House of Lords - Economic Affairs

Select Committee on Economic Affairs First Report

CHAPTER 5: ROLE OF TRANSNATIONAL CORPORATIONS

139. A significant feature of globalisation is the increasing internationalisation of production. There are distinct but related aspects. One is the growth of "production networks" in which stages of production are outsourced to low wage economies.[73] The other is the role of the transnational corporation (TNC) and foreign direct investment (FDI). First, however, we consider the issue of measuring the power of TNCs.

Measuring the power of TNCs

140. Many witnesses focused on the presence and power of TNCs in the global economy as the defining characteristic of the current period of globalisation. According to Christian Aid, "over the last 30 years, the number and size of TNCs has increased dramatically. In 1970, there were 7,000 TNCs, whilst today there are 63,000 parent companies operating with about 690,000 subsidiaries in almost all sectors, countries, industries and economic activities in the world."[74] Donald McKinnon referred to TNCs as the "main drivers of and beneficiaries from globalisation" (Ev 1, p 305). CAFOD saw the "increasing size and dominance of transnational corporations" as one of the main concerns about globalisation (Ev 1, p 339).

141. A theme which emerged from the evidence we received is that TNCs are powerful and becoming ever more powerful. It is not, however, at all clear how the power of TNCs is to be measured or, for that matter, of what it actually consists. To demonstrate the size of the most significant TNCs, some commentators compare them to countries' economies. Christian Aid, for example, asserted that "many TNCs are bigger than most countries in which they operate. In 1998, the annual turnover of BP was larger than the GDP of all the least developed countries combined".[75]

142. Lord Browne, Group Chief Executive of BP plc, was critical of this comparison between company turnover and a country's GDP: he referred to it as an "abuse of data" (Ev II, Q 1270). Sir Samuel Brittan similarly said: "It is often said that large American companies ... [have] a higher turnover than the GDP of Luxembourg or even Belgium, but these are completely different entities." (Ev I, Q 593). Michael Kitson expressed the same view (Ev I, Q 296).

143. A country's Gross Domestic Product is an aggregate of value added - income payments to labour, capital and land - whereas the sum total of a company's sales figures also includes payments to other firms for intermediate goods. The two are not, therefore, comparable. It is nonsensical to talk in such terms, and to compare business turnover with value-added. It is likely, therefore, that Martin Wolf is correct when he asserts that "corporations are neither as big or as powerful as critics claim".[76] We note, however, that UNCTAD has recalculated TNCs sales in terms of value added. They conclude that the value-added activities of the 100 largest TNCs have grown faster than those of countries in recent years, accounting for 4.3% of world GDP in 2000, compared with 3.5% in 1990, and that 29 of the world's 100 largest economic entities are TNCs, compared with 24 in 1990.[77] As Michael Kitson states, TNCs are "more powerful now than they have been" (Ev I, Q 296) - they are powerful players in the globalised economy and powerful forces in many national economies. To anticipate our conclusion in paragraph 157 below, what emerges from the evidence is that TNCs are powerful, but their power is constrained.

TNCs and the economic effects of FDI

144. Foreign direct investment flows have grown significantly in recent years. According to the World Bank's world development indicators, FDI by firms as a share of GDP increased between 1989 and 1999 from 2% of world GDP to 4.6%.[78] Sir Andrew Large referred to both the recent increase in trade which, he said, over the last 10 years had increased fourfold to $3 billion and to the even greater increase in FDI flows which were $2 billion a year in the 1970s, increasing to $130 billion in 2000 (Ev 1, p 293).

