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Individual Essay

“Under globalization, MNEs have been identified as driving down working conditions and employment standards in low income countries. Critically appraise the impact of MNEs in Indonesia and Thailand with respect to wages and working conditions”

Globalisation is a concept that has dominated the world. It is no longer a new concept – particularly in the last few decades (Nester 2010). There has been tremendous increase in trade, migration and investment across borders. Foreign Direct Investment (FDI) has become very common in the business world and many Multinational Enterprises (MNEs) have emerged as a result of this phenomenon (Robertson, Brown, Pierre, & Sanchez-Puerta 2009). Developing countries have become the target for many MNEs and these have brought both positive and negative impacts to those countries. The advocates of globalisation believe that globalisation has brought about economic gains and increased the living standards of the developing countries. However, anti-globalisation movements argue that MNEs are impairing the development of the low-income countries by exploiting their resources (Tomohara & Takii 2011; Osland 2003). One argument is that MNEs have been identified as driving down working conditions and employment standards in low income countries. Hence, this paper will evaluate the impact of MNEs in relation to wages and working conditions in two developing countries – Indonesia and Thailand. This paper has chosen Indonesia and Thailand because these countries are the two largest economies in South East Asia and they attract a large percentage of MNEs especially in the area of manufacturing (Ramstetter & Sjoholm 2006).

The first section of this paper will provide the definition of globalisation and MNEs and analyse the argument that MNEs are driving down working conditions and employment standards in low income countries. The second and third segments will appraise the impact of MNEs in relation to wages and working conditions in the manufacturing sector in Indonesia and Thailand.

International Monetary Fund (as cited in Osland 2003, p. 138) defines globalisation as “the growing economic interdependence of countries worldwide through the increasing volume and variety of cross-border transactions in goods and services and of international capital flows, and also through the more rapid and widespread diffusion of technology”. And MNE is defined as “an enterprise that engages in FDI and owns or, is some way, controls value-added activities in more than one country.” (Dunning & Lundan 2008, p. 3). MNEs expand their businesses abroad to gain cost and competitive advantage by increasing market share and tapping into host countries resources such as cheaper labour and raw materials (Hijzen & Swaim 2008; Brown, Deardorff & Stern 2004).

Opponents of globalisation believe that MNEs are not concerned with the welfare of the host nationals and they are taking advantage of the weak local regulations and law on labour and working conditions in the host country (Bulut & Lane 2010; Brown, Deardorff & Stern 2004). In addition, critics claim that low income countries are forced to lower their labour standards to attract MNEs. The race-to-the-bottom theory suggests globalisation has caused the erosion of employment standards as countries are competing with one another to provide the best competitive advantage to MNEs (Mosley & Uno 2007; Singh & Zammit 2004; Warr 2004).

Despite the arguments, studies have shown that MNE activities and FDI flows are playing a significant role in the global employment (Markey & Ravenswood 2010). MNEs employ about 77 million people worldwide which account for about three percent of the worldwide workforce (UNCTAD 2009). A report by OECD states that on average MNEs pay about 40% higher to their employees compared to the domestic firms (OECD 2008a). A study conducted by OECD also proves that foreign takeovers increase their average wages by 10-20% particularly in the developing economies (Arnal 2008). As MNEs pay higher wages to their employees (Arnal 2008; Baldwin & Winters 2004), there will be a tendency for domestic firms to raise wages as well in order to secure their labour supply. In addition, as more MNEs enter the local market, the labour demand will increase and therefore bidding up local wages (Markey & Ravenswood 2010; Arnal 2008).

However, wages are only one point from the labour conditions. There has been a scarcity of evidence on the effect of MNEs on non-wages employment conditions (Arnal 2008). A number of studies have shown MNEs are unlikely to export labour practices and standards to their foreign affiliates. Instead, MNEs are more likely to adapt to the minimum local standards and practices (Markey & Ravenswood 2010; Arnal 2008; Chinen, Wang & Wang 2008; OECD 2008b). Large MNEs that are concerned with their reputation may introduce voluntary codes of conduct which often include the minimum labour standards and extend these requirements to their suppliers (Edwards 2010; Markey & Ravenswood 2010 ). The lack of evidence means MNEs may not necessarily drive down employment standards in the developing countries nor do they improve the labour conditions (Arnal 2008).

