February 2002

Guest Feature:

Transnational Corporations, see CSR and Third World Development

The last 25 years have witnessed a sea change in the perception of policy-makers and specialists on the role of transnationals in development. For the first three decades after the Second World War, there was much emphasis in international discussions on how to control the operations of transnational enterprises. This was best symbolized by the New International Economic Order that the developing countries advocated strongly in the 1970s. A key demand was the right of developing countries to acquire sovereignty over natural resources and to nationalize foreign companies. Repeated efforts were also made to negotiate codes of conduct on transnationals and transfer of technology in order to eliminate what were described as restrictive practices. The new attitude to transnationals is best illustrated by the Chinese experience. China has gone a full circle from regarding foreign companies as agents of imperialism to welcoming them with a warm embrace. And despite its communist system, the country has become far and away the largest recipient of foreign direct investment in the developing world.

This change in policy towards transnationals is mainly due to the discrediting of state ownership and control of enterprises and of excessive regulation of the economy. It is part of the shift world-wide in favour of reliance on markets and private enterprise as engines of economic growth. Countries of all political hues are bending over backwards to court foreign investment and compete with one another in the incentives they offer to attract transnationals. As a result, the private capital flows to developing countries have soared from an annual average of around $50 billion in the early 1980s to about $250 billion in the late 1990s.


Foreign direct investment is now considered as a panacea for poverty reduction and accelerated development, but the reality is more complex. While a few countries have benefited significantly in terms of economic growth, employment generation and poverty reduction because of foreign investment, for the great majority it has made little or no difference. Foreign investment has been concentrated in a handful of countries with more advanced economies, large markets and mining resources. Smaller countries, even if they get all the policies right, have failed to attract significant amounts of investment. This should not be a surprise, as foreign investment only goes to places where it can make adequate profits. The other limitation is that in most countries, the bulk of the benefits generated are captured by transnationals. Unless they have a diversified economy, the benefits to these countries consist only of the wages paid to workers- these are by definition modest. And even these may be offset by the multitude of incentives countries offer to attract foreign investment.


In recent years, people have been turning to transnationals to solicit their contribution to development over and above through investment. There is increasing realization that while developing country governments, donor agencies and multilateral organizations are trapped for resources, the transnationals dispose of formidable resources of knowledge, innovative capabilities, professional, technical and managerial skills, technology, finance, marketing, public relations and advertising. If only a tiny fraction of them could be devoted to promoting development, the results might be astounding. A whole plethora of schemes have been devised to tap the contribution of transnationals. These include greater sensitivity of transnational corporations to social and environmental norms, the institution of voluntary corporate codes of conduct and the growth of ethical investment. In one way or another, they ask corporations to behave in ‘a socially responsible way’.

The global compact promoted by the UN Secretary General, for instance, asks corporations to sign on to observing internationally accepted human rights and labour standards and environmental norms. These require adherence to minimum wage laws, freedom of association for workers, observance of safety and health regulations, prevention of pollution, safeguarding of biodiversity and natural resources and other norms and rules incorporated in international treaties and conventions.

There is no doubt that such initiatives can make a useful contribution to social development and environmental protection. But the greater potential contribution of transnationals to accelerated development lies in the use of their unique resources to directly support poverty reduction and human development activities. These cover a wide terrain comprising primary health care, literacy, basic education, technical and vocational training, entrepreneurial development, assistance to micro-enterprises, development of new vaccines and drugs against tropical diseases and support of initiatives that hold promise for breakthroughs for poverty reduction and human development. In other words, the proposal is for corporations to allocate a tiny fraction of their resources to promote activities beneficial to humanity in the manner of non-profit foundations with global programmes. The vital difference is that corporations can bring their extraordinary resources to devising new approaches and to replicating and spreading them world-wide. While some corporations support activities of this nature, this is miniscule in relation to their resources.

The sceptics, perhaps rightly, dismiss such proposals as wishful thinking. Corporations are in the business of making profits. Their entire structure and mode of operation are geared to profit making. And especially in this age of ruthless competition where share values are all that counts for the management and the shareholders, support for non-profit activities might appear as unnecessary diversion from their main mission. While this seems a correct appreciation of reality, there are forces at work that might bring about some modifications in the working of the vanguard of the contemporary capitalist system. There is growing world-wide resistance to glaring inequalities at global and national levels and to ever increasing power and influence of transnationals. At the same time, mass misery and spreading hopelessness, especially among the youth in a large number of countries, constitute fertile ground for disorder, instability, terrorism and crime. Transnationals that need stability and order for their operations can hardly be indifferent to these dangerous trends in many parts of the world. But resistance and fear may not be enough to bring about significant changes in the motivation that drives corporate operations. It must be supplemented by appeals to enlightened long-term self-interest and ultimately to their responsibility as global corporate citizens.

[Contributed by Dharam Ghai, former Director, United Nations Research Institute for Social Development (UNRISD), and Advisor, International Institute of Labour Studies, ILO, Geneva.]