International Business and Sustainable Development 178190989X, 9781781909898

Table of contents :
International business and sustainable development
Progress in international business research volume 8
CONTENTS
CHAPTER 1 Taking stock of complexity: In search of new pathways to sustainable development
Introduction: Multiple levels of analysis needed
Macro: Inward FDI, growth and trends
Micro: MNE strategies and sustainable development
Meso: Networks, chains, partnerships
Growing attention, growing challenges
This volume: In search of new approaches
Part I: New trends and concepts in international business and sustainable development
Part II: New corporate strategies for sustainable development
Part III: New forms and levels of cooperation for sustainable development
Part IV: New public policies and governance challenges for sustainable development
Notes
References
PART I NEW TRENDS AND CONCEPTS IN INTERNATIONAL BUSINESS AND SUSTAINABLE DEVELOPMENT
CHAPTER 2 Limits to growth in the 21st century
Introduction
Thinking about prosperity
How we got here
Where we are going
Implications of the story
Notes
References
CHAPTER 3 Foreign direct investment as a driver of industrial development: why is there so little evidence?
Understanding FDI and development
Why does FDI-assisted industrial development not always work?
Not All FDI Is equal: The heterogeneity of MNE Motivations
The Absence of Absorptive Capacity
The Changing Nature of the MNE and Its Relationship to FDI
Not All Affiliates Are Created Equal
Discussion and implications for theory and policy
References
CHAPTER 4 An internalization theory perspective on the Bottom of the Pyramid
Introduction
Bottom of the Pyramid
Internalization theory, bounded rationality, and bounded reliability
Internalization in the IB Context
Bounded Rationality in MNEs
From Opportunism to Bounded Reliability
Internalization theory thinking in the context of the bop
The asset-bundling approach at the bop
Transferability to- and across-BOP markets
Conclusion
References
CHAPTER 5 Internalisation theory, global value chain theory and sustainability standards
Introduction
Internalisation theory and value chains
The distinctiveness of value chain theory
Value chains and private standards for sustainability
External Drivers of Governance
The Whole Chain Approach
Sustainability as a Credence Good
Value Chain Structures and Standards
Buyer Competence
Supplier Competence
Costs of Governance
Conclusions
Notes
References
PART II
CHAPTER 6 Multinational enterprises and sustainability standards: using a partnering-intensity continuum to classify their ...
Introduction
MNE interactions with standards
Coffee
Biofuels
Combining Standards at MNE Level
Toward a categorization of MNE–standard interactions
Three bodies of literature on private standards
IB Literature
GVC Literature
Partnership Literature
Discussion
Conclusion
References
CHAPTER 7 The social irresponsibility of international business: a novel conceptualization
Introduction
Firms’ internationalization and CSI
Limitations in CSI definitions and operationalization
A novel conceptual classification of CSI
Human Rights Abuses
Unethical Conduct
Direct versus Indirect CSI
Empirical evidence
Some Hard Evidence
Qualitative Evidence
Implications for further research
Data issues
Conclusions
Notes
References
Appendix
CHAPTER 8 Do multinational enterprises contribute to sustainable development by engaging in lobbying? The automotive indust...
Introduction
Understanding MNE lobbying in the European Union: An overview of the literature
Lobbying and International Business
MNEs, Governments and Environmental Regulations
Environmental Regulations
Corporate Lobbying, Society and the Automotive Industry
Methods
Study #1: MNEs’ Attitudes to Environmental Regulations
Study #2: MNEs and the Political Process
Findings
Study #1: MNEs’ Attitudes to Environmental Regulations
Study #2: MNEs and the Political Process
Narrative of Legitimacy
Making Sense of Firms’ Own Role in Society
Discussion
Conclusions
Notes
References
CHAPTER 9 Multinationals and SMALL- AND MEDIUM-SIZED ENTERPRISES (SMEs): A linkages perspective on inclusive development st...
Introduction
Multinational enterprises and sustainable development: Linking business models with impact
SME roles in the (inclusive) business models of MNEs
Business Models Towards SMEs
Sample and general patterns
Drivers of SME business models
Suppliers
Distributors
Customers
Innovators
CSR target
Intermediary conclusions
References
PART III
CHAPTER 10 A retrospective on: Infrastructure or foreign direct investment?
Introduction
Changing MNE strategies and structures
FDI flows to LDCs: low development potential
Implications
Reduced Spillover and Linkage Effect
Attracting FDI: Rising Costs and Administrative ‘Crowding Out’
Conclusions and implications for MNE strategies in LDCs
Implications for MNE Strategy
References
CHAPTER 11 Stakeholder dynamics as determinants of substantive versus symbolic csr practices: a macro/micro perspective
Introduction
External stakeholder dynamics, substantive versus symbolic CSR, and the insurance effect
Internal stakeholder dynamics as determinants of substantive versus symbolic SRC adherence
Social Learning
Social Influence
An International Caveat
Conclusions and avenues for future research
Notes
References
CHAPTER 12 Taming a wicked problem? Unilever’s Interpretations of Corporate Social Responsibility 2000–2012
Introduction
Defining CSR: A wicked problem
Methodology and research context
Unilever and the CSR challenge
Unilever 2000–2005: The Burgmans and Fitzgerald Era
Defining CSR
Governance
Partnerships
Reporting Activities and Achievements
Reflections
Unilever 2006–2008: The Cescau Era
Defining CSR
Governance
Partnerships
Reporting Activities/Achievements
Reflections
Unilever 2009–2012: The Polman Era
Defining CSR
Governance
Partnerships
Reporting Activities/Achievements
Reflections
Discussion
Conclusion
Notes
References
Unilever Reports
CHAPTER 13 MNE and multiple embeddedness: A case study of MNE–NGO collaboration in saving the Baltic Sea
Introduction
Theoretical foundations
Business Networks Approach
Stakeholder Approach
The MNE as an Externally Embedded Organisation
Analytical Framework
Research strategy
Empirical case description
The Key Actors
IBM’s First Commitment to the Baltic Sea
IBM’s Second Commitment to the Baltic Sea
Follow-Up
Case Synthesis
Analysis and discussion
External Network Outcomes: Entry into Political and Authorities’ Networks
Internal Network Outcomes: Global Leverage and Competence Deployment
Technological Enablers of Participation: Networks Without Boundaries
Conclusions
Managerial Implications
Limitations and Future Research Directions
References
PART IV
CHAPTER 14 Shudder: The challenges to ‘industrial policies’ in the early 21st century in low- and middle-income economies
Replacing the ladder: Industrial policy is (once again) respectable
Shudder: The structural changes which circumscribe industrial policy
Changing Terms of Trade2
The Broadening and Deepening of Global Value Chains
Environmental Externalities, Growth and Development
Industrialisation and Inclusive Growth
Shudder: Inherited industrial policies hit a wall
Making the Most of Commodities: Building Linkages to the Resource Sector10
Participating Gainfully in Global Value Chains
Endogenising the Environment in Industrial Policy
Promoting a More Inclusive Industrial Sector
Conclusions
Notes
References
CHAPTER 15 The clean development mechanism and technology transfer to China
Introduction
The dataset
Descriptive analysis
Key Features of the Regulatory Framework
Overview of CDM Projects in China
Project Owners and Technology Providers
Geography of Technology Supply and Credit Buying
Project Design Document Consultants and Technology Transfer
Econometric analysis
Estimation Strategy and Variable Description
Base Regression Results
Robustness Check: the Wind Power Sector
Concluding remarks
Notes
References
Appendix
CHAPTER 16 The rise of enterprise regionalisation in ASEAN*This article is partly based on elements of the ASEAN Investment...
Introduction
Trends and characteristics of enterprise regionalisation in ASEAN
Structure of Intra-Regional Investments
Regional Players
Regional factors driving intra-ASEAN investment
Home Country Policies and Measures
Selected ASEAN companies and their regional and global footprints
Drivers and motivations
Concluding remarks
Notes
References
CHAPTER 17 Multistakeholder regulation of business: Assessing the pros and cons
Introduction
The Rise of Multistakeholder Regulation
New approaches to CSR
Appraising MSIs
Signs of progress
Awareness-Raising
Specific “Outcome Standards”
Gradually Widening the Stakeholder Net
Ratcheting-up
Institutional Thickening
Complementarities Between Private and Public Governance
Limitations and dilemmas
Limited Scale
Quantity Versus Quality
Implementation Gaps
Development for Whom?
Structural Constraints
Concluding remarks: Implications for “triangulation”
Notes
References

Citation preview

INTERNATIONAL BUSINESS AND SUSTAINABLE DEVELOPMENT

PROGRESS IN INTERNATIONAL BUSINESS RESEARCH VOLUME 8

INTERNATIONAL BUSINESS AND SUSTAINABLE DEVELOPMENT EDITED BY

ROB VAN TULDER Rotterdam School of Management, Erasmus University, Rotterdam, The Netherlands

ALAIN VERBEKE Haskayne School of Business, University of Calgary, Calgary, Canada; Solvay Business School, University of Brussels (VUB), Brussels, Belgium; Henley Business School, University of Reading, Henley-on-Thames, UK

ROGER STRANGE School of Business, Management and Economics, University of Sussex, Brighton, UK

United Kingdom North America India Malaysia China

Japan

CONTENTS ix

LIST OF CONTRIBUTORS

CHAPTER l TA.KING STOCK OF COMPLEXITY: IN SEARCH OF NEW PATHWAYS TO SUSTAINABLE DEVELOPMENT Rob van Tulder, Alain Verbeke and Roger Strange

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PART I: NEW TRENDS AND CONCEPTS IN INTERNATIONAL BUSINESS AND SUSTAINABLE DEVELOPMENT CHAPTER 2 LIMITS TO GROWTH IN THE 21ST CENTURY Martin Wolf 23 CHAPTER 3 FOREIGN DIRECT INVESTMENT AS A DRIVER OF INDUSTRIAL DEVELOPMENT: WHY IS THERE SO LITTLE EVIDENCE? Rajneesh Narula

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CHAPTER 4 AN INTERNALIZATION THEORY PERSPECTIVE ON THE BOTTOM OF THE PYRAMID Jenny Hi/lemann and Alain Verbeke

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CHAPTER 5 INTERNALISATION THEORY, GLOBAL VALUE CHAIN THEORY AND SUSTAINABILITY STANDARDS John Humphrey

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CONTENTS

PART ll: NEW CORPORATE STRATEGIES FOR SUSTAINABLE DEVELOPMENT CHAPTER 6 MULTINATIONAL ENTERPRISES AND SUSTAINABILITY STANDARDS: USING A PARTNERING-INTENSITY CONTINUUM TO CLASSIFY THEIR INTERACTIONS Greelje Schouten, Sietze Vellema and Jeroen van Wijk

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CHAPTER 7 THE SOCIAL IRRESPONSIBILITY OF INTERNATIONAL BUSINESS: A NOVEL CONCEPTUALIZATION Elisa Giuliani, Chiara Macchi and Davide Fiaschi

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CHAPTER 8 DO MULTINATIONAL ENTERPRISES CONTRIBUTE TO SUSTAINABLE DEVELOPMENT BY ENGAGING IN LOBBYING? THE AUTOMOTIVE INDUSTRY AND ENVIRONMENTAL REGULATIONS Sigrun M. Wagner and Stephanos Anastasiadis CHAPTER 9 MULTINATIONALS AND SMALL- AND MEDIUM-SIZED ENTERPRISES (SMES): A LINKAGES PERSPECTIVE ON INCLUSIVE DEVELOPMENT STRATEGIES Rob van Tu/der and Andrea da Rosa

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PART ID: NEW FORMS AND LEVELS OF COOPERATION FOR SUSTAINABLE DEVELOPMENT CHAPTER 10 A RETROSPECTIVE ON: INFRASTRUCTURE OR FOREIGN DIRECT INVESTMENT? 231 Mo Yamin and Rudo({ R. Sinkovics CHAPTER l I STAKEHOLDER DYNAMICS AS DETERMINANTS OF SUBSTANTIVE VERSUS SYMBOLIC CSR PRACTICES: A MACRO/MICRO PERSPECTIVE Luis A. Perez-Batres and Jonathan P. Doh 249

Comen ts

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CHAPTER 12 TAMING A WICKED PROBLEM? UNILEVER'S INTERPRETATIONS OF CORPORATE SOCIAL RESPONSIBILITY 2000-2012 Jacqueline Mees-Buss and Catherine Welch 265 CHAPTER 13 MNE AND MULTIPLE EMBEDDEDNESS: A CASE STUDY OF MNE-NGO COLLABORATION IN SAYING THE BALTIC SEA Tiina Ritvala, Per Andersson and Asta Salmi 293

PART IV: NEW PUBLIC POLICIES AND GOVERNANCE CHALLENGES FOR SUSTAINABLE DEVELOPMENT CHAPTER 14 SHUDDER: THE CHALLENGES TO 'INDUSTRIAL POLICIES' IN THE EARLY 21ST CENTURY IN LOW- AND MIDDLE-INCOME ECONOMIES Raphael Kaplinsky

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CHAPTER 15 THE CLEAN DEVELOPMENT MECHANISM AND TECHNOLOGY TRANSFER TO CHINA 351 Daniela Marconi and Francesca Sanna-Randaccio CHAPTER 16 THE RISE OF ENTERPRISE REGIONALISA TION IN ASEAN Hafiz Mirza and Kee Hwee Wee

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CHAPTER 17 MULTISTAKEHOLDER REGULATION OF BUSINESS: ASSESSING THE PROS AND CONS 425 Peter Utting

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LIST OF CONTRIBUTORS

Jacqueline Mees-Buss

University of Sydney, Sydney, Australia

Hai f z Mirza

UNCTAD, Geneva, Switzerland; Bradford University School of Management, Bradford, UK

Rajneesh Nanda

Henley Business School, University of Reading, Reading, UK

Luis A. Perez-Batres

Central Michigan University, Mount Pleasant, MI, USA and Erb Institute of Sustainable Enterprise, University of Michigan, Ann Arbor, MI, USA

Tiina Ritva/a

Aalto University School of Business, Helsinki, Finland

Asta Salmi

Aalto University School of Business, Helsinki, Finland

Francesca SannaRandaccio

Sapienza University of Rome, Rome, Italy

Greetje Schouten

Knowledge, Technology and Innovation Group, Partnerships Resource Centre, Wageningen University, Wageningen, The Netherlands

Rudolf R. Sinkovics

Manchester Business School, University of Manchester, Manchester, UK and Lappeenranta University of Technology, Lappeenranta, Finland

Roger Strange

School of Business, Management & Economics, University of Sussex, Brighton, UK

Peter Utting

United Nations Research Institute for Social Development (UNRJSD), Geneva, Switzerland

Rob van Tulder

Rotterdam School of Management, Erasmus University, Rotterdam, The Netherlands

List of Contribwors

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Jeroen van Wijk

Partnerships Resource Centre, Maastricht School of Management, Maastricht, The Netherlands

Sietze Vellema

Knowledge, Technology and Innovation Group, Partnerships Resource Centre, Wageningen University, Wageningen, The Netherlands

Alain Verbeke

Haskayne School of Business, University of Calgary, Calgary, Canada; Solvay Business School, University of Brussels (VUB), Brussels, Belgium; Henley Business School, University of Reading, Henley-on-Thames, UK

Sigrun M. Wagner

Royal Holloway, School of Management, University of London, Egham, Surrey, UK

Kee Hwee Wee

UNCTAD, Geneva, Switzerland

Catherine Welch

University of Sydney, Sydney, Australia

Martin Wolf

Financial Times, London, UK

Mo Yamin

Manchester Business School, University of Manchester, Manchester, UK

CHAPTER 1 TAKING STOCK OF COMPLEXITY: IN SEARCH OF NEW PATHWAYS TO SUSTAINABLE DEVELOPMENT Rob van Tulder, Alain Verbeke and Roger Strange INTRODUCTION: MULTIPLE LEVELS OF ANALYSIS NEEDED Studying the economic, social and environmental impacts of multinational enterprise (MNE) strategies is a precondition for understanding the linkages between international business (IB) and sustainable development. But such study poses severe challenges for researchers. The MNE’s contributions to sustainable development both positive and negative ones are multi-faceted, require a multi-disciplinary approach and can be assessed at multiple levels of analysis. Analysis can be conducted at three levels: the macro (national) level, the micro (MNE) level and the meso (network) level.

International Business and Sustainable Development Progress in International Business Research, Volume 8, 1 20 Copyright r 2014 by Emerald Group Publishing Limited All rights of reproduction in any form reserved ISSN: 1745-8862/doi:10.1108/S1745-8862(2013)0000008006

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MACRO: INWARD FDI, GROWTH AND TRENDS The dominant research stream in IB and sustainable development has been largely macro-economic and quantitative in nature, focussing on the relationship between foreign direct investment (FDI) from developed countries and the national growth/development of developing countries. Neo-classical scholars tend to focus on the positive correlation between these two variables (see, e.g. Sachs, 2005). The conclusion from a large number of World Bank and IMF studies is that, under most circumstances, FDI has a positive effect on economic development. This conclusion has also been supported from various IB studies that have compared the prevailing workplace conditions, environmental strategy approaches and international sustainability standards adoption in MNEs from developed countries versus local incumbents in developing countries. In general terms, the developed economy MNEs operating in developing nations adopt higher standards than local firms (even if the standards adopted in their subsidiaries are often lower than at the head office) (cf. Fortanier, 2007). Anecdotal evidence of the opposite situation, however, is also abundant: numerous media accounts have reported persisting problems with human rights violations (e.g. Nigeria-Shell) and ecological disasters (Bhopal Union Carbide/Dow). Dunning (1981) introduced the ‘investment development path (IDP)’ concept to describe the role of particular types of FDI in various phases of development. The IDP basically argues that the net balance between outward and inward direct investments moves from a deficit to a surplus in consecutive stages of development (Dunning & Narula, 1996). However, in the discourse on the relationship between FDI and development, the meaning of the IDP has often been misinterpreted as meaning that development must by definition be accompanied by net inward direct investments. In reality, a critical condition to make inward FDI instrumental to development at the macro-level is the quality of host countries’ administrative governance and institutions. The first sections of various World Investment Reports by UNCTAD over the past 15 years have systematically covered the size and nature of FDI flows and stocks, and their impact on developing countries, see, for example UNCTAD (1999) for a state-of-the-art synthesis report at that point in time. Scholars critical of alleged linkages between FDI and development have argued that a positive correlation between both parameters is not selfevident but strongly dependent upon a variety of factors. These factors include, inter alia, historical conditions, the actual occurrence of spill-over

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effects in an environment where economic actors attempt to protect their proprietary know-how, effective national policies beyond governance (such as competition policy, or industrial and technology policies) and international institutional influences (such as credit crises, the impact of the Washington consensus and the nature of bilateral trade and investment treaties). Various critical studies have also argued that sustainable development cannot be equated with economic growth alone, just as the lack of accelerated economic growth triggered by FDI does not necessarily imply underdevelopment. The classical definition of sustainable development comes from the World Commission on Environment and Development (WCED), also known as the Brundtland commission. Sustainable development, according to this vision, entails ‘development that meets the needs of the present without compromising the ability of future generations to meet their own needs’ (WCED, 1987). Increasingly, this definition has been questioned for its lack of a proactive focus. In addition, its operationalization has suffered from an almost exclusive focus on environmental sustainability. In reality, any sustainable development path entails complex trade-offs among expected macro-level economic, social and environmental impacts of business activity, whereby it is often difficult to move away from zerosum, individual-interest-based games toward more positive sum-games, aimed at providing public goods and serving collective interests. Moreover, it is hard to assess whether actual progress is being made on improving sustainable development. For example, in the discussion on the millennium development goals (MDG), that is eight UN targets for sustainable development that should be reached by the year 2015 considerable ambiguity exists around assessments of macro-level trends and what they actually mean. MDG1 formulated a target to cut global poverty by half before the end of 2015. In 2013, that is two years ahead of schedule, this target was already reached. However, on closer scrutiny, the decline in poverty was largely attributable to the state of the Chinese economy, whilst many other part of the world experienced continued poverty and even growing economic inequality (see Chapter 14 by Raphael Kaplinsky, 2014). Another critical element in this discussion is to prioritize the global ‘issues’ that should be addressed in the transition towards more sustainable development. Is climate change more important than income inequality? What about education, or unemployment or the impact of the financial crisis? What about tax evasion and corruption?

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MICRO: MNE STRATEGIES AND SUSTAINABLE DEVELOPMENT The IB scholars who have studied sustainable development, have emphasized that the MNE should possibly be considered as the most important vehicle through which economic development in general and poverty reduction in developing countries in particular can be achieved (Rugman & Doh, 2008; Meyer, 2004). Macro-economic studies should therefore be complemented with firm-specific studies, because any linkage between FDI and sustainable development depends on the nature of the investments made by MNEs (Ghauri & Buckley, 2006). Firm-based studies have started to complement macro-economic streams of analysis, but with mixed results, inter alia, because of the considerable heterogeneity among firms, industries and countries of origin of investments. Country-of-origin effects are undoubtedly present, but their exact nature and impact on sustainable development are unclear. Do German MNEs have a greater positive impact on sustainable development than American MNEs? Are emerging market MNEs (EMNEs) better equipped to serve local needs in developing countries for instance due to the lower administrative distance between their home country and host developing nations and do they therefore trigger more appropriate development paths? Within this discourse, it is understandable that corporate social responsibility (CSR) strategies explicitly introduced in support of sustainable development have attracted much attention from IB scholars, but have also led to substantial scepticism as to the actual impact of MNE strategies on sustainable development (e.g. Blowfield & Frynas, 2005). To what extent are contemporary MNE strategies truly more ‘inclusive’, ‘socially embedded’ or ‘sustainable’ as compared to past strategies? Extant studies show mixed results, not only because the direct and indirect effects of firm-level strategies on sustainable development are difficult to measure, but also because it appears difficult to distinguish between ‘talk’ and ‘walk’ regarding sustainable development impacts. To what extent is building local capacity at the subsidiary level a precondition for good performance in developing countries? Do MNEs affect economic development through infrastructure investments (Yamin & Sinkovics, 2009)? It is very difficult to assess the net effects of MNE involvement in developing countries: direct effects might be beneficial (employment, technology transfer), but indirect effects might be negative (crowding out effects, effects on local competition). Sustainable development and CSR strategies have only slowly become relevant areas of

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attention in mainstream management journals in general and in IB publications in particular (see Yuan, Bao, & Verbeke, 2011 for a general overview of possible CSR strategies). MNEs CSR activities in developing countries, however, are often critical to the firm’s survival, profitability and growth (Verbeke, 2013), and therefore important to study in detail. But systematic research and inclusion in the mainstream management literature has largely been lacking or remains relatively fragmented (Kolk & van Tulder, 2010). A number of recent studies have started to explore the relationship between ‘host’ and ‘home’ country CSR, whereby the distance between headquarters and subsidiaries is taken as the critical variable. One study found that foreign affiliates from more distant home countries are actually less likely to engage in CSR activities in host countries (Campbell, Eden, & Miller, 2012). Whether this result can be generalized is open for debate, and rather unlikely, given prior studies that have shown the importance of country-of-origin effects on CSR abroad (e.g. van Tulder & van der Zwart, 2006). Legitimacy challenges in host (developing) countries may largely account for the above empirical result, and are related to the broader issues of social embeddedness and effective stakeholder management. Here, MNE legitimacy in the host country influences the firm’s contributions to sustainable development (Reimann, Ehrgott, Kaufmann, & Carter, 2012). In this context, the MNEs themselves are increasingly interested in measuring their impact on sustainable development, for instance by assessing their ‘social return on investment’. Such measurement can help them in defending their position as ‘good corporate citizens’, earning them a ‘license to operate’ as granted informally by a multitude of constituencies. A final topic of interest in the realm of MNE sustainable development linkages is rapidly gaining scholarly and public policy interest, namely the role played by EMNEs. An ongoing debate has unfolded in the IB research community on whether EMNEs and their ‘springboarding’ strategies require new theory (Luo & Tung, 2007). The bulk of this debate has focused on whether these new entrants represent a different dynamic or logic of internationalization. The above debate has been fraught with protectionist undertones, for instance fears of ‘Chinese’ state-owned enterprises taking over local industries, comparable to 1970s’ fears in Europe towards American MNEs, or 1980s’ fears in the United States (and Europe) towards Japanese MNEs. But the arguably more important question as to EMNEs’ impact on sustainable development has been largely ignored. Here, the focus should be on the effects of (inward) FDI by these firms on the development of

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recipient countries (UNCTAD, 2006). An important complementary question has also been ignored, namely the impact of outward foreign direct investment (OFDI) by EMNEs on the domestic growth/development of the home developing country itself. EMNEs will obviously affect the point in time at which the net balance in the IDP shifts from a deficit to a surplus. However, it should be remembered that at least some EMNE OFDI occurs not as a consequence of home country maturity and development, but is the outcome of political decision making regarding desirable future economic growth of the home country, for example the Chinese government’s desire to secure long run supply of scarce raw materials and to acquire advanced technology held by foreign companies (van Tulder, 2010). Here, a new agenda with critical research questions appears: One key question is how home country location advantages can be exploited through firm specific capabilities (Ramamurti, 2012). Another question is how firm specific capabilities, enhanced through foreign expansion, can affect the further development of the national home base.

MESO: NETWORKS, CHAINS, PARTNERSHIPS A third stream of scholarship often originating in disciplinary areas other than IB introduced other levels of analysis for assessing how MNEs can affect sustainable development. This stream includes global value chain analyses, whereby the MNE as ‘lead firm’ can play a role as orchestrator of entire value chains. The sustainable development challenges addressed in these studies focus on whether the MNE is able to ‘co-create’ value in collaboration with societal (non-market) actors, and whether small firms (upstream and downstream) are able to upgrade and thus seize development opportunities. The nature of governance as exercised by the MNE both vertically within the value chain and horizontally towards external actors along the chain define the upgrading possibilities suppliers as well as local communities (Gereffi, Humphrey, & Sturgeon, 2005; Humphrey & Schmitz, 2002). Very topical as usual, the 2013 World Investment Report (UNCTAD, 2013) provides in-depth analysis, strategic development options and practical advice for policymakers and others. One aim of the report is to help maximize the benefits and minimize the risks associated with global value chains, which is essential to ensure more ‘inclusive growth’ and sustainable development. Related work, drawing upon transaction

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cost economics and resource dependency theory, considers how the power asymmetries within global value chains allow lead firms to outsource (externalize) key elements to independent suppliers often in developing countries whilst still retaining effective control and the greater part of the rents (Strange, 2011). A second novel level of analysis includes the local region or the city in which ‘inclusive’ business strategies (like the bottom of the pyramid (BOP) or micro-finance schemes) are implemented by the MNE. Whereas in the past the challenge of poverty was primarily considered to be a rural area problem, ‘urban poverty’ has recently become a more recognized problem, influenced in particular by rapid urbanization in developing countries. However, the impact of foreign ownership on regional or urban relationships and thus the question as to whether multinationality makes a difference is still only rarely addressed. The third novel level of analysis recognizes that inclusive strategies, to be successful, require alliances and partnerships with non-market or nontraditional actors, such as civil society organizations and governments. This implies research beyond conventional business partnerships, which in the IB field has been largely absent until now. On the one hand, such broad partnerships are a precondition to implement effective bottom-of-thepyramid or inclusive strategies (Hart & Sharma, 2004; Prahalad, 2005). On the other hand, understanding the impact of partnerships between MNEs and non-governmental organizations (NGOs) requires a reconceptualization of the role of MNEs in development, a perspective that can be denoted as ‘resource complementarity’ (Oetzel & Doh, 2009) or ‘resource bundling’ (van Tulder, Verbeke, & Voinea, 2012; Verbeke, 2013). At the firm level, effectively managing partnership portfolios is rapidly becoming a new area for research (van Tulder & Da Rosa, 2012). MNE partnership strategies include, inter alia, setting up roundtables that cover different dimensions of the sustainable development problem. In this context, governments are increasingly involving firms in general and MNEs in particular to enhance the effectiveness of their donor activities. In order to circumvent traditional, unproductive debates about ‘tied aid’, governments are also engaging in partnerships. These public private partnerships (PPPs) often also include NGOs. Sustainable development is increasingly framed as a complex or ‘wicked’ problem or issue that crosses sectoral boundaries and thus cannot be addressed by single actors even if these are large MNEs (see for instance Chapter 12 by Mees-Buss & Welch, 2014). Initiatives such as the roundtables on sustainable palm oil and

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various platforms for a structured dialogue on human rights, can be considered new, prototypical institutions that are at filling voids left by governments at the international level and are usually organized around specific issues (Vellema, Ton, de Roo, & van Wijk). Such advanced approaches to stakeholder engagement are increasingly integrated in MNEs’ inclusive business models. A wide variety of partnerships for sustainable development is presently being constructed, but their effectiveness is open to debate (Seitanidi & Crane, 2013; van Huijstee, Francken, & Leroy, 2007). The ‘issue’ level represents the fourth and last novel level of analysis. Here, specific organizational configurations are crafted around specific issues, usually within a wider economic and political discussion on ‘global public goods’ and consistent with broad policy platforms such as the UN MDG. For MNEs, the decision to participate in such ‘global issue configurations’ is closely related to international strategy choices, for example in the context of efforts to ‘co-create’ value (Porter & Kramer, 2006). For many MNEs, value co-creation can be instrumental to long-term profitability and growth, and it can contribute to sustainable development. An important question is this context is obviously what constitutes ‘value’.

GROWING ATTENTION, GROWING CHALLENGES There is growing attention in the IB research field devoted to the linkages between MNEs and sustainable development, as illustrated by the novel dimensions of this phenomenon described above. In order to measure this growing attention, we searched the four main IB research outlets (the Journal of International Business Studies, Management International Review (MIR), the Journal of World Business (JWB) and International Business Review (IBR) for the 1990 2012 period.1 This search allowed us to assess the evolution of attention devoted to sustainable development in general and to specific key concepts (Fig. 1). A comparable exercise conducted for an earlier period concluded that CSR and sustainable development had not received much attention in the main management journals and only a slightly higher attention in the IB literature (Kolk & van Tulder, 2010). However, this situation now appears to be changing rapidly, in particular at the micro-level of analysis. In the past, the two key concepts of sustainable development and inclusive business/growth received only scant attention: Sustainable

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Fig. 1. Number of Articles Prioritizing Selected Concepts of Sustainable Development in Four IB Journals (1990 2012; in Title/Abstract If Not Otherwise Indicated).

development gained some traction in 1994 and has become somewhat more popular during the past seven years. A number of special journal issues, in particular in JWB and IBR, strongly contributed to this, whereas the score for JIBS the highest impact score journal in this area is extremely modest: no article in the last 22 years was published that included the word ‘sustainable’ in the key text (title, abstract and keywords), whereas only limited and even declining reference was made to sustainable development in the main text of the articles. The picture for ‘inclusive business’ is even bleaker: none of the four journals addressed

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the issue explicitly. As regards the attention devoted to poverty, the overall attention is also very modest, but more promising than for inclusive business. Since 2005, we witness a growing interest in the topic (with one major exception, namely MIR). Meso-level concepts such as global value chains and partnerships have only recently started receiving some attention. Although references to global value chains have been increasing in the full text of articles in almost all journals (with the exception of JWB, see Fig. 1), only a handful of studies were published in which the concept figured prominently. Partnerships have received steady attention over the years in the IB journals, but the bulk of these papers involved partnerships understood as strategic alliances between firms, without any reference to sustainable development. It is disappointing to observe that the volume of literature on partnerships has started to decrease at a time when MNEs have become increasingly involved in partnerships with NGOs and other nonmarket actors. At the micro-level, most of the growth in attention of IB scholars to the link between corporate strategy and sustainable development can be attributed to the phenomenon of CSR. Since 2010, each journal has published at least three articles on CSR-related topics (with JWB being a more modest platform for this substance matter). A special issue in JIBS in an earlier period largely accounted for the increased interest in CSR. The more specific concept of ‘BOP’ is increasingly mentioned in papers, but rarely addressed as the main topic. JWB is again the outlier among the four journals, with zero references to the concept in the articles published. Patient readers of all four journals over the entire 22 years period would have found only two papers in one journal IBR that really addressed the topic in an in-depth fashion. As regards the related concept of the ‘base’ of the pyramid, the score is even lower. An interesting bias can be observed in this respect: JIBS dominates the references to the ‘base of the pyramid’ concept as compared to the ‘BOP’ notion. In the discussion on the difference between the two concepts (base vs. bottom), the latter is usually considered the most relevant to sustainable development. To summarize, many topics related to sustainable development have often only been covered as part of a special issue and have not (yet) become mainstream in the IB literature. Egri and Ralston (2008) arrived at the same conclusion for an earlier period. ‘IB and sustainable development’ still remains a relatively peripheral ‘emerging theme’ in IB research (Griffith, Cavusgil, & Xu, 2008).

Taking Stock of Complexity

11

THIS VOLUME: IN SEARCH OF NEW APPROACHES It could be argued that the relatively weak score of IB research in terms of attention devoted to addressing one of the most wicked problems of our time, sustainable development, also contributes to its relatively poor status in the social sciences in general and management sciences in particular. This situation is remarkable especially since, at the macro-level, no developing country, nor any international organization is denying the importance of FDI for national economic development. At the micro-level, the absence of attention to sustainability strategies in IB research is equally remarkable, since many practitioners are looking for scientific support to craft their firms’ international restructuring strategies. The policy demand for new studies covering sustainable development issues is great, but the supply of established IB studies has been severely lagging. Our concise literature overview has illustrated that there is considerable intellectual work to be performed to understand better in which situations and under which conditions MNE can play a positive role in furthering sustainable development. Here, a myriad of parameters, including institutional, industry, organizational and supply and demand drivers can be considered. This introduction has also shown, however, that various novel approaches are being developed, in particular multi-disciplinary approaches and approaches at different levels of analysis and adopting different actors’ perspectives. There have been pleas for reconceptualizing existing theoretical approaches, a sign that new fundamental work must be undertaken. The present research volume aims to take stock of the latest insights in this complex and fiercely debated area. It explores the extent to which the IB field needs new concepts and methods, or at least needs to revisit and augment existing ones.

PART I: NEW TRENDS AND CONCEPTS IN INTERNATIONAL BUSINESS AND SUSTAINABLE DEVELOPMENT In the first part of this volume, the authors address new trends affecting the context in which MNEs have to operate as well as new concepts best suited to capture the contemporary linkages between IB and sustainable development. This section also considers whether IB actually needs entirely new

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theory to include effectively sustainable development considerations in conceptual and empirical work? In Chapter 2, Martin Wolf, the renowned Financial Times columnist, provides a high-level description and interpretation of major new trends affecting business over the past two centuries. His view is not only that growth has been unprecedented, but also that it has resulted in unprecedented new challenges. He addresses in particular the challenge of achieving greater economic prosperity while recognizing the limited capacity of the global ecosystem to absorb additional growth. He points to the lack of knowledge on how to reconcile economic and ecological imperatives, and in doing so provides a new agenda for IB scholarly research: What agent of change is better equipped than MNEs to serve the dual goals of economic prosperity and ecological improvements? In Chapter 3, Rajneesh Narula discusses the evidence on whether FDI is instrumental to (industrial) development. He argues that we must pay close attention to MNE motivations. ‘Not all FDI is equal’, in terms of MNE goals served and expected broader impacts, and not all MNE affiliates are created equal either. It is therefore critical to recognize firmlevel heterogeneity as to the expected impacts of FDI on industrial development. Narula revisits the usefulness of the well-known IDP framework and suggests how this framework could be augmented so as to accommodate new trends in the realm of FDI industrial development linkages. In Chapter 4, Jenny Hillemann and Alain Verbeke discuss the BOP approach, that is one of the key concepts introduced above as representing a promising new link between IB research and sustainable development. The authors convincingly argue that mainstream IB thinking, namely internalization theory, can be productively applied to analyse the actual attractiveness of BOP markets for MNEs. One important problem associated with implementing a BOP strategy is transferring relevant knowledge from one BOP market to another. The paper applies the recently introduced concept of ‘resource bundling’ (see also Verbeke, van Tulder, & Voinea, 2012) to assess the attractiveness of BOP markets vis-a`-vis alternative international expansion options. In Chapter 5, John Humphrey takes the internalization discussion covered in the previous chapter one step further, by searching for points of similarity and differences with global value chain theory. He explores new avenues for cross-fertilization between both approaches, building upon the strengths of each. He illustrates the power of such cross-fertilization with the example of the impact of private sustainability standards, whereby an

Taking Stock of Complexity

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integrated approach proves more useful than either of the two conventional approaches applied separately.

PART II: NEW CORPORATE STRATEGIES FOR SUSTAINABLE DEVELOPMENT In the second part of this volume, the authors consider new business models and strategies relevant to sustainable development. Assessing MNE impacts on sustainable development requires that we not only look at socially responsible behaviour, but also at expressions and consequences of socially irresponsible behaviour such as human rights violations and obstructive lobbying. In Chapter 6, Greetje Schouten, Sietze Vellema and Jeroen van Wijk follow-up on the effort by John Humphrey (Chapter 5), by adding yet another and more managerial dimension that of partnering. They introduce a novel concept, the ‘intensity continuum’, to classify firm-level interactions in setting sustainability standards. They find that choices about how to partner and how to manage control over implementing standards shape the contributions MNEs make to sustainable development. The paper adopts a firm-based approach to assess MNEs’ contributions to sustainability. The paper illustrates the value of the ‘intensity continuum’ concept by describing standardization in the coffee and biofuels industries, and the way in which an MNE can orchestrate a multitude of approaches, including single-firm standards, bilateral arrangements with certification schemes and multi-stakeholder partnerships. In Chapter 7, Elisa Giuliani, Chiara Macchi and Davide Fiaschi take the discussion on corporate social irresponsible behaviour as their starting point. The authors introduce an original classification of irresponsible MNE behaviour, whereby they adopt an approach based on international law. They focus especially on human rights, whereby international law distinguishes between derogable and non-derogable human rights. By combining this dimension with an assessment of the direct and indirect types of corporate involvement, they create a managerial matrix that should help managers to understand better the human rights aspects of their international CSR approach. In Chapter 8, Sigrun M. Wagner and Stephanos Anastasiadis ask whether MNE lobbying efforts can contribute to sustainable development. The conventional view on lobbying is that MNEs use their power to

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influence policies from being too restrictive. Companies can wield substantial power to hinder the formulation and implementation of restrictive policies. The chapter examines car manufacturers’ lobbying efforts to influence environmental policies in the European Union, one of the most significant regulatory challenges facing this industry. Carmakers often profess their desire to promote sustainable development and frequently appear on company lists that rank highly performing ‘responsible corporations’ and ‘good employers’. The chapter provides valuable insights on how MNEs can contribute to or hinder sustainable development through their attitude to environmental regulations and their lobbying to affect such regulations. It contributes to answering the question whether ‘responsible lobbying’ is possible? In Chapter 9, Rob van Tulder and Andrea da Rosa develop a taxonomy of the different CSR approaches that MNEs can include in their business models. In this chapter, they focus especially on MNE relationships with small and medium sized enterprises (SMEs). Such linkages could significantly affect sustainable development through spill-overs from MNE involvement. The authors explore the implicit and explicit strategies of the one hundred largest companies in the world towards SMEs as described in both their annual reports and specific CSR reports. They pay particular attention to the ‘narratives’ developed by MNEs as an expression of their intended and (perceived) realized strategies. From an MNE strategy perspective, SMEs can serve not only as suppliers, distributors, customers and innovators for the MNE, but can also be the target of MNE CSR policies.

PART III: NEW FORMS AND LEVELS OF COOPERATION FOR SUSTAINABLE DEVELOPMENT Part III of this volume explores the impact of novel organizational forms and levels of cooperation in support of sustainable development. Here, especially the nature of the relationships between the MNE and nonmarket forces such as NGOs and/or secondary stakeholders is vital for understanding (potential) impacts on sustainable development. Chapter 10 contains a postscript of Mo Yamin and Rudolf R. Sinkovic on earlier work in which they drew attention to the paradoxical relationship between MNE current strategies and economic development. They suggest there is evidence of positive developmental impacts of FDI flows,

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but such positive effects are conditional upon high levels of human capital and thus on the existence of good ‘infrastructure’, in particular social infrastructure, in recipient countries. In this retrospective, the conclusion that current MNE strategies can have a negative impact on the development of (social) infrastructure is revisited and implications are formulated in the context of sustainability impacts. By addressing social infrastructure, the authors include the ‘non-market’ environment into their analytical picture. It could be argued that including this dimension is important in any type of IB study, but this holds true especially for studies focused on investments in developing countries characterized by a relatively weak social infrastructure. Here, adoption of novel forms of collaboration and engagement with local communities may be preconditions for MNE market entry and longterm success. In Chapter 11, Luis A. Perez-Batres and Jonathan P. Doh take the discussion on CSR practices one step further by addressing the stakeholder dynamics that allow differentiating between substantive (real) and symbolic CSR practices. The chapter proposes that firms adhering to substantive CSR practices are less likely to be punished by external stakeholders than firms engaged in symbolic CSR practices. The chapter also suggests the presence of a positive relationship between the number of board ties to reputable universities/nonprofit organizations and substantive CSR practices, as well as a negative relationship between managerial discretion and substantive CSR practices. Here, the focus is on the linkage between internal stakeholder dynamics and CSR compliance. Jacqueline Mees-Buss and Catherine Welch discuss the Unilever CSR case in Chapter 12. Unilever is particularly relevant as a case study in this research volume because it has been active in businesses at the forefront of CSR, and focused on meeting the needs of stakeholders and society as a whole. For example, the firm has performed a leadership role in establishing the Dow Jones Sustainability World Index since its inception in 1999 for the food and beverages industry. The paper usefully analyses Unilever’s relationships with societal stakeholders when addressing so-called ‘wicked problems’, for instance through partnerships such as the Roundtable on Sustainable Palm Oil. The authors undertake a thorough textual analysis of corporate communication with the firm’s stakeholders. They examine linguistic and rhetorical elements in this corporate communication in order to trace changes in processes of sense making. By looking at the assumptions made, the choice of words and the usage of rhetorical tools in the corporate communication, the authors effectively catch meaningful glimpses of the underlying ideas and belief structure

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that drive the firm’s interpretation of its responsibilities vis-a`-vis society at large. In some of the above contributions, the concept of ‘embeddedness’ was used to conceptualize the relationship between a company and its nonmarket or social and political environment. Tiina Ritvalda, Per Andersson and Asta Salmi, in Chapter 13, develop this idea further by looking at the challenges of multiple embeddedness, as a descriptive tool to understand the particular managerial problems faced by MNEs operating in different countries. The paper, however, also uses this concept as an analytical stepping-stone for understanding the potential of MNEs to collaborate with stakeholders such as NGOs in solving problems that stretch beyond the boundaries of individual states, in this case problems occurring in the Baltic Sea area. This case provides an excellent illustration of the conditions under which MNEs can help in providing ‘global’ or ‘regional’ public goods. The chapter helps in understanding the relational processes and network dynamics present in MNEs’ participation in cross-sector partnerships.

PART IV: NEW PUBLIC POLICIES AND GOVERNANCE CHALLENGES FOR SUSTAINABLE DEVELOPMENT Part IV focuses on the policy and governance challenges posed by new approaches to sustainable development. Global growth challenges (as identified in Chapter 2 by Martin Wolf) can be addressed by regulation, selfregulation and various multi-stakeholder approaches. In the realm of regulation, it is likely that various types of public policy will need to be revisited, whilst other levels of governance need to be introduced. In Chapter 14, Raphael Kaplinsky argues that industrial and innovation policies have regained respectability, but to be effective in developing countries require an understanding of the novel forms of MNE strategy, including global value chains and partnerships, as documented in the other parts of this volume. He portrays different trajectories of linkages that can help developing countries in engaging in more or less inclusive patterns of growth. He proposes to change the wording of the policies. For example, ‘industrial policy’ should be rebranded as ‘productive sector policy’. Daniela Marconi and Francesca Sanna-Randaccio, in Chapter 15, take one particular sustainability challenge (namely environmental impacts) that

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Taking Stock of Complexity

has resulted in a particular governance measure (clean development mechanism) and assess whether it has affected the transfer of foreign technology to China. They build upon a large database of registered projects. This study provides support for the importance of involving other stakeholders in MNE strategy, to increase its impact on sustainable development, in this case by successfully transferring foreign technology to serve environmental objectives. The study takes into account and isolates the specificities of the Chinese regulatory framework, which makes it particularly relevant to companies willing to engage in technology transfer towards other emerging countries, in particular from the BRIC (see van Tulder, 2010). The contribution by UNCTAD’s Hafiz Mirza and Kee Hwee Wee, in Chapter 16, is based upon recent pioneering work on using global value chain analyses to enhance the impact of policy measures in developing countries. The present paper takes a regional perspective by looking at the ASEAN region and policy arrangements to further cross-ASEAN investment by ASEAN MNEs in the context of plans for an integrated ASEAN by 2020. Finally, Chapter 17 includes a contribution by UNRISD deputy-director Peter Utting. He considers the coming of age of multiple, multi-stakeholder initiatives that have prompted the need for multi-stakeholder regulation. The author takes a critical look at the effectiveness of CSR activities. He documents what he calls a ‘double movement’ in which new forms of contentious politics and new roles of civil society need to be taken into account. An appraisal of many leading multi-stakeholder initiatives leads to identifying various limitations and dilemmas associated with them in the context of effectively addressing the challenges of sustainable development. Utting suggests that multiple bodies of knowledge and theory are needed to understand the wickedness of the problems of sustainable development, and to create new forms of governance to actually discuss and solve these problems.

NOTE 1. Thanks to Andrea da Rosa for timely assistance in gathering these data. Based on a key word search in the title, abstract and keywords of articles in these four journals. This indicates the relative priority attributed to this topic. We also conducted the same search for the full text of each article; where appropriate we will refer to these results. Please note that the fifth (last) period (2010 2012) only covers

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three years, whereas the four prior periods include five years each. Where relevant, we extrapolated these figures to cover the ‘virtual’ period 2010 2014 and included the extrapolation in the analysis.

REFERENCES Blowfield, M., & Frynas, J. (2005). Setting new agendas: Critical perspectives on corporate social responsibility in the developing world. International Affairs, 81(3), 499 513. Campbell, J., Eden, L., & Miller, S. (2012). Multinationals and corporate social responsibility in host countries: Does distance matter? Journal of International Business Studies, 43, 84 106. Dunning, J. H. (1981). Explaining the international direct investment position of countries: Towards a dynamic or developmental approach. Weltwirtschaftliches Archiv, 119, 30 64. Dunning, J. H., & Narula, R. (1996). The investment development path revisited: Some emerging issues. In J. H. Dunning & R. Narula (Eds.), Foreign Direct Investment and Governments: Catalysts for Economic Restructuring (pp. 1 40). London: Routledge. Egri, C., & Ralston, D. (2008). Corporate responsibility: A review of international management research from 1998 to 2007. Journal of International Management, 14(4), 319 339. Fortanier, F. (2007). Foreign direct investment and host country economic growth: Does the investor’s country of origin play a role? Transnational Corporations, 16(2), 41 75. Gereffi, G., Humphrey, J., & Sturgeonx, T. (2005). The governance of global value chains. Review of International Political Economy, 12(1), 78 104. Ghauri, P. N., & Buckley, P. J. (2006). Globalization, multinational enterprises and world poverty. In S. C. Jain & S. Vachani (Eds.), Multinational Corporations and Global Poverty Reduction (pp. 204 222). Cheltenham: Edward Elgar. Griffith, D. A., Cavusgil, S. T., & Xu, S. (2008). Emerging themes in international business research. Journal of International Business Studies, 39, 1220 1235. Hart, S., & Sharma, S. (2004). Engaging fringe stakeholders for competitive imagination. Academy of Management Executive, 18(1), 7 18. Humphrey, J., & Schmitz, H. (2002). How does insertion in global value chains affect upgrading in industrial clusters? Regional Studies, 36(9), 1017 1027. Kaplinsky, R. (2014). Shudder: the challenges to ‘industrial policies’ in the early 21st century in low and middle-income economies. In R. van Tulder, A. Verbeke, & R. Strange (Eds.), International business and sustainable development (Vol. 8). Bingley, UK: Emerald. Kolk, A., & van Tulder, R. (2010). International business, corporate social responsibility and sustainable development. International Business Review, 19, 119 125. Luo, Y., & Tung, R. L. (2007). International expansion of emerging market enterprises: A springboard perspective. Journal of International Business Studies, 38, 481 498. Mees-Buss, J., & Welch, C. (2014). Taming a wicked problem? Unilever’s Interpretations of corporate social responsibility 2000 2012. In R. van Tulder, A. Verbeke, & R. Strange (Eds.), International business and sustainable development (Vol. 8). Bingley, UK: Emerald. Meyer, K. E. (2004). Perspectives on multinational enterprises in emerging economies. Journal of International Business Studies, 35, 259 276.

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Oetzel, J., & Doh, J. (2009). MNEs and development: A review and reconceptualization. Journal of World Business, 44, 108 120. Prahalad, C. K. (2005). The fortune at the bottom of the pyramid: Eradicating poverty through profits, Upper Saddle River, NJ: Wharton School Publishing. Porter, M. E., & Kramer, M. R. (2006). Strategy and society. Harvard Business Review, 84(12), 78 92. Ramamurti, R. (2012). What is really different about emerging market multinationals? Global Strategy Journal, 2(1), 41 47. Reimann, F., Ehrgott, M., Kaufmann, L., & Carter, C. R. (2012). Local stakeholders and local legitimacy: MNEs social strategies in emerging economies. Journal of International Management, 18(3), 241 246. Rugman, A., & Doh, J. (2008). Multinationals and development. New Haven, CT: Yale University Press. Sachs, J. (2005). The end of poverty: Economic possibilities for our time. New York, NY: Penguin Press. Seitanidi, M., & Crane, A. (2013). Social partnerships and responsible business: A research handbook. London: Routledge. Strange, R. (2011). The outsourcing of primary activities: Theoretical analysis and propositions. Journal of Management & Governance, 15(2), 249 269. UNCTAD. (1999). World Investment Report 1999: Foreign direct investment and the challenge of development. New York, NY: UNCTAD. UNCTAD. (2006). FDI from developing and transition economies: Implications for development. New York, NY: UNCTAD. UNCTAD. (2013). World Investment Report 2013: Global value chains: Investment and trade for development. New York, NY: UNCTAD. van Huijstee, M., Franken, M., & Leroy, P. (2007). Partnerships for sustainable development: A review of current literature. Environmental Sciences, 4(2), 75 89. van Tulder, R. (2010). Toward a renewed stages theory for BRIC multinational enterprises? A home country bargaining approach. In K. P. Sauvant & G. McAllister with W. A. Maschek (Eds.), Foreign direct investments from emerging markets (pp. 61 75). New York, NY: Palgrave Macmillan. Van Tulder, R., & Da Rosa, A. (2012). The role of cross-sector partnership portfolios in the inclusive business strategies of multinational enterprises. In R. Van Tulder, A. Verbeke, & L. Voinea (Eds.), New policy challenges for European multinationals (Vol. 7, pp. 153 180). Bingley, UK: Emerald. van Tulder, R., & van der Zwart, A. (2006). International business-society management. London: Routledge. van Tulder, R., Verbeke, A., & Voinea, L. (Eds.). (2012). New policy challenges for european multinationals (Vol. 7). Progress in International Business Research. Bingley, UK: Emerald. Vellema, S., Ton, G., de Roo, N., & van Wijk, J. (2013). Value chains, partnerships and development: Using case studies to refine programme theories. Evaluation, 19(3), 304 320. Verbeke, A. (2012). AV to add. Verbeke, A. (2013). International business strategy: Rethinking the foundations of global corporate success (2nd ed.). Cambridge: Cambridge University Press. Verbeke, A., van Tulder, R., & Voinea, L. (2012). New policy challenges for European multinationals: A resource bundling perspective. In R. van Tulder, A. Verbeke, & L. Voinea

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(Eds.), Policy challenges for european multinationals (Vol. 7, pp. 1 27). Progress in International Business Research. Bingley, UK: Emerald. World Commission on Environment and Development. (1987). Our common future. New York: Oxford University Press. (The Brundtland Report.) Yamin, M., & Sinkovics, R. R. (2009). Infrastructure or foreign direct investment? An examination of the implications of MNE strategy for economic development. Journal of World Business, 44(2), 144 157. Yuan, W., Bao, Y., & Verbeke, A. (2011). Integrating CSR initiatives in business: An organizing framework. Journal of Business Ethics, 101(1), 75 92.

This article has been cited by: 1. Mark Starik, Wendy Stubbs, Suzanne Benn. 2016. Synthesising environmental and socio-economic sustainability models: a multi-level approach for advancing integrated sustainability research and practice. Australasian Journal of Environmental Management 23:4, 402-425. [CrossRef]

PART I NEW TRENDS AND CONCEPTS IN INTERNATIONAL BUSINESS AND SUSTAINABLE DEVELOPMENT

CHAPTER 2 LIMITS TO GROWTH IN THE 21ST CENTURY Martin Wolf ABSTRACT Purpose Highlights the constraints natural, technological and political to continued global economic growth. Methodology/approach Draws upon historical data from various secondary sources. Considers long-term trends. Findings The world economy has grown explosively over the past two centuries and has hugely increased its use of resources and associated emissions over that period. Global output could easily rise more than three-fold over the next 40 years, almost all of it in the emerging world. This will put substantial pressure on energy resources, and emissions of carbon dioxide and equivalents continue to rise. These developments are likely to generate large, unpredictable and possibly calamitous climate change. Research implications Disturbing policy and political revolution.

in the absence of a technological,

Practical implications Emphasises the challenge of mitigating climate change, and highlights the twin imperatives of convincing the people of

International Business and Sustainable Development Progress in International Business Research, Volume 8, 23 43 Copyright r 2014 by Martin Wolf All rights of reproduction in any form reserved ISSN: 1745-8862/doi:10.1108/S1745-8862(2013)0000008007

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the world that it is possible to combine greater prosperity with recognition of environmental limits and of developing the political institutions that make feasible the decisions that need to be taken. Originality/value Offers a comprehensive assessment of the prospects for global economic growth and the increasing demand for non-renewable resources, particularly energy. Keywords: Economic growth; environment; resources; institutions; emissions; climate change

INTRODUCTION Economic growth has been the great story of the past two centuries. It is now the promise beguiling all of humanity. It has allowed hundreds of millions to live like demi-gods. It offers the promise to billions that they might do the same. The question is whether that is feasible. What problems need to be overcome if the world economy is to continue to grow and the bulk of humanity is to achieve the standards of living of the developed countries of today? Some will argue that this is absolutely impossible. Others will argue that it is absolutely inevitable. Which is right? This chapter cannot answer these questions because, in truth, they cannot be answered on the basis of current knowledge. We do not fully understand the constraints natural, technological and political on continued economic growth. But we can describe some of the dimensions of the challenge. In this chapter, I will focus on one set of challenges, those of resources, both marketed and non-marketed. I will note, in particular, that if climate change is a potential wrecking ball, then humanity seems unable to avoid it. But the same might be true of other resources. So this, then, is economics beyond the crises. It is economics for the long run. This discussion will start by considering the intimate relationship between economic growth and the demand for non-renewable resources. It will then turn to the most important potential source of economic growth both now and in the 21st century: the catch-up by emerging and developing countries on the standards of living of today’s high-income countries. Then the analysis will turn to the future. The discussion will start by looking at the broad picture of prospective growth, noting the scale of the potential increases in output. It will then look at productivity growth

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in the most advanced countries, noting that this may be slowing. But, it will argue, this may not be an important obstacle to global growth, at least until 2050, because of the scale of the potential for catch-up growth. If the latter does continue, the structure of the world economy will be transformed. The present high-income countries are likely to become increasingly marginal. That will create some big geopolitical challenges. But a huge question is whether the resources exist to sustain such growth. The world will need to generate large increases in energy inputs, while breaking the link between output and emissions. Hitherto, rising output has swamped improved energy efficiency and diminishing emissions of greenhouse gases per unit of output. This has to change if growth is to be manageable. What is needed, in short, is nothing short of a technological, policy and political revolution. There is no sign of these on the horizon. Indeed, despite much talk, we are going backwards in important respects.

