CHAPTER 5: ROLE OF TRANSNATIONAL CORPORATIONS |
139. A significant feature of globalisation is the
increasing internationalisation of production. There are distinct
but related aspects. One is the growth of "production networks"
in which stages of production are outsourced to low wage economies.
The other is the role of the transnational corporation (TNC) and
foreign direct investment (FDI). First, however, we consider the
issue of measuring the power of TNCs.
Measuring the power of
140. Many witnesses focused on the presence and power
of TNCs in the global economy as the defining characteristic of
the current period of globalisation. According to Christian Aid,
"over the last 30 years, the number and size of TNCs has
increased dramatically. In 1970, there were 7,000 TNCs, whilst
today there are 63,000 parent companies operating with about 690,000
subsidiaries in almost all sectors, countries, industries and
economic activities in the world."
Donald McKinnon referred to TNCs as the "main drivers of
and beneficiaries from globalisation" (Ev 1, p 305). CAFOD
saw the "increasing size and dominance of transnational corporations"
as one of the main concerns about globalisation (Ev 1, p 339).
141. A theme which emerged from the evidence we received
is that TNCs are powerful and becoming ever more powerful. It
is not, however, at all clear how the power of TNCs is to be measured
or, for that matter, of what it actually consists. To demonstrate
the size of the most significant TNCs, some commentators compare
them to countries' economies. Christian Aid, for example, asserted
that "many TNCs are bigger than most countries in which they
operate. In 1998, the annual turnover of BP was larger than the
GDP of all the least developed countries combined".
142. Lord Browne, Group Chief Executive of BP plc,
was critical of this comparison between company turnover and a
country's GDP: he referred to it as an "abuse of data"
(Ev II, Q 1270). Sir Samuel Brittan similarly said: "It is
often said that large American companies ... [have] a higher turnover
than the GDP of Luxembourg or even Belgium, but these are completely
different entities." (Ev I, Q 593). Michael Kitson expressed
the same view (Ev I, Q 296).
143. A country's Gross Domestic Product is an aggregate
of value added - income payments to labour, capital and land -
whereas the sum total of a company's sales figures also includes
payments to other firms for intermediate goods. The two are not,
therefore, comparable. It is nonsensical to talk in such terms,
and to compare business turnover with value-added. It is likely,
therefore, that Martin Wolf is correct when he asserts that "corporations
are neither as big or as powerful as critics claim".
We note, however, that UNCTAD has recalculated TNCs sales in terms
of value added. They conclude that the value-added activities
of the 100 largest TNCs have grown faster than those of countries
in recent years, accounting for 4.3% of world GDP in 2000, compared
with 3.5% in 1990, and that 29 of the world's 100 largest economic
entities are TNCs, compared with 24 in 1990.
As Michael Kitson states, TNCs are "more powerful now than
they have been" (Ev I, Q 296) - they are powerful players
in the globalised economy and powerful forces in many national
economies. To anticipate our conclusion in paragraph 157 below,
what emerges from the evidence is that TNCs are powerful, but
their power is constrained.
TNCs and the economic
effects of FDI
144. Foreign direct investment flows have grown significantly
in recent years. According to the World Bank's world development
indicators, FDI by firms as a share of GDP increased between 1989
and 1999 from 2% of world GDP to 4.6%.
Sir Andrew Large referred to both the recent increase in trade
which, he said, over the last 10 years had increased fourfold
to $3 billion and to the even greater increase in FDI flows which
were $2 billion a year in the 1970s, increasing to $130 billion
in 2000 (Ev 1, p 293).
145. A benefit of FDI is that it makes the surplus
savings of some countries available to others where it will be
more productive and yield a higher return. It also promotes economic
development by acting as a mechanism for the transfer of technology
and skills from developed to developing countries. We received
a range of evidence in support of these views. The Confederation
of British Industry (CBI), for example, said: "
evidence that FDI has helped developing countries to achieve sustained
poverty reduction can be found in the contrast of the Asian Tigers,
which opened themselves to trade and investment, with the experience
of many African countries. Characterised by very low levels of
FDI, they continue to be dogged by persistent levels of poverty."
(Ev 1, pp 134-35). Clare Short was emphatic about the benefits
of FDI to developing countries: "In terms of the interests
of developing countries, responsible, foreign direct investment,
bringing technology transfer and improved infrastructure is absolutely
the key to them speeding up their economic development."
