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Multinational Corporations and Foreign Direct InvestmentAvoiding Simplicity, Embracing Complexity$

Stephen D. Cohen

Print publication date: 2007

Print ISBN-13: 9780195179354

Published to Oxford Scholarship Online: May 2007

DOI: 10.1093/acprof:oso/9780195179354.001.0001

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 An Agenda for Future Action

 An Agenda for Future Action

Chapter:
(p.355) 15 An Agenda for Future Action
Source:
Multinational Corporations and Foreign Direct Investment
Author(s):

Stephen D. Cohen

Publisher:
Oxford University Press
DOI:10.1093/acprof:oso/9780195179354.003.0016

Abstract and Keywords

The more accurate and relevant assessment of MNCs and FDI offered in this book aim to play a role in reconciling the heretofore irreconcilable black-and-white positions on their positive or negative effects. This chapter builds on the thesis that these phenomena are heterogeneous, and therefore critical assessments must be disaggregated according to circumstances. The recommendations presented here for future academic study and policy debates center on the desirability of recognizing the diversity of the subject in general and the spectrum of very high quality inward FDI to very low quality, emphasizing the inclusiveness of actors playing a role in the regulation of MNCs, and acknowledging the legitimate complaints against international business operations articulated by critics of globalization.

Keywords:   transparency, non-government organizations, heterogeneity, disaggregation

The dual objectives of this book are to offer a more accurate understanding of the diverse nature and effects of foreign direct investment (FDI) and multinational corporations (MNCs) and to stimulate a more relevant public policy discussion. These objectives are based on the author's belief that past portrayals of these phenomena do not do justice to their nature, effects, or importance domestically and internationally. This situation is not the result of indifference or deliberate design. The sheer breadth and complexity of these mostly abstract subjects is partly responsible. But so, too, is the mutual failure of the two contesting schools of thought to appreciate that both are partially correct, partially wrong, and partially beside the point. The unacknowledged subliminal roles of perceptions and ideology in shaping what passes for reality perpetuate an endless cycle of irreconcilable, often oversimplified claims and counterclaims that perpetuates a divisive, stagnant, unshakeable, and ultimately unnecessary stalemate. It is as if the advocates and critics of FDI and MNCs each donned blindfolds, touched a few parts of the metaphorical elephant, came to contradictory conclusions as to its total nature and impact, and stubbornly rejected any need to accommodate the other's assessment.

The proposals that follow are designed to serve the aforementioned objectives of this study. They were formulated in the hope that, if well received, they would contribute to a better understanding of the subject and better public policies, both of which would serve the common good.

1. The two ends of the political spectrum and all in between should accept the overwhelming likelihood that on virtually every significant issue involving these international business phenomena, different perceptions of reality will create four legitimate sets of conclusions: positive, negative, neutral, and indeterminate. Their relative validity and relevance will differ according to circumstances. This “quadruple bottom line” approach likely will be increasingly appropriate in the (p.356) future as forms of FDI and MNCs become ever more diverse and transitory in composition. Multinationals will continue to change and evolve as long as external stimuli keep changing. Analysis of FDI and MNCs needs to be aware of and keep pace with these changes. This is unlikely given the current propensity of most interested citizens, government officials, business executives, and researchers to employ faulty methodology. Like the blind men in the parable, they feel rather than see. They focus on narrow aspects of the process of FDI or on particular MNCs and then extrapolate well beyond their data base. At the end of the day, they still want to judge the merits of FDI and MNCs on an either/or basis. This is a flawed and oversimplified approach.

If objectivity and accuracy are what is being sought, the first‐best approach is to emphasize diversity, not seek an all‐inclusive prototype. This stands a better chance of narrowing the chasm between supporters and critics than continuation of the status quo. The real‐world policy dialogue would then be in a better position to devise win‐win rules and procedures that will increase the benefits of FDI as well as reduce its costs—to home and host countries, and to workers and owners of capital.

2. Pay less attention to one‐size‐fits‐all positive or negative evaluations of the nature and impact of the entire universe of FDI and MNCs. Accept the compelling evidence of inherent heterogeneity and the fallacy of sweeping generalizations. Resist the idea that there is a homogenous composite enabling a simple yes or no vote as to the overall desirability of MNCs. Discount all assessments and value judgments (including the ones in this book) regarding FDI and MNCs because of the near inevitability that statements about their nature and impact reflect to some extent the larger political values of beholders—values that differ and legitimately so.