THINKING ABOUT PROSPERITY The discussion here is about aggregate economic growth, as measured by Gross Domestic Product (GDP). This is not because it is an ideal measure of prosperity. Indeed, we know it is imperfect. It omits important things that affect welfare, negatively or positively, such as the impact on the environment or the production of household services. It includes things that do not contribute to welfare, such as the costs of personal and collective security or of repairs. Again, there is evidence, albeit also debated evidence, that higher GDP per head does not lead to greater happiness, at least once incomes have reached the levels in today’s high-income countries. This is partly due to the importance of the zero-sum competition for status. Finally, averages ignore the distribution of incomes. The more unequal is that distribution, the more are the averages dominated by changes in the incomes of the small proportion of the population at the top. Moreover, rising inequality may also directly reduce happiness by making it more difficult for people to feel they are a valued part of a shared social endeavour.1 Nevertheless, this discussion focuses on total and average GDP. This is because measured incomes have a huge influence on welfare. This is particularly true for the world’s poor. Moreover, they are also directly connected to the question of limits, on which this chapter focuses.

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HOW WE GOT HERE The historical record on economic prosperity has four fundamental features. • First, productivity or output per head rose very little for most of human history. Advances in technology and social organization led to larger and denser populations, not higher incomes per head. Thomas Malthus described the past well, even if he did not understand his present or the world’s future. • Second, productivity started to rise rapidly and on a sustained basis from the early 19th century. This led to the ‘great divergence’, as the leading western economies and later still Japan became richer, while most of the rest of the world stagnated. • Third, there was a huge increase in inputs of cheap energy and outputs of greenhouse gases. • Finally, a ‘great convergence’ began, as some of the countries that had fallen behind began to catch up again, the most important of these being China and India, with almost two-fifths of the world’s population. Some two and a half centuries ago, something extraordinary happened. We have grown used to calling it an ‘industrial revolution’. But that is a misnomer. It was an ‘energy revolution’. As Ian Morris (2010), of Stanford University, has noted in a brilliant recent book, humanity learned how to capture far more energy than ever before. More precisely, it learned how to exploit the sunlight fossilised in coal, oil and gas. The old limits on levels of social development, particularly urbanization, fell away. Western energy capture was the same in 1700 as in the year zero. Since then, it has been exploding, followed by Asia (Fig. 1). The energy revolution went hand-in-hand with a revolution in ideas, as science-driven technology advanced, to take advantage of and further develop newly-abundant sources of energy. Alongside these revolutions in energy and ideas came a third revolution, one in institutions. In the economy and in politics, rising affluence and enhanced opportunities liberated people from historic patterns of custom and command. The results were the rise of the market economy and democracy in their tense, but symbiotic, relationship (Fig. 2). The energy revolution made possible a parallel transformation in our standards of living (see Fig. 3). But this is too simple a description of the social and economic revolution of the past two centuries: better health,

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West

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Global Energy Output From Fossil Fuels (Exajoules). Source: http://cdiac. ornl.gov/

longer lives, smaller families, the liberation of women from the cycle of childbirth, industrialization, urbanization, revolutions in transportation and the storage and communication of information. Travel that took years is down to hours and communications that took months are now down to micro-seconds. We enjoy free labour in place of serfdom, and democracy in

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MARTIN WOLF 30,000 25,000 20,000 15,000 10,000 5,000 0

1500 Italy

Fig. 3.

1700

Netherlands

1850 UK

1890 USA

1920

1960 China

2000 Japan

GDP Per Head Of Richest Western and Eastern Countries (1990 PPP $s).

place of despotism. The energy revolution has allowed us to live like gods. We will not give all this up voluntarily. Only another dark age would make us do so. But what sort of dark age might end today’s world? It would surely be as black as a tomb. As the world became more productive and used more energy, it started inevitably to emit more carbon dioxide and other greenhouse gases. The rise in such annual emissions has been continuous. The growth rate has, admittedly, slowed over time. But it has continued to be positive (see Figs. 4 and 5). Obviously, there is no hope of bringing the stock of greenhouse gases in the atmosphere under control if the flow is continuing to rise, as it is. We can safely say that the entire process of negotiation over limits to emissions has failed to bring the problem under control. Indeed, it has failed quite spectacularly to do so. The dramatic rise in output per head and total output began in the west. This was the ‘great divergence’ of the 19th century (Pomeranz, 2000) see Fig. 6. In 1820, the incomes per head (in real terms) of the United States (and of western Europe) were double China’s. By the mid-20th century, they were more than 20 times greater. Nothing like this had happened before. Why it happened is one of the great debates. Some attribute it to the superior culture of the west. Others attribute it to the happy coincidence of coal alongside iron and the ability to open up the vast areas of the New World to imports of labour (both free and unfree) and so to the production of food and fibres for export. Yet others attribute it to the predatory imperialism of the west. Yet others argue that it was the natural result of the advantages of the industrial first-comers, who de-industrialized the world as they industrialised themselves. The truth, no doubt, is that it was

29

Living with Limits 10000 8000 6000 4000 2000 00 20

50

Liquid fuel consumption Cement production

Solid fuel consumption Gas fuel consumption Gas flaring

Fig. 4.

19

00 19

50 18

00 18

17

50

0

History of Carbon Dioxide Emissions (Million Tonnes of Carbon). Source: httpc://cdiac.ornl.gov/

10000 1000 100

Fig. 5.

2000

1950

1900

1800

1750

1

1850

10

History of Carbon Dioxide Emissions (Millions of Tonnes of Carbon). Source: http://cdiac.ornl.gov/

120.0% 100.0% 80.0% 60.0% 40.0% 20.0% 0.0%

1820

1850

1870

Western Europe

Fig. 6.

1890

1930 China

1950

1970 India

1990

2008

Japan

GDP Per Head Relative to the United States (1990 PPP $s). Source: Angus Maddison, http://www.ggdc.net/MADDISON/oriindex.htm

30

MARTIN WOLF 100.0%

Fig. 7.

Japan (from 1950)

South Korea (from 1964)

China (from 1978)

India (from 1978)

60

50

40

30

20

0

1.0%

10

10.0%

GDP Per Head Relative to United States (2009 EK $s).

a mixture of all of these. But, for our purposes, that it happened is more important than why. Such a huge gulf in output per head opened an opportunity for what economists call ‘arbitrage’. Cheap and industrious workers called out to the accumulated western know-how. When the economies of the east were appropriately organized and opened up, it came. The new ways of doing things reached Japan first and then a few smaller east Asian economies Hong, Kong, Singapore, Taiwan and South Korea. But then, in 1978, they came to the giant China, and then, in 1991, to the second giant, India. The ‘great convergence’ began (see Fig. 7). Today, US GDP per head is down to ‘only’ five times higher than China’s, and a little over ten times higher than India’s. The world is returning to what is surely a more normal pattern. Other human beings are replicating what the west has done. Not all parts of the developing world are catching up fast. Indeed, many important countries are failing to catch up on any consistent basis (see Fig. 8). But China and India alone possess 37 per cent of the world’s population, against 12 per cent in all of today’s advanced economies. More will surely follow them. The west’s monopoly of wealth and power is coming to an end.

WHERE WE ARE GOING The affluent economy enjoyed, until recently, by a small proportion of the world’s population is becoming global. Billions of hitherto poor people not

31

Living with Limits 45.0% 40.0% 35.0% 30.0% 25.0% 20.0% 15.0% 10.0% 5.0% 0.0% 1980

1984

1988

Brazil

1992

1996

Indonesia

2000

2004 Mexico

2008

2012

2016

Turkey

Fig. 8. GDP Per Head Relative To United States (at Purchasing Power Parity). Source: International Monetary Fund, World Economic Outlook database.

only aspire to the standards of living of the advanced countries, but expect to achieve them within their lifetimes. By 2050, argues Michael Spence Nobel laureate and former chairman of the independent Commission on Growth and Development perhaps three-quarters of humanity could enjoy standards of living similar to those of today’s high-income countries (Spence, 2011). How many people might that be? Close to seven billion is a plausible answer. My simple calculation is that if 7bn people were to achieve today’s average living standards of the high-income countries by 2050, and another 3 billion or so reach the world’s average income today, global output would expand 3.5 times. This implies a global growth rate of a little over 3 per cent a year. If world output were to grow at its recent rate of 4 per cent a year, it would multiply another five times by the middle of the century, with almost all of this increase in emerging countries (see Fig. 9). The lower growth projection assumes, essentially, no further rises in living standards in today’s rich countries. This is almost certainly too pessimistic. Robert Gordon (2012) of Northwestern University has argued that productivity growth is slowing in the United States, long the world’s productivity front-runner (see Fig. 10). He argues that the peak of innovation was between 1880 and 2050. Nothing comparable to the processes driving the economy at that stage now exists. The vaunted development of information technology, for all its impact, does not match that of the range of innovations associated with, or driven by, electricity, the internal

32

MARTIN WOLF $3,00,000 $2,50,000 $2,00,000 $1,50,000 $1,00,000

World Total ($m)

2050

2030

2010

1990

1970

1950

1700

$0

1900

$50,000

Growth at 3 percent a year

Growth at 4 percent a year

Fig. 9.

Global GDP (Purchasing Power Parity at 1990 $bn). Source: http://www. ggdc.net/Maddison/content.shtml

3.00

2.5

2.50

2.0

2.00

1.9 1.4

1.50 1.00

2.4

0.8

0.50 0.00

Fig. 10.

1906-1928 1928-1950 1950-1972 1972-1987 1987-2007 2007-2027 forecast

Annual Rate of Growth of Real GDP Per Head in the United States (Logarithmic). Source: Robert Gordon (2012).

combustion engine, flight, sewerage and clean water, chemicals, pharmaceuticals and so on. This can be debated. But productivity is still likely to grow. Some argue indeed that he is far too pessimistic, insisting that the full potential of information and communications technology, not least robotics, to transform the world has barely been tapped. In any case, for our purposes, this may not matter that much. Catch-up growth alone, if sustained, could generate rapid growth in the world economy for half a century. True, the high-income countries would be very miserable if growth

33

Living with Limits

were to halt altogether. But the world economy could still grow as the rest caught up on the technologies of the west. So what might the world look like after such catch-up growth? At present, the emerging and developing countries are in aggregate growing more than three times faster than the high-income countries (see Fig. 11). This is a recent transformation. Up to the end of the last century, the growth rates of the emerging countries and of the high-income countries were quite similar, as had been true since the end of World War II. But now the relative weight of different economies is being transformed, largely by the rapidly rising weight of the fast-growing Asian giants in the global total. What would this mean? As Fig. 12 shows, if the emerging and developing countries were to grow at an average rate of, say, 5 per cent a year, while the United States grew at 2.5 per cent, the European Union at 1.5 per cent, and Japan at 1 per cent, China would end up generating 26 per cent of global GDP by 2050, while the United States generates just 11 per cent and the European Union 8 per cent. Is this likely? Perhaps not. Is this impossible? Surely not. It requires improvements in policy, no doubt. But those are certainly not inconceivable. Thus, the direction of economic travel is not implausible. We are looking at the possibility of a global transformation, with the partial reversal of the economic and political consequences of the first and second industrial revolutions. Inevitably, the prognoses for sustained growth remind us of the prophecies of Thomas Malthus, more than two centuries ago, about the impossibility of enduring rises in living standards. Subsequently, the Malthusian view that population would outstrip the increase in food production was (at least temporarily) disproved. Ingenuity and commercial energy rose fast enough to keep ahead of the rising human population (up fivefold, since

19 90 19 92 19 94 19 96 19 98 20 00 20 02 20 04 20 06 20 08 20 10 20 12 20 14 20 16

10 8 6 4 2 0

Fig. 11.

World

Advanced

Emerging

Developing Asia

GDP Growth (Moving Average of the Previous 10-years). Source: IMF, World Economic Outlook database October 2012.

34

MARTIN WOLF 100 90 80 70 60 50 40 30 20 10 0

24 4

29

26 7 25

29

29

14

18

20

17

41

26

25

24

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18

8 11

1990

2000

2010

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2050

United States

European Union

Japan

Other advanced

China

India

Other emerging

Fig. 12.

Shares in World GDP (at Purchasing Power Parity). Source: IMF, World Economic Outlook Database.

1820) and its output per head (up twelvefold).2 Will that continue to be the case? Is it possible, as Professor Spence suggests, for humanity as a whole to enjoy the standards of living of today’s rich countries? On the answer to this question depends the fate of our children. It will surely determine whether this will be a world of hope rather than despair, and of peace rather than conflict. So, are such increases feasible? In answering this question, I find myself falling between those environmentalists who see no solution and those believers in free-markets who see no problem. Such a leap would, on anything like current trends, impose vastly greater demands on the planet’s resources and threaten profound changes in the global environment. But it might be feasible, if managed appropriately. What is already clear is that the growth of emerging countries, particularly China, is already having a big impact on the demand for resources. Of these, energy is much the most important, both for itself and because it is an input into all others. This is shown in recent rises in the real prices of metals and energy. The International Energy Agency argues that global primary energy demand could rise by another 50 per cent by 2035. Without a big change in the energy-intensity of production, that is what economic convergence has to mean. If all of humanity consumed the same energy per head as rich countries do today, consumption of commercial energy would be roughly three times what it is now. While efficiency in the use of energy is indeed rising, growth is overwhelming its beneficial effects. The overall

35

Living with Limits

result is likely to be a world of rising energy consumption and emissions of greenhouse gases (see Figs. 13 and 14). In Fig. 13, the dark green shows the carbon dioxide emissions of the members of the Organisation for Economic Co-operation and Development (OECD), the light green shows the emissions of the non-members. What emerges is that all the increase comes from the latter countries. In Fig. 14, also from BP, the orange line is global GDP, the purple line is the use of energy and the dark grey line is emissions of carbon dioxide. The conclusion is quite stark: despite massive improvements in energy efficiency, energy use and emissions continue to rise. This is a world economy that will continue to demand ever more inputs of resources. The evidence on energy efficiency is quite striking. There have been substantial reductions in energy use per unit of GDP since 1990. This is dramatically true for China (see Fig. 15). Nevertheless, as Fig. 16 shows, energy use per head rises with incomes in the emerging economies, again dramatically so in China. Moreover, China’s energy use per head is still about half of the United Kingdom’s and a quarter of that of the United States. Thus, without some profound revolution China’s energy use per head seems sure to rise further. This is surely going to be even more true of India, whose energy use remains extremely low. It is no surprise that real prices of energy and industrial raw materials have risen (see Fig. 17). Given the stagnation in the production of oil, this is likely to continue for some time, though coal and gas reserves seem to be 40

30

20

10

0 1990

Fig. 13.

2010

2030

Emissions of Greenhouse Gases. Source: BP.

36

MARTIN WOLF 400 350 300 250 200 150 100 1990

Fig. 14.

2010

2030

GDP, Energy Consumption and Emissions of Greenhouse Gases. Source: BP.

0.80 0.70 0.60

1990

0.50

2008

0.40 0.30 0.20 0.10 0.00

Fig. 15.

UK

US

India

China

Energy Input Per Unit of GDP (Kilograms of Oil Equivalent and GDP at 2005 $s). Source: World Bank, World Development Indicators 2011.

plentiful and will be brought into play and the revolution in tight oil and gas may be big enough to change this outcome. Climate change is the most intractable collective action challenge in human history inherently global, extremely long term, technologically demanding and replete with distributional difficulties, among countries, among people and among generations. It is little wonder that we are making such a mess of it.

37

Living with Limits 10,000 8,000

1990

6,000

2008

4,000 2,000 0

US

UK

China

India

Energy Use Per Head (Kilogram of Oil Equivalent). Source: World Bank, World Development Indicators 2011.

Fig. 16.

Total

Non-Energy

Energy

Agricultural

11 20

09 20

07 20

05 20

03 20

20

01

99 19

19

19

95

97

400.0 350.0 300.0 250.0 200.0 150.0 100.0 50.0 0.0

Industrial Metals

Fig. 17. Real Commodity Prices (Deflated by Unit Value of Exports from HighIncome Countries, Previous Five Years’ Moving Average). Source: Goldman Sachs.

Fig. 18.

54 19 58 19 62 19 66 19 70 19 74 19 78 19 82 19 86 19 90 19 94 19 98 20 02 20 06

19

19

50

1.4 1.2 1 0.8 0.6 0.4 0.2 0

Global Carbon Emissions Per Head (Tonnes of Carbon). Source: http:// cdiac.oml.gov/

38

MARTIN WOLF

The fossil fuel revolution brought with it a parallel (and ongoing) rise in emissions of greenhouse. Over the past 40 years, emissions per head have stabilized, but at what climate scientists argue is an unsustainable level (Fig. 18). Of course, the number of heads continues to rise if at a slowing rate. In the 2000s, emissions per head of carbon dioxide (and other greenhouse gases) even rose substantially, despite the efforts to contain them, largely because of the rapid development of China, in particular. Yet China’s emissions per head are still below those of a relatively efficient advanced economy, such as the United Kingdom. They are going to rise further. The explanation is also quite straightforward. Declines in emissions of carbon dioxide per unit of GDP, which have been quite impressive, have been swamped by rises in emissions per head in emerging countries, as a consequence of their energy-demanding growth (see Figs. 19 21). The

2.5 2.0

1990

1.5

2007

1.0 0.5 0.0

Fig. 19.

China

India

US

UK

Carbon Dioxide Emissions Per Unit of GDP (kilogram and 2005 PPP $s). Source: World Bank, World Development Indicators 2011. 25.0 20.0

1990

2007

15.0 10.0 5.0 0.0

Fig. 20.

US

UK

China

India

Carbon Dioxide Emissions Per Head (Tonnes). Source: World Bank, World Development Indicators 2011.

39

Living with Limits 7,000.0 6,000.0 5,000.0

1990

4,000.0

2007

3,000.0 2,000.0 1,000.0 0.0

Fig. 21.

China

US

India

UK

Total Emissions (Million Tonnes). Source: World Bank, World Development Indicators 2011.

developed world is no longer the centre of the story. Developing countries now generate 55 per cent of global carbon dioxide emissions and rising. Professor Nicholas Stern of the London School of Economics, author of the UK Government’s 2006 report on climate change, has analysed the implications (Stern, 2008). He starts from a few simple propositions: first, the concentration of carbon dioxide equivalent in the atmosphere is now 430 parts per million and rising at the rate of 2 parts per million a year; second, the aim should be to stabilise concentrations at between 450 and 500 parts per million; finally, to achieve this, global emissions of greenhouse gas equivalents must peak in the next 15 years and fall by at least 50 per cent, relative to 1990 levels, by 2050, when global average emissions per head must be as low as two tonnes per head. Two tonnes per head is 10 per cent of recent US levels and half China’s! Worse, the longer the world waits, the bigger the reductions must be, because the gases stay up for centuries. Does any such outcome look plausible? The answer is: absolutely not. Ignore what people say. Look at what they are doing. It is an irony of intellectual history that Thomas Malthus, prophet of overpopulation, worried about the lack of resources just as these pessimistic assumptions became untrue. The biggest question of the 21st century may be whether resources prove to be binding constraints, as they often proved to be prior to 1800. Will ingenuity continue to overcome scarcity, or not? If the answer is ‘yes’, all of humanity might come to enjoy the historically unprecedented lifestyles of today’s most favoured people. If the answer is ‘no’, we might, instead, fall prey to what Professor Morris calls the ‘five horsemen of the apocalypse’: climate change, famine, state failure, migration and disease.

40

MARTIN WOLF

In sum, is the tension between the aspirations of humanity and natural limits manageable? If we are to succeed, what will we need to do? If we fail, what might happen? To address these questions, we need to distinguish between resources that can be appropriated and priced in the market, and those that cannot be. The former are far simpler. We have good reason to expect that the demand for such resources, of which energy is the most important, will continue to rise rapidly in coming decades, as economic development spreads across the globe. What will happen to supply? I do not know. From recent experience with ‘experts’, I have concluded they do not know either. What we can say is that if scarcity were to bite and prices of resources rise over the coming decades, growth would slow, as returns on investment decline. We saw that effect after the oil price shock of the 1970s. Vastly more difficult issues arise where we are unable to appropriate the resources in question. The extreme example of this is the atmosphere and the concomitant challenge of climate change. The better we become at expanding the supply of fossil fuels, the bigger this problem must become. The atmosphere is thus the supreme example of a public good: it is nonexcludable, non-appropriable and essential for life, now and in future. Climate change is, as a result, the supreme example of a negative externality. It is obvious that we should not use the atmosphere as if its services were free. Moreover, it is not in the interest of profit-seeking businesses to internalise such externalities, since they would be unable to compete with competitors who do not. Nevertheless, to manage climate change we need to solve some extraordinary challenges. This is not to argue against action. I find persuasive arguments that it is worth paying a great deal to eliminate the risk of an irreversible journey towards catastrophe a change in the climate system so drastic as to destabilise the biosphere (Weitzman, 2011). Evidently, this also rests on the assumption that we have a duty of care to our progeny and, some would argue, other species, as well. The world does not exist for us alone. Bequeathing a planet that might be far less inhabitable than the one we inherited would be immoral. I would argue that this would be true, even if measured incomes were likely to be much higher in future. Man does not live by bread alone. But, along the path of catastrophic climate change, incomes might collapse. In this case, future generations might be poorer than we are and the appropriate social discount rate would be negative. The view that decisive action is justified is contentious. Sceptics offer two counter-arguments: first, that the science underlying climate change is

Living with Limits

41

highly uncertain; second, that costs exceed benefits. Yet it is not enough to argue that the science is uncertain. Given the risks, we have to be sure the science is wrong before following the sceptics. By the time we know it is not, it is likely to be too late to act effectively. We cannot repeat experiments with just one planet. The bigger issue is that of costs. The consensus seems to be that the costs of mitigation are not prohibitive. What is certain is that those who believe this have not proved it to the satisfaction of the general population.

IMPLICATIONS OF THE STORY What then is my story? The world economy has grown explosively over the past two centuries and has hugely increased its use of resources and associated emissions over that period. Humanity has appropriated the resources of the planet for its own use. The growth started with a few countries in western Europe and their offshoots, and then spread to Japan. The result was unprecedented economic divergence. But growth is now being driven by partial convergence, led by China. But convergence is far from complete. This catch-up process has the potential to generate continued very rapid growth in the world economy. This is true even if growth in the highincome countries slows sharply, as seems quite likely, given demographic change and the likely decline in productivity growth. Global output could still easily rise more than three-fold over the next 40 years, almost all of it in the emerging world. Hitherto, rising GDP has more than offset increased efficiency in the use of energy resources per unit of output. Without a big break in the trends, this is sure to continue. This would put substantial pressure on such resources, and is quite likely to lead to sustained high prices. This should encourage further economy in use, but might also slow growth. We do not know how much of a constraint on growth higher prices of marketed resources would turn out to be. Despite much discussion and debate, emissions of carbon dioxide and equivalents also continue to rise year-on-year. Again, rising global output is overwhelming reductions in emissions per unit of output. The big emerging economies still emit much less per head than the high-income countries. Without a massive revolution, the continuing catch-up process would preclude any possibility of capping the concentrations in the atmosphere. But this development is also likely to generate large, unpredictable and possibly calamitous climate change.

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MARTIN WOLF

Optimists believe that economic growth can and will continue. Pessimists believe either that it will not do so, or that it must not do so if we are to avoid the destruction of the environment. I would argue that we have to marry these apparently opposing visions. It is vital that we sustain a positive-sum world economy. It is no less vital to tackle the environmental and resource challenges that economy has thrown up. This is going to be very hard. The conditions for success are at the extremes of ingenuity. But the ingenuity we need is not only or even principally in developing technocratic solutions to the problem of managing scarcity. The ingenuity we need, above all, is technological and political. We must convince the people of the world that it is possible to combine greater prosperity with recognition of environmental limits. And we must also develop the political institutions that make the decisions we need to take feasible, because legitimate. I have no idea whether either of these things is possible. But I am quite sure that, without those two things, the challenge of mitigating climate change will not be met. It will be a case of either adapt or perish, after the fact. Humanity will continue to ignore the limits, until they hit us in the face. By that time it will surely be far too late. It is not enough to produce technocratic solutions. It is even more important to offer credible political and technological ones.

NOTES 1. Adair Turner (2012, Chapter 1) discusses a number of these issues, particularly the link between GDP and happiness. 2. Angus Maddison, http://www.ggdc.net/MADDISON/oriindex.htm

ACKNOWLEDGEMENT This chapter is based on the keynote speech presented at the EIBA (European International Business Academy) Fellows’ plenary session on Sunday 9th December 2012, at the University of Sussex, UK. Parts of it draw on my Grantham Institute for Climate Change Annual Lecture 2011, delivered on the 3rd November 2011 at the Imperial College of Science and Technology, London see Wolf (2012), reprinted by permission of the publisher, Taylor & Francis Group.

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REFERENCES Gordon, R. J. (2012). Is U.S. economic growth over? Faltering innovation confronts the six headwinds. Working Paper No. 18315. National Bureau of Economic Research. Morris, I. (2010). Why the west rules For now. London: Profile Books. Pomeranz, K. (2000). The great divergence: China, Europe, and the making of the modern world economy. Princeton, NJ: Princeton University Press. Spence, M. (2011). The next convergence: The future of economic growth in a multispeed world. New York, NY: Farrar, Straus and Giroux. Stern, N. (2008). Key elements of a global deal on climate change, 2008. Retrieved from http:// eprints.lse.ac.uk/19617/1/Key_Elements_of_a_Global_Deal-Final_version(2)_with_additional_ edits_post_launch.pdf Turner, A. (2012). Economics after the crisis: Objectives and means. Cambridge MA: MIT Press. Weitzman, M. (2011). Fat-tailed uncertainty in the economics of climate change. Retrieved from http://www.economics.harvard.edu/faculty/weitzman/files/REEP2011%2Bfat-tail.pdf Wolf, M. (2012). Living with limits: Growth, resources and climate change. Climate Policy, 12(6), 772 783.

CHAPTER 3 FOREIGN DIRECT INVESTMENT AS A DRIVER OF INDUSTRIAL DEVELOPMENT: WHY IS THERE SO LITTLE EVIDENCE? Rajneesh Narula ABSTRACT Purpose This chapter examines the role of foreign direct investment (FDI) in promoting industrial development, and asks, if FDI is such an important avenue to promote development, why is there little evidence on concomitant industrial development in most developing countries? Methodology/approach I look at the secondary evidence on FDI and development and explore some of the causes for this ambiguity. Findings The complexities of global value chains and networks have begun to trivialise the simplistic principle that increased multinational enterprise (MNE) activity automatically implies a proportional increase in spillovers and linkages. Value/originality Policies towards MNEs need to be closely linked and integrated with industrial policy. MNE activity needs to be evaluated by considering the kinds of externalities that are generated; whether and

International Business and Sustainable Development Progress in International Business Research, Volume 8, 45 67 Copyright r 2014 by Emerald Group Publishing Limited All rights of reproduction in any form reserved ISSN: 1745-8862/doi:10.1108/S1745-8862(2013)0000008008

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RAJNEESH NARULA

how domestic actors can internalise them, and building up absorptive capacities to achieve this. Keywords: MNEs; absorptive capabilities; motives; IDP; services; developing countries

Although today economists and policy makers in most countries consider the attraction and promotion of foreign direct investment (FDI) as a core aspect of their national development policies, this has not always been so. Indeed, in a relatively short time frame less than 70 years the importance of FDI to development has gone through several cycles. Prior to the 1950s, FDI was considered to be a temporary affair. Capital, moved from one country to another in response to medium-term differences in endowments, was considered to be part of the balance of payments, rather than a longer-term phenomenon. This is why, when we look at the International Financial Statistics published by the International Monetary Fund (IMF), FDI is still depicted as an annual flow, measured and understood in much in the same way as trade. Indeed, even today, few countries bother to collect data on FDI flows beyond this mandatory (and rather superficial) reporting requirement to the IMF. With few exceptions, prior to the 1950s, the effects of FDI and its potential influence on either the host or home economy was largely ignored. This was reflected in the lack of academic interest in the subject at the time. Long-term capital flows were small and insignificant, and multinational enterprises (MNEs) were considered to establish foreign subsidiaries largely to support their trading activities. Firms that engaged in more complex cross-border activities were a minor exception, deemed unworthy of serious analysis. Even after the World War II era, few countries made an effort to estimate the size and significance of cross-border long-term capital movements, with the possible exception of the United Kingdom and the United States, which engaged in systematic surveys of MNE activity relatively early. One might have thought that other large outward investors France and the Netherlands come to mind would have some interest in systematically documenting the scale and scope of the growing outward role of their large firms. Nonetheless, a majority of countries continued to produce rather rudimentary statistics (again, largely reflecting their obligatory reporting requirements to the IMF). Indeed, estimates of FDI stocks, sales, employment, and value added were more often than not estimated through

47

Foreign Direct Investment as a Driver of Industrial Development

indirect means, often unreliably. The point remains, however, that the role of the MNE was rather small. By 1960, worldwide FDI stocks were estimated to be $55 billion, an annual average growth rate of 5.6% since 1938 (Fig. 1). To put this into context, this is roughly equivalent to the global sales of an MNE such as IBM today. From the 1960s, the significance of FDI in host economies increasingly became a matter of considerable concern, given the growing popular view of MNEs as one of the causes of economic backwardness of the developing world. MNEs were increasingly regarded as political and economic agents of their home countries a form of neo-colonialism. These were built around economic and political doctrines that drew their inspiration in some instances from Marxist rhetoric (which was developed further in the writings of Rosa Luxemburg (1913)). The point was that large corporations had a tendency to act as monopolists and engage in regulatory capture where it provided an opportunity to increase rents. Other work deriving from ideas championed by Raul Prebisch, Hans Singer and others similarly highlighted the dangers of depending on foreign markets and foreign-owned firms. They emphasised the importance of local, domestic companies in building up industrial production capacity. Set against the background of the cold war, and the dominance of US firms in Latin America, this played a significant role in the import-substitution ideas that were systematically adopted, first in Latin America, and later in most other developing countries. Nonetheless, even as these policies were 25000000

20000000

15000000

10000000

5000000

0 Total Global FDI Stock Developing country

Fig. 1.

1914

1938

1960

1967

1973

14085

24315

54500

11200

166700

698951 2081147 7450022 20438199

1980

1990

2000

2011

1000

2700

30000

297319

517200 1735488 6625032

Inward FDI Stocks 1914 2011. Source: UNCTAD World Investment Report.

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systematically implemented in a growing number of economies, there was little attempt to document the role of MNEs in any serious empirical way by collecting data, whether on a firm, industry or country level, beyond some rather cursory (but alarming and rather important) case studies where MNE activity impeded development. However, by the late 1970s, the pendulum began swinging in the other direction. To some extent, this reflected the failure of the developing countries to exploit the potential that was implied by import-substitution as a force for industrial and economic development. Few developing countries employing import-substitution policies had developed any significantly improved levels of industrial capacity, and those that had developed nascent industrial competences found it hard to sustain this capacity without distorting markets through large and inefficient interventions through public sector ownership and subsidies of various types that required large amounts of capital. Gradually, a number of these countries began seeking financial assistance from the World Bank, the IMF and private capital markets. These loans were conditional on implementing structural adjustment programmes which required them to become more ‘FDI-friendly’ and outward-oriented. This gradual opening up of the developing countries and shift away from import-substitution towards more open economic and capitalism-friendly policies was marked by a growing role of MNEs in developing countries, and indeed, in the developed countries that had adopted similar approaches. The amount of FDI stock had increased from $166 billion in 1973 to 552 billion in 1983, and has since continued to increase at a rapid pace (Fig. 1). Outward-oriented, export-promoting and FDI-friendly policy regimes have gradually become the norm, and by the early 1990s almost all developing countries (and the countries from the former communist bloc) had adopted such policies. Indeed, the GATT agreements, which originally focused primarily on trade issues had moved slowly towards embracing FDI issues, and have become an integral part of the WTO agreements that have succeeded GATT. Almost all supranational organisations including the World Bank, WTO, OECD and the UN are now keen to promote the concept that FDI is a sine qua non for economic development, and almost all developing countries had adopted such polices. Despite FDI becoming a centrepiece of development policy, and FDIassisted development becoming the new dogma, the evidence on FDIassisted economic development in developing countries remains ambiguous. This chapter takes a look at the evidence on FDI and development and explores some of the causes for this ambiguity.

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UNDERSTANDING FDI AND DEVELOPMENT Perhaps the simplest way of explaining the challenges of development is the idea of the vicious cycle of poverty (VCP). The principle of the cycle of poverty is that poverty can be a self-perpetuating problem that requires intervention of some nature. Poverty and underdevelopment are, for all intents and purposes, synonyms (poverty is at the smallest unit of analysis: the individual. Under-development concerns societies, which are by definition an aggregation of individuals). The term ‘vicious’ emphasises the challenges of extrication, and the fact that there is a self-perpetuation of a negative set of associations. What the VCP illustrates is the bottom-up interrelationship between economic condition of the individual and the society in which she is embedded. Fig. 2 demonstrates a very simplified (and stylised) version of the VCP. Essentially, a country that is underdeveloped and suffers from high levels of poverty also has low levels of employment. Low levels of No wages

No employment

No savings

No investment

‘old’ model: ● Supply technology through turn-key projects, arms-length technology transfer agreements ● Supply capital through loans and portfolio investments

Fig. 2.

FDI-assisted development model: ● Supply capital and technology through FDI

The Vicious Cycle of Poverty.

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employment means that aggregate income is low, and with the average individual income levels being close to (or below) the poverty line, there is little opportunity for savings by individuals. This implies that there is little liquidity within the economy, and banks which rely on savings to make loans to industry or entrepreneurs are unable to lend money to potential employers (i.e. firms). Thus start-ups cannot find capital, and established firms will be unable to expand. Besides, since capital is scarce, whatever capital is available is only be at high interest rates. Thus, there will be little expansion of domestic industry, and employment levels will remain low, thereby perpetuating the cycle of poverty. This idea forms the basis of most development models. In particular, the free market view is that if capital were made available both easily and cheaply through, for instance, an influx of capital from foreign lenders, aid, and remittances entrepreneurs and businesses might have the opportunity to grow, thereby increasing employment, which in turn would increase incomes, raise saving rates and thereby increase liquidity, which in turn would lead to more liquidity, etc., breaking the cycle of poverty. Of course, making capital more freely available helps to improve things marginally. Making capital more easily available for instance through micro lending addresses some of the problems of poverty and underdevelopment, but it fails to address the bigger question of creating and sustaining development at the larger level. It may create some additional employment and result in higher individual incomes at the margin, but it does not begin a shift from subsistence activities (typically associated with the agricultural sector) to structured and formal economic activities, and simple capital infusions are not a pervasive or sustainable solution to growth. It is one thing to have capital, it is entirely another to be able to utilise it to generate a sustained return on this capital. This presumes some sort of ownership advantages, either in terms of knowledge of markets, skills, technology or management abilities on the part of the entrepreneur. Despite large flows of foreign remittances to countries such as Pakistan, India, Nigeria, the growth of firms in the formal sector remains low. Promoting industrialisation as opposed to small scale entrepreneurship depends on firms (as opposed to entrepreneurs with capital) access to some kind of technology, managerial skills and so forth, not just liquidity. Firms (and individuals) need to have access to some form of knowledge-based assets from which they can generate profits. Such assets are not easily acquirable on the open market. Simply buying the equipment and technology required to build a car factory, for instance, is insufficient to create a commercially and technologically successful product. It is easy

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to illustrate this with the failure of the Soviet automobile industry. Or indeed, India’s attempt at building cars from the 1950s, built around two imported designs. In both the Soviet and Indian cases, the car plants were turnkey projects, but the domestic firms were unable to make a competitive product, because they lacked either the organisational and technological expertise, or the managerial and marketing skills needed. Earlier models of development popular and prevalent in the 1950s and 1960s were built on the assumption that such knowledge-based assets were relatively easy to acquire. Indeed, these were made available through various technology transfer programmes that were promoted by bilateral programmes and development agencies. Arms-length arrangements to license technologies and turnkey projects (i.e. large projects built by a foreign firm, which were later transferred to domestic ownership) were made available with the idea that domestic firms would easily be able to internalise these assets and technologies, and eventually be able to imitate (and upgrade) them, thereby being able to compete with foreign (developed country) competitors. It is no surprise that many of these grand projects instituted to transfer technology largely failed. We should note, of course, that some of these failures occurred because many such projects were ‘prestige’ projects which were entirely inappropriate for the host countries, but selected simply because they met the grandiose expectations of various political groups. This model, therefore, made capital and technology available separately, but little account as taken of the cost (and time) of transferring skills and expertise to domestic workers, entrepreneurs and firms. Although training programmes were established, the assumption was that technology (and managerial know-how) was an easily-transferable good, greatly underestimating the tacit aspect of knowledge. This was especially a challenge with the more technology-intensive sectors: the more complex the technology, the greater the tacit element, thereby making its transfer more difficult. The difficulty of transferring technology applies not just to machinery and equipment but also the ‘soft’ aspects or organising and operating a business, such as finance, human resource and general management. It did not help that many countries also decided to rely on state-owned enterprises and large projects that were on a scale completely unsuited to the local economy. That is, building an automobile industry whose minimum efficient scale is 250,000, where annual demand was less than a 50,000 almost guaranteed that the unit costs would be substantially higher than similar imported products. Projects were also sometimes located in response to political objectives, rather than on economic ones. As an example, steel rolling mills in Nigeria were located almost a 1,000 km away from where

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the pig iron was smelted, with no proper transport links between the two sites, entirely because it was politically expedient to do so. This immediately ensured that steel was produced at uncompetitive prices, and without high import tariffs and subsidies, the domestic sector was unable to survive. Similar examples exist in almost every developing country where attempts to break the cycle of poverty through separate ‘injections’ of capital and technology did not work, with rather few exceptions. These exceptions mostly reflected situations where government planners sought to match the industrial projects to the competences and resources of the economy in which they were established. It was against this backdrop of failed large-scale interventions that the idea evolved that there were considerable potential benefits from using MNEs to break the cycle of poverty and build domestic capacity. FDI represented a ‘package’ of both capital and technology. The MNE already possessed the appropriate machinery and equipment, as well as the engineering skills to utilise this equipment efficiently, not to mention the managerial expertise needed to organise these activities to generate a profit. Their choice of products and processes was based on economic reason and rationale, rather than on prestige and political objectives. In most cases, they exploited technologies that were most suitable for the location, rather than the latest technologies that were inappropriate for the comparative advantages of the host economy. This is the principle in a very broad sense that FDI-assisted industrial development has been based on. The growth of FDI over the last 30 years, and the increasingly popular use of industrial policy that relies on MNEs reflect this particular model for economic growth through industrial development. However, it is not always clear that this model works. The next section explores some of the challenges in this regard.

WHY DOES FDI-ASSISTED INDUSTRIAL DEVELOPMENT NOT ALWAYS WORK? Despite the fact that FDI-assisted industrial development is now the new dogma, it is not entirely clear that greater FDI has caused more rapid development. Why is that? Quantitative researchers have often made the rather simple error of concluding that because FDI levels and GDP growth are highly correlated, there must be causality (for a discussion, see, e.g. Chowdhury & Mavrotas,

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2006 and Hansen & Rand, 2006). The more sceptical view is that the determinants of GDP growth happen to be the same as the determinants of increased inward FDI flows, but a kinder interpretation is that there is an important concatenation between the two. Simply put, MNE (or FDI) activity is not a conditio sine qua non for development (Lall & Narula, 2004). Instead the link between MNEs and development is an indirect one: Where inward MNE activity results in positive externalities, and when domestic firms have the capacity to usefully internalise these externalities, and if the non-firm sector supports domestic capacity building, there will be industrial development (Narula & Dunning, 2010). Second, there is a fundamental error on the part of analysts that every dollar of FDI has the same potential to promote development. The evidence is clear that not all FDI is equal in this regard: certain investment projects simply have a higher multiplier effect than others. In brief: not all FDI is the same from its value to development, and this itself is a function on the level of economic development of the country (Dunning & Narula, 1996). Both of these arguments are broad issues, and one that I cannot hope to cover in sufficient detail in a single chapter. However, I offer some indicative comments on both here. It is also worth highlighting that the two issues are connected. I have emphasised elsewhere the importance of ‘the right kinds’ of FDI (Narula & Dunning, 2000). This is itself dependent on the kinds of location advantages available to the MNE. Even where the ‘right kinds’ of MNE activity are located in the host country, the ownership advantages of domestic firms need to have the necessary absorptive capability to benefit from them.

Not All FDI Is equal: The heterogeneity of MNE Motivations Considerable differences have emerged over the last 40 years, as MNEs have evolved in their spatial and internal organisation of their activities. MNE activity was primarily driven by cost-economising considerations as well as efforts to overcome market failures to trade. Cross-border organisation structures were simple, and motivations for specific subsidiaries tended to be overwhelmingly resource seeking or market-seeking, with a minority of MNEs engaged in efficiency-seeking or strategic asset-seeking activities. The emphasis has shifted considerably over the last 30 years, in that MNEs have become increasingly sophisticated in managing and integrating activities across borders, and even relatively new and smaller MNEs are organised to maximise cross-border efficiencies and take advantages of the economies that derive from multinationality.

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It is generally acknowledged that there are four main motives for investment: to seek natural resources; to seek new markets; to restructure existing foreign production through rationalisation; and to seek strategically related created assets. These in turn can be broadly divided into two types. The first three represent motives which are primarily asset-exploiting in nature: that is, the investing company’s primary purpose is to generate economic rent through the use of its existing firm-specific assets. The last is a case of asset-augmenting activity, whereby the firm wishes to acquire additional assets which protect or augment their existing assets in some way. Broadly speaking, FDI to most developing countries tends to be focused on asset exploitation. MNEs seek to benefit from globalisation by leveraging their assets (whether in terms of exploiting economies of scale or scope) to supply a wider array of markets in a broader set of countries. Although there has been growth in FDI in developing countries, it is worth noting that different motives of FDI provide different potential for domestic spillovers and linkages. There are two areas where a large share of the growth in FDI to developing countries has come from: resourceseeking FDI and services FDI. That is to say, a very large share of FDI has been in resource-extracting sectors (such as mining and petroleum), and the tertiary sector, and not in the manufacturing, where past research has indicated a greater potential for linkages and spillovers to the domestic industry. Services FDI in developing countries increased by a factor of eight between 1990 and 2004, twice that of FDI stocks in manufacturing. FDI in the primary sector also grew 50% faster during the same period. One of the primary changes associated with the WTO (and in general, from economic liberalisation) has been the ability of MNEs to engage in the services sector. In many cases, the services industries in developing countries were dominated by large state-owned enterprises that were often inefficient, but enjoyed a local monopoly. Liberalisation led to the privatisation of many of these firms, often by much more efficient MNEs. However, it is not immediately clear that these investments have had a positive effect on domestic entrepreneurship and employment investments in telecommunications (for instance) provide relatively few knowledge spillovers and linkages to domestic firms in the least developed countries, compared to (say) manufacturing, although there may be pecuniary spillovers. In other sectors, such as transportation, banking and insurance, the benefits have been limited in terms of creating and promoting domestic firms as suppliers or competitors, such as in insurance, banking, where MNEs enjoy important benefits of size and multinationality. FDI in services may have a profound competition effect and increase the consumer

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surplus, but it does not always create linkages and potential for technological upgrading by domestic firms. Likewise, there has been considerable growth in FDI in the primary sector in many developing countries. However, large amounts of FDI to resource-rich economies such as Nigeria, South Africa and so on, have not always resulted in building up domestic capacity. In general, natural resource-extractive FDI tends to have limited opportunities for employment. These activities also do not provide opportunities for significant knowledge transfers and on the whole cannot be expected to provide significant spillovers and linkages (Morrissey, 2010, 2012). Resource-seeking investment generally (but not always) implies low-value adding activity and low capital expenditure on plant and equipment (extractive industries being the exception), FDI is less ‘sticky’, that is more footloose. In general, a purely resource-seeking investment is not normally tightly integrated into the investing firm’s organisational structure: indeed MNEs rarely engage in complete internalisation of raw material markets; they prefer instead to conclude non-equity agreements with foreign firms, or purchase their inputs at arm’s-length prices. In general, FDI in the least developed countries is often largely resource seeking. Since least-developed countries tend to have few location advantages to offer MNEs beyond natural resources, this is often the only kind of FDI present. Where vertical forward integration and further value adding does occur, either to exploit markets or to access other location advantages, the ‘stickiness’ of the investment increases.

The Absence of Absorptive Capacity Even where the motivation of MNE activity creates opportunities for spillovers and linkages to the host economy, it is not always the case that the domestic economy has the capacity to absorb them. Even where the ‘right kinds’ of MNE activity are located in the host country, domestic firms need to have the necessary absorptive capability to benefit from them. Absorptive capacity has been more extensively analysed at the firm level, where technological learning and technological change take place, and where available data have allowed researchers to assess the role of absorptive capacity in the firm’s innovation performance (Cohen & Levinthal, 1989, 1990). In their 1989 article, Cohen and Levinthal define absorptive capacity as ‘the firm’s ability to identify, assimilate, and exploit knowledge from the environment’. It is important to note that absorptive capacity is a subset of technological capability, which in addition to absorptive

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capacity includes the ability to generate new technologies through innovative means. In order to understand the notion of national absorptive capacity one should keep in mind that a country’s absorptive capacity is not simply an aggregation of its firms or its industries. It is salient to point out that firms operate within systems and countries, like firms, are not isolated from outside knowledge. Hence, absorptive capacity may be affected by the stock of knowledge of firms of other countries (Criscuolo & Narula, 2008). Much of the work on absorptive capacity considers the primary determinant behind technological accumulation and absorptive capacity in countries as human capital. Indeed, the definition of human capital shares much with absorptive capacity and several empirical studies have in fact used human capital measures as proxies for absorptive capacity. Both human capital and absorptive capacity involve learning activities and therefore are cumulative processes: The competence ‘… to evaluate and utilize outside knowledge is largely a function of the level of prior related knowledge’ (Cohen & Levinthal, 1990, p. 128). Qualified human resources are essential in monitoring the evolution of external knowledge and in evaluating their relevance, and for the integration of these technologies into productive activities. The availability of a large stock of suitably qualified workers does not in itself result in efficient absorption of knowledge, as is well illustrated by the former socialist economies of Eastern Europe (Narula & Jormanainen, 2008). Absorbing and utilising knowledge that is embodied in MNEs and their products, services and activities requires the existence of firms and other economic actors, which in turn requires the presence of institutions for them to function efficiently. Economic actors whether firms or state actors need also to be able to efficiently utilise markets and hierarchies, be they intra-firm, intra-industry or intra-country. This knowledge is not costless, and must be accumulated over time. Important externalities arise which impinge on the ease of diffusion and efficiency of absorption and utilisation of external knowledge. Absorptive capacity is therefore also concerned with the efficient use of knowledge acquired. Firms need the ability to use prior knowledge in the solution of practical problems that are commercially viable. Thus, absorptive capacity implies problem-solving skills that emerge directly as a result of attempts to assimilate external knowledge(Criscuolo & Narula, 2008). Absorptive capacity also reflects the ability of a country to integrate the existing and exploitable resources technological opportunities into the production chain, and the foresight to anticipate potential and relevant

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technological trajectories. This ability is therefore affected by the international technological environment. The extent to which a firm is able to exploit external sources of knowledge thus depends on its absorptive capacity, which is assumed to be a function of its innovative efforts and the degree to which outside knowledge corresponds to the firm’s needs, as well as the general complexity of the knowledge target. For FDI-assisted development to occur, it is important that a minimum level of absorptive capacity exists. The existence of an external stock of knowledge (in the form of FDI) does not automatically imply efficient internalisation by domestic firms, because knowledge can be specific to the originating source. Hence, a country (and by extension, its firms and its entrepreneurs) should possess a minimum threshold stock of knowledge that will allow it to absorb external knowledge. Successful absorption should lead to higher productivity growth. Narula and Marin (2003) show that only firms with high absorptive capacity are likely to benefit from FDI spillovers. Likewise, Xu (2000) shows that a country needs to reach a minimum human capital threshold level in order to benefit from technology transfer. The absence of sufficient levels of absorptive capacity tends to lead to the inefficient use of technology flows that occur through FDI. The ambiguous empirical evidence on the impact of FDI at the host country level reinforces the claim that MNE externalities and knowledge spillover effects are not automatic as one would tend to believe but are affected by several host industry and host country factors. An important characteristic for the emergence of technology spillovers is the technology gap between MNE affiliates and local firms in the host country. There is evidence to support the hypothesis that spillovers are easier to identify empirically when the technological attributes of local firms match those of the MNE affiliates. Kokko, Tansini, and Zejan (1996) argue that a high technology gap combined with low competition prevents spillovers to the host economy. The absorptive capability of host country firms to absorb foreign technology appears to be an important determinant of the size of the FDI spillovers. Kokko, Zejan, and Tansini (2001) also highlight the importance of past experience in industrialisation as a precondition for international transfer of technology and the absence of this experience is concomitant to lack of absorptive capacity by the local sector (Radosevic, 1999). For example, in the Sub-Saharan African region the conditions that stimulate technological assimilation (such as developed human capital, adequate physical infrastructure and a dynamic business climate) are absent, leading to constraints in mastering foreign, imported technology as well as to compete in international markets (Lall & Pietrobelli, 2002; Mytelka,

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1985). The development of domestic capacities and capabilities is key to both potentially attracting more FDI inflows as well as increasing the potential for MNE technological spillovers tenable to industrial upgrading of the host economy. It is unfortunate that most FDI policies of developing countries focus almost exclusively on the attraction of FDI, as if it were simply a matter of capital, rather than systematically engaging the MNEs to achieve greater embeddedness.

The Changing Nature of the MNE and Its Relationship to FDI FDI and MNE activity have been synonymous, partly a reflection of the way in which most international and national agencies that maintain and collect data on MNE activity. Although FDI remains one of the main modes by which MNEs engage in cross-border value adding activities, the MNE may also control and engage in value adding activities through nonequity means, such as through cooperative agreements and outsourcing, sometimes without de jure ownership of the productive assets, but de facto controlling the operations of the non-affiliated operation. Therefore, the use of the term ‘MNE’ as a synonym for FDI is increasingly inaccurate (Narula & Dunning, 2010). There is no clear estimate of the value of ‘nonFDI’ component of MNE activity, but it may be as high as a one-third of the FDI component. When we raise the discussion to the level of the MNE, the significance of the physical establishment takes a less important role. We discuss this concept using Fig. 3, which shows using a two-country scenario and is based around a joint venture between an MNE and a domestic firm. MNEs engage in a variety of other agreements, many of which use a variety of means to engage in knowledge exchange. For instance, technology may be licensed or purchased by the MNE affiliate from unaffiliated public research organisations either abroad or based locally. A second set of linkages are active two-way collaborations (indicated in Fig. 3 by the dashed lines which may involve a large array of actors, both domestic and foreign). Such agreements represent a higher level of knowledge exchange, and may be undertaken with a variety of partners. In general, these non-equity linkages present considerable potential to increase knowledge flows and the potential technological competitiveness of domestic firms, as it creates important new sources of demand for commercially driven economic units engaged in R&D.

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Home country

59

Host country

R&D institute/ university

R&D institute/ university

Parent of MNE

Domestic firm

MNE affiliate J

JV

Unaffiliated supplier

Unaffiliated domestic supplier

Competitor of parent

Licensing/supplier relationship (one way flows of knowledge) Two-way non-equity flow (collaboration) Equity relationship

Fig. 3.

Equity and Non-Equity Cross Border Knowledge Flows. Source: Narula and Dunning (2010).

Not All Affiliates Are Created Equal The nature of the affiliate and the nature of their role within the MNE’s global portfolio of affiliates play a significant role as well. Some affiliates

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may be passive in the sense that they may receive ready-made innovations from their parent firms. Thus, they do not establish these other types of linkages that might enhance the indigenous innovation milieu. In other words, at one extreme, the affiliate may be operating in an enclave, utilising foreign suppliers and foreign collaborators that have been pre-specified by their parent firm. Such affiliates are largely unassimilated with the host country innovation system, although they may engage in value adding activity and be part of business systems in the host country, and may have spillovers in terms of low-level employment, etc. The quality of the knowledge spillovers that derive from an investment are associated with the scope and competence level of the subsidiary, and these are co-determined by a variety of factors (see Fig. 4). These include MNE internal factors such as their internationalisation strategy, the role of

Parent MNE level influences • Internationalisation strategy • Role of subsidiary in global MNE portfolio • Motivation of investment • Parent-level partnerships/supply chain agreements • Parent-home country agreements/political obligations

Host country influences

Subsidiary history/sunk costs

• Market size/accessibility to market • Regulatory policy • Industrial policy • Trade barriers o Tariff o Non-tariff • Presence of suppliers • Presence of competitors • Political stability

‘feedback’

Subsidiary scope Subsidiary scale Subsidiary competences

Fig. 4.

Determinants of the Competence, Scope and Scale of a Foreign Affiliate.

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the new location in their global portfolio of subsidiaries and the motivation of their investment, in addition to the available location-specific resources which can be used for that purpose (Benito, Grogaard, & Narula, 2003). High competence levels require complementary assets that are non-generic in nature and are often associated with agglomeration effects, clusters and the presence of highly specialised skills (Lall & Pietrobelli, 2002). In other words, firms are constrained in their choice of location of high competence subsidiaries by local resource availability. For instance, R&D activities tend to be concentrated in few locations, because the appropriate specialised resources are associated with only few locations. The embeddedness of firms is often a function of the duration of the MNEs’ presence, since firms tend to build incrementally. However, while the scope of activities undertaken by a subsidiary can be modified more or less instantly, developing competence levels takes time. MNE investments in high value-added activities (often associated with high competence levels) have the tendency to be ‘sticky’. Firms demonstrate greater inertia when it comes to relocating R&D activities (Narula, 2002). Increasingly firms are engaged in rationalising their activities globally, so as to maximise the link with specific value adding activities and locations which have specific competitive and comparative advantages. This has led to a tendency amongst MNEs to ‘break-up’ their value chains and locate specific aspects in particular locations for purposes of maximum efficiency. As such, few locations host all parts of the value chain of one product for any give MNE, leading to an agglomeration of specific types of activities in particular locations. Prior to economic liberalisation, MNEs responded to investment opportunities primarily by establishing truncated miniature replicas of their facilities at home, although the extent to which they are truncated varied considerably between countries. The extent of truncation was determined by a number of factors, but by far the most important determinant of truncation and thereby the scope of activities and competence level of the subsidiary were associated with market size, and capacity and capability of domestic industry (Fig. 5). One of the results of globalisation and the subsequent spatial redistribution of their value chains has been that many countries have seen a downgrading of their subsidiaries in terms of scope and competence, moving towards sales and marketing operations, although some rather few locations have seen a reduction in the cope, but an increase in the competence levels towards R&D units. Only very few have seen a shift towards strategic centres, or indeed maintained a multi-activity unit.