(Ev II, Q 2039). Nicholas Stern described FDI as "a powerful
force in support of growth" and "a powerful force in
terms of ideas, management, technology and so on." (Ev II,
146. The Department for Trade and Industry also referred
to the benefits - especially to developing countries - of the
technological spread facilitated by foreign direct investment
and the link between FDI and economic growth:
the economics of this debate is the
extent to which it is true that multinationals
them to host countries things which are likely to improve the
long-term rate of growth of that country's economy. The evidence
seems to be stronger for developing countries. The proposition
there is that they (developing countries) have a greater chance
of catching up
than if they did not have this new technology."
(Ev I, Q 20).
147. Peter Aven, President of the Alfa Bank in Russia,
and Kakha Bendookidze, Director General of United Heavy Machinery,
offered a Russian perspective. Mr Aven acknowledged that there
is an anxiety, expressed by the anti-globalisation movement, that
TNCs wield unaccountable power (Ev II, Q 1718). As far as the
Russian economy was concerned, however, such corporations were,
in his view, a force for good: "
technology did not
exist until transnational corporations came into the country ...
For Russia, especially after the collapse of the Soviet Union,
more openness and stronger presence of transnational corporations
are positive factors." (Ev II, Q 1678). Mr Bendookidze referred
to the contribution of TNCs in the way in which they promoted
the spread of knowledge and experience about organising and managing
companies and the transfer of new technologies (Ev II, Q 1959).
Tito Mboweni of the South Africa Reserve Bank was similarly positive
about the effect of TNCs in South Africa: "Have they exploited
South Africa or have they assisted South Africa to develop? The
answer is most definitely that they have assisted South Africa
to develop, without a doubt" (Ev I, Q 583) - in fact, he
said, it was certain domestic companies which could be described
as exploiting South Africa because of their pollution of the environment.
148. Dr Yilmaz Akyuz of UNCTAD stressed the importance,
however, of getting the right sort of foreign direct investment.
It was not, he suggested, sufficient that the TNCs should be entering
a country in order to employ unskilled labour: "We want them
to bring technology; we want them to bring know-how. We want them
to establish linkages with domestic industry and eventually we
want them to pass on some of the advantages that they enjoy."
(Ev I, Q 962). And Michael Kitson suggested that "FDI
may be an effective vehicle for increasing the globalisation of
technology" but "much will depend on the objectives
of the MNC: is it seeking the lowest cost of production or is
it seeking to utilise national or sub-national expertise and research?"
He went on: "
many MNCs may tend to be loyal to their
own home-based country when they have to locate a strategic asset
such as technology although others may be seeking out competitive
clusters abroad." (Ev 1, p 111).
149. Donald McKinnon recognised that TNCs were "a
powerful force for global technology transfer, skills development
and international investment flows" but thought that there
was a perception amongst recipient countries that significant
benefits were not flowing to their citizens: "
is a perception that they are not doing enough in terms of promoting
training; transferring technology/addressing the digital divide;
widening the country coverage and depth of investment flows; bringing
about a more equitable multilateral trading system; and protecting
the global commons." (Ev 1, p 305). Lord Browne acknowledged
this point. Reflecting on the achievements of globalisation, he
commented that there is "
an awful lot still to do.
It is not evident to me, when I go to a place like Angola, or
I go to South Africa or I go to Indonesia, that the benefits of
what we do are directly coupled to those who are affected by it
- not yet." (Ev II, Q 1268).
150. We believe that foreign direct investment
is an effective mechanism for economic change in developing countries
(although there is evidence that it could be more effective).
To put this in context, however, we note that although FDI
flows far exceed the level of aid from developed to developing
they remain highly concentrated amongst developed countries.
The CBI provided some clear evidence (drawn from the UNCTAD
World Investment Report 2000) of this: "Between 1985
and 1995, 71 per cent of inward flows of FDI were concentrated
in the developed world, rising to 73 per cent by 1999. Similarly,
90 per cent of outward flows originated in the developed world
between 1985 and 1995, increasing to 91 per cent by 1999."
