As globalization proceeds and the attraction of foreign direct investment (FDI)(1) becomes increasingly important for developing countries governments should act quickly to put in place effective FDI policies.
"Formulating and implementing an effective FDI strategy requires above all a development vision, coherence and coordination. It also requires the ability to decide on trade-offs between different objectives of development," states Rubens Ricupero, Secretary-General of the United Nations Conference on Trade and Development (UNCTAD) in World Investment Report 1999: Foreign Direct Investment and the Challenge of Development(2).
WIR99 reports that FDI has become the most dynamic component of international resource flows to developing countries, and that policies to attract transnational corporations (TNCs)(3) to invest are therefore of growing importance. TNCs can, and do, contribute to the development of developing countries.
However, the extent to which they can contribute to the social and economic development objectives of a country depends also on policies pursued by the countries concerned. This is the case in particular for many of the poorest developing countries, increasingly marginalized as participants in the international production system being established by TNCs.
As they invest around the world and integrate their organizations on an unprecedented scale, TNCs are enjoying increasing liberty with regard to their global production activities. UNCTAD observes, however, that, at the same time they have increasing social responsibilities.
The right policies can enhance TNCs’ contribution to development
Globalization is accelerating change in the world economy in an uneven manner, with many developing countries failing to keep up with the processes involved. WIR 99 leaves no doubt that the activities of TNCs do not necessarily reduce this skewed impact. They may even exacerbate it.
The governments of developing countries have changed attitudes towards TNCs over the last 20 years, according to the report. Says Karl P. Sauvant, leader of the team that produced WIR 99: "Twenty years or so ago, many governments saw TNCs as part of the development problem. Today, TNCs are seen as part of the solution".
Developing countries expect that TNCs can enhance a country´s capital inflows, strengthen its technological base, boost its export competitiveness and raise the quantity and quality of employment. Many countries are thus now competing with one another to attract FDI. UNCTAD warns of the dangers for countries in "engaging in a financial incentive-competition race towards the sky; of a fiscal incentives-competition race towards zero." In consequence, governments could face a situation in which higher levels of subsidy packages produce diminishing returns.
Policies to attract FDI and to maximize the development benefits that FDI can yield now matter more than ever, says today´s report. There are dangers, for example, that TNCs may crowd out domestic competitors and undermine new domestic ventures as they enter developing countries. WIR99 stresses, however, that, in a global economic environment of rapid change, one key to attracting FDI rests in a constant review of the impact of regulations on actions by TNCs, along with the ability of governments to change policies and adapt them to new circumstances.
Vital are sound regulatory frameworks for FDI; the report notes that no less important is the existence of appropriate government institutions for FDI policy administration, coordination and problem resolution. Corruption and pervasive red tape are highlighted as factors that represent disincentives to investment by TNCs, while increasing the costs of investment.
The technology, trade, and labour equation
Of mounting importance in the development equation is the transfer of technology by TNCs to developing countries. Here the picture to date is a mixed one.
While TNCs are globalizing research and development, almost all of the innovative research and development by the affiliates of TNCs is located in industrial countries. On the other hand, the introduction of new products, processes and organizational technologies into the affiliates of TNCs in developing countries has raised productivity and contributed to employee training.
Again, good policies can make a major difference. Governments can induce TNCs to improve the content of their technology transfer by fostering the building up of better domestic skills, capabilities, supplier networks and infrastructure.
Some countries, notably exemplified by Singapore, have stimulated technological upgrading in affiliates by investing in the supply side of their capabilities and offering incentives to TNCs for the transfer of more advanced technological activities. In India, meanwhile, TNCs are taking advantage of plentiful and inexpensive scientific and engineering skills through both FDI and non-equity based strategic partnerships.
While a few economies such as the Republic of Korea have successfully built up domestic technological capacities while restricting inward FDI and relying on licensing, sub-contracting relationships and arms-length purchases of machinery and equipment from foreign firms, policies that merely restrict the inflow of FDI and do not pay attention to other forms of technological upgrading have frequently not obtained the desired development objectives.
Governments of developing countries need to give priority to policies that raise the local levels of technological capabilities. They also need to enhance competition in the environment in which firms operate, so as to improve the quality of technology transfers and ensure the regular upgrading of technological capabilities.
National policies to increase and upgrade education, promote workforce training, and maintain competition are critical in these respects. These policies need to be complemented by international measures that assist developing countries in strengthening their technological capabilities, accessing and diffusing new technologies.
The report suggests a number of elements for international consideration in order to upgrade technological capabilities in developing countries. These include for instance multilateral initiatives to undertake assessments of technology needs of developing countries, provide information on foreign technology markets, and encourage networks and partnerships that stimulate the transfer of tacit knowledge and encourage the mastery of new technologies; or the development of tax and development incentives by technology supplier countries to encourage technology transfer to developing countries (as a number of home countries are already doing).
One major benefit of investment by TNCs in developing countries can be a rising level of export volume and trade competitiveness. WIR99 points out, however, that maximizing these potential benefits depends upon the policies adopted by host governments and the strategies of TNCs. These policies include investment promotion activities that focus upon the attraction of export-oriented foreign investors, as well as strengthening human skills and competencies and establishing the kind of domestic environment that encourages high-quality FDI inflows.
Increasing employment and raising the quality of employment are critical objectives for developing countries as they seek to attract FDI. In this regard, Governments need to focus on the development of sound labour market institutions, embracing, among others, trade unions and business sector organizations such as chambers of commerce, educational and training facilities.
A clean environment and attracting FDI are not incompatible
No less vital are sound policies in the environmental area.
The report notes that TNCs may be tempted to shift the location of pollution-intensive production to countries where environmental policies are lax. There is little evidence, however, to suggest that countries that enforce high environmental standards generally lose FDI. TNCs in manufacturing, for example, utilize more environmentally friendly technology and can contribute through their affiliates to raising overall standards of environmental management in developing countries.
"The challenge," says UNCTAD, "for TNCs and developing country governments - and the international community - is to devise ways in which a transfer of environmentally sound management practices and clean technology into the domestic industry can be encouraged."
Corporate social responsibilities
The social responsibilities of TNCs are increasingly seen by the international community at large in terms of corporate roles related to an array of stakeholders: shareholders, workers, managers, customers, suppliers, local communities and governments. Human rights, the environment and workers´ rights in particular, have been identified by the UN as key issues.
Some TNCs oppose actions that create new rules in these areas. Commenting, the report states: "The business community´s aversion to binding international legal standards governing corporate operations contrasts with its strong advocacy of international law commitments applied to the obligations of governments towards foreign investors."
Momentum is, meanwhile, gathering to give the concept of "global corporate citizenship" more practical meaning. Earlier this year, United Nations Secretary-General Kofi A. Annan challenged world business leaders to encourage their companies to abide by the values and principles stated in three key UN documents: "The Universal Declaration of Human Rights," the International Labour Organization´s "Declaration on fundamental principles and rights at work," and "The Rio Declaration" of the United Nations Conference on Environment and Development.
UNCTAD is willing to assist with the dialogue between TNCs and developing countries in the arena of corporate social responsibility, especially as far as development dimensions are concerned. And it warns that a failure by TNCs to be constructive on this front could exacerbate the backlash already seen against liberalization policies in some quarters. For firms to assume the social responsibility which accompanies globalization is in their self interest.