Workers in the globalized economy

The globalized economy exerts significant influence on a wide set of domestic policies, including financial policies (Mosley Reference Mosley2003), welfare policies (Rudra Reference Rudra2002), environmental practice (Prakash and Potoski Reference Prakash and Potoski2007), and human rights (Blanton and Blanton Reference Blanton and Blanton2006; Kim and Trumbore Reference Kim and Trumbore2010). Studies have also shown that the flow of global capital shapes labor standards through various pathways such as IMF and World Bank programs (Blanton, Blanton, and Peksen Reference Blanton, Blanton and Peksen2015b), financial crises (Blanton, Blanton, and Peksen Reference Blanton, Blanton and Peksen2015a), and trading relationships (Greenhill, Mosley, and Prakash Reference Greenhill, Mosley and Prakash2009; Malesky and Mosley Reference Malesky and Mosley2018).

The most significant pathway through which the globalized economy impacts labor standards is multinational production. Countries participate in the interconnected network of production which shapes domestic labor standards. In the process, each type of multinational production yields varying consequences for labor standards. For example, Mosley (Reference Mosley2011, 12) suggests that foreign direct investment is more likely to enhance labor rights while higher levels of trade and subcontracting undermine labor rights in developing countries. The implication is that multinational corporations (MNCs) are more likely to improve labor rights when they produce through directly owned factories—which are captured by foreign direct investment—compared to subcontracting and trade, which aim to minimize labor costs.

Other studies also note that MNCs can bring improved labor standards to developing countries (Moran Reference Moran2002; Greenhill, Mosley, and Prakash Reference Greenhill, Mosley and Prakash2009; Malesky and Mosley Reference Malesky and Mosley2018). For example, the OECD (2002) notes FDI can function as a channel to enhance working conditions and bring international labor standards to developing countries. NGOs’ attention toward MNC activity and the reputational costs of labor abuses encourage MNCs to pay more attention to labor standards. The activity of MNCs can be more likely to be associated with higher wages and improved working conditions (Flanagan Reference Flanagan2006). In addition, MNCs pay more attention to other investment options rather than lower labor costs. For example, studies suggest that firms also consider political and social stability (Kucera Reference Kucera2002), the quality of labor (Moran Reference Moran2002), social standards (Distelhorst and Locke Reference Distelhorst and Locke2018), and market access (Malesky and Mosley Reference Malesky and Mosley2021). In this case, FDI is more likely to be driven toward countries providing these conditions than by than cheaper labor costs.

In contrast, another group of scholars suggests that FDI is negatively associated with labor standards. The key linkage is that the race-to-the-bottom competition in labor standards occurs among governments to attract foreign investment. The underlying assumption for this downward competition is that foreign investment is more likely to head toward destinations with more lax labor standards. Thus, countries pursuing economic development through investment are pressured to undermine labor standards. Moreover, even if undercutting labor standards does not attract FDI in reality, the sheer belief of political leaders that lowering labor standards draws foreign capital can cause a race to the bottom (Davies and Vadlamannati Reference Davies and Vadlamannati2013). Such belief spurs the competitive undercutting of labor standards regardless of actual flows. Therefore, FDI inflows are more likely to be negatively associated with labor standards.

Empirical evidence on the relationship between FDI and labor standards is mixed. The first strand of literature reports that there is no significant association between labor standards and FDI (OECD 1996; Kucera Reference Kucera2002; Neumayer and De Soysa Reference Neumayer and Soysa2006). These studies indicate that labor standards are not a major factor when MNCs investment assessment. Other studies suggest that FDI is positively associated with labor standards (Busse, Reference Busse2003; Mosley and Uno Reference Mosley and Uno2007; Mosley Reference Mosley2011). In particular, Mosley and Uno (Reference Mosley and Uno2007) and Mosley (Reference Mosley2011) focus on the improvement of collective labor rights which are positively associated with other labor standards and working conditions.