(Ev I, p 128). The reason for this concentration is explained
by the TUC: "The increase in [gross foreign direct investment
and private capital flows] as a share of GDP over the past ten
years is largely confined to the OECD economies, with especially
big flows involving the Eurozone economies and the UK. This is
not very surprising - private investment and private capital tends
to be drawn to the richer and bigger economies because this is
where the market demand for funds and the opportunities to invest
profitably are greatest." (Ev 1, p 33). Of course, much of
this investment is beneficial too. International technological
transfer accompanied by improved managerial skills is an important
source of improvement in advanced countries where productivity
is still below the best.
151. We also note that much FDI involves mergers
and acquisitions (M&A) rather than creating a new or expanding
an existing enterprise. However, while 80-90% of FDI flows into
developed countries are due to M&A, less than one-third of
flows into developing countries take this form: the remainder
is 'greenfield' investment, associated with the construction of
new facilities in these countries. Furthermore, as Michael Kitson,
told us, there can be benefits from M&A: "M&A may
obviously create benefits because it brings in new managerial
techniques, new technologies and so on. New capital may produce
this as well but it will also add to the domestic capital stock
" (Ev I, Q 289).
Complaints about the
power of TNCs
152. The complaints which emerged from the evidence
about the power of transnational corporations fall into the following
- the democratic deficit arising from the power
of TNCs to influence policy-makers at national and international
- the consequences of the exercise of that power
on employment standards, the capacity of governments to pursue
social welfare programmes, on the environment and culture.
153. A number of witnesses raised questions about
the relationship between TNCs and democracy.
Professor Bulmer-Thomas, for example, suggested that one of the
costs associated with globalisation "
is the transfer
of power - from governments, other firms and to some extent labour
- to MNCs.
There are still too many cases of MNCs misusing
their power to extract tax concessions from weak governments or
to impose unsafe working practices on their labour forces"
(Ev 1, p 52). The Green Party of England and Wales (Ev II, p 85)
took a similar view, as did Friends of the Earth England, Wales
and Northern Ireland (Ev II, p 273), the Foundation for the Economics
of Sustainability (Feasta)(Ev II, p 258) and the Royal Academy
of Engineering (Ev II, p 372). Michael Kitson thought that one
of the greatest areas of concern in relation to TNCs was "the
way they may be having an influence on policy making and on the
policy agenda", given that the objectives of TNCs "are
not necessarily aligned with the objectives of societies and nation
states" (Ev I, Q 296). Dr Noreena Hertz's view was that governments
have ceded too much power to corporations - "their capacity
is increasingly shaped and constrained by the interests
of big business": "Governments are torn between wanting
investment, wanting the multinationals there and having to take
into account what price they have to pay to get them in and keep
them in." (Ev II, QQ 1653 and 1656).
154. Aside from allegations relating to the role
of TNCs at national policy level, we also received evidence of
their influence in international fora. In Chapter 6, we give an
example where it is alleged that the pharmaceutical companies
played an influential role in bring about the World Trade Organisation
agreement on Trade-related Intellectual Property Rights (TRIPS).
155. In contrast, other witnesses have argued that
TNCs are subject to constraints from a variety of sources: government,
competitors, consumers, campaigning organisations and consumer
pressure. Lord Browne suggested that TNCs are constrained both
by governments ("They set the rules, sometimes imperfectly
but nonetheless the rules, on property to a degree, on taxes,
revenues, on the way in which the environment is creative for
and by competition (Ev II, Q 1270). The World Bank, in Globalization,
Growth and Poverty, endorses the latter point (although argues
that "even here globalisation is not an unmitigated good"
because an industry might be dominated by a monopoly or a cartel
at a global level exposing the weakness of an international economy
where competition is regulated at the national level).
156. A second constraint suggested by the World Bank
is "the globalisation of information": "companies
are now far more vulnerable to international public opinion because
people have learned how to harness their potential power as consumers."
Peter Aven, in describing his experience in the oil industry and
of a partnership between his company and BP, provided an example
of the power of popular opinion: "[BP] are much more strict
on ecological issues than ourselves
I am sure that labour
standards for transnational companies in Russia is higher than
for Russian ones." Mr Aven suggested that the reason for
BP's ecological stance was that "they are so much afraid
to be accused of wrongdoing with the environment" (Ev II,
Q 1710). Dr Hertz, whilst critical of the power of transnational
corporations, also describes their weaknesses in terms similar
to those applied by the TNCs themselves:
never have companies been so powerful
and never have they been so vulnerable, because companies now
are under this amazing kind of pressure from all these new investors.
They are under pressure from the anti-globalisation movement.