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Level of competence High

Strategic center

Highly specialized unit, e.g. R&D center Multi-activity unit, e.g. manufacturing and sales subsidiary

Low

Single-activity unit, e.g. sales subsidiary

Few value activities

Fig. 5.

Miniature replica

Many value activities

Scope of activities

Different Types of Subsidiaries, and their Relationship to Scope and Competence Levels. Source: Benito et al. (2003).

As firms have used global production networks, this has by and large been to the benefit of the MNE, while most host countries with generic location advantages have seen a shift in scale, scope and competence. The competition for such activities between locations is considerable, and few locations provide the specialised and well-developed innovation systems that are needed. The benefits from subsidiaries vary considerably. A sales office or an assembly unit may have a high turnover, employ a large staff, but the technological spillovers will be relatively fewer than, a manufacturing facility. Countries that are at an early stage of development with a very limited domestic sector are often host to single-activity subsidiaries, primarily in sales and marketing, as well as natural resource extraction. The most advanced economies with domestic technological capacity have hosted the least truncated subsidiaries, often with R&D departments. Few MNEs still utilise miniature replicas when engaging in Greenfield investments. Rationalisation of activities within the single market has, in many cases, led to a downgrading of activities from truncated replica to single activity affiliates. MNEs have taken advantage of the globalisation to rationalise production capacity in fewer locations to exploit economies of scale at the plant level, especially where local consumption patterns are not radically different to justify local capacity and where transportation costs are not prohibitive. This has meant that some miniature replicas have been downgraded to sales and marketing affiliates, which can be expected to have fewer opportunities for spillovers.

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DISCUSSION AND IMPLICATIONS FOR THEORY AND POLICY This chapter examines that role of FDI in promoting industrial development, and raises a rather important question: Why, if FDI is such an important avenue to promote development, is there little evidence on concomitant industrial development? There are well over 150 countries that are classified as ‘developing’, yet over 50% of the FDI stocks in the developing world are based in less than 10 countries. As Table 1 shows, there is a high concentration of FDI in just a few countries. Indeed, in each continent, a handful of countries account for the majority of MNE investments. To some extent this reflects the fundamental dynamics of the investment development path. The level and extent of MNE activity into and from every country reflects the underlying economic structure and level of Table 1. Share of Inward FDI in the Developing World, by Continent, and Share of Total from that Continent (2011, US$ millions). Africa

569,559

South Africa Egypt

129,890 72,612

Nigeria

69,242

Morocco

46,300

Tunisia

31,414

Share of 5 countries in total FDI to Africa Latin America

61% 2,048,101

Brazil

669,670

Chile Colombia

158,102 95,668

Argentina

95,148

Peru

51,208

Share of 5 countries in total FDI to Latin America Asia

52% 3,990,731

China

711,802

Singapore

518,625

India Indonesia

201,724 173,064

Thailand

139,735

Share of 5 countries in total FDI to Asia

44%

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development of each country. Fig. 6 illustrates the fundamental dynamics of the IDP, which has become a popular tool for analysing the interaction between FDI and development. Despite the apparent graphical simplicity of the IDP, it hides a variety of complex and important assumptions and generalisations, which have been discussed at length in Narula and Dunning (2010). At one level, however, the IDP remains valid in its most basic role: that of understanding that growth of countries and the growth of the commercial activity of domestic and foreign firms are closely linked together. It also still remains the case that countries’ location assets and the ownership advantages of its firms reflect the sequential processes associated with other, similar countries. Few countries behave atypically. For instance, it is rare to see low-economic-stage countries generating significant outward FDI as they do not have the absorptive capacity or the economic structure to support it (Narula, 2012). Likewise, inward FDI does not simply rush into countries simply because there are incentives and subsidies without strong location advantages. As this chapter (and many others) have

Outward FDI

FDI stock

Inward FDI

NOI

GNP -

I

II

III

IV

V

Stages of IDP NOI = Net outward investment (Remark: not drawn in scale; for illustrative purpose only)

Fig. 6.

Graphical Version of IDP. Source: Narula and Dunning (2010).

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emphasised, simply having FDI inflow does not automatically translate into economic growth for the recipient country. At the same time, this chapter discusses the fact that the IDP hides many sins by being a macro-framework: FDI is no longer always a reliable proxy of MNE activity, and that different motives of FDI have different development outcomes. Besides, the economic structural evolution concept that has been the mainstay of the economic development community does seem to be coming apart: that countries sequentially evolve from primary to manufacturing to services, we have identified two of the reasons for this: the significant share of FDI going to the primary and tertiary sector; and the break-up of the value chain. Quite apart from the dangers of crowding-out and the problems of stage-inappropriate MNE activities, it is not clear that increased MNE activity necessarily implies a proportional increase in spillovers and linkages. An important issue not dealt with in this chapter is the potential development effects of MNE activity in the services sector. This has been an area of growth in terms of inward FDI. However, there is considerable variety in the nature of services investments in telecommunications provides relatively few knowledge spillovers and linkages to domestic firms in the least developed countries, compared to banking. To our knowledge, there are no studies that evaluate relative benefits of investments in tertiary sectors, relative to primary or secondary sectors. Developing countries have largely liberalised their policies towards FDI, but this is not the same as developing FDI policies. Most take a passive approach to attracting FDI flows, and pay insufficient attention to the nature of the benefits and costs associated with embedding subsidiaries and exploiting externalities. The adoption of neoliberal policies as part of structural adjustment programmes in many developing countries has meant that few have an explicit or well-considered industrial policy, often applying principles that belong as part of a more closed, importsubstituting era. This is increasingly at odds with the economic realities of a post-WTO, interdependent world. Specifically, policies towards MNEs need to be closely linked and integrated with industrial policy. MNE activity needs to be evaluated by considering the kinds of externalities that are generated; whether and how domestic actors can internalise them; and what kinds of location advantages may be required to achieve this. Indeed, the ‘success stories’ of MNE-assisted development have sought to attract MNEs, but have also built up domestic absorptive capacities in tandem.

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REFERENCES Benito, G., Grogaard, B., & Narula, R. (2003). Environmental influences on MNE subsidiary roles: Economic integration and the Nordic countries. Journal of International Business Studies, 34, 443 456. Chowdhury, A., & Mavrotas, G. (2006). FDI and growth: what causes what? World Economy, 29(1), 9 19. Cohen, W. M., & Levinthal, D. (1989). Innovation and learning: The two faces of R&D. The Economic Journal, 99, 569 96. Cohen, W. M., & Levinthal, D. (1990). Absorptive capacity: A new perspective on learning and innovation. Administrative Science Quarterly, 35, 128 52. Criscuolo, P., & Narula, R. (2008). A novel approach to national technological accumulation and absorptive capacity: Aggregating Cohen and Levinthal. The European Journal of Development Research, 20(1), 56 73. Dunning, J. H., & Narula, R. (1996). Foreign direct investment and governments: Catalysts for economic restructuring. London: Routledge. Dunning, J. H., & Narula, R. (2004). Multinational and industrial competitiveness: A new agenda. Cheltenham: Edward Elgar. Hansen, H., & Rand, J. (2006). On the causal links between FDI and growth in developing countries. World Economy, 29(1), 21 41. Kokko, A., Tansini, R., & Zejan, M. (1996). Local technology capability and productivity spillovers from FDI in the Uruguayan manufacturing sector. Journal of Development Studies, 32(4), 602 612. Kokko, A., Zejan, M., & Tansini, R. (2001). Trade regimes and spillover effects of FDI: Evidence from Uruguay. Welwirtschaftliches Archiv, 137, 124 149. Lall, S., & Narula, R. (2004). FDI and its role in economic development: Do we need a new agenda. European Journal of Development Research, 16(3), 447 464. Lall, S., & Pietrobelli, C. (2002). Failing to compete: Technology Development and Technology Systems in Africa. Cheltenham, UK: Edward Elgar. Luxemburg, R. (1913). The accumulation of capital. London: Routledge. Morrissey, O. (2010). Impact of China and India on SSA countries. Trade Hot Topic Issue 80. London: Commonwealth Secretariat. Morrissey, O. (2012). FDI in Sub-Saharan Africa: Fewer linkages, fewer spillovers. The European Journal of Development Research, 24, 26 31. Mytelka, L. K. (1985). Stimulating effective technology transfer: The case of textiles in Africa. In N. Rosenberg & C. Frischtak (Eds.), International technology transfer. New York, NY: Praeger. Narula, R. (2002). Innovation systems and ‘inertia’ in R&D location: Norwegian firms and the role of systemic lock-in. Research Policy, 31, 795 816. Narula, R. (2012). Do we need different frameworks to explain infant MNEs from developing countries? Global Strategy Journal, 2, 188 204. Narula, R., & Dunning, J. (2000). Industrial development, globalisation and multinational enterprises: New realities for developing countries. Oxford Development Studies, 28(2), 141 67. Narula, R., & Dunning, J. (2010). Multinational enterprises, development and globalisation: Some clarifications and a research agenda. Oxford Development Studies, 38(3), 263 287.

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Narula, R., & Jormanainen, I. (2008). When a good science base is not enough to create competitive industries: Lock-in and inertia in Russian systems of innovation, UNU-MERI. Working Paper Series, 2008-059. Narula, R., & Marin, A. (2003). FDI spillovers, absorptive capacities and human capital development: Evidence from Argentina. MERIT Research Memorandum, 2003-16. Radosevic, S. (1999). Transformation of science and technology systems into systems of innovation in central and eastern Europe: The emerging patterns and determinants. Structural Change and Economic Dynamics, 10(3 4), 277 320. Xu, B. (2000). Multinational enterprises, technology diffusion, and host country productivity growth. Journal of Development Economics, 62, 477 493.

CHAPTER 4 AN INTERNALIZATION THEORY PERSPECTIVE ON THE BOTTOM OF THE PYRAMID Jenny Hillemann and Alain Verbeke ABSTRACT Purpose The purpose of this chapter is to demonstrate that sound, mainstream international business (IB) thinking should be applied when assessing the economic opportunities available to multinational enterprises (MNEs) in Bottom of the Pyramid (BOP) markets. Design/methodology/approach We describe and evaluate critically the key points made in the BOP literature about the alleged attractiveness of BOP markets, and the alleged strengths of MNEs to penetrate these markets successfully. We revisit the managerial implications from the BOP literature using an internalization theory lens. Findings We demonstrate the weak conceptual grounding of conventional BOP thinking, which suggests that MNEs from developed economies should be very entrepreneurial and should systematically serve BOP markets with new products and business models. We also show the fallacy of the idea that a “success template” in one BOP market would

International Business and Sustainable Development Progress in International Business Research, Volume 8, 69 90 Copyright r 2014 by Emerald Group Publishing Limited All rights of reproduction in any form reserved ISSN: 1745-8862/doi:10.1108/S1745-8862(2013)0000008009

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be easily replicable in other BOP markets and would allow the MNE to earn economies of scale and scope. Research implications IB researchers should start conducting serious studies on the attractiveness of BOP markets for MNEs. They should also analyze seriously the micro-foundations of successful knowledge recombination in BOP markets and the limits to the transferability of success templates. Mainstream IB theory, namely internalization theory, is particularly well equipped to analyze the costs and benefits of entering BOP markets, building upon a comparative institutional logic. Practical implications Senior MNE managers should not allow themselves to be blinded by BOP gurus, advocating the alleged great benefits of penetrating BOP markets. BOP markets may be especially challenging international expansion targets for MNEs because of large institutional voids, high uncertainty, high “distance” vis-a`-vis the home country market and the difficulties of transferring relevant knowledge from one BOP market to another. Originality/value This chapter is the first to show that mainstream IB research can be usefully applied to analyze the “real” attractiveness of BOP markets for MNEs. Comparative institutional analysis is proven to provide substantially more insight to make BOP market penetration work than past guru-talk on BOP markets. Keywords: Internalization theory; Bottom of the Pyramid (BOP); firm-specific advantages; multinational enterprise; resource bundling; bounded reliability

INTRODUCTION Fifteen years after the introduction of the Base/Bottom of the Pyramid (BOP) concept, scholarly thinking about multinational enterprise (MNE) management for BOP markets has advanced dramatically, following Prahalad and colleagues’ original reflections on the issue (see below). Through their active presence in BOP markets, MNEs can move away from the conventional, philanthropy-oriented approach adopted by some to support the poor, and contribute more effectively to poverty alleviation and sustainable development, while simultaneously keeping focused on the bottom-line.

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This chapter provides a new internalization theory perspective on BOP markets, building upon Hennart’s (2009) asset-bundling approach, and Verbeke’s (2013) modern international business (IB) framework. It provides a tentative response to Kolk, Rivera-Santos, and Rufin’s (2012) call for integrating mainstream IB theory and concepts from the BOP literature. We will argue that the decision on whether to expand to BOP markets depends upon two main parameters. First is the MNEs’ ability to transfer, deploy, and exploit profitably its extant, non-location-bound firm-specific advantages (FSAs). Second is the firm’s effectiveness in developing (or acquiring) additional FSAs needed in the BOP market so as to reduce the liability of outsidership. Especially in the context of BOP markets, MNEs need to maintain this dual focus on sharing (extant) best practice knowledge throughout the organization, while developing innovative products and routines, adapted to BOP environments, in order to achieve both profitability and poverty reduction.

BOTTOM OF THE PYRAMID In 1998, Prahalad’s coauthored Harvard Business Review article, entitled “The end of corporate imperialism,” introduced initial aspects of the BOP concept (Prahalad & Lieberthal, 1998). A year later, Prahalad and Hart (1999) more fully described the significance of managing BOP markets, and suggested to MNEs’ managers that they consider seriously the business potential of serving the poor in such markets. Since then, the BOP concept has been widely discussed in the scholarly literature. Proponents (e.g., London & Hart, 2004) and critics (e.g., Karnani, 2011) alike have debated the very notion that MNEs should attempt simultaneously to generate profits and alleviate poverty through serving BOP markets. Prahalad (2006) distinguishes among five alleged, distinctive BOP market characteristics. First, in his view, BOP markets do reflect actual demand for products and can be viable for the firms serving them. Second, serving BOP markets typically requires an innovative distribution scheme adapted to these environments’ (limited) infrastructure and widely varying population densities in rural and urban areas. Third, consumers in BOP markets are often very conscious about brands and economic value. Fourth, strong connections among BOP market participants and well-developed networks can stimulate rapid information exchange within the BOP market and among BOP consumers. Fifth, the existence and

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usefulness of advanced technology is often widely acknowledged among BOP consumers. The five above alleged BOP market characteristics reinforce the notion of the BOP as a viable business opportunity for firms that can lead to profits and poverty reduction. Prahalad’s (2006) book on BOP markets elaborates on the business opportunity at hand and did garner substantial attention from both practitioners and management scholars. In general terms, the BOP value proposition views the poor not just as consumers, but as potential producers in their own right or as partners in joint knowledge development processes, for example, in the context of new product design, distribution, or supply contracts (Kolk et al., 2012). Here, MNEs should explicitly pursue crafting goods and services adapted to the needs of the poor, thereby increasing corporate profits. A number of scholars, most notably Hart (2005, 2010), have interpreted the BOP value proposition somewhat more provocatively, and expect MNEs to move away from a primary, profit-driven orientation. More specifically, MNEs should adopt triple bottom-line thinking and integrate corporate roadmaps that simultaneously create economic, social, and environmental benefits for all stakeholders involved. Prahalad and Hart (2002) suggest that MNEs from developed countries should take a lead role in BOP market creation for three reasons. First, developed country MNEs can use their internal organizational network to transfer non-location-bound FSAs in the form of knowledge and corporate best practices as they expand internationally. Second, these firms have the resources needed to develop new FSAs, leading to, for example, innovative products, effective distribution channels, etc. adapted to local environments. Third, and this is related to the first two points, but relevant especially to the poverty alleviation element in BOP market creation, these firms command FSAs in the relational sphere, as well as financial strength and managerial know-how, allowing to “negotiate” effectively with other key stakeholders involved in BOP markets, such as nongovernmental organizations, local interest groups, governments, etc. In the past, BOP markets received only relatively limited attention as potential expansion targets from developed economy MNEs. Prahalad (2006) views this lack of attention as the direct result of many MNEs’ “dominant logic.” Here, five elements are important in his view. First, if the “poor” at the BOP are defined as earning $US 2 a day, they will typically be perceived as unable to afford the MNEs’ goods and services. Second, there is a widely held view within many MNEs that the poor at the BOP simply cannot make use of the goods produced for developed country

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consumers (e.g., because of a lack of necessary complementary infrastructure or complementary goods and services). Third, whereas consumers in developed countries have a high appreciation and strong willingness to pay for products with advanced technological content, the BOP environment is typically not viewed as conducive to advanced technology development. Fourth, given the perceived small size of BOP markets, these are viewed as a distraction rather than as legitimate expansion targets. Fifth, BOP markets are perceived as lacking in trained managers and intellectual excitement. However, Prahalad (2006) challenges the above conventional logic and suggests the empowerment of BOP consumers by offering them goods that are affordable and easily accessible. Prahalad (2006) also suggests that a number of less developed countries actually do have sufficient BOP market size to attract MNEs, and can offer promising opportunities for growth and innovation, which could at a later stage be transferred to developed countries. Further, MNEs may succeed in creating value-added through learning lessons in BOP markets that can have a positive impact on MNEs’ global management practices. Despite his role as advocate for targeting BOP markets as attractive venues for MNE expansion, Prahalad (2006) does acknowledge the widespread presence of corruption in most BOP markets and warns about costs and business uncertainty associated with corruption. In addition, a number of scholars (e.g., Karnani, 2007) have cast doubts on the competitive advantage that MNEs from developed countries could potentially gain over local, especially small- and medium-sized enterprises in BOP markets that have superior, location-bound knowledge on how to operate in such markets. Kolk et al.’s (2012) literature review amplifies this concern and highlights that, in practice, relatively few BOP projects have been initiated by large MNEs, whereas small, local firms have been responsible for most projects (see e.g., Anderson & Markides, 2007; Arnould & Mohr, 2005; Brinkerhoff, 2008). Nevertheless, especially Hart (2010) focuses on the very idea that MNEs should take responsibility for poverty reduction and sustainable development, rather than leaving this to public agencies or nongovernmental organizations. The main reason for this suggestion is that MNEs command FSAs that can be usefully deployed in BOP markets. In general terms, a firm’s potential to expand profitably to a BOP market depends on two conditions: (1) the firm’s extant, non-location-bound FSAs, which can be transferred across national borders, and (2) the firm’s ability to create or acquire new FSAs, and to adapt its products and routines to the BOP

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market’s specific requirements, taking into account its liability of outsidership, which will have cost-increasing effects. A first review of a decade of research on the BOP concept (Kolk et al., 2012) suggests that the BOP value proposition lacks requisite linkages with widely accepted insights from IB research. Answering the question as to whether MNEs from developed countries should enter BOP markets and ultimately support poverty alleviation and sustainable development should at least take into account these mainstream insights.

INTERNALIZATION THEORY, BOUNDED RATIONALITY, AND BOUNDED RELIABILITY Internalization in the IB Context The core IB theory is internalization theory, a joint transaction cost economics (TCE) and resource-based view (RBV) theory of the firm (Verbeke & Greidanus, 2012). Following Williamson (1998), the TCE approach describes the firm as a governance structure, which arises as the outcome of market failure (see also Teece, 1986). It is assumed that economic actors have the ability to anticipate and identify potential hazards or drawbacks, and to consider these in organizational design (Williamson, 1999). However, critics have questioned not only Williamsonian TCE’s ignorance of key organizational mechanisms (Simon, 1991), but also its alleged lack of generalization as “individuals, firms, and nations differ greatly in degrees of generalized sloppiness” (Dore, 1983, p. 474). In addition, Williamsonian TCE does not consider fully the impact of social and industry context on human action and assumes (mistakenly according to some critics) that the most efficient organizational structure will normally prevail (Granovetter, 1985). Moreover, Ghoshal and Moran (1996) argue that TCE should recognize organizations as being more than mere substitutes for sets of inefficient external transactions when market failure occurs. Firms command unique advantages in managing economic activities in a different way than the market. In the IB context, internalization theory, also did build on Coase’s (1937) insights regarding the governance implications of the relative costs of internal versus external markets, but it was developed in parallel with Williamson’s (1975, 1985, 1996) thinking, rather than derived from it. While Williamson proposes bounded rationality and opportunism as

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the underlying behavioral drivers of economizing actions, other TCEbased literature (including internalization theory) does not consider the opportunism assumption as particularly relevant (North, 1990) or as the decisive element in governance choices (Casson, 2000; Rugman & Verbeke, 2003). Despite such discrepancies, most scholars (Carroll & Teece, 1999; Carter & Hodgson, 2006; David & Han, 2004) agree that TCE is one of the leading theories in the social sciences as it establishes a sound understanding of the MNEs’ existence (Buckley & Casson, 1976, 2009; Hennart, 1982; Rugman, 1980; Teece, 1981). It also explains MNEs’ foreign entry mode decisions, the interactions with external economic actors (Beamish & Banks, 1987; Buckley & Casson, 1998; Chen, 2004; Hennart, 1988, 2009; Rugman, 1981), and MNEs’ internal governance (Dunning & Lundan, 2008; Hennart, 1993; Verbeke & Greidanus, 2009; Verbeke & Kenworthy, 2008). Internalization theory can best be described through three main principles (Buckley & Casson, 2009). First, for MNEs to exist, the benefits from internalization must exceed the associated costs (relative to usage of external markets). Internalization gives way to de-internalization when the MNE has reached a size where the marginal costs of additional internalization exceed the related marginal benefits. Second, MNEs will choose host countries as expansion targets where the best fit can be achieved between the firms’ extant sets of FSAs and the desired location advantages of the countries involved. Third, in the presence of systemic, requisite upgrading of extant FSAs, for example, through continuous investments in research and development (R&D), which reflect “dynamic asset specificity,” the public goods nature of knowledge can cause potential conflicts between the MNE and a variety of external stakeholders, and may give rise to knowledge dissipation risks (Erramilli & Rao, 1993; Hill, 1990; Williamson, 1985). The more firm-specific knowledge the MNE has developed, the higher the risk that “potential partner firms might try to appropriate the returns to the MNE’s knowledge and take advantage of the MNE’s dependency in the local market” (Brouthers, 2002; Gatignon & Anderson, 1988; Hennart, 1991; Verbeke, 2013; Verbeke & Hillemann, 2013, p. 43; Williamson, 1985). In order to protect FSAs and to reduce the risk of knowledge dissipation, the MNE may then want to keep full control over all its vulnerable, valuable assets by choosing a more hierarchical entry mode or by making a business partner with equally vulnerable, valuable assets a co-owner (Gatignon & Anderson, 1988; Hennart, 1991; Makino & Neupert, 2000). Here, the degree of control over FSAs that must be safeguarded against dissipation

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is important (Anderson & Gatignon, 1986; Grossman & Hart, 1986). Williamson (1975, 1985) argues that firms engaged in highly asset-specific transactions will tend to internalize these because of the increased risk of opportunism from (external) market actors. In contrast, firms involved in transactions with lower levels of asset specificity will tend to focus more on conventional mode efficiencies rather than opportunistic behavior by partners or more generally the protection of firm-specific assets against dissipation (Brouthers, 2002). Thus, the net benefits of internalization depend upon the MNE’s FSAs, the host country environment, and the micro-level detail of alternative entry mode “contracts” (Dunning & Lundan, 2008). In the context of foreign market entry, internalization advantages can be defined as the relative benefits associated with the firm’s mode choice in favor of wholly owned operations vis-a`-vis actionable alternatives (Buckley & Casson, 1976; Hennart, 1982, 1989; Rugman, 1981; Teece, 1986). MNEs typically prefer host countries with solid institutional frameworks and easily accessible location advantages. In this context, Rugman and Verbeke (1992) argue that regulatory (or nonmarket) failure may affect governance decisions. In many emerging economies, and especially BOP markets, developed economy MNEs typically face high barriers related to cultural, administrative, geographic, and economic distance (Ghemawat, 2001). In order to overcome these various distance dimensions and to manage host country operations efficiently, MNEs will tend to engage in governance choices that will limit undesired (from the MNE’s perspective) spillovers of their activities, even if such spillovers could potentially support poverty alleviation (e.g., the transfer of modern management techniques to joint venture partners). In other words, alliances and other forms of complex contracting will typically have a focus on making sure that no unwanted knowledge transfer/dissipation occurs.

Bounded Rationality in MNEs The concept of bounded rationality can be traced back to Herbert A. Simon (1957). He reasoned that behavior of human actors “is intendedly rational, but only limitedly so” (Simon, 1961, p. XXIV). Economic actors, that is, individuals, and by extension groups and organizations engaged in economic transactions, have a limited information-processing capacity as compared to the “ideal capacity” to solve real-world problems, for several reasons. First, most economic environments are characterized by

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substantial uncertainty and complexity. Second, economic actors have a limited mental or computational ability relative to the volume of information to be gathered, processed, and acted upon. Third, and related to the above, economic actors’ computational ability can be increased through a variety of means (e.g., by introducing sophisticated ICT systems, by hiring experts to support strategic decision-making, etc.), but most economic actors face resource constraints, whether in terms of monetary resources, managerial resources, or time compression diseconomies. According to Williamson (1996), Simon’s seminal insights have profound implications from an economizing perspective. First, even the most complex and elaborate contracts cannot be “complete” in the sense of foreseeing all possible future contingencies. Second, economic organization precisely serves the purposes of economizing on bounded rationality and making possible farsighted contracting where required by the complexity and uncertainty surrounding transactions. Verbeke and Yuan (2005) have advanced further the concept of bounded rationality in the MNE context. They describe four sources of bounded rationality. The first two sources have been discussed extensively in the mainstream literature, namely incomplete information and limited managerial information processing capacity. The last two sources are more MNEspecific. First, information has multiple facets and economic actors in the MNE may choose to focus on particular facets, as a function of their position in the MNE and their geographic location in the MNE network. Such selectivity in the choice of “relevant” information will lead to biased decision-making and may trigger internal conflict, especially between the head office and subsidiaries (e.g., what are the most relevant sources of information to determine an American MNE’s growth prospects in China: analysis performed by a specialized US-based think thank or information gathered by subsidiary managers operating in the Chinese market?). Second, even when contemplating identical information facets, different economic actors might interpret this information in an idiosyncratic fashion (e.g., the managerial implications of information on country risk or industry growth prospects for the firm’s investment projects). In other words, the same information may lead to different conclusions in terms of desired managerial decisions and actions, based on each economic actor’s judgment, which will be guided by this actor’s background and experiential knowledge. Precisely given the likely divergence between the dominant logic of top management teams in developed-economy MNEs vis-a`-vis the dominant logic prevailing in operations located in BOP markets, the likelihood of

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internal conflict inside the MNE network, arising from the choice of different information facets and the diverging interpretation of identical information sets, will be very high. Operating in BOP markets will likely exacerbate bounded rationality challenges.

From Opportunism to Bounded Reliability The bounded reliability concept is a substitute for Williamsonian opportunism, and was developed because of the latter concept’s shortcomings, with alternatives such as trust being equally unsatisfactory (Verbeke & Greidanus, 2009). Verbeke and Greidanus (2009) criticize the Williamsonian opportunism concept for the lack of detail on how opportunism develops, evolves, or could be reduced through organizational design beyond giving direct economic incentives. They also criticize the relative emphasis on the alleged human disposition to act opportunistically at the expense of analysis of the situational context within which contracting occurs. Here, they note the concept’s potentially negative influence on economic behavior, given the almost axiomatic view that opportunism is a universal human characteristic that should be guarded against at all time. FSA development processes inside MNEs, though occurring at least in part because of the dangers of opportunism in external contracting, largely build upon routines meant to make all actors involved more reliable, and are focused primarily on “managing the innovation process in its entirety,” whereby guarding against opportunism is typically only a secondary consideration. Failure to make good on open-ended commitments may obviously include “opportunism as intentional deceit,” but more commonly reflects “benevolent preference reversal associated with reprioritization [and] benevolent preference reversal associated with scaling back on overcommitment” (Verbeke & Greidanus, 2009, p. 1482). With more stakeholders being involved in the MNEs’ BOP market entry and in its operating strategies than in conventional markets, and with at least some stakeholders being focused on poverty-reduction goals, bounded rationality and bounded reliability challenges may be amplified. The number of relevant goals to be pursued increases and so do the related information processing requirements and potential occurrences of unreliability.

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INTERNALIZATION THEORY THINKING IN THE CONTEXT OF THE BOP In general terms, an MNE’s decision on whether to expand activities to BOP markets will likely be based only very partially on social criteria such as poverty alleviation, and mainly on expected corporate performance in terms of growth and profitability. Hence, Prahalad and Hart’s (2002) BOP value proposition cannot be viewed solely in the context of corporate social responsibility practices, but should be assessed in the broader context of corporate strategy and marketing (e.g., Olsen & Boxenbaum, 2009; Weiser, 2007). However, in spite of Prahalad’s (2006) and Hart’s (2010) stated intention to establish the BOP value proposition as an overarching approach to strategy, it is de facto very much a specific roadmap to alleviate a variety of societal ailments. For example, according to those authors, MNEs should almost as a rule focus on creating new business models and on engaging in product innovation for the poor, instead of entering new markets with existing products previously sold in developed countries and adjusting only incrementally the extant, dominant business models and products (Hart & Christensen, 2002; London & Hart, 2004; Prahalad & Lieberthal, 1998; Ricart, Enright, Ghemawat, Hart, & Khanna, 2004; Simanis & Hart, 2009). In contrast, internalization theory suggests that an MNE’s investment decision to enter a BOP market will be guided by the same elements as those valid for any other market. It is consistent with internalization theory to assume that large, developed economy MNEs may be the best suited to integrate the BOP value proposition in their international expansion strategies. First, these MNEs have typically built at least some of their international success on the basis of higher order FSAs, allowing “resource recombination” (Verbeke, 2013), meaning inter alia, innovation in the realm of new business models and products. Second, these MNEs command an international network of operations and have typically accumulated substantial experience in knowledge transfers across borders, which means that any BOP market entry “success templates” could be transferred relatively easily from one BOP environment to another if these environments are similar. However, whether an MNE will actually expand to a particular BOP market will depend largely on its ability to overcome the liability of outsidership. Internalization theory suggests that the expected net benefits of such an expansion move must exceed the costs incurred, not only on a stand-alone basis but in comparison with expansion alternatives in nonBOP environments.

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One visible constraint in this context is that most BOP markets are characterized by weak(er) macro-level institutions, often associated with greater legal and regulatory barriers and uncertainties, thereby raising the bar for the MNE to achieve the requisite resource recombination. At the same time, greater institutional distance may affect extant FSA transferability itself from the home country to a BOP environment, and certainly FSA deployability and profitable exploitation. Another problem is that BOP markets may differ substantially among each other. Such heterogeneity among BOP markets can again limit FSA transferability, deployability, and profitable exploitation. Only extant FSAs unaffected by the host country’s cultural, institutional, and economic context will be truly nonlocation-bound and provide a platform upon which the MNE can build further in terms of developing additional FSAs, geared specifically toward BOP market expansion. As regards entry mode choice, the extant literature expects greater institutional distance between the MNE’s home country and the host country to affect negatively the likelihood of choosing a full control mode (Kim & Hwang, 1992; Shan, 1991). MNEs tend to reduce their level of ownership in foreign markets characterized by greater political instability and uncertainty (Anderson & Gatignon, 1986; Hennart, 1988; Hill, Hwang, & Kim, 1990). Irrespective of the choice of entry mode, in the context of BOP markets institutional voids are likely to affect the MNEs’ international expansion patterns. Greater institutional distance to BOP markets will not only reduce FSA transferability, deployability, and exploitation potential, but will also greatly increase the new location-bound FSAs to be created or accessed, so as to be successful in each individual BOP environment (Verbeke, 2013). Institutional voids such as the absence of intermediaries (e.g., firms specialized in market research) will force foreign MNEs to expand their activity scope from core activities to more peripheral ones (Khanna & Palepu, 1997). In other words, when entering BOP markets, extant FSA transfers will be limited, and greater efforts will be required to develop and/or access location-bound FSAs indispensable to business success (Prahalad & Hammond, 2002; Prahalad & Hart, 2002).

THE ASSET-BUNDLING APPROACH AT THE BOP The MNE’s management must consider “the transactional characteristics of complementary assets in the host country and their potential for

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bundling with the MNE’s FSAs” (Verbeke & Hillemann, 2013, p. 39), since these assets influence the firm’s initial entry mode selection and its development thereafter. Hennart (2009) defines this approach as asset bundling. In order to develop successfully value-adding activities in host markets, the combination of the MNE’s FSAs and complementary assets that may be held by local firms is required. MNEs from developed countries have traditionally developed the bulk of their non-location-bound FSAs in mature markets (Rugman & Verbeke, 2004). However, when expanding to BOP markets, the economic potential of a firm’s extant FSAs bundles crafted in developed countries may be low and uncertain (Seelos & Mair, 2007). In other words, it is easy to overestimate the non-location-boundedness of extant FSAs. Especially institutional voids can hinder the MNE’s ability to transfer, deploy, and exploit profitably knowledge developed in the home country with its very different institutional context as compared to host country markets (Khanna, Palepu, & Sinha, 2005; Verbeke, 2013). Given that MNE’s success may require entering BOP markets with innovative products, aligned with local customer needs and with the (limited) purchasing power of individual consumers in the large BOP population, the BOP literature has focused primarily on new FSA development rather than on leveraging extant FSA bundles (Chesbrough, Ahern, Finn, & Guerraz, 2006; Prahalad & Hart, 2002). However, new FSA development does not occur in a vacuum, but typically requires access to and usage of complementary assets held by external asset owners. MNEs needing complementary assets to be successful in a host environment must determine the transaction costs associated with contracts in each of three different markets that might provide access to these assets, namely the market for asset services, the market for assets, and the market for firms (Hennart, 2009) (see Table 1). The efficiency of these markets for each required complementary asset may strongly differ among host countries, including BOP host environments (Grøgaard & Verbeke, 2012). The recombination of knowledge through whichever of the three markets typically requires a high level of MNEs’ entrepreneurial skills as it involves revisiting the MNEs’ existing FSAs bundles and adding new FSAs (to be) developed in the local BOP market, so that goods and services can be produced or distributed profitably in or for those markets. Here, the “asset services” provided by “unusual” stakeholders such as nongovernmental organizations and local interest groups may allow the MNE to gain valuable know-how about BOP market conditions and its consumers and hence help the MNE to gain credibility in those markets,

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Interactions between MNEs from Developed Countries and BOP Actors in Three Markets (Illustrative). Asset Bundling at the BOP

Market for MNE purchases the usage of asset knowledge from a BOP actor services Market for MNE purchases BOP actors’ assets assets and bundles these with extant MNE know-how Market for MNE purchases a firm owned and firms controlled by a BOP actor

BOP Contracts MNE signs service contracts, such as labor contracts, manufacturing contracts, etc. with BOP actors MNE’s local operation purchases land, buildings, machines, proprietary knowledge, etc. from BOP actors MNE engages in a merger or acquisition of a BOP actor

Source: Inspired by Hennart (2009).

thereby reducing transaction costs (London & Hart, 2004; Seelos & Mair, 2007; Webb, Kistruck, Ireland, & Ketchen Jr., 2010). According to Chesbrough et al. (2006) and Webb et al. (2010), in particular nongovernmental organizations should be considered as valuable partners to overcome institutional distance and establish viable BOP business models. In addition, small local entrepreneurs can perform valuable activities at the end of the value chain and distribute finished goods to end consumers at the BOP (Vachani & Smith, 2008). However, in contracting with local stakeholders from BOP markets, MNEs must consider the costs to be incurred so as to overcome cultural, organizational, and institutional barriers (Arora & Romijn, 2009; Webb et al., 2010). Conventional IB theory suggests that MNEs can exploit their extant, non-location-bound FSAs bundles without much need for local complementary assets and hence without high linking investments (Grøgaard & Verbeke, 2012; Verbeke, 2013; Verbeke & Hillemann, 2013). However, the nature of each BOP market precisely imposes high linking investments on many MNEs, since effective FSA exploitation can only be achieved with extensive adaptation to the local BOP environment. When expanding to the BOP, especially market-seeking MNEs are confronted with the “[p]ressures for FSA adaptation to suit host country needs through linking investments” (Grøgaard & Verbeke, 2012, p. 12). Obviously, within the full set of potential BOP markets contemplated by MNE management, we would expect the MNE to prefer BOP markets that involve lower linking investments since in those markets extant FSAs retain a relatively higher value compared to the ones in the home country and less focus is required on accessing complementary assets.

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Given the expected high level of requisite linking investments in BOP markets, MNE managers should understand that successful contracting in any of the three markets providing complementary assets may be difficult to achieve. The BOP value proposition described earlier builds upon a very optimistic attitude toward the nature of economic actors. However, in practice, evidence of failed promises is abundant (Karnani, 2007), and such failure is rooted both in opportunism and in benevolent reprioritization and scaling back on overcommitments (Verbeke & Greidanus, 2009).

TRANSFERABILITY TO- AND ACROSS-BOP MARKETS Prahalad and Hart (2002) argue that an MNE’s main advantage over local firms is its international reach, allowing to expand to a variety of BOP markets. However, scholars such as Arora and Romijn (2009) have criticized the absence of actual studies focused on the transferability of success recipes in one BOP market to other BOP environments. Following internalization theory’s logic, it is likely that MNEs are indeed able to deploy a bundle (however narrow) of non-location-bound FSAs across different BOP markets. However, host country, locational specificities may limit FSA transferability and profitable exploitation, and may force the MNE to develop or acquire new FSAs. Differences in cultural, economic, and institutional contexts among BOP markets reduce the non-location-boundedness of the MNE’s FSA bundles across BOP markets, and may impose new FSA development as well as idiosyncratic partnerships with very specific local organizations in each market (Arora & Romijn, 2009; Webb et al., 2010). In line with Verbeke’s (2013) understanding of the essence of IB strategy as well as Hennart’s (2009) asset-bundling approach, complementary assets of local BOP actors may be a prerequisite for the MNE to access and benefit from location advantages in BOP markets, but this comes at a cost. As shown on the left-hand side of Fig. 1, an MNE from a developed home country develops FSA bundles based on this home country’s location advantages. Large FSA bundles are typically location-bound, that is, deployable only in this home country, and can take three forms: stand-alone FSAs, routines, and resource recombination capabilities. Routines are “stable patterns of decisions and actions that coordinate the productive use of resources, and thereby generate value” (Verbeke, 2013, p. 6). Recombination capabilities reflect the firm’s ability to meld

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Bounded Rationality

International border

BOP Market A

Stand-alone FSAs BOP Market B

Routines Re-combination capabilities

BOP Market C Location advantages

Locationbound FSAs

Non-locationbound FSAs Bounded Rationality

Fig. 1.

Extending Verbeke’s (2013) International Expansion Framework to the BOP Market Case.

existing FSA bundles with newly accessed resources into novel FSAs, and allow diversification in new, domestic product-market areas. For a firm to become an MNE, some of its FSAs must be non-location-bound, that is, transferable, deployable, and amenable to profitable exploitation abroad. However, international expansion can trigger new problems of bounded rationality (“scarcity of mind”) and bounded reliability (“scarcity of effort to make good on open-ended promises”), especially as cultural, economic, and institutional distance with the home country increase (Verbeke, 2013). Here, MNEs expanding to BOP markets must link their non-locationbound FSA bundles (whereby the composition of relevant FSA bundles may differ from one host country to another) as efficiently as possible with coveted location advantages in BOP markets. New, location-bound FSAs must typically be developed or acquired (shaded areas on the right-hand side of Fig. 1) to complement the MNE’s non-location-bound ones. The point of Fig. 1 is that the requisite bundles of non-location-bound FSAs transferred from the MNE network and location-bound FSAs to be

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created in the host country can differ greatly among BOP environments. This is reflected in the difference in size of the shaded areas in the various BOP markets on the right-hand side of Fig. 1. Here, commonality of requisite FSA bundles across BOP markets may be desirable from the MNE’s perspective, but this is not necessarily a realistic option. MNEs may thus need to transfer different sets of non-location-bound FSAs from the home country to the various BOP environments. They may also want to access completely different bundles of location advantages in each BOP market, and may therefore need to develop very different location-bound FSA bundles in each market. The circle in Fig. 1 reflects the MNE coordinating its activities across its internal network and thereby the linkages among operations in the various host countries, including the BOP markets where the firm is active. However, the transferability of any new FSAs developed in one BOP market to other BOP environments is very uncertain. The large, dotted middle areas in the BOP markets, on the right-hand side of Fig. 1, precisely reflect the necessity to develop or acquire idiosyncratic location-bound FSA bundles in each BOP market. The double-headed arrows between the MNE’s newly created location-bound FSAs in each BOP market and the location advantages in that country represent the close alignment that must be achieved between both, so as to make the MNEs BOP operations successful. Cumulative investments in location-bound FSAs performed by several MNEs may ultimately help filling the “institutional voids” characterizing a particular BOP market through, for example, quality controls in production spilling over to other partners in the value chain. A generalized strengthening of the location advantages of a particular emerging economy may be the outcome, but there is obviously no direct international transferability of such outcome to other BOP markets (Verbeke, 2013).

CONCLUSION The BOP concept has incited many MNEs to rethink their business plans with respect to emerging economy markets. The BOP value proposition suggests that MNEs from developed countries should attempt to achieve both profit generation and social transformation through poverty alleviation. This chapter has shown that TCE and the concepts of bounded rationality and bounded reliability can provide useful guidance to MNEs, when

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engaged in processes of international expansion to BOP markets. When contemplating a BOP-related expansion, MNEs should consider host country location factors such as political stability, property rights protection, and other indicators of economic freedom that may affect the attractiveness of the foreign business opportunity. In general terms, international investors tend to prefer host countries with a stable environment, both in political and business terms, irrespective of whether these countries represent BOP markets. In other words, when deciding on an investment linked to BOP markets, MNEs should consider the “normal” economic, political, and other environmental parameters that affect transaction costs, instead of focusing exclusively on their ability to innovate so as to create new goods for BOP consumers. In addition, a BOP-market, just as any other foreign market, requires the MNE to deploy non-location-bound FSAs as a precondition for international expansion (Verbeke, 2013). Here, Hennart’s (2009) asset-bundling approach can easily be adapted to explain the MNE’s exploitation of knowledge in the BOP environment and the usage of the markets for asset services, assets, and firms, in order to access host country resources that are held by foreign asset owners. The application of Verbeke’s (2013) framework to analyze IB strategies highlights some major challenges MNEs face in BOP markets. The framework illustrates the sometimes limited transferability of extant capabilities from the MNE’s home country to BOP markets. The heterogeneity in institutional environments among BOP markets represents an additional barrier that makes the coordination of managerial action across these markets more difficult. Major institutional voids in BOP markets present the MNE with equally major managerial challenges to adapt prevailing routines and to deploy effectively extant recombination capabilities throughout these markets. Here, as is the case with any foreign market penetration, the interdependencies between the MNE’s proprietary FSA bundles and accessible location advantages in BOP markets will ultimately determine the potential for joint success in profit generation and poverty alleviation.

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CHAPTER 5 INTERNALISATION THEORY, GLOBAL VALUE CHAIN THEORY AND SUSTAINABILITY STANDARDS John Humphrey ABSTRACT Purpose To identify points of similarity and differences of emphasis between internalisation theory and global value chain (GVC) theory and to highlight how the latter’s particular approach is useful in analysing the impact of private sustainability standards. Methodology Review of some key texts and reviews of internalisation theory combined with author’s reflections on GVC theory based on his contributions to its development. Findings GVC theory shares much common ground with the internalisation theory of international business, but their different starting points lead to different strengths and weaknesses. Internalisation theory is strong on the logic of decisions by transnational companies to internalise or externalise their activities. GVC theory is strongest in its

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consideration of how and why companies manage externalised activities in different ways, and its theory of network governance focuses on how governance challenges change in response to market requirements, shifts in the break point between enterprises, the role of codification in simplifying governance and the control of activities across multiple links in value chains. These factors explain how private and public private standards in the field of sustainability are both a response to new external demands on value chains and, simultaneously, a means of reducing the complexity of governance challenges that such demands create. Originality and value Few attempts have been made to compare the two theories, and value chain theorists have not engaged with the international business literature. The chapter highlights the scope for a continuing and more systematic comparison of the two literatures. Keywords: Global value chains; internalisation theory; standards; sustainability

INTRODUCTION It has long been evident that there is a considerable overlap between internalisation theory in international business and global value chain (GVC) theory. Both explain patterns of international expansion by businesses, and both draw on elements of transaction cost economics (TCE) and resourcebased theories of the firm. The approximation grew when Buckley and Casson introduced the idea of the global factory into the internalisation model (see, e.g. Buckley, 2009a, 2011), and more recently Mark Casson (2013) has provided an internalisation theory perspective on offshoring and outsourcing in global value chains. Up until now, value chain theory has engaged less with the business literature, and in particular internalisation theory, in spite of the common elements. This chapter examines the ways in which the two theories used different starting points and addressed somewhat different questions, at least initially. It goes on to highlight some distinctive features of value chain theory that are of particular use in the analysis of sustainability standards, discussing how the development of private standards in the field of sustainability can be analysed using the concepts of value chain governance and strategies to reduce the costs of governance.

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INTERNALISATION THEORY AND VALUE CHAINS One of the main concerns of research on international business has been to establish a theory of the boundaries of the firm, and through this to understand the different modalities through which firms internationalise. Buckley and Casson (2009) have been particularly influential in developing internalisation theory, and they summarised the development of their thinking over a period of more than 30 years in a review article. Characterising the multinational enterprise (MNE) ‘as a complex of interdependent activities, linked by flows of knowledge and intermediate products’ (Buckley & Casson, 2009, p. 1565), they pose the question of why companies that possess knowledge do not licence this knowledge to other companies. They develop an argument drawing on a TCE approach, and the work of Coase and Williamson: In a situation where firms are attempting to maximise profits in a world of imperfect markets, there will often exist an incentive to bypass imperfect markets in intermediate products. The activities that were previously linked by the market mechanism are brought under common ownership and control in a ‘market’ internal to the firm. Where markets are internalised across national boundaries, MNEs are created. Benefits of internalisation arise from the avoidance of imperfections in the external market, but there are also costs. The optimum size of firm is set where the costs and benefits of further internalisation are equalised at the margin. (Buckley & Casson, 2009, p. 1564)

This quote summarises four important features of internalisation theory. First, the default expectation is market governance. It is market imperfections that lead to internalisation, and the focus of the theory is the decision by firms about what activities to internalise. Second, these imperfections are particularly important with respect to the exchange of knowledge. Internalisation is most likely to be found in knowledge-intensive industries. Third, this theory applies to all firms, not merely MNEs. An MNE is simply a company that internalises some of its operations across more than one country. Fourth, internalisation itself is not costless. It creates its own challenges, as discussed extensively by Hennart (1993). The extent of internalisation is limited by decreasing returns to management: ‘The profitseeking managers of a firm will internalise intermediate product markets up to the margin where the benefits and costs of internalisation are equalised’ (Buckley & Casson, 2009, p. 1567). Developed in the 1970s, internalisation theory was able to explain the rapid development of multi-domestic MNEs in the 1950s and 1960s and the increasingly integrated global operations of MNEs from the 1970s onwards. Later, the addition to the theory of the ‘global factory’ idea

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introduced the ideas of complex divisions of labour across space and between enterprises: ‘Managers in companies with global operations have learned to “fine slice” their activities and to locate each “stage” of activity in its optimal location and to control the whole supply chain, even when not owning all of it’ (Buckley, 2011, p. 270). Here, the idea of control without ownership is introduced, although where to locate different operations remained the predominant focus of the global factory argument. The GVC approach, initially formulated by Gereffi (Gereffi, 1994; Gereffi & Korzeniewicz, 1990) and subsequently refined by Gereffi, Humphrey, and Sturgeon (2005) took as its empirical starting point the fragmentation of the value chain through offshoring and outsourcing. Gereffi’s early work on the garment industry made a significant contribution to the literature on globalisation by emphasising the role of nonmanufacturing companies in driving the development of tightly integrated supply chains that spanned various countries. He later referred to companies such as Liz Claiborne, Nike and The Gap as ‘manufacturers without factories’ (Gereffi, 1999, p. 46). As a result, the starting question for GVC theory was not why firms internalised certain operations it was taken as an empirical fact that these firms did internalise key activities such as design, marketing and branding, and in some cases even retail. These would be the activities that Buckley and Casson would be likely to characterise as knowledge-intensive and therefore more likely to be internalised. The key issue was how these lead firms1 exercised control without ownership along the value chain. The idea of control without ownership is familiar to specialists in international business. Mudambi and Tallman suggest that, ‘Alliances, or what Williamson refers to as hybrid arrangements, arise when transactional conditions lead the firm to desire some degree of control over the transaction without formally internalising it’ (2010, p. 1438). Various writers have discussed the intermediate or hybrid forms that are used to manage relationships between enterprises including Hennart and Kryda (1998). In the garments industry, the firms organising fashion-oriented chains had knowledge of trends and markets in Europe and North America and communicated customised requirements to their suppliers. In some cases, buyers would take responsibility for procurement of inputs and outbound logistics, slicing of these activities and allocating them to different companies. Having made a decision to take such an activity away from the supplier, the lead firm would not necessarily internalise it. Such activities could be externalised to specialist intermediary companies such as Li & Fung, which defines its role as ‘the design, development and sourcing of consumer

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products for trading worldwide, as well as the operation of extensive logistics and distribution networks serving major brands internationally’.2 Later work on the horticulture industry and the role of UK supermarkets in relation to African producers examined the buyers’ role in specifying production, packaging, scheduling, etc. and monitoring compliance (Dolan & Humphrey, 2000). This further expanded analysis of what was controlled along value chains, why and how. Value chain theory has two main concerns. The first is value chain structure. This is related to the literatures on globalisation, trade and fragmentation. The level of analysis is the characteristics of particular industries, and it is mostly concerned with the international division of labour, the distribution of different activities across different countries and types of countries, and the implications of this for production and productive capabilities in developing countries. The new global networks provided opportunities for producers in developing countries to enter global markets, changing both the entry requirements (fewer activities to be carried out, but with greater efficiency) and the routes by which firms can acquire new knowledge and capabilities. The new networks have had implications for the development of local productive capacity both in the short term, and in the longer term as a result of the dynamics of local capability development and the emergence in some locations of specialised intermediaries and large-scale manufacturing companies (Sturgeon, Humphrey, & Gereffi, 2011). The second preoccupation is with governance if activities are to be fragmented, or sliced up, how are the fragments to be coordinated across space and across different companies? As a number of critics have noted, this focus on the costs of externalisation meant that little attention was given to the costs of coordination within firm boundaries, which is a key element of internalisation theory. Within GVC theory, vertical integration was left as a residual category. Similarly, in the theory proposed in Gereffi et al. (2005), any transaction involving standard products, and hence requiring non-complex information flows, will be managed through market governance. This is the standard perspectives on search goods: specification and verification of the qualities relevant to the buyer are straightforward and can be managed through market governance. The key question for GVC theory is the intermediate forms of governance how control can be exercised without ownership in chains where the performance of one business in the chain has non-trivial consequences for businesses in other parts of the chain.3 From this starting point, the key question for value chain theory was the characteristics of network

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governance and the dynamics of both quasi-externalisation (outsourcing activities previously carried out by firms but continuing to exercise some control through network governance) and quasi-internalisation (exercising more coordination and control over activities previously managed through market governance the shift by UK supermarkets from wholesale markets to coordinated supply chains would be an example). The non-trivial consequences of chain performance and management are used to explain why network governance is exercised. GVC emphasised two reasons for network governance: the need to coordinate the production of non-standard products with suppliers and risk management. Brandname companies and UK supermarkets have employed product differentiation as part of their competitive strategies, and this frequently (although not necessarily) implies the procurement of non-standard products, involving information exchange and some degree of adaptation of processes. The non-standard characteristics of products moving along the chain might include not only product design but also quality and quality systems, safety procedures, delivery, etc. At the same time, to the extent that supplier performance across these characteristics has non-trivial consequences for the buyer, coordination is also aimed at controlling the risks arising from such interdependencies. It will be argued below that private standards relating to sustainability and other issues (such as food safety) are responses to such risks as they pertain to brand image and customer or social expectations about company performance. GVC theory focused on the forms of network governance, the aspects of transactions that were most subject to coordination and control, and how the process of governing was organised in practice. This meant, in particular, thinking about the combinations of organising methods discussed by Hennart (1993, p. 544), even though GVC theory did not draw on this work at the time. Hennart refers to two organising principles for managing interdependencies control over output through the price mechanism and control over behaviour through hierarchy and argues that they are frequently combined. The two institutional forms, markets and firms, frequently include elements of both of these two organising principles. Contracts might include a range of specifications whose purpose is to specify and control the behaviour of one or both of the parties, rather than focusing on output requirements alone, while firms may make use of the price mechanism in their internal operations. The behaviour control issue is particularly important for credence goods, as controls over how goods are produced is one way of establishing characteristics that are hard to check or impossible-to-check, as will be discussed below.

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In analysing particular cases, such as the role of UK supermarkets in monitoring horticultural supply chains, research focused not so much on particular institutional forms joint ventures, franchising, etc. but rather on the objectives of this control and the means by which it was achieved. The research identified the particular performance factors that were most important to the buyers and also analyse the particular methods by which companies would establish norms and monitor performance. UK supermarkets might send out agents to monitor conditions at supplier farms or discuss new products even though they owned neither the farms, nor the exporters responsible for packing and expediting the product, nor the importing companies that manage the UK side of the business. However, their key role in controlling access to the lucrative UK market meant that supermarkets were able to make demands on suppliers and be able to offer prices that made meeting these demands attractive to potential suppliers.