Hard, incontrovertible truths on these subjects are in very short supply, but opinions based on limited data are not. As argued in chapter 4, there is no such thing as a standard or prototypical form of FDI or MNC. Measuring clear‐cut cause and effect relationships and isolating foreign investment activity from domestic economic activity is getting progressively more difficult. A report by the secretariat of the Asian Development Bank offered a superb summary explanation of why there is no such thing as a “typical” foreign‐owned subsidiary:

It is increasingly difficult to characterize and typify foreign [direct] investment. In most economies, it enters practically all sectors. It originates from industrial and developing economies … It ranges from the global investments of the world's largest corporations to smaller cross‐border investments. The distinction between foreign and domestic investment is increasingly blurred, especially when a country's diaspora [e.g., China] is actively involved. A world of increasingly seamless national boundaries also connotes highly fluid capital whose characteristics are often difficult to (p.357) discern. … In assessing the impact of FDI, a key issue is one of attribution, in the sense of discerning causality. … In most cases … causality appears to be either weak or nonexistent.1

3. Emphasize inclusiveness and transparency as the transcendent principles in all future efforts to reach multilateral consensus on new or more specific rights and obligations for both governments and MNCs. Government, business, and civil society should improve the means by which they communicate both quantitatively and qualitatively. A better understanding of the nuances of MNCs and FDI as well as mutual acceptance by these three “constituencies” of the proposition that none of them has anything close to a monopoly on wisdom about these phenomena can improve the communications process.

Maximum inclusiveness and transparency will not guarantee excellent policies and honorable behavior, but they will maximize checks and balances and provide maximum oversight of the major actors. Human beings are imperfect. Because institutions are composed of humans, they, too, are imperfect. Even the most respected organizations cannot guarantee that their leaders will not occasionally succumb to corrupt, greedy, narrow‐minded/self‐serving, or just plain stupid behavior. Leaders of any and all organizations—governmental, corporate, and nonprofit—have shown themselves capable of becoming intoxicated with power, overly righteous about their vision of the public good, or indifferent to the interests of the public at large. Some will continue to do so, even with tightened rules affecting the conduct of international business. “Rules exist to govern behavior, but rules cannot substitute for character.”2

4. Create an ongoing “quadralogue” among governments, business and nongovernmental organization (NGO) representatives, and academic and institute researchers. It would be charged with slowly but surely working through the trade‐offs necessary to achieve more specific, mutually advantageous multilateral FDI agreements affecting the behavior of both the private and official sectors. No critical need exists at present for immediate establishment of an FDI regime, and no master formula exists for resolving the deep philosophical differences toward the relative merits of MNCs. Nevertheless, a simple procedural change in the way that four key actors communicate with each other might at least partially loosen the Gordian knot choking off consensus on a proper allocation of rights and obligations for governmental policy making and MNC activities. Governments have talked mostly to other governments; MNCs have talked mostly to other companies (and occasionally to UN officials); NGOs, including labor unions, have mostly talked to other NGOs and periodically to MNCs; academicians and researchers have mostly talked to other academicians and researchers. The four constituent groups need to talk more extensively to one another and spend less time communicating only with counterparts.

(p.358) A kind of four cultures syndrome has materialized; it is characterized by an ineffective communications process that is sustained by turf‐protection concerns and distrust of the other three actors. Incredibly, no public record exists of any extended talks among representatives of all principal constituencies in the FDI/MNC debate being held to identify and broaden overlapping areas of agreement. A more formal and comprehensive multilateral consultative framework holds great promise for a more effective system than today's scatter‐shot collection of bilateral investment treaties and voluntary codes of conduct. Opinions about FDI and MNCs are entrenched and antagonistic, but they would not necessarily be impervious to a patient, friendlier four‐way dialogue. Because these opinions do not represent state‐of‐the‐art incisiveness, even a small reconciliation of their differences would be a step in the direction of mutual benefit.