Nonetheless, the impact of MNEs on working conditions and employment standards in low income countries cannot be generalised. Hence the next two sections will analyse the impact in Indonesia and Thailand in terms of wages and working conditions.

Indonesia is the largest economy in Southeast Asia with its GDP size of nearly US$ 707billion in 2010 (BKPM 2012). In 1997-98, Indonesia was badly hit by the Asian financial crisis which led to significant unemployment, falling wages and possibly worsening working conditions as firms sought to cut costs. Nevertheless, Indonesian government made a tremendous effort to promote Indonesia to foreign investment (Robertson et al. 2009). The country was able to save itself from the global financial crisis and its economy increased by 4.5% in 2009, 6.1% in 2010 and is predicted to grow into 6.4% in 2012 (BKPM 2012).

As mentioned previously, MNEs have a positive impact in increasing overall wages in developing countries. This holds true for Indonesia whereby there is wage spillovers from foreign affiliates to domestic establishments (Lipsey & Sjoholm 2004). Employees in Indonesian domestic firms enjoy increased wages in the presence of FDI (Takii 2009). Over the period of 1975-99 real wages grew by almost 130 percent for blue-collar workers and nearly 200 percent for white-collar workers (Lipsey & Sjoholm 2003). In 1975, wages in foreign owned plants were about three times higher than the domestic plants and in 1999; the gap has dropped to about 44% for blue-collar workers and 68% for white-collar workers (Ramstetter & Sjoholm 2006; Lipsey & Sjoholm 2004; Lipsey & Sjoholm 2003). Nevertheless, there is no national minimum wage as regional governments set their own minimum wage in their own provinces (Quiano 2011).

Trade liberalisation in Indonesia has increased productivity in the manufacturing plants. This productivity may be gained from the technological spillovers, the reduction of tariffs on final goods and the pressure from increase competition (Wei & Liu 2006). As productivity rise, firms are able to provide higher wages and better working conditions. In addition, when Suharto (Second President of Indonesia) stepped down in 1997, Indonesia’s new government has to immediately reinstate the terms of labour-friendly labour laws that were established by Sukarno (the first president of Indonesia). These laws allow labour unions to deal with both the government and business to protect the labour market. As the world economies are increasingly integrated, international pressure played an important role in the enactment of laws to improve working conditions in Indonesia (Robertson et al. 2009). During the anti-sweatshop campaigns, Indonesian manufacturing increased their wages by 50 percent (Harrison & Scorse 2010). Hence, the presence of MNEs in Indonesia has led to an increase in wages in domestic establishments (Tomohara & Takii 2011; Robertson et al. 2009; Osland 2003).

On the other hand, studies have found that increase trade liberalisation may not necessarily improve non-wages working conditions in Indonesia. The majority of firms (both foreign and domestic establishments) have low level of compliance because most workers are not familiar with their benefits which give firms the opportunity not to comply (Robertson et al. 2009). In addition, the increase number of MNEs in Indonesia has put pressure on local firms to find ways to reduce costs in order to remain competitive. This phenomenon has caused firms to respond by not improving working conditions at the same rate as they might have in the past. Globalisation has exerted downward pressure on non-wages working conditions in Indonesia (Robertson et al. 2009).

Thailand’s economic performance is growing (Huang, Juntiwasarakij, Techatassanasoontorn & Trauth 2011; Wang 2011) and it is a world leader in manufacturing, food products, mining and tourism. In 2002-2006, Thailand received FDI inflows on average of US$6.6 billion. Companies, both MNEs and locals are earning high profits and demand for workers is high with unemployment around 1.2 percent. Nonetheless there has been a decrease in wage share of GDP, flat wage growth and rising inequality (Wang 2011).

