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Reproduced with permission from
the United Nations Research Institute for Social Development

Transnational Corporations: Impediments or Catalysts of Social Development?
Environmental Resources

Transnational corporations can adversely affect social development in two ways through their consumption of environmental resources. First, TNCs engaged in extracting industries such as mining and oil production have been accused of plundering natural resources in developing countries. Many transnational corporations first bought mineral-rich lands when developing countries were economically too weak or poor to exploit these resources themselves.55 Long-term contracts permit transnational corporations to continue to mine these resources without offering just compensation to developing countries.56 After extracting such resources at low cost, TNCs then process them in developed countries before shipping them back to developing countries where they are sold at inflated prices — a process that generates little benefit for the developing country from which the resources were originally mined.57

Transnational corporations can also negatively impact social development through their degradation of environmental resources. These entities have been responsible for some tragic environmental disasters over the past 20 years, for example, Union Carbide in Bhopal, India,58 Exxon's Valdez spill off Alaska,59 and Texaco in Ecuador.60

TNCs have been linked to a host of environmental problems. They generate 50 per cent of greenhouse emissions, which are responsible for global warming.61 They are also the primary producers and users of ozone-depleting chlorofluorocarbons (CFCs).62 Furthermore, transnational corporations are significant polluters of air, land, ground water, wetlands and the ocean.63 Finally, through their commercial logging and mining activities, TNCs contribute to deforestation. In the mid-1980s, for example, foreign corporations controlled 90 per cent of logging in Gabon and 77 per cent in the Congo.64 Such logging and mining activities possess negative externalities such as rapid run-off of rain water leading to flooding and loss of topsoil; TNCs often do not internalize these social costs and farmers are usually too poor to buy the land from the forest owners to prevent the occurrence of such negative externalities.65

Although transnational corporations can certainly impede social development through their environmental practices, the relationship between TNCs and the environment is exceedingly complex. Critics do not maintain that transnational corporations should abstain from consuming environmental resources, but rather that their activities should promote sustainable growth and development. While TNCs usually follow lower environmental standards in developing countries than in industrialized nations, there is some evidence that their environmental practices in developing countries are more responsible than local firms operating in such countries.66 However, critics assert that, because transnational firms possess greater resources and better access to research and development, TNCs bear an enhanced responsibility to promote environmentally sustainable practices.67 Under pressure from citizen organizations, some companies have begun to follow more environmentally responsible policies. For example, Dow Chemical, a once maligned polluter, has established quarterly meetings where environmentalists brief senior management for one-and-a-half days each session. Managers' salaries are pegged to environmental goals, and the company cut toxic releases 32 per cent between 1988 and 1991. IBM has also implemented some laudable environmental practices including the rewarding of employees for technical innovations that help it comply with environmental standards. Finally, AT&T has won 18 environmental awards since 1990.68

However, while these three companies have begun to follow more environmentally responsible policies, the majority continue to plunder the mineral resources of developing countries and consume environmental resources in a destructive and non-sustainable manner — practices which certainly hamper prospects for social development. General Electric and DuPont are more typical of companies involved in environmental issues, both possessing abominable records. DuPont, for example, was responsible for 254 million pounds of toxic chemical releases in 1991 in the United States alone, and has demonstrated little desire to improve its environmentally destructive practices.69

Indirect Effects of TNCs on Social Development

Economic Growth

Transnational corporations can potentially promote social development through their activities that generate economic growth. One observer has written:

"As per capita income increases, as levels of education increase and as the growth in communications technology increases awareness of alternative lifestyles, there are rising expectations with regard to matters such as housing, welfare, recreation, and medicine. These public welfare functions have traditionally been considered the province of public agencies... But as corporations are intimately involved with the growth of the economy, they are perceived by many as the most effective levers for change."70

There exists some evidence that foreign direct investment by TNCs and the foreign exchange that TNCs provide can improve the economic performance of the countries in which they operate.71 "TNCs impact the process of economic growth by influencing the amount and quality of new capital formation, transfer of hard and soft technology, development of human resources, and the expansion of trade opportunities."72

Furthermore, as case studies of Taiwan, Province of China, and South Korea demonstrate, economic growth can foster social development under some conditions. In Taiwan, for example, miraculous economic growth has been correlated with increased educational levels, improved health conditions, longer life spans, better housing conditions, enhanced civil liberties and political liberalization.73

While in theory TNCs can promote social development by fostering economic growth, in practice this relationship rarely exists for two reasons. First, it is unclear whether transnational corporations are actually responsible for economic growth in host countries. In the two most notable cases of recent economic transformation, South Korea and Taiwan, transnational corporations played a negligible role.74 Furthermore, TNCs can actually hamper indigenous economic growth by driving local entrepreneurs out of business, importing key goods and services, remitting a majority of the profits to their home countries, and transferring fees and royalties to parent companies located outside the host economy.75

Second, even if TNCs do improve a host country's economy, the relationship between economic growth and social development is tenuous. Although the global economy continues to grow annually, such growth is hardly curing problems of poverty, unemployment, disparities in wealth, or other issues of social malaise. In Côte d'Ivoire, for example, while TNCs might have helped to foster aggregate economic growth from 1960 to 1975, they did little to promote social development: unemployment increased, distribution of income widened and nationals increasingly lost control over the country's industrial capacities.76 In sum, while transnational corporations can be the engines of economic growth under some circumstances, the economic power of TNCs is rarely harnessed to achieve the ends of social development.