They are under pressure from political shoppers. ... They are
under pressure from governments. ... They are under pressure from
disenfranchised constituents and under pressure from activist
groups who will keep demanding the earth." (Ev I, Q 1656).
157. Witnesses expressed a real concern about
the influence of TNCs in democracies. We acknowledge that TNCs
are powerful, but we believe that they are also subject to a range
of constraints and, in particular, to the power of governments
and of public opinion.
Consequences of the exercise of power by TNCs
158. It was argued by some witnesses that capital
market liberalisation and the technological developments which
are such important features of current globalisation allow TNCs
to be "footloose" and enable them to pressurise investment-hungry
developing countries to engage in a regulatory and tax "race
to the bottom". This, in turn, has the damaging effect of
encouraging poor standards (for example, in terms of labour conditions
and the environment) and, because of the competition to provide
a TNC-friendly tax environment, depleting a government's capacity
to raise revenue to provide for an adequate social infrastructure.
159. CAFOD, for example, said that "the danger
is that competition between countries wishing to attract foreign
investment and technology could lead to a 'race to the bottom'
in terms of tax incentives and labour market suppression, thereby
minimising the potential social benefits offered by the private
sector." (Ev I, p 339). Christian Aid, in Trade for Life:
Making Trade Work for the Poor, were more emphatic:
"The mobility of capital means that TNCs can
increasingly move freely around the globe in search of the least
restrictive conditions in which to operate and sell to make profits.
TNCs can play countries off against each other or take
advantage of weak or absent national governance.
share and control of global activity increases, developing countries
have to make more and more concessions to them, skewing national
development priorities to the demands of TNC-driven global markets."
160. George Soros appeared to concur - "I think
that the ability of individual countries to constrain the transnationals
has diminished because the companies can move their business
elsewhere. So the ability of capital to move around does limit
the capacity of individual governments to tax them or to remunerate
them." (Ev II, Q 1931). He went on: "
a competition to attract capital and therefore there is a pressure
to make conditions as favourable as possible, to tax as little
as possible, to impose as little regulation as possible
which means that if you look at the world as a whole, the governments
are less well situated to provide public goods as they were because
they cannot tax capital as they used to." (Ev II, Q 1932).
He followed this, however, with the reservation that FDI, unlike
highly mobile financial capital, once invested, could not be easily
moved and to that extent a TNC would then become "a hostage
to the government of the country" where it had invested (Ev
II, Q 1931).
161. We received evidence from a small number of
large TNCs. All dismissed the allegation that their investment
decisions were short-term - or "footloose". Lord Browne
said: "you do not go into business and go into a country
for a year, it is just not possible, it is very long term"
and he gave the example of BP's interests in Vietnam. BP went
into Vietnam in 1990 and "the cycle of business" is
expected to be completed in 2020 (Ev II, Q 1272). Sir Richard
Sykes, Chairman of GlaxoSmithKline plc, gave a similar - although
perhaps hyperbolic - response: "We are not in the business
for a week. We are in the business for hundreds of years";
GSK, he said, "do not worry about losses here and there":
their "job is to be a good corporate citizen, to operate
in all countries of the world and to
behave in an honest
" (Ev II, Q 1480). Niall Fitzgerald of Unilever
said: "We take a very long term view of business. Most of
the countries in which we have operated, particularly developing
markets, we have been in for 50, 70 or 100 years and we very much
hope we will be there for another 70 or 100 years plus."
(Ev II, Q 1548).
162. We acknowledge that there is a concern that
some TNCs have the capacity to be "footloose", but we
believe that, in practice, their mobility is constrained and that
foreign direct investment by TNCs, once undertaken, is locked
in to a significant extent. We think that this point is fundamental
"RACE TO THE BOTTOM"
163. The World Bank, in Globalization, Growth
and Poverty, acknowledges that globalisation and the mobility
of capital have empowered capital "at the expense of government
and workers" and that, as a consequence, there may be competition
between governments to offer an attractive tax environment. The
Bank concludes, however, that "such competition is limited".
This is because companies will tend not to be concerned about
tax policy but rather the broader climate for investment which
a country can offer.
Commissioner Solbes also thought that the evidence showed that
TNCs did not invest in countries solely because of any advantages
being held out by the governments of those countries (Ev II, Q
164. In contrast, Anita Roddick characterised economic
globalisation principally in terms of "
maraud[ing] around the world seeking the cheapest
labour to exploit, the lowest pollution standards to operate to,
the least protected natural resources to plunder." (Ev II,
p 366). Stephen Pursey of the ILO, however, took a different view.
