Corporate Social Responsibility, Human Rights and the Law

Multinational Corporations in Developing Countries

Olufemi Amao

• Publisher: Routledge
• Year: 2011
• ISBN:
  9781136715891
• Edition: 1
• Topic: Betriebswirtschaft
• Subtopic: Wirtschaftsrecht

The control of multinational corporations is an area of law that has attracted immense attention both at national and international level. In recognition of the importance of the subject matter, the United Nations Secretary General has appointed a special representative to work in this area.

The book discusses the current trend by MNCs to self regulate by employing voluntary corporate social responsibility (CSR) strategy. Olufemi Amao argues that the CSR concept is insufficient to deal with externalities emanating from MNCs' operations, including human rights violations. Amao maintains that for CSR to be effective, the law must engage with the concept. In particular, he examines how the law can be employed to achieve this goal. While noting that the control of MNCs involves regulation at the international level, it is argued that more emphasis needs to be placed on possibilities at home, in States and host States where there are stronger bases for the control of corporations.

This book will be useful to academic scholars, students, policy makers in developing countries, UN, UN Agencies, the African Union and its agencies, the European Union and its agencies and other international policy makers.

1 Multinational corporations, states and international regulation

Historical background

Introduction

This chapter is an historical introduction to the role of multinational corporations (MNCs), states and the international regulation of MNCs. The chapter starts with a consideration of the meaning of the concept “multinational corporations”. The chapter goes on to examine the relationship between MNCs and states and the concerns about MNCs involvement in the abuse of human rights. The chapter explores the role of corporations in the slave trade, the colonial enterprise and the Second World War. It further examines the relationship between MNCs and the countries of the South after independence.

What are “multinational corporations”?

Different nomenclatures have been used to describe MNCs over the years. Apart from “multinational corporation (MNC)”, the concept has variously been referred to as “transnational corporation (TNC)” and “multinational enterprise (MNE)”. The different names have been used in attempts to encapsulate the nature of MNCs in an appropriate definition. In practice today, these names are used interchangeably and it will serve no useful purpose to distinguish between them. Since there is no legal instrument ascribing a definition to MNCs, defining the concept may not be possible with any degree of accuracy.¹ Muchlinski therefore suggests that it may be helpful to show how MNEs² differ from uninational companies (a company incorporated and domiciled in only one country). In the first place, MNCs operate their assets and control their use across national borders unlike uninational companies whose operations remain within national borders. The organisational structure of an MNC is such that it allows managerial control to reach across national frontiers despite the different national identities of the various operating units within the group. MNCs also have a distinct competitive advantage with their ability to trade across borders not only in respect of finished products but also in factor inputs, such as technical knowhow and managerial skills, between affiliates and third parties.³ Other legal commentators have also tried to define the concept. Wallace describes a “multinational enterprise” as: “an aggregate of corporate entities, each having its own juridical identity and national origin, but each in some way interconnected by a system of centralised management and control, normally, exercised from the seat of primary ownership”.⁴ Kamminga describes an MNC as “a legal person that owns or controls production, distribution or service, facilities outside the country it is based”.⁵ According to Dine, “multinational and transnational companies do not exist as an entity defined or recognised by law. They are made up of complex structures of individual companies with an enormous variety of interrelationships”.⁶ In an attempt to ascribe a legal definition to MNCs, the moribund, United Nation’s Norms on Responsibility of Transnational Corporations and other Business Enterprises with regard to Human Rights⁷ provides in its paragraph 20 that

The term “transnational corporation” refers to an economic entity operating in more than one country or a cluster of economic entities operating in two or more countries – whatever their legal form, whether in their home country or country of activity, and whether taken individually or collectively.

The distinctive features of MNCs have led commentators to recognise the challenges posed by their operations to the traditional legal framework. Muchlinski observes that the features of MNCs permit them to affect international allocation of productive resources, and consequently create distinct problems in the development of economic policy in the states where they operate.⁸ According to Jagers:

The common feature of these large and often rather opaque corporations is that they operate across national borders. Operating in many different countries places these corporations outside the effective supervision of domestic and international law, which can result in a deficiency.⁹

For the purpose of this book the term MNC is used to describe companies with foreign origin/seat that operate in one or more countries through affiliates or subsidiaries and have production or marketing facilities in these other countries.

Multinational corporations and states

The modern history of most developing countries would be incomplete without an examination of the role of foreign MNCs in the emergence of the states. Foreign MNCs played a pivotal role in exposing many parts of the world and uncovering their wealth. Corporations were instrumental to the development and advancement of nation states in Africa and Asia and it is therefore not surprising that they have emerged as the driver of globalisation in the modern era.¹⁰ While their operations have been largely beneficial in the case of developed countries, the same cannot be said of the experience in the developing countries of the South.