Several studies, on the other hand, present the negative relationship between FDI and labor standard (Görg Reference Görg2005; Gross and Ryan Reference Gross and Ryan2008; Dewit, Görg, and Montagna Reference Dewit, Görg and Montagna2009; Olney Reference Olney2013). These studies emphasize the impact of FDI heightening flexibility in labor market regulation including employment protection and dismissal regulation. Given that “labor flexibility does come at the cost of undermining core labor rights” (Blanton, Blanton, and Peksen Reference Blanton, Blanton and Peksen2015b, 332), the findings indicate that more flexible labor regulations induced by FDI bolster the downward pressures of foreign investors. Apart from the dichotomous diagnosis of the effects, several studies underscore that FDI generates varying effects in host countries depending on industrial characteristics and types of FDIs (Mosley Reference Mosley2011; Blanton and Blanton Reference Blanton and Blanton2012; Biglaiser and Lee Reference Biglaiser and Lee2019).

This study engages with the theoretical and empirical discussion of previous literature. This study first theorizes how domestic factors of host countries moderate the impact of FDI to a varying degree. The outcome of economic globalization depends on the role of domestic politics and economic conditions (Mosley Reference Mosley2011; Distelhorst et al. Reference Distelhorst, Locke, Pal and Samel2015). Political institution also alleviates the effects of FDI as regimes opt for different policies in institutionalizing industrial conflicts (Robertson and Teitelbaum Reference Robertson and Teitelbaum2011). More specifically, Distelhorst et al. (Reference Distelhorst, Locke, Pal and Samel2015) suggests that factories in China are less likely to observe regulation compared with the ones in countries with stronger civil society and regulation. In the similar vein, this paper explores how economic globalization leads to differing consequences across or within countries depending on domestic conditions.

Moreover, this study examines labor law and workers’ protests through sub-national analysis which controls cross-national differences. National-level data obscures the geographical variation in the enforcement of labor law. Thus, sub-national analysis enables a more accurate description of policy implementation (Snyder Reference Snyder2001, 99). Sub-national analysis also rules out the possibility that unobserved differences among countries confound empirical results. The detailed investigation of China will capture the impact of FDI on de facto labor standards more accurately.

FDI and labor protests in China

China began to accept foreign capital following the period of major economic reform in the late 1970s. The crux of the reform was “increasing the role of market forces while reducing government planning in the economy and inserting China more fully in the global economy” (Gilley Reference Gilley and Joseph2019, 125). As the comprehensive reform took hold, the influx of foreign direct investment (FDI) rapidly accelerated, bolstering economic growth. FDI increased competitive pressure, providing a laboratory for the implementation of reforms and enabling the ideological reformulation of socialism (Gallagher Reference Gallagher2011, 15). FDI enabled the regime to reform the foreign and private sectors, gradually diminishing the relative size of the state sector while maintaining political control. As FDI skyrocketed, its significance in local economies increased considerably. The economic liberalization “sparked regional competition for inflows of both foreign and domestic capital, which further enhanced the bargaining power of capital” (Gallagher Reference Gallagher2011, 26).

This regional competition has put considerable pressure on local governments to make regulatory concessions to foreign investors. Studies have demonstrated that local governments have provided expansive incentives to foreign investors by deregulating policy in realms such as taxation (Liu and Martinez-Vazquez Reference Liu and Martinez-Vazquez2014), environment (Zhang and Fu Reference Zhang and Fu2008), and minimum wages (Li, Kanbur, and Lin Reference Li, Kanbur and Lin2019). The downward regulatory race also undercut labor standards in China while enhancing the bargaining power of foreign investors. Migrant workers have increasingly been exposed to informal employment and declining working conditions (Kuruvilla, Lee, and Gallagher Reference Kuruvilla, Lee and Gallagher2011, 6). The expansion of labor subcontracting has also posed challenges for workers, including lower wages and fewer social benefits compared to regular employees (Gallagher Reference Gallagher2014).

Following the relaxation of labor regulations, worker discontent intensified and led to industrial conflicts. Labor issues were the most frequent cause of large-scale social protests from 2003 to 2010 (Tong and Lei Reference Tong and Lei2013, 58). The growing dissatisfaction among workers aroused the concerns of the Chinese Communist Party (CCP), which proposed the “Labor Contract Law” in 2008 in order to maintain social stability (Wang et al. Reference Wang, Appelbaum, Degiuli and Lichtenstein2009). The central government intended to ensure that social insurance comprehensively protected the rights and interests of workers based on the labor contract system. The legislation created a space for workers to speak up for their rights in labor disputes (Gallagher and Dong, Reference Gallagher and Dong2011, 59). Labor protests continued to increase, peaking in 2015 with 2,775 protests across China.Footnote ²

