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

: Corporate social responsibility

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3.4: Corporate social responsibility

Widespread and high profile occurrences of corporate harm and crime helped to promote massive protests at large IGO meetings as well as prompted successful worldwide boycotts of particular global brands (Klein, 2001; Richter, 2001; Stiglitz, 2004, 2006). The extensive public condemnation of corporate harm helped to promote global political actors such as IGOs, NGOs, civil society organisations (CSOs) as well as TNCs to look to new alternative methods of controlling corporate behaviour (Utting, 2005; Farnsworth, 2014). The result was a movement focused on CSR (Haynes et al, 2013). Farnsworth (2014, p. 93) defines CSR as:

…a range of business initiatives and policies that contributes positively to the welfare of a company’s stakeholders, whether employees, consumers or their communities, while maintaining the interests of another set of corporate stakeholders – its shareholders.

Marques and Utting (2010, p.4) explain that both IGOs and development communities called upon TNCs to employ their competencies and ingenuity in ways more directly linked to inclusive growth in developing countries:

The CSR agenda promoted an ever-widening range of reforms and voluntary initiatives. These included the setting of social and environmental standards; development of various monitoring, reporting and verification mechanisms; consultation and engagement with different stakeholders; and assistance to local communities.

CSR is argued to decrease the level of corporate harm and such practices gain varying degrees of support from a range of business and business organisations, IGOs, state governments, and sections of civil society (O’Brien and Williams, 2007, 2013; Haynes et al, 2013). However, CSR also draws strong scepticism from critics (Jenkins, 2005; Haufler, 2000; Haynes et al, 2013). Part of the scepticism and criticism of CSR argues that corporations only became involved in CSR when threatened with stricter regulation thus making it a disingenuous movement on the part of business (Jenkins, 2005; Farnsworth, 2014). It is argued that corporations acted pre-emptively to international demands for imposed regulation and emphasised their willingness to voluntarily promote social responsibility which served to starve off enforceable regulation at the international level (Jenkins, 2005; Haufler, 2000; Haynes et al, 2013). However, it is important to note that the voluntary nature of CSR has often been supported by developing countries themselves (Farnsworth, 2014; Holden, 2014). Issues of state sovereignty have prevented IGOs from intervening and demanding that a country strictly follow international treaties such as the Global Compact which attempts to foster fundamental principles in the areas of human rights, labour rights and environmental law (Farnsworth, 2014). In the past when trade unions and high income countries have attempted to tie labour conditions to trade agreements within the WTO, developing countries have often refused and accused high income countries of attempting ‘back door protectionism’ as lower wages and relaxed regulations are argued to be a component of their competitive advantage over high income countries (Holden, 2014).

There are a number of voluntary or self-regulated initiatives for good corporate behaviour that were constructed and promoted by IGOs such as the UN, OECD, EU, and ILO. The UN’s Global Compact is an example of a CSR initiative (Farnsworth, 2014). However, as Farnsworth (2014) argues, as these initiatives are voluntary, the potential to influence corporate behaviour will remain context specific to several factors including the ownership of the firm; the regulatory environment in which it operates; the relative strength of labour groups, NGOs, and CSOs; and the extent of public scrutiny.

Having discussed general issues of corporate harm and CSR that are applicable to all firms, it will be helpful to explore the issues of harm that are specific to particular types of firms. As stated above, different types of firms carry various potential risks and benefits for host countries that are often context specific to the type of firm (Dunning, 2002, 2008; Chang, 2003; Farnsworth, 2004, 2010). The next subsection will highlight types of TNCs before moving on to look at the impact specific types of TNCs can have on the social welfare of citizens within developing countries.

3.5: Types of TNCs and the implications for social policy within developing countries

The basic rationale for utilisation of FDI by firms is to either increase or protect their profitability and/or capital value (Dunning, 1997a, 2002, 2008; UNCTAD, 2006; Forsgren, 2013). TNCs accomplish this goal by using FDI to either better exploit their existing competitive advantages or protect or increase their advantage (Dunning, 2002, 2008; UNCTAD, 2006; Forsgren, 2013). By utilising one or many of their advantages, the TNC is employing a strategy known as ‘asset exploiting’ and will choose a host location for its investment based on one or more of three motivations: to seek new markets, to raise the level of the firm’s efficiency, and/or to source better quality input resources such as natural resources, skilled labour, good quality infrastructure, etc. (Dunning, 2002, 2008; UNCTAD, 2006; Forsgren, 2013). When a company seeks new markets, this type of firm or investment strategy is referred to as market seeking (Dunning, 2002, 2008; UNCTAD, 2006; Forsgren, 2013). Market seeking firms may choose new markets based on the number of consumers or they may choose markets which are close in proximity to domestic markets and/or are similar and familiar to domestic markets in terms of culture and language, etc. (UNCTAD, 2006). Efficiency seeking FDI is investment that takes advantage of differences in the availability and costs of resources within a country (Dunning, 2002, 2008; Forsgren, 2013). Often, the term ‘efficiency seeking’ is associated with firms looking for lower cost labour and common examples of efficiency seeking firms are garments and electrical products (UNCTAD, 2006). Resource seeking is the third type of asset seeking motivation and occurs when firms internationalise to source better quality or cheaper inputs of production such as land, labour, capital and natural resources (Dunning, 2002, 2008; UNCTAD, 2006; Forsgren, 2013). Resource seeking firms are often associated with natural resources whereby firms are based in the primary sector or in sectors directly connected to natural resources such as metal manufacturing. In contrast with asset exploiting TNCs, other firms may not possess the assets or comparative advantages to utilise the motivations listed above yet they do possess some advantages which enable them to invest abroad (Dunning, 2002, 2008; UNCTAD, 2006). These firms may internationalise operations in order to augment assets or acquire ‘strategic’ created assets such as technology, distribution networks, R&D capabilities, managerial competences, etc. (UNCTAD, 2006).