He suggested that TNCs were looking for a broad range of factors
when deciding whether to invest - rather than just labour costs:
"When you look around you find very little evidence that
big multinational companies pay much attention to the labour costs
in their choices. There are usually lots of other things that
outweigh that." (Ev II, Q 1239). Although smaller companies,
on the margins of survival, might be tempted to cut labour costs,
the larger TNCs (such as those from whom we took evidence) were
able to take a longer term view which would not only benefit the
host country but would also be in the long-term interest of the
company. Diane Coyle endorsed this view in her observation that
"the fact that foreign direct investment flows to a small
group of middle-income countries I think shows that what companies
are looking for is not the cheapest possible labour, they are
looking for a bundle of characteristics
" (Ev I, Q
668). And Lord Browne suggested that the decision to invest in
a country would involve asking: "do they have the capability
in terms of people, most importantly, do they have an understanding
of the place and can they
build a point of mutual advantage
?" (Ev II, Q 1272).
165. We asked the TNCs who gave evidence whether
TNCs encouraged a "race to the bottom" in terms, for
example, of labour and environmental standards. We were not surprised
that they argued the reverse: that the presence of TNCs improved
local standards. Niall FitzGerald gave the example of Vietnam:
you see the benefit not only to consumers but to
the local suppliers with whom we operate because they need to
operate at a standard which is compatible with ours. Therefore,
we have to put in both the investment and the time and the technology
to help them get to those standards." (Ev II, Q 1548). Lord
Browne agreed that it was fundamental to BP that it would not
be a party to lowering labour standards in the countries in which
it was operating: for example, he said, BP policed very carefully
the issue of child labour. Pay, however, was different: pay was
"dependent on the competitive environment in the country"
and although BP paid "at the upper edge", it was not
appropriate nor expected that they should pay "on a global
basis" (Ev II, Q 1278).
166. Ignazio Visco of the OECD summed up his views
on the influence of TNCs as follows:
"Critics of globalisation often accuse multinational
firms investing in developing countries of reaping undue advantages.
They are blamed for exploiting workers, damaging the environment
and dictating their own rule. Often, however, multinational firms
invest in developing countries not only attracted by the lower
costs of labour but also to get closer to customers and to diversify
their assets. The evidence of inappropriate behaviour in developing
countries is scant, even if there might be some notorious cases.
In general foreign firms have to follow the same local laws and
rules as domestic firms, and in fact often face more stringent
ones. They pay workers less than in developed economies, reflecting
differences in skills and overall purchasing power, but there
is well established evidence that foreign affiliates pay better
wages than domestic firms." (Ev 1, pp 172-3).
167. Clare Short expressed a similar view: "If
you look at labour standards and respect of the environment, overwhelmingly
have higher standards than the going rate
in the country." (Ev II, Q 2039). And she was optimistic
that transnational corporations would continue to improve standards
- because they were aware of public expectations about high corporate
standards (Ev II, Q 2043).
168. Christian Aid, in Trade for Life: Making
Trade Work for the Poor, acknowledged that the TNCs could
be beneficial although warned about the detrimental effects as
"TNCs can and do often provide benefits to the
economies of developing countries and enhance poor people's economic
opportunities. They can build or finance infrastructure, and provide
employment and technology. Their investments can support local
businesses and stimulate domestic economic activity. But in many
developing countries TNC-led globalisation has led to greater
environmental degradation, the undermining of human rights and
threats to the livelihoods of the most vulnerable."
169. TNCs are not an homogeneous group and standards
of conduct will vary between them. Some TNCs behave responsibly
but others act against the interests of the country in which they
have located production. The evidence we have received suggests
that often TNCs adopt standards which are higher than those adopted
by local businesses. We are not complacent however. We are aware
that businesses have a primary duty to act in the interests of
their shareholders and that there is, therefore, a case for government
measures to be taken to encourage them to take responsibility
for a wider range of the interests which are affected by their
CULTURAL AND ENVIRONMENTAL ISSUES
170. When we began this inquiry, we were aware that
a number of issues relating to globalisation would be raised which
although important could not be encompassed within the scope of
our investigation. These included allegations - against TNCs in
particular (although not exclusively so)
- of promoting cultural homogeneity and of causing environmental
171. Dr Supachai Panitchpakdi, for example, said:
"People sometimes equate globalisation with the predomination
of one culture over another or by some countries over another.
