Expectations of Foreign Investors in Terms of Labor Laws

Human Resource Management Project Report on Expectations of Foreign Investors in terms of Labor Laws India, like other countries worldwide, is experiencing the effects of globalization. In order to make conditions friendlier for investors, there is a need for adaptability. Labor legislation, such as the Indian Disputes Act and Contract Labor (Regulation and Abolition) Act, are now under debate, along with issues concerning special economic zones. Submitted by: Introduction

There has been a steady expansion of foreign investment in recent decades. The upward trend is particularly strong for less developed countries, signifying the increased importance for these countries of FDI, as well as the increased presence of multinational firms. Alongside the expansion of FDI have risen concerns regarding competition between countries or regions to attract FDI. After adopting new economic policy by government of India in July 1991 many foreign investors came in the Indian economic scene because the government of India gave many incentives to the foreign investors.

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So it is clear that government opened the doors of Indian market to foreign investors. With more companies operating internationally, the impact on various business functions and labour laws in India is becoming more pronounced. Globalization, and the need to attract foreign investment, inevitably leads to an attack on workers’ rights by diluting existing labour standards, as trans-national corporations concede to the demands of multinationals.

This dilution of stringent labour standards and strong resistance to any strengthening of workers’ rights (which sometimes become an obstacle to competitiveness in the global economy) is becoming prevalent in India. Since the beginning of the reforms in the early 1990s, there have been demands from industry for liberalization in the stringent labour regulatory framework. The in? ux of foreign companies has increased the demand for more relaxation in labour laws to make investment conditions more conducive. This article identi? s the areas in Indian labour laws where change is demanded in the wake of increased foreign participation and steps taken to adapt to the changing time of globalization. International Labour Standards: A world of division This section reviews international labour standards and its progression in the context of divergent geo-political and economic environments of global trade. The 1947 preamble of the original General Agreement on Tariffs and Trade (GATT) states: ‘Relations among countries in the field of trade and economic endeavor should be conducted with the view of raising standards of living and ensuring full employment’.

Little towards this end has been achieved as the debate between developed and developing countries continues to play out at WTO negotiation meetings (e. g. , Human Rights Caucus 2005). A major reason behind this is the political economic conflicts between developing and developed countries, as market liberalization offered both challenges and opportunities for developing countries. At the first WTO Ministerial Conference in 1996, the US and the European Commission supported labour standards enforcement on a human rights basis, whereas minimum wage and labour rights were missing from the agenda.

Asian nations questioned Western countries’ motivation and resisted linking trade with enforceable labour standards because such standards could be used as non-tariff barriers to trade (Fields 2003). The Ministerial Conference concluded: ‘We reject the use of labour standards for protectionist purposes, and agree that the comparative advantage of countries, particularly low-wage developing countries, must in no way be put into question’ (WTO 1996). The task of ensuring labour standards was delegated to the ILO. The ILO is an UN organization charged to oversee labour standards around the world.

The ILO passes resolutions and urges nations to honour their obligation to work towards the realization of the ILO Declaration of Fundamental Principles and Rights at Work declared in 1998 (ILO 1998). However, scholars and practitioners argue that the ILO does not have any enforcement powers, prompting critics to label the organization ‘toothless’. The declaration established four areas of fundamental labour standards, or core labour rights. They are: 1) Freedom of association and the right to collective bargaining 2) Abolition of child labor ) A ban on forced labour, and 4) The elimination of discrimination with regard to employment. These are also known as ‘social clauses’ at the legal level. Labour practices embody the implementation of these standards, as well as minimum wages versus living wages,5 limitation of work hours, and occupational health and safety. However, as the debate over incomplete labour standards persists. The question is how to realize this when ‘decent work evolved with social and economic progress and goals can and should rise over time’.

