The EU- And Contagion-Effects in Latin America: Upgrading Working Conditions in Brazil Through Outward FDI Linkages

The decade that has passed since the 2008 global financial crisis has introduced a major shift in the global political economy. In that time, the BRICs have asserted themselves as champions and drivers of global economic integration. But what does this newfound political economic prominence mean for workers, working conditions, and labour? While some research has already been conducted on the impact of North-South investment and export flows on labor standards, the flow of South to North investments and the implications for labor standards remains understudied. This paper proposes an “investing-up” effect whereby high standard working conditions diffuse back from European hosts to developing host jurisdictions, driven by firm-level compliance and standardization and learning effects. Using a novel sectoral dataset from Brazil covering outward investment and working conditions in 27 states and 5,563 municipalities, I test whether direct investment in Europe by Brazilian companies leads to improvements in workplace-level labor standards and further explore how these practices spread between neighboring states and municipalities in Brazil. I find strong support for the EU-effect across a wide range of working conditions both between Europe and Brazil and between Brazilian municipalities and states using a mixture of panel data analysis and spatial econometrics. These results suggest that economic integration with high-standard developed countries can act as a powerful mechanism for labor standard improvements and more equitable development in developing countries. Furthermore, the findings suggest another indirect soft-power channel through which the EU’s social standards and practices may diffuse.