A group comprised of respected, well‐informed representatives from business, government, NGOs, and academicians‐researchers agreeing to serve for an extended period of time should be convened on a permanent basis on neutral ground, perhaps a forum cohosted in Geneva by UNCTAD and the World Trade Organization. Participants in the quadralogue would be selected by the respective constituencies. Their mandate, with no fixed deadline, would be to compile a growing list of broadly defined but enforceable commitments that would be acceptable in principle to governments, MNCs, and relevant NGOs. The ultimate objective would be to reach enough agreements that a de facto multilateral FDI regime gradually emerges, one that would not necessarily be a cure‐all, just an improvement over the current patchwork quilt. No set of behavioral rules for MNCs will forever prevent determined executives from violating them and behaving in a manner detrimental to society. Nor can a multilateral agreement prevent determined political leaders from implementing “outlawed” FDI policies. A means of punishing violators does, however, create disincentives for taking actions outside of consensus‐based norms.

5. Give more attention to the thesis that not all incoming FDI is created equal: Any given foreign subsidiary can make invaluable contributions to domestic economic growth and rising incomes, and any given subsidiary can be more harmful than beneficial. Differences in the quality of individual foreign‐owned or ‐controlled subsidiaries should be the guiding principle in the formulation and administration of economic policies toward incoming FDI. These policies should recognize and respond appropriately to the wide range of differences in the nature and effects of the many forms of FDI and individual MNCs. Governments, especially those of relatively vulnerable (to the power of big MNCs) developing countries, should formulate policies that (1) distinguish between the types of FDI that are appropriate for their individual circumstances; (2) encourage the entry of FDI considered desirable, while discouraging or disallowing FDI considered less appropriate to the country; and (3) make FDI policies serve wider national objectives and development needs.3

(p.359) 6. Developing countries on a case‐by‐case basis should consider adopting a nonpolitical system of screening inward FDI to discourage the least desirable investment projects and encourage potential foreign investors to design a mutually beneficial investment project to improve its chances of gaining government approval. An efficient form of screening run by technocrats can allay at least some of the concerns about MNC exploitation of less developed countries (LDCs) while not significantly antagonizing potential foreign investors. International organizations, such as the World Bank or UNCTAD, should consider providing free technical training programs for the people who will judge applications in nonindustrialized countries. The target audience would be government and private sector technocrats; the subject matter would focus on creation and operation of a government‐sanctioned facility, perhaps with private sector input, to screen applications for incoming FDI on a quick, professional, and nonpolitical basis. The more advanced developing countries that can afford to be selective should look to the techniques used by the investment promotion agencies of Ireland, Singapore, and Costa Rica as the gold standard for attracting relatively high‐quality FDI. The least developed countries presumably need to be less selective in allowing incoming manufacturing FDI, but they still could impose a screening process and more stringent regulatory conditions on extractive MNCs.

Developing countries would disproportionately benefit if the proposed quadralogue could devise meaningful multilateral restraints on the ability of governments to extend overly generous financial incentives to foreign‐owned companies looking for investment sites. If the “no one wants to disarm first” syndrome can be overcome through concerted action, more taxpayers' money can be channeled from large corporations' bottom lines to serve domestic goals with potentially higher long‐term pay‐offs, for example, improved human capital and physical infrastructure.

7. Appreciate the critical need to preserve and maximize competition among the larger MNCs. There is probably no stopping them from growing ever bigger in size and increasing global market shares for their goods and services as they respond to competitive pressures and follow economies of scale strategies to minimize production costs and maximize profitability. This absolutely does not mean that passive government acquiescence to corporate gigantism is acceptable. Because further cross‐border mergers of already large MNC manufacturers suggest further concentration (few major competitors) in key industries,4 all countries have an interest in ensuring vigorous enforcement of reasonably comparable national antitrust laws. Governments should increase their ability to identify collusion among corporate giants. Discouraging collusion and promoting transparency and inclusiveness will improve the world's chances to maximize the benefits and minimize the costs of FDI and MNCs. Big corporations per se are not a problem, argues Swedish economist Johan Norberg, as long as they are exposed to competition that (p.360) threatens to harm them financially should they “turn out products inferior to or more expensive than those of other firms. What we have to fear is not size but monopoly.”5