Many developing countries either do not have laws to protect these rights or, due to institutional and infrastructural limitations, cannot implement them. The limited implementation of core standards affects labour practices. 6 In 2000, the ILO introduced ‘decent work’ as means of capturing and realizing objectives from different interest groups involved in the debate (ILO 2000). The following section analyzes the complexity and contradictions embedded in labour standards discourse within the context of international trade. Foreign Investors and developing countries like India

This section explores foreign investors’ relationships with India and other developing countries, particularly with respect to mass produced consumer goods industries, which remain labour intensive despite technological upgrading. Primarily, foreign investors and developing countries are intertwined with political economic relationships of convenience. Few countries can sustainably provide an environment conducive to foreign investors’ FDI. As a result, the effects of labour standards vary widely among developing countries.

Why are developing countries like India attractive to Foreign Investors? The first reason Foreign investors are attracted to developing countries is consistent with neoclassical economic theory that countries with a relative abundance of low-skilled and unskilled labour will specialize in the production and export of goods using their factor endowment. Wood argues that global competition among labour-abundant countries like China, India, and Indonesia changes the nature of factor endowments as it pressures roduction technique improvements to remain competitive, while pushing down wages (1999). As labour requirements increase, new industries develop. When the US, Japan, and South Korea moved out of the apparel industry in the course of economic expansion, India and other developing countries moved in. Second, a goal of most Foreign investors is to remain competitive and increase market share, often implemented through effective uses of cost structures. As firms increase in size, they locate capital investments in production facilities where operational costs are low.

Developing countries are increasing attractive to Foreign investors because they enable bargaining power over wages, since labour supply is inelastic with respect to wages in developing countries. Cheap labour is central to the low-skilled industry’s growth. Today, virtually all name brand and own-brand garments and shoes are based in developed countries and employ production facilities in developing countries. Labour costs account for only 1% to 3% of the retail price paid by the final customer, while profit margins are more than 50% (WRC 2005).

Third, Foreign investors are interested to take advantage of emerging markets in developing countries, so locating production facilities in these countries positions firms favourably. As foreign investors seek to increase market share through expansion – a critical factor of remaining competitive globally – they prefer countries that fulfill both of the requirements of low cost production and easy access to emerging markets. Companies are hence more likely to invest in China than in Myanmar.

Fourth, the consumer goods industries are sensitive to changes in quality, delivery reliability, and production schedules to meet constant consumer demand (Moran 2002, The New York Times 2002/06/29). Foreign investors invest in developing countries where firm-specific advantages allow rents to be created to compensate for costs (political, social, cultural, etc. ) that can make overseas production uncertain and expensive. For instance, Schoenberger attributes the shift of apparel companies from Myanmar to China in the 1990s to increased transaction costs stemming from political instability and human rights abuses.

What are the effects on labour standards? There is ongoing debate on the effect of Foreign investors on developing countries’ low-skilled apparel labour standards. Wood argues that North-South trade disparity and the demand for low-skilled labour lowers wages in developing countries. Singh and Zammit reject that hypothesis since South (sans China) exports to the North accounts for only 2% of OECD nations’ GDP, so trade’s effect on wage dispersion is limited .

Recent studies argue that internal political and economic factors are the primary forces affecting wages (Rodrik 1999, Kucera 2001). Rodrik relates this to export-promotion development strategy, where labour supply inelasticity gives Foreign investors more bargaining power over wages and choices (1997). Integration into the global supply chain increases competition in the labour intensive export industries, challenging labour practices in developing countries (Gereffi et al. 2003).

One immediate effect is low wages in developing countries’ mass produced consumer goods industries, as seen in Figure 2. Notice the polynomially increasing slope of wages from developing to developed countries. The lowest wages reflect the intensity of South-South competition and internal political and economic issues. Ten years later, Ajit Singh and Ann Zammit argue that this pattern has not changed (personal interview 2008). Moreover, nation-states are in a difficult situation in terms of their response to labour standards and practices.

Case studies show the apparel industry created 42 million jobs in that government supported EPZs in developing countries (Perman et al. , 2004). 7 However, concomitant with the government support were bans on unionization and restricted workers’ bargaining power, further lowering wages. Farber (1996) documents a decrease in job security in developing countries in the 1990s compared to the 1980s. Job-loss rates are higher now than the recession of the early 1980s, particularly among low-skilled workers such as craftspeople, operatives, and labourers.

