The Economic and Social Impacts to India and Its Citizens from Inward Foreign Direct Investment


: Business power and influence on social policy construction



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3.2: Business power and influence on social policy construction


As discussed in Chapter Two, TNCs are agents of power and one of the main actors in the global arena with influence upon political decision making at both the international and national level (Rodrik, 2011; Held et al, 1999; O’Brien and Williams, 2007, 2013). The economic dimension of TNC influence on host countries is important but equally important are the political faces of corporate power, the sources of such power and the ability to influence policy making (Sklair, 2012; Clapp and Fuchs, 2009; Farnsworth, 2004, 2010). Discussions of business power are very important to this thesis. In order to fully understand and investigate the impact of foreign investment on a host country, it is critical to evaluate the role of business in policy formation and implementation. Upcoming empirical chapters will draw on elite policy stakeholders’ perception of the role of business and business power in Indian policymaking and explore this impact on social welfare provisions in two specific investment policies. This section is divided into two parts. The first part will discuss the theoretical conceptions of business power and the second will explore the factors that serve to promote or constrict the ability of business power to influence social policy construction.

3.2.1: Theorizing business power


Governments depend on business investment but have no control over private investment decisions (Thomas, 2011; Farnsworth, 2004, 2010; Hill et al, 2013). Governments can induce and incentivise investment but they cannot force them to invest. How far business shapes policymaking often depends on how far countries are prepared to offer inducements and actively court investment (Farnsworth, 2010). In the context of development, this can be even more important (Utting and Marques, 2010; Thomas, 2011). The power of business to exert influence on policy outcomes assumes various forms (Utting and Marques, 2010). A helpful analysis of business power is the categorisation of structural and agency mechanisms of power (Farnsworth, 2004; 2010). I will briefly explore both types of power.

Structural power pertains to the ability of business to indirectly influence policy outcomes without specific dictation on the part of business (Farnsworth, 2004; 2010; Bell and Hindmoor, 2013). Structural power is important to understand as it captures the way business is able to exert control over the range of choices available to policy makers (Bell and Hindmoor, 2013; Fuchs, 2005; Farnsworth, 2004, 2010). Various factors restrict the policy options of the capitalist state to those compatible with the needs of business (Bell and Hindmoor, 2013; Thomas, 2011; Poulantzas, 1973; Gough, 1979; Farnsworth and Gough, 2000). Farnsworth (2004, pp 13-16) underscores four resources of structural power: control over investment, state dependence upon business revenue, power over labour, and ideological control.

The first factor and a main source of structural power for business is the independent control over present and future investment decisions (Hirschman, 1970; Bell and Hindmoor, 2013). As mentioned above, although host governments can entice FDI, they cannot force business to either invest in the region or stay should it want to withdraw (Bell and Hindmoor, 2013; Hirschman, 1970; Lindblom, 1977; Przeworski and Wallerstein, 1988; Farnsworth, 2004). This autonomy over investment decisions and the increased mobility of business (Gough and Farnsworth, 2000; Przeworski and Wallerstein, 1988) can result in either perceived or real threats of ‘capital flight’ or ‘capital strike’ and propel governments to prioritise the needs and preferences of business in policy outcomes (Utting and Marques, 2010, p.2). In light of this, Hirschman (1970) emphasises the power of business to ‘exit’ can serve to influence policy as much as the active ‘voice’ of business.

The second source of structural power is the dependence of the state to raise revenue from business in order to fund its social and political programmes (Thomas, 2011; Offe and Ronge, 1982; Tilly, 1990; Farnsworth, 2004). This structural dependence on the business sector for revenue places business in a position whereby the state does not actively pursue policies that undermine the profitability of business because to do so would endanger the state’s own self-interest (Thomas, 2011; Poulantzas, 1973; Offe and Ronge, 1982; Wetherly, 2005).

The third form of structural business power is its asymmetrical power over labour and trade unions (Baccaro and Howell, 2011; Offe and Wiesenthal, 1980). Farnsworth (2004, p. 15) explains:

The fact that business occupies a monopoly position over private investments, and that workers have no other means of subsistence apart from paid employment, places labour in a position of relative dependence and business in a position of power and control.