They talk about globalisation as the proliferation of the multinational
corporations around the world, with the blessing of international
organisations such as the World Bank, the IMF and the WTO
(Ev I, Q 562). Donald McKinnon similarly described "the stifling
of cultural diversity" as one of the elements of the concern
about globalisation, albeit the last on his list of concerns (Ev
I, Q 778)
and Feasta referred to the rise of a "global monoculture"
with the global spread of products and education systems to support
the production of those products (Ev II, p 302).
172. Two issues, in particular, emerged from the
evidence we received about cultural homogeneity: the proliferation
of global brands and the global prevalence of the English language.
The Foreign and Commonwealth Office saw the presence of global
brands as perhaps a defining feature of current globalisation
(Ev I, Q 12). The CBI, in its written submission, referred to
a study on global brands
which anticipated that the number would increase "dramatically
over the course of the next few years as companies further increase
their global presence" (Ev I, p 133). This view, however,
contrasted with that expressed by Richard Tomkins in the Financial
where he argued that "big consumer brands were under pressure"
because of what he describes as the fragmentation of the media:
"today there are hundreds of [television] channels to choose
from and people are much more individualistic in their tastes,
so brand owners are left trying to sell to a mass market that
173. A similarly optimistic view of the future of
cultural diversity was expressed by witnesses in relation to the
dominant position of the English language. Niall FitzGerald confirmed
that English was the language of commerce, as did Dr Geitz of
DHL (Ev II, QQ 1809-10), but did not think that this should cause
us to worry about language diversity: not only was English the
second language in a large proportion of the world but, although
it was the language of commerce, it was not the "language
of the street" (Ev II, Q 1573). Sir Andrew Large acknowledged
the emergence of an "homogeneous business culture" (which
included the fact that business was largely conducted in English)
but, like Mr FitzGerald, was sanguine about the implications for
cultural diversity more generally: "I do not think I see
that the existence of an homogeneous business culture
the social and political aspects of cultures." (Ev I, Q 761).
174. Whilst the cultural impact of globalisation
is important, allegations relating to the despoliation of the
environment, whether by TNCs or indigenous companies, have given
rise to more immediate fears about the welfare of those developing
countries which suffer environmental damage as a side-effect of
economic development. Anita Roddick referred to the "alarming
trends in environmental degradation" which had had the most
severe impact in developing countries in the southern temperate
or tropical regions (Ev II, p 368). Ronnie Hall of Friends of
the Earth gave an indication of the breadth of the debate about
the tension between economic development and environmental sustainability:
"The policies that countries in sub-Saharan
Africa are being asked to adhere to at the moment assume that
trade will lead to global integration, will lead to development,
and that is something that is being questioned at the moment.
In terms of environmental impacts, there is a whole
range of impacts, including increased use of natural resources
to increase trade
we have seen this very clearly at the
World Summit for Sustainable Development in the last few weeks
where there has been quite a battle over the status of multinational
environmental agreements in relation to trade." (Ev II, Q
Dr Supachai Panitchpakdi also referred to the rise
in conflicts between trade and environmental rules (Ev I, Q 569).
Professor Joseph Stiglitz expressed the concern that, under the
WTO trading system, despite the environmental implications of
trade decisions, "it is the trade ministers who set the rules
of the game" without - as there is at the national level
- the counterbalance of participation by environment ministers
(Ev I, Q 735).
175. While cultural and environmental issues are
important and contentious areas of the globalisation debate, we
have not explored them in detail as part of our inquiry and do
not think, therefore, that it is right for us to offer conclusions
or recommendations in respect of them. In adopting this approach,
we emphasise that we do not intend to diminish their importance
in any way.
Regulation of TNCs
Corporate Social Responsibility
176. In its written submission, the CBI suggested
that "any discussion involving business and globalisation
cannot but help get drawn into the wider debate surrounding the
role that business has to play in terms of corporate social responsibility"
(Ev I, p 135) and a number of witnesses raised this issue in evidence.