This paper provides an explanation for labor protests following the enactment of the 2008 Labor Contract Law based on the “fragmented authoritarianism” framework, exploring how the coalition of local bureaucracies and foreign capital induces labor protests in China. The framework characterizes China's policy-making process as a disjointed one in which multiple bureaucratic organizations and private actors pursue their own interests (Lieberthal and Oksenberg Reference Lieberthal and Oksenberg1988; Mertha Reference Mertha2009; Fu Reference Fu2017b). In the case of the labor regime, the central government's mandate is exposed to the interests of local agencies and private actors. While the central government proposed the labor law, local governments can avoid implementing it in the context of the regional competition to attract foreign investment. Each actor, including the central and local governments, foreign investors, and workers, has different cost–benefit considerations, which provide an explanation for the link between foreign investment and labor protests. By examining each actor's preferences, we can understand how FDI induces labor deregulation and worker protests in China.

First, the key difference between the central and local governments is that the central government protects the regime's legitimacy by enhancing de jure labor standards.Footnote ³ For example, in a series of “Warm Spring Action” (chū nnuǎ n xíngdòng) policies, the central government proclaimed that all local governments should comply with their policy and establish a labor contract system for migrants.Footnote ⁴ Improving de jure standards can promote governments’ legitimacy by providing a clear sign that the political system actively protects people's rights. Previous studies have frequently noted that governments enhance civil rights to protect their legitimacy (e.g. Hafner-Burton and Tsutsui Reference Hafner-Burton and Tsutsui2005; Cole Reference Cole2013). Governments can increase their legitimacy by announcing a commitment to improve de jure standards even if these standards are not effectively enforced (Peksen and Blanton, Reference Peksen and Blanton2017). The central government of China has also adopted this strategy by announcing its commitment to the labor law, potentially leading workers to believe that the central government has done its work.

The enactment of the labor law signals the legitimacy of the central government, which can shift blame for labor law violations to local governments and firms. Thus, the possible costs arising from the lack of enforcement are not significant for the central government, which already did its part by introducing the labor law. Instead, local governments and firms can be held accountable for their failure to comply with the central government's mandate. Given these costs and benefits, promising to improve de jure labor rights is a strategic choice for the central government, which protects its legitimacy regardless of whether the law will actually be enforced by local governments.

Local governments, on the other hand, diverge from the central government in their consideration of the costs and benefits of enforcing the law. For local governments, implementing the labor law means having to endure both the economic costs of enforcement and the political costs of revising previous practices (Cai Reference Cai2010, 5). The additional costs cause more burdens for local governments, which diminish the incentives in enforcing the labor law. Moreover, local governments have a greater incentive to attract capital investment to promote regional development (Friedman and Lee Reference Friedman and Lee2010). The rate of economic growth has been a significant factor in the CCP's evaluation of local officials (e.g. Li and Zhou Reference Li and Zhou2005; Landry, Lü, and Duan Reference Landry, Lü and Duan2018), despite the diversification of the evaluation criteria. For example, sample cadre evaluation from Guangzhou City weighs economic development as 30 while weighing social development as 22 (Wang Reference Wang2015, 25). The higher weights explicitly suggest that economic development is a more important criterion in evaluations.Footnote ⁵ The incentive structure induces local governments to provide more regulatory concessions to foreign investors.

Undercutting labor standards does not always guarantee greater inflow of FDI, however, because a diverse set of factors including taxes and environmental regulations affect where investment goes. Despite the uncertainty whether FDI can attract more investment, local governments’ belief that lowering labor standards draws foreign capital can cause a race to the bottom. As Davies and Vadlamannati (Reference Davies and Vadlamannati2013) suggests, the sheer belief of political leaders that lowering labor standards draws foreign capital can cause the race to the bottom. These beliefs induce local governments to lower labor standards even though a wide range of factors affect FDI decisions. In the end, selective enforcement creates regional variation in the implementation of labor laws (Lee Reference Lee2016, 321).Footnote ⁶

Furthermore, pressure from foreign investors can expedite deregulatory shifts. Foreign investors impact local governments via various channels, such as by offering information and expertise, lobbying or coercing local officials, and weakening vested interests by providing alternative sources of revenue and employment (Jensen et al. Reference Jensen, Biglaiser, Li and Malesky2012, 116). As foreign investors intervene in the policy-making process, the inflow of FDI can broadly influence local institutions as well as regional economies (Malesky Reference Malesky2008; Long, Yang, and Zhang Reference Long, Yang and Zhang2015). Moreover, as China's local governments compete to attract capital, foreign investors have been able to demand more preferential policies in exchange for relocating investment. Foreign investors’ exit option strengthens their bargaining power vis-à-vis local governments.Footnote ⁷

