-taylorist" production schemes at global level (Charles Oman (1994), Globalisation and Regionalisation: The Challenge for Developing Countries, OECD Development Centre Studies). Advanced and sophisticated technologies in manufacturing have enabled whole sectors to produce the same goods of the same quality almost everywhere in the world - using even less-skilled labour. In a context of trade and investment liberalisation the mobility of machinery and equipment tends to make decisions on locations for high value-added production less dependent on factor endowments. At the same time, global competition entails a higher degree of product standardisation and greater harmonisation of production techniques.
43. In many sectors global sourcing for global production has led to the creation of global product markets in which competition is taking a new shape. When input factor prices for capital and energy are given, the cost of the remaining factors of labour and the environment is the area where competition ultimately takes place. Global product markets are tending to create global labour markets. Trade unions are increasingly confronted with pressure from the employer's side to revise existing collective agreements on wages and benefits downwards for the sake of international competitiveness. In many cases the pressure is exerted with a more or less open threat to relocate production elsewhere.

The Case of South Carolina

44. An example of direct incentives offered to the investor within the OECD area can be shown in the circumstances that led to the decision of a German company to locate an overseas automobile production site in South Carolina, USA. After the announcement in 1992 of plans to build a $400 million plant, providing 2000 jobs with a $66 million annual payroll, the State of South Carolina acquired 1000 acres of land (value: $36.6 million), and further offered the company a $130 million incentive package, including $71 million in tax breaks and the extension of an airport runway allowing for big cargo plane air traffic. The State also agreed to place job advertisements for the company, to further reduce hiring costs by screening potential employees and guaranteeing five qualified applicants for each job vacancy. Technical schools adopted the company's specific training needs into their curriculum.
45. South Carolina has advertised itself as a "right to work" state with low wages and low cost, promising higher returns for potential investors. Altogether, there are 22 "right to work" states in the southern sun belt. The State's industrial policy to attract investment is based on the view that workers can be "priced into jobs" as long as costs remain sufficiently low compared to other regions. A constituent part of this strategy is to keep the State's unionisation rate very low (less than 3 per cent of the workforce is unionised) and to avoid organising campaigns from the outset. Organising is discouraged in practice. Human Resource Managers are offered special training courses by the local chamber of commerce on how to beat unionisation and specialised law firms advertise their ability to screen job applicants for their potential inclination to trade unions.
46. For the production of the same high value-added goods, namely luxury cars, workers in the company's home country enjoy wages which in dollar terms are approximately two thirds higher than those of their South Carolina counterparts. The workers' wages in the company are higher than the average South Carolina wage in manufacturing, but lower than the average US wage in the automobile industry. German workers are represented by a strong trade union and there is a well functioning system of industrial relations in place in which the metalworker's union negotiates wages and working conditions. The union and the management cooperate under the terms of co-determination provided by company law. None of this has been "exported" to the US site. (International Herald Tribune, 11 May, 1995).
47. Similarly, in 1993, Mercedes-Benz invited US States to bid for a new car plant. The winner of this reverse auction process, Alabama has now run into financial problems to fund the $300 million subsidy package offered to Mercedes-Benz. To maintain its payments to the company, the State is now borrowing from its pension fund at penal rates of interest, after first trying to raid its education budget.
48. In other countries cases of companies have recently become known where foreign investment projects were made conditional on the non-application of freedom of association. A US-based toy distribution chain failed in these attempts after a long labour dispute on union recognition in Sweden. In this case, the interest of market penetration finally outweighed the management's anti-union stance. A Korean MNE in the electronics sector attempted to get round of existing labour legislation in Germany for the establishment of its European headquarters but failed and subsequently relocated to the UK.

Corporate Codes and the Rule of the OECD Guidelines

49. A reaction to negative publicity and bad industrial relations that these attempts have brought have led some companies to introduce voluntary guidelines for their foreign based subsidiaries and their suppliers. One such example is the Levi Strauss and Company "Business Partner Terms and Engagement and Guidelines for Country selection". This is a good example of a MNE acting in a responsible way.
50. However, the adoption of voluntary guidelines covering corporate behaviour is no guarantee of their effective application, as acknowledged by the OECD Report on Trade, Employment and Labour Standards (page 19). One multinational sportswear company has such guidelines that cover its subsidiaries. Recently, American trade unions raised their concerns over working conditions in this firm's "partner" factories. In response in a letter to the AFL-CIO, the President of the company stated: "It is a common assumption that ---- (parent company) is directly responsible for all elements of the manufacturing process for products bearing the --- (trade) mark. This is not the case....(parent company) has established (the following guidelines) which are substantially controllable by our individual business partners". One such guideline notes that the company will only "continue to do business with partners" that fairly compensate their workers and allow freedom of association. On the alleged safety and human rights violations the President further stated: "you must appreciate that (the parent company) is not in a position, nor qualified, to determine if (your) allegations....are true....until proved otherwise, (the parent company) must trust that its business partners are acting within our guidelines" (letter to AFL-CIO September 1995). Companies can adopt guidelines covering their suppliers, but they often will bear no responsibility or exercise no control over their implementation.
51. Resistance is often encountered by trade unions and others when promoting the adoption of voluntary guidelines by companies and trade associations. In response to the growing number of fires and deaths in Asian subsidiaries of Hong Kong toy manufactures the ICFTU and others urged the Hong Kong Toy Council to adopt a 'Toy Safety Charter' to ensure that workers health and safety and labour rights are respected in the toy factories. In response to this initiative the Chair of the Toy Council responded that the Council's members knew best how to run their factories and so outside intervention was unnecessary. However, following increased pressure by the international trade union movement and others, the International Council of Toy Industries (ICTI) adopted on 21 May 1996 a Code of Business Practices. As welcome though this move is it still falls short of what is needed in the toy industry. The code does not include the right for workers to organise and bargain collectively, and neither does it allow for any independent verification of its provisions.
52. TUAC welcomes the adoption by MNEs of effective voluntary corporate guidelines, but these are not an alternative to the obligations all enterprises have under the OECD Guidelines for Multinational Enterprises which have been adopted by governments and supported by BIAC member organisations. Likewise, governments cannot evade their responsibility for the effective implementation of the Guidelines, whether in their own borders or in the subsidiaries of home based MNEs operating in non-OECD countries.
53. More specifically, MNEs operating within EPZs have, on occasion, far from raising standards applied pressure to ensure the continuing violation of standards. The Malaysian example noted above is a case in point where following an announcement by the government that it would allow workers to establish unions of their own choice, employers threatened to relocate elsewhere. One MNE said it would consider relocation to Thailand and placed guards on its buses transporting its workforce in order to prevent their contact with trade union organisers; another threatened the dismissal of trade unionists; and yet another threatened to relocate to China ( ICFTU 1991 Survey of Violations of Trade Union Rights).