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

Transnational Corporations: Impediments or Catalysts of Social Development?
Part 3: Institutional Arrangements and Pressures to Foster Transnational Corporate Responsibility

Because transnational corporations cannot be expected to unilaterally promote social development and social integration, it is important that they be subjected to pressures and institutional arrangements compelling them to advance such goals. Part 3 will describe some of the effective governmental and non-governmental measures designed to foster corporate social responsibility.  

Governmental Efforts

In recent history, governments have constituted the agents most responsible for advancing social development and social integration. Through anti-trust laws, anti-discrimination codes, labour legislation, consumer protection regulations, welfare assistance programmes, health care plans, educational facilities and transportation systems, governments have attempted to meet citizens' basic needs, ensure equal opportunity for advancement and minimize disparities in living standards. However, in a world where the most dynamic economic entities are global and yet governments remain local and national, serious problems emerge. As transnational corporations are increasingly able to play communities and nations off against one another to receive the most advantageous investment package, governments are decreasingly able to perform their traditional functions of promoting social welfare:

"The internationalization of once local corporations has placed a growing number of communities in a terrible dilemma: either cut wages, gut environmental standards, and offer tax breaks to induce corporations to build new factories or offices, or prepare to become an economic ghost town." 150

As governments remain concerned with citizens' living standards, jobs and the environment at home, their largest corporations are slashing jobs, abandoning communities and competing globally by shaving environmental and labour costs. Despite these disadvantages and weaknesses, however, governments continue their efforts to engender socially responsible activities by transnational corporations.

Sub-National and National Level

Governments attempt to promote social development and social integration through regulation of transnational corporations and trade-related investment measures (TRIMs). These measures can assume a number of different forms including positive law, informal incentive schemes151 and foreign direct investment criteria.152 Furthermore, such measures can cover a broad expanse of substantive areas, including corporate transparency through disclosure of information requirements, production processes through local content regulations, workplace conditions through labour legislation, and employment levels through mandated hiring of nationals. Governments have also enacted a host of financially oriented measures regulating banks, stock markets, divestment and the repatriation of profits. Additionally, governments have implemented legislation mandating local equity participation, property ownership limitations, transfer of technology requirements as well as responsible environmental and energy practices. Finally, governments have required transnational corporations to assist with macro-economic issues through balance-of-payments clauses, anti-trust laws and import-export limitations.

Although governments have enacted a broad range of regulatory and trade-related investment measures, it is difficult to ascertain the effectiveness of such efforts. There exist surprisingly few micro studies on the effects of TRIMs on corporate behaviour. The studies that do exist indicate that trade-related investment measures have produced mixed effects. One of the most contentious and complex issues is the extent to which TRIMs dissuade transnational corporations from investing within a particular country at all; this concern is especially prevalent now when TNCs are able to play governments off against one another in efforts to receive the most advantageous investment package.

Two case studies involving the automotive and computer industries have demonstrated the ways in which the Mexican government has successfully used trade-related investment measures to advance social goals. In the automotive sector, Mexico's domestic content laws and export requirements have been particularly effective.153 In the mid-1970s, the Mexican government announced that manufacturers who did not comply with these TRIMs would have to withdraw from the market; Ford, Volkswagen, Chrysler and Nissan all met Mexico's demands. Despite heavy protests from United States unions, General Motors also decided to comply with Mexico's policies. As a result of these TRIMs, Mexico became one of the world's most important sourcing countries for auto engines;154 furthermore, Mexican auto exports expanded from 253 million dollars in 1977 to 3.3 billion in 1987.155

The Mexican government has also successfully implemented trade-related measures in the computer industry.156 In 1981, when Mexico's market for computers was completely supplied by imports, the government enacted legislation in the computer sector regarding local manufacturing, local equity ownership, domestic content, exports, as well as research and development. By juggling these various requirements in negotiations with IBM, Apple and Hewlett-Packard, the Mexican government "achieved its goal of stimulating the local manufacturing of computers. While Mexico has allowed the industry to remain reliant on foreign investment and technology, it has made considerable progress toward increasing the percentage of Mexican value-added in the industry".157