Explaining the relationship between the states of the North and MNCs: the mercantilist origin of the multinational corporation

The modern capitalist system and the predecessor of the modern day MNC were established during the period generally described as the “mercantilist” period. The mercantile system was in operation for more than 200 years between the sixteenth and eighteenth centuries. The mercantile system was dominant for so long because it was beneficial to rent seeking merchants and governments.¹¹ Central to the mercantile system is the belief that governments should advance the goal of maintaining a positive balance of trade with other nations by assuming a protectionist role in the economy. To achieve this end, governments enforced monopolies, banned foreign competitions and subjected workers to poor conditions of service for the benefit of merchants. To the mercantilist, trade was a zero sum game with each participant taking advantage of the other in a ruthless competition.¹² Most of the companies that could arguably be regarded as the predecessors of modern day MNCs such as the East India Company, Hudson’s Bay Company and the African Company were established and became big players during this period.¹³ It has been suggested that mercantilism provides a meaningful interpretation of the relationship between MNCs and government.¹⁴

Today some of the ideas of the mercantile system can be perceived in the relationship between developed countries and MNCs based on their territories. In their study of MNCs, Ruigrock and van Tulder found that “virtually all of the world’s largest core firms have experienced a decisive influence from government policies and/or trade barriers on their strategy and competitive position”, second that “at least 20 companies in the 1993 Fortune 100 would not have survived at all as independent companies, if they had not been saved by their respective governments” and third, that government intervention had been the rule rather than the exception in the past two centuries and “has played a key role in the development and diffusion of many product and process innovations – particularly in aerospace, electronics, modern agriculture, materials technologies, energy, and transportation technology”.¹⁵ Chomsky points out other areas such as the Internet and the World Wide Web and in the earlier days, textiles, steel and energy industries where government intervention on behalf of MNCs has been the decisive factor in their emergence as powerful entities.¹⁶ The 2008/2009 financial crisis and the intervention of governments is also a manifestation of this relationship. The British government’s support for BP in the face of scathing criticisms of the company for the Gulf of Mexico oil spill disaster in 2010 also exemplify the strong bond between states and MNCs.

This is not, however, to argue that there is a formal conspiracy between MNCs and governments but that structures are devised to protect and support them by their home governments. Gilpin, explaining the relationship between states and MNCs says from an American perspective that:

While these political and corporate elites have interests in common, they also have divergent interests. At the same time, therefore, that public officials attempt to utilize corporate power to advance perceived national objectives, the corporate executives seek to maximize their freedom from all government restrictions and to utilize national power for corporate advantage. But generally, in the relationship between American business and government the activities of the corporation are seen by public officials to advance the larger security and economic interests of the nation.¹⁷

The synergy between the state and corporations has enhanced corporate power and, as shall be shown in this book, corporate ability to interfere with human rights.

Corporations and the transatlantic slave trade

The earliest form of corporate abuse of human rights in the countries of the South (including Africa) can be traced to the slave trade period. Though the corporation did not exist then in the form it does today, companies of the slave trade era are very similar in the manner of their operations to the modern day corporate form. Carlos and Nicholas correctly argue that the early sixteenth- and seventeenth-century companies such as the English and Dutch East India companies, the Muscovy Company, the Hudson’s Bay Company and the Royal African Company meet the criteria of modern day multinational corporations.¹⁸ In their article, which emphasises the transaction cost and theory of the firm, the authors argue that the defining character of modern business enterprise similar to early MNCs is a hierarchy of salaried managers who make decisions on production, distribution and prices. The managers of the early MNCs grappled with how to make decisions in the context of trading overseas and similar challenges are faced by the managers of modern MNCs. The search for an organisational structure capable of accommodating global trade is a common feature of early and modern MNCs. In the same vein, Levitt argues that because of their structures, the present day MNCs are similar in character to the trading corporations of the mercantile era.¹⁹ Gilpin asserts that “the giant American corporations which comprise most of the world’s multinationals are the descendants of the East India Company and the other mercantile enterprises that dominated the world economy in the seventeenth and eighteenth centuries”.²⁰ The significance of the slave trade for corporations is that it set the stage for the rise to prominence of corporations which had huge implications for the economic well-being of nation states. From this period, corporations leveraged their powers to bargain with governments and gradually extricate themselves from state control. States of the North also recognised the economic potential of corporations in inter...