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

: Deleterious corporate behaviour: Harm, cost, crime and risk

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3.3: Deleterious corporate behaviour: Harm, cost, crime and risk

As discussed in Chapter Two (see section, TNCs are both reviled and respected, and held accountable for globalisation’s ills as well as its successes (Stiglitz, 2006). The scorn for TNCs stems from the reality that business operations can impose large negative impacts in the host countries in which they operate (Haynes et al, 2013; Korten, 1995; Madeley, 1999; Richter, 2001; Bakan, 2004). There are four concepts that will be discussed here that relate to the negative impact of TNCs to host countries: harm, cost, crime and risk. For this thesis, harm denotes social and/or environmental injurious actions made by TNCs (Farnsworth, 2014) whereas costs refer to the overall effect or impact that such actions impose. TNCs can impose economic and financial costs, physical costs (injury/violence) as well as social costs (Lilly et al, 2015). Corporate crime, on the other hand, refers to the:

…conduct of a corporation or of employees acting on behalf of a corporation which is proscribed and punishable by law (Braithwaite, 2013, 1984, p.6).

Finally, risk refers to the possibility or likelihood that TNCs will conduct and impose harm, cost, and/or criminal actions. As all of the concepts are types of harm, harm will be used to denote any or all of these actions unless stated specifically. I will briefly describe each of these concepts.

3.3.1: Corporate harm

Farnsworth (2014, p. 82) breaks the concept of corporate harm into three categories relating to corporate activity:

  • physical harm, such as is caused by exposure to environmental pollutants, hazardous products or by unsafe working conditions;

  • financial/economic harm, such as poverty wages and financial losses that are the result of, for example, fraud, price fixing or corporate tax avoidance;

  • emotional and psychological harm, such as anomie and depression resulting from poor working environments.

All types of firms can cause harm and possible fatality via employment practices, sales and marketing, and research and development (in particular in the case of clinical trials for pharmaceuticals) (Haynes et al, 2013; Madeley 1999; Richter, 2001; Farnsworth 2014). Table 3.1 outlines the range of corporate harms and specific examples.

Table 3.1 Examples of corporate harm

Type of corporate harm

Examples of corporate harm

Physical harm. TNCs are accused of exploiting weak labour regulations in developing countries and providing unsafe working conditions.

A fire at a garment factory outside of Dhaka, Bangladesh where more than 100 workers died in November 2012 highlights the occupational dangers facing garment workers due to unsafe working conditions. Most of the workers who died were killed because there were not enough exits in the building. The factory employs approximately 1,500 workers and produces $35 million in sales per year (Bajaj, 2012). Clean Clothes Campaign, an anti-sweatshop advocacy group argue that global brands such as Tommy Hilfiger, the Gap and Walmart should take responsibility for the working in the Bangladesh factories that produce their garments and failure to do so amounts to criminal negligence (Clean Clothes Campaign, 2013). Clean Clothes Campaign links 14 global brands to the factory and contends that one year on only two companies have made any substantial contributions for compensation for victims (Clean Clothes Campaign, 2013).

Financial harm. TNCs are accused of enhancing their profits by avoiding corporate tax which results in financial loss in revenues for host countries.

Global firms such as Starbucks, Google and Amazon have all been criticised for avoiding payment of tax on their sales in the UK (Barford and Holt, 2012). In 2013 retail and internet giant, Amazon, paid just £4.2 million in taxes despite selling goods worth £4.3 billion in the UK (Garside, 2014). In 2012 Starbucks had sales of $400 million and paid no corporate tax. Google’s UK subsidiary paid a mere £6 million in taxes in 2011 after a profit of £395 million (Barford and Holt, 2013).

Emotional and psychological harm. TNCs are accused of conducting clinical trials in developing countries to exploit lax ethics and regulatory mechanisms as well as desperate and poor patient populations.

Global pharmaceutical firms Johnson & Johnson and AstraZeneca have conducted clinical trials in India that violated both national and international ethical guidelines (Srinivasan, 2009). First, both companies conducted trials for psychotropic medication for mental illness and recruited mentally ill patients with such severe symptoms that their ability to provide informed consent was in question. Second, both trials went against national and international ethical guidelines and conducted placebo trials when the experimental drug should have been tested against the established medication for the condition. Control groups were taken off their medication and were administered sugar pills. Patients in control groups relapsed into severe states of mental illness. There were deaths in both trials. No information is available to suggest any compensation was awarded. One patient committed suicide after taking a placebo for 173 days (Srinivasan, 2009).