THE DISTINCTIVENESS OF VALUE CHAIN THEORY Given the strong overlap in the problems posed and the use of a TCE approach to address them, it is unsurprising that there are many points of commonality between internalisation theory and GVC theory. Nevertheless, the latter has some distinctive features. These lie not so much in its theoretical foundations, but rather in the questions that it explores and its understanding of the determinants of transaction costs. With any transaction cost based theory, the generation of specific hypotheses about how value chain structure and governance develops has to draw on theories about the costs of different governance forms (including hierarchy), how these might be subject to change and the likely or possible patterns of change over time. In this area, value chain theory offers a number of arguments that would be complementary or additional to internalisation theory. First, GVC theory is concerned not only with the relationship between outsourcing companies and first-tier suppliers, but also with activities further upstream along the supply chain. There are some chains where what happens early on in the value chain has non-trivial consequences for the overall performance of the chain, with the result that firms have an interest in what happens not only in their suppliers, but in suppliers to the suppliers of these suppliers. The food sector is a case in point. For some

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products, quality, shelf life and food safety are decisively affected by what happens at the beginning of the chain, with input supplies, growing and harvesting influencing the characteristics of the product delivered to the consumer. Therefore, supermarkets may monitor (or arrange to have monitored) the behaviour of firms at the beginning of the supply chain. This ‘span of control’ issue varies considerably from one product to another, and companies may actively try to reduce such interdependencies. Attempts to loosen the linkage between the quality of raw cocoa and the quality of cocoa-derived products would be a case in point (Daviron, 2002, p. 177). The chain metaphor itself emphasises the connectedness (or nontrivial consequences) of multiple links in the chain. As a result, network governance may be exercised across numerous links along the chain. Second, GVC theory takes a different view about the drivers of governance costs. In particular, it links decisions about the costs of governance to particular qualities embodied into the goods that are being delivered by the chain. As a result of focusing particularly on the activities that companies do not internalise, GVC theory is much more fine-grained with respect to the types of knowledge flows and controls needed for different types of transactions. It has emphasised the shaping of these transactional requirements by choices made about market strategies, and most notably about product differentiation strategies and the needs of different market segments. It is these choices that determine what types of information have to be transmitted to suppliers and the monitoring processes that have to be put in place. The intrinsic characteristics of one green bean may be very similar to another, but beans that are cut, packaged and labelled to certain precise specifications, delivered on a daily, adjustable deliver schedule, and conforming to requirements about pesticide use and labour controls is a very different product to one bought in a wholesale market and requires quite a different supply chain. The specificity of the product then produces new risk with respect to supplier performance. In other words, the product strategies of the buyers determine which aspects of value chain performance might have non-trivial consequences for the buyer, and these vary across products and market segments, and as will be seen below, they can also vary according to the changing external context in which firms operate. Third, GVC theory examines the ways that firms can change the costs of network governance. For internalisation theory, the costs of internalisation and externalisation are determined by a broad range of exogenous and endogenous factors (Buckley & Casson, 2009, p. 1569), but there appears to be no theory about how firms go about changing these costs. In its analysis of the determinants of governance forms in value chains, GVC theory

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highlights the information costs involved in communicating productspecific information and monitoring performance. These costs in turn are determined by the extent to which information can be codified (which reduces the costs of transferring information and also reduces the extent to which companies need to make transaction-specific adaptations of resources) and by the competence of suppliers in relation to the requirements of the transaction. Put simply, the more competent a supplier, the less the buyer needs to worry about it being unable to meet its contractual obligations and the liabilities resulting from such a failure (Gereffi et al., 2005). However, it will be argued below that strategies around codification and monitoring not only change total costs but also change the competences required along the value chain and the point at which the costs are borne. For the understanding of the role of codification in changing governance costs, GVC theory draws on Baldwin and Clark’s (2000) work on the development and broader market implications of the IBM 360 series computer, the first of IBM’s computers to adopt a modular rather than integral architecture. By standardising components, identifying the interdependencies between different parts of the computer system and developing design rules that would limit interdependencies by curtailing design decisions that would have consequences outside of each module (and by remitting design decisions that would have broader consequences to a different hierarchical level). Decisions about module boundaries and about codification reduce the complexity of the interfaces between different elements of the system. Interdependencies between different modules decrease, but complex interdependencies are allowed within them. The latter require tacit knowledge and intense exchanges of information. The difference between codified and tacit knowledge used in GVC theory is similar to the distinction between routine and tacit knowledge proposed by Mudambi and Tallman (2010, p. 1443), and their categories of contractual alliances and institutional alliances correspond to modular and relational value chain governance. The same logic applies for value chains. Baldwin and Clark’s study of the IBM 360 included an analysis of the consequences of the use of a modular architecture for the whole structure of the computer industry. The modular design enabled the emergence of a new supplier industry for parts such as disk drives, computer terminals and printed circuit boards. Companies may seek to standardise inputs and modularise parts of the value chain through firm-level strategies, through the development of industry standards or through public regulations (e.g. on grades and standards).

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GVC theory uses the notions of interface complexity, standardisation and modularity to consider how companies may actively seek to reduce the costs of governance by changing the points of interface between companies and by standardising products and codifying information. In horticulture value chains, for example, the introduction of category management was designed to simplify the interface between supermarkets and the first-tier suppliers by transferring certain chain management and strategic choices from the former to the latter (Dolan & Humphrey, 2004, pp. 503 505). The design and adoption of private food safety standards such as GLOBALG.A.P. and the BRC global standard have codified knowledge about supplier performance. Further, governance challenges can also be addressed through the transfer of particular activities between agents in the value chain. In export horticulture chains, control of pesticide residues is particularly important. Rather than training farmers and then monitoring their behaviour, some exporters provide spraying services to farmers so that the task is carried out by staff employed by the exporter or by specialist service providers, whose competence should be higher because of specialisation and for whom monitoring costs should be lower. Fourth, Forsgren (2013, pp. 76 77) has argued that internalisation theory tends to focus on the individual firm and its decision-making, defining a ‘closed system’. In fact, internalisation theory, particularly in its global factory version, does recognise the importance of changes in the relative costs of internalisation in externalisation as a result of major global trends such as the rise of manufacturing capacity in developing countries (Buckley, 2009b; Casson, 2013, p. 8). However, GVC theory has a more comprehensive analysis of the impact of the external environment on the costs of externalisation. One aspect of this external environment is the public and regulatory pressures placed on companies and their supply chains. Increasing government and public pressures on firms to take into account the environmental impacts of their supply chains is one example, while the issue of labour conditions is another. A consequence of this is that supplier competence (a key driver of value chain governance) is not static. Suppliers will tend to increase their competencies over time, either through ‘learning by doing’ or through investing in capability development. Where competent suppliers are hard to find (e.g. when MNEs build on greenfield sites in developing countries), companies may actively support the development of supplier competence. Nevertheless, new demands from the market or from the regulatory environment may place new obligations on suppliers that they find difficult to meet.

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The logic of this argument should be extended to the issue of buyer competence as a factor in GVC governance, even though it is not taken up by Gereffi et al. Fujita observes that the theory did not consider the issue of buyer competence: ‘Because the primary focus of Gereffi et al. (2005) is on the global value chains that are coordinated by major MNEs, they implicitly assume that lead firms possess the sophisticated capability necessary to coordinate value chains’ (Fujita, 2013, p. 11, emphasis in original). This is not a good assumption to make. An analysis of coffee franchising in Brazil by de Azevedo and dos Santos Silva (2003) demonstrates the way in which lead firm capacity affects governance options. They argue that firms just entering the coffee retailing business are inclined to vertically integrate, because they do not fully understand the processes they are operating. Once they have understood them, they are more able to specify the requirements of franchisees, although they still require additional knowledge about how to develop and manage franchise operations. This suggests that buyers gain competence in codification, although as will be seen below, there are more buyer competence challenges than this posed by sustainability standards. Further, companies also face new challenges and they need to acquire new competences (or work with organisations that already have them). In the case of sustainability standards, for example, it can be argued that pressures on companies to meet changing external expectations with respect to not only the activities within the boundaries of the company, but also further along the value chain, require management not only to change strategy, but develop the capacity to work with an expanded range of stakeholders whose visions and practices may be very different to the usual interlocutors and partners. The issue of how companies respond to these pressures and the difficulties involved in developing new strategies was discussed by, among others, van Tulder, van Wijk, and Kolk (2009). Such analysis can be taken further by considering the co-evolution of buyers and suppliers in value chains. Sturgeon and Lee (2004) argue that firms acquire capabilities in the course of cooperating, and this changes the range of possibilities with respect to both the point of interface between the enterprises (activities may be transferred from one firm to another), the type of governance required and the overall capacity of the chain to deliver different outputs. Fifth, as a result of the above, GVC theory draws attention to the way in which governance forms may move in cycles. Supplier competence is not established once and for all, and nor are codification and standardisation.

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Supplier competence may be developed as a result of learning within value chain relationships, but it can be undermined by the emergence of new challenges (such as environmental responsibility) and also by the emergence of new, low-cost locations (or the rise in wage costs associated with successful economic development) that make it attractive for firms to switch suppliers and locations and start the process of supplier upgrading over again. Similarly, firms have to deal with the challenges of standardisation and innovation, as discussed by David (1995). Modular networks can be undermined by new innovations that create new tacit knowledge and the need for greater communication between buyers and sellers. In these ways, the external environment introduces a dynamic element into value chain analysis. Value chains might evolve simply because the participants in the chain seek to reposition themselves as part of their competitive strategy. They can evolve because suppliers acquire competencies over time, which changes governance options for buyers, as discussed by Sturgeon et al. (2011); they can evolve because buyers themselves acquire competencies to manage chains; and they can evolve new actors such as specialist intermediaries like Li & Fung offer new options for identifying and managing suppliers. The differences between the two approaches are summarised in Table 1. Both theories are based on variants of TCE. Internalisation theory has a well-grounded analysis of the decision about whether to internalise based on rational action modelling that provides a strong basis for understanding decisions about both where activities to should be located and whether they should be retained within the enterprise. GVC theory also has a parsimonious model of the determinants of economic governance, including Table 1.

Comparison of Internalisation and Global Value Chain Approaches.

Internalisation Theory Emphasis on decision as to whether to internalise or outsource Focus on costs of internalisation Focus mostly on MNE and immediate suppliers Focus on institutional forms of governance Transactions costs largely invariable at the firm level

Global Value Chain Theory Emphasis on how to manage outsourced activities, with emphasis on changing external environment Focus on costs of externalisation Analysis of linkages down the chain Focus on what is to be governed and mechanics of governance Firms can vary transactions costs through chain strategies

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different varieties of network governance. It is less formalised, but extends the analysis beyond bilateral relationships and identifies some ways in which the costs of governance and therefore optimal governance forms are subject to alteration.

VALUE CHAINS AND PRIVATE STANDARDS FOR SUSTAINABILITY The distinctive characteristics of GVC theory make it particularly pertinent to the analysis of how businesses might address issues of sustainability, and in particular how sustainability standards affect chain governance. Seven features will be discussed here: 1. The impact of pressures from the external environment on governance requirements for sustainability. 2. The relevance of a whole chain approach to sustainability. 3. Aligning GVC structures and governance through standards. 4. Behaviour controls and credence goods. 5. The development of buyer competence. 6. The development of supplier competence and pressure on suppliers. 7. The costs of value chain governance. In recent years, sustainability has moved up the business agenda, and one information source about ecolabelling schemes identifies 435 labels across 25 sectors and 197 countries (http://www.ecolabelindex.com/). Taking a broader view on sustainability so as to include labour and social standards as part of the business contribution to economic development and poverty reduction extends the range of even further, while more recent trend is the adoption of standards relating to greenhouse gas emissions in order to reduce energy consumption, both to achieve business efficiency and as a contribution to climate change mitigation. Many of these standards have been created by multi-stakeholder initiatives that have emerged to fill regulatory gaps created by the failure of have inter-governmental negotiations to provide solutions. The Forest Stewardship Council (FSC) standard4 arose in the context of the failure of intergovernmental negotiations to agree regulations to combat deforestation in the 1990s (Pattberg, 2005), while the Greenhouse Gas (GHG) Protocol, which provides a framework for accounting for greenhouse gas emissions that is widely employed in carbon standards, was developed when, according to Green, ‘Dissent among these states

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about the role of emissions trading, and thus, the possible uses of GHG emissions accounting standards took the issue of accounting methodologies off the agenda for inter-governmental cooperation’ (Green, 2010, p. 2). Similarly, labour standards have been developed partly in response to the weakness of national systems of regulation in many countries. GVC theory has been used to analyse the development of private standards across a range of issues, ranging from food safety (Henson & Humphrey, 2009, 2010) to labour standards (Lund-Thomsen & Nadvi, 2010) and environmental standards (Nang’ole, Mitho¨fer, & Franzel, 2011). The discussion of such standards from a value chain perspective highlights the seven points made at the beginning of this section.

External Drivers of Governance Businesses are being increasingly held to account over the impacts of their businesses activities. Some of the pressures come from a changing regulatory environment: in the food industry, repeated food scares have led to more stringent standards and greater responsibility for food safety being placed on business. Other pressures come from civil society and social movements that have held businesses to account for how their businesses perform in areas such as responsible and sustainable use of resources, carbon footprint, labour conditions and poverty reduction in developing countries. Private standards are developed and adopted in this context. On the one hand, private standards are a means of responding to the governance challenges that arise when new issues have to be addressed. Companies that have been subject to high-profile campaigns on social and environmental issues may develop or adopt standards as a means of demonstrating that their behaviour will be monitored in a transparent and credible way. On the other hand, standards may be developed as a way of establishing new norms of behaviour that companies are then pressured to adopt. As consumer recognition of such standards becomes more widespread, their adoption by businesses may be part of a market development strategy aimed at offering consumers some additional value through establishing sustainability.

The Whole Chain Approach Some of the most high-profile standards adopters have been precisely the ‘manufacturers without factories’ have been held accountable for what

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happens not only in their directly managed and owned businesses, but for what happens further down the supply chain, extending to their suppliers and even through to their suppliers’ suppliers. In part, this tendency recognises the fact of control without ownership. In some cases companies work closely with their suppliers to make improvements in areas such as procurement, quality, scheduling, etc. Information exchange along the chain may be intense.5 If buyers work closely with their suppliers, then such quasiinternalisation provides a strong argument in favour of companies also taking responsibility for other impacts of their suppliers behaviour, including labour and environmental standards. Nevertheless, there is a broader ethical argument. In the early period of the development of the market for Fairtrade coffee in the Netherlands (as described in Ingenbleek & Reinders, 2013), coffee roasters argued that they were buying a commodity and had no such responsibilities to the farmers who were producing a product. It was true, to a large extent that roasters worked through intermediaries and had little or no direct impact on how the business was managed in rural areas in supplying countries. Nevertheless, the argument made by Fairtrade promoters was that they had a moral responsibility to improve the welfare of the farmers who appeared to be benefiting least from an operation which was a profitable activity overall. Therefore, the pressure was to exercise control where no such control had been evident previously. This increases governance challenges along the value chain, and places a requirement upon the lead firms to develop the capacity to exercise control.

Sustainability as a Credence Good Sustainability standards have the characteristics of credence goods. The relevant characteristics that need to be controlled are extrinsic to the product. They cannot be identified through inspection or consumption. Therefore, controls over the behaviour of firms along the value chain have to be put in place. As Dingwerth and Pattberg suggest in their analysis of transnational sustainability governance: If we conceptualize rules as ‘relatively specific commands for behaviour whose normative authority warrants the expectation of at least a minimum level of compliance’ … transnational rule-making refers to a process in which non-state actors from more than one country generate behavioural prescriptions that are intended to apply across national borders. (2009, p. 711)

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Controlling credence characteristics is a particular challenge for businesses. Credence claims may be made in both business-to-business and business-to-consumer contexts, and in both cases the credibility of the claim being made has to be based on some arguments about the pertinence of the characteristics being measured and the integrity of the measurement system. One aspect of integrity relates to scheme ownership, and this is where multi-stakeholder schemes can be attractive. Sustainability standards frequently mobilise resources from beyond individual companies, or even groups of companies, as part of the process of establishing legitimacy. Multi-stakeholder standards such as FSC and Marine Stewardship Council schemes claim legitimacy in part from the range of stakeholders that contribute to their development and use (Pattberg, 2005) and in part from the credibility of the bodies that monitor and enforce the standard. Even company-specific standards such as Starbucks’ C.A.F.E standard for coffee growing is based on and monitored by the Rainforest Alliance, and Nestle´ has decided to switch its Nespresso coffee scheme for farmers to the Rainforest Alliance standard.6 The second aspect of integrity relates to the monitoring and enforcement of the standard. The standard is only effective if it is enforced properly. A standard is a set of rules, or specific commands for behaviour that are designed to control behaviour. Standards may codify good practice into a clear set of instructions and control points. Depending on the nature of the standard and the environment in which it operates, the standard may identify specific hazards to be avoided (such as damaging community rights in forests) or require specific rules to be followed to ensure consistency of application across different companies or establishments (as is the case with carbon schemes). In all these cases, behaviour monitoring and the process of enforcing compliance or expelling non-compliant establishments are essential for behaviour control. These mechanisms turn a standard into a standards scheme.

Value Chain Structures and Standards Value chain structures and standardisation strategies have to be aligned. This can be done through fitting the standards scheme to chain characteristics or changing procurement models so that the structure of the chain and its governance is more suited to cost-effective implementation, monitoring and enforcement of standards.7 The discussion of modularity in value chains suggests that points of control are best placed at ‘pinch

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points’, where there are relatively few actors. An example of a regulatory strategy focusing on pinch points is provided by Tewari and Pillai (2005). They show how in the 1990s the Indian leather industry faced a challenge of complying with restrictions by the German government on Azo dyes and PCPs in leather products. The highly fragmented nature of the Indian tanning industry, with its many small establishments and elaborate divisions of labour made controls based on traceability and control of substances at the point of use difficult to implement. As an alternative, the industry adopted compliance strategy based on marketing suitable dyes and removing non-compliant products from the market. Collaboration between the government, the large chemical companies supplying the products and the active involvement of a well-organised leather industry made it possible to implement the strategy. Such an option is not available in parts of the forestry sector, where the challenge is to maintain the link between sustainable lead managed forests and certified products, even though these products may have been transported and processed by a variety of firms of different sizes and functions across different countries. In this case, the monitoring of behaviour at the forest level has to be complemented by a chain of custody standard that enables the link from forest to product to be established.8 In contrast, traceability in the GLOBALG.A.P. scheme for fresh fruit and vegetables can be managed through company record-keeping as fresh food moves quickly through the chain.

Buyer Competence Standards may create new requirements for buyer competence, but not all standards are the same in this respect. Some schemes define very broad principles of conduct and impact. The UN Global Compact principles include ‘effective abolition of child labour’ and ‘undertake initiatives to promote greater environmental responsibility’.9 This leaves companies with the challenge of working out how to interpret these principles and how to implement them. As van Tulder et al. (2009, pp. 401 403) note, companies can choose to implement these principles on a continuum from being minimally compliant and largely passive to proactively transforming how the company operates and how it relates to the external world. The latter approach requires competences for strategic engagement with internal and external actors.

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However, other standards may prescribe particular types of behaviour or controls that deliberately remove the work of interpretation in order to standardise implementation across many companies and locations. Standards schemes based on enforcement through third-party certification have these characteristics: the rules are meant to be clear and unambiguous and suitable for verification through audit. In this case, it could be argued that most of the standardisation process has been outsourced to the body developing and owning the standard. However, even in these cases it is well-known that companies need to remain watchful. Certification does not always ensure continuing compliance along the value chain, and buyers themselves sometimes promote the behaviour they are committed to eliminating through the demand they place on suppliers. An example of this would be the way in which just-in-time delivery and last-minute adjustments production schedules lead to excessive working hours at suppliers. Supplier Competence Sustainability standards frequently place new demands on suppliers, compliance with which turns into conditions of entry to particular value chains. Compliance with sustainability standards usually requires changes in how the business functions. Logging companies, for example, would be expected to manage forests in new ways. Part of this management might involve changing the way business interacts with the local community (e.g. meeting requirements on respect for community rights). At the same time, companies have to demonstrate compliance with the standard through internal and external audit and associated record-keeping. All of this is likely to create new competence challenges. Different suppliers may have different capacities for meeting these new challenges. For example, larger farms or more educated farmers might have greater capacity to implement standards related to the environmental impacts of farming and to demonstrate compliance with these standards. There are economies of scale in standards implementation and compliance, which favour larger operations. Such supply limitations may be overcome through support offered by the buyer, but the buyer has to have some motivation to incur the costs associated with providing such support. Costs of Governance One of the main benefits of translating value chain governance requirements into codified standards is that it should reduce governance costs.

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However, standards are experienced in different ways along the value chain, with different consequences and costs. First, prescriptive standards schemes, in particular, reduce costs for buyers. The costs of scheme development and scheme management are not borne by individual businesses, but rather by the owners of the scheme. The adopters of the standard gain from the economies of scale in design, management and reputation building that are enjoyed by the supplier of the scheme. In imperfect markets, the costs of standards development and compliance monitoring are transferred from the buyer (who no longer has to directly monitor behaviour along the chain) to the supplier (who has to implement the standards and pay the costs of certification). Second, standards schemes may economise on monitoring and compliance overall by the use of standardised metrics and reporting procedures. Green, for example, notes that the Greenhouse Gas Protocol employs ‘Standardized “off the shelf” reporting procedures created by the [Greenhouse Gas] Protocol made it relatively easy for individual firms interested in adopting voluntary reporting measures to do so’ (Green, 2010, p. 2). Standards also build on meta-standards that provide general framework for implementation. Sinden (2009) notes the adoption of the life-cycle assessment model published by the British Standards Institute, PAS 2050, in different international greenhouse gas emission standards, while Murray (2009) has shown how different standards schemes for food processing all follow the recommendations set down by the Codex Alimentarius Commission very closely. Third, the process of developing standards codifies what may have previously been tacit knowledge. Direct understanding of operations along the value chain and the extent to which they comply with sustainability principles is substituted by a system of codified knowledge that presents its results in two simple forms for the buyer, performance is indicated by possession of a certificate; for the producer, buyer requirements are codified into unambiguous instructions. This not only reduces the costs of communicating needs and monitoring supplier behaviour, but also lowers switching costs for both parties. Standards do not, however, provide a comprehensive and reliable indication of supplier performance. Nevertheless, standards can also increase costs, particularly upstream in the value chain where they have to be implemented. It is one thing, for example, for a standard for shrimp aquaculture to state that ‘New ponds, farms sites or related facilities are built according to national planning and legal frameworks in environmentally suitable locations, making efficient use of land and water resources’ (GLOBALG.A.P., 2009, p. 4), and another for shrimp processors to find suppliers that are able to conform

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with these requirements and ensure that shrimp does not come from other sources. Similarly, efficient use of land and water might require changes in production techniques and capital investment, as well as the costs of monitoring supplying farms. In addition to these costs, a frequently expressed complaint is standards proliferation. In the case of sustainability standards for coffee, there is a range of different standards, ranging from company standards such as Starbucks C.A.F.E. standard to Utz, Max Havelaar, Rainforest Alliance, Fairtrade, etc.10 Similarly, there are competing standards in forestry, as analysed by Gulbrandsen (2005). Such proliferation is partly the result of competing approaches to defining the stringency and scope of standards, as discussed by Prakash and Potoski (2010), but also an effect of the way in which standards schemes gain the characteristics of a brand, with consequences for the value chain control.11 However, there have been attempts in various sectors to benchmark standards schemes so that certification to one standard is accepted as equivalent to certification by others.

CONCLUSIONS Internalisation theory and GVC theory both adopt a TCE approach to understanding the questions of fragmentation and coordination in the global economy. Their different starting points have led these theories in different directions and created different strengths and weaknesses. Internalisation theory started from the transnational company as a knowledge-intensive operation and focused on the decision about whether to locate specific activities within the boundaries of the enterprise or outside. In contrast, GVC theory started from the observation that many firms in the global economy externalised many activities but were also exercising quite detailed control over these externalised activities. In some cases they had been ‘born externalised’ having never owned substantial manufacturing capabilities. The theory considered different ways in which this externalisation might be controlled in the absence of ownership, which led to a distinction between different forms of value chain governance and the different ways this might be exercised along value chains. Whereas the focus of internalisation theory is how the firm minimises its total costs of operations and management through decisions about both what it produces or buys and where these different activities are located, GVC theory has been more concerned with the ways in which governance costs are affected

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by what types of information companies need to obtain about what goes on along the value chain and the reasons for and extent of the need to exercise control without ownership along multiple points in the chain. This analysis frequently refers to factors external to the firm, such as the characteristics of consumer markets and the capability of the supply base. This focus on the external environment is particularly relevant to the issue of sustainability and sustainability standards. Many of the pressures relating to sustainability derived from external forces, both from consumers and pressure groups mostly concerned responsible use of diminishing resources and preservation of the environment, and also from the recognition of the externalities of greenhouse gas emissions and precious to reduce emissions. GVC theory is able to show how the development of private and public private sustainability standards reduces the costs of chain governance and enables companies to reduce the costs of meeting and demonstrating that they are meeting the changing obligations placed on them by society and by governments.

NOTES 1. The concept of lead firm in GVC theory appears to be identical to the concept of the focal firm in global factory theory (see, e.g. Buckley, 2011). However, the Gereffi et al. (2005) conceptualisation of value chain theory does not require a lead firm in any particular value chain. Subsequent analysis has considered sectors where there are different firms leading different parts of the value chain (Ponte & Sturgeon, forthcoming). 2. Taken from http://www.funggroup.com/eng/global/intro.php. Li & Fung is now a business grouping under the umbrella of the Fung Group, which also has a retailing arm operating in China and Southeast Asia. 3. These non-trivial consequences create the interdependencies that are at the heart of both internalisation theory and GVC theory and lead to the quest for control without ownership. 4. For more information on the FSC, see https://ic.fsc.org/. 5. UK supermarkets will provide weekly supply schedules to their African suppliers and then amend them day by day according to demand. Similarly, clothing suppliers will hold low stocks and adjust orders very frequently in accordance with sales volumes the particular lines and sizes. 6. As highlighted by the Rainforest Alliance: http://www.rainforest-alliance.org/ newsroom/news/nespresso-ecolaboration. 7. The analysis of standards schemes for food safety by Henson and Humphrey (2010) distinguishes five elements in a standard scheme: the design of the standard, the decision by one or more parties to adopt it (which may not be the designers of

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the standard), the implementation of the procedures and rules in particular establishments, the monitoring of conformance and enforcement. These may be done by different organisations, and recommendations for the management of standards systems by the ISO recommend, for example, that design and monitoring are carried out by different bodies. ISO/IEC 17021:2011 provides guidance for the competence, consistency and impartiality of audit and certification. 8. For a discussion of chain of custody and how standard schemes choose to operationalise it, see Gulbrandsen (2005). 9. http://www.unglobalcompact.org/AboutTheGC/TheTenPrinciples/index.html. 10. For a discussion of the dynamics of the development and adoption of competing standards in the Dutch coffee market, see Ingenbleek and Reinders (2013). 11. Duguid (2003) provides an analysis of how brands affect supply chain relationships.

ACKNOWLEDGEMENTS The author thanks Rob van Tulder for comments on an earlier draft and also recognises the contributions of Spencer Henson to the analysis of private standards. The defects in the chapter are the author’s sole responsibility.

REFERENCES Baldwin, C., & Clark, K. (2000). Design rules. Cambridge, MA: MIT Press. Buckley, P. (2009a). The impact of the global factory on economic development. Journal of World Business, 44(2), 131 143. Buckley, P. (2009b). Internalisation thinking: From the multinational enterprise to the global factory. International Business Review, 18(3), 224 235. Buckley, P. (2011). International integration and coordination in the global factory. Management International Review, 51(2), 269 283. Buckley, P., & Casson, M. (2009). The internalisation theory of the multinational enterprise: A review of the progress of a research agenda after 30 years. Journal of International Business Studies, 40, 1563 1580. Casson, M. (2013). Economic analysis of international supply chains: An internalisation perspective. Journal of Supply Chain Management, 49(2), 8 13. David, P. A. (1995). Standardization policies for network technologies: The flux between freedom and order revisited. In R. Hawkins, R. Mansell, & J. Skea (Eds.), Standards, innovation, and competitiveness: The politics and economics of standards in national and technical environments (pp. 15 35). Aldershot, UK: Edward Elgar. Daviron, B. (2002). Small farm production and the standardization of tropical products. Journal of Agrarian Change, 2(2), 162 184.

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Ingenbleek, P., & Reinders, M. (2013). The development of a market for sustainable coffee in the Netherlands: Rethinking the contribution of Fair Trade. Journal of Business Ethics, 113(3), 461 474. Lund-Thomsen, P., & Nadvi, K. (2010). Clusters, chains and compliance: Corporate social responsibility and governance in football manufacturing in South Asia. Journal of Business Ethics, 93, 201 222. Mudambi, S., & Tallman, S. (2010). Make, buy or ally? Theoretical perspectives on knowledge process outsourcing through alliances. Journal of Management Studies, 47(8), 1434 1455. Murray, G. (2009, April). Produce food safety standards today: United fresh audits benchmarking matrix. Paper presented at the Global Conference on Produce Food Safety Standards, Washington, DC. Nang’ole, E., Mitho¨fer, D., & Franzel, S. (2011). Review of guidelines and manuals for value chain analysis for agricultural and forest products. ICRAF Occasional Paper No. 17, World Agroforestry Centre, Nairobi. Pattberg, P. (2005). The Forest Stewardship Council: Risk and potential of private forest governance. The Journal of Environment and Development, 14, 356 374. Ponte, S., & Sturgeon, T. (forthcoming). Explaining governance of global value chains: A modular theory-building effort. Review of International Political Economy. doi:10.1080/ 09692290.2013.809596 Prakash, A., & Potoski, M. (2010). Private authority certification regimes: A club theory perspective. In T. Porter & K. Ronit (Eds.), The challenges of global business authority: Democratic renewal, stalemate or decay? (pp. 39 64). Albany, NY: State University of New York Press. Sinden, G. (2009). The contribution of PAS 2050 to the evolution of international greenhouse gas emission standards. International Journal of Life Cycle Assessment, 14, 195 203. Sturgeon, T., Humphrey, J., & Gereffi, G. (2011). Making the global supply base. In G. Hamilton, M. Petrovic, & B. Senauer (Eds.), The market makers: How retailers are reshaping the global economy (pp. 231 254). Oxford: Oxford University Press. Sturgeon, T., & Lee, J.-R. (2004). Industry co-evolution: A comparison of Taiwan and North America’s electronics contract manufacturers. ITEC Research Paper Series, 04-03, Doshisha University, Kyoto. Tewari, M., & Pillai, P. (2005). Global standards and the dynamics of environmental compliance in India’s leather industry. Mimeo. Oxford Development Studies, 33(2), 245 267. van Tulder, R., van Wijk, J., & Kolk, A. (2009). From chain liability to chain responsibility. Journal of Business Ethics, 85(Suppl. 2), 399 412.

PART II

CHAPTER 6 MULTINATIONAL ENTERPRISES AND SUSTAINABILITY STANDARDS: USING A PARTNERING-INTENSITY CONTINUUM TO CLASSIFY THEIR INTERACTIONS Greetje Schouten, Sietze Vellema and Jeroen van Wijk ABSTRACT Purpose The sustainability performance of multinational enterprises (MNEs) is often judged from their participation in distinct sustainability standards initiatives. But MNEs interact with a variety of sustainability standards in their value chains. This chapter proposes a partneringintensity continuum to categorize the MNE standards interactions to explore the benefits of a more firm-based approach for the assessment of MNEs’ contributions to sustainability.

International Business and Sustainable Development Progress in International Business Research, Volume 8, 117 139 Copyright r 2014 by Emerald Group Publishing Limited All rights of reproduction in any form reserved ISSN: 1745-8862/doi:10.1108/S1745-8862(2013)0000008011

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Methodology/approach The chapter describes standardization in coffee and biofuels industries and presents the case of a single firm to compose a continuum that reflects how MNEs move between standards attached to operations of single firms, bilateral arrangements with certification schemes, and multistakeholder partnerships. It elaborates this observed continuum by linking international business (IB) literature with the literature on global value chains (GVCs) and partnerships. Findings Choices about how to partner in and how to handle control over the implementation of standards shape the contributions MNEs make to sustainable development. Specifying how MNEs interact with different standards, with varying degrees of partnering and combined logics, is proposed as a better way to assess how MNEs contribute to sustainable development compared to evaluating standards per se. Originality/value This chapter draws attention to the phenomenon that international “lead firms” engage with a variety of standards. The chapter proposes that looking at partnering intensity and the subsequent level of influence over the implementation of standards enables assessing how and to what extent lead firms contribute to addressing sustainability problems. Keywords: Partnering; governance; lead firms; agrifood chains; sustainability standards

INTRODUCTION Multinational enterprises (MNEs) are key actors in the debate on sustainable development. They are part of the problem due to the adverse social and environmental effects that many of their international activities bring along. They are part of the solution because of their size and international market power through which they can move and shape production and trading conditions across the globe. One important and rather recent strategy is the adoption of corporate social responsibility (CSR) strategies and sustainability standards against which products are certified. In the last decade, MNEs have engaged themselves with multiple sustainability standards to mitigate the negative consequences of their international business (IB) operations on the environment and people. For example, 40 percent of a sample of 200 European companies with more than 1000 employees makes public reference to at least one internationally recognized CSR instrument. One-third of the 200 firms meet the European Commission’s

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call to refer to at least the UN Global Compact, OECD Guidelines for Multinational Enterprises, or to ISO 26000 (European Commission, 2013). Another study reported that 96 percent of the largest firms in the world are actively involved in collaborations with nonmarket actors and that this represents an increasing trend. On average, firms have 18 cross-sector collaborations (van Tulder & da Rosa, 2010). Standards receive much attention in assessments of the contribution of the private sector to sustainable development. These assessments are conducted partly to accommodate the need of certification schemes such as Utz Certified, Rainforest Alliance, or Fair Trade, to substantiate their claims. In this case, focus is on the transformative capacity of standards per se or a comparison of the effectiveness of standards (for an example in coffee see Ruben & Verkaart, 2011). The contribution of MNEs to sustainable development is then primarily linked to the orientation and effectiveness of voluntary standards. In this chapter, we try to place the interaction of MNE and standards at the core of the analysis. We consider this interaction to be a good entry point for documenting how MNEs maneuver in the landscape of standards, and for analyzing how MNEs link standards to their core business, how they manage interdependencies with other firms for achieving sustainability targets, and how they partner with private, public and civic actors. These are dynamic and evolving processes, which go beyond the more static focus on compliance with standards. We emphasize the centrality of MNE strategies and action in the implementation of different standards. We suggest that how MNEs incorporate partnering and manage control over implementation of sustainability standards are important aspects for assessing the contributions companies make in addressing the multifaceted and often unpredictable process of sustainable development. The strategies and action of MNEs relate to choices made about how to link the societal demand for sustainability with internationalization and competitiveness strategies, how to be accountable for actions of other chain actors, and with whom to team up at global and national levels. Our suggestion to focus on the MNE standard interaction is further explained in the second section, which zooms in on a range of empirical examples, focusing on sustainability standards in food and agriculture, to illustrate the different ways in which MNEs interact with sustainability standards. The third section tries to categorize the variety of these standards by looking at the degree of partnering of an MNE with other actors. In the fourth section, we combine three strands of literature on IB, global value chains (GVCs), and partnerships for further substantiating

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a partnering-intensity continuum underlying MNE standard interactions. We argue that combining IB literature with GVC literature and partnership literature might help to categorize the different interactions of MNEs and sustainability standards from the perspective of partnering and control. This section briefly introduces IB, GVC, and partnership literature and examines the reach of these literatures for an analysis of MNE standard interactions. In the discussion, we further examine the value of the proposed partnering-intensity continuum. We conclude that when it comes to implementation of sustainability standards the combination of different logics, within a single company, a value chain, or a cross-sector partnership, sets the conditions for addressing complicated sustainability problems; the combination of three literatures enabled us to further unravel these different logics.

MNE INTERACTIONS WITH STANDARDS MNEs interact with sustainability standards in various ways. On the one hand, we observe standards that are developed by a single company and are therefore often geared toward that company’s own business and cover their internal supply chain. These sustainability standards might give MNEs a competitive advantage as they differentiate products using sustainability-related qualities (Lee, Gereffi, & Beauvais, 2012, p. 12327). On the other hand, standards are increasingly developed in global multistakeholder partnerships. Dentoni and Peterson (2011, p. 85) found that 22 out of the 50 largest MNEs in the food and beverage sector engage in global multistakeholder partnerships. These arrangements include actors from all links of the supply chain, banks and investors, developmental and social nongovernmental organizations (NGOs), and other civil society organizations. Sometimes governments are also included. Examples include the Roundtable on Sustainable Palm Oil (RSPO), the Forest Stewardship Council, and Bonsucro. In between these two types of standards, we find standards that are developed and implemented in strategic coalitions between MNEs and other actors, such as nongovernmental organizations (NGOs) and certification programs or standard setters. These include industry consortia that developed a certification scheme for sector and cross-sector partnerships between one NGO and one MNE. This section discusses how MNEs in different industries relate to this variety of standards. We use the examples of coffee and biofuels and of a single

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company, Unilever, to illustrate that companies usually do not rely on a single standard, but that they navigate the landscape of standards. On the basis of this we propose a continuum to classify MNE standard interactions.

Coffee Coffee is the world’s most widely traded tropical agricultural commodity, and the crop is of strategic importance to a large number of smallholder producers, their organizations, and government in producing countries. The international coffee market is characterized by volatile commodity prices, powerful coffee traders, and whimsical conditions for coffee producers. Poverty and uncertainty faced by coffee producers has triggered various standard-based initiatives aiming to enhance their socioeconomic situation and to strengthen their position in the commodity chain. Fair trade labeling was a forerunner for standards oriented toward sustainable development, which emphasized countervailing power of organized coffee producers. Over the years, the coffee market featured a variety of sustainability labels. These could be based on third-party certification such as Utz Certified, Rainforest Alliance, or the Bird Friendly seal. And companies introduced labels referring to a certain quality-sustainability combination, such as Nespresso AAA or Starbucks, or to a certain origin. Besides the environmental and social impacts of coffee production and trading, the economic position of smallholder coffee producers and the related possible exploitation by lead firms drove the conceptualization and implementation of voluntary standards. The emergence and mainstreaming of this variety of voluntary standards for sustainable coffee production, with their own peculiarities, coincided with a reordering of the coffee sector resulting in more power with trade and industry and increased public attention gaining power in the consuming countries (Kolk, forthcoming). In the coffee industry, lead firms made different strategic choices about how to engage with standards and with whom to partner. Fair trade has for a long time been influential in standard-setting in coffee. This label provided an alternative to organized farmers for supplying end user markets. Since the beginning of this century alternative labels have been used in the coffee industry. Leading roasters and coffee manufacturers aligned with certification schemes, such as Utz Certified or Rainforest Alliance, for several reasons: to respond to public pressures, to ensure sourcing of coffee in the future, to enhance transparency in the supply chain and to build stronger linkages with their suppliers, and to work on improved sustainability in coffee production. These lead firms are also engaged with

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a more generic standard, the Common Code for the Coffee Community, which worked as a multistakeholder initiative implementing a generic threshold in the mainstream coffee market. In producing countries, for example, Uganda and Tanzania, exporters collaborate with other stakeholders, such as public coffee authorities, NGOs, and producer organizations, on sector problems, such as declining productivity, plant diseases, or the lack of planting material for replacing old trees. The international coffee industry also aligns with these national partnering initiatives. These types of standards focusing more on the production of coffee are complemented with standards and control measures targeting product quality. Some brands, for example, Nescafe´ and Starbucks relied strongly on private labels and communicated this in combination with sensory qualities of their coffee product. More recently, these companies aligned their private labels to third-party certification in order to increase the legitimacy of their claims. Also, the international nature of the coffee industry stimulates companies to partner with national coalitions, directly or via exporters, for example in endeavors to ensure productive and access to quality coffee beans. At an international level, the bilateral arrangements with third-party certification have become part of competitive strategies of all leading companies. At national level, traders and exporters supplying the lead firms in the international market seem to be prepared to join private public partnerships that work on precompetitive issues, such as the provision of planting material. The voluntary standards influential at the downstream side of the coffee chain feature less prominently in such national initiatives, which are rooted in the historically grown interaction between states, businesses, and producers organizations. Standards for product quality, which can be enforcement by buyers and/or national regulatory authorities, have been part of standardization in coffee. The above indicates that in coffee, MNEs interact with a variety of standards at different levels. This leads to strategies of individual MNEs composed of multiple interactions with standards. Biofuels The biofuel industry is plagued by various complicated sustainable challenges. Though initially being presented as an environmental friendly alternative to fossil fuels, the production of biofuels rapidly provoked strong opposition by many different stakeholder groups, claiming that biofuels cause severe environmental and social problems. The production of biofuel

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might result in a loss of biodiversity caused by land-use change, and might compromise food security by reducing available arable land (Overmars, Stehfest, Ros, & Prins, 2011). Furthermore, biofuel production is increasingly associated with land-grabbing in Africa. Currently, various public regulatory strategies and many private governance arrangements are involved in governing this issue-field. The biofuel industry is therefore characterized by a plethora of sustainability standards. In the production and marketing of biofuels, three types of standards can be distinguished: single firm standards, industry standards, and multistakeholder standards. However, even within these categories, standards differ considerably in scope. Some sustainability standards that are developed by a single firm cover only their own supply chain and therefore certify one type of agricultural crop from a specific region (e.g., Ensus). Other single firm standards, however, can certify all types of feedstock and have a global reach (e.g., RBSA Abengoa RED). Most multistakeholder arrangements are also global in scope, but differ in the type of feedstock they can certify. The Roundtable on Sustainable Biofuels (RSB), for example, is designed to certify every feedstock, while Bonsucro, for example, is only fit to certify sugarcane. Other multistakeholder arrangements, including the Roundtable on Responsible Soy (RTRS) and the RSPO, only recently added a “biofuel annex” to their certification scheme to be able to comply with the Renewable Energy Directive of the European Union. These annexes include additional criteria on for example greenhouse gas emissions. MNEs can be involved in multiple certification schemes. Shell, for example, is a member of the RSB, RSPO, International Sustainability and Carbon Certification (ISCC), Bonsucro, and RTRS. MNEs also work with standards with a different scope, in terms of both their technical content and their geographical coverage. There is quite some variation in the number of partners MNEs work with in efforts to improve the sustainability of biofuels. This also depends on the national and local configurations the MNEs work in. Even for standards for a single product type, MNEs choose either to work bilaterally or individually or to engage with evolving multistakeholder processes.

Combining Standards at MNE Level Individual MNEs can follow distinct standard strategies for different products. Consumer goods company Unilever, for example, employs a wide

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range of approaches to sustainability standards and participates in a variety of partnerships. The company has developed its own sustainability indicators to realize a shift toward sustainable sourcing, but also collaborates with external stakeholders (Unilever, 2013). At the international level, Unilever is proactively involved in building strategic partnerships around specific sustainability standards and in the initiation of broad coalitions, for example, multistakeholder Roundtables. At the national level, the company collaborates with local producers or organizations to get the standards accepted and implemented. The chapter by Welch and Mees in this volume shows the dynamic and changeful ways in which Unilever, for the period 2000 2012, tried to make sense of its commitment to being a responsible citizen and to sustainability. They present the company as confident and proactive in framing of its social role. And they identify how the company’s linkages with other players evolved. In the beginning phases, the company engaged with the UN Global Compact and organized internal groups responsible for environmental management and for monitoring codes of conduct. Over time, the company became more proactive in collaborative industry initiatives, which try to set benchmarks and to induce a transformation of entire industries. For example, Unilever has been actively involved in the design and operations of the RSPO for which the firm delivers the President. The company is also represented on the executive board of the RTRS. Furthermore, the company participates in other multistakeholder partnerships, including the global Marine Stewardship Council and the World Water Forum. Besides working on the transformation of industries in collaboration with other stakeholders, ranging from value chain actors to environmental NGOs and financers, Unilever developed its own internal “Sustainable Agriculture Code” (SAC). This code lists the practices all its suppliers should strive to achieve and acts as a benchmark for other voluntary standards the company’s brands work with. In 2010, Unilever launched the “Unilever Sustainable Living Plan” (USLP). This strategic document is governed by teams and committees inside the company. Simultaneously, the company recognizes working with external actors in partnerships with governments, NGOs, suppliers, and consumers as a key condition for achieving the targets set in the USLP. Next to in-house sustainability strategies and participation in multistakeholder arrangements, Unilever is involved in more bilateral forms of partnering. The various brands of Unilever started to ally with international NGOs and certification schemes. Individual brands attempt to show

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Unilever’s progress in the field of sustainability via external certification schemes. For example, Unilever’s tea brand Lipton teamed up with the certification scheme of Rainforest Alliance in the context of up scaling its existing collaboration with the Kenya Tea Development Agency (KTDA) on farmer field schools about good agricultural practices (Waarts, Ge, Ton, & Jansen, 2012). For its Ben and Jerry’s brand, Unilever sources FairTrade certified ingredients and uses the FairTrade label. This short and partial overview indicates that a single company can employ a variety of standard strategies to manage the sustainability of its supply chain, or even an entire subsector. Unilever, a frontrunner in the field of sustainable development, works with distinct product standards, which are developed in company, by an external certifying body, or involve negotiations in networks of stakeholders that differ in goal, in size, and in geographic coverage.

TOWARD A CATEGORIZATION OF MNE STANDARD INTERACTIONS These examples show that the interaction of IB with the current array of standards is neither univocal nor can it be explained exclusively from the strategy of a single firm alone. The question arises as to what can be a useful categorization to capture the variety of interactions of MNEs with sustainability standards observed in the previous section? The literature discusses a variety of standards primarily on the basis of the “technical” content (e.g., Dankers, 2003; Fulponi, 2007; Gibbon & Ponte, 2005; Henson & Jaffee, 2006; McCluskey, 2007). Most of this literature, however, does not link the variety of standards to business strategies or collaborations. The most comprehensive attempt to introduce an overall typology of a wide variety of standards is made by Nadvi and Wa¨ltring (2004, p. 60). They list a set of criteria that can be used to characterize and group quality standards, including Scope (process or product standards), Function (social, labor, environmental, quality, safety, ethical), Key drivers (public, private, public private), Forms: (management standards, Codes of Conduct, labels), Coverage (generic, sector, firm/chain), Regulatory implications (mandatory, necessary for competition, voluntary), and Geographical reach (national, regional, international). The same authors also introduce a historical dimension through the distinction of generations of value chain standards, which differ primarily in function and key drivers. Also this

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typology has a strong and almost exclusive focus on the standards, it provides limited insight into how standards relate to the strategizing and internationalization of business. This chapter argues that the interaction of MNEs and standards can best be characterized by varying degrees of partnering. When we take the MNE as a central actor to categorize the interaction with standards, the interactions and interdependencies of MNEs with other actors become relevant. MNEs develop and implement standards on sustainable development alone or with other stakeholders. Central to our proposal for categorizing these various interactions is the degree of partnering. Fig. 1 places different MNE standard interactions on a continuum ranging from a low to a high degree of partnering. The continuum is a function of two distinct factors: the variety and the amount of partners. The variety of partners is assumed to be more important for the degree of partnering than the actual amount of partners. Therefore, cross-sector partnerships with only two partners are placed further to the right of the continuum than industry consortia, which might have a larger amount of participants. MNEs partnering with other industry actors is assumed to be more similar to single firm sustainability standards than to sustainability standards developed by cross-sector partnerships. Body of literature:

IB literature

GVC literature

Partnership literature

DEGREE OF PARTNERING Standard developed by:

Single firm

Industry consortium

Business label partnership

Business-NGO collaboration

Private multistakeholder initiative

ensus

REDcert

UTZ

RSPO

2BSvs

FAIRTRADE

Community Fair Trade (Body Shop)

Public-private multistakeholder initiative

RSB RTRS

Fig. 1. MNEs and Standards in a Partnering Continuum. Note: ensus: voluntary scheme for Ensus bioethanol production; REDcert: voluntary scheme for biofuels developed by industry consortium from Germany; 2BSvs: voluntary scheme for biofuels developed by industry consortium from France; UTZ certified: provides sustainability standards for coffee, cocoa, and tea; Community Fair Trade: sustainable sourcing program of the Body Shop; RSPO: Roundtable on Sustainable Palm Oil; RTRS: Roundtable on Responsible Soy; RSB: Roundtable on Sustainable Biomaterials.

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The latter are developed by actors from different spheres of society market, civil society, and/or government which therefore are guided by different core logics (van Huijstee, Pollock, Glasbergen, & Leroy, 2011). Therefore, the standards resulting from such partnerships are assumed to include different rationales as well (e.g., a social and an economic rationale). When moving from the right to the left in the continuum, the number of logics and their possible combination increases.

THREE BODIES OF LITERATURE ON PRIVATE STANDARDS So far, we have followed an inductive approach for developing the proposed partnering-intensity continuum. To elaborate the analytical scope of the continuum we explore, in this section, to what extent the continuum also fits the perspectives on standards developed in three bodies of relevant literature: on IB, GVCs, and partnerships. The IB literature links firms’ motivations to engage with supply chain standards with their internationalization strategies. The literature on GVCs follows a network approach of companies that are linked to one another in producing and bringing a product to the market. It links value chain standards with the governance of the entire chain as well as with upgrading opportunities for chain actors in specific geographic locations. Finally, the partnership literature documents how companies negotiate problem-solving strategies in the context of multifaceted issues, such as sustainability, with stakeholders from other societal sectors, leading to the adoption of a new sustainability standard for the firm’s value chain.

IB Literature The IB literature has a strong focus on the internationalization strategies of MNEs. Internalization theory plays an important role in understanding these internationalization processes. It essentially explains why companies internalize or externalize international activities. For a comprehensive overview of the debate about internationalization and internalization we refer to Chapter 5 by John Humphrey. In this section, we examine briefly how the IB literature investigated supply chain standards in the context of selfregulation of the industry.

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Self-regulation refers to a firm’s commitment to control its own conduct beyond what is required by the law (Christmann & Taylor, 2006). CSR increasingly has become a strategic issue for MNEs, in that it affects the core business of the firm and serves as a source of competitive advantage (Kolk & van Tulder, 2011). Firms may have diverse motivations to engage themselves with such private regulation, varying from reactive to proactive CSR approaches (van Tulder, van Wijk, & Kolk, 2009). Standards are being used to reduce transaction costs, and for product differentiation and market segmentation and get ever more important with the lengthening of the value chain. Firms may go beyond what is legally required for “due diligence” reasons, that is, as pre-emptive step in view of possible future claims; they may embrace self-regulation to influence or avoid future government regulation, or in response to societal concerns concerning the product safety, social and labor conditions, and environmental issues (Fulponi, 2007). For supplying companies the main motive for adopting the self-regulatory sustainability standards is the pressure from buyers, often in the export markets, who require certified products and processes (Christmann & Taylor, 2006). MNEs may have an incentive to cooperate in the harmonization of supply chain standards in specific industries, because it would decrease certification costs for suppliers and offer buyers a better opportunity to switch suppliers in sourcing (Fulponi, 2007). The effectiveness of certifiable management standards as governance mechanism for self-regulation of CSR is yet to be established. Especially the conditions under which CSR may have impact, such as the type of issue, stakeholder, country, industry, have not yet been systematically examined in the IB literature (Christmann & Taylor, 2006; Kolk & van Tulder, 2011).

GVC Literature GVC analysis focuses on the transnational networks of companies (Gereffi, 1994). It offers an analytical model to understand the nature of ties between small, local firms and multinational corporations that are linked together in global markets. It also allows the inclusion of nonmarket actors, such as governments, and civil society organizations that have other than purely economic interests. Central in GVC analysis is the organizational or governance dimension, which refers to forms of internal chain governance, and which is closely linked to the (inter) dependencies between chain actors. Essentially, GVC literature focuses on the globalization of

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production and takes the value chain as focal point of analysis. It originated in an academic interest in the globalization of production networks and focuses on the coordination and governance of globally dispersed production and consumption by firms that build reliable supply chains. GVC literature therefore brings industrial structure to the discussion on standards (Lee et al., 2012). In most GVCs a “lead” company can be identified on the basis of its market power and value-added generation. The lead company is capable of setting the standards of production for the entire chain. Depending on the vulnerability of a lead firm toward critical consumerism, they may be more or less committed to participating in different standards, and may use various combinations of pressure and support to enforce a standard throughout their supply chain (Altenburg, 2006). Lee et al. (2012, p. 12328) mention the difference between retailers and manufacturers. Retailers tend to be more concerned with product safety and brand reputations, which was one of the driving forces of the establishment of GlobalGAP as a standard for good agricultural practices controlling the risks attached to pest management. Retailers have a strong interest in combining their capacities to manage food safety risks and thereby securing consumer confidence in all the food products they sell, which is also a response to the General Food Law in the EU that stipulates the responsibility of a company for its supplier. Food manufacturers, such as Unilever, can use standards to compete on the basis of product differentiation, but also to use the concerns on social and environmental impacts in efforts to ensure long-term access to raw materials. Initially, two types of GVCs were distinguished in GVC analysis: (a) producer-driven chains and (b) buyer-driven chains. This idea was first developed by Gereffi (1994). He made a distinction between “buyer-driven” and “producer-driven” as two ideal-typical governance structures. In producer-driven chains, the lead company is the manufacturer or a large, integrated industrial enterprise that controls the production system through its network of suppliers, subsidiaries, and subcontractors. Producer-driven chains are typical for capital and technology-intensive industries like automobiles, aerospace, and electrical machinery. In buyer-driven chains, the lead company is the retailer or branded company that derives its position from its consumer market knowledge, while they outsource most, if not all, of their production. These chains are usually found in labor-intensive, consumer goods industries such as garments, consumer electronics, and food. This distinction still is the main conceptualization for understanding contemporary developments in the global economy (Ponte & Gibbon, 2005).

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In producer-driven chains MNEs, or other large corporations, play a key role in the coordination of the production systems (Gereffi, 1994, p. 97). These chains can be found in capital- and technology-intensive industries, including the automobile and computer industry. “In these chains, producers tend to retain control of capital-intensive operations in house, subcontracting out only more labor-intensive functions to suppliers that are hierarchically organized within vertical networks coordinated and managed by lead firms” (Gibbon, Bair, & Ponte, 2008, p. 320). In contrast, in buyer-driven chains large retailers, brand-named companies, and trading companies play key roles in the coordination of production networks and can be found in labor-intensive, consumer-goods industries, including clothing and housewares (Gereffi, 1994, p. 97). In this type of chains lead firms focus on product development and design, branding and marketing instead of manufacturing (Gibbon et al., 2008, p. 320). Later, a more comprehensive theoretical framework for the identification and explanation of governance in GVCs was developed by Humphrey and Schmitz (2001) and Gereffi, Humphrey and Sturgeon (2005). The framework draws on three approaches: transaction cost analysis, production networks, and technological capability and firm-level learning. The main thrust of the theory is (1) that chain governance and coordination are located on a continuum between a market situation (little governance no vertical integration) and a hierarchy situation (high governance combined with a high degree of vertical integration), and (2) that three variables determine that governance location: the complexity of interfirm transactions, the ability to codify these transactions, and the capabilities of suppliers to meet requirements of buyer. The capability of a core firm to govern, coordinate, or control the chain largely determines the value chain structure. Gibbon and Ponte (2005) stress that core firms may be able to determine the functional division of labor along the chain without having actual control of other chain actors. They point to the historical trend away from hands-on, toward hands-off forms of coordination between core firms and their suppliers. The design of quality standards along the chain enables lead companies to retain power and control, even in highly fragmented chains. Quality management has become one of the key aspects of this chain governance (Fulponi, 2007; Gibbon & Ponte, 2005; Muradian & Pelupessy, 2005). In fact, control over the qualification of specific products is a key source of power in GVCs, and this source is not related to the degree of ownership, but rather to the ability of managing the sales of the chain’s product. Hands-on forms of coordination upstream remain required, but this function is passed on to the immediate (first-tier) suppliers who need to secure an optimally competitive

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portfolio of subcontractors. Hands-off coordination occurs through the codification and standardization of quality and performance criterions, and through the adoption of third-party certification and monitoring. The latter allows buyers/core firms to transfer the cost of quality control to suppliers. From a GVC perspective, strategic choices of MNEs importantly determine the value chain structure, which is reflected in the form of governance and coordination. GVC literature can therefore be helpful in explaining the strategies of MNEs toward sustainability standards by offering a perspective on the interdependent performance of actors linked through different nodes in the value chain structure. However, GVC approaches often take the MNE or the lead firm as a black box; therefore, combining IB approaches with GVC is a promising research strategy. Moreover, the precise dynamics of partnerships in which lead firms participate fall outside the scope of GVS literature, which suggests a link to the literature on partnerships.