8. Encourage the poorest LDCs to embrace the economic priorities practiced by the more advanced emerging market economies: Before seeking incoming FDI, they should get the domestic and economic fundamentals right, that is, enhance human capital and create the good governance and private sector‐accommodating environment that has had a high statistical correlation with increased economic growth and rising growth rates. LDCs “should provide a stable, noninflationary, micro and macroeconomic environment, with appropriate legal and regulatory infrastructure, that rewards both domestic and foreign investment.”6 These countries should accept the abundant evidence that a domestic order that repels inward FDI or a policy stance that systematically excludes or limits it, is unlikely to be an order that can successfully generate sustained economic development and poverty reduction. Developing countries should also be guided by the proposition that the more vibrant the domestic business sector, the more likely incoming foreign subsidiaries will forge links with the domestic economy by procuring locally produced goods and services. Courting MNCs, however, should not require these governments to capitulate to costly and egregiously self‐serving corporate demands for economic concessions.

9. Address the legitimate criticisms of the antiglobalization movement. Judgments on the relative merits of MNCs are properly made in the larger context of attitudes toward globalization. This is a mega‐trend that promises continued economic prosperity for many people, but not all and perhaps not even for most people. It is a trend that probably cannot be reversed short of causing grievous economic harm on a worldwide basis. Internationalization of production arguably is preferable to the alternatives, but increased efforts are necessary to ameliorate its more egregiously undesirable features—beginning with efforts to stabilize the widening gap between beneficiaries and victims of globalization.

It is disingenuous and counterproductive to ignore the fact that some people and some communities have been and will be economically disadvantaged by forces unleashed by globalization. Although it is inevitable that a relatively small number of entrepreneurs, investors, and executives will gain disproportionately from globalization, more ought to be done to strengthen the social safety nets that soften the financial distress of those that have been harmed. In political terms, market‐oriented international economic policies are put at risk if increasing numbers of people perceive that the system worships profits and views workers as expendable inputs. Market‐oriented policies will be attacked by people who believe that at the same time their standard of living is stagnant and their job security is declining, the wealthy minority is getting steadily richer—absolutely and relatively. “Employment insurance” could be provided to significantly offset lost wages and benefits (e.g., health care and pensions) suffered by the relatively few workers displaced by (p.361) MNC production shifts or increased imports and unable to find suitable new jobs. It would be a win‐win situation if these benefits included enhanced technical training designed to make less skilled workers more employable and elevate them to the ranks of those having a positive stake in the trend toward greater internationalization of production. The response to those that say such a program would be too expensive is that it would be cheaper than imposition of what effectively is a sales tax on all consumers when imports are restricted or cost‐reducing MNC production shifts are blocked by governmental fiat.

10. Intensify the research agenda on the FDI/MNC phenomena in both qualitative and quantitative terms. Although it is unlikely we will ever definitively know all that would be useful to know, a moderate increase in understanding these phenomena more likely than not will demonstrate the heterogeneity and variability of FDI and MNCs rather than perpetuate the false and distracting notion that their nature and impact is overwhelmingly good or bad on an all‐inclusive basis. A number of priority research topics present themselves. The variables determining whether a direct investment project will be high quality and beneficial, marginal, or low quality and costly to the host country need to be more clearly identified. A related question is whether any statistical relationship can be found between the arrival of certain kinds of investment by certain kinds of companies and above‐average increases in growth and per capita income in host countries. Another worthy effort would be increasing our understanding of how the domestic variables of human capital and the economic and political environment affect the success or failure of incoming foreign subsidiaries. Other important factors that need to be better understood are the numbers and relative pay scales of jobs created by incoming foreign‐owned subsidiaries, the relative importance of factors that MNC executives find appealing and repelling for specific kinds of direct investments, and what have been the effects, good and bad, of incoming FDI on domestic competitors in host countries.

Governments should spend a modest amount of additional money to improve the data on FDI flows and the monetary value of cumulative inward and outward direct investments. Governments should also expend the nominal amount of effort that would be necessary to bring greater worldwide uniformity to definitions and measurement criteria. Governments should collect data (on a confidential basis) from foreign‐owned subsidiaries located within their jurisdiction to more fully and accurately measure the flows of hard currency these subsidiaries both bring into host countries and remit overseas. At a nominal cost, this procedure would provide valuable insights into the domestic and balance of payments impacts of inward FDI. Similarly, a better understanding of FDI's effects on foreign trade could be gained if countries required confidential reporting on the imports and exports of inward direct investments and published the aggregate results.