145. A benefit of FDI is that it makes the surplus savings of some countries available to others where it will be more productive and yield a higher return. It also promotes economic development by acting as a mechanism for the transfer of technology and skills from developed to developing countries. We received a range of evidence in support of these views. The Confederation of British Industry (CBI), for example, said: "… compelling evidence that FDI has helped developing countries to achieve sustained poverty reduction can be found in the contrast of the Asian Tigers, which opened themselves to trade and investment, with the experience of many African countries. Characterised by very low levels of FDI, they continue to be dogged by persistent levels of poverty." (Ev 1, pp 134-35). Clare Short was emphatic about the benefits of FDI to developing countries: "In terms of the interests of developing countries, responsible, foreign direct investment, bringing technology transfer and improved infrastructure is absolutely the key to them speeding up their economic development." (Ev II, Q 2039). Nicholas Stern described FDI as "a powerful force in support of growth" and "a powerful force in terms of ideas, management, technology and so on." (Ev II, Q 1826).

146. The Department for Trade and Industry also referred to the benefits - especially to developing countries - of the technological spread facilitated by foreign direct investment and the link between FDI and economic growth:

"… the economics of this debate is the extent to which it is true that multinationals … bring with them to host countries things which are likely to improve the long-term rate of growth of that country's economy. The evidence seems to be stronger for developing countries. The proposition there is that they (developing countries) have a greater chance of catching up … than if they did not have this new technology." (Ev I, Q 20).

147. Peter Aven, President of the Alfa Bank in Russia, and Kakha Bendookidze, Director General of United Heavy Machinery, offered a Russian perspective. Mr Aven acknowledged that there is an anxiety, expressed by the anti-globalisation movement, that TNCs wield unaccountable power (Ev II, Q 1718). As far as the Russian economy was concerned, however, such corporations were, in his view, a force for good: "… technology did not exist until transnational corporations came into the country ... For Russia, especially after the collapse of the Soviet Union, more openness and stronger presence of transnational corporations are positive factors." (Ev II, Q 1678). Mr Bendookidze referred to the contribution of TNCs in the way in which they promoted the spread of knowledge and experience about organising and managing companies and the transfer of new technologies (Ev II, Q 1959). Tito Mboweni of the South Africa Reserve Bank was similarly positive about the effect of TNCs in South Africa: "Have they exploited South Africa or have they assisted South Africa to develop? The answer is most definitely that they have assisted South Africa to develop, without a doubt" (Ev I, Q 583) - in fact, he said, it was certain domestic companies which could be described as exploiting South Africa because of their pollution of the environment.

148. Dr Yilmaz Akyuz of UNCTAD stressed the importance, however, of getting the right sort of foreign direct investment. It was not, he suggested, sufficient that the TNCs should be entering a country in order to employ unskilled labour: "We want them to bring technology; we want them to bring know-how. We want them to establish linkages with domestic industry and eventually we want them to pass on some of the advantages that they enjoy." (Ev I, Q 962). And Michael Kitson suggested that "FDI … may be an effective vehicle for increasing the globalisation of technology" but "much will depend on the objectives of the MNC: is it seeking the lowest cost of production or is it seeking to utilise national or sub-national expertise and research?" He went on: "… many MNCs may tend to be loyal to their own home-based country when they have to locate a strategic asset such as technology although others may be seeking out competitive clusters abroad." (Ev 1, p 111).

149. Donald McKinnon recognised that TNCs were "a powerful force for global technology transfer, skills development and international investment flows" but thought that there was a perception amongst recipient countries that significant benefits were not flowing to their citizens: "… there is a perception that they are not doing enough in terms of promoting training; transferring technology/addressing the digital divide; widening the country coverage and depth of investment flows; bringing about a more equitable multilateral trading system; and protecting the global commons." (Ev 1, p 305). Lord Browne acknowledged this point. Reflecting on the achievements of globalisation, he commented that there is "… an awful lot still to do. It is not evident to me, when I go to a place like Angola, or I go to South Africa or I go to Indonesia, that the benefits of what we do are directly coupled to those who are affected by it - not yet." (Ev II, Q 1268).