Similarly, declining wages in the Mexican apparel industry have been linked to competition for international trade and ineffective government policies (Hanson 2003). Despite the drops, Mexico’s monthly wages were twice as much as China’s (US$ 110 versus US$ 54) in 2000, luring FDI from one to the other (Chan and Ross 2003). According to Chinese government standards, the minimum wage of a locality should be set at 40% to 60% of the average wage in that locality, and there is even competition among regions to lower wages more (Chan and Ross 2003, 1019).

While attention on China peaks among pro-globalization forces, the Gini coefficient rose sharply from 0. 33 in 1980 to 0. 458 in 2000, and China is among the countries with the highest levels of inequality in the world (World Bank 2006). Furthermore, developing countries specializing in the apparel industry entered a new phase of intense competition after the elimination of the MultiFibre Agreement in January 2005, which implemented import quotas in developed markets.

The World Bank and the International Monetary Fund predicted that Bangladesh’s garment industry may shrink by 30% as a result of lifting the quota regime, while exports actually grew by 24% (Tahmina 2006). The fundamental reason behind this is that the Bangladesh government, whose top foreign exchange earner is the apparel industry, worked actively to support apparel exports, including turning a blind eye to labour standards irregularities. This was partially from inadequate infrastructure to monitor and penalize, though perhaps largely from sensitivity to investors’ sentiments to keep FDI flowing.

This combination made it possible for agents’ factories to ignore set minimum wages and coerce labour to work over 100 hours per week in unhealthy environments (Tahmina 2006). This is a complex reality for developing countries – a race to the bottom of wages and labour standards in the shadow of developing states to attract foreign investment. In sum, globalization has the potential to bring opportunities, but it has transformed developing countries’ capabilities to affect labour practices significantly.

Governments are becoming more streamlined, workers are increasingly bonded, and confined to factory compounds while paid minimally. Institutional limitations in developing countries to monitor conditions exacerbate the situation, transforming workers into cheap commodities. While the ranks of developing countries compete with each other for foreign investment, only a select few continue to receive the majority of foreign investment. Identifying areas for change in Indian labour legislation

In such a scenario, the challenge before the Indian industrial regulatory system is to devise a framework, which combines the efficiency of the enterprise with the interests of the workers. The regulators need also to ensure an investor friendly environment. For this it is necessary to take a holistic view of labour market regulation and address the reform debate with respect to the Industrial Disputes Act, 1947 (IDA), Contract Labour (Regulation and Abolition) Act, 1976 (CLA) and other associated labour egulations. The Indian constitution provides that both union and state governments can enact labour laws, but the effect of national laws in the local labour market depends upon how well they are implemented. The different key aspects of labour legislation present across the country today are: restrictions on hiring measures, hours of work measures and retrenchment, restrictions of dismissals index, cost of dismissal measures, and the rigidity of employment. Provisions of the IDA and demands for change

The debatable areas in the Indian Disputes Act, mainly applicable to commercial and manufacturing operations, includes: Chapter VB related to the special provisions of lay-off, retrenchment and closure in certain establishments; Sections 11-A related to powers of labour courts, Tribunals and National Tribunals; Section 25-F that lays down the conditions precedent to retrenchment; and Section 25-G that details the procedure for retrenchment, dispute resolution mechanism, adjudication and labour inspections.

Primarily, the disputable aspect of section 11-A of the IDA is that it permits the labour courts to modify a retrenchment order dealt to an employee, including the case in which a worker is retrenched on disciplinary grounds. In U. P. State Road Transport Corporation vs. Subhash Chandra Sharma and Others, AIR 2000 SC 1163, the Supreme Court observed: “… this section vests the Labour Court with discretion to substitute the order of discharge or dismissal of a workman into an order of reinstatement on such terms and conditions, if any, as it thinks ? or give such other relief to the workman including the award of any lesser punishment in lieu of discharge or dismissal as the circumstances of the case may require. ” The effect of national laws in the local labour market depends upon how well they are implemented. Court interference in matters of retrenchment order by an employer is perceived by the companies as over-interference even in their primary functioning.