177. There are at present a number of voluntary codes
on corporate social responsibility (CSR). These include:
- the OECD Guidelines on Multinationals (adopted
in 1976 and revised in 2000) which provides a voluntary framework
of "principles of good conduct";
- the United Nations Global Compact (launched in
July 2000) which encourages businesses to espouse nine "universal
principles" based on the Universal Declaration of Human Rights,
the Rio principles on environment and development and the ILO's
Fundamental Principles on Rights at Work;
- the Ethical Trading Initiative, an organisation
comprised of business members, NGOs and trade unions which seeks
to identify and promote good practice in the implementation of
codes of labour practice;
- the Global Reporting Initiative (formed in 1997)
which has the aim of developing globally applicable guidelines
for businesses to report on environmental, economic and social
- a proposed European Code of Conduct for European
Enterprises Operating in Developing Countries.
178. In the United Kingdom, more than 60% of the
top 500 companies have adopted a code of conduct,
and we received evidence from one of them - Unilever plc - about
their adherence to a CSR code. Unilever plc emphasised the importance
of CSR: "We regard the very business of 'doing business'
in a responsible and sustainable way as the core of our corporate
social responsibility: selling products that meet local consumers'
needs, investing in productive capacity, spreading our technical
know-how, working in partnerships through the value chain and
in local communities, and making environmental responsibility
a central business practice." (Ev II, p 110).
179. Clare Short, referring to the various voluntary
codes (in particular the OECD code and the Ethical Trading Initiative)
suggested that their effectiveness was a result of "the power
of public opinion and consumer" and also because companies
were aware that members of their workforce were likely to work
better if they were able to take pride in the ethical stance of
their employer and if they were treated well by their employer
(Ev II, Q 2040). Lord Browne endorsed the point about reputation:
"the ability of a corporation to exist in today's world is
a function of the way in which it is respected and regarded
(Ev II, Q 1286).
180. The European Commissioner for Trade, Pascal
Lamy, referred to the role of the European Union in pursuing CSR
and told us that the EU, through the Commission, had been instrumental
in getting the OECD guidelines agreed. He supported the promotion
of CSR - but through soft regulation rather than through legislation
(Ev II, Q 1918). Other witnesses, however, took the view that
the present voluntary codes governing CSR should be tightened
up and made enforceable. Barry Coates of the WDM suggested the
following prescription for regulating TNCs: first, voluntary codes
of conduct and voluntary regulation by the companies themselves;
second, the enforcement of an international code through national
legislation; and third, in addition to regulation of CSR, a strengthening
of corruption legislation and competition policy (Ev I, Q 903).
Friends of the Earth England, Wales and Northern Ireland also
called for mandatory CSR so as to enable stakeholders to challenge
corporations (Ev II, p 273).
181. There has been a welcome increase in transparency
of governments and of public financial institutions in recent
years. Although similar advances have been made by some TNCs,
the corporate sector has a long way to go in this respect. We
recognise the right of companies to a degree of commercial confidentiality,
but believe that their claims to this could be regarded as excessive,
making it almost impossible for the international financial institutions
and governments, let alone a committee such as ours, to give them
the scrutiny that good global governance requires.
182. We welcome international initiatives to promote
CSR amongst TNCs as a mechanism for enhancing transparency and
accountability of TNCs. We recognise, however, that there is concern
that a purely voluntary regime will not provide a sufficient safeguard
against abuse of power by TNCs. We note with approval that, as
part of its current review of company law, the UK Government is
considering that some companies should be required to report on
the impact of their activities on the environment and, more broadly,
on the communities in which they operate.
183. International capital flows are often connected
with the formation of mergers. That in turn relates to the question
of whether global markets have become more or less competitive.
More generally, there is the problem of what effect globalisation
of business has on competition policy at both national and (say)
EU level. Following Peter Sutherland's comment on global problems
requiring global solutions and possibly new global institutions
(Ev I, p 204), there is a need to consider whether a powerful
global competition authority is necessary. At a more parochial
level we are certainly sympathetic to the European Commission's
proposal to look again at the regulatory framework for mergers
within a European context.
While our bias would be in favour of doing as much as possible
at the national level, we agree that in some cases the "best
placed competition authority" would sometimes be part of
the European Commission itself.
Information about TNCs
184. Finally, we have been struck by how little factual
information we have on some aspects of transnational corporations.