There are many illustrative cases that depict how foreign investors influence domestic regulation within China. For example, during the 2007 elections for the American Chamber of Commerce (AmCham) in Shanghai, multinational corporations influenced Chinese regulations through multiple channels, including discussion with decision-makers, the mobilization of regulatory experts, and collaborative work with other business groups and domestic actors (Jensen et al. Reference Jensen, Biglaiser, Li and Malesky2012, 117). In Guangdong Province, foreign investors similarly pushed for a more favorable business environment, and in 2018, the Department of Commerce of Guangdong Province announced preferential measures for foreign investment.Footnote ⁸ The AmCham continued to push for more preferential policies to further reduce labor costs, especially for low-value manufacturers.Footnote ⁹ These cases elucidate how foreign investors can influence local governments’ policies in China.

Moreover, these pressures from foreign investors yield a “spillover effect” that diminishes overall labor standards across industries. For several reasons, local governments apply weakened labor standards to domestic enterprises and various sectors as well as to foreign-owned enterprises and FDI-concentrated industries. First, this protects the price competitiveness of domestic industries. Second, by doing so they avoid triggering a political backlash that would occur if the local governments only allowed foreign investors to benefit from labor deregulation. Third, implementing divergent standards within the same jurisdiction could cause administrative confusion, amplifying the costs of implementing the labor regulation. For these reasons, foreign investment causes diminutions in labor standards across industries in a jurisdiction.Footnote ¹⁰

The lax enforcement by local governments exposes workers to labor violations, especially low-skilled workers who lack bargaining power vis-à-vis firms and local governments. Many low-skilled workers are informal workers deprived of legal contracts and basic social benefits (Lee Reference Lee2016, 320). Their weak bargaining power renders these workers more vulnerable to labor rights violations. Compared with high-skilled workers who have more bargaining power in the workplace, lower-skilled workers strive to achieve their rights by protesting against wage arrears and low payment in labor-intensive industries such as the garment, shoe, and clothing manufacturing sectors (China Labor Bulletin, 2014).

So, how and why do workers react to labor violations through protests? If workers have access to institutionalized routes to voice their grievances, they are less likely to resort to protests (Robertson and Teitelbaum Reference Robertson and Teitelbaum2011). However, the CCP has been reluctant to institutionalize labor conflicts, which could empower labor groups and pose a threat to the regime (Gallagher Reference Gallagher2014). Workers in China are not allowed to establish independent unions in workplaces. China allows only one state-run union, the All China Federation of Trade Unions (ACFTU), which monopolizes the space for labor representation but plays a limited role in representing workers’ interests (Lee Reference Lee2007; Friedman and Lee Reference Friedman and Lee2010; Fu Reference Fu2017a).

Deprived of institutionalized channels, workers have resorted to protests to resolve their grievances. As Su and He (Reference Su and He2010) suggests, “the aggrieved workers are often left with little choice but to turn to the street to protest.” Protestors have demanded that local governments enforce the labor law based on the “ready-made rationales” of the central government (O'Brien and Li Reference O'Brien and Li2006, 9). Full or even partial implementation of the labor law by local governments and firms could address workers’ demands, such as proper wage payment and decent working conditions.

Moreover, since workers’ demands are rightfully based on the central government mandate, they can expect that such protests will be less likely to trigger repression by their local governments. If the local governments employ repressive measures in response to these protests, they might appear unable to manage local unrest—which stems from local governments’ in compliance with the labor law—in the eyes of the central government. Therefore, if workers focus on the gap between the labor law and its enforcement, the possible benefits of protests exceed the expected costs of repression. This consideration enables workers to participate in protests to resolve their grievances. Based on the argument, I expect an increase in FDI to produce an increase in labor protests.

Data and empirical strategy

The main dependent variable is regional variation in labor protests in China between 2012 and 2018. This paper draws its data from the labor protest dataset compiled by the Hong Kong-based NGO China Labor Bulletin (CLB). The organization has been tracking the collective actions of workers (including strikes and protests) using social media and Chinese newspaper reports. The CLB dataset is a comprehensive dataset on labor protests in China which includes information about the location (province and city), date, industry, number of participants, enterprise type, and government reactions for each protest.Footnote ¹¹ CLB updates the dataset on a daily basis and includes its information sources and images of posts, which alleviate possible bias arising from state censorship.

