The Effect of Multinational Companies on Development
by Novartis Foundation for sustainable developmentA general evaluation
The presence and activities of multinational corporations in the developing world have been the subject of controversy in discussions on development policy. The theoretical background for the negative verdict is largely from the ideological left (for example, the theory of peripheral capitalism and Latin American dependency theories). The skepticism shown is often partly based on negative experiences in the late 1960s and early 1970s, with blatant examples of incorrect behavior - e.g. inappropriate influence of political decisions, exploitative wages and poor social conditions. In recent years the impact on developing countries of multinational corporations has been judged more favorably.
Comparative surveys by the International Labor Organization (ILO) of social conditions, effects on employment, choice of technology and training by multinationals and local companies paint a positive picture for multinationals - certainly in comparison with local companies. This view is confirmed by studies from the UN Center for Transnational Corporations (UNCTC) since the early eighties.
Positive contribution to development
Most multinationals make a positive contribution to the economic growth of developing countries through their investments, products and services. This is primarily through:
• translating theoretical knowledge into practical results by the correct use of their products and services, for example in agriculture, health and industry;
• providing access to modern technological and management know-how (e.g. research, development, marketing, finance);
• investment and employment
• training in all areas, on all hierarchical levels.
The benefits for host countries from a multinational's presence vary according to its structure, product range, services and sphere of activity. Suitable regulatory and financial conditions, a dependable legal system, an adequate infrastructure and a well-functioning government help reinforce such potentially positive effects, while their absence prevents or hinders them.
As is the case with any economic or social activity, multinationals in developing countries can also generate conflicts of interest.
Conflicts of interest
A commercial enterprise seeking profit optimization pursues its own corporate objectives such as achieving an acceptable rate of return on invested capital, gaining market share, or ensuring its long term competitiveness, rather than supporting the host country's economic and social development objectives. The result is that corporations and host country authorities have diverging opinions on very fundamental issues:
• Repatriation of profits to the parent company is in most cases essential in order to contribute to overhead costs incurred at headquarters (e.g. for research and development) as well as to corporate profits as repayment for financial risks. Host countries often consider this a regrettable drain on limited foreign exchange and a burden on the balance of payments.
• Patents which safeguard the results of a company's research and the associated transfer of patent and licensing fees may lead to conflicts because developing countries prefer the lower priced product imitations (e.g. generics).
• A corporation's research policy and its strategic direction may also not coincide with the developing country's interests and needs.
• A company's location policy, for example of production facilities, is largely determined by economic criteria (e.g. volume of production, market size, availability of high quality raw materials and technical skills), and not by a government's need to become self-sufficient through the local production of specific goods.
There are other potential areas of conflict that differ from company to company and country to country. Solving such conflicts requires a serious evaluation of the interests of and benefits to both parties, taking the overall social and economic benefit of a company and product concerned into consideration. There are no universally valid answers.
Ethical behavior
Corporations that act responsibly in a number of obvious areas reduce the potential for conflict between a socially and economically viable development policy and the impact of a corporation's involvement in a developing country. In this context these are the minimum requirements for good business practices:
• As far as the consumer is concerned, there should be no fundamental difference between industrialized and developing countries in the quality of products and services, their safety and information for their use (e.g. indications and side-effects of drugs).
• The same objectives and principles must be adopted in the safety of production and environmental protection all over the world. Double standards in areas which affect the lives and health of people are unacceptable.
• If better information or greater insight reveals problem areas which fall within the responsibility of a company, it must take corrective action, regardless of existing regulations.
• Multinationals should set an example in their wage and social policies. Applying the standards of local industry or simply observing the legal minimum is, in many cases, inappropriate for the social conditions in poor countries.
A multinational corporation which operates in different legal and social frameworks, and which strives for uniform ethical standards, is well advised to develop corporate policies for sensitive activities in the developing world - whether in marketing, environmental protection or other areas. Not everything legal is morally acceptable.
The Novartis Foundation seeks to partner with agencies on the local level to secure basic needs and improve economic conditions, health, and food security among the world's poorest people. © Novartis Foundation for Sustainable Development (NFSD), 2000. http://www.foundation.novartis.com/
Unless otherwise noted, all materials on the urbana.org web site are Copyright InterVarsity Christian Fellowship / USA. All rights reserved.
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