(p.362) A detailed, case‐by‐case examination of thousands of overseas subsidiaries in lower income countries to determine the extent (if any) that each increased the number of relatively high‐paying jobs, transferred state‐of‐the‐art technology, established linkage to domestically owned businesses, increased exports, and encouraged subsequent FDI inflows would be illuminating. Although no quick, easy, or inexpensive task, such a study could geometrically increase our relatively limited understanding of how well or how poorly—and under what circumstances—the various kinds of multinationals have boosted economic performance in those LDCs where they have a significant presence. Another addition to the research agenda of the larger industrial countries should be a comprehensive examination of the push and pull factors responsible for companies closing entire plants and moving production to overseas subsidiaries. It also would be useful to have greater insights into how frequently this has occurred and to give more thought to remedial policies in the home country that might ease the plight of at‐risk workers.

Hopefully, foundations, corporations, and governments will support an expanded research effort in the belief that the advancement to knowledge about a very important but inadequately understood set of public policy issues would be worth far more than the costs.

11. Encourage the use of innovative ideas to assist the least developed countries to attract and reap the benefits of incoming FDI (assuming willingness to simultaneously address internal shortcomings). Relatively wealthy countries should consider reducing the corporate tax rates on profits remitted from designated LDCs, including export‐processing zones, as an incentive to invest in them. The World Bank and other regional development banks should establish additional programs in the poorest countries similar to the Bank's initiative to counter corruption in Chad. It was designed to ensure a minimum percentage of the country's revenues from foreign oil companies is transferred directly into escrow‐like accounts to benefit the current and future population rather than being diverted into the pockets of the elites or used to buy military equipment and weapons. A stipulated percentage of Chad's oil bonanza is to be earmarked for externally administered accounts divided between those designated for current development projects and poverty alleviation programs and one reserved for future use after oil reserves are depleted. The peoples of other poor countries hosting big money extractive FDI would surely benefit from a similar version of externally controlled bank accounts.7

A Closing Thought

To describe the nature and impact of FDI/MNCs in all‐encompassing or immutable terms is to repeat the mistakes of the blind men separately touching (p.363) individual parts of the elephant. A full and proper appreciation of these animals requires observers to scrutinize and compare all major physical and behavioral characteristics of all species of elephants. Moving from metaphor to specifics, the best way to assess FDI and MNCs is to accept the thesis that the appropriate answer to most of the important questions about them is “it depends.” Disaggregation and appreciation of the heterogeneity of these complex and dynamic phenomena can lead to more accurate insights into their nature and effects as well as to the most appropriate policy responses. An analysis of FDI and MNCs that mislabels perceptions as fact and proffers wobbly generalizations to prove its arguments is “irrelephant.”

(p.364)

Notes:

(1.)  Asian Development Bank, Asian Development Outlook 2004, pp. 259–60, available online at http://www.adb.org/Documents/Books/ADO/2004/part030000.asp; accessed July 2005.

(2.)  Alan Greenspan, “Commencement Address,” May 15, 2005, Board of Governors press release, p. 5.

(3.)  Martin Khor, “Globalization and the South: Some Critical Issues,” UNCTAD Discussion Paper no. 147, April 2000, p. 44, available online at http://www.unctad.org/en/docs/dp_147.en.pdf; accessed September 2004.

(4.)  In the early weeks of 2006 alone, press reports indicated that Mittal Steel had made an offer to buy Arcelor, the world's second largest steelmaker; if consummated this could lead to further consolidation in the world's steel industry. In addition, General Electric and Hitachi, both large producers of nuclear reactors, made a joint bid to take control of Westinghouse Electric, a major British nuclear technology company.

(5.)  Johan Norberg, In Defense of Globalization (Washington, DC: Cato Institute, 2003), p. 210.

(6.)  Theodore H. Moran, Foreign Direct Investment and Development (Washington, DC: Institute for International Economics, 1998), p. 29.

(7.)  The program early on ran into major complications. Chad's government demanded that the amount of cash earmarked for the escrow accounts be reduced and transferred to current expenditures.