150. We believe that foreign direct investment is an effective mechanism for economic change in developing countries (although there is evidence that it could be more effective). To put this in context, however, we note that although FDI flows far exceed the level of aid from developed to developing countries,[79] they remain highly concentrated amongst developed countries. The CBI provided some clear evidence (drawn from the UNCTAD World Investment Report 2000) of this: "Between 1985 and 1995, 71 per cent of inward flows of FDI were concentrated in the developed world, rising to 73 per cent by 1999. Similarly, 90 per cent of outward flows originated in the developed world between 1985 and 1995, increasing to 91 per cent by 1999." (Ev I, p 128). The reason for this concentration is explained by the TUC: "The increase in [gross foreign direct investment and private capital flows] as a share of GDP over the past ten years is largely confined to the OECD economies, with especially big flows involving the Eurozone economies and the UK. This is not very surprising - private investment and private capital tends to be drawn to the richer and bigger economies because this is where the market demand for funds and the opportunities to invest profitably are greatest." (Ev 1, p 33). Of course, much of this investment is beneficial too. International technological transfer accompanied by improved managerial skills is an important source of improvement in advanced countries where productivity is still below the best.

151. We also note that much FDI involves mergers and acquisitions (M&A) rather than creating a new or expanding an existing enterprise. However, while 80-90% of FDI flows into developed countries are due to M&A, less than one-third of flows into developing countries take this form: the remainder is 'greenfield' investment, associated with the construction of new facilities in these countries. Furthermore, as Michael Kitson, told us, there can be benefits from M&A: "M&A may obviously create benefits because it brings in new managerial techniques, new technologies and so on. New capital may produce this as well but it will also add to the domestic capital stock …" (Ev I, Q 289).

Complaints about the power of TNCs

152. The complaints which emerged from the evidence about the power of transnational corporations fall into the following broad categories:

the democratic deficit arising from the power of TNCs to influence policy-makers at national and international levels; and
the consequences of the exercise of that power on employment standards, the capacity of governments to pursue social welfare programmes, on the environment and culture.

Democratic deficit

153. A number of witnesses raised questions about the relationship between TNCs and democracy.[80] Professor Bulmer-Thomas, for example, suggested that one of the costs associated with globalisation "… is the transfer of power - from governments, other firms and to some extent labour - to MNCs. … There are still too many cases of MNCs misusing their power to extract tax concessions from weak governments or to impose unsafe working practices on their labour forces" (Ev 1, p 52). The Green Party of England and Wales (Ev II, p 85) took a similar view, as did Friends of the Earth England, Wales and Northern Ireland (Ev II, p 273), the Foundation for the Economics of Sustainability (Feasta)(Ev II, p 258) and the Royal Academy of Engineering (Ev II, p 372). Michael Kitson thought that one of the greatest areas of concern in relation to TNCs was "the way they may be having an influence on policy making and on the policy agenda", given that the objectives of TNCs "are not necessarily aligned with the objectives of societies and nation states" (Ev I, Q 296). Dr Noreena Hertz's view was that governments have ceded too much power to corporations - "their capacity to rule … is increasingly shaped and constrained by the interests of big business": "Governments are torn between wanting investment, wanting the multinationals there and having to take into account what price they have to pay to get them in and keep them in." (Ev II, QQ 1653 and 1656).

154. Aside from allegations relating to the role of TNCs at national policy level, we also received evidence of their influence in international fora. In Chapter 6, we give an example where it is alleged that the pharmaceutical companies played an influential role in bring about the World Trade Organisation agreement on Trade-related Intellectual Property Rights (TRIPS).

155. In contrast, other witnesses have argued that TNCs are subject to constraints from a variety of sources: government, competitors, consumers, campaigning organisations and consumer pressure. Lord Browne suggested that TNCs are constrained both by governments ("They set the rules, sometimes imperfectly but nonetheless the rules, on property to a degree, on taxes, revenues, on the way in which the environment is creative for business.")[81] and by competition (Ev II, Q 1270). The World Bank, in Globalization, Growth and Poverty, endorses the latter point (although argues that "even here globalisation is not an unmitigated good" because an industry might be dominated by a monopoly or a cartel at a global level exposing the weakness of an international economy where competition is regulated at the national level).[82]

