What’s Stopping Better Work Conditions in Offshore Factories?

Even when multinationals try to clean up their act, a country’s institutions can get in the way
Alan Morantz
Indian workers sew in clothing factory in Dharavi slum in Mumbai, India.

When even blue-chip multinationals such as Apple, Nike and Adidas—firms that ferociously protect their brand—struggle to ensure their far-flung supplier network is free of child labour and unsafe working conditions, you know there is a fundamental problem. Public commitments are made, tough global industry standards are enacted, surprise on-site audits are done, yet scandalous conditions persist. Even first-tier, export-oriented suppliers that are closely watched get tripped up. 

Global improvement has been slow and spotty. In some countries, social and working conditions improve, in other countries they go down, and in still others nothing changes. There are many factors at play: the challenge of suppliers in developing countries to respond to wildly fluctuating consumer demand in the West; misaligned incentives focused more on outputs than working conditions; ineffective on-site auditing; or anonymous lower-tier suppliers with little incentive or training to improve matters. One study found that pressure for compliance has factories in the developing world to focus more on meeting measurable standards than on the real needs of workers.

One potential overlooked factor is the strength or weakness of institutions in countries where factories are located. These factors include political stability, government effectiveness (the strength of the bureaucracy, for example), regulatory quality (the extent to which the government legislates to promote private-sector development), rule of law, anti-corruption efforts and freedom of expression (or “voice and accountability”).

It turns out, some of these institutional factors can either help or hinder local compliance with multinational or industry-led employment standards, according to a new study conducted by Anthony Goerzen and Simon Iskander of Smith School of Business and Joerg Hofstetter of Kedge Business School in France. The researchers analyzed data from over 10 years that incorporated more than 8,000 audits from 2,300 firms in 17 countries. They found that increasing the quality of institutions does not necessarily translate into better social or worker outcomes.

In this conversation with Smith Business Insight, Goerzen and Iskander explain their results.

It seems surprising that, in some cases, strong public institutions can actually undermine efforts by multinationals to ensure their global suppliers meet certain labour standards. Can you explain the dynamics at play?

Goerzen: One factor—voice and accountability—is key to understanding the dynamics behind the others because it is the only factor that had a positive effect on efforts to improve working conditions. It is also negatively correlated with the other factors. 

Think about political stability. It seems intuitive that there’s a negative relationship between political stability and a free press. Strong and stable governments, especially in the developing world, have a vested interest in remaining in power, and one way of ensuring that is by controlling the media. So more powerful and stable governments lead to suppression of the media, and scandals can’t get reported. And even if they are reported, suppression of other civil liberties—such as freedom of association—damper efforts to collectivize and protest. 

One fascinating study illustrates this point well. In Mexico, private watchdog organizations were able to report labour abuses to the media. Word got out and the workers took collective action and unionized, correcting the injustices that had been committed. In China, on the other hand, even though labour abuses in a factory were reported to the media, and even though there was a union technically representing factory workers, nothing came of it—the union was effectively powerless. 

Regulatory quality is a similar story. Unfortunately, it seems that legislation meant to “promote private sector development” in developing countries is typically associated with a reduction in social, labour and environmental standards

What are the conditions under which industry or third-party initiatives are most effective in developing countries?

Iskander: Due to the mind-boggling complexity of these systems, it’s impossible to say for certain. Based solely on our study, it looks like third-party interventions are most effective when there is a high degree of press freedom and freedom of association, and an otherwise low degree of government interference. The former results in more meaningful exposés, empowers workers to make their voices heard and puts pressure on managers at firms to comply—whether due to social stigma or a loss of economic productivity. 

As for the latter, it weakens the ability of the government to censor the press and take action against protestors. Again, it appears as though private governance, like third-party organizations such as Amfori [a global business association for open and sustainable trade], fills an institutional void when public governance is weak. These private, not-for-profit organizations—with codes of conduct inspired by United Nations and International Labour Organization proclamations and conventions—typically have more stringent demands and hold firms to a higher standard.

It seems that private standards and codes of conduct can be beneficial. But is it also true that they can undermine host country governance? 

Iskander: I think there are a few ways to think about this. There are plenty of agricultural producers in the U.S. that differentiate themselves through various labels, private standards and codes of conduct, such as ‘organic’ or ‘grass-fed beef’. Do these undermine the authority of the USDA?

The issue is still under investigation by scholars. On the one hand, there appears to be a type of “synergistic” form of governance emerging in some value chains, where governmental agencies and private organizations or non-governmental organizations (NGOs) work together to bring about sustainable social upgrading. Here, private interventions support and reinforce host country governance rather than undermine it.

On the other hand, I think it’s entirely reasonable to believe that private interventions undermine host country governance. Maybe that’s not a bad thing. One example that comes to mind is Amfori operating in Cambodia, a nation that enjoys many trade privileges with the European Union. A delegation from the European Commission, along with Amfori, found severe and rampant human rights violations—from forced labour to suppressed electoral and bargaining rights. This resulted in Amfori lobbying the Cambodian government to enact the changes necessary to correct these injustices and to retain preferential trade status. 

I think this case further supports the findings in our study. It highlights the importance of basic individual freedoms and illustrates how private organizations emerge to fill institutional voids.

In what ways would your findings change how firms manage their supply chains? After all, there’s not much they can do about a host country’s institutions. 

Goerzen: There are a few things we would like industry leaders to take away from our research. First, it speaks to the dangers of rolling out a blanket policy or set of standards applied to all suppliers. One earlier study found that factories often are so poorly underfunded that they just don’t have the resources necessary to install up-to-date safety equipment, so they improvise and make do with what little they have. Audits might reveal this problem but won’t do anything to alleviate it.

Second, and this point speaks more to policymakers and civil leaders, I think our findings highlight the importance of collaboration with other actors. It would be better if governmental agencies worked with private actors and NGOs, drawing on their expertise to develop local institutions and regulatory agencies instead of crowding them out via legislation or suppressing civil rights movements or the free press.

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