3.3.2: The costs of corporate harm

Harmful and injurious corporate behaviour results in various costs to host country environments. One of the driving motivations behind the rise of criminological explorations and discussions of corporate crime as well as white-collar crime was to emphasise that crimes committed by the powerful, for example corporations, invoke far greater economic, physical and social costs in comparison to ‘conventional’ crime, namely street crime, which has been the focus of criminal justice systems (Tombs and Whyte, 2003; Lilly et al, 2015; Rothe and Friedrichs, 2006; Kramer et al, 2002; Sutherland 1940, 1949, 1983). Incidents such as widespread insider trading on Wall Street (Tombs and Whyte, 2003), the manipulation of Libor interest rates by international banks (the Economist, 2012) and the savings a loan crisis of the 1980s and 90s (Lilly et al, 2015) alerted the public to the massive economic costs derived from corporate harm and crime. Furthermore, the extent of violence perpetuated by corporations has resulted in widespread physical costs which have been underscored by criminologists and sociologist to far surpass that of street crime (Lilly et al, 2015; Tombs and Whyte, 2003). Finally, although the financial/economic and physical costs accrued by corporations are great, corporate harm and corporate crime also result in social costs to societies as well (Lilly et al, 2015; Bruce and Becker, 2007; Sutherland, 1940, 1949, 1983). The ‘inventor’ of the criminological genre of white-collar crime, Edwin Sutherland, emphasised that crimes committed by corporations and other powerful actors cause damage to social relations by violating trust, lowering social morale and producing social disorganisation (Sutherland, 1940, 1949, 1983; Lilly et al., 2015; Bruce and Becker, 2007). This negative impact on social organisation is the social costs of corporate deleterious behaviour (Lilly et al, 2015; Bruce and Becker, 2007).

3.3.3: Corporate crime

Corporate crime is a type of white-collar crime (Benson and Simpson, 2015; Simpson, 2009). Sutherland (1940, 1949, 1983, p.7) introduced the concept of white-collar crime in 1939 as criminal activity “committed by a person of respectability and high social status in the course of his occupation.” By placing the spotlight on white-collar crime, Sutherland demanded criminology include examinations of crimes committed by the powerful as these crimes had been largely ignored by academic disciplines (Lilly et al, 2015; Simpson, 2002; Rothe and Friedrichs, 2006). There are debates, however, among researchers concerning the conceptualisation of corporate crime (Lilly et al, 2015; Kramer and Michalowski, 2005; Dorling et al, 2005). Some researchers contend the concept of corporate crime should only refer to criminal convictions and violations of the law (Shapiro, 1983). However, as the laws of home and host country differ coupled with the ability of corporations to influence the legal system in their favour (Kramer and Michalowski, 2005), other scholars assert the definition of crime needs to include violations of civil, regulatory as well as criminal statutes (Clinard and Yeager, 2006, 1980; Sutherland, 1940, 1949, 1983; Paternoster and Simpson, 1993). Still others declare that state statutes are too narrow in definition and advocate for the definition of crime to be informed by the concept of social harm (Dorling et al, 2005) or human rights (Ruggie, 2008; Kramer and Michalowski, 2005).

3.3.4: The risks of harmful corporate action

Lastly, there is an element of risk to host countries that TNCs will bring harm, cost and/or crime. Much of the risk depends on the legal and regulatory framework of the host country which can serve to mitigate harm and crime (OECD, 2002). Risk is also context specific to the industrial sector and the type of firm which will be explored in an upcoming section. Having explored corporate harm, cost, crime and risk it will be helpful to explore theories of corporate crime as doing so will shed light on how and why corporations act in deleterious ways.

3.3.5: Theories of corporate crime: Organisational culture, strain and opportunity, rational choice and state-corporate crime

There are various criminological theories that help to explain corporate crime. This section will discuss four variations of corporate crime theory relating to organisational culture, organisational strain and opportunity, rational choice and state-corporate crime. Corporate crime as a result of the culture of corporations

One of Sutherland’s contributions to the genre of corporate crime stressed the culture of corporations can be criminogenic and serve to influence employees to break the law to further organisational goals (Lilly et al, 2015). Similarly, Clinard and Yeager (2006; 1980, p.58) in their classic study Corporate Crime furthered the idea that the “culture of the corporation” facilitates criminal behaviour. They demonstrated that corporations are rife with “rationalizations” or beliefs that the laws which regulate corporations can be adhered to selectively (Clinard and Yeager, 1980, p.68). Examples of rationalisations include the belief that free market capitalism renders government regulation invalid or that law violations are unavoidable if regulations are complex (Lilly et al, 2015). Corporations are able to neutralise conceptions of illegality and injurious actions by the beliefs they endorse such as government regulations unfairly impede the right of business to make profit (Benson and Simpson, 2015, 2009; Lilly et al, 2015). Corporate crime as a result of strain and opportunity