156. A second constraint suggested by the World Bank is "the globalisation of information": "companies are now far more vulnerable to international public opinion because people have learned how to harness their potential power as consumers."[83] Peter Aven, in describing his experience in the oil industry and of a partnership between his company and BP, provided an example of the power of popular opinion: "[BP] are much more strict on ecological issues than ourselves … I am sure that labour standards for transnational companies in Russia is higher than for Russian ones." Mr Aven suggested that the reason for BP's ecological stance was that "they are so much afraid to be accused of wrongdoing with the environment" (Ev II, Q 1710). Dr Hertz, whilst critical of the power of transnational corporations, also describes their weaknesses in terms similar to those applied by the TNCs themselves:

"… never have companies been so powerful and never have they been so vulnerable, because companies now are under this amazing kind of pressure from all these new investors. They are under pressure from the anti-globalisation movement. They are under pressure from political shoppers. ... They are under pressure from governments. ... They are under pressure from disenfranchised constituents and under pressure from activist groups who will keep demanding the earth." (Ev I, Q 1656).

157. Witnesses expressed a real concern about the influence of TNCs in democracies. We acknowledge that TNCs are powerful, but we believe that they are also subject to a range of constraints and, in particular, to the power of governments and of public opinion.

Consequences of the exercise of power by TNCs

"FOOTLOOSE" CAPITAL

158. It was argued by some witnesses that capital market liberalisation and the technological developments which are such important features of current globalisation allow TNCs to be "footloose" and enable them to pressurise investment-hungry developing countries to engage in a regulatory and tax "race to the bottom". This, in turn, has the damaging effect of encouraging poor standards (for example, in terms of labour conditions and the environment) and, because of the competition to provide a TNC-friendly tax environment, depleting a government's capacity to raise revenue to provide for an adequate social infrastructure.

159. CAFOD, for example, said that "the danger is that competition between countries wishing to attract foreign investment and technology could lead to a 'race to the bottom' in terms of tax incentives and labour market suppression, thereby minimising the potential social benefits offered by the private sector." (Ev I, p 339). Christian Aid, in Trade for Life: Making Trade Work for the Poor, were more emphatic:

"The mobility of capital means that TNCs can increasingly move freely around the globe in search of the least restrictive conditions in which to operate and sell to make profits. … TNCs can play countries off against each other or take advantage of weak or absent national governance. … as TNCs' share and control of global activity increases, developing countries have to make more and more concessions to them, skewing national development priorities to the demands of TNC-driven global markets."[84]

160. George Soros appeared to concur - "I think that the ability of individual countries to constrain the transnationals … has diminished because the companies can move their business elsewhere. So the ability of capital to move around does limit the capacity of individual governments to tax them or to remunerate them." (Ev II, Q 1931). He went on: "… there is a competition to attract capital and therefore there is a pressure to make conditions as favourable as possible, to tax as little as possible, to impose as little regulation as possible … which means that if you look at the world as a whole, the governments are less well situated to provide public goods as they were because they cannot tax capital as they used to." (Ev II, Q 1932). He followed this, however, with the reservation that FDI, unlike highly mobile financial capital, once invested, could not be easily moved and to that extent a TNC would then become "a hostage to the government of the country" where it had invested (Ev II, Q 1931).

161. We received evidence from a small number of large TNCs. All dismissed the allegation that their investment decisions were short-term - or "footloose". Lord Browne said: "you do not go into business and go into a country for a year, it is just not possible, it is very long term" and he gave the example of BP's interests in Vietnam. BP went into Vietnam in 1990 and "the cycle of business" is expected to be completed in 2020 (Ev II, Q 1272). Sir Richard Sykes, Chairman of GlaxoSmithKline plc, gave a similar - although perhaps hyperbolic - response: "We are not in the business for a week. We are in the business for hundreds of years"; GSK, he said, "do not worry about losses here and there": their "job is to be a good corporate citizen, to operate in all countries of the world and to … behave in an honest manner … " (Ev II, Q 1480). Niall Fitzgerald of Unilever said: "We take a very long term view of business. Most of the countries in which we have operated, particularly developing markets, we have been in for 50, 70 or 100 years and we very much hope we will be there for another 70 or 100 years plus." (Ev II, Q 1548).