Partnership Literature Sustainable development is an issue-field with which a large variety of aspects are associated: such as environmental protection and conservation, poverty reduction, labor rights, cultural diversity, and economic development. Especially in the international, transboundary context in which MNEs operate, these factors can present large inherent tensions. For example, most of the world’s biodiversity hotspots are located in tropical developing countries. Converting land with a high biodiversity level for industrial or agricultural development may reduce poverty, but at a great environmental cost. The “wickedness” of the issue at hand therefore makes it necessary to look at MNEs as one of many stakeholders that have a specific framing of this issue and that are connected to other actors and sectors in a variety of ways. A wicked problem is an issue that is not bound to a single sector and therefore cannot be addressed by a single actor alone. Wicked problems are “dynamically complex, ill-structured, public problems” (Batie, 2008, p. 1176) for which stakeholders have fundamentally different frames of reference and for which therefore no ultimate problem definition and no definite solution exists (Peterson, 2009). In the context of sustainable development it is interesting to look at MNEs as part of a larger web of interactions and connected issues. The above relates to a third body of literature that addresses the MNE in the context of sustainable development. The partnership literature is

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bound by its object of research rather than by academic discipline. Crosssector partnerships can be defined as “collaborative arrangements in which actors from two or more spheres of society (state, market and civil society) are involved in a non-hierarchical process, and through which these actors strive for a sustainability goal” (van Huijstee, Francken, & Leroy, 2007). These partnerships may take many forms and emerge on different levels and locations of the value chain. Particularly large MNEs have a growing interest in cross-sector partnerships (van Tulder & da Ros, 2010). van Huijstee et al. (2007) found two perspectives in partnership research that address essentially different questions. The first is an institutional perspective that conceptualizes partnerships as being part of environmental governance regimes. This approach focuses on the implications of the proliferation of partnerships in environmental governance and the ways in which they might contribute to the effectiveness and legitimacy thereof (e.g., Bitzer, 2012; Pattberg, 2005; Schouten & Glasbergen, 2011; Schouten, Leroy, & Glasbergen, 2012; Visseren-Hamakers & Glasbergen, 2007). The second is an actor perspective that conceptualizes partnerships as a “possible strategic instrument for the goal achievement and problem solving of individual actors” (van Huijstee et al., 2007, p. 75). This literature therefore focuses on the collaboration itself and analyzes the conditions under which partnering is successful (e.g., Gray, 2007). Bitzer (2012) makes a distinction between two other strands of literature within the partnership domain: (environmental) governance and development studies. The governance approach is similar to the institutional approach to partnerships as identified by van Huijstee et al. (2007). From this perspective the capacity of partnerships to address issues in global governance is rather ambiguous: “while partnerships have been shown to contribute to agenda-setting, knowledge production and discourse formation (Pattberg, 2005), the picture is less clear with respect to their actual output” (Bitzer, 2012, p. 16). The development literature looks at partnerships as part of a shift in the political economy of international development cooperation in the 1990s in which a new and active role was assigned to business in development. The partnership literature explains the participation of MNEs in partnerships and multistakeholder arrangements by the concept of “collaborative advantage”: the opportunities of partnering should outweigh the risks, and each partner should gain something that cannot be obtained individually (Glasbergen, 2010; Gray, 1996; Schouten & Glasbergen, 2012). This collaborative advantage is based on the different institutional logics the partners from multiple societal sectors are subjected to as well as on

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the complementarity of their resources. Institutional logics are the principles that prescribe an organization’s interpretation of social reality, the guidelines for appropriate behavior, and the route how to succeed (Greenwood, Raynard, & Kodeih, 2011). Institutional logics are related to different institutional roles and resources. Firms can bring to the partnership market access, market, managerial and technical expertise; NGOs can generate public legitimacy, enable access to potential customers, support from their local networks; governments can provide legal backup, access to financing, and security (cf. Rivera Santos, Rufin, & Kolk, 2012). Firms increasingly engage with cross-sector partnerships because the collaborative advantage presents a business case (van Tulder & da Rosa, 2010) that commonly combines increased profitability with an improved reputation, more secure risk management, and more legitimacy. Van Huijstee and Glasbergen (2008) found that interactions of MNEs with usually international NGOs are often conceptualized as sustainability instruments or as strategic management instruments. The first interpretation sees the interactions as a way to overcome complex sustainability problems, while the other perspective focuses more on the strategic value for the MNEs. They found that the decision of MNEs to engage in interaction with NGOs is solely determined by strategic management considerations, such as decreasing possible reputation damage and taking advantage of new business opportunities. The most direct outcomes of these interactions are improved relationships, and increased understanding and trust between the different partners (van Huijstee & Glasbergen, 2008). Van Tulder and da Rosa (2010) found that MNEs increasingly build partnership portfolios. However, they also found that these partnership portfolios are often poorly managed by firms, which potentially reduces collaborative advantages. While multistakeholder partnerships formulate standards and conceptualize sustainability on a global level, their rules need to be implemented at production level, which may cause frictions between these global standards versus local practices and institutional arrangements (Vellema & van Wijk, forthcoming, p. 8). In order to be able to understand the engagement of MNEs in multistakeholder partnership, one cannot suffice by only looking at the macro level. Global standards touch down in local institutional contexts and therefore the meso and micro levels also have to be taken into account (Helmsing & Vellema, 2011a, 2011b). This may differ for value chains that are largely dominated by retailers or by food manufacturers. Empirically, GVCs are the link between global “conceptualizing” partnerships and local “implementing” partnerships.

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Three Degrees of Partnering in the MNE Standard Continuum Substantiated by IB, GVC, and Partnership Literature.

Body of Literature Partnering intensity Unit of analysis

MNE standard interaction

Influence over implementation standard Link with sustainable development

IB

GVC

Partnership

Low

Medium

High

MNE’s internalization of market failure and codification of norms Defined in competitive strategy and operational scope firm Anchored in resources and capacities individual firm Existing market demand for sustainable products in competitive field

Lead firm’s impact on Private sector value chain involvement in crossstructure and sector partnerships governance forms Defined in arrangement with third-party certification schemes Grounded in enforcement of rules and practices

Defined in goal alignment by public and private actors

Chain responsibility and transparency as response to public pressure

Collaboration targeting wider societal impact creates legitimacy and shared value

Embedded in rules and practices emerging in cross-sector partnering

Fig. 1 places these three literatures, IB literature, GVC literature, and partnership literature, on a specific part of the continuum. Table 1 epitomizes the different bodies of literature and their relation to MNE standard interactions.

DISCUSSION This chapter started with a selection of examples of MNE standard interactions in essentially demand-driven agro and food value chains. In these chains, sustainability standards have become important strategic elements for processing and retail MNEs. The examples in this chapter indicate that MNEs do not necessarily rely on the adoption of a single type of standard, hence one degree of partnering intensity. Usually, MNEs seek combinations of different standards, which can be designed within the company, by external certification schemes or in partnerships with NGOs and/or governments. The precise combination of different types of standards within individual

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firms affects the level of influence that these firms have over sustainability improvements along the value chain. The evolving interactions between MNEs and standards suggest that firms select standards and partners, and opt to change their positions when a standard does not fulfill its expectations or when public pressures encourage them to seek new alliances. To classify MNE standard interactions, we propose a partneringintensity continuum, which makes it possible to further understand how MNEs organize their contribution to sustainable development and how different logics are combined. The continuum has the capacity to accommodate the dynamics of the MNE standard interactions observed in this chapter. It complements the proposition developed in Tulder et al. (2009) that the implementation likelihood of corporate codes of conduct in the field of occupational health increases with the involvement of stakeholders, by showing how MNEs combine different degrees of partnering related to specific standards. Likewise, MNEs may combine a more reactive strategy, for example, responding to regulatory pressure to uphold food safety or labor rights, and a proactive strategy for creating shared value (Austin & Seitanidi, 2012) by partnering with salient, international NGOs, for example, for the protection of rainforests. The main proposition underlying the partnering-intensity continuum is that the more an individual company designs and implements sustainability standards on its own (the left side of the continuum, Fig. 1), the more it relies on its own institutional market logic, business networks, and company resources to enhance the sustainability of the products and production processes among suppliers in the value chain. Decisions on how to manage monitoring and compliance, and how to defend the business case in the sustainability efforts are inherently largely internal to the company. Then, the transformation toward sustainable development importantly depends on the resources and capacities of the multinational enterprise. This type of business standard interaction fits with the analytical focus on self-regulation in the IB literature. The discussion in this chapter shows the limitation of an exclusive focus on the internal logic of a company. It points at the varying levels of influence the MNE has over implementation and conceptualization of standards, which, we posit, may be related to the intensity of partnering and the resulting combination of logics in different MNE standard interactions. The nature of the business standard interaction changes when the firm collaborates with other private sector actors for standard harmonization, or in multistakeholder initiatives (the right side of the continuum). Through collaboration, the outcomes of implementing a standard become increasingly dependent on how the institutional logic, resources,

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capacities, and action of the firm combine with those of others. In partnerships, therefore, the market logic used by firms is combined with the more societal or civic rationality of NGOs. Therefore, the standards resulting from such partnerships are assumed to include these different logics as well. In theory, the combination of distinct institutional logics and resources would result in interorganizational complexity, but one that is intentionally chosen to address wicked problems. The alignment of MNEs with third-party certification delegates to control actors external to the firm has the advantage that the arrangement is relatively clear and transparent. The MNE standard interaction becomes more diffuse in the case of Roundtables or industry-based platforms, wherein goals, strategies, and the division of responsibilities are continuously negotiated. The level of influence over the implementation of standards also depends on whether such a multistakeholder process takes place at the global, international, or national level. Usually, interactions between MNEs and international NGOs sharing a similar orientation are central to global and international initiatives. Partnerships that operate at a national level, for example, in the coffee industry, build on diverse trajectories and interactions between private and public actors embedded in historically developed business systems. The influence of MNEs most likely differs in these distinct settings. The above suggests that the role of MNEs in sustainable development can be depicted by answering the question how their interaction with standards leads to different intensities of partnering and degrees of influence over implementation. Considering the complicated and wicked nature of sustainable development, the question is whether relying on a coherent strategy strongly connected to the internationalization and standardization strategies of an MNE is the most preferred option. Looking at MNE standard interaction from the perspective of the partnering-intensity continuum, rather than from an individual firm or individual standard, enables to analyze how MNEs do not necessarily rely on one single degree of partnering in developing and implementing sustainability standards, but can employ different strategies at the same time.

CONCLUSION The chapter has explored a partnering-intensity continuum to identify how MNE standard interactions shape endeavors that aim to manage

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their impact on sustainable development. The continuum moves from MNE standard interaction that takes place within the operational boundaries of a single firm and wherein implementation is highly internalized, the interactions of MNEs with standard systems and certification schemes, and the interactions of MNEs with other stakeholders in the setting of crosssector partnerships. The examples from the coffee and the biofuel industry and of a multinational consumer goods company suggest that MNEs rarely rely on a single standard, but rather seek combinations of different types of standards. The chapter emphasizes the interaction of MNEs and standards as a way to understand how companies contribute to addressing anticipated and unanticipated sustainability problems. To further categorize and understand the logics underlying the choices for (combinations of) standards made by MNEs, the chapter used literature on IB, GVCs, and partnerships. Combining the different bodies of literature further substantiated the centrality of partnering intensity and subsequently the level of influence over the implementation of sustainability standards in assessing how MNEs contribute to the realization of wider societal goals.

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This article has been cited by: 1. Alexander Moutchnik. 2015. The maturity model for corporate environmental management. uwf UmweltWirtschaftsForum 23:4, 161-170. [CrossRef]

CHAPTER 7 THE SOCIAL IRRESPONSIBILITY OF INTERNATIONAL BUSINESS: A NOVEL CONCEPTUALIZATION Elisa Giuliani, Chiara Macchi and Davide Fiaschi ABSTRACT Purpose This chapter develops a novel conceptualization of corporate social irresponsibility (CSI) and identifies possible avenues for further research in the international business (IB) and related fields. Design/methodology/approach A conceptual chapter examining the existing definitions of CSI and proposing a classification of irresponsible behaviours using an international law approach. Findings The concept of CSI has been weakly conceptualized and measured so far. We improve this by distinguishing between unethical conduct bearing no direct impact on human rights and those behaviours that do entail a human rights impact. Next, we classify human rights abuses in two categories based on whether they entail the violation of a derogable or a non-derogable human right. Finally, we make a distinction between direct and indirect irresponsible actions. These distinctions are also illustrated empirically.

International Business and Sustainable Development Progress in International Business Research, Volume 8, 141 171 Copyright r 2014 by Emerald Group Publishing Limited All rights of reproduction in any form reserved ISSN: 1745-8862/doi:10.1108/S1745-8862(2013)0000008012

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Originality/value This chapter bridges the gap between IB, management and international law research on human rights or else defined irresponsible behaviours. Our novel conceptualization of CSI can help to better address unanswered questions about factors driving CSI in IB firms. Keywords: Corporate social irresponsibility; human rights abuses; unethical conduct; multinational enterprises (MNEs); international business

INTRODUCTION In recent years, management and international business (IB) scholars have progressively become more interested in analysing the relationship between corporate social responsibility (CSR) and irresponsibility (CSI). While most of the work in this area has been conceptual (see Lin-Hi & Mu¨ller, 2013 for a review), more recent research has explored this relationship empirically within the context of internationalization and multinational enterprises (MNEs) (Fiaschi, Giuliani, & Macchi, 2013; Surroca, Tribo, & Zahra, 2013; Strike, Gao, & Bansal, 2006). CSI is relevant to the IB literature as it connects to the fundamental issue of how IB can contribute to sustainable development by way of reducing its harmful impacts, for instance, by reducing contaminating emissions, avoiding the use of child labour in production and limiting unethical conducts at large. However, we argue in this chapter that the concept of CSI is still largely a black box, as often studies refer to it as a unique bundle including irresponsible behaviours as different as bribing and child labour, and consequently the operationalization of this concept is rather poor. Drawing on an international law perspective, we contend future research should address this limitation, by being able to distinguish between different kinds of irresponsible behaviour. In particular, we should distinguish human rights abuses defined on the basis of the 1948 Universal Declaration of Human Rights and international human rights treaties from other kinds of irresponsible behaviours that do not directly constitute a human rights abuse (e.g. bribing). Among human rights abuses, we moreover consider that an additional qualitative distinction should be made between the infringement of human rights that are considered nonderogable under international human rights law and the rest of human

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rights abuses. Although corporations are not presently considered as (full) subjects of international law and, therefore, not directly bound by human rights obligations comparable to those of States for practical reasons, in our paradigm, we consider corporations as perpetrators of (or accomplices in) human rights violations, and we draw inspiration from internationally recognized non-derogable norms (among which the prohibitions on torture, slavery, servitude, forced labour, arbitrary deprivation of life) to qualitatively define the types of violations. Hence, we argue that it is important to distinguish violations of those human rights which are defined as non-derogable in the main international human rights treaties from other types of abuses, and from unethical behaviour at large. Also, we discuss in this chapter that scholars working on CSI should consider distinguishing between direct abuses committed by the corporation and/or any of its subsidiaries and indirect abuses, which are committed by third parties (e.g. suppliers, clients, governments) with the complicity of the corporation. We further contend that such a more profound understanding of CSI is relevant to scholarship, because different kinds of irresponsible behaviours may follow different trajectories and may be driven by different underlying motivations, upon which the relationship between CSR and CSI is likely to depend. The chapter proceeds as follows. First, we review the extant literature on internationalization and CSI. Next we discuss the main limitations of current literatures on CSI’s definitions and operationalization. Based on this, we introduce a novel classification of CSI. We draw on this classification to show some empirical evidence of irresponsible behaviours associated to both advanced and emerging countries’ MNEs. We conclude the chapter by providing avenues for future CSI/IB research.

FIRMS’ INTERNATIONALIZATION AND CSI A scant but growing body of management and IB literature is focusing on CSI. This subject is particularly relevant to the IB audience because most of the irresponsible behaviour takes place in distant countries and is therefore strongly connected to firms’ internationalization strategies. Prior evidence has shown that the more firms internationalize, the more they incur in irresponsible behaviours (Fiaschi et al., 2013; Strike et al., 2006). One interpretation that is often given to this finding is related to institutional failures. As suggested by Kolk and van Tulder (2010, p. 119), ‘the absence

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of widespread international regulation on social and environmental issues can be considered as both a problem and an opportunity for MNEs’. In this vein, Ruggie (2006, 2010) stresses that the worst corporate-related human rights abuses occur in countries affected by or emerging from conflict; or otherwise characterized by weak governance and rule of law. Others have referred to this phenomenon as the ‘pollution heaven’ hypothesis, whereby firms choose to enter in particular countries because their weak rule of law guarantees them lax regulations, and virtually no obstacle for the unscrupulous businessman (see Wijen & van Tulder, 2011 for a more profound discussion on the environmental strategies of MNEs). The pollution ‘heaven hypothesis’ is tested by a recent empirical analysis looking at the transfer of irresponsible practices from MNEs’ headquarters to subsidiaries (Surroca et al., 2013). The authors find that MNEs facing stakeholder pressure in the home country are likely to transfer irresponsible practices to their subsidiaries, particularly to their inter-locked minorityowned subsidiaries. In such cases, an irresponsible behaviour committed at the subsidiary level is unlikely to be associated to the headquarter, with the result that the latter will only incur in limited compensation costs or reputational backlashes. In their landmark contribution on international diversification and CSI, Strike et al. (2006) offer yet another interpretation why international firms are more likely to misbehave. They mostly ascribe their findings to the incapacity of MNEs to monitor their subsidiaries rather than to their attempt to exploit the institutional weaknesses of other countries: ‘MNEs may act irresponsibly, not out of malice or ill will, but because they have to stretch their resources and capabilities in order to coordinate and monitor subsidiaries’ (Strike et al., 2006, p. 853, emphasis added). Hence, according to this alternative view, irresponsibility may be the result of the incapacity of the headquarters to monitor and control subsidiaries’ operations in distant countries, which may be challenging in countries that are culturally very distant from the home country. These contributions reveal the complexity of factors influencing CSI, some of which are to be found in the external environment of the MNE for example the home and host countries’ institutional contexts while others are internal to the MNE, and are due to the inherent difficulties involved with managing business cross countries. Yet this area of research is still very open and largely under-investigated. We envisage that research on CSI in IB is on the rise, since it is very coherent with the IB agenda to appreciate how MNEs can contribute to sustainable development.

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LIMITATIONS IN CSI DEFINITIONS AND OPERATIONALIZATION Despite the growing interest in CSI and IB, the way this concept has been defined and operationalized so far presents some limitations. A pioneering article on CSI by Armstrong (1977) defines a socially irresponsible act as ‘a decision to accept an alternative that is thought by the decision maker to be inferior to another alternative when the effects upon all parties are considered. Generally this involves a gain by one party at the expense of the total system’ (p. 3). More recently, scholars have given various other definitions. For instance, Kotchen and Moon (2012) define CSI as ‘a set of actions that increase externalized costs and/or promotes distributional conflicts’ (p. 2) and therefore firms are irresponsible if they employ business practices that are in conflict with social values. Other scholars more loosely defined CSI as a set of corporate actions that cause harm or disadvantages to an identifiable set of stakeholders (e.g. community, employees, consumers) (Lin-Hi & Mu¨ller, 2013; Strike et al., 2006), or simply as bad deeds (Muller & Kra¨ussl, 2011). Armstrong and Green (2013) further define CSI as ‘unethical procedures’ (p. 4) that increase managers’ personal wealth at the expense of the firm. In some other cases scholars suggest that, at its extreme, CSI may entail breaking the law (Jones, Bowd, & Tench, 2009), although it is also agreed that ‘corporate actions can adversely affect others even if corporations do not break the law’ (Lin-Hi & Mu¨ller, 2013, p. 3). A separate strand of research in IB ethics has also analysed deviant organizational practices, which are defined as ‘an event, activity or circumstance, occurring in and/or produced by a formal organization, that deviates from both formal design goals and normative standards or expectations, either in the fact of its occurrence or in its consequences’ (Vaughan, 1999, p. 273, taken from Earle, Spicer, & Sabirianova Peter, 2010, p. 218). Although by no means we intend to be exhaustive in our review of definitions, we do nevertheless find that scholars attach different meanings to the concept of irresponsible behaviour, and they do not necessarily cross-reference each other, which leaves us with a very fragmented picture of what actually irresponsible behaviours are. The operationalization of the concept is also problematic. Almost all of the empirical papers measuring CSI are based on the ‘concerns’ data from the Kinder, Lydenberg and Domini (KLD) database (now MSCI Environmental, Social and Governance (ESG) Indices) widely used to measure CSR as well (Doh, Howton, Howton, & Siegel, 2010). Most uses of KLD ‘concerns’ data are based on the creation of a composite indicator

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that sums up a number of concerns across a wide variety of types of irresponsible actions, available within the dataset, which normally refer to: community relations, corporate governance, diversity, employee relations, environment, human rights, products and controversial business issues (see Muller & Kra¨ussl, 2011; Strike et al., 2006). Even in the cases in which separate indicators are constructed for the empirical exercise, no theoretical or conceptual distinction is made across different categories of irresponsible behaviour (see, e.g. Kotchen & Moon, 2012), with the result that they are treated conceptually simply as different specifications of a very general phenomenon.1 By pooling all kinds of irresponsible behaviours from bribing, to toxic dumping, to child labour into a unique index, past research has failed to acknowledge that there might be profound differences in the irresponsible actions of corporations. A recent attempt to categorize irresponsible behaviour is in Lin-Hi and Mu¨ller (2013), who distinguish between intentional and unintentional CSI. Intentional CSI occurs when corporations deliberately perform actions that disadvantage and/or harm others, a category in which the authors include bribery, excessive bills, illegal waste disposal and tax evasion. Whereas, unintentional CSI refers to the (potential) disadvantages and/or harm to others that are not inflicted deliberately by a corporation, but are rather the result of an unforeseen contingency (e.g. a plant explosion due to an earthquake). Even with this distinction, however, the category of intentional CSI, the one which management and IB scholars are mostly interested in, is largely a black box. What is both interesting and striking is that, with a few exceptions (see, e.g. Bailey & Spicer, 2007), extant empirical research on CSI seems to have never seriously contemplated the hypothesis of using or elaborating upon the concepts of ‘hyper norms’ or ‘core human values’ proposed in the mid1990s by Donaldson and Dunfee (1994) and Donaldson (1996) within the framework of Integrative Social Contract Theory (ISCT). The core of their argument is that managers need to adapt their ethical behaviour to the local context where they operate, since ‘concepts of business ethics vary significantly from culture to culture, as well as from time period to time period’ (Donaldson & Dunfee, 1994, p. 259). However, these authors also maintain that such adaptation does not regard what they call ‘hyper norms’ (Donaldson & Dunfee, 1994) or ‘core human values’, which instead should be valid worldwide and include the ‘respect for human dignity, respect for basic rights, and good citizenship’ (Donaldson, 1996, p. 54). The authors further claim that, at minimum, they should include ‘core human rights, including those to personal freedom, physical security and well-being,

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political participation, informed consent, the ownership of property, the right to subsistence; and the obligation to respect the dignity of each human person’ (Donaldson & Dunfee, 1994, p. 267). Their analyses also make reference to the UN Declaration of Human Rights as a possible way to categorize ethical norms: ‘the vocabulary of rights is not a bad way of talking about injuries and wrong that no one should have to endure’ (p. 267). However, the scepticism existing in the mid-1990s about the applicability of the UN Declaration of Human Rights to IB (see Donaldson & Dunfee, 1994, p. 277) refrained the authors (and possibly other scholars later on) from taking human rights as a reference for classifying irresponsible behaviours.2

A NOVEL CONCEPTUAL CLASSIFICATION OF CSI The international context on business and human rights has now largely changed. In this sense, we must briefly recall the recent adoption by the Human Rights Council of the UN Guiding Principles on Business and Human Rights (2011). Unlike States and International Organizations, private corporations are not considered subjects of international law and, as such, are not directly bound by the obligations arising from international human rights law. However, in 2005 the UN Special Representative on business and human rights, John Ruggie, started to draft the ‘Protect, Respect and Remedy’ framework,3 in which the States’ duty to protect and the corporations’ responsibility to respect became constitutive elements of a new conceptual paradigm on business and human rights. The UN Guiding Principles on Business and Human Rights (GPs) are the international non-binding instrument that resulted from this process and that closely influenced other international developments, such as the 2011 update of the OECD Guidelines for Multinational Enterprises.4 The GPs clearly state that the responsibility of corporations to respect human rights is the ‘basic expectation’ that society has of business and that it exists independent of State duties (p. 5). The use of the term ‘responsibility’ instead of ‘obligation’ reflects the fact that States continue to be sole bearers of human rights obligations under international law, but it also constitute an authoritative statement of the existence of corporate responsibilities that are grounded in internationally sanctioned values. Contrary to the traditional concept of CSR, therefore, the GPs’ notion of ‘social responsibility’ does not stem from a voluntary adherence of

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the company to a certain code of conduct or from the company’s autonomous decision to engage in socially beneficial activities. The GPs entail, first and foremost, the ‘negative’ responsibility not to contribute, directly or indirectly, to adverse human rights impact, as well as the positive responsibility to prevent, mitigate and redress those impacts. Those responsibilities are a global standard of expected conduct for all business enterprises, wherever they operate (Guiding Principle 11). Moreover, the UN Special Representative pointed out that CSR initiatives, while desirable, cannot offset a company’s failure to respect human rights throughout its operations and relationships (p. 17). The main human rights norms that the GPs refer to as ‘the benchmarks against which other social actors assess the human rights impacts of business enterprises’ are those included in the International Bill of Human Rights5 and in the ILO’s Fundamental Principles and Rights at Work (GPs, 2011, Principle 12). The importance of distinguishing between ‘doing good deeds’ and respecting the negative duty not to harm has been also recently emphasized by van Tulder (2010), who distinguishes between an ‘inactive approach to CSR that aims at self-responsibilities and the application of hard powers’ and a ‘more active approach to CSR that generally aims at social responsibilities and the application of more soft powers’ (p. 14). Along these lines, in this chapter we focus on the negative duty not to harm and aim at improving the analysis of corporate irresponsible behaviours. As summarized in Table 1, we first distinguish ‘human rights abuses’ from other kinds of ‘unethical conducts’ that, despite being unethical and, in some cases, unlawful under international or national laws, bear no direct impact on human rights. Second, within the category of ‘human rights abuses’ caused by enterprises we introduce the qualitative distinction between non-derogable and derogable rights. Third, we classify irresponsible Table 1. CSI: A Novel Conceptualization. Type of Irresponsibility Type of Corporate Involvement

Human Right Abuses Non-derogable

Derogable

Direct

Direct non-derogable

Direct derogable

Indirect

Indirect non-derogable

Indirect derogable

Source: Own elaboration.

Unethical Behaviour Direct unethical conduct Indirect unethical conduct

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behaviours depending on whether corporations have directly caused, or, instead, only indirectly contributed to a particular irresponsible activity.

Human Rights Abuses Corporate conducts such as the firing of a worker on the basis of his/her religion and the complicity in mass killings perpetrated by a government are intuitively different types of human rights impacts. However, there is at present no agreement among human rights scholars on the possibility and desirability of establishing a hierarchy of international human rights norms (Klein, 2008; Quane, 2012, p. 49). In other words, it would be improper to speak about a category of ‘superior’ or ‘more serious’ human rights impacts. All human rights are universal, indivisible, interdependent and interrelated (World Conference on Human Rights, 1993, para. 5), meaning that some rights cannot be fully enjoyed without the enjoyment of others and that there is a mutually reinforcing dynamic between different rights (Quane, 2012, p. 49). Despite this, there are certain rights that have been afforded a ‘reinforced’ protection by the international community, being considered non-derogable in all circumstances, including in times of national emergency.6 Although the list of such rights is not perfectly homogeneous among different international and regional human rights conventions, it certainly entails the right not to be arbitrarily deprived of one’s life; freedom from torture (including medical or scientific experimentation without consent); freedom from slavery, servitude and forced labour (ICCPR art. 4.2; ECHR art. 15; ACHR art. 27.2).7 The worst forms of child labour, although not explicitly mentioned in the relevant articles of the treaties considered, must also be read within the meaning of the term ‘servitude’ (Humbert, 2009, p. 60). Thus, drawing inspiration from this international law approach to corporate irresponsibility, we distinguish two categories of corporate conduct: non-derogable human rights abuses and derogable human rights abuses (i.e. abuses that do not fall in the group of non-derogable abuses). Although human rights treaties obviously refer to derogations that States are permitted or not permitted to apply, we use this categorization to highlight the cases in which corporations alone or in complicity with another party have breached or are accused of breaching a norm to which the international community afford a particular degree of protection (non-derogable rights), and distinguish them from the remaining abuses. Our classification rightly connects to the work of Donaldson and Dunfee (1994) as it

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specifies, using international law as a key reference point, what ‘hyper norms’ are in practice and why these are to be considered a separate category from the other types of rights. Differently from Donaldson and Dunfee (1994) and subsequent works on ISCT, however, we do not consider that derogable rights should be interpreted in relativistic terms, since they are still rights included in the 1948 UN Universal Declaration of Human Rights.

Unethical Conduct A separate category of CSI entails ‘unethical behaviours’ in general a form of irresponsibility that has attracted great scholarly interest in the recent years (see among many others Bailey & Spicer, 2007; Earle et al., 2010). We include in this category, activities that despite being unethical and, in some cases, unlawful under international or national laws, do not entail a direct impact on human rights per se. One example may be an environmental damage that does not have any direct implication for human beings (e.g. an oil leak in a desert area that causes no prejudice to human health or livelihoods). Another typical example is corruption: although it is widely recognized that this phenomenon, especially in countries where it is widespread and endemic, can bear serious consequences for the protection and fulfilment of human rights (see on this the OHCHR website), it does not represent, per se, the breach of a human rights obligation. We therefore list it as an unethical conduct, by which definition we do not mean to downplay the fact that corruption is also an unlawful behaviour under many national and international laws.8

Direct versus Indirect CSI Another relevant distinction is between direct and indirect irresponsible conduct. By direct irresponsible conduct we refer to actions that are committed by the MNE headquarters’ managers and/or managers at any of its subsidiaries, while indirect irresponsibility refers to actions that are committed by third parties (e.g. suppliers, clients, governments) with the complicity of the corporation. As production is being increasingly organized along Global Value Chains (GVCs) that span different countries, the monitoring and analyses of indirect CSI is very important as it accounts for the abusing or unethical behaviours of actors in the focal firm’s value chain

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(Gereffi, Humphrey, & Sturgeon, 2005; Giuliani, Pietrobelli, & Rabellotti, 2005; Sturgeon, Van Biesebroeck, & Gereffi, 2008). A fundamental inspiration for making this distinction comes from the paradigm of the UN Guiding Principles (see, in particular, Principle 13), which clearly state the responsibility of corporations to avoid contributing to negative human rights impacts both through their own operations (direct contribution) and through their business relationships (indirect contribution). The concept of indirect contribution to human rights abuses is particularly important in the case of MNEs whose production processes, operations and supply chains usually extend through a wide variety of legal, economic and social systems. In 2006, the UNSG Special Representative, Professor John Ruggie, surveyed 65 allegations of the worst cases of corporate-related human rights abuses and found that all these occurred in low-income countries; countries in conflict or just emerged from it; countries characterized by high corruption levels and weak rule of law. In such contexts, inefficient governance and weak law enforcement often couple with government’s willingness to compete internationally for investment by loosening social and environmental regulations (Ruggie, 2006, para. 27, 2008a, para. 14). Not surprisingly, corporations have often been accused of being complicit with other governmental or business entities in the perpetration of abuses. According to the UN Special Representative, for example, most of the over 40 Alien Tort Claims Act (ATCA)9 cases brought against companies in the United States to date, now the largest body of domestic jurisprudence regarding corporate responsibility for violations of international law, have concerned alleged complicity with governments, security forces and other such actors (Ruggie, 2008b, p. 9). Moreover, transnational companies are routinely held responsible by the international public opinion for human rights abuses (e.g. use of child and forced labour, murder and torture of trade unionists, etc.) committed by their suppliers (Lundan & Muchlinski, 2012), being accused either of failing to take steps to ensure that supply of goods or services did not entail human rights violations, or of being directly implicated in the abuses due to the conditions of supply they imposed (International Commission of Jurists, 2008, p. 29). According to Lundan and Muchlinski (2012), indirect abuses are more likely to occur in the case of value chains that rely purely on market contracting, where two conditions hold: first, the specification of price and quantity targets are not set up for close monitoring of how the value adding process takes place and, second, the leading firm of the chain is not on the spotlight (Spar, 1998) and it has therefore no strong brand reputation to safeguard.

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Table 2. A Novel Classification of CSI: Examples. Human Rights Abuses Non-derogable Direct

Indirect

Derogable

Grave injuries to workers or local communities due to negligent implementation of environmental, health and safety measures Use of forced labour Inhuman and degrading treatment of workers Sourcing from suppliers that employ children in the worst forms of child labour Complicity in the torture of trade unionists by a government Supplying a government with weapons that are used to carry out mass killings

Violation of the workers’ freedom of association Career discrimination against women or workers belonging to minorities Unlawful destruction of private property Sourcing from suppliers that forces workers to excessive overtime Sourcing from suppliers that pay their workers a wage that is below the living wage level Complicity with a government in busting of trade unions

Unethical Behaviour Corrupt practices Damages to natural sites False/ misleading advertising

To make our conceptualization of CSI more usable and immediate, we report a non-exhaustive list of types of irresponsible behaviours associated to our typology of CSI. In the section that follows we then provide empirical evidence and concrete examples about each type of irresponsible behaviour (Table 2).

EMPIRICAL EVIDENCE Some Hard Evidence Using data on the largest international corporations from both advanced and emerging economies,10 we show here empirical evidence about different types of irresponsible behaviours using the classification we developed in the earlier section. Figs. 1 2 show the percentage of companies involved in at least one irresponsible activity (i.e. non-derogable human rights abuses; derogable human rights abuses; unethical conduct) for over more than a decade, distinguishing between advanced countries’

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Human Rights Abuses (Non Derogable) Human Rights Abuses (Derogable) Unethical Behaviour Total Abuses

Percentage of firms with at least one reported abuse

40

30

20

10

0 1990

1995

2000

2005

Year

Fig. 1. Derogable and Non-Derogable Human Rights Abuses, and Unethical Behavior in Advanced Country Corporations. Source: Own elaboration based on own data.

corporations (in the cohort 1990 2006) and corporations from Brazil, Russia, China and India (BRIC) (in the cohort 1990 2009). In both figures, we observe a growing trend of reported abuses, which in any case reflects an increase in the media coverage and in NGOs’ reporting of abuses over time. Although our samples are not designed to be comparable,11 we notice that BRIC corporations’ human rights abuses tend to be less reported, as compared to advanced countries corporations a result that may also signal the higher visibility of the latter, which implies that any of their wrongdoings gets spotted by the press. Another interpretation is that, since in some of the emerging countries, particularly China and Russia, free press is limited, certain news about corporate abuses especially if they involve State-Owned Enterprises (SOEs) never come to be known. Even with this caveats, we observe that derogable human rights abuses are on the rise for both samples of firms, whereas abuses of nonderogable rights are rather stable over the period of observation, probably reflecting the fact that such abuses come to be known much more easily

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Percentage of firms with at least one reported abuse

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Human Rights Abuses (Non derogable) Human Rights Abuses (Derogable) Unethical Behaviour Total Abuses

15

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Fig. 2. Derogable and Non-derogable Human Rights Abuses, and Unethical Behavior in BRIC Countries’ Corporations. Source: Own elaboration based on own data.

(and therefore do not need watchdog journalism to be spotted). Unethical behaviour is far less reported than irresponsible behaviour infringing directly on human rights.12 Figs. 3 4 report the percentage of companies involved in at least one direct and one indirect human rights abuse. In this case, we observe that, while at the beginning of our period of observation most of the reported abuses were direct, over time the reporting of indirect abuses, committed by complicit third parties (such as suppliers and clients), has increased steadily, especially for advanced countries’ corporations. This trend deserves two considerations: first, this is largely due to the growing awareness of observers about the responsibility of corporations for the abuses committed by complicit third parties (see for instance the 2011/2012 Apple scandal related to Foxconn, a major Apple’s supplier in China, which was associated with poor working conditions, unsafe job leading to the death of some employees and suicides); second, and more convincingly, this data is also in line with the growing internationalization of productive and innovative activities.

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Direct abuses Indirect abuses Total abuses

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Fig. 3.

Direct and Indirect Human Rights Abuses in Advanced Country Corporations. Source: Own elaboration based on own data.

Percentage of firms with at least one reported abuse

20

Direct Abuses Indirect Abuses Total Abuses

15

10

5

0 1990

Fig. 4.

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2000 Year

2005

Direct and Indirect Human Rights Abuses in BRIC Corporations. Source: Own elaboration based on own data.

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Qualitative Evidence In this section we illustrate some qualitative differences existing between different kinds of irresponsible behaviour, providing concrete examples for each typology of CSI we have identified in the earlier section (see Table 3 for a summary). • Direct non-derogable human rights abuses To illustrate this type of CSI we use two cases from British Petroleum (BP) and Petrochina: the former has been involved in March 2005 in a series of explosions occurred at a Texas City refinery during the restarting of a hydrocarbon isomerization unit. Fifteen workers were killed and 180 were Table 3.

Qualitative Evidence on Different Types of CSI. Cases

Non-derogable Human Rights Abuses (i) Direct BP plant major explosion and killing of 15 workers Petrochina chemical spill killed 5 workers and caused major contamination with carcinogenic chemicals (ii) Indirect Shell Oil complicity with Government for torture and summary executions of MOSOP members Child labour in factories supplying to Puma, Hanes, Penny and others Derogable Human Rights Abuses (i) Direct Novartis’ discrimination against 5,600 women in workplace Wal-Mart union busting (ii) Indirect ‘Sweatshop’ conditions at factories supplying to Lenovo, IBM, Microsoft, HP and Dell Unethical Northrop Grumman Co. for behaviour overcharging the Government for some equipment Sinopec accused of illegally dynamiting and polluting the Loango National Park in Gabon and destroying the forest Source: Own elaboration.

Country (Year)

Compensation

United States (2005) China (2005)

More than 2 billion USD NA

Nigeria (1995)

15.5 million USD (settlement) NA

Bangladesh (before 2006)

United States 3.3 million USD (before 2010) Several countries NA China (before NA 2009) USA (1994 1999)

62 million USD (settlement)

Gabon (2005 2006)

NA

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injured in the accident. The explosion was caused when the hydrocarbon vapours released from a ‘blowdown stack’ combusted after coming into contact with an ignition source. BP admitted that safety procedures were ignored (The Telegraph, 2012). BP paid over $2 billion (£1.26 billion) to settle legal claims from the explosion, as well as $71.6 million for worker safety violations and $100 million in pollution fines (The Telegraph, 2012). The U.S. Occupational Safety and Health Administration (OSHA) said the penalty ‘rightly reflects BP’s disregard for workplace safety’ (BBC News, 2010). Another notable example is represented by Petrochina chemical spill in Harbin (China). According to numerous sources reporting this case, in November 2005 a blast at a petrochemical plant in Jilin province killed five workers, injuring seventy, and led to 100 tonnes of the carcinogenic chemicals benzene and nitrobenzene being discharged into the Songhua river. These chemicals are considered to be very dangerous if inhaled or ingested in large quantities, with nitrobenzene being associated to leukaemia. Following the blast, the 4 million inhabitants of Harbin city in the northeastern Heilongjiang province had their water supply cut off for five days. To make things worse, both Petrochina officials and local government officials covered up the existence of the spill for some days, violating local residents’ right to information, and exacerbating violations of the right to health (Schafer & Ansfield, 2005; The Economist, 2005). • Indirect non-derogable human rights abuses A case of indirect non-derogable abuse is the Wiwa lawsuit against Shell Oil for complicity in activists’ execution by the Nigerian Government. In 1996, Ken Wiwa son of the late Ogoni activist Ken Saro-Wiwa, who was executed in 1995 and other members of the Movement for the Survival of the Ogoni People (MOSOP) filed a lawsuit in the United States against Shell. They alleged that the Nigerian military government and security forces committed human rights violations, including torture and summary execution of MOSOP members, to suppress MOSOP’s activities and that Royal Dutch/Shell was complicit in the commission of these abuses. In early June 2009, the parties announced that they had agreed to settle the case for $15.5 million.13 Shell also faced public opinion’s condemnation for not using its influence in Nigeria to stop the human rights violations of the Abacha junta (Cragg, 2012, pp. 120 121). Another case of this kind includes the employment and physical abuse of child labourers at a Bangladesh factory supplying clothing to U.S. and European brands. This case was denounced in 2006 by a report

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(The National Labor Committee, 2006) and video footage realized by activists, showing that children as young as 11 were sewing clothing at a Bangladesh factory that supplied big international brands such as Puma, Hanes, J. C. Penney and others. The children reported being routinely slapped, beaten and cursed, sometimes falling down from exhaustion. They reported being forced to work 12 14 hours a day, often for seven days a week, including all-night 19 to 20-hour shifts, for 6½ cents an hour.14 The National Labor Committee, author of the report, called on the concerned brands to push for a change in the supplier’s conduct. • Direct derogable human rights abuses Novartis can be used as an illustrative case of direct derogable human rights abuses. The Swiss pharmaceutical MNE has been condemned for discriminating against women in the workplace. A jury in New York ruled in 2010 that a United States division of the firm discriminated against women workers, and awarded compensatory damages of $3.3 million to 12 women, as well as punitive damages to a larger group. The class action lawsuit, representing 5,600 women, alleged that the women were discriminated against in the areas of pay, promotions and pregnancy-related matters (The New York Times, 2010). In court papers, some women said complaints made to the company’s human resources division were routinely ignored and pregnancies were often the source of discrimination (SwissInfo, 2010). The company announced it would appeal the decision. Other rather common types of labour rights violations also fall in this same category of irresponsible behaviour. Wal-Mart, for instance, has been reported in several occasions to practice union-busting and to interfere with employees’ freedom of association (see, e.g. Clark, 2007). • Indirect derogable human rights abuses ‘Sweatshop’ conditions at a Chinese factory supplying computer parts to big international brands are an example of this kind of CSI. In 2009, activists denounced that workers at a Chinese factory supplying Lenovo, IBM, Microsoft, Hewlett-Packard and Dell were working excessive forced overtime and paid wages below the subsistence level (Institute for Global Labour and Human Rights, 2009). According to the report, ‘workers are prohibited from talking, listening to music, raising their heads, putting their hands in their pockets’ (Institute for Global Labour and Human Rights, 2009, p. 1). They work 12 hours a day, seven days a week. As the assembly line never stops, they are not permitted to use the bathroom until scheduled breaks. They are forced to work overtime exceeding China’s legal limits by

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318%. Management also restricts the free movement of the workers: it is only on Wednesdays, Saturdays and Sundays that they are free to leave the compound without permission (Institute for Global Labour and Human Rights, 2009). • Unethical conduct Based on our data collection, most of the cases of unethical behaviours that do not entail a human rights abuse refer to unfair conduct, corruption and bribing. A case is that of Northrop Grumman Corp., that agreed to pay $62 million to settle 15-year-old allegations of overcharging the government for radar-jamming equipment. Northrop said it also has agreed to settle personal claims by two whistle-blowers, including their petition for attorneys’ fees, as well as to reimburse the government for legal costs. Another case from China relates to Sinopec, which was granted in 2005 a concession for oil exploration in Gabon’s Loango National Park and was later accused of dynamiting and polluting the park, tearing up the forest to create unauthorized roads and damaging the habitat of Loango’s plants and animals (Alphroy, 2006). After the Wildlife Conservation Society (WCS), based on the Gabonese ministry of environment’s rejection of Sinopec’s environmental impact study, accused the Chinese company of acting illegally, a government delegation visited the park and confirmed that Sinopec was guilty of several of the abuses logged by the WCS in its report (Yates, 2007, p. 258). Finally, business can also be indirectly unethical. A case in point is that of MNEs operating in countries with high corruption records that recur to intermediary agencies to sub-contract the payment of bribes or other illegal duties to corrupt host Government officials in order to obtain licenses and contracts.

IMPLICATIONS FOR FURTHER RESEARCH While earlier research has conceptualized and measured CSI by putting all different kinds of irresponsible actions together, we contend in this chapter that a different and more profound conceptualization of CSI can be very useful to improve our understanding of the drivers and outcomes of irresponsible conduct by the business sector. In this respect, one important strand of CSI research has concerned the analysis of the relationship between CSR and CSI (Kotchen & Moon, 2012; Muller & Kra¨ussl, 2011;

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Strike et al., 2006), with a focus on whether past irresponsible behaviours condition firm’s future commitment in CSR. Yet another important and largely under-investigated research question is whether the adoption of CSR policies is bound to reduce CSI (see on this: Fiaschi & Giuliani, 2012; Fiaschi et al., 2013). Distinguishing between derogable and non-derogable human rights abuses, as well as between direct and indirect abuses, can prove to be particularly useful, since different types of abuses can generate different types of reactions from the audiences. Work done in the field of organizational justice (Aguilera, Rupp, Williams, & Ganapathi, 2007; Rupp, Ganapathi, Aguilera, & Williams, 2006) and attribution theory approaches to CSI (Lange & Washburn, 2012) claim that audiences react differently to corporate abuses depending on their perceived gravity. The more an irresponsible act is perceived as being undesirable that is ‘it evokes deep-seated negative moral reactions’ (Lange & Washburn, 2012, p. 305) the more the observers are likely to attribute it to the corporation, since ‘perceptions of a greater degree of victim suffering is likely to elicit observer sympathy and concern (…).’ Consequently, in such cases ‘observers may … lower their typical standards for establishing corporate causality’ (Lange & Washburn, 2012, p. 309) and they may thus even exaggerate their perceptions about the causal link between the firm and the irresponsible act. Hence, our distinction between non-derogable and derogable abuses can be of relevance because these two kinds of abuses are likely to spark different justice relations. Second, the attribution of culpability is likely also to be influenced by the degree to which observers consider firms to be morally responsible for the abuse. In this regard, responsibility judgements are associated with ‘beliefs that the firm had reasonable foresight of the negative outcomes’ (Lange & Washburn, 2012, p. 306). In this sense, our distinction between direct and indirect abuses is particularly salient, because firms have far higher control on their direct abuses than on their indirect abuses, which means that the observers may attach a higher moral responsibility to direct abuses than to indirect ones. Third, our distinction among different types of irresponsibility can be relevant to investigate the relationship between stakeholder pressure and ‘symbolic’ CSR put forward in this book (Chapter 11 by Perez-Batres and Doh). By ‘symbolic’ CSR the authors refer to companies’ publicizing their adoption of voluntary selfregulatory codes without complying with them. We would encourage to push the argument further by unpacking the concept of symbolic CSR into different types of irresponsible behaviours, since there may be wide variation in the extent to which firms do not comply with their codes of conducts. For instance, there is a substantial difference between a company that

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adheres to the Forest Stewardship Council (FSC) and, in the meantime, contaminates through its own operations the soil and air of a whole community of people, threatening their livelihood over the long term, and a company that adheres to FSC but that at the same time does not recycle its garbage. Such a profound difference has obvious implications on a firm’s role in promoting (or hindering) sustainable development, and it should therefore not be overlooked. The study of the relationship between CSR and CSI is just one area in which further research is needed, which could benefit from our novel conceptualization of irresponsible behaviours. In addition to this, our CSI new conceptualization could, more broadly, contribute to advance our knowledge about the conditions that positively or negatively mediate corporate involvement in abusing or unethical behaviours. In fact while bad deeds as different as bribing and toxic dumping may have some common grounds for example they may signal an altogether criminal firm it would not be sound to assume that the drivers and mediating conditions underlying different kinds of irresponsible actions are the same. For instance, CSR may be used instrumentally to outweigh the potential negative effects of derogable human rights abuses, but it may also be used to moralize the firm and reduce its involvement into the most serious non-derogable human rights abuses (Fiaschi & Giuliani, 2012). Other dimensions may influence different types of abuses in different ways. Elaborating on the work of Surroca et al. (2013), a relevant question would be to ask whether headquarters transfer to subsidiaries certain types of human rights abuses, but not others, or likewise allow them to infringe on different kinds of rights, depending on the host country characteristics (e.g. state capacity and degree of transparency). For instance, do least developed countries, characterized by weak rule of law, attract investments that are likely to be unethical and be associated with all kinds of human rights abuses? How does this figure change when investments are done in Europe or the United States? How does MNEs’ portfolio of irresponsible behaviours change across the world, depending on where their operations take place? Another set of research questions concerns the relationship between different types of irresponsible behaviour and the international organizational strategy of the MNEs. Building on the work of Husted and Allen (2006) on MNEs’ local and global CSR strategies, a question arises around the differences existing between multi-domestic, global and transnational corporations in terms of their propensity to be involved in different kinds of irresponsible behaviour. Do multidomestic firms, by virtue of their higher autonomy and embeddedness in the host country, adapt their irresponsible

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practices to the host country? And in doing so, are they more likely than other kinds of MNEs to infringe on human rights in host developing countries? What kind of human rights abuses are more likely to be perpetrated at the local level and what is instead ‘left at home’? Similar questions can be asked with reference to MNEs’ subsidiaries liability of foreignness (LOF) and liability of privateness (LOP), whose role in shaping CSR policies have been recently investigated by Campbell, Eden, and Miller (2011) and by Bhanji and Oxley (2013). In this sense, questions along these lines could be interesting: What is the relationship between LOF and MNEs’ subsidiary involvement in different kinds of irresponsible behaviours? Are subsidiaries coming from culturally or institutionally distant countries more likely to behave unethically and to abuse human rights? Or are firms that suffer from the LOP seeking more legitimization and, therefore their involvement in non-derogable human rights abuses is less likely? What are the kinds of CSI that firms use instrumentally to overcome the LOF? And how does this change over time?

DATA ISSUES Addressing these and similar questions poses a number of methodological challenges. To start with, there are some measurement issues with human rights, which essentially are a qualitative phenomenon (for a critical discussion see Claude & Jabine, 1986). To measure human rights, it is necessary to consider the problems inherent in gathering the necessary data and assessing its reliability. Besides, as suggested recently by Kolk and van Tulder (2010, p. 123), ‘there are hardly large-scale databases on CSR and on the impact of MNEs on the various dimensions of sustainable development’, especially when the focus is developing countries. So far, most of the management and IB research on irresponsible behaviour is based on the KLD/ESG dataset, which has gained absolute legitimization in both fields. Such legitimization is so strong that reviewers themselves urge authors to use KLD data instead of their own collected data on irresponsible behaviour.15 However, given that the objective of this book is to progress our understanding of IB and sustainable development, let us be provocative and contend that future research should not self-contain the understanding of CSI within what is allowed with KLD/ESG data. KLD/ESG data are very rich in the sense that they span different types of concerns (among others, see Kotchen & Moon, 2012 for the full list), but they do not provide

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any clear-cut information that allow us to distinguish non-derogable human rights abuses from derogable human rights abuses, simply because they do not allow getting back to the source of information on which such index is based. For instance, the item ‘Poor Union Relations’ (EMP-con-A under Employee Relations) reports a 1 for each year in which the firm is considered to have ‘a history of notably poor union relations’ (KLD Research & Analytics, 2003, p. 7). However, from this we derive no genuine information about how severe such problems have been: did they entail restrictions on the freedom of association, or did they also involve non-derogable human rights abuses like the assassination of unionists? In the case of environmental concerns, moreover, KLD/ESG reports the year in which certain sanctions penalties have been paid, while nothing is known about when any environmental damage has been generated. Firms may be sanctioned to pay a fine for an abuse many years after the actual abuse has been perpetrated, but in order to understand how the firm behaves we need to know at least an estimate of when the actual abuse took place, not (only) when it was (if ever) sanctioned. An even more problematic terrain with KLD/ESG is that it does not allow to distinguish between direct and indirect abuses, with the exception of a few general items such as the ‘Other concerns’ category under Human Rights: ‘the company’s non-U.S. operations are subject to controversies related to the community, diversity issues, the environment, product safety, or product quality’ (KLD Research & Analytics, 2003, p. 11). While this captures part of the subsidiaries’ wrongdoings, it does not fully cover MNEs’ complicity with other actors such as Governments, or even specify what are the third-party actors involved in irresponsible behaviour abroad (e.g. clients, suppliers and governments). Given the growing division of international labour, the ability to detect indirect abuses is important, as discussed earlier. On these grounds, we contend here that, in order to advance our understanding of CSI in the context of IB, it is also important to enlarge our horizons beyond the KLD/ESG indicators, and exploit the rich empirical evidence that is now growingly available about human rights abuses and unethical behaviours of international firms. In this sense, we maintain that sources like the Business and Human Rights Resource Centre (BHRRC) are very valuable, since they allow researchers to have first-hand information about the allegations of irresponsible behaviour and to classify and analyse such information in ways than can contribute to further advance our understanding of irresponsible behaviour in IB. However, the collection of secondary data on human rights of the kind we have proposed here is not free from criticism as well. On the one hand,

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a problem with these data is that we can only know what is observed and reported to the press that is we cannot know what is unknown. Hence, such data are likely to underestimate the abuses, since unreported abuses do not leave trace (a problem that does also affect other sources like KLD/ ESG). Unreported abuses may be more common in countries where political and civil rights are weak, freedom of the press is limited and protests by local communities, NGOs and other components of civil society are repressed. Also, abuses are unlikely to be reported in those countries where governments are complicit in corporate human rights abuses and impose bans on this type of information. Connected to this, there is also the presence of a significant time trend in the reporting of abuses or other irresponsible behaviour, since media and NGOs attention on CSI has increased over time as noticed earlier with reference to derogable human rights abuses. On the other hand, most of what we observe is allegations of abuses, since many of them may never go through the judicial system. The lack of an effective international law regulatory framework (and the fact that relevant treaties are seldom incorporated into national legal systems) in many developing countries (e.g. Kobrin, 2009), the often low level of protection granted by national legislation and the weakness of many governments in respecting the rule of law (e.g. due to widespread corruption and/or incompetence in the judicial branch) make it difficult for victims of abuses to access formal justice and to have their cases heard in fair proceedings. Even when this does occur, the courts may take several years to reach a final decision, and the parties frequently embark on negotiations to reach a ‘friendly settlement’ which per se is not definitive proof of guilt. These caveats need to be taken into serious account when undertaking research in this area.

