In developing countries, governments often lack the capacity or the political will to update and to enforce regulation (Dal Bó and Finan, 2016), including labor regulation. In response, many Western multinationals sourcing from developing countries privately enforce local labor laws on their suppliers through “Corporate Social Responsibility” (CSR) programs (O’Rourke, 2014).
In a globalized production system, such CSR programs could provide an important source of enforcement. It is an open question, however, whether multinationals have the incentives and the capabilities to improve labor standards in developing countries. On one hand, multinationals have incentives to prevent industrial disasters that could pose reputational risks (Tadelis, 2002, McDevitt, 2011). On the other, enforcement of labor laws may increase labor costs, which suggests that multinationals’ promises may not be credible (Besley and Ghatak, 2007). Finally, even if multinationals are motivated to improve labor standards, it’s unclear whether they have sufficient bargaining power and monitoring capacity to influence suppliers’ practices (Short, Toffel and Hugill, 2016).
Further, if private enforcement of labor law can improve targeted establishments’ compliance, it raises the question of whether it generates net benefits or costs to these establishments and to their workers. Although limited, existing empirical evidence provides grounds for concern: It finds negative associations between increased labor regulation and firm competitiveness as well as worker outcomes (Botero et al., 2004; Besley and Burgess, 2004).