Figure 1 presents the geographical distribution of labor protests in China. Labor protests have arisen most frequently in southeastern coastal areas—the Pearl River Delta Metropolitan Region, which includes Shenzhen, Dongguan, and Guangzhou in Guangdong Province. Following the cities in Guangdong Province, Beijing and Shanghai have the next most frequent incidence of labor protests. Protests have also taken place in inland industrialized cities, including Chengdu, Chongqing, and Zhengzhou. The wide geographical distribution shows that labor protests have occurred in most major cities in China.

Figure 1: Geographical distribution of labor protests in China, 2012–2018

Figure 2 presents labor protests in China by ownership of enterprises (left) and by industry (right). Most labor protests have been concentrated in domestic private enterprises, while other protests have occurred in state-owned enterprises (SOE); Hong Kong-, Taiwan-, or Macau-owned (HTM) enterprises; foreign-owned enterprises; and joint ventures in order of frequency. The high proportion of protests in domestic private enterprises reflects China's labor market composition, given that a significant number of Chinese workers work in domestic enterprises. The proportion still suggests a complicated picture with a “spillover” effect from foreign investment that diminishes enforcement of labor regulations overall. As foreign investment causes the diminution of labor standards city-wide, labor protests take place not only in foreign-owned enterprises but also in domestic enterprises.

Figure 2: Labor protests by ownership (left) and industry (right)

The industrial composition of the labor protests depicted in Figure 2 also suggests that labor protests take place both in sectors with less FDI and those sectors with more. A substantial proportion of the labor protests take place in the manufacturing industry, where foreign investment is concentrated. In the period between 2012 and 2018, 28 percent of labor protests took place in the manufacturing industry. Labor protests are not restricted to the manufacturing industry, however. Workers have participated in labor protests across many industries, including construction, services, transport logistics, and mining, in order of frequency. As the theoretical argument suggests, the city-wide diminution of labor standards causes worker protests across diverse industries as presented in Figure 2. The mechanism analysis in Table 2 and Table 3 provides more systematic evidence that FDI causes a spillover effect that weakens labor standards across industries.

The main independent variable is the stock of utilized foreign capital as a percentage of cities’ gross regional product (GRP), drawn from the China City Statistical Yearbook. Figure 3 presents the geographical distribution of the average FDI to GRP percentage within China. The coastal cities, including Tianjin and Dalian, have a higher percentage of FDI. Some of the industrialized cities located in the inland area also have a relatively high percentage of FDI. The percentage of FDI to GRP measures foreign investors’ bargaining power in each city. Local governments are more prone to the pressures of foreign investors when foreign capital makes up a larger proportion of the regional economy. I also employed a one-year lagged measure of FDI proportion, as pressure from foreign investors first leads to labor deregulation and then to worker actions.

Figure 3: Geographical distribution of average FDI-to-GRP percentage in China, 2011–2017

In the empirical analysis, I include a wide range of covariates based on the data from the China City Statistical Yearbook. First, I consider regional variation in social policy coverage. China has been expanding its social policies following the central government's introduction of the Social Insurance Law in 2011, but local governments have implemented social policies to varying degrees (Huang Reference Huang2015; Huang and Kim Reference Huang and Kim2020). Some governments provide comprehensive social insurance policies based on residency while other governments restrict social insurance benefits to workers with formal employment (Yang Reference Yang2020). If local governments provide more comprehensive social compensation, they can moderate the grievances of workers and alleviate labor unrest. The coverage rate of social insurance is measured by the number of participants in pension and unemployment programs as a share of the total population of each city.Footnote ¹²

I also consider the employment composition of the local economy. Since China engages in multinational production primarily through the manufacturing industry, employment in the manufacturing industry measures the participation rate in the global value chain. More intense price competition in trade and subcontracting is more likely to lead to labor abuses in each city (Mosley Reference Mosley2011, 23). Moreover, since workers in industrialized cities are more likely to organize protests, the employment proportion captures workers’ organizational capacity. I additionally control for GRP growth rate to capture the business cycle in each city. Other socio-demographic factors include total population and GRP per capita. The main analysis employs a negative binomial regression model considering the overdispersion of counts (Hilbe Reference Hilbe2011, 221). The overdispersion test indicates that the variance in the counts of protests is significantly larger than the mean, thus a negative binomial regression is more appropriate than a Poisson regression. The model also includes city fixed effects and year fixed effects. Including fixed effects controls for city-specific and year-specific factors related to foreign investment and labor protests. The fully specified model is as follows:

(1)$$Labor \ Protests_{i, t} = \theta \,\ast\, FDI/GRP_{i, t-1} + X_{i, t-1} + \lambda _i + \gamma _i + \mu _i$$

Equation (1) presents a negative binomial regression model for the main analysis where X_{i ,t-1} includes controlled covariates indexed for city i and year t-1. λ_i and γ_i captures city-fixed effects and year-fixed effects respectively. μ_i is the error term. The model uses the one-year lagged values of covariates to alleviate concerns about the post-treatment bias.

Additional tests

I conduct additional tests in this section to make sure that the main results are not driven by model specifications and the endogeneity problem. I first test whether the results remain robust to alternative model specifications. I present empirical evidence employing correlated random effects (CRE) models in Table A3. Moreover, I implement a robust population-averaged negative binomial model to alleviate concerns about serial correlation in Table A4. To address concerns with spatial autocorrelation, I further conduct empirical analysis by controlling labor protests in the same province and employing autocovariate spatial regression in Table A5 and Table A6. The results remain essentially similar and suggest that the main findings are not driven by model specifications.

Moreover, there are concerns with the endogeneity problem because foreign investors can select into locations with weak labor regulation. While addressing the concerns is a challenging task in the absence of the randomized treatments, an instrumental variable approach additionally provides empirical evidence that address the concerns with the endogeneity problem. I employ an instrumental variable using the ratio of foreign marriages to total marriages divided by the shortest distance to one of neighboring economies which include Tokyo, Singapore, Seoul, Taipei, Hong Kong drawing on Jiang, Liang, and Pan (Reference Jiang, Liang and Pan2022). While Jiang, Liang, and Pan (Reference Jiang, Liang and Pan2022) employ the ratio of foreign marriages over shortest distance to nearest ports, I alternatively use cities’ shortest distance to nearby economies from which most inward FDI originates instead of distance to nearest ports. The instrumental variable is specified as follows:

$$Z_{i, t-5} = \displaystyle{{Foreign\,Marriage_{\,j, t-5}} \over {Shortest\,Distance\,to\,Neighboring\,Economies_i}}$$

where Foreign Marriage_{j ,t−5} measures the time-varying ratio of foreign-related marriages (5-year lag) at the province-level and Shortest Distance to Neighboring Economies_i captures the time-invariant city-level distance to neighboring economies. Thus, the instrumental variable measures the time-varying values at the city level which predicts the inflows of FDI in China. I estimate the first-stage regression model as follows:

(3)$$FDI/GRP_{i, t-1} = \theta \,\ast\, Z_{i, t-5} + X_{i, t-1} + \lambda _i + \gamma _t + \mu _i$$

where Z_i,t-5 is the instrumental variable and X_{i ,t-1} includes controlled covariates indexed for city i and year t-1. λ_i and γ_t captures city-fixed effects and year-fixed effects respectively. μ_i is the error term.

The ratio of foreign marriage is positively associated with FDI inflows because marriage provides reliable social networks to investors. Family ties are especially more important when investors face weak institutions (Burkart, Panunzi, and Shleifer Reference Burkart, Panunzi and Shleifer2003; Bunkanwanicha, Fan, and Wiwattanakantang Reference Bunkanwanicha, Fan and Wiwattanakantang2013). In the context of China where investors also face institutions strongly intervened by the authority, He, Xue, and Zhu (Reference He, Xue and Zhu2017) explain how the ratio of foreign marriages can function as an instrument for FDI. Having local networks through marriages enables investors to acquire information about the regulation and legal requirements. It can alleviate investors’ information asymmetry in weak institutions fostering more investment. Family ties also contribute to effective monitoring through more frequent interactions with locals. Moreover, family ties can strengthen mutually beneficial cooperation between investors and locals which can lead to transactions with other local partners. The instrumental variable is lagged by 5 years because building and strengthening social ties is a gradual process over several years.