Finally, the fourth resource for structural power is executed through ideological hegemony (see section 2.2.3) or the ‘discursive power’ of business to influence ideas of how development should occur, to borrow Fuchs’ (2005) terminology. Hegemony, a concept of power that originated with Antonio Gramsci (1971), occurs when the dominant group is successful in manipulating the belief system of the subordinate group so that they come to believe that the set of rules created by the dominant group is in their own best interest. According to Lindblom (1977, p.202) the dependence of the state and its citizens on capital accumulation reinforces the idea that business is the driving force behind most social and economic activities within a society and this has an impact on the ideological ‘volitions’ of the population. The state, with its dependence on business as explained above, also plays a key role in promoting pro-business ideology while, at the same time, limiting oppositional voices to it (Robinson, 2012; Miliband, 1969,p. 165; Poulantzas, 1973, pp. 303-305).

Agency power results from direct action by business to influence the policy decision making process (Farnsworth, 2004). Business’ access to large reserves of financial resources helps to secure its direct role within political influence and policy decision making (Farnsworth, 2004; Hill et al, 2013). One of the most visible forms of agency power occurs via corporate lobbying or political campaign financing (Fisher, 1994; Fuchs, 2005; Hill et al, 2013; Culpepper, 2011). Businesses can directly engage in the lobbying system or they can employ a professional lobbying organisation to do so on their behalf (Jordon, 1991; Hill et al, 2013; Culpepper, 2011). Businesses also can utilise their reserves of financial resources to finance business- centered interest groups which can pool together significant financial and political clout and gain access to politicians to help sway policy decisions (Farnsworth, 2010; Kohli, 2012).

Given these arguments, it can be presumed that business has a privileged interest within capitalist nation states and access to the policy making arena that is not open to other social groups, however, it is important to note that its ability to dictate the outcomes is variable across time and space (Thelen, 2014; Bell and Hindmoor, 2013; Pierson, 1995; Vogel, 1996; Hacker and Pierson, 2002; Farnsworth, 2004, 2010). The next subsection will explore the factors that serve to propel or constrain business influence on policy decision making.

3.2.2: The variability of business power


As explored, business has the potential power to influence the public policies of host countries. However, the extent to which this potential is actualized is variable as several factors serve to either increase or limit theoretical business power (Bell and Hindmoor, 2013; Pierson, 1995; Vogel, 1996; Hacker and Pierson, 2002; Farnsworth, 2004, 2010). Farnsworth (2010, pp 65-68) examines five principle factors that work to further promote and/or limit business power in policy construction:

  1. Business -IGO relationship. Business priorities are institutionally embedded in IGOs who, in turn, have a large influence on national policy construction.

  2. The business- state relationship and the extent to which business is embedded within the policy making of the nation state.

  3. The extent to which business can relocate or exit the host country.

  4. The divisions between business groups and industries at the national and international level.

  5. The relative power of other actors who have a vested interest in policy outcomes such as labour groups and civil society.

As explored in Chapter Two (see section 2.2.2), IGOs function to monitor and promote stability, growth, development and cooperation between and amongst the member nation states (Weiss, 2013; Hale et al, 2013). However, they place pressure on developing economies to liberalise their economies and the prescriptions given and the rules created by these institutions are embedded with business priorities and preferences (Tesner and Kell, 2000; Farnsworth, 2010; Rodrik, 2011). A key ingredient of IGO’s policy prescription is that developing countries need to create an attractive environment for foreign investment (Gore, 2000; Stiglitz, 2002; Davies and Vadlamannati, 2013). Given these arguments, Farnsworth (2010) contends that the global policy making environment has increased business power at the international and national levels.

The priority of business interest at the international level also stems from pressure from nation states (Farnsworth, 2010). Individual nation-states often lobby IGOs on behalf of their own TNCs as a way to defend and promote their national and economic interest (Farnsworth, 2010; Holden, 2014). The nation states with more political and economic clout within IGOs are more likely to be successful in these lobbying attempts (Wade, 2002; Stiglitz, 2006; Farnsworth, 2010; Holden, 2014). Furthermore, the international business community has been very successful in creating linkages with IGOs and has done so on a relatively united front (Sklair, 2001; Farnsworth, 2010). A final example of the embedded business priorities within IGOs is in line with elite integration theories (Domhoff, 1967, 1978, 1987; Scott and Griff, 1984; Scott, 1991; Robinson, 2012) and argues that the senior positions within IGOs such as the World Bank and IMF are filled by economists and politicians that often have strong links with the business community (Tesner and Kell, 2000; Stiglitz, 2002; Farnsworth, 2010; Robinson, 2012).

A second factor that can determine the ability of business to influence policy making is the dynamics of the business-state relationship (Farnsworth, 2010). How open the state’s policy making institutions are to business influence will directly impact policy construction (Anthonsen et al, 2010; Thelen, 2014; Skocpol, 1979; Thelen and Steinmo, 1992). The organisation of the state including the rules and regulations that govern it set the parameters by which business can access and influence the policy making process (Farnsworth, 2004; 2010; Anthonsen et al, 2010).