Further, Section 25-F of the IDA provides mandatory conditions precedent for retrenchment of workmen. These provisions only prescribe the conditions for terminating the services and do not confer any right on the workman for permanent absorption, as suggested by the judicial interpretation in a number of cases, much to the consolation of employers. Section 25-G lays down the procedure for retrenchment. It follows the principle of “last come, ? st go”, based on the foundations of seniority of service and rules of social justice. This rule in turn may deprive the employer to retain their most updated and technically accomplished employees. It violates the employer’s right to select among the best workers, and neutralizes the right to retain the younger and better-trained workers in favour of the older and less trained ones, as the case may be. Section 25-O of the IDA lays down the procedure to be followed by employers during closure of a company.

It prescribes a condition that the employer should refer the cases of closure to the state government. However, in Excel Wears vs. Union of India AIR 1979 SC 25, when this aspect of law came into question, the court held that the right to close a business is an integral part of the fundamental right to carry on a business and it is wrong to suggest that an employer has no right to close down a business once he starts it.

The section 25-O as it stood was declared unconstitutional. Further in G. K. Sengupta vs. Hindustan Construction Co. Ltd. , 1994 LLR 550 (Bom), the court held that such a permission of closure should be refused only if the Tribunal is satis? ed that the management’s action is not bona? de, the principles of natural justice have been violated or such a decision would not justify any reasonable person in coming to such a conclusion.

Though the approach of the section is to provide the procedure for closing down an undertaking, this section goes further and, among other things, imposes a restriction of seeking permission by the employer even to close down his undertaking. The complication of too much legislation The presence of a large body of legislations complicates the normal functioning of companies. The working conditions are governed principally by the Factories Act, 1948; the Industrial Employment (Standing Orders) Act, 1946, and the CLA.

The principal laws relating to wages are the Payment of Wages Act, 1937 and the Minimum Wages Act, 1948. Laws related to Industrial Relations include the Trade Unions Act, 1926, the Trade Unions (Amendments) Act, 2001 and The Industrial Employment (Standing Orders) Rules, 1946. Further, social security systems in India impose a liability either solely on the employer (Maternity Bene? t Act, 1961) or on employers and employees together (Employees Provident Fund and Miscellaneous Provisions Act, 1952), r on an insurance scheme where employer, employees and the State contribute to the insurance fund (Employees State Insurance Act, 1948). There is an urgent need to simplify, rationalize, and consolidate the complex and ambiguous extant pieces of labour legislation into a comprehensive but simple code that allows for labour adjustment with adequate social and income security for the workers, together with keeping the globalization patterns in consideration after wide consultation among employers, trade unions, and labour law experts.

Issues concerning the CLA Under the provisions of the Contract Labour (Regulation and Abolition) Act, a workman is deemed to be employed as contract labour when he is hired in connection with the work of an establishment by or through a contractor for work which is speci? c and for a de? nite duration. Thus, contract labour differs from direct labour in terms of employment relationship with the establishment and method of wage payment. Contract labour, by and large, is not on the payroll. It is usual that the main social bene? s paid by the contractor towards the contract labour are charged back to the establishment. The Supreme Court of India in the Standard Vacuum Re? nery Company vs. their workmen (1960-II-ILJ page 233) observed that contract labour should not be employed where (i) the work is perennial and must go on from day-to-day; (ii) the work is incidental to and necessary for the work of the factory; (iii) the work is suf? cient to employ a considerable number of full-time workmen; and (iv) the work is done in most concerns through regular workmen.

The legal regulation of contract workers has profound implications for those enterprises that have a global supply chain spread over several countries. The CLA was created with the objective of gradual abolition of casual labour hiring, and to regulate the working conditions of casual labour, wherever permitted. Section 10 of the CLA prevents ? rms from outsourcing most core functions or hiring workers on temporary contracts for more than 120 days. Anyone so employed can demand permanent employment from the company.