Transfer of Technology

Transnational corporations can also indirectly affect social development through the transfer of technology to host countries. Transferred technology can assume many forms including hardware such as machinery and equipment; software such as blueprints; process and product design; and training in management, marketing and quality control methods.77 Furthermore, such technology can be transferred through a variety of methods including joint ventures, foreign direct investment, licensing agreements, turnkey plants, technical assistance, subcontracting arrangements and non-equity investments.78

TNC technology transfer can potentially provide host countries with a number of benefits, including enhanced economic growth.79 "More advanced foreign technology transfer has acted as a trigger mechanism for modern economic growth in some developing countries which are on a lower level of economic and social development."80 Technology transfer can advance economic growth in a variety of ways: facilitating the production of new goods with higher value-added content; increasing exports; increasing output for a given level of input; and improving management techniques.81 There also exists some evidence that transfers of technology can help develop a particular host country industry. For example, the expansion of foreign-owned TNC semiconductor plants off the coast of Singapore has spurred the emergence of the domestic semiconductor industry within Singapore itself.82

TNC transfer of management skills can also potentially advance human resource development — an important component of social development. "Through its employment of indigenous professionals and managers, the multinational corporate subsidiary transmits knowledge and experiences that are less available locally."83 Transnational corporations can also foster human resource development through their research and development practices, particularly in developing countries. Such practices can potentially increase the skill levels and technical capabilities of employees in developing countries.

Although in theory transnational corporations can foster social development in developing countries by transferring management skills as well as research and development (R&D) capacities, in practice their record in this field is mixed. First, governments in developing countries have historically criticized TNCs for not employing enough nationals in management positions and, therefore, transferring only minimal management skills. Second, while large transnational corporations spend billions of dollars on research and development annually, they conduct only a small fraction of such R&D outside industrialized countries.84 Third, when transnational corporations do conduct R&D in developing countries, they often merely adapt existing technology to local conditions — a process that generates little impact on deeper indigenous research and innovation capabilities (know-why).85

Finally, TNC transfer of technology policies in developing countries have received criticism on numerous other grounds. For example, there is some evidence that the technology transnational corporations transfer is too costly for developing countries, does not create local linkages, is protected too exclusively through patents, is often capital intensive and therefore inappropriate for labour-intensive developing countries, and produces goods for affluent classes while failing to meet local needs.86

Transnational Corporations and Taxes

Transnational corporations can also indirectly foster social development through their provision of taxes to the state, because governments often use these revenues to finance social welfare programmes. Such taxes can be substantial. For example, in 1989, foreign affiliates of US-based transnational corporations provided 15.5 per cent of government revenues in Guatemala, 12.2 per cent in Peru, and 4.6 per cent in Mexico.87 In 1992, Phillip Morris paid 4.5 billion dollars in taxes to the United States government alone, including billions more in employee and excise taxes.88

While transnational corporations do pay substantial taxes under some circumstances, they engage in a variety of practices that intentionally deprive governments of tax revenues they are due. The ability of transnational corporations to move funds and goods rapidly between countries allows them to manipulate intracompany payments and avoid taxes — a process known as transfer pricing. For example, a German company manufacturing in France where tax rates are high sells its product at below-market values to a subsidiary in Puerto Rico where taxes are low. From Puerto Rico, the company sells to wholesalers or retailers, claiming a loss in France and huge profits in Puerto Rico where it pays minimal taxes. Countries have attempted to combat transfer pricing tactics through unitary taxation policies under which a government calculates a company's taxes on the basis of its global profits instead of on the basis of profits it declares within the country's borders.89 However, companies have successfully lobbied against unitary taxation policies in most jurisdictions.
 

Transnational Corporations and Economic and Social Equality

With the income of the richest one fifth of the world's population averaging 50 times that of the poorest one fifth,90 disparities in wealth characterize most countries. In many nations the gap between poor and rich is widening.91 Although transnational corporations may not be responsible for the conditions which originally precipitated such inequities, their activities with respect to foreign direct investment, consumer issues and employment often exacerbate the situation. While TNCs certainly produce benefits for some people of the world, the bulk of the population is left out of the system that these enterprises help to perpetuate. As two analysts have recently written regarding the form of "globalization" transnational corporations are creating:

"The inhabitants of a penthouse apartment on the Upper East Side of Manhattan are drawn by taste, style, habit, and outlook into a closer relationship with similarly situated citizens of Brussels, Rio, or Tokyo, and further and further away from poorer, less mobile residents who may live a block or two away." 92

Transnational corporations can exacerbate existing disparities between the poor and rich, for example, through their activities affecting consumers. With over four fifths of the globe's purchasing power concentrated in countries possessing only one quarter of the world's population,93 transnational corporations structure their marketing and distribution systems to provide goods and services only to economically prosperous locations. Approximately two thirds of individuals in the world are unable to enjoy any of the consumer benefits transnational corporations can provide.94 Lawyers in Frankfurt and Hong Kong will always present better profit-making opportunities than will sharecropping farmers in India or Mali.

