As global value chains undergo structural changes in the 21st century, one of the major challenges facing both firms and policymakers alike is supply chain governance – particularly with respect to working conditions in second-tier manufacturing firms. These are firms which supply intermediate goods to the firm producing the end-product. With geographical fragmentation of stages within the value chain increasing drastically, the main narrative of global value chain governance is that of conceptualizing industry standards and holding lead firms accountable for working conditions in affiliated factories, especially those located in countries with weak legislature and poor enforcement of labor protection.
Interestingly however, the intention of businesses to adhere to higher labor standards may have been misunderstood. While firms do pursue the obvious motive of profit maximization when they shift production to or source intermediate products from a different country – where wages are lower and labor standards weaker, the reality is more nuanced.
As social media and online journalism allow individuals to have broader and faster access to information, which in turn has empowered consumers with greater agency over their buying choices, businesses are increasingly realizing the importance of corporate reputation. Damage to a company’s image arising from scandals, such as the factory fires in Bangladesh in 2012, 2013, and 2016 or the deaths occurring at iPhone production sites in China last year may have a long-lasting detrimental effect on the lead firm’s profits. This may be especially true if the production country also happens to be a market for the firm’s consumers.
Thus, lead firms venturing into new production locations are increasingly considering the labor regulations of the host country, in addition to conducting conventional economic feasibility analyses. In fact, even if the government of a potential production country offers economic conditions conducive to foreign businesses – such as tax incentives, the lack of adequate legislature on labor protection and the inconsistent implementation of existing laws, may push firms to reconsider their offshoring decision.
If businesses ascertain that governments do not provide enforceable labor laws, the risk that deteriorating labor conditions in production sites may be disclosed and scrutinized by the public is real and imminent.
The result is that lead firms, governments and representatives of civil society may essentially end up with a similar goal: working toward comprehensive labor regulations that improve working conditions, while lowering the risk of factory accidents, strikes and violations of workers’ rights.
Many such valuable insights were gleaned as part of recent roundtable discussions with business representatives, held by the JustJobs Network, the Global Works Foundation and Business Coalition for Global Development, in partnership with the U.S. Department of State. The roundtable explored what businesses and governments should do to strike a balance between building a financially attractive investment destination and maintaining decent employment and working conditions.
Since companies are increasingly acknowledging that relaxed or absent labor regulations may play out to their disadvantage, it opens up a new window of opportunity for negotiating labor standards in the future to ensure shared prosperity.
About the Author
Tanja Matheis is Project Manager at the JustJobs Network.