Capital Inflows and Working Children in Developing Countries: An Empirical Approach

Abstract

International capital flows and the operation of multinational enterprises (MNEs) are influenced by several socioeconomic and political factors. Among them, low labor cost is listed among the determinants that attract foreign capital, primarily foreign direct investment (FDI) inflows, which in various cases is attributed to unskilled employees, including working children. Working children, mainly in developing countries, remain an important social issue which has attracted increasing research interest, as well as the coordinated efforts of international organizations. The present research aims to empirically investigate the interaction between FDI inflows and child labor in developing countries using panel data analysis. The paper includes an extensive literature review of related empirical research on the association between child labor and FDI inflows in developing countries. The novelty of the study is attributed to its effort to empirically investigate the causality between FDI and child labor in two geographic regions that present high rates of working children, namely sub-Saharan Africa and Latin America. A sample of 42 developing countries from a period ranging from 1980 to 2019 was used and Granger causality tests were applied. The study concludes that there is a unidirectional causal relationship from FDI inflows to child labor in these regions and no causality was observed from child labor on macroeconomic independent variables. Several policies and proposals that will reduce or prevent child labor in the subsidiaries of multinational companies are included.