Also, the “appropriate government” under section 10 is authorized, after consultation with the central board or state board, as the case may be, to prohibit, by noti? cation in the official gazette, employment of contract labour in any establishment in any process, operation or other work. The Supreme Court in Steel Authority of India Ltd. vs. National Union of Waterfront Workers & Others 2001 (4) LLN 135 OR, held that the contract workers would have no right to automatic absorption. They would only have a right to a preference in employment if permanent workers were to be employed to ? l in the vacancies created by the removal of the contract workers. The court added that on issuance of a noti? cation by the appropriate government under Section 10 prohibiting employment of contract labour in a given establishment, it is for the contractor to provide work to his labour in other establishments, where the contract labour system is not prohibited. Giving permanent status to every contract labourer after 120 days would discourage this policy of hiring skilled labour for shorter duration and specialized works.

This helps the establishment to involve more labour force on a contractual basis and get work done with efficiency. The legal regulation of contract workers has profound implications for those enterprises that have a global supply chain spread over several countries. Contracting out work allows ? rms to concentrate on their core business and improve overall competitiveness. Therefore, there is a demand from employers for an amendment of Section 10 of the CLA so that there are suf? cient guidelines for deciding any process, operation or other work in any establishment.

Issues concerning special economic zones Apart from the demand for changes in the existing labour laws, the increase in the number of special economic zones (SEZs) and foreign companies in India has led to a fresh stipulation for the relaxation of labour laws in SEZs areas. There is also a debate about having a new set of labour and employment laws for the SEZs. In tone with this demand, in 2001, the Federation of Indian Chambers of Commerce and Industry submitted a study to the Ministry of Commerce and Industries, which brie? sets out some of the factors for the success of SEZs and advocates a ? exible labour policy for the zones. The only concern is that the free market argument with no level playing ? eld puts workers at the mercy of developers and, therefore, all labour laws are now applicable to SEZs as well. To create a new institutional infrastructure that can truly advance the cause of workers and promote growth, the present regulations must evolve from protecting the job to protecting the worker.

So far there has been a concession on economic aspects, now providing concession on social cost of doing business would make doing business in SEZ more pro? table. The support from the Federation and consideration to this effect of the Ministry would help in the grant of concessions in retrenchment laws and the CLA. Shift in the focus of labour laws Indian labour laws are often perceived to be too restrictive on employers and despite repeated demands from industry for liberalization in the regulatory framework, little legal change has been allowed since the reforms began in early 1990s.

However, in recent times and pursuant to globalization, a major shift is taking place in employment from permanent to temporary, casual and contract employment. This has weakened the collective bargaining machinery of labour. The voluntary retirement scheme has become one of the main instruments for reducing the workforce. Permanent workers in non-core activities are removed and contractual workers are hired either through outsourcing to other ? rms or direct recruitment.

Further, several states have relaxed the provision of enforcement of labour laws leading to ? exible practices at the ground level. For example, the states of Rajasthan, Uttar Pradesh and Andhra Pradesh have reduced the scope of labour inspection, and have exempted several establishments from the authority of labour inspection. To create a new institutional infrastructure that can truly advance the cause of workers and promote growth, the present regulations must evolve from protecting the job to protecting the worker.

This implies transforming current provisions aimed at ensuring job security into mechanisms that protect the income and welfare of those workers adversely affected by technological changes or market ? uctuations.. Conclusion Adaptability is a necessary condition for the continued existence of a legal system. The challenges of the contemporary world (namely economic, political and social) can be successfully met by either discarding or by adjusting the labour regulations of the Indian legal system.

With huge expansion in cross border capital, trade technology and information ? ows becoming a de? ning feature of the Indian economy, addressing labour concerns for making conditions more investor friendly would be the next rational step. Bibliography Multinational Corporations’ role in improving labour standards in developing countries http://www. academia. edu Analysis of the effects of Foreign investors on India since Liberalization http://artsandscience. usask. ca Globalization and Labour Laws in India http://www. psalegal. com

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