I also incorporate the shortest distance to neighboring economies as the denominator of the instrumental variable building upon previous studies that employ the spatial instrument for inward FDI in China (Zhu Reference Zhu2017; Zheng, Kahn, and Liu Reference Zheng, Kahn and Liu2010; Jiang, Liang, and Pan Reference Jiang, Liang and Pan2022). If a city is located closer to one of the neighboring economies, it is more likely to receive foreign investment because it diminishes transaction and transportation costs. I calculate the shortest distance from Chinese cities to one of the neighboring economies instead of considering distances to all neighboring economies. The reason is that FDI from neighboring economies is regionally clustered—for example, foreign investment from Japan and Korea is concentrated in north and northeastern China, while firms from Taiwan and Hong Kong tend to be mainly in southeastern coastal cities (Zhu, Reference Zhu2017). Therefore, the short distance to one of the neighboring economic centers can effectively predict an inflow of foreign investment.

The instrument variable predicts the FDI/GRP ratio avoiding the weak instrumental variable problem. Table A11 presents the 1st-stage results that the instrumental variable is significantly associated with the FDI/GRP ratio. The Donald-Cragg Wald F statistic test shows that critical values of all models exceed the 10 percent threshold.Footnote ¹⁵ These results show that the instrumental variable effectively predicts the FDI/GRP ratio.

A valid instrumental variable should also satisfy the exclusion restriction. That is, the instrumental variable should affect labor protests only through the channel of FDI. The instrumental variable of this paper uses the five-year lag and province-level ratio of foreign marriage which are less likely to be associated with protests at the city level. Despite the empirical estimation, there are still two possible concerns about the exclusion restriction. The first potential challenge concerns the possibility that foreign marriages can draw media attention from other countries that can embolden workers to protest. The second potential challenge regards the possibility that foreign marriage can diffuse different norms about politics. I address these concerns as best as possible in the Appendix (see A-10 through A-13).

Table A13 suggests the second-stage results from the two-stage least squares (2SLS) models. The empirical models follow the same logic in Table 1 in deciding the city-level covariates. The findings support the main argument of this paper suggesting that the FDI ratio significantly increases the frequency of labor protests across the models. These results alleviate the endogeneity concerns and provide additional evidence that the influx of FDI leads to more labor protests in China.

Mechanism: FDI and labor deregulation

This section provides empirical evidence for the mechanism of the main argument—the deregulatory effect of FDI. The analysis in Table 1 supports the main argument, that FDI induces more labor protests. However, the analysis does not show that inflow of FDI ratchets down the enforcement of labor regulations. The mechanism analysis in this section examines the impact of FDI on labor regulations to clarify through which channels FDI causes workers’ collective action.

Measuring the enforcement of labor regulations requires close investigation of how de jure labor regulations are implemented in reality. This study examines the implementation of labor laws using the World Bank Enterprise Survey in China, conducted from December 2011 to February 2013.Footnote ¹⁶ Regional stratification covers 25 cities and municipalities. A total of 2,700 private enterprises participated in the survey (2,367 domestic firms, 61 foreign-owned enterprises, and 272 jointly owned enterprises). The survey data provide a rich ground from which to evaluate firms’ perceptions about the enforcement of regulations. By controlling a wide range of city-level and firm-level variables, the analysis elucidates how labor regulations are enforced in practice across different cities depending on FDI inflow. I estimate the model as follows:

(4)$$Labor\,regulation_{i, t} = \alpha + \beta \ast FDI/GRP_{i, t-1} + \lambda _{i, t-1} + \gamma _{i, t} + \varepsilon $$

Labor regulationi,t is the enforcement of labor regulations measured using the question, “To what degree are labor regulations an obstacle to the current operations of this establishment?” The answers range from “not an obstacle” to “a very severe obstacle.” If local governments strongly enforce labor regulations, firms are more likely to perceive those regulations as an obstacle. Thus, a higher proportion of companies answering that labor regulations are an obstacle implies that enforcement of labor regulations is stronger. In particular, as city-level and firm-level factors associated with labor costs are controlled, the perception of labor regulations more closely reflects the actual implementation of the regulations.

FDI/GRP is the stock of utilized foreign capital as a percentage of each city's GRP. λ_{i ,t−1} denotes city-level control variables. I control for unemployment insurance ratio, pension ratio, total employment, industrial composition, GRP growth, population, and GRP per capita. The city-level variables draw on the data from the China City Statistical Yearbook.