Another tenet of corporate crime theory examines the normalisation of deviance (Vaughan, 1996). The crash of the US Space Shuttle Challenger in 1986 launched criminological investigations into corporate crime as significant safety risks were known to the manufacturer of the shuttle as well as NASA but the decision to launch was made despite the grave risks (Vaughan, 1996; Kramer, 1992). One explanation as to why corporations take unacceptable and dangerous risks, according to Diane Vaughan (1996, p.196), relates to the “culture of production” where intense production and performance pressures, deadlines, and cost savings spur businesses to take risks. Vaughan (1996) argued that risk taking as a result of production pressures becomes normalised and, ultimately, the ‘normalisation of deviance’ occurs whereby the perception of danger is neutralised. Lilly et al (2015) explicate that Vaughan’s theory provides valuable insight into corporate criminal negligence.

In line with Vaughan’s (1996) culture of production theory, several researchers examined corporate harm by looking at organisational strain and opportunity. Conventional conceptions of strain theory were used in criminology to explain street crime and delinquency which, the theory holds, occurs when an individual’s goal for upward mobility are blocked and the strain from this blockage results in criminal behaviour (Lilly et al, 2015). However, some criminologists began to apply strain theory to corporate crime (Yeager and Simpson, 2009; Croall, 2001, 1992; Vaughan, 1998). As businesses are under constant pressure to make profit and meet organisational goals, they experience strain when goal attainment is blocked and may undertake harmful and criminal actions to achieve their goals (Yeager and Simpson, 2009). The intense emphasis on profit accumulation can go further than strain, researchers argue, to create anomie whereby the norms promoting legitimate behaviour breaks down (Messner and Rosenfeld, 2012; Passas, 2010; Vaughan, 1998; Lilly et al, 2015). When anomie is prevalent in business, goal attainment is the priority and attainment is achieved by any means necessary, whether legal or illegal (Messner and Rosenfeld, 2012; Lilly et al, 2015).

Corporate strain describes motivation but as Yeager and Simpson (2009) emphasise, corporate crime will not proceed without opportunity and choice. Benson and Simpson (2015, 2009) devised an opportunity approach that helps to explain white-collar crime which can help to shed light on motivations of corporate crime. Benson and Simpson (2015, 2009) contend that white-collar crime has three distinctive characteristics. First the offender has legitimate access to the location of the crime. Second, the offender is spatially separated from the victims of the crime. Third, their actions have an apparent appearance of legitimacy. Foreign investment via TNCs could certainly display these characteristics in that TNCs have legitimate access to host country locations, corporate decision makers are often located far from the people their decisions will impact and the power and financial clout of TNCs gives the impression that their actions are legitimate and cannot be challenged. Corporate crime as a result of rational choice

Organisational culture, strain and opportunity help to explicate motivation and opportunity for deleterious corporate behaviour but what about the decision-making process to behave in harmful and criminal ways? How and why do corporations make decisions that victimise people and the environment? Paternoster and Simpson’s (1993) rational choice theory of corporate crime is particularly helpful in understanding why corporate decision makers conduct actions that result in social harm. Traditional deterrence models stipulate that the greater the certainty and severity of punishment the less likely decision makers will act in criminal ways (Paternoster and Simpson, 1993). However, Paternoster and Simpson (1993) extend this model in two main ways. They argue decision makers take into account both formal and informal consequences and weigh these risks against the perceived benefits of malfeasance. In regards to the former, Paternoster and Simpson (1993) argued that informal sanctions such as negative publicity or damage to corporate reputation are equally, if not more, concerning to corporations than formal penalties and sanctions. Other forms of informal sanctions include moral costs and self-imposed sanctions such as loss of self-esteem (Paternoster and Simpson, 1993). In regards to the latter, an important aspect of Paternoster and Simpson’s (1993) rational choice theory is that corporations will also compare the costs and expense of complying with law to the benefits of not complying. They argue that corporations often break the law not in direct expectation of advancement but, rather, to avoid what is considered an expensive and avoidable cost of compliance. In other words, some regulations are perceived as too costly to follow. Examples of perceived corporate benefit include greater market share, increased worker productivity, lower production cost, increased profit and reduced health and safety expenses (Paternoster and Simpson, 1993; Lilly et al, 2015). It is important to note that this theory is a subjective utility theory of corporate crime. That is, it is concerned with the perceived costs and benefits not the objective costs and benefits (Paternoster and Simpson, 1993). In addition, Paternoster and Simpson (1993, p.45) hold, when considering the potential consequences and benefits, corporate decision makers use moral evaluations that define the acceptability of particular actions in particular instances or “moral rules-in-use”:

Moral beliefs or moral rules-in-use are related to but conceptually distinct from the notion of a perceived sense of legitimacy of the rules and rule enforcers. We argue that corporate decision makers will be less inclined to comply with rules and regulations they perceive as unreasonable or capricious (emphasis in original).