162. We acknowledge that there is a concern that some TNCs have the capacity to be "footloose", but we believe that, in practice, their mobility is constrained and that foreign direct investment by TNCs, once undertaken, is locked in to a significant extent. We think that this point is fundamental

"RACE TO THE BOTTOM"

163. The World Bank, in Globalization, Growth and Poverty, acknowledges that globalisation and the mobility of capital have empowered capital "at the expense of government and workers" and that, as a consequence, there may be competition between governments to offer an attractive tax environment. The Bank concludes, however, that "such competition is limited". This is because companies will tend not to be concerned about tax policy but rather the broader climate for investment which a country can offer.[85] Commissioner Solbes also thought that the evidence showed that TNCs did not invest in countries solely because of any advantages being held out by the governments of those countries (Ev II, Q 1992).

164. In contrast, Anita Roddick characterised economic globalisation principally in terms of "… unscrupuluous companies … maraud[ing] around the world seeking the cheapest labour to exploit, the lowest pollution standards to operate to, the least protected natural resources to plunder." (Ev II, p 366). Stephen Pursey of the ILO, however, took a different view. He suggested that TNCs were looking for a broad range of factors when deciding whether to invest - rather than just labour costs: "When you look around you find very little evidence that big multinational companies pay much attention to the labour costs in their choices. There are usually lots of other things that outweigh that." (Ev II, Q 1239). Although smaller companies, on the margins of survival, might be tempted to cut labour costs, the larger TNCs (such as those from whom we took evidence) were able to take a longer term view which would not only benefit the host country but would also be in the long-term interest of the company. Diane Coyle endorsed this view in her observation that "the fact that foreign direct investment flows to a small group of middle-income countries I think shows that what companies are looking for is not the cheapest possible labour, they are looking for a bundle of characteristics …" (Ev I, Q 668). And Lord Browne suggested that the decision to invest in a country would involve asking: "do they have the capability in terms of people, most importantly, do they have an understanding of the place and can they … build a point of mutual advantage … ?" (Ev II, Q 1272).

165. We asked the TNCs who gave evidence whether TNCs encouraged a "race to the bottom" in terms, for example, of labour and environmental standards. We were not surprised that they argued the reverse: that the presence of TNCs improved local standards. Niall FitzGerald gave the example of Vietnam: " … you see the benefit not only to consumers but to the local suppliers with whom we operate because they need to operate at a standard which is compatible with ours. Therefore, we have to put in both the investment and the time and the technology to help them get to those standards." (Ev II, Q 1548). Lord Browne agreed that it was fundamental to BP that it would not be a party to lowering labour standards in the countries in which it was operating: for example, he said, BP policed very carefully the issue of child labour. Pay, however, was different: pay was "dependent on the competitive environment in the country" and although BP paid "at the upper edge", it was not appropriate nor expected that they should pay "on a global basis" (Ev II, Q 1278).[86] [87]

166. Ignazio Visco of the OECD summed up his views on the influence of TNCs as follows:

"Critics of globalisation often accuse multinational firms investing in developing countries of reaping undue advantages. They are blamed for exploiting workers, damaging the environment and dictating their own rule. Often, however, multinational firms invest in developing countries not only attracted by the lower costs of labour but also to get closer to customers and to diversify their assets. The evidence of inappropriate behaviour in developing countries is scant, even if there might be some notorious cases. In general foreign firms have to follow the same local laws and rules as domestic firms, and in fact often face more stringent ones. They pay workers less than in developed economies, reflecting differences in skills and overall purchasing power, but there is well established evidence that foreign affiliates pay better wages than domestic firms." (Ev 1, pp 172-3).

167. Clare Short expressed a similar view: "If you look at labour standards and respect of the environment, overwhelmingly transnationals … have higher standards than the going rate in the country." (Ev II, Q 2039). And she was optimistic that transnational corporations would continue to improve standards - because they were aware of public expectations about high corporate standards (Ev II, Q 2043).