The nature of the business-state relationship can deviate and change as states develop and evolve as Murali (2010) illustrates in her analysis of the Indian business- state relationship. Murali (2010) underscores the increasing alignment between business and the Indian government following economic liberalisation in 1991, whereby there has been a proliferation of activities, consultations, and information sharing events between business and the government in the form of policy briefs, surveys, advisory committees, trade fairs, and brand building exercises. Murali (2010) also observes that the Indian government is more responsive in ascertaining business feedback in regards to certain policy areas.

A third factor that serves to promote or limit business influence in policy construction is how easily TNCs can relocate their investments to other countries that are more conducive to their policy desires (Bell and Hindmoor, 2013). As explored in the previous section, the ‘exit threat’ is a type of structural power for business and can influence policy decisions as TNCs can relocate investments in protest to specific policies (Bell and Hindmoor, 2013). However, TNCs are often more fixed than their transnational nature suggests (Yeates, 2001; Chang, 2003, 2014; Farnsworth, 2010). This is not to contend that TNCs are immobile as their ability to exit a country has increased in the globalized world but they are not as versatile and nomadic as often perceived (Chang, 2003; Bell and Hindmoor, 2013). Chang (2003) discusses the concept of sunk cost as being a factor impacting the relative ease with which TNCs can relocate investments. Sunk costs are past costs to a firm that have already been incurred and cannot be recovered. Chang (2003, p.263) remarks that industries with low sunk cost such as the garment or shoe industries have potential to be more nomadic, whereas industries with high sunk cost such as pharmaceutical companies are not as footloose. The large amounts of money spent in establishing the business venture, as is the case with businesses with high sunk cost, essentially ties them to the area to recover the costs. However, this does not mean that location bound TNCs will submit to all conditions provided by the state but, arguably, are willing to put up with more restrictive policy measures so long as they are stable and predictable (Ostry,1990).

The fourth factor that can affect the ability of business to influence policy making is how united businesses and business groups are in their policy preferences (Farnsworth, 2004; 2010). Dahl (1961) contends that the differences between specific industries’ needs in terms of policies are varied and work to keep business as a collective entity from presenting a unified view or coherent set of policy prescriptions. Differences between size, sector, and the home governments of business can all work to create different needs and policy preferences (Mann, 1993; Forsgren, 2013; Thomas, 2011).

Farnsworth (2010) remarks that divisions between different types of business may constrict influence in certain instances but it will not completely negate business power and its ability to influence national policy making. Furthermore, business associations at the international level are more united in policy preferences and where divisions do exist between international investor groups, the issues are smaller and less controversial (Farnsworth, 2010).

The fifth and final factor that helps to determine the level of business power is the relative power of other actors who have a vested interest in policy outcomes (Farnsworth, 2010; Thelen, 2013; Anthonsen et al, 2010). Labour movements, non-governmental organisations (NGOs), and other fractions of civil society often have a competing and opposing interest to business policy preferences and are able to challenge the power of business in policy outcomes (Thelen, 2013; Baccaro and Howell, 2011; Anthonsen et al, 2010; Piven and Cloward, 1971; Korpi, 1983). This is particularly the case in domains such as social policy and labour regulations (Thelen, 2013; Anthonsen et al, 2010; Korpi, 1989; Esping-Anderson, 1990). Non business actors have the capability to successfully challenge powerful business interests and can do so by democratic means or by other outlets such as civil disobedience and protest uprisings (Smith, 2011; Piven and Cloward, 1971; Yeates, 2001). Yeates (2001) highlights the importance of international labour and human rights regimes such as the ILO in the promotion of labour standards which are promoted to prevent countries from basing their attractiveness to foreign investment based on low labour standards.

It is important to note that although firms have power to influence policies it is not guaranteed they will engage in the policy making process of host economies (Farnsworth, 2010). Farnsworth (2010) lists three reasons why business actors may not participate in social policy making: one, social policy is complex and diverse arena; two, social policy has long- term and uncertain consequences; and three; social policies do not always have an obvious implication for business needs (Farnsworth, 2010).

While exploring the ability of business to influence policy outcomes is important to the investigation of the impact of FDI on developing countries, it is also important to look more directly at the possible adverse social and economic impact that TNCs can impose on host countries. The proceeding section will examine corporate harm, crime, cost and risk.




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