Another governmental measure that has successfully influenced transnational corporate behaviour is a "clawback clause". As mentioned above, governments have implemented various informal incentive schemes to attract TNC investment. For example, in efforts to induce Diamond Star Motors, a joint venture of Chrysler and Mitsubishi to locate a plant in Illinois, the relevant American state and local governments offered the company 296 million dollars in tax breaks and 10 million dollars in land; in return, the companies promised to employ 28,000 individuals in their factory.158 A "clawback clause" would require these corporations to refund to the state and local governments the millions of dollars in incentives they accepted if the companies were to break their contractual obligations or decide to close the plant earlier than expected. European governments have repeatedly and successfully attached such measures to heavy industrial subsidies.159

Another creative idea regarding governmental regulation of transnational corporate activity includes the extraterritorial application of home country laws. This measure would require transnational corporations operating in developing countries to adhere to relevant laws applicable in their home countries, because such laws in the environmental, consumer and labour fields are often more stringent than the requirements found in host countries. Extraterritorial application of home country laws could have a beneficial impact on the activities of US-based pesticide companies, for example. Under current United States law, pesticide companies wishing to sell their products in the United States must first obtain approval from the Federal Drug Administration; however, even if the FDA determines that their products are too unsafe to sell in the domestic market, these companies are permitted to sell their pesticides abroad.160 As described above, the marketing and distribution policies of transnational pesticide companies continue to produce health and environmental problems in both industrialized and developing countries.161 If the United States were to adopt a law mandating the extraterritorial application of its drug and pesticide laws, US-based transnational corporations would have to adhere to the stringent FDA regulations — no matter where they wanted to sell their pesticides. Unfortunately, no country has enacted such legislation yet.

International Level

Because trade agreements such as the GATT render trade-related investment measures more difficult162 and because transnational corporations are increasingly able to play communities and nations off against one another, it is crucial that there exist international governmental attempts to promote socially responsible behaviour by transnational corporations. International governmental bodies can pressure TNCs into socially responsible activities through two primary methods: the implementation of a code of conduct and regulatory efforts.

Code of Conduct

Efforts to formulate a code of conduct for transnational corporations originated in the early 1970s when the United Nations established the Commission on Transnational Corporations as an intergovernmental subsidiary body of the United Nations Economic and Social Council (ECOSOC). The Commission quickly established a working group to formulate a code of conduct for TNCs and, by 1978, it had completed a first draft. However, due to disagreements between the business community, industrialized countries and developing countries, this initial draft underwent a number of revisions that granted TNCs increasingly broader rights.

The most recent draft emerged in 1990.163 This code of conduct is only a voluntary instrument and contracting parties do not assume any legally binding obligations. Although the 1990 draft generally grants transnational corporations broader rights and privileges than earlier drafts, it covers very similar issues and is divided into two sections: activities and treatment of transnational corporations. The section on TNC activities is very thorough, stating that these entities should respect national sovereignty; refrain from interfering in a government's internal affairs; adhere to the host government's economic, social and cultural objectives; renegotiate contracts signed under duress; respect human and worker rights; abstain from corrupt practices; facilitate local employment and ownership; co-operate on balance-of-payments issues; refrain from transfer pricing and anti-competitive practices; foster transfer of technology; promote consumer and environmental protection; and disclose relevant information.164 In return, host governments must grant transnational corporations fair and equitable treatment as well as national treatment; adequately compensate transnational corporations for nationalized or expropriated property; permit TNCs to transfer all payments legally due; disclose to corporations relevant information on laws and administrative policies; ensure the confidentiality of TNC-disclosed materials; and facilitate the transfer of TNC employees between entities of the corporation.165

