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IBM/U4 Topic 8 Social Responsibility of TNC

Privatization, Deregulation and Liberalization create more space for firms to pursue their corporate objectives. International agreements give more rights to firms to operate internationally.

Should this expansion of action, space and rights be accompanied by an increase in corporate responsibilities? In the international context, this question attracts particular attention because transnational corporations (TNCs) are one of the principal drivers of globalization.

They are also seen to be the most important beneficiaries of the liberalization of investment and trade regimes, with rising influence on the development of the world economy and its constituent parts. The concept of “social responsibility” captures the search for an answer to this question. It implies that firms have obligations that go beyond what countries require individually, and agreements prescribe internationally. The assumption of greater social responsibility by TNCs would be particularly important in light of the economic and social disruptions that accompany the globalization process, which — if not tackled — could threaten the very framework within which firms build their international production systems.

Corporate social responsibility concerns how business enterprises relate to, and impact upon, a society’s needs and goals.

All societal groups are expected to perform certain roles and functions that can change over time with a society’s own evolution. Expectations related to business enterprises, and particularly TNCs, are undergoing unusually rapid change due to the expanded role these enterprises play in a globalizing society. Discussions relating to TNC social responsibility standards and performance therefore comprise an important component of efforts to develop a stable, prosperous and just global society.

TNCs, by definition, operate in multiple societies around the world, responding to each country’s legal requirements while adjusting to diverse social and economic conditions. Occasionally,

TNCs are caught between conflicting requirements or expectations in different countries. Multiple public and private sector groups comprise overlapping societies in the local, national and regional settings in which TNCs operate. At the same time, TNCs seek to maintain their corporate identity and the operating procedures of an integrated global enterprise. The context for the social responsibility of TNCs therefore encompasses a multilayered environment of societal requirements and expectations. Overlaying this collage is the fabric of an emerging global society in which emerging common standards and expectations must also be met, including concerns for the special development needs of the world’s poorest countries.

Economic models that rely on competitive market disciplines and the regulatory functioning of public authorities do not fully capture the dynamics of the current globalizing economy, particularly for developing countries in which marketplace competition is often insufficiently developed and governmental resources are often inadequate for the task of effective regulation. Under these circumstances, a governance vacuum may develop, underlining the responsibilities of TNCs. Indeed, greater corporate social responsibility may prove important for broad support for a globalizing world economy.

The increased importance of TNC social responsibility corresponds to the growing scope of activities undertaken by these enterprises in the globalizing world economy (UNCTAD, 1999).

Another factor that explains the broadened importance of TNCs in the global economy is the conceptual as well as operational expansion in the definition of TNCs, as they are now – in addition to their traditional FDI mode – increasingly defined by a variety of low- or non-equity investments.

Large retailers, for example, face calls for action against abusive working conditions in foreign plants that produce clothing for them under sub-contracting arrangements, although the retailer has no equity ownership or even foreign presence in the country in which the abusive labour conditions exist.

A similarly broadened scope arises with enterprises whose valuable brand-names reflect many years of significant financial investments in building a product’s reputation and image. These firms seek to protect their assets from misappropriation or misuse in foreign markets, establishing contractual obligations and accompanying controls that shape related business activities in those markets, with or without an actual presence by the TNC itself. Other low or non-equity TNC investments are reflected in the rapidly expanding range of international strategic alliances and partnerships that blend the comparative and competitive advantages of firms from several different countries in complex sets of evolving TNC linkages (UNCTAD, 1995, 1997).

The changes in the magnitude and nature of TNC activity increase the relevance and importance of social responsibility in two interrelated ways. First, the impact of TNCs on people around the world has grown exponentially as these agents of economic globalization reach into the life of domestic societies through both equity and non-equity mechanisms. Reflecting their increased global span and scope, TNCs have become more capable, proximate and aware actors whose activities can create causal links to societal outcomes in multiple countries and cultures. This impact can raise particular concerns for governments if the main TNC purveyor of change does not even have an invested local presence that is susceptible to the country’s legal jurisdiction. This situation is most likely to occur in smaller developing countries whose societies may already be among the most vulnerable to the impact of external forces.

Among linked social responsibility variables, TNC capability seems to emerge as the most prominent factor in recent calls for greater corporate responsiveness. Proximity through FDI certainly increases a TNC’s awareness and capability to act in local situations.

But – as was evident with social pressures on non-invested retailers – neither a local presence nor direct causality links to abusive conditions are necessary preconditions for asserting that a firm’s foreign business ties produce significant social responsibility obligations.

TNCs can be called upon to use their expanded capabilities to prevent or to rectify offensive conditions even in countries in which a firm has played no causal role in their creation.

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