Given the above, Paternoster and Simpson (1993) outlined six conditions that help predict the likelihood that corporate crime will occur. Corporate crime is more likely when decision makers: (1) perceive that formal and informal sanctions will be weak, (2) do not experience a loss of self-respect, (3) have internalised situational rules-in-use that justify the act, (4) perceive the regulations as unreasonable or capricious, (5) weigh the costs of compliance as well as the benefits of noncompliance as great, (6) have offended in the past.

These then are examples of corporate crime theories that help explicate how and why corporations make decisions that are socially harmful and criminal. However, Ronald Kramer and Michael Michalowski (1990) argued that it was unlikely that corporations would commit criminal acts without assistance (either commission or omission) from the state. The last theory to be explored here is state-corporate crime. Crime as state-corporate crime

Until Kramer and Michalowski’s (1990) conception of state-corporate crime, criminology separated these crimes into two distinct categories (Bruce and Becker, 2007; Rothe and Friedrichs, 2006). State crime is defined as:

…any action that violates public international law, international criminal law, or domestic law when these actions are committed by individuals acting in official or covert capacity as agents of the state pursuant to expressed or implied orders of the state, or resulting from state failure to exercise due diligence over the actions of its agents (Rothe and Friedrichs, 2006, p.151).

However, Kramer et al (2002, p.263) conceptualised the state and the corporation working together to partake in criminal activities and devised the concept of state-corporate crime as:

…criminal acts that occur when one or more institutions of political governance pursue a goal in direct cooperation with one or more institutions of production and distribution.

Kramer et al (2002) distinguished between two types of state-corporate crime: state-initiated corporate crime and state-facilitated corporate crime. State-initiated corporate crime occurs when corporations who are employed by the state partake in ‘organisational deviance’ either at the direction or tacit approval of the state (Kramer et al, 2002, p.271). By specifying ‘organisational deviance’, this definition appears to advocate a definition of corporate crime that uses conceptions of social harm rather than simply violations of the law thus making it a much more inclusive definition of crime. State-facilitated corporate crime underscores the passive role that the state can take in committing crimes by omission. Kramer et al (2002) explain that state-facilitated corporate crime:

…occurs when government regulatory institutions fail to restrain deviant business activities, either because of direct collusion between business and government or because they adhere to shared goals whose attainment would be hampered by aggressive regulation.

Thus, for example, when host governments turn a blind eye to the failure of corporations to follow regulations because they want to create a business friendly environment and attract FDI, the social harm that results from this negligence—according to this theory—is a result of the complicity of the state in a state-facilitated corporate crime.

Kauzlarich et al (2003, p.248) add to the theory of state-corporate crime by devising a complicity continuum for both state commissions and omissions. The model explores differences in state action or inaction according to the extent in which harm results from direct intention. The continuum consists of four discrete divisions of crime:

  1. Explicit acts of commission occur when the state acts deliberately toward clearly specified goals.

  2. Implicit acts of commission occur when state agencies provide tacit support of actions which result in social harm though participation is more indirect.

  3. Explicit acts of omission occur when the state disregards unsafe and dangerous conditions when it has a clear mandate and responsibility to make a situation or context safe.

  4. Implicit acts of omission occur when the state neglects to ameliorate general harmful social conditions.

Bruce and Becker (2007) examine the harms caused to plant workers and the environment at the Paducah Gaseous Diffusion Plant in Paducah, Kentucky and conclude the harms committed are an example of state-corporate crime. Their findings extend Kramer et al’s (2002) theory to demonstrate that, in their case, the role of the state in the Paducah crimes evolved from that of an instigator to facilitator.

Given the above, it is important to note that corporate crime is under-researched in criminology and sociology (Tombs and Whyte, 2003; Bruce and Becker, 2007; Rothe and Friedrichs, 2006). It is largely recognised now that crimes that are committed by corporations have far greater economic, physical and social costs in comparison to street crime:

…yet this pressing aspect of social reality is generally ignored, or at best the subject of empty, gestural acknowledgment in current research, writing, and commentary on crime and criminal justice (Tombs and Whyte, 2003, p. 3).

Tombs and Whyte (2003) explicate that this is, in part, due to the ability of the powerful to evade critical examination. The difficulties in examining corporation harm will be explored further in the upcoming Methodology chapter.

Having examined issues of corporate harm, costs, risks and crime, the following section will explore how corporations have attempted to combat the widespread condemnation of corporate harm with corporate social responsibility.

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