While a significant level of effort has been expended to draft an international code of conduct for transnational corporations, the utility of implementing such a code has been subject to debate. Critics assert that this code merely duplicates existing international standards and agreements; that its voluntary nature renders it useless; and that it is politically not viable. However, the arguments in favour of a code are stronger. First, a code of conduct is important because it addresses TNC activities on an international level — a critical endeavour given the recent rise in transnational corporate power relative to national governments' regulatory power. Second, the process of revising and ratifying a code can help build trust between transnational corporations, non-governmental organizations and developing countries — an important development as attitudes towards economic activity increasingly favour the free market. Third, it could help address the afore-mentioned substantive issues and prevent the downward harmonization of consumer, environmental and labour standards. Fourth, a code could help streamline the confusing and sometimes contradictory multitude of charters, guidelines and laws regulating transnational corporate activity. A simplified system would decrease administrative costs TNCs currently incur to ensure compliance with a confusing web of regulatory frameworks and could facilitate adherence to minimum standards. Fifth, a code of conduct would not duplicate many existing instruments, because very few such documents are explicitly directed towards the activities of transnational corporations, focusing instead on governmental obligations. Finally, it is important to note that non-binding agreements can be influential because they engender a normative environment, form the building blocks of future international law and can provide a forum for continued dialogue on their subject matter.

Unfortunately, however, the current prospects for a code of conduct are not promising. The political will behind the initial efforts to formulate such a code has waned. In May 1994, the United Nations Commission on Transnational Corporations decided to dissolve itself and fold into the United Nations Conference on Trade and Development (UNCTAD). Furthermore, last year the Commission's companion body, the United Nations Centre on Transnational Corporations, was downgraded into a smaller unit of UNCTAD, and its office moved from New York to Geneva. The Centre's mandate was also radically transformed: as of 1994, it no longer undertakes valuable studies on TNC activity but rather seeks only to promote foreign direct investment. Because of the recent changes in the former United Nations Commission and Centre on Transnational Corporations, attempts to promulgate an international code of conduct for TNCs must now occur in a different forum.

In addition to this United Nations document, there exist two other international governmental codes focused upon transnational corporate conduct: the Organisation for Economic Co-operation and Development's166 Guidelines for Multinational Enterprises (1976) and the International Labour Organisation's Tripartite Declaration of Principles Concerning Multinational Enterprises and Social Policy.167 Similar to the United Nations code, the OECD Guidelines are directed at TNCs, are voluntary and are not legally enforceable. The critical differences between the OECD Guidelines and the United Nations code are that, while the Guidelines apply only to the few industrialized countries that are signatories, the code would apply globally. Furthermore, the United Nations code is far more comprehensive and restrictive of transnational corporate activity. The ILO Declaration is also directed towards both governments and TNCs, is voluntary and is not legally enforceable. While the ILO instrument is more restrictive of TNC activity than the OECD document, the ILO Declaration is not as comprehensive as the United Nations code. It is also important to note that not all countries have ratified this Declaration.

Regulatory Efforts

International governmental bodies currently regulate the activities of transnational corporations pursuant to customary law and numerous treaties. The efforts of these international institutions to promote socially responsible behaviour by TNCs constitute an expansion of national and sub-national attempts to advance such goals.

A thorough discussion of the vast and disparate array of international regulations governing transnational corporations is outside the scope of this paper. It is important to note, however, that very few of these instruments are directed explicitly towards transnational corporations — although they might indirectly affect the legality of TNC activities. Examples of relevant international instruments include the United Nations General Assembly resolutions on permanent sovereignty over natural resources,168 the United Nations Charter of Economic Rights and Duties of States,169 the World Health Organization's International Code of Marketing of Breast Milk Substitutes, FAO's (Food and Agriculture Organization of the United Nations) International Code of Conduct on the Distribution and use of Pesticides,170 the International Covenant on Civil and Political Rights,171 the Set of Multilaterally Agreed Equitable Principles and Rules for the Control of Restrictive Business Practices,172 the United Nations General Assembly resolution on consumer protection,173 the Vienna Convention for the Protection of the Ozone Layer,174 and the International Convention for the Prevention of Pollution of the Sea by Oil.175