CONCLUSIONS We are witnessing increased interest in the positive role of private corporations in promoting sustainable development. The influence of big business on society is so strong that in some countries it assumes important activities that weak governments have abandoned, such as education and health. While we could speculate about the proactive role of business in society, we should not forget that MNEs also contribute to sustainable development by reducing over time their negative impacts on society that is by

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reducing instances of their activities generating different types of human rights abuses, or being otherwise unethical. In this chapter we focused on the latter aspect of sustainable development and contended that contemporary conceptualizations of CSI fail to provide a qualitative distinction among different types of irresponsible activities, citing cases as different as child labour, union busting and bribing as a unique bundle. We proposed a novel and more profound conceptualization of CSI, drawing on the distinction in international law between derogable and non-derogable human rights, and by marking a difference between irresponsible activities that constitute an abuse of human rights, and unethical behaviour more generally. Finally, our classification proposed a distinction between direct and indirect irresponsible behaviours. Our contention and hope is that our novel conceptualization of CSI will contribute to both the management and IB literatures which investigate the drivers and outcomes of irresponsible behaviours. We would expect, and future research could investigate, that firms subject to strong stakeholder pressure particularly firms under strong market and media scrutiny would take the lead to minimize involvement in the worst human rights abuses (i.e. non-derogable abuses in our typology) and, in so doing, they may help to ‘moralize’ the whole business sector. At the same time it is debatable whether less serious abuses (i.e. derogable in our typology) or unethical conduct will persist or increase over time given the less negative connotations compared to non-derogable abuses. Moreover, given the growing disintegration of IB across different countries, and the tendency to organize production along global value chains, the issue of indirect abuses should be of direct relevance to scholars interested in the impact of the business sector on sustainable development. The distinction made in this chapter among different kinds of irresponsible behaviours could be used to explore these very important questions.

NOTES 1. In other cases, CSI is not measured directly, but it is only indirectly estimated as an underreaction to industry CSR shocks by comparing the predicted and reported value of a firm’s CSR (Surroca et al., 2013). 2. We notice here, for example, that as late as 2004 the then UN Commission on Human Rights failed to endorse the ‘Draft Norms on the Responsibilities of

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Transnational Corporations and Other Business Enterprises with Regard to Human Rights’, which had been developed by its Sub-commission with the aim of directly imposing on companies binding human rights obligations comparable to those of States. 3. All the relevant documents of the Special Representative’s mandate can be retrieved from http://www.business-humanrights.org/SpecialRepPortal/Home. 4. After the 2011 update, the OECD Guidelines entail a human rights chapter closely recalling the UN Guiding Principles. 5. The Universal Declaration of Human Rights and the main instruments through which it has been codified: the International Covenant on Civil and Political Rights and the International Covenant on Economic, Social and Cultural Rights. 6. The derogation regime aims at striking a balance between the protection of individual human rights and the protection of national needs in times of emergency. The provision of non-derogable rights poses a limit on the State’s emergency powers. 7. Another non-derogable right that is included in all these instruments is the freedom from retroactive application of penal laws, but it is not relevant for the purpose of this chapter. 8. See, at the international level: General Assembly, UN Convention Against Corruption, 2004. 9. This tort law statute has been interpreted by U.S. jurisprudence as allowing U.S. courts, under certain conditions, to hear human-rights cases brought by foreign citizens for conduct committed outside the United States, including when the defendant is a corporation. 10. This section is based on two original large-scale datasets reporting abuses associated to a sample of Forbes Global 2000 firms from both advanced and emerging economies (i.e. Brazil, Russia, India and China). See the appendix for details about our data. An earlier work by the authors has also relied on these descriptive statistics as a background (Fiaschi, Giuliani, Macchi, & Perrone, 2012). 11. See the appendix. 12. It is possible that our analysis based on the BHRRC (see appendix) data does not fully cover unethical behaviors. In this sense, scholars wishing to focus their analysis on unethical conduct should also look at other sources of data. 13. For a summary of the lawsuit: Business & Human Rights Resource Centre, ‘Case profile: Shell lawsuit (re Nigeria)’, see http://www.business-humanrights.org/ Categories/Lawlawsuits/Lawsuitsregulatoryaction/LawsuitsSelectedcases/Shelllawsuit reNigeria. 14. These working conditions match the definition of ‘worst forms of child labour’ as stated by the ILO: ‘work which exposes children to physical, psychological or sexual abuse’; ‘work under particularly difficult conditions such as work for long hours or during the night’, http://www.ilo.org/ipec/facts/WorstForms ofChildLabour/lang–en/index.htm. 15. This is based on the personal experience of the authors with publishing earlier works. 16. Business & Human Rights Resource Centre a brief description, Retrieved from http://www.business-humanrights.org/Aboutus/Briefdescription.

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ACKNOWLEDGEMENT We would like to thank Rob van Tulder and Emanuele Sommario for comments on an earlier draft of this chapter. All omissions and errors are our responsibility.

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APPENDIX To collect data on CSI, we use Business and Human Rights Resource Center (BHRRC) as a resource to retrieve information in the form of news, reports and other documentation about allegations of human rights abuses. We used BHRRC since this is considered the world’s leading independent information hub on the positive and negative impacts exerted by corporations on human rights and was the source used for the Addendum to Special Representative John Ruggie’s 2008 report to the UN Human Rights Council (Wright, 2008). The Centre has offices in London and New York and relies on the efforts of regional researchers based in Africa, Asia, Eastern Europe and Latin America, who interact with local NGOs and gather information in the field. The BHRRC database ‘covers the social and environmental impacts of over 5,000 companies, operating in over 180 countries. Taking international human rights standards as its starting point, topics covered by the BHRRC include discrimination, environment, poverty and development, labour, access to medicines, health and safety, security, trade’.16 BHRRC researchers collect news and reports relating to business and human rights from the web and other sources, on a day to day basis, paying attention to sources in all regions of the world, including local newspapers and reports produced by large and small NGOs. News, reports and events focusing on the relations between the activities of companies and human rights, are examined and are published on the BHRRC website provided they meet a minimum criterion of credibility (therefore excluding blind attacks on companies). They highlight the impact of business on human beings (e.g. news relating to the protection of an endangered species but with no clear connection to an impact on human rights is not usually published). Our empirical section is based on data collected for a sample of advanced and BRIC countries’ corporations. As concerns the former we drew on the Forbes Global 2000 ranking for 2006, and we selected 140 large corporations across 28 sectors. In selecting the firms we adopted a stratified random sampling approach with equal allocation, by randomly selecting from the Forbes list five firms in each sector. This sample includes firms from the United States and Canada (54%), Europe (38%), Asia (Japan and South Korea) (7%) and Bermuda (1%). As concerns BRIC corporations, they were also selected from Forbes Global 2000 ranking (2011 edition) through a stratified random sampling approach that selected 12 firms for each of the BRIC countries. BRIC firms in our sample belong mainly to the energy (both extractive and distribution, 43%), banking (23%) and the metals and mining (18%) sectors. The remaining 16% firms are active in pulp and paper, electrical equipment, computer electronics, TLC, etc.

CHAPTER 8 DO MULTINATIONAL ENTERPRISES CONTRIBUTE TO SUSTAINABLE DEVELOPMENT BY ENGAGING IN LOBBYING? THE AUTOMOTIVE INDUSTRY AND ENVIRONMENTAL REGULATIONS Sigrun M. Wagner and Stephanos Anastasiadis ABSTRACT Purpose This chapter addresses the research question of whether multinational enterprise (MNE) lobbying can contribute to sustainable development. Methodology/approach It presents the results of two case studies, from different perspectives, whose results strengthen and complement each other. Both studies use interviews as their main source of data within triangulation, and both adopt iterative processes for their analyses: one uses data coding, the other takes a narrative approach.

International Business and Sustainable Development Progress in International Business Research, Volume 8, 173 202 Copyright r 2014 by Emerald Group Publishing Limited All rights of reproduction in any form reserved ISSN: 1745-8862/doi:10.1108/S1745-8862(2013)0000008013

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Findings The findings suggest that whilst companies see both costs and opportunities in environmental regulations, this is not perceived by their policy-making counterparts. Furthermore, company-internal communication suggests that lobbying and corporate social responsibility (CSR) are not joined up, which leads to mixed (external) messages sent from the company to policy-makers and the public. Research limitations The chapter focuses on one industry (automobiles) in one host country setting (EU). Practical implications Policy-makers, as well as companies that want to contribute to sustainability, could usefully adopt the concept of internalising external costs as a minimum proxy for sustainability. Companies that wish to promote sustainable development, or even wish to act in a consistent manner, might usefully examine their assumptions about the political process. This is particularly the case with MNEs as they operate in numerous jurisdictions. Originality/value The chapter integrates the MNE literature and the literature on international business (IB) government interactions. The findings underline the importance of addressing both environmental issues and the relationships between policy-makers and MNEs, an area that can be further developed by extending the scope of the study to other industries in further research. Keywords: Sustainable development; lobbying; corporate social responsibility; environmental regulations; European Union; automotive industry

INTRODUCTION Corporations have a significant role to play in promoting sustainable development. Research and debate on MNEs’ contribution to sustainable development are largely confined to actions in the day-to-day market-place; for example, a company’s actions to limit biodiversity loss, or the management of its supply chain. Far less attention has been paid to corporations’ contribution to sustainable development in the non-market environment, and in particular to their political engagement. This chapter contributes to redressing this lacuna. Environmental issues have been a focus for sustainability research. As MNEs have an impact on the environment through their activities

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(e.g. producing and selling potentially polluting products), society exerts pressure on them to alleviate these negative externalities on the environment. One way this can be done is through voluntary approaches. Often, however, governments conclude that regulation would be preferable, and develop rules that may have an effect on companies’ costs and profits. Interaction between business and government is therefore critical for corporations, whether it involves shaping the form of planned regulation to increase profits or raise rivals’ costs or, in the words of Adair Turner, former head of the Confederation of British Industry, ‘beat[ing] off unwanted government actions’ (cited in Caulkin & Collins, 2003, p. 12) to make way for voluntary initiatives or even policy inaction. Companies therefore have a clear reason to engage in lobbying, which typically takes place via their public affairs or government relations functions. Given the high salience of sustainable development, one could argue that once firms engage in the political process, they should do so in a way that promotes sustainability. Alas, corporate lobbying has a very poor reputation, and lobbying is often portrayed in the popular media as inherently morally suspect. Understanding the role that businesses play in promoting sustainability through their lobbying requires an understanding of firms’ approaches to particular regulations, as well as of their broader understanding of the political process. The automotive industry in Europe is particularly interesting in this respect. On the one hand, carmakers in Europe typically enjoy an excellent reputation as good employers and good neighbours (see Anastasiadis, 2013, forthcoming). On the other hand, however, they also have a reputation for obstructive and unethical lobbying (e.g. Greenpeace, 2011; Worstlobby.eu, 2007). Moreover, the environmental area is now the single most important issue in government relations of automotive companies in the European Union (EU). In this chapter, we present two studies of automotive industry lobbying at the EU level that were conducted independently at roughly the same time and using similar methods. One looked at a number of environmental issues, including regulation of carbon dioxide (CO2), the other focussed exclusively on CO2 regulation. They reach broadly similar conclusions. Together, they go some way to addressing the research question of MNEs’ contribution to sustainable development through lobbying. The first study addresses the attitude of MNEs towards environmental regulations, in particular whether they regard these as opportunities, for example, for innovation and first-mover advantages or as costs. The results suggest that while companies try to convey a balance between those two

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perspectives, this is not perceived in the same way by policy-makers and observers, thus opening up questions about the contribution to sustainability and responsibility of MNEs’ lobbying approaches. The second study goes some way to explaining this gap. It shows that the manner in which carmakers understand and thus approach the political environment is crucial in understanding the content and tone of their engagement; and that carmakers’ approaches to policy-making and lobbying is often one of scepticism, making it difficult for them to engage in a pro-sustainability manner. The results suggest that a company’s narratives about lobbying influence its ability to contribute to sustainable development. An underlying assumption in both studies is that sustainable development can be substantially promoted or blocked by developments in public policy, and that corporations are in a position to influence such public policy through lobbying. We acknowledge that there are limitations on the study: MNEs pursue sustainable competitive advantage as a primary goal, with sustainable development as a subordinate goal to the primary profit-making objective. Substantial recent work on lobbying effectiveness suggests that effecting public policy change is difficult and not guaranteed, and that blocking a policy initiative is more likely to succeed than proposing changes to the status quo (Baumgartner, Berry, Hojnacki, Kimball, & Leech, 2009; Mahoney, 2008). Nonetheless, corporations clearly have a great deal of influence. The rest of this chapter is structured in the following way: we start by presenting key literature, then move to a discussion of our methods and material. Then we present our findings, before entering into a discussion and conclusion.

UNDERSTANDING MNE LOBBYING IN THE EUROPEAN UNION: AN OVERVIEW OF THE LITERATURE In this section, we start by discussing political engagement in the international business (IB) literature. We then move to a brief discussion of environmental regulations in general, and in the EU in particular. We argue that responsible lobbying however defined can be seen as a proxy for the corporate contribution to sustainable development in the public policy arena. We therefore return to this concept in the discussion (for a discussion of the concept, see Anastasiadis, 2006).

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Lobbying and International Business Lobbying forms a significant part of firms’ corporate political activity (CPA) engagement, but is less well understood than other aspects of CPA. It has always been controversial, being associated with ‘back room deals’ and ‘special interests’. Yet on the other hand, it is essential for the proper functioning of liberal democracy, and corporations cannot ignore it. Moreover, precise and realistic definitions of lobbying are unavailable, views instead being contradictory and partial; not least because it is of interest to a range of disciplines (Mahon & McGowan, 1998, p. 390). What is lobbying in the context of IB, then, and what purpose does it serve? According to Boddewyn and Brewer (1994, p. 137), political behaviour is intrinsic to IB as the crossing of borders means introducing companies into other sovereignties. The authors assert that IB research is much more concerned with political factors than research in domestic business. Governmental policies differ from country to country and thus distinguish IB from domestic business (Boddewyn & Brewer, 1994, pp. 123 125; see also Grosse & Behrman, 1992, p. 119; Toyne & Nigh, 1998). Boddewyn (1988) anticipates this notion in claiming that the distinction between IB and domestic business is fundamentally political (see also Boddewyn, 1997; Grosse, 2005). Grosse (2005) implicitly defines IB government relations as the relations between national governments and multinational firms. Moon and Lado (2000) confirm that an important issue in the IB literature is the interaction between multinationals and host governments, among which strategic interdependence often exists (Ring, Lenway, & Govekar, 1990). Blumentritt and Nigh (2002) argue for more integration between the MNE literature and the literature on IB government interactions. The focus in the IB literature on business government relations tends to be on business host government relations. In practice, however, MNEs face home governments as well as host governments. The EU as a political entity with state-like features (Grant, 1993) dilutes the traditional borders between domestic and IB, as it is simultaneously home and host country for European multinationals. Previous work on CPA has often focused on US MNEs and their domestic context (with such elements as Political Action Committees) (see, e.g., Hillman, Keim, & Schuler, 2004, for a wider review and Hillman and Hitt, 1999, for political strategy formulation). There is thus a need to extend the scope of research beyond US borders (Barron, 2010; Boddewyn & Brewer, 1994; Windsor, 2007). Whilst there is some existing work on MNEs and their socio-political behaviour with respect to (for example) policy networks and the EU, these

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studies have also pointed out the need for IB research to pay more attention to MNEs as political actors (Hadjikhani & Ghauri, 2001; Hadjikhani, Lee, & Ghauri, 2008; Rizopoulos & Sergakis, 2010). The chapter at hand explicitly addresses this question of MNEs as political actors.

MNEs, Governments and Environmental Regulations Luo (2004) points to environment protection as one area where there are still substantial differences between MNEs and governments. Grosse (2005) confirms that this issue is an increasingly important element in relations between governments and companies, which has potential for serious conflict. Brewer (2005, p. 167) emphasises that global warming especially has ‘emerged as one of the most challenging and contentious problems facing multinational firms and governments’. Furthermore, international environmental regulations are growing rapidly, especially on a regional level as part of regional integration agreements such as the EU. MNEs therefore have stronger incentives than domestic firms to interact with public policymakers in this area in striving for potential scope economies (Rugman & Verbeke, 2001). The general increase in environmental regulations has been attributed to society’s concern over the negative environmental impacts of business activities (Rugman & Verbeke, 1998a). Conventional wisdom claims that economic growth and rigorous pollution abatement measures are mutually exclusive, as environmental measures will increase costs and lower profits (Simpson & Bradford, 1996; Wurzel, 2002, p. 14). Society’s desire for higher environmental standards has therefore often been met with opposition from industrial groups (Farzin, 2003). Traditionally, the relationship between businesses’ competitiveness and environmental objectives has been conceived as a trade-off between private costs and social benefits, and thus as a kind of ‘arm-wrestling match’ (Porter & Van der Linde, 1995, p. 97). Researchers have argued that increased environmental regulations could possibly have unproductive investments, higher costs and possible losses of competitive advantage as a consequence (Arago´nCorrea & Sharma, 2003; Walley & Whitehead, 1994). This assertion is contested by Porter & van der Linde (1995) through the so-called Porter Hypothesis which states that tougher environmental standards if properly designed can lead to more innovation and thus to more economic benefits for corporate environmental leaders (‘first-mover advantage’). This is particularly the case for companies in a triad-based economy, as

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Rugman and Verbeke (1998b) point out, since companies from smaller economies sell more abroad than in their respective home countries.

Environmental Regulations This chapter investigates the question of how companies in the automotive industry view environmental regulations, on two axes. The first is their perception of regulations as costs or as opportunities for innovation. The second is their general approach to the political process. It expects to shed light on to what extent companies can contribute to or hinder sustainable development through their attitude to lobbying regarding environmental regulations. The general principles of environmental regulations comprise the precautionary principle, the prevention principle, rectification of damage at source and the polluter-pays principle (Kra¨mer, 2000; see also Papadakis, 1996). There are different ‘standard-setting philosophies’ concerning principles of environmental regulations which differ in the EU member states, so that Germany for example has favoured the precautionary principle and ‘Best Available Technology’ while Britain has favoured environmental quality objectives and ‘Best Practicable Means’ (Wurzel, 2002, p. 19f). Environmental regulations in the EU have grown immensely in number over the past two decades and pose new challenges for policy-makers and industry (Wagner, 2009) see Fig. 1. This has been followed by a corresponding rise in corporate lobbying offices in Brussels. Areas generally 160 140 120 100 80 60 40 20 0 1959 1962 1965 1968 1971 1974 1977 1980 1983 1986 1989 1992 1995 1998 2001 2004

Fig. 1.

EU Environmental Legislation in Force 1959 2005 (Directives only). Source: Lenschow and Sprungk (2010, p. 138).

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covered under environmental legislation include waste, noise, air, soil, nature, water and chemicals (DG Environment, 2007; Kra¨mer, 1997). The EU is considered an international environmental leader its environmental regulations are among the world’s strictest and most ambitious (Kelemen & Vogel, 2010), and there is some evidence that the environmental rules the EU generates are influential beyond Europe’s borders (see, e.g., Economist, 2007). It is therefore a fitting context for studying firms’ attempts to influence environmental policy. According to Rugman and Verbeke (1998a), research on MNE environmental strategies is vital as MNEs dominate in pollution-intensive industries such as petroleum and chemicals (see also Levy, 1995). Environmental legislation in the EU is most costly for manufacturing and energy production industries (EEA, 2003); their political involvement is thus practically inevitable, as Markussen & Svendsen (2005) illustrate. Boyd (2002) as well as Pedler (2002) point out, however, that industries often do not speak with one voice, which reflects scientific and policy controversies over the issue. It is therefore worth asking how MNEs regard environmental regulations and lobbying in order to gauge whether their political involvement can contribute to sustainable development. Whilst some previous studies have addressed lobbying on environmental regulations, this was not with regard to MNEs’ attitudes to environmental regulations and lobbying nor was it in the context of sustainable development (Levy & Egan, 2003; Polk & Schmutzler, 2005).

Corporate Lobbying, Society and the Automotive Industry Stigson (1997) emphasises that industry is part of the solution for environmental and climate change issues. Certainly, the complexity of the issues means that good environmental rules require corporate involvement particularly for highly technical issues for which firms are likely to have the greatest level of expertise. Grant (2000), writing from a political science perspective, would likely agree. He argues that, not only do firms have a right in a liberal democracy to participate in those decisions that will affect them, but that their doing so leads to better legislation, which is better implemented. The corporate function responsible for lobbying is mostly in the public affairs function, where government affairs are one of the most important activities (Marcus, Kaufman, & Beam, 1987). Other terms used for this function are: regulatory issues, public policy, external affairs and external relations. Nevertheless, this special status does generate a degree

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of tension, resulting in a need to control companies to a greater extent than other participants in the process. It is precisely this tension that leads to corporate lobbying being treated with some suspicion. It can be argued that a combination of public pressure, and the spreading of the ideas embodied in Elkington’s Triple Bottom Line concept (1999) that takes economic, social and environmental factors into account, led to a softening of corporate views over time. Fierce resistance to the issues by business in the early 1990s changed to a less opposing stance by the mid and late 1990s. Whereas fossil fuel as well as most manufacturing and processing industries opposed climate change regulation, it was insurance companies that sounded the bell for supporting such policies, threatened by weather-related losses (Grubb, Vrolijk, & Brack, 1999, p. 257). MNEs are often large firms which have more resources to utilise lobbying (Levy, 1995; Lenway & Rehbein, 1991), whereas smaller firms tend to engage in political activities through trade associations (Schuler, 1996). Thus, it is advisable to analyse MNEs’ political behaviour rather than smaller firms’ political activities. Wurzel (2002) points out that the involvement of corporate actors in environmental policy-making in the EU varies from sector to sector (see, e.g., Michaelowa (2000) for a comparison of sectors regarding EU climate policies). They do play a very important role in EU policy-making. Industry, however, is not a homogenous actor: there are ‘corporate environmental leaders’ as well as ‘corporate environmental laggards’ (Wurzel, 2002). The picture is therefore not a simple one, and it is essential to understand how companies view environmental regulations. The regulatory environment is one of the major determinants of competitiveness of the automotive industry as it affects almost all aspects of doing business (European Commission, 2004). In the EU, where they remain of fundamental economic importance (McLaughlin & Maloney, 1999), automobile companies are subject to a whole range of (not only environmental) regulations regulations specifically designed for the industry as well as regulations more generally for business and other sectors. Consequently, there is a tradition of interest representation of the automobile industry in the EU (see Mazey & Richardson, 1993; McLaughlin & Jordan, 1993; Spell, 2000), and currently all mass car producers have representative offices in Brussels. As all the major car companies (original equipment manufacturers, OEMs) operate (i.e. not only sell but also produce) in the Union, it is possible to compare MNEs from the three triad regions of Europe, North America and Japan in one single location, exemplified by the so-called capital of the EU Brussels. Combined with the fact that

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the industry faces significant market and technological challenges on account of climate change (Levy & Egan, 2003) and other environmental regulations both in voluntary and legally binding form, this makes the world’s largest manufacturing industry (Nieuwenhuis & Wells, 2003) a suitable industry for investigating the lobbying of MNEs in relation to EU environmental regulations. Environmental regulations represent trends that already have an impact on the automotive business and will continue to do so in the future (Nieuwenhuis & Wells, 2003, p. 3). They are rarely addressed, however, in a business context, although this is becoming increasingly important. As Nieuwenhuis and Wells (2003) demonstrate, the existing ‘automobility system’ is not sustainable, with two major factors determining car industry developments in the 21st century. The first factor is how to overcome the chronic lack of profitable volume car production. The second factor is how to deal with the increasing environmental pressures on the trade, CO2 being widely considered to be the most significant of these (see, e.g., Nieuwenhuis & Wells, 2003). One of the ways to deal with possibly contradictory environmental pressures is to engage with the political decisionmakers who impose such regulations on the industry. Such pre-regulatory lobbying is the subject of this chapter.

METHODS This chapter presents the results of two complementary studies carried out independently in Brussels at approximately the same time, using different but related methods (use of triangulation and interviews) to reach similar conclusions. They are, to the authors’ best knowledge, the only studies of their kind to date. Both were conducted as part of larger research projects. Research into corporate lobbying is known to be difficult, as it is a complex and often highly sensitive area (e.g. Keim, Zeithaml, & Baysinger, 1984; Rehbein & Schuler, 2006). This makes data gathering a great challenge, particularly quantitative data. It is therefore no surprise that studies in the EU political environment typically make use of qualitative methods (e.g. Mahoney, 2007; Warleigh, 2000). Moreover, the small number of automotive firms involved in lobbying in Brussels, and the relative lack of research in this area, speak for a qualitative, exploratory approach. Both studies presented in this chapter therefore follow that qualitative tradition. This section proceeds as follows. First, we present the details of each study

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in turn. We then discuss a number of the issues arising from the studies. This leads to a presentation in the next section of the studies’ complementary findings.

Study #1: MNEs’ Attitudes to Environmental Regulations The first study approached the issue from an IB perspective, and examined the entire population of automotive MNEs engaging in lobbying at the EU level regarding three kinds of environmental policy: CO2 regulation; pollutant emissions; and end-of-life vehicles. There are eleven cases of politically active automotive companies in Brussels, of which ten were directly interviewed and one indirectly through other sources. These comprised semistructured interviews, supported by primary and secondary sources such as reports, policy and legal documents from the companies and industry associations involved, and from the EU institutions. Data sources as well as interview sources were triangulated: all three corners (i.e. state, market and civil society) of the so-called societal triangle (Van Tulder & Van der Zwart, 2006) were included in the investigation, to give a holistic representation of the complex reality involved in lobbying see Gillham (2000) and Ghauri and Grønhaug (2005) for the use of interviews in general and for material sensitive in character; see also Hadjikhani and Ghauri (2001) particularly for the sensitivities of researching MNEs’ socio-political environments. The stakeholders were identified by investigating contributions to the consultation process of EU legislation as well as by following up references in organisational documents, and academic and professional publications related to the regulatory areas. In those situations where the initial contact felt they were not able to offer helpful information, they recommended alternative respondents in their stead. Moreover, a snowball approach was used, with respondents recommending possible new interviewees. A total of 71 interviews were conducted for this study. Most interviews were face-toface in Brussels, though some were conducted over the telephone or in Berlin. On the market side, 37 respondents were interviewed from firms and industry associations represented in Brussels, in both the automotive industry and related industries (such as component and supplier industries, raw material industries, recycling industry). On the state side, 26 interviews were conducted with officials in the European Commission and in the European Parliament. Eight interviews were conducted with Civil Society

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respondents, mostly from environmental non-government organisations (NGOs) that are involved in lobbying. The interview sections were coded on paper, with codes developed during data analysis (Harrison, 2003) as in vivo codes or closely fitting ones, thus resulting in data-driven codes (Gibbs, 2002) or open coding (Corbin & Strauss, 2008). Sets of codes resulted for each area and research question examined. In order to arrive at a smaller number of analytic units (Miles & Huberman, 1994), clusters were formed and defined by the author to subsume the codes into higher-level sub-categories or concepts and themes (Corbin & Strauss, 2008), allowing the identification of key themes in the responses (see Crotty, 2006). Quotes are used to provide evidence and to make sense of the analysis (Corbin & Strauss, 2008), according to themes and concepts arising out of the data. An iterative process of presenting the data and writing about them and going back to the data was followed which helped clarify thoughts and logic (see Corbin & Strauss, 2008). As triangulation of data sources is applied throughout, the results of Study #1 are presented accordingly, and interviewees are identified by the societal triangle and type of organisation. Companies are referred to by their triad region of origin and a number (e.g. EU1, US1 and JP2). Company representatives are identified by their company code and a letter (e.g. EU1-A, US2-B) in order to protect their anonymity. Other interviewees are referred to by societal triangle and organisational type (e.g. Rel1, Com10, MEP4, NGO1-A). In the cases of more than one respondent per organisations, these are differentiated by letter, e.g. US2-A and US2-B or NGO1-A and NGO1-B. The codes and abbreviations used are summarised in the Table 1.

Study #2: MNEs and the Political Process The second study was more tightly focussed than the first. It specifically addressed carmakers’ responses to climate change in the EU policy environment, in the light of industry’s voluntary commitments to reduce CO2 from new cars, and the legislation to limit emissions that was then pending. It was also focussed more on internal company processes, taking a narrative sensemaking approach to the data gathered. The research was conducted with a view to implications for issues of sustainability and corporate citizenship. The approach in this study follows the ‘linguistic turn’ in the social sciences, in which it is acknowledged that ‘language constructs organizational reality, rather than simply reflect[ing] it’ (Hardy, Lawrence, & Grant,

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Table 1. Key to Codes of Companies and Interviewees. AA1-A to AA3

Respondent from Automotive Association (interview key), Market side: AA1 to AA2 European automotive associations AA3 Japanese automotive association Com1 to Com13 Respondent from European Commission (interview key), State side: Com1 DG Employment Com2 to Com8 DG Environment Com9 to Com13 DG Industry and Enterprise EU1 to EU6 European Automotive Company EU1-A/B to Respondent from European Automotive Company (interview key), EU6-A Market side JP1 to JP3 Japanese Automotive Company JP1-A to JP3-A Respondent from Japanese Automotive Company (interview key), Market side MEP1 to MEP13 Member of the European Parliament, respondent (interview key), State side: MEP1 to MEP5 Conservative Party MEP6 to MEP9 Labour/Social Democrat Party MEP10 to MEP12 Green Party MEP13 Liberal Party NGO1-A to Respondent from Non-Governmental Organisation (interview key), NGO6 Civil society side: NGO1 to NGO5 Environmental NGO NGO6 Consumer NGO Rel1 to Rel14 Respondent from Related Industry (interview key), Market side: Rel1 to Rel9 related industry association Rel10 to Rel14 related industry company US1 to US2 American Automotive Company US1-A to US2-B Respondent from American Automotive Company (interview key), Market side

2005, p. 60, emphasis in original). That is, the way that respondents understand their organisational reality determines how they interact with it. As the award-winning paper by Ferraro, Pfeffer, and Sutton (2005) illustrates, the notion that theories can become self-fulfilling is now widely accepted. The principal data source for this study was a series of semi-structured interviews as well. Interviews were recorded and supplemented with field notes. Secondary data came from corporate documents. The research attempted to understand carmakers ‘in as much depth as possible’, with the ‘freedom to make adjustments during the data collection process’ (Eisenhardt, 1989, p. 539). The study addressed a slightly different research field than the first. Carmakers in this study were all functionally independent mass producers with easy access to EU policy-makers in Brussels.

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This latter was defined as having a representative office in Brussels and at least one lobbyist accredited with the European Parliament. Nine automotive manufacturers formed the resulting research pool: BMW, DaimlerChrysler (as it was then), Fiat, Ford, General Motors, PSA Peugeot Citroen, Renault, Toyota and Volkswagen. Seven companies participated in the research. Other interviews were conducted with respondents from government, civil society and media in a triangulation of sources. A total of 33 interviews were conducted in total: 18 with respondents from manufacturers, 15 with other stakeholders. Most interviews were in Brussels, but interviews were also conducted in several other locations, in Germany, France and the United Kingdom. All interviews were conducted face-to-face, then transcribed and coded. Participants and organisations were given pseudonyms to preserve anonymity. There is no template for researchers using qualitative data (Pratt, 2009), and researchers need to ‘customize’ their analysis (Phillips & Hardy, 2002, p. 78) developing ‘an approach that makes sense in light of their particular study and establish a set of arguments to justify the particular approach they adopt’ (Phillips & Hardy, 2002, p. 74). Reflexivity is a critical element of this kind of research. As Cunliffe ([2003, p. 988], emphases in original) puts it, ‘we construct intersubjectively the very objective realities we think we are studying.’ The analysis paid great attention to this element, following Weick’s (1999, pp. 802 803) suggestion to be ‘mindful of the reflexive turn, but not overwhelmed by it.’ The result was a multi-phase iterative narrative analysis that did not ‘occur in an orderly, sequential fashion’ (Spiggle, 1994, p. 493). The findings presented here are drawn from two independently conducted studies. Nonetheless, there is a great deal of agreement in the findings. We argue that this general agreement between the studies strengthens our findings. We do not, however, claim generalisability for our findings, and together our research suggests urgent questions for further research. In presenting the findings from these two studies, we follow Pratt’s (2009, p. 860) suggestion of maintaining a balance between ‘telling’ and ‘showing’. The main unit of analysis, and therefore of presenting the findings, is the vehicle manufacturers and the industry these MNEs form.

FINDINGS In this section, we set out the key findings of our research. In keeping with the previous section, and in the interests of clarity, we start by presenting

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the results of the two studies independently. The first part thus details the attitudes of MNEs to environmental regulations, on the basis of the Porter hypothesis discussed above to unearth whether companies in the automotive industry view such policies as opportunities for innovation or rather as costs. The second part then teases out narratives regarding companies’ approach to the political process in general and to CO2 regulations in particular. This then leads to a broader discussion.

Study #1: MNEs’ Attitudes to Environmental Regulations The results are presented according to the categories of the societal triangle (market, state, civil society) and by organisational type (companies, association, Commission, EP, NGOs), thereby triangulating responses. The emphasis is on the market side, complemented by a summary of state and civil society responses. The responses from the automotive companies show mixed results and with wide-ranging replies for the question on how companies in the automotive industry view environmental regulations as costs or as opportunities for innovation. On the one hand, the importance of environmental regulations is acknowledged and taken seriously (EU3-B, US1-B, JP1-A, JP2-A), which create chances and opportunities (US2-A) to be proactive (EU6-A) and to drive technological progress (US1-A): We take the position on environmental issues very serious, and we have adopted a position of environmental leadership, which gives us a heavy weight of responsibility of obeying the law. (JP2-A)

Both Japanese companies that were interviewed stressed their goal of being leaders in environmental regulations or performance (JP1-A, JP2-A), while European and American firms seem to be more mixed in their responses. Both US companies active in Brussels try to turn environmental challenges into opportunities (US2-A) and try to do what is technically feasible while not being in opposition to environmental regulations, stressing the issue of timing (US1-B). The respondent who had worked in both the Washington and Brussels offices of their firm pointed out that the opposition to environmental regulations is much stronger in the United States than in the EU because of the public debate in Europe (EU2-B). On the other hand, environmental regulations are seen as imposed (EU1-A), as too numerous and too strict (EU1-B), as challenges (EU2-A),

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even a key challenge in public relations (EU5-B) and as considerable cost factors (US1-A): The fact that costs is a constraint, big constraint for us, because we are mass producers, lies in the fact that the solution is not always first innovation, because it’s very costly. (EU5-B) We are very finance-driven as a company, these are all considerable cost factors (…) it is very difficult to pass on costs to the consumer. (US1-A)

In this respect the consumer aspect is emphasised: customers are not prepared to pay extra for cars that meet environmental standards (EU1-A); it is difficult to pass on the costs to consumers (US1-A) as affordability is a problem for them (EU4-A). Similarly, profitability is a priority for companies where the cost factor comes first and innovation second (EU5-B). Furthermore, regulatory conflicts and contradictory requirements within environmental regulations are pointed out (EU2-A, EU3-B, EU6-A), which should be avoided by policy-makers as there is otherwise the danger of promoting certain technologies at the cost of innovation ability when only the goal and not the technology should be prescribed (EU3-B). Environmental regulations should therefore be reasonable, balanced, and realistic, at justifiable costs (EU3-B, US2-B). Similarly, a balanced view is offered by respondents who see both an opportunity for innovation and cost factors in environmental regulations (EU6-A, US2-B, JP1-A); it is acknowledged that a balance is difficult to strike in terms of questions of cost and wishes to prioritise environmental issues (EU4-A): (…) on the one hand, first of all, these are costs factors, very clearly, we are in a highly competitive environment in principle and in this it is very difficult to allocate the additional costs of EU legislation to the consumer. But it has its environmental advantages; that’s recognisable, without the legislation on the European side (…). This way, the European Commission is demanding on the automobile industry in terms of the environmentally conscious consumer; they also push and drive technical progress. (US1-A)

The issue of social desirability emerges, illustrated in the following quote, possibly pointing to ‘green PR’ of firms: The firms also want to show that they are active regarding the negative effects of their activities. (EU3-A)

Among respondents in automotive associations this issue seems to be more clear-cut. The importance of a cost-effective solution for environmental issues is stressed (AA1-B, AA1-D) and, similarly to corporate

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responses, contradictory or conflicting requirements within environmental regulations are pointed out (AA1-C, AA1-D). The respondent from the Japanese association confirms above statements about its members building environmentally friendly vehicles but also acknowledges that environmental regulations, especially CO2, are a serious issue with a negative impact on the automotive industry (AA3). Therefore, ‘it has to be a balance’ as association membership may be heterogeneous in this respect (AA2). Similarly, the respondents from related industries emphasised an aspect of balance with regard to how environmental regulations are viewed: a balance between being necessary and welcome, and between being realistic and cost effective (Rel4), between objectives agreed with and regulations sometimes too detailed and bureaucratic, and therefore both a cost factor and an opportunity for innovation (Rel6), depending on the topic and individual regulations (Rel14). Rel3 saw environmental regulations becoming stricter and stricter whilst also stating that it is important to recognise the needs of society with regard to the environment. It is therefore a compromise (Rel9) where the industry favours the biggest environmental gain at the lowest cost (Rel6). Whilst the car industry is seen as being technologically advanced, it is also perceived as only seeing costs and putting brakes on environmental regulations (Rel8). This is particularly the case for ACEA, the European Car Manufacturers’ Association,1 who is seen to use the cost factor as a reason to push against such legislation (Rel7, see quote below). In order to keep costs down, firms and their association are seen to ‘blow the cost factor out of proportion’ (Rel8) which leads to the car industry being seen to ‘cry wolf’ on environmental regulations (Rel8). There are, however, real concerns about contradictory requirements in environmental regulations for car manufacturers (Rel12), but their negative approach makes them ‘look bad’ in this respect (Rel12). It is an issue of timing for car manufacturers (Rel9) and an important distinction is made by respondent Rel7 who points to such regulations being a cost factor in the short term and an opportunity in the long term: The cost of technology, ACEA is using it as one factor against pushing legislation. What looks as cost in the short term is an opportunity in the long term on a wider scale. (Rel7)

He emphasises a difference between European and Japanese car manufacturers in this respect (Rel7), with the latter being more advanced in clean technology development, thereby confirming car industry responses (AA3, JP1-A, JP2-A).

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While also acknowledging the need for balance and compromise in this area, state-side respondents from both the Commission and the European Parliament perceived the industry to view environmental regulations mainly negatively and as a cost factor. This was echoed by the civil society respondents who also saw an element of ‘green PR’ in the industry’s stance towards environmental regulations. It emerged from both the market and state side that timing is an issue, where environmental regulations might be a cost in the short-term but can be an opportunity for innovation in the long-term. Japanese companies (particularly JP2) were identified as firms that more than their European and American counterparts see opportunities for innovation and environmental leadership in such legislation.

Study #2: MNEs and the Political Process Basu and Palazzo (2008) argue that examining activities related to corporate social responsibility (CSR) ‘without understanding their precipitating causes is unlikely to reveal real differences among firms.’ Following this reasoning, the second study presented here examined car company narratives around the political process more broadly. It is worth noting that this study started by explicitly seeking links between the carmakers’ CSR departments and their lobbying function, and found no functional interaction. The reason for this seems to be that corporate responsibility and lobbying are not related. In the words of one car company manager, a company’s CSR is ‘linked to a budget’ and is about ‘the roles a company plays as a social actor.’ This relates partly to the way in which companies make sense of politics. The view of MNEs from non-corporate respondents is summed up by Paul, an NGO representative: senior management have no interest in the political process, and merely want their lobbyists to ‘keep these people off our backs’. This echoes Adair Turner’s words, cited earlier, and does describe the approach of some companies. However, the view from within carmakers is more differentiated. Firms make sense of the political process in a range of ways, running from broadly cooperative to broadly suspicious of politics. The findings in this section present that spectrum and then link it to a broader self-understanding of carmakers’ role in society and do so by identifying the narratives that companies use in doing so.

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Narrative of Legitimacy Some carmakers consider the political process to be legitimate, deserving active engagement and dedication of company resources. One such company is Atlas. [T]he political process is going about it in the right way. …[I]t should be a panEuropean process. It is. It should be vigorous and challenging. It is and will be. And I think it should be broadly based with a very wide range of stakeholders being involved, and on the whole that is the case. (Richard, Atlas)

At the other end of the spectrum, other companies see the political process not simply as a hindrance, but rather as ‘illegitimate meddling’ in corporate affairs. One can consider the stance as an ‘individualistic identity orientation’ manifesting, in extreme cases, in a defensive posture (Basu & Palazzo, 2008, p. 131, more generally 125ff.). The attitude associated with such a narrative is clearly visible, and produces a reaction in non-corporate actors, which can be summed up by citing David (Euro-NGO, emphasis by respondent): carmakers ‘are typically … just too arrogant to think that politics could ever change anything about the way they [act]’. Crucially for its contribution to sustainable development, a company that sees the political process as illegitimate may not only seek to limit its lobbying to the defensive posture outlined earlier, perceiving the political arena as a source of costs to be minimised. It may even feel justified in withholding resources from its own lobbyists, in extreme cases even making it difficult to operate in Brussels. Thus, for example, one Cedarberg lobbyist had to struggle to be taken seriously within the firm (a constant theme in that interview), for precisely this reason. [Cedarberg] conceives, it produces, and it sells cars. … everything that has to do with European Affairs is supposed to be a service. So, it’s very difficult for people that are working inside [Cedarberg] to understand… It’s not in the core activities of [Cedarberg]. So, this is why we are supposed to explain in more ways and to motivate them, so as to be in the European agenda. (Virginia, Cedarberg)

The picture is not as extreme with other companies: most understand the significance of the political process for the company, even if they do not accept the legitimacy of the political process to govern it. This is the most common approach. [W]e realised that it doesn’t make any sense to be against the target as such. Because there is unanimous support at all political levels… Therefore, we agree with the 120g target… We disagree with the logic of that approach. But, fighting windmills has its limits. (Nicholas, Ural)

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Firms’ attitudes to the political arena in general were broadly reflected in the attitudes to individual actors in the political environment. Here, interview attitudes can be summarised as falling along a broad scale running from respect to condescension, based on perceptions of interlocutors’ competence. Several respondents even impute bad faith on the part of politicians and decision-makers. Where the attitude is negative, a number of negatively evaluated traits are evident: the others are unpredictable, ideological (for which, read: anti-facts) or ‘simply do not understand market economy’ (Mark, Alpine, 2008). The underlying assumption seems to be that economic arguments should have precedence. The overall perception is that others notably policy-makers do not understand economic arguments and are not competent to regulate carmakers; the underlying narrative is one of condescension. The corollary is that companies themselves should regulate their emissions. [T]o get majorities of people in the Parliament, Council and sometimes the Commission to that understanding is very, very difficult; because they are coming ideologically from somewhere else. (Mark, Alpine, 2006) There was no debate, it was impossible to debate. … I’ve seen this, this stubborn attitude on some of those points. Absolutely resistant to any advice and argument. (Nicholas, Ural)

It should be noted that this type of attitude is evident in makers of all kinds of cars, independent of CO2 performance. From this viewpoint, officials are unrealistic and ideologically motivated people who do not really understand the issues at stake. In other words, the story within these firms treats policy-makers in a shallow manner: they are presented almost as caricatures. Under this view, it is very easy to see how a company might choose to engage with the political process in an instrumental manner that outside observers would characterise as unethical. One practical consequence of such a perspective is that mutual trust is likely to be missing, given the limited effort to understand the other side. At the other end of the spectrum, other firms approach policy-makers with the assumption that their interlocutors are competent, generating an attitude of respect. One could label this view a narrative of competent partnership, because here the firm sees interlocutors as legitimate and credible. Policy-makers may make mistakes or engage in foolish activity from time to time, but this will not be taken as evidence of incompetence or lead to a condemnation of the system as a whole. The picture of a firm’s interlocutors has a degree of depth. It also means that political engagement is on

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a basis of respect. Atlas is an example of the more constructive, cooperative end of the spectrum. In this view, the company has a responsibility to be credible when interacting with interlocutors, who are competent and respectable. Having a dialogue with key stakeholders … it’s not just going to NGOs or politicians or officials like a dry sponge and sucking up the information, then coming back and wringing it out …. It is about developing communication with them and a relationship with them, and making them feel that we can be trusted and that we have something to contribute to their concerns, and to solving them. (Richard, Atlas)

The manner in which firms see policy-makers as caricatures or rounded figures appears to be directly related to the way in which they understand their own political role in society. Making Sense of Firms’ Own Role in Society In this section, we now turn the perspective around, examining firms’ view of their own role in society. This provides a more detailed view of the narratives that influence political engagement, and unsurprisingly yields a similar picture to firms’ perspectives on the outside world. All the firms interviewed had a view on their broader role in society, through the lens of political engagement. Sometimes this was implicit, but it was also often explicitly expressed. Here, two types of narrative can be discerned with respect to the political process: entitlement and respect. Many carmakers appear to conflate the good of the firm with the good of society. This goes beyond the perfectly legitimate desire to get the best results for one’s company in a lobbying situation of equally legitimate actors (i.e. ‘fighting one’s corner’). Rather, the view underlying this perspective is that the concerns of the company are more legitimate than those of other participants in the process: companies feel that their rights exceed their responsibilities in the political environment, and that their concerns should be central to the process. This is the most common narrative, as evidenced by the reactions of non-industry actors in Brussels. Chris (MEP) certainly understands carmakers’ attitude in this way: in response to a question about argumentation around responsibility, he replied, ‘The industry has been very self-centred on that score.’ Related to this is a legalistic approach, where companies focus on the responsibilities of others. Jane’s comment about differing responsibilities provides a good example. It’s pretty clear to us that we have lead responsibility to develop and bring to market technologies. Whether it be safety or in this case, lower CO2. The CO2 from the

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products in use is primarily the responsibility of the customer … ‘he who buys the energy owns the emissions’. (Jane, Carpathian)

The underlying view is that carmakers are entitled to special treatment by virtue of their particular status as an economic actor with large numbers of staff. It belies the companies’ own public communications on responsibility, and places responsibility for CO2 emissions at the feet of customers, planners, non-corporate actors: others. While individual customers do clearly have a responsibility for their own behaviour, in a political discussion about systems and structures, such an approach is the equivalent of denying responsibility for change. A different way of engaging is to concede that the company is ‘part of the problem’ but to also seek to be ‘part of the solution’ (Esther, Himalayan). Others are more modest, perceiving themselves as merely (an important) part of the political process and having certain responsibilities towards other participants; notably the duty to engage in the process, in an honest manner. For example: … in the long run [it’s] much more important to build trust and confidence in the company. I have seen this with other companies at a certain point [laughs]. Politicians, they don’t trust you anymore. … [S]o they add ten percent, or whatever, because they know, you are not honest… And then you come into a really difficult area. (Andrew, Atlas)

This last quote nicely sums up part of the challenge for sustainable development that many company narratives on lobbying pose. By engaging as they have, companies have awakened the expectation that they will exaggerate costs and seek to stretch timeframes. This makes it more difficult to achieve public policy that promotes sustainable development based on truthful, responsible lobbying.

DISCUSSION For the first study, the question regarding companies’ position on environmental regulations was largely based upon the so-called ‘Porter Hypothesis’ regarding the opportunity of innovation versus the threat of costs, also in terms of employment issues. Here, the perception was markedly different between companies and other sources. Industry sources saw the issue very much as both, innovation and costs, although this might have been through the provision of socially desirable answers. Similarly, reflecting the findings of the first study, the narratives of the second study regarding the approach of carmakers to the political process indicate/

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suggest that there is a split between companies that see the process as opportunity and companies that see it as a threat that needs to be eliminated or fought; though there is a clear majority of companies that are sceptical of the process. On the basis of the above, we therefore argue that companies in the automotive sector are to a large extent not contributing to sustainable development through their lobbying activities, for one of two reasons. First, many do not see environmental regulations as opportunities, instead seeking ‘freedom from Leviathan’, in line with profitability and sustained competitive advantage as their priority, rather than sustainability. Second, even if a firm does perceive environmental regulation as an opportunity, the companies’ interlocutors remain highly sceptical. This pattern of engagement has substantially impacted on the policy-making process in Brussels. In a number of instances, there is even a case to be made that their activities are instead moving away from sustainability. Such findings contradict the stated ambitions of all the companies in our study variously expressed to be good corporate citizens and to be part of a sustainable future. Our findings therefore certainly provide further ammunition to critics of large corporations, and particularly of their lobbying activities. Such criticism is significant, as it can undermine companies’ legitimacy over time (see Palazzo & Scherer, 2006; Suchman, 1995), legitimacy being one of two goals of corporate involvement in the political process, the other one being competitive advantage according to Gale and Buchholz (1987), Boddewyn and Brewer (1994) as well as Holtbru¨gge and Berg (2004). However, we do not believe that the attitudes or activities are based on reflexive practice; that is, we found no evidence that any carmaker sought to stymie progress towards sustainable development out of bad faith. Far more likely, we believe, is that their patterns of perception and behaviour reflect unexamined assumptions and disjointed organisational functions. The result is the same, however, and many carmakers’ lobbying activities appear to be undermining the progress they are making towards sustainable development in other areas. We therefore see an urgent need to expand the scope of this research to other economic sectors, as these are not integrated in the same policy networks and thus dissimilar to the car industry, as Rizopoulos and Sergakis (2010) point out. Further, we hypothesise that the extent to which a firm sees environmental regulations as an opportunity is in a causative relationship with its perception of the political process. We argue that researchers interested in companies and sustainability should pay greater attention to corporate lobbying, and to corporate

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interiority. This latter is in line with the linguistic turn discussed earlier, and with an increasing tendency for CSR researchers to pay attention to institutional theory (see, e.g., a recent special issue of the Socio-Economic Review, guest edited by Brammer, Jackson, & Matten, 2012). IB researchers might find it fruitful to tease out national differences between companies in their lobbying work. Furthermore, the concept of sustainable development itself has been rather loosely interpreted, and as a result, there is little practical guidance that firms can use in their political work. We therefore suggest that a more measurable concept is needed, and for this the concept of internalising external costs seems useful (see Crouch, 2006), as it is operationalisable and also acceptable in the language of political debate, which emphasises economic language. Future research might usefully focus in this direction. More broadly, we suggest future research address the nature of responsible lobbying, in the light of our findings which suggest that MNE lobbying is not necessarily contributing to sustainable development. Policy-makers, as well as companies that want to contribute to sustainability, could also usefully adopt the concept of internalising external costs as a minimum proxy for sustainability. Companies that wish to promote sustainable development, or even wish to act in a consistent manner, might usefully examine their assumptions about the political process. This is particularly the case with MNEs as they operate in numerous jurisdictions.

CONCLUSIONS Although many stakeholders perceived that car companies view environmental regulations negatively and as cost factors, automotive firms seemed to recognise these as both costs and opportunities for innovation, and acknowledged contradictory requirements in environmental legislation along with association respondents, for which a balance and compromise needs to be found. Civil society respondents perceived an element of ‘green PR’ from the automotive industry, which raises the question of social desirability for industry responses. It emerged from both the market and the state side that timing is an issue where environmental regulations might be a cost in the short-term but can be an opportunity for innovation in the long-term. Japanese companies were pointed out by all three sides as firms that more than their European and American counterparts see opportunities for innovation and environmental leadership in such legislation. The seemingly contradictory requirements in environmental regulations, as

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expressed by respondents from the car industry, are reflected in the contradictions of their messages from lobbying outlets and from their CSR departments. This raises doubts as to whether lobbying can contribute to sustainable development. In addressing MNEs’ attitudes to the political process and to environmental regulations we have heeded Blumentritt and Nigh’s (2002) call for more integration between MNE literature and literature on IB government interactions. With the particular focus on the EU, we have dealt with the simultaneous nature of MNE government relations with the EU as both a home and a host region for global carmakers. The findings underline the importance of addressing both environmental issues and the relationships between policy-makers and MNEs, an area that can be further developed by extending the scope of the study to other industries in further research.

NOTE 1. Only OEMs are members of ACEA, currently 15 comprising car, truck and bus manufacturers (Available at ACEA website www.acea.be. Accessed on 3 May, 2013).

ACKNOWLEDGEMENTS The authors would like to thank all participating interview partners for their valuable contribution to this research.

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CHAPTER 9 MULTINATIONALS AND SMALL- AND MEDIUM-SIZED ENTERPRISES (SMEs): A LINKAGES PERSPECTIVE ON INCLUSIVE DEVELOPMENT STRATEGIES Rob van Tulder and Andrea da Rosa ABSTRACT Purpose This chapter presents an exploratory study aiming at understanding how the largest multinational enterprises (MNEs) engage small- and medium-sized enterprises (SMEs) in their (inclusive) business strategies, either as suppliers, distributors, customers, innovators or as a target of their (Corporate Social Responsibility) CSR policies. Methodology/approach We explore the implicit or explicit strategies of 100 largest companies in the world towards SMEs as mentioned in their annual and CSR reports. This approach takes in particular stock of the ‘narratives’ developed by MNEs as an expression of their intended and (perceived) realised strategies.

International Business and Sustainable Development Progress in International Business Research, Volume 8, 203 227 Copyright r 2014 by Emerald Group Publishing Limited All rights of reproduction in any form reserved ISSN: 1745-8862/doi:10.1108/S1745-8862(2013)0000008014

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Findings The analysis of company statements show a country of origin effect in that European firms are clearly amongst the leaders in experimenting with inclusive business strategies that include SMEs. However, their number still remains limited. Sectors like banking and retail have developed the most interesting examples that are also spread over a large number of functions. Originality and value Although the results are not yet very radical, the developed taxonomy for the different types of approaches in which MNEs take a more or less active position towards SMES provides material for further studies. It can be applied in studying leading (betterpractice) cases in order to help policy makers and business strategists to develop better business models for inclusive growth. Keywords: Multinational enterprise; small- and medium-sized enterprise; foreign direct investment; inclusive development; inclusive business

INTRODUCTION Mainstream studies in International Business and International (development) economics generally focus on the impact of inward Foreign Direct Investment (FDI) on the economic growth of an economy. They thereby often abstract from assessing in any detail the action of two types of corporate actors that particularly shape development: Multinational enterprises (MNEs) and Small- and Medium-Sized enterprises (SMEs) (see Chapter 1 of this volume). MNEs often represent a small group of investors in a country. The effectiveness of development policies, in particular the question to what extent an economy need to be open towards FDI and trade or apply specific forms of regulation in order to be successful (Rodrik, 2006), depends on properly assessing the intended and unintended effects of MNE strategies (Van Tulder & Da Rosa, 2012). SMEs play an important role in economic growth and development, through innovation, the employment they generate, their entrepreneurial capabilities and their contribution at large to the competitive position of clusters, regions and sometimes whole countries. Moreover, a competitive SME-sector and private-sector development is increasingly considered to be key to development. In the transition towards higher levels of development, the formal SME sector takes up an increasingly important role. Assessments of the World Bank on the size

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composition of the industrial tissue of countries show that, in all stages of development, large companies occupy a comparable share of the economy (Fig. 1). The distinctive characteristic lies specifically in the diminishing role of the informal sector and the increasing role of SMEs in the economy. SMEs have an important buffer function during times of crises, are less international than large companies (and less prone to internationalize to search for economies of scale), but are often also less efficient, which makes them a force of stability for many economies. SMEs, however, do not operate on their own; they often operate in the (global and local) networks of MNEs. This implies that for private-sector development programmes to be successful, they need to take the interaction between MNEs and SMEs into account. One of the present challenges for development studies and for international business studies that aim at understanding the link with development is, therefore, how to consider the way MNEs influence development through their approach towards SMEs (Fig. 2). MNEs not only can bring development through their direct investments, but also through the indirect effects of their investments, through their linkages with local (often smaller) firms. The effect can also be reversed; however, through employment displacement effects at suppliers, distributors or competitors, MNEs can have a negative short-term effect on development. This mechanism is also known as ‘crowding out’, which leaves the final assessment of the contribution

100 Large firms 70

63

65 SMEs

48 30 12

0 Low income countries

Fig. 1.