For example, in the cross-Departmental memorandum, we were told
that "there are no recent official data on trade by UK-based
or owned transnational corporations", that the latest data
in respect of the percentage of United Kingdom exports of goods
accounted for by transnational corporations was for 1981, and
that there was no data available in respect of trade in services
(Ev I, p 12). More generally, much of the data we were given by
the Departments related to several years ago. The UK Government
should review its data collection in respect of TNCs. Data collection
at present is too limited and out of date and should be substantially
73 It is estimated that at least one third of world
trade in manufactures is a consequence of this activity - for
example, trade in parts and components for further assembly -
and the activity is particularly important for many Asian economies.
The labour market implications of this are considered in Chapter
4 above. Back
Christian Aid, Trade for Life: Making Trade Work for the Poor
(2001), p 114, citing Sarah Anderson and John Cavanagh, "Top
200: The rise of corporate global power", Institute for Policy
Studies, Washington, 2000, p 1. Back
Ibid, p 114, citing UNCTAD, World Investment Report
2000, Geneva, 2000. Back
Martin Wolf, "Countries still rule the world", Financial
Times, 6 February 2002. Back
UNCTAD Press Release, Are transnationals bigger than countries?,
12 August 2002. Back
Quoted in the written submission of the TUC (Ev 1, p 31). Back
Between 1991-2000, aid to developing countries fell from $60.9
billion to 38.6 billion, whereas FDI rose from $35.7 billion to
178 billion: Centre for Economic Policy Research, Making Sense
of Globalization: A Guide to the Economic Issues, Policy Paper
No 8, July 2002, p 44, Table 5. Back
More traditionally, of course, TNCs are alleged to prefer dictatorships
to democracies. It is not, however, obvious to us of where, in
recent years, it can be said that TNCs or globalisation can be
held responsible for the subversion of multi-party democracy in
favour of a dictatorship. Countries seem to have undergone that
subversion without outside assistance. Back
We note a review of Open World: The Truth About Globalisation
by Philippe Legrain in the Economist, 12 October 2002,
p 110, where it states: "The book shows that governments
have great sway over both the extent and the form of economic
integration. As for the idea that companies are more powerful
than governments, it dissolves the moment you examine it". Back
World Bank, Globalization, Growth and Poverty (2002), p
Ibid, p 124. Back
Christian Aid, op cit, p 115. Back
World Bank, Globalization, Growth and Poverty (2002), p
Mr Bendookidze, in evidence to us, gave a robust account of the
difficulty of imposing higher pay where the trade-off is between
employment and better employment conditions, referring by way
of example to the breaking up of ships for scrap in developing
countries (Ev II, Q 1966). Back
We assume that they mean by this that they do not pay the same
rate for the job in all the countries they operate in. Instead
they adapt remuneration to local labour market conditions. Back
Christian Aid, op cit, pp 33-4. Back
See, for example, the comments of Tito Mboweni in paragraph 147
(above) of this report. Back
In contrast, Dr Gietz of DHL suggested that his company in fact
promoted diversity: "
we are very conscious of the
need to strike a balance between the global aspect of running
a business in more than 220 countries and territories, and meeting
local requirements and being sensitive to and understanding of
local cultures and values." (Ev II, Q 1817). In the same
vein, when it was put to Niall FitzGerald that a McDonald's hamburger
was the same the world over, he observed that although the logo
was the same everywhere, the product in China, say, was fundamentally
different from that in Russia (Ev II, Q 1568). Back
"Global brand" is defined as a brand which has achieved
cumulative sales of at least $1 billion for the last 12 months
ending Q1 2001 with a measurable presence in each of the four
major geographic regions of Latin America, Asia Pacific, North
America and Europe, Middle East and Africa. The study to which
the CBI referred was undertaken by A C Nielsen. (Ev I, p 133). Back
31 October 2002. Back
Corporate social responsibility can be defined in a variety of
ways. In the European Commission Green Paper, Promoting a European
Framework for Corporate Social Responsibility, COM(2001)366,
18.7.2001, it is defined as "a concept whereby companies
integrate social and environmental concerns in their business
operations and in their interaction with their stakeholders on
a voluntary basis". Back
Christian Aid, Trade for Life: Making Trade Work for Poor People
(2001), p 126. Back
The Department of Trade and Industry published a White Paper Modernising
Company Law, Cm 5553, on 16 July 2002. The White Paper proposes
a significant change in the reporting requirements of large companies. Back
Green Paper on the Review of Council Regulations (EEC) No 4064/89,
COM (2001) 745/6, 11.12.2001. Back