Both developed and developing countries create investment strategies that will encourage one or more of these types of firms to their domestic markets. State investment strategies will be explored further below (3.7). However for now it is important to understand that countries compete with one another for investment opportunity and the aforementioned types of firms that invest in the host economy will bring a different set of risks and benefits and create different implications for social welfare.

One major difference between types of firms is the type of labour needed for the business operation. Thomas (2011) explains that inward investment that requires cheap, unskilled, labour such as efficiency seeking firms can place downward pressure on social policy. The World Investment Report for 2006 explains that efficiency seeking firms in developing countries are often embedded in global value chains (GVCs) (see section are highly competitive and often embedded in labour intensive industries (UNCTAD, 2006). These types of firms are motivated:

…incessantly by competitive pressures, other cost reducing factors, including national and international policies can affect the location choice quite markedly (UNCTAD, 2006, p. 160).

Policies that increase minimum wages, for example, will adversely affect efficiency seeking firms’ motivation for lower costs. As efficiency seeking firms have lower sunk costs, they are more mobile and can shop around for the cheapest labour as well as use exit threats to influence policy construction that incorporate their preferences (Chang, 2003, 2014; Chang and Grabel, 2004).

As explained in Chapter Two (see section, often efficiency seeking firms are integrated into GVCs; they control the branding and marketing and contract the production of the product to low cost locations (Nathan and Kalpana, 2007; UNCTAD, 2006). Efficiency seeking firms and GVCs are connected with the establishment of export processing zones (EPZs) by host countries to try and attract this investment mainly for the export of manufactured goods (UNCTAD, 2013). EPZs are designated enclaves for business, in particular, foreign business and the production activities are not subject to the same tax rates in comparison with those in the rest of the economy (Yeates, 2001). EPZs are known for providing tax and financial incentives to business and, equally, for insecure and casual employment creation with low wages and, often, depressed workers’ rights (Yeates, 2001; Thomas, 2011). UNCTAD (2013) conclude that national polices will be of crucial importance to mitigating for potential costs and extracting benefits:

To mitigate the risks involved in GVC participation, these efforts should take place within a strong environmental, social and governance framework, with strengthened regulation and enforcement and capacity-building support to local firms for compliance (UNCTAD, 2013, p. xi).

On the other hand, resource seeking firms in need of higher skilled labour can place upper pressure on host economies to implement supportive educational programmes (Estevez-Abe et al, 2001; Farnsworth, 2010). Whereas resource seeking firms in need of mineral extracts will place different pressure on states and will bring a different set risks and advantages than those in need of highly skilled labour (Farnsworth, 2010).

Business needs continually evolve and may evolve into different policy preferences over time (Thomas, 2011; Farnsworth, 2010). Market seeking companies may be initially attracted to a host country and later in time become involved in the privatisation of public services and, thus, try and influence policy accordingly (Farnsworth, 2010). Market seeking firms may need to expand their consumer reach and benefit from the redistribution of income so that more consumers can buy their products and services and support policies of this nature (Farnsworth, 2010). Market seeking firms may also try to change consumer spending habits or change consumer preferences and, worse still, introduce and push inappropriate goods and services into the market (Richter, 2001). Thus, even within categories of types of firms, there are various outcomes as to the possible costs and benefits and implications to social welfare that business can bring to host economies and these may evolve into various policy needs as well.

Thus far much of the discussion has concentrated on the impact of business, business policy needs and preferences and the implications that TNCs have for social welfare in developing countries. However, the state has a large role to play in mediating the impact of FDI on its citizens and economies. As will be argued below, the state must provide environments that are conducive to both human and corporate welfare. How the state is able to balance making provisions for both equitably will influence the overall impact of corporations, on the social welfare of the host country. This is the topic of the next section.

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