168. Christian Aid, in Trade for Life: Making Trade Work for the Poor, acknowledged that the TNCs could be beneficial although warned about the detrimental effects as well:

"TNCs can and do often provide benefits to the economies of developing countries and enhance poor people's economic opportunities. They can build or finance infrastructure, and provide employment and technology. Their investments can support local businesses and stimulate domestic economic activity. But in many developing countries TNC-led globalisation has led to greater environmental degradation, the undermining of human rights and threats to the livelihoods of the most vulnerable."[88]

169. TNCs are not an homogeneous group and standards of conduct will vary between them. Some TNCs behave responsibly but others act against the interests of the country in which they have located production. The evidence we have received suggests that often TNCs adopt standards which are higher than those adopted by local businesses. We are not complacent however. We are aware that businesses have a primary duty to act in the interests of their shareholders and that there is, therefore, a case for government measures to be taken to encourage them to take responsibility for a wider range of the interests which are affected by their activities.

CULTURAL AND ENVIRONMENTAL ISSUES

170. When we began this inquiry, we were aware that a number of issues relating to globalisation would be raised which although important could not be encompassed within the scope of our investigation. These included allegations - against TNCs in particular (although not exclusively so)[89] - of promoting cultural homogeneity and of causing environmental degradation.

171. Dr Supachai Panitchpakdi, for example, said: "People sometimes equate globalisation with the predomination of one culture over another or by some countries over another. They talk about globalisation as the proliferation of the multinational corporations around the world, with the blessing of international organisations such as the World Bank, the IMF and the WTO …" (Ev I, Q 562). Donald McKinnon similarly described "the stifling of cultural diversity" as one of the elements of the concern about globalisation, albeit the last on his list of concerns (Ev I, Q 778)[90] and Feasta referred to the rise of a "global monoculture" with the global spread of products and education systems to support the production of those products (Ev II, p 302).

172. Two issues, in particular, emerged from the evidence we received about cultural homogeneity: the proliferation of global brands and the global prevalence of the English language. The Foreign and Commonwealth Office saw the presence of global brands as perhaps a defining feature of current globalisation (Ev I, Q 12). The CBI, in its written submission, referred to a study on global brands[91] which anticipated that the number would increase "dramatically over the course of the next few years as companies further increase their global presence" (Ev I, p 133). This view, however, contrasted with that expressed by Richard Tomkins in the Financial Times[92] where he argued that "big consumer brands were under pressure" because of what he describes as the fragmentation of the media: "today there are hundreds of [television] channels to choose from and people are much more individualistic in their tastes, so brand owners are left trying to sell to a mass market that barely exists".

173. A similarly optimistic view of the future of cultural diversity was expressed by witnesses in relation to the dominant position of the English language. Niall FitzGerald confirmed that English was the language of commerce, as did Dr Geitz of DHL (Ev II, QQ 1809-10), but did not think that this should cause us to worry about language diversity: not only was English the second language in a large proportion of the world but, although it was the language of commerce, it was not the "language of the street" (Ev II, Q 1573). Sir Andrew Large acknowledged the emergence of an "homogeneous business culture" (which included the fact that business was largely conducted in English) but, like Mr FitzGerald, was sanguine about the implications for cultural diversity more generally: "I do not think I see that the existence of an homogeneous business culture … destroys the social and political aspects of cultures." (Ev I, Q 761).

174. Whilst the cultural impact of globalisation is important, allegations relating to the despoliation of the environment, whether by TNCs or indigenous companies, have given rise to more immediate fears about the welfare of those developing countries which suffer environmental damage as a side-effect of economic development. Anita Roddick referred to the "alarming trends in environmental degradation" which had had the most severe impact in developing countries in the southern temperate or tropical regions (Ev II, p 368). Ronnie Hall of Friends of the Earth gave an indication of the breadth of the debate about the tension between economic development and environmental sustainability:

"The policies that countries in sub-Saharan Africa are being asked to adhere to at the moment assume that trade will lead to global integration, will lead to development, and that is something that is being questioned at the moment.