γ_{i ,t} denotes firm-level control variables drawn from the World Bank Enterprise Survey, including number of employees, ratio of labor costs to sales, ownership ratio, export ratio, and industry. The firm-level control variables first consider firm size and the ratio of labor costs to total sales. Labor costs include wages, salaries, bonuses, and social security payments. Ownership type reflects the percentage of domestic, foreign, and state ownership. I also include the ratio of indirect exports (sold domestically to third parties for export) and direct exports as a percentage of total sales. Firms engaged in exporting industries are more susceptible to cost competition, which increases their sensitivity to labor costs stemming from the enforcement of labor standards. Industry fixed effects additionally control for industry-specific factors related to firms’ perceptions of labor regulations.

Table 2 shows the analysis of the firm-level survey using an OLS regression model with robust standard errors clustered at the city level.Footnote ¹⁷ Model 1 only includes the city-level control variables drawn from the China City Statistical Yearbook. Model 2 additionally controls for firm-level variables, including the total number of employees, labor costs as a percentage of total sales, company ownership, export ratio, and industry fixed effects. The negative relationship between the FDI/GRP variable and labor regulation remains strong across the models. The findings demonstrate that firms are less likely to perceive labor regulation as an obstacle in cities with a higher proportion of FDI. When firm-level variables associated with labor costs are controlled, firms’ perceptions of labor regulations measure how labor regulation is enforced in practice. Thus, the negative coefficient of FDI/GRP implies that inflow of FDI is associated with lax enforcement of labor regulations.

Table 2. Spillover effects by industry and export-ratio

Note: Robust standard errors clustered at city-level

*p < 0.10, ** p < 0.05, *** p < 0.01. Additional results are presented in Table A8

Table 2 also presents how the spillover effect in labor deregulation takes place among firms of different ownership types. Models 3 through 5 test the relationship between FDI and labor regulation by restricting the sample to wholly foreign-owned enterprises, domestic enterprises,and jointly owned enterprises respectively. The negative relationship between FDI/GRP and labor regulation is statistically significant across the models.

The results in Models 3 through 5 are noteworthy in two respects. One is that the magnitude of the FDI effect is stronger among foreign-owned and joint enterprises than among domestic ones. Foreign ownership enables firms to enjoy greater deregulation, since foreign investors bargain with local governments regarding the enforcement of labor regulations. However, domestic firms also benefit from the relaxation of regulations demanded by foreign investors. As local governments reduce the general level of labor regulation in each jurisdiction, domestic firms also experience weaker labor regulation. The results support the spillover effect of FDI, in which lax enforcement benefits enterprises of every ownership type.

In a similar vein, Table 3 demonstrates how FDI produces a spillover effect in labor deregulation that benefits firms operating in different industries and with different export shares.Footnote ¹⁸ Models 1 through 3 restrict the sample to manufacturing, labor-intensive industries, and service sectors, respectively. Model 1 shows that manufacturing firms are more likely to perceive the relaxation of labor regulation in cities with greater FDI inflow. These results remain robust in Model 2, which restricts the sample to labor-intensive industries including the textile, garment, and electronics industries.Footnote ¹⁹

Table 3. Spillover effects by industry and export-ratio

Note: Robust standard errors clustered at city-level

*p < 0.10, ** p < 0.05, *** p < 0.01. Complete results for Table 3 are presented in Table A10

These firms are more exposed to foreign investment, and thus tend to make stronger demands for deregulation. However, these policies are not exclusively applied to the manufacturing industry where FDI is concentrated. As Model 3 shows, firms in retail sectors also enjoy weaker enforcement of labor regulations. This result implies that the general regulatory environment with regard to labor laws becomes weaker in cities with greater FDI inflow.

Models 4 and 5 in Table 3 consider whether the export ratio moderates the effect of FDI on labor standards. Model 4 restricts the sample to export firms, excluding those firms with only national sales. Model 5 includes firms with national sales accounting for more than 50 percent of total sales. The effect of FDI on labor deregulation is more robust and significant in Model 4. The result implies that firms that rely on exports are more likely to experience weakened labor standards, as foreign investment is more concentrated in these sectors. The significant effect of FDI in Model 5, however, shows that firms operating primarily in the domestic market also benefit from loosened regulations as local governments relax their average level of enforcement. These results demonstrate that FDI induces a spillover effect that affects firms with different export ratios.