Middle income countries

Informal sector High income countries

Size composition of Economies at Three Stages of Development. Source: World Bank studies, quoted in Karnani, 2012.

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Fig. 2.

From Factors to Actors in Development Studies.

MNEs make to development a matter of longer term and very complex assessments. But what assessment do MNEs themselves make of this relationship? Do they try to address SMEs in such a way that the link with development is more direct and more positive, or do they leave it to ‘the market’ without any effort to engage in what nowadays is becoming known as ‘inclusive business’ strategies? This chapter focuses on how the largest MNEs engage SMEs in their (inclusive) business strategies, either as suppliers, distributors, customers, innovators or as a target of their Corporate Social Responsibility (CSR) policies. By doing this, this chapter brings an ‘actor’ and a ‘business model’ perspective into the study of development. This chapter explores the implicit or explicit strategies of 100 largest companies in the world towards SMEs as mentioned in their annual and CSR reports. This approach takes in particular stock of the ‘narratives’ developed by MNEs as an expression of their intended and (perceived) realised strategies (cf. De Wit and Meyer, 2010). Whether they thereby take symbolic or substantive action (as further elaborated by Perez-Batres and Doh in Chapter 11 of this volume) depends on the sophistication and concreteness of the elaboration chosen. Formulating and implementing strategies in a complex world is always surrounded by major uncertainties, but the extent to which MNEs take a passive or a more active approach is often illustrative of the wider strategic realities firms are facing and the business models they seek to implement (Van Tulder, Van Tilburg, Francken, & Da Rosa, 2013). As such, the statements used in this chapter to document strategic intent comes close to documenting the business models of these companies (see also Welsh & Mees in Chapter 12 of this volume). The chapter continues as follows. The second section shortly elaborates how MNEs take a more passive or active approach to sustainable development and what this entails for more or less ‘inclusive’ business models. This classification builds further on earlier work (Van Tulder & Da Rosa, 2012;

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van Tulder with Van der Zwart, 2006). The third section elaborates more specifically on whether firms take a more or less inclusive approach towards SMEs in these generic business models. MNEs can thereby take an inactive, a reactive, an active, or a proactive attitude towards inclusive business in general, and towards SMEs in specific. The third section develops a taxonomy and a list of indicators. The fourth section then reports on the methodology and the general results of an exploratory, systematic, study amongst the 100 largest MNEs in 2005/2006 (the benchmark year for which we also performed other reviews). The fifth section discusses the more specific results along the five roles played by SMEs in inclusive business strategies and considers to what extent specific ‘countries of origin’ and specific sectors have a more or less active (inclusive) approach towards SMEs. The sixth section draws some first conclusions for policy makers and business strategists.

MULTINATIONAL ENTERPRISES AND SUSTAINABLE DEVELOPMENT: LINKING BUSINESS MODELS WITH IMPACT The relationship between FDI and ‘host country’ development generally represents the relationship between ‘inclusive business’ and ‘inclusive growth’ (Meyer, 2004). This relationship also calls for a more active approach of MNEs in development: both as key partners in the process of societal transformation (Stiglitz, 1998), and in activities related to Corporate Responsibility. These activities may take different forms, such as implementation of environmental, health and safety management systems at their production sites, as well as engagement in philanthropic projects (Dunning & Fortanier, 2007; Fortanier & Kolk, 2007). Passive effects of an MNE for host country development are those effects that occur through ‘standard business practice’. In case they are indirect, SMEs are often involved for instance through linkages with buyers and suppliers (Blomstro¨m, Globerman, & Kokko, 1999). Many empirical studies have found evidence of the creation of both backward linkages (e.g. Alfaro & Rodrı´ guez-Clare, 2004; Javorcik, 2004), and forward linkages (Aitken & Harrison, 1999). MNEs change the market structure of the industry: on the one hand, they enhance efficiency and spread the latest technology, but on the other hand, they can also crowd out local firms and tend to increase market concentration (Blomstro¨m et al., 1999; Cho, 1990).

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Macro-economic studies on the net-effect of FDI on host country development focus primarily on these passive effects, thereby abstaining from a more strategic assessment of the intervention of the multinational corporation itself (Fortanier, 2008). Active effects encompass the environmental, health and safety, and employment practices of a multinational at its subsidiaries, which are actively promoted by the largest MNEs in the world (Fortanier & Kolk, 2007; Van Tulder et al., 2013). When active (inclusive) business models reinforce the positive indirect effects that go beyond the direct impact of corporate activities (beyond the MNEs site), inclusive business and inclusive growth models are mutually reinforcing (van Tulder & Da Rosa, 2012). Since the early 21st century new business models, labels and certifications have become available that have enabled large firms to engage in more active or even proactive strategies. MNEs are faced with the possibility of a transition to a sustainable enterprise in which they apply ever more sophisticated techniques of inclusion: through a ‘bottom of the pyramid’ strategy (as explained in Chapter 4 of this volume), by engaging in partnerships in their value chains with non-market parties (see part III of this volume), or by adopting standards and human rights policies (see Chapters 5, 6 and 7). Firms in interaction with increasingly critical stakeholders represented by NGOs as well as by governments face the tension between a defensive (reactive) or an accommodative/preventive (proactive) strategy. The resource-based view of the firm adds ‘intrinsic’ motivations to the stakeholder view. Depending on their capabilities and own ambitions, managers manage the tension between an in-active and an active attitude. These two types of tensions applied to two types of general strategies introduced earlier (passive/active) result in four specific CSR approaches with different procedural attributes in which the same CSR abbreviation also has four different meanings (Van Tulder, Van Wijk, & Kolk, 2009): • An inactive approach is also referred to as ‘Corporate Self Responsibility’. The company is relatively indifferent towards the issue of poverty either directly or indirectly through SMEs. • A re-active approach translates into Corporate Social Responsiveness is often defined as a response to concrete triggering events in which their reputation or legitimacy is at stake. • An active go-it-alone approach can be referred to as Corporate Social Responsibility. This type of firm tries to come up with a number of activities that are strategic (core activities) and/or complementary to its own corporate activities.

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• A proactive approach materializes when an entrepreneur involves external stakeholders and can be equated with ‘Corporate Sustainable Responsibility’ In the transition towards more inclusive business models, firms first find it particularly difficult to move from a reactive to an active stance, which requires internal alignment of all the business functions. This phase puts in particular the relationship with primary stakeholders, such as customers and suppliers often SMEs under pressure. The hardest transition, however, is from active to proactive, which requires external alignment with a large number of stakeholders, including secondary non-market stakeholders such as environmental or humanitarian parties.

SME ROLES IN THE (INCLUSIVE) BUSINESS MODELS OF MNEs Regarding the position of SMEs in their inclusive business models, big (multinational) corporations generally take five roles into account. These roles guide the nature of the linkages with SMEs and can therefore be considered of vital influence on the resulting spinoff, spillover or crowding out effects in regions and clusters. First and second, most SMEs function in vertical relationships with MNEs, in their (global) supply chains either as supplier or distributor rarely as direct competitor. In general, these roles are strictly separated, because they develop upstream and downstream under the influence of MNEs as the ‘core’ or ‘lead’ (director) company in global value chains (cf. Gereffi, Humphrey & Sturgeon, 2005). Supply and distribution strategies represent the business-to-business (B2B) domain of MNE activity. In an open market these relationships are based on competitive pricing strategies, but value chains in most commodities are often governed through non-market principles, for instance, to guarantee reliable supply. MNEs actively shape the practices of SMEs through ‘global outsourcing’ and ‘offshoring’ strategies. Global sourcing is at the same time accompanied by local sourcing strategies. In more inclusive business models, MNEs see these relationships furthermore as co-production and co-consumption aimed not only at price, but also at quality and more sustainable product characteristics, which generally require a longer term relationship and a clear vision on ‘localisation’ of supply chains (for instance as part of a greening strategy). By engaging suppliers and distributors into

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their investment strategy, MNEs can actively search to make the indirect effects of their investment socially responsible. Third, SMEs function as customers in the business-to-consumer (B2C) segment. By engaging customers of end-products into their inclusive business strategies, MNEs can help upgrade the end-consumption markets in developing countries. Both suppliers and distributing SMEs can at the same time serve as customers to the MNE. The fourth, and increasingly important strategy adopted by MNEs, is to see SMEs as innovators. Whereas in the past core firms mainly aimed at in-house innovation, the degree of outsourcing of innovation has increased as well. This is increasingly known as ‘open innovation’ which requires a particular type of relationship with SMEs for instance in the form of corporate ventures (Chesbrough, 2003). In supply chains, innovative behaviour of suppliers can lead to ‘black box engineering’ in which the supplier does the bulk of the innovation, which is supplied as ‘tacit knowledge’ in the final products. The more MNEs engage actively in innovative relationships with SMEs, the more this can be interpreted as a ‘co-creation’ relationship (cf. Prahalad & Krishan, 2008) which increases the relevance of the innovation for the people at the ‘bottom of the pyramid’ and thus makes the strategy more inclusive. Finally, MNEs can also directly target SMEs for CSR purposes. Different types of CSR strategies (see Fig. 3) overlap with all the other SME roles. Engaging SMEs in the generic strategies of MNEs is arguably the most complex challenge.

Innovators

Supplier

CSR

Distributor

Customers

Fig. 3.

Overlapping SME Roles.

Multinationals and Small- and Medium-Sized Enterprises (SMEs)

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Business Models Towards SMEs With regard to the five roles identified, MNEs can also adopt an inactive, reactive, active and/or proactive attitude. Table 1 operationalises relevant indicators to assess the business models adopted by MNEs along the general characteristics as discussed in the previous section. Every inactive strategy either does not acknowledge the importance of SMEs as a separate category or adopts a market-oriented approach towards SMEs. SMEs are seen as a cost-minimising factor and most firms that take an inactive approach legitimise their existence by referring to the number of jobs created amongst SMEs. An inactive or reactive approach to local job creation through SMEs only looks at the positive direct effects without taking into consideration the possible negative (crowding out) effects, or making no assessment of the net (on-balance) effect. The latter arguably is a very difficult exercise in the first place. Reactive strategies acknowledge the importance of SMEs, but do this primarily for a variety of stakeholder related reasons: either because of government regulation, risk reduction, spread of liabilities or quality enhancement. For instance, in the United States, government policy requires companies to engage (‘actively’) in supplier diversity programmes. Thus refer, for instance, to strategies that promote inclusion of small, local suppliers run by foreign minorities or women. Active strategies acknowledge the position of SMEs as supporter of the innovative strategies of the MNE and important partner in the direct business networks of a company. A more active form of inclusive business strategies in engaging SMEs in the distribution chain is for instance by using SMEs for the distribution of products/services in poor areas of limited access. Proactive strategies look at SME as partners in indirect business networks as well, which can contribute to solving societal problems and the future strategic position of the MNEs (for instance as regards the bottom of the pyramid). Local private-sector development in an inactive or reactive approach is linked to the direct interests of the MNE in particular in its supply and distribution chain whereas in an active or proactive approach the involvement of SMEs has wider and more independent aims and is related to wider societal or community development goals. Certification schemes and codes of conduct are other elements of inclusive business strategies that either do not or do take indirect and social effects into account. As regards SMEs as customers, an inactive approach merely considers them a separate segment of a marketing strategy. A more active approach tries to produce products and services that can solve specific needs of SMEs. A third way that Fortune 100 firms reported on SMEs as

Inclusive Business Strategies and SME Roles.

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Table 1.

Mode of Engagement of SMEs in the Value Chain for Social Development

Position of the SME in the value chain

SME as supplier

Reactive

• no statement on SMEs as suppliers • general statements on the use of SMEs as suppliers (business as usual)

• local sourcing aimed at re-ducing costs + competitiveness • supplier diversity programmes (government requirement) • supplier development schemes aimed at quality and process optimisation • provision of financing for local supplier development • assistance for suppliers to improve environmental, safety, and health policies from a risk aversion perspective • adoption of environmental and quality standards • assistance for supplier insertion in global value chains • SME supplier certification • search for Fair trade suppliers only ‘if customers’ have interest • cross-sector partnerships used defensively

Active

Proactive

• statements on buying • cross-sector partnerships from local suppliers as aimed at economic and means to encourage local social development development and as • long-term partnerships part of being a with SMEs to contribute responsible company to economic and social • focus of supplier and development community development at the same time • SME supplier certification schemes specific to poverty as part of core business (e.g. strong support for Fair trade and Rain Forest Alliance) • aim at fair and long-term relationships with suppliers • assistance for suppliers to improve environmental, safety, and health policies from a local development perspective (e.g. HIV/ AIDS programmes)

ROB VAN TULDER AND ANDREA DA ROSA

Inactive

• no statement on SMEs as distributors • general statement on creation of SMEs through franchising opportunities

SME as customer

• no statement on SMEs as customers • business as usual with SMEs seen as separate customer/ market segment

SME as innovator

no statement on SMEs as innovators

cross-sector partnerships aimed at economic and social development

involving SME customers in co-development

• co-creation/codevelopment with SMEs • SMEs as part of open/ interactive innovation networks

213

SME as CSR target

• use of SMEs for the distribution of products/ services in poor areas of limited access • setting up SMEs with vision of regional development • broad BOP approach market creation through the involvement of SMEs • provision of credit, loans • products and services and micro-financing for developed to solve the creation and development specific needs of SMEs of micro enterprises and • emphasis on sustainability SMEs (financial aspects such as ecoinstitutions core friendly packaging business) • narrow BOP • broad BOP market creation through the involvement of SMEs prospects of supplier • innovation in value chain involvement in product through supplier development (no social programmes to involve factor) small farmers (aimed explicitly at poverty alleviation) • promotion of local development by helping SMEs ‘make the most of their skills’ • assistance/support to micro and SME sector • development of reseller diversity programmes (to meet government requirements) • spinoffs SME stimulated through employees • narrow BOP approach

Multinationals and Small- and Medium-Sized Enterprises (SMEs)

SME as distributor

(Continued )

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Table 1.

Mode of Engagement of SMEs in the Value Chain for Social Development Inactive no statement on SMEs as CSR target

Active

Proactive

• general statements on firm’s contribution to SME sector development • sponsorship of (or investment in) projects aimed at development of small scale farmers and SMEs (not related to firm’s core business) • microfinancing as philanthropy • disaster relieve assistance to micro enterprises and SMEs • support for microentrepreneurs (niche strategy)

development in combination to local development in areas that are related to the firm’s core expertise (e.g. training, sharing of knowledge and experience) • strong commitment to contribute to social and economic development of local communities though SME business development • support for microentrepreneurs (core strategy) • explicit reference to job creation at SME

• cross-sector collaboration and partnerships aimed at local development • support for microentrepreneurs (in collaboration with NGOs and other stakeholders) • set up SMEs as part of social partnerships

ROB VAN TULDER AND ANDREA DA ROSA

Reactive

Multinationals and Small- and Medium-Sized Enterprises (SMEs)

215

customers is specifically (but not uniquely) related to financial institutions that refer to the provision of credit, (unsecured) loans, and microfinancing to help (micro) entrepreneurs set up their businesses.

SAMPLE AND GENERAL PATTERNS The set of firms targeted for this exploratory study has been the world’s largest firms as represented by the top 100 firms of the Fortune Global list for 2006. We analysed the content of these firms’ CSR reports for the year 2005 or 2006, depending on availability, for their treatment of SMEs in general, and for inclusive business strategies in specific. In case of lacking CSR reports, Annual Reports or websites were consulted. The concept of ‘SME’ was taken broadly in this chapter to include also micro enterprises. The reports were analysed on the basis keywords search, for the words ‘micro’, ‘small’, ‘medium’, ‘local’, ‘SME’, and ‘SMB’ (the latter did not reveal any hits). Firms were scored in three manners: first, by indicating the absence or presence of statements in the report referring micro enterprises or SMEs; second, based on their statements on how they position these enterprises in their value chain and third, based on the level of engagement of micro enterprises or SMEs within the value chain of these MNEs (based on the categorisation in Table 1). The sample consists of firms that all have activities in developing countries and can therefore be considered ‘interested’ in inclusive business strategies. In a previous empirical study (Van Tulder, 2009) it was found that at least 58% of this sample had developed any type of initiative in terms of an inclusive business strategy. The question for this chapter is to find out whether this has been accompanied by explicit statements on the importance of SMEs. Witnessing the growing attention in the popular media and the business journals for the role of SMEs in sustainable development, and as increasingly important part of the innovation networks of core companies (see Chesbrough, 2003; Prahalad & Krishan, 2008), it comes as a surprise that only a minority (42%) of the 100 largest firms in the world explicitly acknowledge SMEs. This implies that the idea of SMEs as part of an inclusive business strategy has still to be operationalised. SMEs are primarily mentioned as suppliers or as target for CSR activities (Table 2). SME as distributors or innovators are marginally mentioned. Country of origin effects are present, which imply that Asian country companies consider SMEs only as suppliers, whereas European have the most diversified vision

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Table 2.

Position of SMEs in the Value Chain of Fortune 100 Global firms, by Region and Industry (2006).

Banks (N = 17) Insurance and securities (N = 14) Electonics, computers, telecom (N = 15) Petroleum refining (N = 14) Wholesalers, retailers, general merchandise, food, soaps (N = 15) Motor vehicles and parts (N = 13) Other (N = 12)

SMEs as Distributors

SMEs as Customers

SMEs as Innovators

SMEs as CSR Target

No Statements on SMEs

21 9 8 3 1

4 2 2 0 0

8 6 2 0 0

3 3 0 0 0

22 16 6 0 0

58 25 19 12 2

1 0

0 0

5 1

0 0

9 0

5 13

3

1

1

0

1

12

7 7

0 2

0 1

0 1

7 2

5 5

3

0

0

2

0

9

0

1

0

0

3

9

The numbers under the columns ‘SMEs as suppliers’, ‘SMEs as distributors’, ‘SMEs as customers’ and ‘SMEs as CSR target’ refer to the number of firms that include a reference to one of these categories in their CSR or Annual reports.

ROB VAN TULDER AND ANDREA DA ROSA

Total (N = 100) Europe (N = 52) USA (N = 30) Asia (N = 15) Developing (N = 3)

SMEs as Suppliers

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Multinationals and Small- and Medium-Sized Enterprises (SMEs)

of SMEs (including the largest number both in absolute an relative share of firms that explicitly acknowledge SMEs as target for CSR strategies). There exist relatively clear sector effects as well. Only banking, petroleum and retail MNEs acknowledge SMEs in any meaningful manner. Banks have been the most explicit in targeting SMEs equally as customer and as CSR target which in the case of microcredits for instance can be easily combined as part of a marketing strategy. Petroleum companies see SMEs equally as CSR target and as suppliers which is an indication of their risk management strategies since suppliers are often located in politically fragile states. For motor vehicles, suppliers are also considered innovators, which builds on a long tradition in the car industry of ‘black box engineering’ and Toyotism (cf. Carillo, Lung & Van Tulder, 2004) in which networks of suppliers are considered an important part of the lean manufacturing business model of Original Equipment Manufacturers. It seems logical that car manufacturers built on this tradition develop inclusive business strategies together with their most innovative probably first-tier suppliers. Contrary to the car industry, the electronics industry considers SMEs in their business in a rather scant but diverse set of roles, with one major exception: innovation. The general pattern in terms of business models (Table 3) reveals that the most proactive inclusive strategies are built on the roles of SMEs as suppliers and as CSRs targets, whereas the least developed aspects of SMEs in inclusive business strategies relates to innovation and distribution. There exists a link between the level of attention for a specific SME role and a more active approach. This reveals a bias in reporting initiatives for activities that might contribute to a more positive image of the company in the media. Nevertheless, the choice of ‘framing’ and the ‘narrative’ related to the specific role attributed to SMEs in this exercise, remains relevant and enables us to look for drivers of SMEs attention in the business models of MNEs. Table 3.

Mode of Engagement of SMEs in the Value Chain of Top 100 Fortune Global Firms, for Inclusive Business.

SMEs as suppliers SMEs as distributors SMEs as customers SMEs as innovators SMEs as CSR targets

Inactive

Reactive

Active

Proactive

80 97 95 98 78

16 3 2 2 13

7 1 4 2 13

3 0 2 1 7

N = 100; overlap in strategies possible.

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DRIVERS OF SME BUSINESS MODELS The classification of particular strategies as either passive or active makes it possible to search whether the general patterns (Table 4) can be explained by specific factors, in particular country-of-origin or sector. This section first reveals a number of statements of MNEs that can be considered typical for an inactive, reactive, active or proactive strategy on one of the five specific SME roles. This classification enabled a first count of prevailing business models for the whole sample and consequently a first explanation of possible patterns. Suppliers Typical statements for the approach of MNEs towards SMEs as part of their upstream inclusive business strategy are: Inactive

Total provides work for a large number of suppliers, including both major oil service industry companies and small- and medium-sized businesses located near our facilities. In 2005, we worked with nearly 100,000 suppliers (Total CSR Report, 2005, p. 18)

Reactive

[…] Petrobras will be investing approximately R$ 60 million by the end of 2007 in 35 projects for the development of new products and service suppliers, to enable imports to be substituted competitively. Through an agreement signed in 2004 with Sebrae (Brazilian Service for the Support of Micro and Small Enterprises) the Company is helping small- and medium-sized enterprises to insert themselves into the productive chain of the oil and gas sector, in 12 states. By the end of 2007, R$ 6 million will be invested (Petrobras Social and Environmental Report, 2005, p. 67)

Active

Buying from local suppliers is a particularly effective way for us to encourage development in the places where we operate. It directly contributes to the local economy, creates jobs and builds skills. We actively promote the use of local suppliers and contractors and train local companies to help them meet our standards, so they can compete for contracts (Shell CSR Report, 2006, p. 28)

Active/ proactive

Nestle´ has been working with the communities and dairy farmers with the aim of transferring technology. It is providing technical assistance to improve animal productivity, herd management and farm economics. With rural support programmes Nestle´ has educated over 10,000 village women in dairy farming practices. Nestle´ is developing software in collaboration with local organisations and the Swiss agricultural universities of Zollikofen to optimize the quality of milk and help reduce cost of production to encourage dairy farming as a sustainable cash crop (Nestle Community Report, 2006, pp. 8 9).

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Multinationals and Small- and Medium-Sized Enterprises (SMEs)

Table 4.

SMEs as Suppliers

Strategies, by Region and Industry. Inactive

Reactive

Active

Proactive

SMEs as suppliers Europe (N = 52) USA (N = 30) Asia (N = 15) Developing (N = 3)

80 44 22 12 2

16 4 8 3 1

7 6 1 0 0

3 3 0 0 0

Banks (N = 17) Insurance and securities (N = 14) Electonics, computers, telecom (N = 15) Petroleum refining (N = 14) Wholesalers, retailers, general merchandise, food, soaps (N = 15) Motor vehicles and parts (N = 13) Other (N = 12)

16 14 12 8 8

1 0 3 5 4

0 0 0 2 4

0 0 0 0 3

10 12

3 0

1 0

0 0

N = 100; overlap in strategies possible.

The following pattern emerges (Table 4). Most firms have an inactive approach towards SMEs as distributors. European firms prevail in the subsample of (pro)active approaches, whereas Asian and developing country firms relatively prevail in the subsample of passive approaches. Neither patterns, however, is dominant. The regulatory framework in Europe clearly impacts on these strategies as has been revealed in more general terms elsewhere (cf. Van Tulder with Van der Zwart, 2006 for a literature overview). Best practice examples of more active approaches can primarily be found in the retail sector (in Europe). Distributors Typical statements for the approach of MNEs towards SMEs as part of their downstream inclusive business strategy are: Inactive/ reactive

‘The leading franchiser in France and Europe, Carrefour is developing franchises and partnerships abroad with a network of 12 partner companies in 16 countries and territories. All formats, from the hypermarket to the convenience store, are open to franchising and partnerships, enabling individual investors and companies to belong to a retail banner. Access to franchising is facilitated for employees through a system of gateways. Carrefour is thus continuing to develop an entrepreneurial spirit, to support the creation of SMEs, and to foster the rise of a new class of company heads in many countries […] Partnership SME is a specialized structure responsible for developing relations with SMEs in France.

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Its policy involves promoting the regional development of such companies, assisting them with contacts within the Group’ (Carrefour Sustainability Report, 2005, pp. 31, 34 35) Reactive

‘HP has a global policy and program to ensure that we offer under-represented businesses equal opportunities to become HP suppliers and resellers. This policy ensures that HP meets the diversity requirements of the U.S. Federal Government and the expectations of the public sector, corporate customers and consumers. In the United States, the main categories of businesses supported by our supplier diversity program are minority-owned, women-owned and veteran-owned businesses’ (Hewlett-Packard Global Citizen Report, 2006, p. 59)

Active

‘In rural areas far from the grid, the Access program fosters the creation of small energy service companies to supply electricity to families and small economic activities (Morocco, Mali, South Africa). In periurban areas (Capetown, Buenos Aires), Access uses low consumption technologies and equipment. In 2005, the number of customers connected to electricity through the Access program reached 29,500 (223,000 people), up from 16,138 (133,000 people) in 2004’ (E´lectricite´ De France Sustainable Development Report, 2005, p. 52)

Examples of proactive strategies, in which MNEs explicitly approached SMEs as part of a co-creation strategy for inclusive business, could not be found. This is an indication first of the much lower importance of SMEs in the distribution strategies of MNEs. Large MNEs with a quotation on the stock market have received their power primarily due to their control Table 5. SMEs as Distributors

Strategies, by Region and Industry. Inactive

Reactive

Active

Proactive

SMES as distributors Europe (N = 52) USA (N = 30) Asia (N = 15) Developing (N = 3)

97 51 28 15 3

3 1 2 0 0

1 1 0 0 0

0 0 0 0 0

Banks (N = 17) Insurance and securities (N = 14) Electonics, computers, telecom (N = 15) Petroleum refining (N = 14) Wholesalers, retailers, general merchandise, food, soaps (N = 15) Motor vehicles and parts (N = 13) Other (N = 12)

17 14 14 14 14

0 0 1 0 2

0 0 0 0 0

0 0 0 0 0

13 11

0 0

0 1

0 0

N = 100; overlap in strategies possible.

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over distribution chains, which are often wholly owned, which has clearly had a negative impact on the way they include SMEs as a potential partner in their distribution strategy (Table 5). The only exception comes from Europe in public utilities (electricity), which can be interpreted as a first indication of the growing need for partnerships with SMEs as well as with NGOs and governments in creating sufficiently expanded infrastructure in developing countries in particular in fragile or failed states.

Customers Typical statements for the approach of MNEs towards SMEs as customers in an inclusive business strategy are: Inactive

‘We serve small- and mid-sized business customers worldwide by providing specialized advice, technology and services through our Smart Office Portfolio’ (Hewlett-Packard Corporate Citizen Report 2006, p. 75).

Reactive

‘SAM’S CLUB [business unit of Wal-Mart] plans to open over 30 new, relocated or expanded clubs in the fiscal year ending January 31, 2007. Our ongoing commitment to small business owners and increased attention to the personal needs of our Advantage Members will help us accelerate sales growth. We continue to build quality into our affordable luxury offerings. A new emphasis on sustainability, including eco-friendly packaging and organic products, is fast becoming part of our culture’ (Wal-Mart Annual Report, 2006, p. 15).

Active

‘Our consumer clients range from microfinance and mass retail consumers to high net-worth private clients, while our corporate clients range from small businesses to the world’s largest multinationals. All these client groups are core to our strategy. […] We provide microfinance loans at fair market prices. Microfinance goes beyond just business loans, as it aims to alleviate poverty and create positive social impacts in health, education and empowerment of women and communities’ (ABN AMRO Sustainability Report, 2005, 21, 47).

Active/ proactive

‘In 2005, the Regional Banks invested more than e18 million in nearly 6,000 projects, mainly focused on enhancing the quality of life in the countryside. By encouraging company creation, they also take part in the economic development of such zones. Some noteworthy initiatives in the field of helping entrepreneurs take over or set up micro-businesses include unsecured loans, such as Cre´dit Agricole de Savoie’s Preˆts Tremplin or Cre´dit Agricole Centre Est’s Cre´dit Agricole Cre´ation. Regional Banks also cooperate with the two networks that provide aid for company creation and economic insertion, the Association pour le Droit a` l’Initiative E´conomique (ADIE) and France Active’ (Cre´dit Agricole Sustainability Report, 2005, p. 39).

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Only six European banks (some of them cooperatives or semi-state) are developing a more or less active strategy towards SMEs as customers, thereby adopting some of the BOP approaches as pioneered by Prahalad (2005) (Table 6).

Innovators Typical statements for the approach of MNEs towards SMEs as part of an innovative and inclusive business strategy are: Inactive/ reactive

‘Suppliers, too, know how important proximity to a productive global company can be. Their collaboration with DaimlerChrysler goes beyond simply filling orders. For example, the company’s Minority Supplier Program insures that a minimum percentage of the company’s purchasing is fulfilled by minority-owned businesses. Top performing suppliers are integrated into the supply chain at an early stage and thus receive even deeper insights into the market and customer needs […] Experts predict that the proportion of value-added attributable to suppliers will rise in the next few years, and that they will become even more closely involved in product development’ (DaimlerChrysler Sustainability Report, part 1, 2006, p. 28).

Reactive/ active

‘In 2005, Elasis- Fiat’s research centre- continued to pursue its strategic goal of forging new links in the research/innovation system’s value chain and of promoting local development. Within the framework of this activity, it participated with universities, private institutions and consortia in basic research and training, by continuing to work on the issues related to mobility and its environmental impact, and by cooperating with employers’ associations and chambers of commerce in Southern Italy to help the area’s SMEs make the most of their skills’ (Fiat Sustainability Report, 2005, p. 79).

Active/ proactive

‘The 2005 “Make Poverty History” campaign identified increased trade as one of three key means of eliminating poverty an aim we support. We source products from farms in 15 African countries. Sales of African products have increased consistently, helping our suppliers to invest in their businesses and add value to the local economy. For example, one of our Kenyan suppliers, Homegrown, has an innovative smallholder programme which enables over 1,000 small-scale farmers to reach our customers’ (Tesco CSR Report, 2006, p. 27).

European retailers take the lead in this area with the most active approach, but over the whole in a very modest setting (Table 7). Too many companies have an inactive approach (either because they don’t even mention SMEs as innovators or because they explicitly see only a marginal or relatively weak role for SMEs as part of their innovation network.

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Table 6.

SMEs as Customers

Strategies, by Region and Industry. Inactive

Reactive

Active

Proactive

SMEs as customers Europe (N = 52) USA (N = 30) Asia (N = 15) Developing (N = 3)

95 48 29 15 3

2 1 1 0 0

4 4 0 0 0

2 2 0 0 0

Banks (N = 17) Insurance and Securities (N = 14) Electonics, computers, telecom (N = 15) Petroleum refining (N = 14) Wholesalers, retailers, general merchandise, food, soaps (N = 15) Motor vehicles and parts (N = 13) Other (N = 12)

13 14 15 14 14

1 0 0 0 1

4 0 0 0 0

2 0 0 0 0

13 12

0 0

0 0

0 0

N = 100; overlap in strategies possible.

Table 7.

SMEs as Innovators

Strategies, by Region and Industry. Inactive

Reactive

Active

Proactive

SMEs as innovators Europe (N = 52) USA (N = 30) Asia (N = 15) Developing (N = 3)

98 50 30 15 3

2 2 0 0 0

2 2 0 0 0

1 1 0 0 0

Banks (N = 17) Insurance and Securities (N = 14) Electonics, computers, telecom (N = 15) Petroleum refining (N = 14) Wholesalers, retailers, general merchandise, food, soaps (N = 15) Motor vehicles and parts (N = 13) Other (N = 12)

17 14 15 14 14

0 0 0 0 0

0 0 0 0 1

0 0 0 0 1

12 12

2 0

1 0

0 0

N = 100; overlap in strategies possible.

The claim of open innovation (which would necessitate an active attitude of MNEs towards a large number of much smaller firms) has clearly not reached the ranks of MNEs for their inclusive growth/innovation strategies. This is remarkable since a prequisite of Prahalad’s BOP strategy has been the involvement of SMEs in innovation.

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CSR target Typical statements of MNEs towards SMEs in which they consider them as CSR target are: Reactive

‘The actions undertaken by the Group to help rebuild and develop areas that were devastated by the tsunami that swept through Southeast Asia in early 2005 are striking examples of steadfast solidarity. Of the e2 million earmarked for this aid, more than e750,000 has already been distributed. The projects financed cover a wide range of fields, from rebuilding fishing fleets to setting up micro-loans to finance the revival of traditional industries’ (Cre´dit Agricole Sustainability Report, 2005, p. 39)

Active

‘We are also working directly in Coˆte d’Ivoire to help small farms produce sustainably grown cocoa. Following a fact-finding mission in May 2005, we launched our first project at year-end and are anticipating the region’s first sustainably produced cocoa in 2007 […] In 2000, Kraft joined with other coffee buyers, multi-government funding agencies and a local producer, the Tan Lam Company (TALACO), to support sustainable production in the Khe Sanh region. Our goals were to help the 2,000 farmers there who grow arabica coffee to improve quality, introduce sustainable agriculture practices, and improve living standards of farm workers through infrastructure developments and programs to support children’s needs’ (Altria Group CSR Report, 2005, pp. 12 13)

Proactive ‘In late 2003, we launched our first Growing Sustainable Business or Poverty Reduction (GSB) project in Madagascar, in cooperation with the government, for whom improving road safety is a priority. Funded at $1 million, the three-year Program to Improve Petroleum Product Transportation in Madagascar (PATH) is designed to enhance the skills, safety, productivity and revenue of small- and mediumsized carriers’ (Total, CSR Report, 2005, p. 66).

These statements reveal the type of relationships through which American and in particular European firms established inclusive business strategies particularly aimed at SMEs (Table 8). This approach re-inforces the World Bank’s ‘private sector development’ schemes, which has been considered one of the most effective means of contributing to economic sustainability. The complete absence of SMEs as target of CSR policies in Asian and developing country firms is remarkable. Sector patterns again reveal the particular importance of banks and petroleum, but do not reiterate the active role of retailers that was part of the general pattern. The latter implies that the largest retailers might have a more active approach towards SMEs, but not in the area of CSR. This reinforces the claim of many NGOs around the world, which accuse big retailers of stalling progress in the value chain that is ‘governed’ by the retailers/wholesalers.

225

Multinationals and Small- and Medium-Sized Enterprises (SMEs)

Table 8.

SMEs as CSR Targets

Strategies, by Region and Industry. Inactive

Reactive

Active

Proactive

SMEs as CSR targets Europe (N = 52) USA (N = 30) Asia (N = 15) Developing (N = 3)

78 36 24 15 3

13 11 2 0 0

13 9 4 0 0

7 4 3 0 0

Banks (N = 17) Insurance and securities (N = 14) Electonics, computers, telecom (N = 15) Petroleum refining (N = 14) Wholesalers, retailers, general merchandise, food, soaps (N = 15) Motor vehicles and parts (N = 13) Other (N = 12)

8 14 14 7 13

7 0 0 4 1

4 0 1 3 2

2 0 1 3 0

13 9

0 1

0 3

0 1

N = 100; overlap in strategies possible.

INTERMEDIARY CONCLUSIONS This chapter reported the first results of an exploratory study on the inclusive business models of MNEs. The literature is still in need of sophisticated concepts and taxonomies, so the chapter concentrated on developing a first taxonomy for different types of approaches in which the MNE takes a more or less active position towards SMES in developing countries. Five roles were identified for SMEs that either related to their position in the supply chain, or to their (potential) function towards the issue of sustainable development (i.e. what could make the strategy of an MNE qualify as ‘inclusive’). The taxonomy has largely been validated, but the results are not yet very radical. There exists a country of origin effect in that European firms are clearly amongst the leaders in experimenting with inclusive business strategies that include SMEs, but their number still remains limited. Sectors like banking and retail have developed the most interesting examples that are also spread over a large number of functions. This study and its concepts can provide material for further studying leading (better-practice) cases in order to help policy makers and business strategists to develop better business models for inclusive growth. This is not a luxury. The area is still poorly conceptualised and empirically tested. The exploratory approach in this study which comes with a large number of limitations should help to bring this particular area of research further.

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REFERENCES Aitken, B. J., & Harrison, A. E. (1999). Do domestic firms benefit from direct foreign investment? Evidence from Venezuela. The American Economic Review, 89(3), 605–618. Alfaro, L., & Rodriguez-Clare, A. (2004). Multinationals and linkages, an empirical investigation. Economia, 4(2), 113 169. Blomstrom, M., Globerman, S., & Kokko, A. (1999). The determinants of host country spillovers from FDI: Review and synthesis of the literature. SSE/EFI Economics and Finance Working Paper No. 239, Stockholm School of Economics. Carillo, J., Lung, Y., & Van Tulder, R. (Eds.). (2004). Cars, carriers of regionalism. London: Palgrave-McMillan. Chesbrough, H. (2003). The logic of open innovation: Managing intellectual property. California Management Review, 45(3), 33–58. Cho, K. R. (1990). Foreign banking presence and banking market concentration: The case of Indonesia. Journal of Development Studies, 27(1), 98–110. De Wit, B., & Meyer, R. (2010). Strategy: Process, content, context: An international perspective (4th ed.). Hampshire: Cengage Learning EMEA. Dunning, J. H., & Fortanier, F. (2007). Multinational enterprises and the new development paradigm: Consequences for host country development. Multinational Business Review, 15(1), 25 46. Fortanier, F. (2008). Multinational enterprises, institutions and sustainable development. PhD Disseration, University of Amsterdam. Fortanier, F., & Kolk, A. (2007). On the economic dimensions of CSR: Exploring Fortune Global 250 reports. Business and Society, 46(4), 457 478. Gereffi, G., Humphrey, J., & Sturgeon, T. (2005). The governance of global value chains. Review of International Political Economy, 12(1), 78–104. Javorcik, B. (2004). Does foreign direct investment increase the productivity of domestic firms? In search of spillovers through backward linkages. American Economic Review, 94(3), 605 627. Mees-Buss, J., & Welch, C. (2014). Taming a wicked problem? Unilever’s interpretations of corporate social responsibility 2000–2012. In R. Van Tulder, A. Verbeke, & R. Strange (Eds.), International business and sustainable development (Vol. 8). Bingley, UK: Emerald Group Publishing Limited. Meyer, K. (2004). Perspective on multinational enterprises in emerging economies. Journal of International Business Studies, 35, 259 276. Prahalad, C. K. (2005). The fortune at the Bottom of the Pyramid: Eradicating poverty through profits. Upper Saddle River, NJ: Wharton School Publishing. Prahalad, C. K., & Krishan, M. S. (2008). The new age of innovation: Driving co-created value through global networks. New York, NY: McGraw Hill. Rodrik, D. (2006). What’s so special about China’s exports. China and World Economy, 14(5), 1–19. Stiglitz, J. (1998). Towards a new paradigm of development: Strategies, policies and processes. Prebisch lecture, UNCTAD, Geneva. Van Tulder, R., & Da Rosa, A. (2012). The role of cross-sector partnership portfolios in the inclusive business strategies of multinational enterprises. In R. Van Tulder, A. Verbeke, & L. Voinea (Eds.), New policy challenges for European multinationals (Vol. 7, pp. 153–180).

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Progress in International Business Research. Bingley, UK: Emerald Group Publishing Limited. Van Tulder, R., Van Wijk, J., & Kolk, A. (2009). From chain liability to chain responsibility. Journal of Business Ethics, 85, 399–412. Van Tulder, R., & Van der Zwart, A. (2006). International Business-Society Management: linking corporate responsibility and globalization. London: Routledge. Van Tulder, R., Van Tilburg, R., Francken, M., & Da Rosa, A. (2013). Managing the transition to a sustainable Enterprise. London: Earthscan at Routledge.

This article has been cited by: 1. Adeleke.O. Banwo, Jianguo Du, Uchechi Onokala. 2015. Symbiotic Innovative Relationships of Small and Medium Enterprises. Journal of Advanced Management Science 128-131. [CrossRef]

PART III

CHAPTER 10 A RETROSPECTIVE ON: INFRASTRUCTURE OR FOREIGN DIRECT INVESTMENT? Mo Yamin and Rudolf R. Sinkovics ABSTRACT Purpose This chapter revisits the paper by Yamin and Sinkovics (2009) on the paradoxical relationship between MNE current strategies and economic development. There is evidence that positive developmental impacts of FDI flows are conditional on high levels of human capital and thus on the existence of ‘good’ infrastructure in recipient countries. Design/methodology/approach The chapter makes a conceptual contribution and critically evaluates the key points made in the Yamin and Sinkovics (2009) paper. Findings The build-up of infrastructure and enhancement of domestic capabilities are important underpinnings of sustainable development. ‘Good’ infrastructure, especially basic social infrastructure, is the rock on which otherwise marginalised individuals, groups and country governments can build capabilities. Research implications The chapter draws attention to the ‘prisoner dilemma’ nature of the relationship between MNEs and host

International Business and Sustainable Development Progress in International Business Research, Volume 8, 231 247 Copyright r 2014 by Mo Yamin & Rudolf R. Sinkovics All rights of reproduction in any form reserved ISSN: 1745-8862/doi:10.1108/S1745-8862(2013)0000008015

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governments. Dominant MNE strategies in LDCs create a low payoff for both parties. To proceed towards mutually beneficial outcomes in the MNE LDC relationship, credible and sustained co-operation between the parties are necessary. Research in the area of mutual value creation has only just emerged in the domain of IB. Practical implications Progressing towards ‘sustainability’ requires that MNE managers are advised to develop a global capability in ‘social embeddedness’. LDCs have great potential of becoming strategic markets and important sites for new product and service development. To pursue these opportunities requires credible and sustained commitment to mutual value creation. Originality/value This chapter shows that the relationship between MNE strategies and economic development is a contested one. The paper by Yamin and Sinkovics (2009) was one of the first in the domain of IB to suggest that developmental impacts of FDI are contingent on the existence of good infrastructure in recipient countries. Keywords: Infrastructure; economic development; FDI benefits; multinational strategy; poverty

INTRODUCTION Yamin and Sinkovics (2009) explore the paradoxical relationship between MNE strategies and economic development. They suggest that there is evidence that positive developmental impacts of FDI flows are conditional on high levels of human capital and thus on the existence of ‘good’ infrastructure in recipient countries. Their conclusion is that current MNE strategies may have a negative impact on the development of infrastructure in LDCs, because of resource-poor countries compromising potential basic infrastructure investments by attracting increasingly footloose investment. The motivation for this chapter was that recent IB discussions of the MNE development had begun to focus on poverty reduction as an important issue (e.g. Dawar & Chattopadhyay, 2002; London & Hart, 2004; Ramamurti, 2004). Specifically the work of Prahalad (2004) and London and Hart (2004) who had critiqued the impact of MNEs for its neglect of the bottom of the pyramid as potential markets and contexts for collaborative networks (London, 2009; London & Hart, 2011), has triggered some considerations of MNE social strategies, legitimacy issues and impacts on

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emerging economies (Karnani, 2007; Reimann et al., 2012; Sinkovics, Sinkovics, & Yamin, 2014). The focus on infrastructure in Yamin and Sinkovics (2009) derived directly from the intention to explore how the IB literature could engage with the discourse of developmental impacts on poverty reduction. Our starting point was the observation of a paradox in the IB literature. On the one hand a number of studies investigating, in aggregate terms, the impact of FDI on economic development generate a strong consensus that the positive impact of FDI on economic development was significantly contingent on high levels of human capital development in recipient countries (Yamin & Sinkovics, 2009, p.149). On the other hand, the radical change in MNE strategies from generally (host country) market-focused, federative structures towards more efficiency-seeking, and de-federative structures (Yamin & Forsgren, 2006), currently evolved into a literature around the notion of global factories (Buckley & Ghauri, 2004; Ghauri & Buckley, 2006). The latter body of work would suggest a low developmental impact. In this postscript we briefly review our analytical steps in developing the arguments that FDI and infrastructure would be competing for resources to the detriment of LDCs. In retrospect we appreciate that the paper was implicitly criticising both LDC policies and the strategies of MNEs. We conclude by relating our arguments to the specific issue of sustainability and the type of MNE strategies that would be broadly consistent with this aim. We acknowledge the challenging nature of the required strategic shifts that sustainability implies both for MNEs and host country governments. Whilst we recognise that sustainability is inevitably complex and multi-facetted, as the editors have highlighted in the introduction to this book, we argue that a key-prerequisite for sustainability is capability development. Ultimately the debate on the impact of MNEs on LDCs is thus to be seen in light of MNEs’ contribution to the capability development in LDCs.

CHANGING MNE STRATEGIES AND STRUCTURES Traditionally IB scholarship assumed that the key strategic issue for the MNE was the handling of the tension between the imperative of global integration on the one hand and the need for national responsiveness on the other (Bartlett & Ghoshal, 1987). The need for national responsiveness, in part, reflected an environment in which national governments

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had significantly more bargaining power in their dealings with MNEs than they generally do nowadays. This dual imperative was reflected in the organization of the MNE. The seminal work of Ghoshal and Bartlett (1990) explained why multinationals would tend to be federative rather than unitary structures, although industry and other contingencies would also be influential in shaping the structure. In the federative structure, national subsidiaries (by which we mean a subsidiary whose focus is very much on the national environment and market of the host country) were an important part of the organization of MNE. Thus, Ghoshal and Bartlett (1990, p. 607) argued that one reason for the limit to the efficacy of headquarters fiat in MNEs was that (some) subsidiaries ‘control critical linkages with the host governments’. The basis for the power of national governments was of course control over access to the national economy and in particular to their markets. Multinational expansion frequently took the form of establishing ‘miniature replicas’, that is subsidiaries which performed several value chain activities in an integrated way and whose main function was to adopt or adapt the products and technologies of the MNE to the market and customer environment of the host countries. Over time however, miniature replicas could become more powerful; focus on the national economy would lead to significant degrees of ‘embeddedness’ in the national market, meaning that the subsidiary would become rooted in a network of business, technological and institutional actors in the host country (Ghauri, 1992; Phene & Almeida, 2003). In the words of Phene and Almeida (2003) subsidiaries grow ‘progressively closer to local host country networks both in terms of sourcing and sharing knowledge’ (Phene & Almeida 2003, p. 363). It has also been found that subsidiary embeddedness in local business and technology networks is an important source of subsidiary strategic capabilities (Andersson, Forsgren, & Holm, 2002). From the perspective of economic development, this ‘old model’ of MNE expansion had a positive quality compared to what has replaced it in potentially encouraging linkages in the domestic economy and the development of industrialization, although in practice the models’ implementation was often mired in excessively protectionist policies. Moreover the smaller markets and lower purchasing power of many LDCs constrained the scope for subsidiary development and linkage formation. However the experience of MNE assisted import substitution is not wholly negative (Hirschman, 1968). Globalization has reduced the need for national responsiveness. MNE strategies are shifting towards greater global (or at least regional) integration (Levy, 2008) and their investment decisions are increasingly motivated

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by efficiency and strategic asset seeking. The MNEs’ emerging strategies are underpinned, on the one hand, by their increasingly knowledge-based, intangible and hence mobile core assets and capabilities and, on the other hand, by lower and falling barriers to cross border operations. This gives MNEs more locational choices, particularly with respect to production and operational activities. Thus MNE strategies revolve around the disintegration of the value chain (Birkinshaw, 2001; Buckley & Ghauri, 2004) reflecting an increasing ability ‘to segment their activities and to seek the optimal location’ for narrowly specialised activities (Buckley & Ghauri, 2004, p. 83). This observation is a central pillow around the notion of the ‘global factory’ (Buckley, 2009, 2011; Yamin, 2011). In this view of MNE strategy the pattern of FDI flows is influenced by the fact that, increasingly, host countries fit into the strategic calculation of MNEs as sites for key resources or capabilities rather than markets. All of this has led to a reduction in the importance of nationally focused subsidiaries. Birkinshaw (2001) in fact has observed that the national subsidiary is an ‘endangered species’. They have typically experienced a significant reduction in the value chain scope and a shift towards greater operational integration into the MNE and less integration in the host economies where they are located. However despite this general trend, the potential impact of the MNEs’ new globalising strategies is likely to be systematically different between developed countries and LDCs. In developed economies, the demise of the national subsidiary has not necessarily meant that they have become totally powerless organizations. They have lost control over market positioning (that is where and who they sell to) as their focus is no longer typically the local market. But they retain the potential to develop resources and capabilities which are valuable in meeting demands of the MNE customers. These are increasingly defined on global or regional rather than individual country basis. There is ample evidence that subsidiaries in developed countries can become major players in the MNE through developing ‘global mandates’ or becoming ‘centres of excellence’ (Andersson & Forsgren, 2000; Birkinshaw, 1996). Thus the narrowing of the value chain scope of subsidiaries does not necessarily imply a withering of subsidiary capabilities in fact they can become capable specialists with a global or regional reach. It all seems to depend on the subsidiary’s ability to develop its internal capabilities often in the process of interacting with external counterparts in its local environment (Andersson & Forsgren, 2000; Birkinshaw & Ridderstrale, 1999). However the situation seems to be radically different in most LDCs.

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FDI FLOWS TO LDCS: LOW DEVELOPMENT POTENTIAL Most developing countries, due to their small population and low per capita income are unlikely to attract much market seeking FDI. Market seeking investment in LDCs is, at any rate, mostly focused on the higher end of the income distribution, incorporating product offerings and marketing policies that mostly bypass the majority of potential (but poor) consumers. However, this may be more a consequence of a weakness of MNE strategies in the LDCs rather than an inherent difficulty in reaching the poor (Dawar & Chattopadhyay, 2002; London & Hart, 2004). In general, LDCs are overwhelmingly attracting ‘asset-exploiting’ investment, comprising of the transfer of relatively low technology and low value activities to be combined with the main location bound advantages of these countries mostly cheap and unskilled labour. The dominant trend is LDCs’ participation in MNE controlled production networks (Levy, 2008; Nadvi, 2011). LDCs usually enter these networks as sites for the production of highly specified and narrow range of low value-adding activities (‘slivers of specialised activity’, Buckley & Ghauri, 2004). The distinctive contribution of FDI to economic development revolves around its potential to generate positive spillovers. This is the ‘external economy’ associated with FDI. FDI can generate benefits that are not fully captured by the MNE undertaking the investment. Thus in theory LDC firms gain productivity and knowledge advantages that they don’t pay for in full (Zanfei, 2005). The mechanisms through which spillover can occur have been discussed at length in the literature (see, e.g. Bloomstro¨m, Kokko, & Zejan, 2000) and include leaning by and knowledge transfer to domestic firms and enhanced productivity through greater competition induced by the entry of the MNE. The interest in the extent and depth of MNE linkages in the host economy reflect an expectation of the enhanced possibility of knowledge and productivity benefits accruing to the MNEs’ local partners at a lower cost than would otherwise be the case. However such an outcome is not automatic and only in rare circumstances does being tied into global value chains actually lead to opportunities for upgrading skills and resources (Giuliani, Pietrobelli, & Rabellotti, 2005; Pietrobelli & Rabellotti, 2004). The literature suggests only a positive correlation rather than a definite cause and effect relationship between linkages and spillovers. Generally, the greater the degree of an MNEs’ resource commitment to the host economy, through linkages and sourcing of

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intermediate inputs (Rodriguez-Clare, 1996), the greater the degree of positive spillovers are likely to occur in LDCs. As we indicate in the original paper (Yamin & Sinkovics, 2009, p. 147), empirical work focused on LDCs conforms to these conclusions. Thus, these findings support the new consensus relating to the low development potential of FDI patterns in LDCs, which replaces the earlier optimism regarding FDI as ‘an engine of development’ (UNCTAD, 1992).

IMPLICATIONS In an endeavour to enrich the assessment of low developmental potential of FDI for economic development, the Yamin and Sinkovics (2009) paper progresses by focusing on how currently dominant strategies of MNEs vis-a`-vis LDCs may have negative consequences for the development of infrastructure in these countries and thus aggravate the obstacles to poverty eradication. Fig. 1 encapsulates our arguments, linking low development potential of FDI to reducing investment in basic infrastructure. The two key mechanisms in the process are (a) reduced spillover and linkage effects and thus weaker income multiplier effects of FDI and (b) rising costs and administrative crowding out consequences of attracting footloose FDI. The outcome of this process is reduced government revenue and investment on basic infrastructure.

Reduced Spillover and Linkage Effect First, as the discussion of the literature in the previous section indicates, a consequence of current MNE strategies is that the ‘quality’ of FDI flows to LDCs has declined, meaning that other things being equal the prospect that efficiency seeking FDI may promote economic growth is rather discouraging. The reduced spillover and linkage effects associated with the dominant pattern of FDI in LDCs imply a low value added multiplier (Bende-Nabende & Ford, 1998; Mirza & Giroud, 2004) in the economy and ceteris paribus a reduced ability to increase public revenue through taxation. A second effect which we have not yet considered, relates to the rising cost of attracting FDI. This will be discussed in the following sub-section.

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Globalization dynamics (Pressure from WTO and Int’I Institutions, Technology & ICT Advancements, Trade & Investment liberalization pressures) MNE level

MNE Strategy

Subsidiaries specialize narrowly in slivers of activity Subsidiaries more integrated in the corporate system, less embedded in host economy

... hence: FDI Flows FDI more footloose FDI more incentive elastic

LDC country effects

Rising cost of attracting FDI

∗

Fiscal conservatism Pressures for macroeconomic stability Reduced policy space for governments

Weaker spillover / linkage effects (weaker income multiplier effects)

∗∗

Increasing pressure on public revenue and hence public expenditure Reduced investment in basic infrastructure

Fig. 1. Linking MNE Strategies to Infrastructure Development in LDCs (Yamin & Sinkovics, 2009). Note: *increases for countries with weak infrastructure; ** weaker for economies with weak infrastructure.