Commercial banks sometimes exemplify the ways in which TNC consumer-related activities can reinforce existing inequities in developing countries. First, such financial institutions usually conduct transactions only with the government and the élite, refusing to extend credit to those citizens who need it most; second, their loans have historically resulted in huge debts which developing countries have financed at the expense of social programmes; and, third, commercial banks have often served as conduits for legal and illegal capital flight.95

Furthermore, transnational corporations can perpetuate an inequitable social and economic system through their employment practices. As a United Nations report recently summarized:

"The emerging pattern of integrated international production may indeed be accentuating disparities between certain core activities and jobs that are dispersed throughout a firm's international production system...[creating] a growing periphery of jobs, many of which are less stable and less highly remunerated than those at the core." 96

For example, while the Japanese might manufacture computer components in Thailand, they refuse to export jobs in the crucial value-added stage of the process, i.e. the manufacture of the computer chip; while NIKE employs Indonesian women to sew shoes together, the company does not introduce these employees to the value-added process in which NIKE infuses its patented technology (the "Pump") into the product. Thus, as companies integrate their production strategies, they reinforce regional disparities in skills and income — a process some advocates of developing countries have termed economic "recolonization" .97

55 5. de George, op. cit., p. 75.

56 6. Ibid., p. 74.

57 7. Ibid.

58 8. In December 1984, one of the world's worst industrial disasters occurred in a Union Carbide plant in Bhopal, India. Poisonous gas leaked from a negligently maintained chemical factory killing 3,000 and injuring over 200,000. See Reinhold (1985), Lueck (1985) and Everest (1985).

59 9. An Exxon ship called the Valdez crashed off the coast of Alaska, spilling thousands of gallons of oil into the ocean and killing large amounts of marine life. The company untruthfully maintained that the oil spill had caused only minor damage and that the oil spill had been satisfactorily neutralized (de George, op. cit., p. 5).

60 0. For years, Texaco has been pumping oil from the Ecuadorian rain forest. Recently a class action suit against the company has been filed in the United States on behalf of 300,000 indigenous people in Ecuador seeking compensation for the environmental destruction Texaco's activities have visited upon their lands. See The Multinational Monitor, 1993.

61 1. UNCTAD, 1993, p. 101.

62 2. E.I. DuPont de Nemours & Co. accounts for one quarter of all CFCs (United Nations Transnational Corporations and Management Division, 1992, p. 226).

63 3. UNCTAD, 1993, p. 141.

64 4. United Nations Transnational Corporations and Management Division, 1992, p. 228.

65 5. de George, op. cit., p. 67.

66 6. United Nations Transnational Corporations and Management Division, 1992, pp. 233-234.

67 7. Ibid., p. 226.

68 8. Rice, 1993, p. 122.

69 9. Ibid.

70 0. Samuels, op. cit., p. 18.

71 1. United Nations Commission on Transnational Corportions, 1993a, p. 7, paras. 6-7; UNCTAD, 1994c, p. 42, para. 79.

72 2. United Nations Transnational Corporations and Management Division, 1992, p. 245.

73 3. Chan and Clark, 1992, pp. 42-44; Tien, 1992, p. 15; Economic Intelligence Unit, 1993/94, p. 9.

74 4. See, for example, Chan and Clark (op. cit., pp. 42-44), Tien (op.cit.), and Cheng and Haggard (1992).

75 5. UNCTAD, 1994c, p. 42, para. 79.

76 6. Alschuler, op. cit., p. 97.

77 7. United Nations Commission on Transnational Corporations, 1992, pp. 5-6, para. 8.

78 8. Tolentino, 1993, p. 121.

79 9. As described above, of course, the relationship between economic growth and social development is ambiguous.

80 0. Tolentino, op. cit., p. 121.

81 1. United Nations Commission on Transnational Corporations, 1992, p. 6, para. 10.

82 2. Tolentino, op. cit., p. 142.

83 3. DiConti, 1992, p. 107.

84 4. United Nations Commission on Transnational Corporations, 1992, p. 7, para. 14, and p. 10, para. 20. Large scale R&D rarely occurs in developing countries (United Nations Transnational Corporations and Management Division, 1992, p. 167).

85 5. United Nations Commission on Transnational Corporations, 1992, p. 14, para. 37.

86 6. Lall, 1993, p. 13.

87 7. United Nations Transnational Corporations and Management Division, 1992, p. 115.

88 8. Rosenblatt, 1994.

89 9. Barrett, 1994.

90 0. Leger Sivard, 1991, p. 5.

91 1. Barnet and Cavanagh, op. cit., p. 179.

92 2. Ibid., p. 22.

93 3. Barnet and Cavanagh, op. cit., p. 192.

94 4. Ibid., p. 183.

95 5. de George, op. cit., p. 68.

96 6. UNCTAD, 1994b, p. 40, para. 60.

97 7. Chakravarthi, 1990.


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