In terms of environmental impacts, there is a whole range of impacts, including increased use of natural resources to increase trade … we have seen this very clearly at the World Summit for Sustainable Development in the last few weeks where there has been quite a battle over the status of multinational environmental agreements in relation to trade." (Ev II, Q 2124).

Dr Supachai Panitchpakdi also referred to the rise in conflicts between trade and environmental rules (Ev I, Q 569). Professor Joseph Stiglitz expressed the concern that, under the WTO trading system, despite the environmental implications of trade decisions, "it is the trade ministers who set the rules of the game" without - as there is at the national level - the counterbalance of participation by environment ministers (Ev I, Q 735).

175. While cultural and environmental issues are important and contentious areas of the globalisation debate, we have not explored them in detail as part of our inquiry and do not think, therefore, that it is right for us to offer conclusions or recommendations in respect of them. In adopting this approach, we emphasise that we do not intend to diminish their importance in any way.

Regulation of TNCs

Corporate Social Responsibility[93]

176. In its written submission, the CBI suggested that "any discussion involving business and globalisation cannot but help get drawn into the wider debate surrounding the role that business has to play in terms of corporate social responsibility" (Ev I, p 135) and a number of witnesses raised this issue in evidence.

177. There are at present a number of voluntary codes on corporate social responsibility (CSR). These include:

the OECD Guidelines on Multinationals (adopted in 1976 and revised in 2000) which provides a voluntary framework of "principles of good conduct";
the United Nations Global Compact (launched in July 2000) which encourages businesses to espouse nine "universal principles" based on the Universal Declaration of Human Rights, the Rio principles on environment and development and the ILO's Fundamental Principles on Rights at Work;
the Ethical Trading Initiative, an organisation comprised of business members, NGOs and trade unions which seeks to identify and promote good practice in the implementation of codes of labour practice;
the Global Reporting Initiative (formed in 1997) which has the aim of developing globally applicable guidelines for businesses to report on environmental, economic and social performance; and,
a proposed European Code of Conduct for European Enterprises Operating in Developing Countries.

178. In the United Kingdom, more than 60% of the top 500 companies have adopted a code of conduct,[94] and we received evidence from one of them - Unilever plc - about their adherence to a CSR code. Unilever plc emphasised the importance of CSR: "We regard the very business of 'doing business' in a responsible and sustainable way as the core of our corporate social responsibility: selling products that meet local consumers' needs, investing in productive capacity, spreading our technical know-how, working in partnerships through the value chain and in local communities, and making environmental responsibility a central business practice." (Ev II, p 110).

179. Clare Short, referring to the various voluntary codes (in particular the OECD code and the Ethical Trading Initiative) suggested that their effectiveness was a result of "the power of public opinion and consumer" and also because companies were aware that members of their workforce were likely to work better if they were able to take pride in the ethical stance of their employer and if they were treated well by their employer (Ev II, Q 2040). Lord Browne endorsed the point about reputation: "the ability of a corporation to exist in today's world is a function of the way in which it is respected and regarded …" (Ev II, Q 1286).

180. The European Commissioner for Trade, Pascal Lamy, referred to the role of the European Union in pursuing CSR and told us that the EU, through the Commission, had been instrumental in getting the OECD guidelines agreed. He supported the promotion of CSR - but through soft regulation rather than through legislation (Ev II, Q 1918). Other witnesses, however, took the view that the present voluntary codes governing CSR should be tightened up and made enforceable. Barry Coates of the WDM suggested the following prescription for regulating TNCs: first, voluntary codes of conduct and voluntary regulation by the companies themselves; second, the enforcement of an international code through national legislation; and third, in addition to regulation of CSR, a strengthening of corruption legislation and competition policy (Ev I, Q 903). Friends of the Earth England, Wales and Northern Ireland also called for mandatory CSR so as to enable stakeholders to challenge corporations (Ev II, p 273).