According to the data compilation of National Statistical Office in Thailand, MNEs in manufacturing are paying higher wages compare with the local plants. MNEs are paying more than 50 percent higher wages to their non-production workers and about 25 percent higher to the production workers even after accounting in other factors that may influence wages. MNEs are often at the leading edge of using new technology. For this reason, they often require skilled workers that have good educational basis with at least secondary education. On the flip side, Thailand has had a relatively low secondary enrolment rate due to its government ineffectiveness in stimulating secondary education (Hallinger & Lee 2011; Velde & Morrisey 2010) and in result there have been scarcity of skilled workers in Thailand. The increase of MNEs adding to the scarcity of skilled workers in Thailand would have pushed up wages of skilled workers (Velde & Morrisey 2010).

A traditional trade theory suggests MNEs reduce wage inequality between skilled and low-skilled workers as MNEs increase the relative demand for low-skilled workers (Velde & Morrisey 2010). This holds true for Thailand as in 2011 the Central Wage Committee has raised the minimum wage in Thailand. Even though the increase is less than the amount originally proposed by the government, nevertheless on average, the minimum wage has increased around 7 percent. The minimum wage in Bangkok has increased from 206 Baht per day to 215 Baht. The rationale behind this was to reduce wage inequality in the country and to alleviate the burden of the lower income earners (Business in Asia 2011).

MNEs are facing global pressure regarding their working standard and as a result, the majority of MNEs have produced their own codes of conduct to avoid any potential damage from the media (Dayal-Gulati & Finn 2007; Egels-Zanden 2007; Veral 2005). Most MNEs in Thailand have standards that are stricter than the Thai laws and they generally include minimum wage, maximum working hours and overtime, compensation, holiday and sick pay leave, minimum health and safety requirements in the factory and company providing housing and freedom of association (Dayal-Gulati & Finn 2007). MNEs have to ensure compliance with their standards and these standards are extended to their horizontal and vertical suppliers (Dayal-Gulati & Finn 2007; Egels-Zanden 2007). Most local manufacturing companies in Thailand are subcontract for MNEs which means they too have to comply with the labour standards that have been stipulated by MNEs. The issue of working conditions in Thailand are slowly improving. However, most companies have trouble implementing the standards because of their unpopularity among the Thai workers. Most workers prefer to work longer hours in order to earn extra income (Dayal-Gulati & Finn 2007). The labour law in Thailand states the maximum working hours of eight hours a day, 48 hours a week. However, workers in manufacturing and construction are working more than the stipulated maximum working hours. In 2003, 30.1 percent of women and 37.9 percent of men worked more than what was stated in the law. Most workers have no choice but to tolerate longer working hours as the minimum wage is not a living wage (Kusakabe 2006). Nonetheless, the implementation of codes of conduct by MNEs has helped to improve the working conditions in Thailand.

In conclusion, the world reacts to globalisation in a different manner. Some people support globalisation while others oppose it. Various arguments and critics are circulating around the globe particularly on the impact of globalisation on the labour market. Anti-globalisation claims that trade liberalisation has put downward pressure on wages and working conditions in developing countries. However this claim cannot be established since numerous studies have proven otherwise. A few conclusions can be made regarding the impact of MNEs in Indonesia and Thailand in the context of wages and working conditions. First, MNEs are in fact paying higher wages to their employees, which ultimately increase the minimum wage in developing countries as a result of the wage spillover. This holds true for Indonesia and Thailand in which studies have shown that wages in these countries have increased with the presence of MNEs. Second, there is a lack of evidence on the impact of MNEs on the working conditions in developing countries which made it difficult to either support or refute the argument. Nevertheless, it can be concluded that MNEs have caused a negative impact on the working conditions in Indonesia due to the pressure faced by the local establishments to remain competitive. However, the conclusion differs for Thailand as MNEs are in fact improving the working conditions in Thailand with the implementation of companies’ codes of conduct.

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