The extent to which these international agreements have been effective in regulating the activities of transnational corporations is difficult to determine. As mentioned above, these documents often possess the drawbacks that they are not explicitly directed towards TNCs, establish weak oversight mechanisms and fail to create an enforcement authority. Legal realists would contend, therefore, that these international agreements are completely ineffective. While such agreements are certainly not ideal, however, the legal realist critique is too extreme because it ignores the more subtle ways in which law operates. Although these international documents do not possess enforcement mechanisms and, therefore, no TNC can be legally compelled to comply with their provisions, these agreements can still influence the behaviour of transnational corporations by conditioning the normative context in which TNCs operate. The environmental, consumer, labour and human rights agreements that occupy the international arena are difficult to ignore. Furthermore, they provide citizen groups with legitimacy as they campaign against damaging TNC policies. For example, while the World Health Organization's International Code of Marketing of Breast Milk Substitutes is not legally enforceable, it provides TNCs with a benchmark by which to judge their operations and enhances the legitimacy of citizen claims that a TNC might be violating international moral standards. In sum, these international agreements are not perfect and their lack of enforceability renders difficult an assessment of their effectiveness. However, they are simultaneously not irrelevant because they shape the normative environment in which TNCs operate and possibly constitute the first step in the creation of a more enforceable international legal régime.

150 50. Shuman, forthcoming.

151 51. Examples include tax breaks for investors, special economic zones for manufacturers and subsidies to companies engaging in value-added production.

152 52. Governments sometimes require investors to meet certain criteria before being granted access to a national market. For example, TNCs might be required to co-operate on balance-of-payments issues or employ nationals as a condition of market entry.

153 53. Samuels, op. cit.

154 54. Ibid., p. 133.

155 55. Ibid., p. 113.

156 56. DiConti, op. cit., pp. 108-112.

157 57. Ibid., p. 112.

158 58. Shuman, op. cit.

159 59. LeRoy, 1994, p. 43.

160 60. Zuckoff, 1994c.

161 61. See the sub-sections on "Consumer issues and health ramifications" and "Environmental resources" in part 1 of this paper.

162 62. See the section on "The rights of transnational corporations" in part 2 of this paper.

163 63. United Nations Centre on Transnational Corporations, 1990.

164 64. Ibid., paras. 7-46.

165 65. Ibid., paras. 49-55.

166 66. The Organisation for Economic Co-operation and Development (OECD) is the major policy-formulating body for industrialized countries. Members include Australia, Canada, Japan, New Zealand, the United States and the nations of Western Europe. The OECD revised its guidelines in 1979 and 1984 (Getz, 1991, p. 569).

167 67. American Society of International Law, 1978, p. 422.

168 68. These resolutions contain more detailed provisions than the United Nations code regarding countries' sovereignty over their natural resources. However, they do not explicitly mention transnational corporations, are not legally binding, and possess no implementation mechanisms (United Nations, 1963, General Assembly resolution 1803, p. 15; United Nations, 1973, General Assembly resolution 3171, p. 52).

169 69. This document states that transnational corporations shall not intervene in the internal affairs of host countries, but is less detailed than the United Nations code. This charter is not legally binding, nor does it possess any implementation mechanism (United Nations, 1975, General Assembly resolution 3281, p. 50).

170 70. This document applies to both private and public entities involved in the pesticide industry with respect to labelling, advertising, distribution, training of personnel and disclosure of information.

171 71. Some human rights treaties such as the Covenant on Civil and Political Rights are binding on their signatories and possess established implementation mechanisms. On the other hand, there is disagreement as to whether these instruments regulate the conduct of private actors such as transnational corporations (United Nations, 1967, General Assembly resolution 2200, p. 52).

172 72. United Nations, 1980, General Assembly resolution 35/63, p. 123.

173 73. United Nations, 1985, General Assembly resolution 39/248, p. 179.

174 74. American Society of International Law, 1985, p. 1529.

175 75. This instrument applies both to public and private shipping entities (American Society of International Law, 1970, p. 1).


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