181. There has been a welcome increase in transparency of governments and of public financial institutions in recent years. Although similar advances have been made by some TNCs, the corporate sector has a long way to go in this respect. We recognise the right of companies to a degree of commercial confidentiality, but believe that their claims to this could be regarded as excessive, making it almost impossible for the international financial institutions and governments, let alone a committee such as ours, to give them the scrutiny that good global governance requires.

182. We welcome international initiatives to promote CSR amongst TNCs as a mechanism for enhancing transparency and accountability of TNCs. We recognise, however, that there is concern that a purely voluntary regime will not provide a sufficient safeguard against abuse of power by TNCs. We note with approval that, as part of its current review of company law, the UK Government is considering that some companies should be required to report on the impact of their activities on the environment and, more broadly, on the communities in which they operate.[95]

Competition policy

183. International capital flows are often connected with the formation of mergers. That in turn relates to the question of whether global markets have become more or less competitive. More generally, there is the problem of what effect globalisation of business has on competition policy at both national and (say) EU level. Following Peter Sutherland's comment on global problems requiring global solutions and possibly new global institutions (Ev I, p 204), there is a need to consider whether a powerful global competition authority is necessary. At a more parochial level we are certainly sympathetic to the European Commission's proposal to look again at the regulatory framework for mergers within a European context.[96] While our bias would be in favour of doing as much as possible at the national level, we agree that in some cases the "best placed competition authority" would sometimes be part of the European Commission itself.

Information about TNCs

184. Finally, we have been struck by how little factual information we have on some aspects of transnational corporations. For example, in the cross-Departmental memorandum, we were told that "there are no recent official data on trade by UK-based or owned transnational corporations", that the latest data in respect of the percentage of United Kingdom exports of goods accounted for by transnational corporations was for 1981, and that there was no data available in respect of trade in services (Ev I, p 12). More generally, much of the data we were given by the Departments related to several years ago. The UK Government should review its data collection in respect of TNCs. Data collection at present is too limited and out of date and should be substantially improved

73 It is estimated that at least one third of world trade in manufactures is a consequence of this activity - for example, trade in parts and components for further assembly - and the activity is particularly important for many Asian economies. The labour market implications of this are considered in Chapter 4 above. Back

74 Christian Aid, Trade for Life: Making Trade Work for the Poor (2001), p 114, citing Sarah Anderson and John Cavanagh, "Top 200: The rise of corporate global power", Institute for Policy Studies, Washington, 2000, p 1. Back

75 Ibid, p 114, citing UNCTAD, World Investment Report 2000, Geneva, 2000. Back

76 Martin Wolf, "Countries still rule the world", Financial Times, 6 February 2002. Back

77 UNCTAD Press Release, Are transnationals bigger than countries?, 12 August 2002. Back

78 Quoted in the written submission of the TUC (Ev 1, p 31). Back

79 Between 1991-2000, aid to developing countries fell from $60.9 billion to 38.6 billion, whereas FDI rose from $35.7 billion to 178 billion: Centre for Economic Policy Research, Making Sense of Globalization: A Guide to the Economic Issues, Policy Paper No 8, July 2002, p 44, Table 5. Back

80 More traditionally, of course, TNCs are alleged to prefer dictatorships to democracies. It is not, however, obvious to us of where, in recent years, it can be said that TNCs or globalisation can be held responsible for the subversion of multi-party democracy in favour of a dictatorship. Countries seem to have undergone that subversion without outside assistance. Back

81 We note a review of Open World: The Truth About Globalisation by Philippe Legrain in the Economist, 12 October 2002, p 110, where it states: "The book shows that governments have great sway over both the extent and the form of economic integration. As for the idea that companies are more powerful than governments, it dissolves the moment you examine it". Back

82 World Bank, Globalization, Growth and Poverty (2002), p 124. Back

83 Ibid, p 124. Back

84 Christian Aid, op cit, p 115. Back