Attracting FDI: Rising Costs and Administrative ‘Crowding Out’ MNE strategies and the consequent general pattern of FDI flows generate competition between countries to attract footloose FDI which bids up the ‘price’ that MNEs can extract for locating activities in a particular country or region within the country. The price is further bid up if LDCs have to compete with (the poorer regions of) developed economies whose governments have much greater resources to subsidize incoming FDI (Dunning & Narula, 2004, p. 30). An important manifestation of this is the increase in the incentive elasticity of FDI flows (Easson, 2001; Mutti & Grubert, 2004; Taylor, 2000; UNCTAD, 2003). Easson observes that while MNE executives used to downplay the role of incentives, they now readily acknowledge their increasing importance for investment decisions (2001, p. 272). The World Investment Report (UNCTAD, 2003, p. 125) puts recent findings in perspective, noting that locational incentives have become more important as the mobility of firms has increased. Econometric studies that previously found incentives ineffective, now find that they have become more

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significant determinants of FDI flows. The study by Mutti and Grubert (2004) puts emphasis on the variability of (tax) incentive sensitivity across different activities and countries: ‘empirical estimates indicated that investment geared towards export markets, rather than the domestic market, is particularly sensitive to host country taxation, that this sensitivity appears to be greater in developing countries than developed countries, and that it is becoming greater over time’ (Mutti & Grubert, 2004, p. 337, emphasis added). MNEs’ increasing sensitivity to incentives is itself in part a function of unregulated and uncoordinated competition between countries. As incentives become ever more generous, their weight in the investment calculation of MNE inevitably increases. As Easson has noted, decisions that would not have been influenced by a ‘mere’ two year tax holiday may well be swayed by a 10 year holiday (2001, p. 372). Beyond loss of tax revenue, there are other costs involved in competing for incoming FDI. Many LDCs have created national and regional investment agencies to promote the country or region to foreign investors. A key aim of such agencies is to help improve the investment climate by reducing bureaucratic and administrative costs for investors. Because MNEs can choose amongst different locations and compare transaction and administrative costs across countries, ‘attracting them requires not just that transaction costs be lowered, but also, increasingly, that they be benchmarked against those of competing host countries’ (UNCTAD, 1999). One measure that many LDCs have adopted to ensure that international investors face minimal costs is to set up one-stop promotion agencies to guide and assist them in getting necessary approvals (UNCTAD, 1999). However, as the UNCTAD report notes, unless the agencies have the authority needed to provide truly one-stop services, they will not be effective. The authority exercised by such an agency is partly a political issue but it does require having competent administrative leadership and operational manpower. The case study of the development of the ‘one-stop-shop’ investment promotion agency in Egypt suggests that it only became successful after managing to attract a number of highly qualified and experienced administrators to occupy leading positions in the agency (MIGA, 2004). Earlier failure of the agency was partly explained in terms of its staff lacking the ‘knowledge, competency, training and authority to grant approvals or licenses, and so were not able to help investors However attracting MNE through high-powered one stop-shop probably can entail a degree of administrative ‘crowding out’ in many developing countries, depriving other public policy priorities not only of funding but also of adequate administrative support. This is all the more concerning

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when we take account of the fact that LDCs typically suffer from a generally low level of (public) administrative resources. The absence of skilled and competent state bureaucracy has been held to be an obstacle to economic development and a key difference between the small group of Asian ‘tigers’ and many other less successful developing countries (World Bank, 1993). In its influential 2001 Report on ‘Attacking Poverty’ (World Bank, 2001) bemoaned the low quality of state apparatus and its lack of responsiveness to the poor, in particular. The Report puts stress mostly on the institutional aspect of poor public service to the poor; such as the high level of corruption and the arbitrary and non-transparent decision making of state bodies. However it is clear that the development of physical infrastructure may be similarly constrained by inadequate state funding and low organizational capabilities of the state bureaucracy. Furthermore as most FDI is probably attracted to the already better off regions of the country there will be a greater effort to improve infrastructure in these areas, depriving the poorer regions and the rural areas in particular. Even after years of very rapid growth in the two largest emerging economies (China and India), the rural areas lag significantly in terms of access to basic infrastructure such as heath and sanitation (in India, for example only 23% of the rural population had access to improved sanitation in 2010 (Asian Development Bank, 2013). Generally the opportunity cost of attracting FDI in terms of constraints on public infrastructure is likely to be even greater for the poorer rural areas in LDCs. Thus we may expect the negative impact of attracting FDI on infra structural development may be greater in rural areas and the poorer regions of LDCs. Finally we note that the negative impact of attracting FDI is likely to be greater in the large group of non-‘catching up’ economies. China and India are leading members of the ‘catching up’ group of emerging economies which have not only attracted large amount of FDI but have also managed to benefit from it. In this group of economies the likelihood that FDI flows may contribute to economic growth is somewhat greater (Zhang, 2001, 2006) and thus the constraint on infrastructure development is eased. In most other LDCs, it has been much easier to attract FDI than to benefit from it, mostly due to absent or low level of complementary human capital and absorptive capacity (Nunnenkamp, 2004). A focus on the implications of MNE strategies for LDC infrastructure is particularly justified for the larger group of non-catching up counties. Thus the negative impact of attracting FDI on infrastructure is greater in countries with low levels of human capital.

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CONCLUSIONS AND IMPLICATIONS FOR MNE STRATEGIES IN LDCS The Yamin and Sinkovics (2009) paper endeavoured to explore how FDI flows may have negative effects on public investment on basic infrastructure. It essentially attempted to examine the opportunity costs of FDI in terms of the forgone resources that are not devoted to basic infrastructure. More specifically we argued that shifts in MNE strategy have two related consequences: weaker spillover and linkage effects and greater incentive elasticity of incoming FDI. The first implies a lower income multiplier in the economy and ceteris paribus a reduced ability to increase public revenue through taxation. The effect of the second is to increase competition between actual and potential recipients of incoming FDI and to encourage a more proactive stance with respect to attracting FDI. Thus, a relatively greater portion of public revenues and public administrative and related resources are taken up in attracting incoming FDI. Both MNE and LDCs are affected by fundamental environmental changes that can rather roughly be described as ‘globalization’. The key dynamics of globalization include liberalization relating to trade and investment regulation, and technological advance, particularly in information and communication (ICT) technologies enabling, inter alia, production modularization and geographical flexibility. Yet, in our 2009 paper these forces have not been in the forefront of the analysis. We concentrated on the effects of MNE strategies on infrastructure. However, as indicated in Fig. 1, MNE related effects constraining the development of infrastructure can be magnified, as LDCs also face pressures emanating from the globalization dynamics which effectively reduce the policy ‘space’ available to their governments (UNCTAD, 2004). Thus as Wade (2003, p. 622) and Chang (2008) have argued trade and investment liberalization measures (such as TRIMS and GATS) have resulted in the ‘development space’ for diversification and upgrading policies in developing countries being shrunk. The rules being written into multilateral and bilateral agreements actively prevent developing countries from pursuing the kinds of industrial and technology policies adopted by the newly developed countries of East Asia, and by the older developed countries when they were developing. Similarly, fiscal ‘conservatism’ and the demands for macroeconomic stability imply a reduction in the scope for public expenditure (Islam, 2005; Ocampo, 2002). The MNE related constraints on infrastructural development in a particular country are

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shaped by its macro context in terms of its ability to adapt to globalization pressures. We have not brought this into the forefront of our discussion as we believe that such country capabilities are themselves influenced by the level of infrastructure development.

Implications for MNE Strategy Recent IB discussions of the MNE development connections have implicitly and occasionally explicitly questioned the efficacy of the dominant MNE strategies in the LDCs (Dawar & Chattopadhyay, 2002; London & Hart, 2004; Ramamurti, 2004). The focus on poverty in some recent writings is arguably also a reflection of a critical stance vis-a`-vis MNE strategies (Ghauri & Buckley, 2006; Jain & Vachani, 2006; Kolk & van Tulder, 2006). Others have observed the absence of a governance structure to manage the interdependence between LDCs and MNEs (Ghauri & Cao, 2006; Zanfei, 2005). The key point in discussion is not so much that LDCs have not gained sufficiently from their engagement with MNEs but that current strategies do not serve the MNEs very well either. Thus Dawar and Chattopadhyay (2002) chastise MNEs for being ‘trapped by their own devices in gilded cages, serving the affluent few but ignoring the potential of the billions of new consumers’. A similar criticism is developed by London and Hart (2004) who recommend a ‘reinvention’ of MNE strategies for LDCs and emerging economies and propose a departure from the current low involvement strategies and operational modalities in LDCs. This is an important observation and one that gains significant credence from the investment behaviour of MNEs in developed countries where they have developed collaborative strategies to effectively tap into the created assets of countries and companies (Dunning & Narula, 2004). London and Hart (2004) cite cases of companies succeeding with ‘nontraditional’ strategies in LDCs. These strategies include developing relationships with non-traditional partners (Doh & Teegen, 2002), co-inventing custom solutions, and building local capacity. London and Hart (2004) conclude that, these successful strategies suggest the importance of MNEs developing a global capability in ‘social embeddedness’. In subsequent contributions (London, Anupindi, & Sheth, 2010; London & Hart, 2011), develop this line of thinking, advocating strategies for working with the BOP to generate business models that specifically create social value (London, Anupindi, & Sheth, 2010). Looking back, we believe our focus on infra-structure ties well with a concern to enhance sustainable

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development. Whilst as the editors have argued sustainability is a complex and multifaceted phenomenon, we believe that enhancing domestic capabilities are an important underpinning of sustainability. ‘Good’ infrastructure, especially basic social infra-structure can be seen as the rock on which otherwise marginalised individuals, groups and country governments can build capabilities. This is fully in line strategies for mutual value creation advocated by London, Anupindi, and Sheth (2010) and others (e.g. Sinkovics, Sinkovics, & Yamin, 2014). We caution however that the adoption of strategies focused on mutual value creation is a challenging phenomenon. In part the challenge lies in the ‘prisoner dilemma’ nature of the relationship between MNEs and host governments as argued by Zanfei (2005). The dominant MNE strategies in LDCs create a low payoff outcome for both parties. LDCs resources are focused on attracting FDI rather than investing in human capital and infrastructure so as to benefit more fully from incoming FDI. On the other hand current MNE strategies readily ignore the benefits they themselves could derive by helping to develop local capabilities (Oetzel & Doh, 2009; Zanfei, 2005, p. 12). Many LDCs have great potential of becoming strategic markets and in particular may become important sites for developing new products and services, oriented towards large markets with distinctive cultural and institutional patterns. However, as in the typical prisoner dilemma situation, mutually beneficial outcomes in the MNE-LDC relationship are difficult to obtain as these require credible and sustained cooperation between the parties. The challenge is arguably even more forbidding for two related reasons. First, even when MNEs are following strategies whereby social embeddedness may be an outcome, such embeddedness does not necessarily traverse areas or communities where poverty reduction is particularly urgent. MNES can be said to ‘suffer’ a kind of liability of ‘outsider ship’ with respect to the BOP in particular (Sinkovics, Sinkovics, & Yamin, 2014). Secondly current strategies have mostly nurtured capabilities for ‘flexibility’, achieved through ‘remote’ largely contractual, governing of dispersed and highly ‘sliced’ activities where local engagement or social embeddedness is not a necessary dimension of good performance (Buckley, 2011; Yamin, 2011). The essence of social embeddedness by contrasts is a commitment to building relationships and engaging with communities over the long term (Tasavori & Sinkovics, 2011). Given the prevalence of global factory type strategies, MNEs also suffer a capability gap with respect to launching strategies which promote sustainable development.

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ACKNOWLEDGEMENT This chapter has built upon the paper previously published in a journal by Yamin, M., & Sinkovics, R. R. (2009). Infrastructure or foreign direct investment? An examination of the implications of MNE strategy for economic development. Journal of World Business, 44(2), 144 157, Copyright Elsevier 2009. It is reprinted here with full permission from Elsevier.

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CHAPTER 11 STAKEHOLDER DYNAMICS AS DETERMINANTS OF SUBSTANTIVE VERSUS SYMBOLIC CSR PRACTICES: A MACRO/MICRO PERSPECTIVE Luis A. Perez-Batres and Jonathan P. Doh ABSTRACT Purpose Moving beyond the question of whether large corporations are truly addressing sustainability, some scholars have explored the degree to which CSR activities are purely symbolic or substantive in nature. Most of the studies have focused on external stakeholder pressures. The aim of this chapter is to extend this line of inquiry by theorizing that the dynamics among internal stakeholders also shapes CSR conduct. Design/methodology/approach This theoretical contribution borrows from research on socially responsible indices, behavioral corporate governance theory in CSR and from recent research that has leveraged attribution theory to better understand reactions to corporate social irresponsibility (CSiR).

International Business and Sustainable Development Progress in International Business Research, Volume 8, 249 264 Copyright r 2014 by Emerald Group Publishing Limited All rights of reproduction in any form reserved ISSN: 1745-8862/doi:10.1108/S1745-8862(2013)0000008016

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Findings Our chapter proposes that firms adhering to substantive CSR practice are less likely to be punished by external stakeholders than otherwise. From an internal stakeholder viewpoint, it suggests there is a positive relationship between the number of board ties to reputable universities/nonprofit organizations and substantive CSR practices; and a negative relationship between managerial discretion and substantive CSR practices. Social implications This chapter can have social applicability as it deals with stakeholders’ role in pressuring the modern organization to engage in substantive CSR. Originality/value As aforementioned, most studies explore the relationship between CSR compliance and external stakeholder pressures. In contrast, the relationship between internal stakeholder dynamics and CSR compliances is still not well understood. Hence, the incorporating of these dynamics provides theoretical insights for the CSR, sustainability, and corporate governance arenas. Keywords: Corporate social responsibility; sustainability; corporate governance; corporate social irresponsibility; voluntary selfregulatory codes

INTRODUCTION Corporate social responsibility (CSR) and the related concept of sustainability are now part of the scholarly and applied business landscape (Holt & Barkemeyer, 2012). Most large and reputable corporations have recognized and responded to a shift in public awareness of CSR and sustainability and have taken some form of action to respond to and satisfy their influential stakeholders. One manifestation of this action is the proliferation of voluntary self-regulatory codes (SRC), such as the Global Reporting Initiative (GRI), United Nations Global Compact (UNGC) and the International Standards Organization social responsibility standards series (ISO 26000) (Alvarez-Larrauri & Fogel, 2008; Doh & Guay, 2004; Henriques, 2010; Pe´rez-Batres, Doh, Miller, & Pisani, 2012; Tietenberg, 1998; Wang et al., 2002). SRCs, in turn, have become an important vehicle through which firms demonstrate their commitment to a more sustainable future as they require them adherence to certain rules and regulations. Moreover, SRC

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membership also includes public disclosure and in some cases external audits and validation of the reported information (Cetindamar & Husoy, 2007; Pe´rez-Batres, Miller, & Pisani, 2010; Runhaar & Lafferty, 2009). Nonetheless, many analysts, scholars and even those involved in the development of these standards have identified a range of shortcomings. For instance, Henriques (2010) (chair of the UK committee on ISO 26000) reports that the development of the ISO 26000 was “fraught with politics” as many companies showed more interest in publicizing their use of the standard rather than in complying with it. Likewise, Delmas and Burbano (2012) and many others suggest that a number of corporations engage in “greenwashing.”1 Hess (2008) goes as far as to warn that some types of CSR standards are counterproductive because they may shield the organization from further scrutiny. In order to move beyond the question of whether large corporations are addressing sustainability in some fashion, some scholars have focused on the nature of that action, exploring the degree to which CSR activities are purely symbolic or substantive in nature. Most of the limited studies on the antecedents of whether firms pursue more substantive versus symbolic CSR have focused on external pressures (Berchicci & King, 2007; Delmas & Montes-Sancho, 2010; Pe´rez-Batres et al., 2012). In this chapter, we extend this research by incorporating both external and internal stakeholder dynamics, theorizing that the combination of external and internal stakeholders will shape firms’ CSR conduct, and specifically, whether firms pursue substantive versus symbolic CSR. In so doing, we borrow from research on the market impact of additions to and deletions from socially responsible indices (Doh, Howton, Howton, & Siegel, 2010), explanations of the importance of context and behavioral corporate governance theory in CSR (Westphal & Zajac, 2013) and from recent research that has leveraged attribution theory to better understand reactions to corporate social irresponsibility (CSiR) (Lange & Washburn, 2012). We propose a series of relationships regarding external and internal pressures on the corporation to engage in CSR, the degree to which those actions represent substantive versus symbolic action, and the potential consequences of these dynamics. The chapter proceeds as follows. First, we review the extant literature on external stakeholder dynamics as determinants of symbolic vs. substantive CSR. Building on research by Doh et al. (2010). we introduce an “insurance” rationale to explain this decision. Next, we elaborate on internal stakeholder dynamics, focusing on the interactions of the CEO and Board of Directors as an important element that contributes to CSR. We draw from corporate governance literature to provide an additional explanation

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for symbolic versus substantive management practice. Building on this logic, we touch on the possible effects of CSiR on the substantive vs. symbolic CSR dichotomy. We conclude the chapter by providing avenues for future CSR/corporate governance research.

EXTERNAL STAKEHOLDER DYNAMICS, SUBSTANTIVE VERSUS SYMBOLIC CSR, AND THE INSURANCE EFFECT To encourage corporations to contribute positively to the social and environmental environment in which they operate, firms engage in different types of CSR actions and initiatives, often motivated by different rationales or constituencies. One stream of research which is central to our discussion has explored the degree to which firms CSR actions are substantive i.e., whether they are concrete, measureable and impactful or symbolic i.e., where firms are merely seeking to appear to be committed to CSR, often to placate various stakeholder groups or avoid more serious legal or other consequences (Jiang & Bansal, 2003; King & Lenox, 2000). Symbolic management, however, is not a new topic. According to Pe´rez-Batres et al. (2012), management scholarship has recently suggested that in some instances symbolic actions can be decoupled from actual implementation while still yielding the desire effect of positively affecting a firm’s legitimacy (Berrone, Gelabert, & Fosfuri, 2009; Stevens, Steensma, Harrison, & Cochran, 2005; Weaver, Trevin˜o, & Cochran, 1999; Westphal & Zajac, 2001; Zott & Huy, 2007). Pe´rez-Batres et al. (2012) explored firm decisions to join SRCs such as the UNGC and the GRI, finding those decisions may be influenced by different types of stakeholder pressures. They note that both stakeholder theory (Donaldson & Preston, 1995) and institutional theory (Pe´rez-Batres, Miller, & Pisani, 2011) suggest that firms are motivated by external pressures to demonstrate their positive actions and their effects. A related argument rests on the reputation and legitimacy-conferring benefits of CSR. For example, Tietenberg (1998) reports that SRC membership may both encourage and reward the highest performing firms with added reputation and legitimacy. Relatedly, joining an SRC or taking some other kind of CSR actions may help firms mitigate the negative effects of asymmetric information (Darnall & Carmin, 2005; King, Lenox, & Barnett, 2002); that is, by

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joining sound SRCs, corporations can communicate to their relevant stakeholders about unobserved attributes of their products and processes. Doh, Howton, Howton, and Siegel (2010, p. 1466) argue that “consideration as a socially responsible firm constitutes a form of organizational legitimacy that is operationalized in a comparative sense (reputation) through inclusion in (or exclusion from) a social index” and that under conditions of evaluative uncertainty, the capabilities of social actors are assessed by certification contests or endorsements from reputable third parties (Rao, 1994; Scott, 1995). More recent research on the impact of prior reputation for CSR on subsequent effects of a CSR “event” has suggested that there is a negative shareholder wealth effect associated with a firm’s deletion from a social index (Doh et al., 2010). Further, this research has suggested that the magnitude of the negative shareholder wealth effect associated with a firm’s deletion from a social index is tempered by the firm’s prior CSR reputation. Hence, the better the prior reputation the less negative the shareholder wealth effect resulting from deletion (Doh et al., 2010). Lange and Washburn (2012) extend this notion using the frame of attribution theory. They suggest that corporate culpability has an important influence on how stakeholders respond to a negative development with regard to firm reputation. That is, external stakeholders make an assessment of moral responsibility and culpability in their judgments of firm behavior. They use the examples of the BP gulf oil spill and the Ford’s handling of the Ford Pinto crashes as illustrations of how external observers overall assessment of the responsibility of these firms is skewed by attributions they make about past handling and motivations, even when facts do not entirely support these assessments. In sum, according to Lange and Washburn (2012, p. 309), “Assessments of effect undesirability are positively related to subsequent assessments of corporate culpability.” Combining the logic of Doh et al. (2010) and Lange and Washburn (2012), we suggest stakeholders will be more forgiving of firms if they perceive them to have acted in good faith, even during a negative event. Hence, a firm adhering to substantive SRC should be seen as less culpable than firms that did less to prevent an unexpected negative sustainability outcome. To that end, the corporate culpability concept enhances the “insurance rationale” advocated by Doh et al. (2010) and others. P1. When negative and unexpected outcomes occur, firms adhering to substantive SRCs will be less likely to be punished by external stakeholders than firms adhering to symbolic SRCs (or those not adhering).

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INTERNAL STAKEHOLDER DYNAMICS AS DETERMINANTS OF SUBSTANTIVE VERSUS SYMBOLIC SRC ADHERENCE Most of the extant literature on strategic CSR and stakeholder management has focused on the role of influential external stakeholders as determinants of CSR policy (Berchicci & King, 2007; Pe´rez-Batres et al., 2012). Less attention has been placed on the role of internal stakeholders as determinants of CSR policy. From this vantage point, there is a need to further understand why some firms are more likely to follow substantive SRCs rather than symbolic ones and vice versa. Recently, Westphal and Zajac (2013) proposed an alternative view to traditional (agency theory-based) corporate governance. In so doing, they advance one that is behavioralbased “socially informed, yet actor-centric.” More specifically, these authors identify a four-way categorization where social processes take place between (among) corporate leaders and their constituents. These four categories include: helping behavior, reciprocity, social influence, and social learning. For the purpose of this theory development exercise, we further explore the latter two as determinants of CSR.

Social Learning The ability to understand the external environment has long been recognized as a key determinant of organizational performance (Porter, 1990). Firms respond to environmental pressures reflecting what they have learned about their external environment (Argote, 1999). As firms implement learned routines in response to the environment, they increase their legitimacy by conforming to established norms (Feldman & March, 1981; Meyer & Rowan, 1977), thereby reducing their likelihood of failure (March, 1991). According to Feldman and Pentland (2003), while organizational routines are reenacting solutions of solved problems via organizational “memory” (Huber, 1991) they also facilitate adaptation to contexts that require reflecting on the meaning of actions to solve future realities. These authors also suggest organizational routines consist of two main characteristics, the ostensive and the performative. The ostensive characteristic is the routine’s principle, ideal archetype, or perception. The performative characteristic, though, is the implementing of the routine, which is inherently

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improvisational (Bourdieu, 1977, 1990). Furthermore, Holmqvist (2004) identifies cooperative and experiential as two types of learning processes. Cooperative learning is derived through collaboration while experiential learning occurs when the firm learns through its own experiences. From a corporate governance perspective, some scholars identify board appointments and resulting interlock ties as a catalyst for social learning and decision-making processes (Beckman & Haunschild, 2002; Westphal, 1999; Westphal, Seidel, & Stewart, 2001). For instance, Westphal et al. (2001) finds that firms with extensive board ties (to other firms) follow similar decision-making processes and corporate policy. Congruent with a normative viewpoint (Scott, 2001), where the organizational objective is to truly comply with a morally imposed responsibility, organizational learning is a key process to fulfill such an obligation. For instance, because decisions about how to implement suggested sustainability guidelines can be cumbersome, managers need to understand how to balance the sustainability requirement with their high performance goals (Helfat et al., 2007; Makadok, 2003; Priem, 2007). Informed by insights from organizational learning, we posit that in light of the still uncertain landscape, within sustainability matters, board ties can certainly enhance cooperative learning in this area. For instance, research on strategic alliances (e.g., Kogut, 1988) or strategic networking (Gulati, Nohria, & Zaheer, 2000) has long suggested that the need for learning is a major rationale for alliance/network formation. In other words, cooperative learning can take place through strategic alliances or network effects and they provide opportunities for partners to learn from each other. Likewise, directors with interlock ties can, in effect, maximize cooperative learning by building a common (and superior) scheme about how to better customize CSR policy. Let us remember that interlock ties not only enhance socialization among directors, but maximizes “first hand” nonexperiential learning as directors learn from the experience of other firms (not only their own). In following these arguments, we also draw upon the perspective of Ansari, Fiss, and Zajac’s (2010) in so far as we assume management practices can rarely be seen as “off-the-shelf” practices. Hence, newly acquired (or prospective) managerial practices require custom adaptation. Indeed, successful adopters make these practices suitable within specific contexts (Robertson, Swan, & Newell, 1996; Strang & Kim, 2004). Cooperative learning involves building new knowledge, which can be unrelated to a set of firms’ current stock of knowledge, as well as enriching current knowledge stock (Hitt, Li, & Worthington, 2005; March, 1991).

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In effect, interlock board ties can be thought as conduits for “learning laboratories.” To that end, board members (with shared appointments) are more likely to jointly help in the CSR-policy customization process of their firms (than boards without such interlock dynamic). While it might be true that a CSR “recipe” might not fit all organization where these board members serve, we figure a common ostensive characteristic will be in place. Likewise, these firms would also share a performative CSR-routine (Bourdieu, 1990). To this point, our argument has focused on the board member’s ability to learn through share experiences in multiple boards. This experience, in turn, provides top managers and their firms with superior learning capabilities. As is currently the case, and despite not being a brand new topic anymore, sustainability and corresponding corporate practices are far from well understood. Thus, learning capabilities within this topic are still quite relevant. Moreover, our argument further implies a covenantal relationship (toward a common goal) between board members and their organization (Caldwell, Hayes, Karri, & Bernal, 2008). In this sense, to “the extent to which an individual willingly subjugates his or her personal interests to act in protection of others’ long-term welfare,” stewardship behavior takes place (Hernandez, 2012, p. 174). In short, from a behavioral corporate governance perspective and assuming social learning as a stewardship goal, we propose: P2a. The higher the number of interlock board ties, the higher the likelihood of a firm choosing substantive SRCs; and vice versa. In further extending these arguments, we also consider the prominence gained by nontraditional external stakeholders (and how they might affect internal ones). For instance, Pe´rez-Batres et al. (2011) found a positive relationship between the number of large firms adhering to sustainability programs (within a country) and the number of local (reputable) universities concerned with sustainability. While their argument was predicated on institutional theory insights, their findings do not preclude the existence of a more nuanced dynamic. Indeed, a high number of top corporate executives serve on boards of trustees at dozens (perhaps hundreds) of American universities interested in the sustainability topic. Likewise, University presidents (from institutions highly interested in sustainability) also serve on boards of directors of public corporations. For instance, President Coleman who in 2009 created the new position of Special Counsel to the President for Sustainability, at the University of Michigan serves on the boards of directors of Johnson & Johnson and

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the Meredith Corporation.2 Not surprisingly these corporations adhere to reputable SRCs such as the GRI3 (Johnson & Johnson), the Forest Stewardship Council and the Sustainability Forestry Initiative4 (Meredith Corporation). Hence, extending our previous cooperative learning arguments (P2a), and even considering an interlock effect, it is certainly possible that board members who serve in both public corporations and institutions of higher learning be better equipped to suggest meaningful sustainability practices. Moreover, we also agree with the notion that cooperative learning can occur between corporations and other types of nonprofit organizations (not only reputable universities interested in sustainability). For instance, Conservation International has successfully partnered with well known (GRI-reporting member-) corporations such as Starbucks (Austin, WeiSkillern, & Lefort, 2004), Wal-Mart, J. P. Morgan Chase, and BHP Billiton, among others.5 In congruence with these arguments, we posit: P2b. There is a positive relationship between the number of board ties to reputable universities / nonprofit organizations and corporate affiliation to substantive SRCs.

Social Influence At odds with the social learning argument (which assumes stewardship) and as described by Westphal and Zajac (2013), a common form of social influence among corporate leaders is ingratiation via social exchange, identification, and attachment. Essentially, ingratiation tactics aim to neutralize the effects of board independence with regards to corporate policy. By suggesting social influence tactics enhance opinion conformity, Westphal and Zajac’s arguments imply that the CEO’s goal is closer to that of maximizing his/her decision-making discretion (Hambrick, 2007) rather than that of allowing the board unfiltered participation in the firm’s strategic initiatives. Moreover, social influence through ingratiation can also be complemented by symbolic management whereby socially legitimate (normative) practices are announced by the firm, yet not implemented (Berrone et al., 2009; Stevens et al., 2005; Westphal & Zajac, 1994, 1998; Zott & Huy, 2007). Under this scenario, the CEO’s main goal is to appear compliant with the norms set forth by influential others (e.g., corporate governance mechanisms). To this end, decoupling actual management practices from

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announced policy adherence can be an option (Elsbach, 2003) as long as CEO credibility (and that of his/her board) is not compromised. In terms of sustainability, top managers (and their board) need to appear socially responsible. Corporate actions predicated on symbolic management (e.g., adherence to symbolic SRCs) might be favored when they are likely to shield the corporation from further scrutiny (Hess, 2008). Avoiding further scrutiny might not be enough, however, when a requisite for achieving the goal is to evade the appearance of CSiR. Per Lange and Washburn’s (2012) logic, perceptions of CSiR are determined by three main factors: event undesirability, corporate culpability, and affected party complicity. By extending this logic to the realm of corporate governance, as it relates to CSR, we suggest corporate leaders can better control/prevent the possible adverse effects of event undesirability and corporate culpability. On the one hand, they may do so by selecting substantive SRCs, where corporate leaders are in effect selecting maximum protection against the appearance of CSiR. The likelihood of incurring an undesirable even is greatly lessened by following the prescriptions advocated by substantive SRCs. And even if an undesirable event were to occur, by way of implementing these prescriptions, corporate culpability would also be lessened. This benefit, however, is not free. Substantive SRCs might erode a corporate leader’s executive discretion given that substantive SRCs often times demand proof of program implementation. On the other hand, selecting a symbolic SRC can still yield corporate benefits in so far as symbolic SRCs might lessen CSiR should an undesirable event occur. Because symbolic SRCs do not “force” corporations to implement their sustainability prescriptions, executive discretion is not affected, yet this decision also comes at a cost. Symbolic SRCs are unlikely to lessen the probability of an undesired effect. Based on these arguments and Westphal and Zajac’s (2013) review, top managers with high levels of discretion might be more likely to seek symbolic SRCs in order to retain that discretion. Hambrick and Abrahamson’s (1995, p. 1432) panel rating on managerial discretion might help explain the aforementioned dynamic. For instance, they identify petroleum & gas, steel mills and gold/silver ores as industries with low levels of managerial discretion. Recently, Pe´rez-Batres et al. (2012) found that firms from these industries were more likely to join substantive SRCs rather than symbolic ones; albeit their argument was predicated on identifying these industries as high polluters, thereby more willing to avoid the appearance of CSiR, before relevant (external) stakeholders. Nonetheless, an alternative argument can be made. Top managers from industries with low

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managerial discretion levels have little to gain by adhering to symbolic SRCs given their “constrained” status (relative to their peers from higher level managerial discretion industries). In contrast, top managers from industries with high managerial discretion levels have much to lose (discretion-wise) by adhering to substantive SRCs as these types of organizations might limit top management decision-making, based on their prescriptions. In sum, the effects of social influence occur within a context of (higher/ lower) top management discretion. At low levels of managerial discretion, managers should be more willing to embrace strategic initiatives and programs from board members and substantive SRCs, respectively. As managerial discretion increases, however, managers might be less willing to follow suggestions or adhere to managerial prescriptions (i.e., those from SRCs). Accordingly, we posit: P3. There is a positive relationship between managerial discretion and corporate affiliation to symbolic SRCs.

An International Caveat While we conceive our propositions to “travel” well, we would certainly expect to find differences within countries and cultures. For instance, the work of Donaldson and Dunfee (1994) informs us that without known hypernorms able to control a “moral free space” among parties, business negotiations would be costly due to enhanced uncertainty. To that end, there is a need to know about societal values, in different part of the world, when referring to verbal commitments. For instance, are we to think that adopting symbolic SRCs is a form of deception? Is it unethical? Or is it part of following some “rules of the game”? For instance, in a context of labor negotiations in the United States, misstating facts might be considered unethical. Yet, stating one’s requiring a particular item, which in truth is not needed, is acceptable as it is understood parties would take “straw” positions as part of the “rules of the game”. The purpose of this chapter is not to determine whether a particular practice, inclusive of symbolic management practices or even perceived “green-washing” practices, is per se ethical or unethical (that viewpoint might vary around the world). We rather invite our colleagues to test our propositions while being mindful of the contextual differences of the world’s regions.

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CONCLUSIONS AND AVENUES FOR FUTURE RESEARCH In this chapter we have extended the literature on CSR and sustainability as it relates to substantive versus symbolic actions by theorizing about how external stakeholder attributions about firm motivation and culpability can affect subsequent assessments of responsibility (or irresponsibility) and how internal stakeholder (executive and board) actions can influence choices about substantive versus symbolic CSR. In so doing, we have drawn upon research that has leveraged scholarship on reputation, legitimacy, attribution and managerial and board discretion to provide a more nuanced and finely variegated account of both the causes and consequences of firms CSR decisions. This account takes into consideration how prior action influences future perception, and how internal stakeholder dynamics influence decision alternatives (see Table 1 for a summary of the proposed relationships). Future research could extend and test our intuitions by modeling and measuring the relationships we have proposed. Such research might include using cross-sectional, longitudinal and event study methods to explore the connections between external stakeholders, firm decisions, and executive/board structures and characteristics. In addition, case studies of negative CSR events could be documented to provide rich descriptions of how firms respond to external pressures, and how internal dynamics among executive, board members and external stakeholders influence subsequent corporate behavior. Likewise, future research can develop Westphal and Zajac’s (2013) “helping behavior and reciprocity” categorization. For this chapter, Table 1.

Stakeholder Dynamics (Reactions and Influence).

Firm Strategic Choice External (negative) outcomes – e.g., social controversies, environmental accidents Internal (governance) Board ties Higher number of strong ties among board members Higher number of board ties to reputable universities and nonprofit orgs. Managerial discretion

Symbolic SRC

Substantive SRC

Very likely to be punished by relevant stakeholders

Less likely to be punished by relevant stakeholders

Relationship

+ Relationship

Relationship

+ Relationship

+ Relationship

Relationship

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however, we decided against developing a logic rooted in these categories because both of them, we think, belong to a set of dynamics where the CEO is the focal actor. Thereby, this perspective and set of dynamics merits a different approach at relationship theorizing. For instance, aspect of strategic leadership theory, upper echelon theory, even succession rationales, need to be brought to bear in order to more fully explain the relationship between CEO helping behavior/reciprocity and an organization’s adopting of a substantive/symbolic SRC. In contrast, the pressures among a group of individuals within a seemingly similar rank (board members) provides a better approach at theorizing the possible internal pressures that this groups of individuals exert on an organization for it to adopt a substantive/symbolic SRC, independently of CEO power. These dynamics were explained through a social learning rationale. Moreover, we believe we provided a starting point at exploring the relationship between board and CEO via social influence, where CEO discretion is a key determinant. In sum, our study provides the first extension, to our knowledge, from external stakeholder pressures to internal stakeholder pressures and organizational adoption of substantive/ symbolic SRCs. Again, another interesting follow up would be to develop the CEO-related categories, as identified in this section.

NOTES 1. Greenwashing refers to actions designed to mislead firm stakeholders about their social and environmental practices. 2. This information was retrieved from the University of Michigan’s web site, on June 2013: http://president.umich.edu/init/init8.php 3. The GRI website provides ample information about its CSR/Sustainability principles. It also provides the list of registered members (and their country of origin) at http://database.globalreporting.org/search 4. See article from Mater, Price, and Sample (2002), from the Pinchot Institute for Conservation in Washington DC, acknowledging these two certification bodies as legitimate. 5. Information obtained at Conservation International’s web site on June 2013. http://www.conservation.org/how/partnership/corporate/Pages/default.aspx

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CHAPTER 12 TAMING A WICKED PROBLEM? UNILEVER’S INTERPRETATIONS OF CORPORATE SOCIAL RESPONSIBILITY 2000 2012 Jacqueline Mees-Buss and Catherine Welch ABSTRACT Purpose The purpose of this chapter is to examine how a multinational enterprise (MNE) makes sense of the ‘wicked problem’ of corporate social responsibility (CSR). Design/methodology/approach We analyse the single case of an acknowledged leader in CSR, Unilever. We undertake an interpretive textual analysis of how Unilever has accounted for its progress towards greater social and environmental responsibility in its annual social and environmental reports published between 2000 and 2012. Findings We identify enduring themes as well as what has changed in this 12-year period. We conclude that while Unilever has made definite progress, becoming more confident and ambitious in its plans and achievements, it potentially runs the risk of reducing CSR to a ‘tame

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problem’ that can be solved through technical solutions that offer winwin solutions and do not challenge the economic theory of the firm. Research implications We show the value of using the perspective of ‘wicked problems’ to understand the complexity of the CSR challenge facing the MNE. Practical implications We suggest that the current approach of measuring CSR progress has limitations and potentially negative side effects. Originality/value Our chapter offers a novel conceptualisation of CSR, as well as empirical evidence of CSR as a process of corporate sensemaking in the face of ‘wicked problems’. Keywords: Corporate social responsibility; wicked problems; interpretive textual analysis; social and environmental reporting

INTRODUCTION Unilever’s Chairman in the 1960s, Ernest Woodroofe, described how one day he realised that he had become one of the bad guys: ‘I awoke to find that the multinational enterprise (MNE) was a stereotyped enterprise, big, bad and irresponsible’ (quoted in Jones, 2005, p. 326). In Woodroofe’s day and age, practically all MNEs came from the most advanced economies (Sagafi-Nejad & Dunning, 2008) and internationalisation was generally seen as beneficial, spreading progress and success. But this record came under increasing scrutiny. Notable developments included the publication of the Club of Rome report, Limits to Growth, which predicted that the prevailing business trends at the time were not environmentally sustainable (Meadows, 1972), and the formation in 1974 of the United Nations Commission on Transnational Corporations (UNCTC), which was tasked with designing a code of conduct for MNEs to protect host countries from exploitation. Reflecting the critical reassessment of the MNE of this period, Stephen Hymer (1972) was one of the first academics to draw attention to the duality of the social impact of the multinational. Internationalisation through foreign direct investment does not only bring wealth and labour to host countries, Hymer pointed out, but also exploits local resources and creates monopolistic advantages. After almost 20 years of fruitless debate on a code of conduct, the UNCTC was dismantled (Moran, 2009; Sagafi-Nejad & Dunning, 2008).

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But at the start of the 21st century the debate about the role and responsibility of MNEs was reignited, spurred on by the UN Millennium Goals and an intensified public discussion over climate change. Some of the world’s largest MNEs responded with the signing of a voluntary commitment the UN Global Compact (UNGC) to align their operations and strategies with the Millennium Goals. The renewed debate surrounding the responsibility of the MNE is also reflected in the academic literature, with the growing popularity of Corporate Social Responsibility (CSR) as a topic for study. A few years later, reviewers of this literature all express frustration over the fact that CSR remains ill-defined and fragmented as a concept (e.g. Aguinis & Glavas, 2012; Egri & Ralston, 2008; Garriga & Mele´, 2004). Given this background, the question we address in this chapter is: How does a MNE make sense of what it means to be socially and environmentally responsible? On the basis of twelve years of annual social and environmental reports, we reconstruct and analyse the interpretive process undertaken by one of the acknowledged leaders in CSR and signatory members of the UNGC, Unilever. We examine how Unilever has publicly accounted for its social and environmental responsibility. We identify enduring themes as well as what has changed in the 12 years since the signing of the UNGC. Existing research often focuses on companies’ motivation for, and performance in relation to, CSR (e.g. Banerjee, 2008; Bansal, 2005; Kolk & van Tulder, 2005; Lynes & Andrachuk, 2008; Matten & Crane, 2005; Wood, 1991). In this chapter, however, we shift the focus to the nature of CSR and its implementation. Our objective is to contribute to a more nuanced understanding of the challenge CSR presents and how MNEs make sense of this challenge. To do so, we start by reconceptualising CSR as a ‘wicked problem’. A key characteristic of a wicked problem is that it is so complex, dynamic and interrelated that causes and effects are extremely difficult to model, and every attempt to understand and define the problem is always subjective (Weber & Khandemian, 2008). In addition to this, every attempt to solve the problem, changes it (Camillus, 2008; Rittel & Webber, 1973; Weber & Khandemian, 2008). We then turn to our case study, in which we identify how Unilever has changed the way it has publicly interpreted and reported on CSR during a 12-year period (2000 2012). Unilever’s sensemaking (to use the term coined by Weick, 1995) not only reflects its unique history and context, but also the wicked nature of CSR in general. Our conclusion is that Unilever has made significant progress in defining a new way of working in response to ongoing environmental challenges.

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Its current confidence and pro-activeness in accordance with a specific, somewhat narrow interpretation of what it means to be a socially and environmentally responsible corporation has led it to implement an impressively comprehensive plan. Paradoxically, this same confidence runs the risk of losing sight of other, ongoing and newly emerging, negative impacts the company has on society. The fact that each plan leads to the emergence of new shortcomings is unavoidable in the face of wicked problems. The nature of wicked problems is such that with every solution we implement, a new set of challenges will emerge and become more pronounced. The greatest challenge therefore is not to be tempted to redefine the problem as a tame problem, but rather to continue to acknowledge the subjectivity of each solution, to remain flexible, to allow for public debate and disagreement, and to be willing to revise constantly both the definition of and solution to the wicked problem.

DEFINING CSR: A WICKED PROBLEM The first thing that stands out when one reviews the literature on CSR and its related terms is the general concern that CSR is ill-defined. As a result, already in 1975, Prakash Sethi lamented that the phrase ‘corporate social responsibility’ had lost all meaning and had come to mean ‘all things to all people’ (1975, p. 58). This did not stop authors from using the term. However, in a review of the CSR literature in 2004, Garriga and Mele´ (2004) still describe the plethora of theories, constructs and approaches in CSR as ‘controversial, complex and unclear’ (2004, p. 52). McWilliams, Siegel, and Wright (2006) point out that this has serious implications for theory development: ‘Numerous definitions of CSR have been proposed and often no clear definition is given, making theoretical development and measurement difficult’ (2006, p. 1). The problem is that every attempt to capture the role and responsibility of business in society has proven to be subjective, value-laden, incomplete and temporary (van Tulder & van der Zwart, 2006). Some scholars have suggested avoiding the term CSR based on its moralistic overtones (e.g. van Tulder & van der Zwart, 2006, p. 146) while others have replaced it with alternatives such as corporate social responsiveness, corporate citizenship, or corporate sustainability. More recently, Porter and Kramer’s (2006, 2011) concept of ‘shared value creation’ has gained prominence. They define shared value as ‘creating economic value in a way

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that also creates value for society by addressing its needs and challenges’ (2011, p. 64). Concepts matter: while it has been very popular, the notion of ‘shared value creation’ arguably narrows the scope of CSR to only those activities that simultaneously create economic benefits for the corporation. According to shared value creation, there does not need to be a contradiction between economic and social needs; the ‘wicked’ contradictions between the two are assumed away. In contrast, Scherer and Palazzo (2011) argue that we cannot ignore the importance of the CSR debate, including its contradictions, and need to avoid a simplistic instrumental perspective. Instead, they propose a political perspective to acknowledge the subjective nature of CSR. The CSR debate, they argue, needs to be embedded ‘in the context of the changing order of political institutions’ (Scherer & Palazzo, 2011, p. 906). This changing institutional order challenges the notion of the MNE as a purely economic institution and introduces MNEs as actors in the political arena. The CSR debate therefore, is in essence a debate about the role and responsibility of corporations in society. The growing size and increasing levels of globalization and centralization of the world’s largest MNEs has turned them into a new category of political ‘superpowers’. We subscribe to this political understanding of CSR as a debate around corporate identity and roles, adding to this the notion that CSR is an exemplary form of a wicked problem. The term ‘wicked problem’ is used in sociology and politics to describe a highly complex and dynamic problem that involves multiple actors, interdependencies, and institutionalised beliefs and habits (Rittel & Webber, 1973). Wicked problems are not problems of efficiency that can be rationally addressed and ultimately solved (e.g. how to build a bridge that will not collapse?), but rather they are problems that incorporate questions of equity and value (e.g. how to deal with a growing stream of refugees or how to stop racial discrimination?) (Rittel & Webber, 1973). Whereas tame problems pertain to the domain of permanent and absolute truth where solutions follow predictable algorithms, wicked problems pertain to the domain of contingent realities where problems are dynamic and possible solutions are seemingly infinite. Solutions are not right or wrong, but better or worse, being specifically linked to ideological predispositions and beliefs concerning how social systems can best be changed. As a result, resolutions are often ideologically contested. To ignore this and apply rational, linear and top-down change processes designed for tame problems in the domain of wicked problems is counterproductive. It pretends that there is objectivity and neutrality where there is none, and denies the true complexity of the issue.

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Instead of attempting to ‘tame’ a wicked problem, Rittel and Webber (1973) proposed a rhetorical or ‘political’1 process for the domain of contingent realities: a participatory exchange of ideas and interpretations and a process of trial and error to solve the ultimately political question, ‘what would be the best thing to do next in order to create a better future, that is a future that deals with the problems we are facing today?’ Because every response will change the problem often in unpredictable ways the wicked problem is never solved, but always changed by these responses. Accordingly, we will not solve the problem of creating ‘a better society’ with a clear role and responsibility for the MNE therein. Society will change, MNEs will change, and within this dynamic environment we must continue to debate what the role of the MNE should and could be. We now turn to our exploration of how the wicked problem of CSR has been understood by a single MNE, Unilever.

METHODOLOGY AND RESEARCH CONTEXT The case we have selected for analysis, Unilever, is widely recognised as being at the forefront of businesses that are seeking to become more considerate towards the needs of their stakeholders and society as a whole. Unilever has been the Food & Beverage industry leader in the Dow Jones Sustainability World Index since its inception in 1999; for the third consecutive year Unilever is amongst the top ranking corporations in the 2013 Sustainability Leaders survey from GlobeScan/SustainAbility; recently the World Environment Centre awarded Unilever its 2013 Gold Medal for International Corporate Achievement in Sustainable Development, and so the list goes on (see www.Unilever.com, Sustainable Living, Awards & Recognition). We examine Unilever’s public reporting on social and environmental initiatives. In 2000 Unilever first published a Social Review and Environmental Review. From 2006 onwards these two annual reviews were combined into one annual report, the Sustainable Development Report. In 2010 Unilever publicly presented a 10-year plan that combined aggressive growth targets with a zero increase in the company’s overall environmental footprint, the Unilever Sustainable Living Plan (USLP). From this point on the Sustainable Development Report was replaced by Progress Reports of the USLP (with the 2012 progress report the most recent one at the time of writing).

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To analyse Unilever’s ongoing interpretation and reporting of CSR between 2000 and 2012, we divide this period into three episodes or temporal brackets (Langley, 1999) marked by changes in top management. Chief executive officer (CEO) changes are significant to how an organisation deals with wicked problems because the CEO is the ultimate interpreter of the problem. We examine both the continuities and differences from one period to the next. We do not restrict ourselves to a factual and thematic analysis of the reports alone. As well, we undertake a more interpretive textual analysis (Gephart, 1997), examining linguistic and rhetorical elements of the text in order to trace changes in processes of meaning-making. By looking at the assumptions, word choices and rhetorical tools used in the text, we catch a glimpse of the underlying ideas and beliefs that form part of the official interpretation of the role and responsibility of the corporation in society at the time.

UNILEVER AND THE CSR CHALLENGE The practice of CSR was not new to Unilever in 2000, even though the term itself was. The company’s enduring culture of care and respect for its stakeholders and for its environment is well documented (Jones, 2005). In the 1990s, the focus in Unilever had been on environmental safety and hazard reduction and establishing a suitable code of conduct to regulate its trans-border activities (Environmental Performance Report 2001, p. 4). After 2000, the number of issues placed on the agenda rapidly intensified. At the same time, Unilever made itself publicly accountable for progress in the areas of environmental and social responsibility with the introduction of reviews as part of its annual reporting process. Between 2000 and 2012 Unilever had three or strictly speaking, four CEOs. As a remnant of Unilever’s origin in a cross-border merger, the company had two Chairmen, one British and one Dutch. This was only changed in 2005. From 2000 to 2004 the company was led by Niall Fitzgerald and Anthony Burgmans. In 2004 Fitzgerald retired. His role as Chairman was taken over by a Frenchman, Patrick Cescau. Early in 2005 Burgmans became non-executive Chairman of the Board and Cescau became the sole Group Chief Executive. At the end of 2008 Cescau moved on and was replaced by the first externally recruited Chief Executive, Paul Polman. The role was redefined and rather than Group Chief Executive, Polman became the first global CEO. Each change in leadership was

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accompanied by a major change to the corporate structure. Unilever moved from a multinational structure to a multi-regional structure in 2001 during the reign of Burgmans and Fitzgerald. In 2005, when Cescau took the helm, the company underwent another major restructuring and became what is best described as a multi-category global corporation. This structure was further centralised in 2009 2010 with the appointment of global chief executives for marketing, research & development and supply chain management. We analyse each period as follows (for a summary, see Table 1). First, we scrutinise the company’s framing of its social role and responsibility at the time. Then we look at the structural changes that were made during the time to support and implement this commitment. This includes the governance framework for CSR and alliances with NGOs and government organisations. Next, we examine the reported activities and achievements. Conscious of the fact that the reported activities are only a selection of what happened in this large global corporation, our analysis focuses on the nature of these examples and what that tells us about the interpretation of social responsibility at the time. We conclude each section with a reflection on the overall understanding of CSR that prevailed during the period under study.

Unilever 2000 2005: The Burgmans and Fitzgerald Era Defining CSR Unilever produces its first Social Review in 2000. The title of the review uses the term Corporate Social Responsibility. In their introduction the Chairmen explicitly define CSR as: ‘Responsibly managing a multiplicity of relationships every day with employees, consumers, shareholders, suppliers, governments, local communities and many others in wider society’ (Social Review 2000). They acknowledge that society’s expectations of corporations are constantly evolving, that the definitions and scope of CSR are ‘much debated’ (Social Review 2000, p. 4), that they do not have all the answers and are open to dialogue, to listen, and to learn (Chairmen’s Introduction Social Review 2000). The need ‘to listen and learn’ is repeated numerous times during this era. In the corporate purpose statement the ultimate purpose of the corporation is defined as ‘sustainable, profitable growth’ and ‘value creation for our shareholders and our employees’, but to succeed in this will require ‘the highest standards of corporate behaviour’ (Social Review 2000, p. 3.1).

2000 2005 Burgmans and Fitzgerald

2006 2008 Patrick Cescau

2009 2012 Paul Polmana

Framing of the social role and responsibility of the corporation

CSR; Responsible stakeholder management

Sustainable development; Corporate citizenship; Value-led brands

Business case for sustainability; Shared value creation; Sustainable growth

Structural changes: Governance Partnerships

Unilever Environment Group, Unilever Sustainable Developments Group Establishment of industry-level initiatives, e.g. Marine Stewardship Council

Corporate Responsibility and Reputation Committee, working groups and specialist teams, e.g. for packaging Alliances between international NGOs and brand teams

Continuation of Corporate Responsibility and Reputation Committee, specialist teams Establishment of the Unilever Foundation, which has alliances with five leading global NGOs

Nature of reported activities/achievements

Environmental: Progress against 1999 measurable targets for supply chain; Inter-institutional collaboration to address key issues. Social impact: focus on the positive contribution of day-to-day business on stakeholders and society

Environmental: Linking achievements to brands and corporate identity to create strong image as responsible citizen. Brand impact tracking project initiated Social: Emphasis on how Unilever (brands) go beyond the expected. No negatives with one exception: selfregulation of advertising

Annual progress towards 60 measurable targets to contribute to 3 major social needs. Focus on (a) initiatives that drive significant improvements in environmental impact and (b) examples of shared value creation Unilever Foundation to achieve social objectives in collaboration with the world’s largest NGOs

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a Paul Polman is the current CEO at the time of writing, but we end our analysis with the most recent sustainability development report in 2012.

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Table 1. The Three Eras of CSR in Unilever, 2000 2012.

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In other words, CSR is more than sustainable growth; it is also linked to the way in which growth is achieved. This emphasis on behaviour results in a review of the Code of Business Principles in 2001 that includes clear standards of behaviour and commitments to each of Unilever’s stakeholder groups. The report distinguishes three ‘levels’ of CSR. The largest impact of the business on society comes from its own operations, but other ‘levels of CSR’ include philanthropic contributions to communities, and Unilever’s impact through the value chain. Sustainability is a term reserved for the company’s impact on the environment. The way Unilever manages environmental issues is reported separately, in the Environmental Performance Report. Care for the environment is linked to the company’s reputation as ‘a good corporate citizen’, as well as protection of the sources of Unilever’s raw materials three quarters of which come from agriculture. Quoting almost literally from the Brundtland report ‘Our Common Future’ (WCED, 1987), the Social Review summarises Unilever’s position as: If we are to continue meeting our consumers’ needs, Unilever’s actions must be aligned with the principles of sustainable development: ensuring we meet the needs of today without jeopardising the ability of future generations to meet their own needs. (Social Review 2000, p. 16)

In conclusion, in 2000, social responsibility, sustainability and providing shareholder return are not conflated, but are seen as three different demands on the corporation. All have their own Annual Report, but the Social Review also includes a short summary of the financial and environmental impacts; in other words, financial and environmental impacts are a sub-set of the social impact: ‘Companies have a duty to manage all aspects of business in a responsible and sustainable way. In doing so, they make a substantial contribution to society’ (Social Review 2000, p. 19). Governance Prior to 2000 Unilever had already set up a structure for environmental hazard reduction that consisted of advisory groups, committees and local safety managers. In 2001, after joining the UNGC, the Chairmen appoint one of the executive directors, the Corporate Development Director, as CSR champion. The Director forms an environmental decision making committee, The Unilever Environment Group (UEG), with representatives from each business group. The role of the UEG is to develop strategies to increase Unilever’s environmental performance on a global scale. The group is supported by five high-profile external independent advisors who

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form the Unilever Sustainable Development Group (USDG). They advise the UEG on environmental issues, including the development of corporate key performance indicators and standards, such as the Global Reporting Initiative. Sustainable agriculture is advised by yet another board of 12 independent experts (Environmental Performance Report 2001, p. 4). It is important to note that this governance structure is primarily focussed around environmental sustainability. This is not necessarily because social responsibility is considered less important, but rather because social responsibility is interpreted as a moral responsibility, made explicit in Unilever’s code of conduct, and part of what is considered ‘core business’. Partnerships Unilever is aware that the implementation of its environmental initiatives ‘heavily depends on partnerships for their success’ (Environmental Review 2001, p. 4). Unilever’s partnerships are with ‘industry bodies, government agencies, business partners and other concerned organisations, to promote environmental care, increase knowledge and disseminate good practice’ (Social Review 2000, p. 17). By 2004, the Social Review reports more than 300 social partnerships at country level (Social Review 2004, p. 20). Advisory organisations include the World Business Council for Sustainable Development, Business for Social Responsibility, and the Global Reporting Initiative. To address specific issues, Unilever is proactive in the establishment of collaborative industry initiatives such as the global Marine Stewardship Council, the World Water Forum, and the global Roundtable on Sustainable Palm Oil (RSPO) (Social Review 2004). Reporting Activities and Achievements What stands out immediately is that the reporting of social achievements is very different from that of environmental achievements. Environmental initiatives are linked to an analysis that identified the areas where Unilever’s supply chain has the greatest (negative) impact on the environment. For these areas, clear and measurable five-year targets were set in place in 1999. The sustainability review reports the progress that was made against these targets. Targets include CO2 reduction, hazardous waste reduction and water usage in Unilever’s 427 manufacturing sites, 8 research laboratories and 2 head offices worldwide. The measurement of social, as opposed to environmental, impact never starts with an analysis of the negative social impact of the corporation on society. The social review sets out to argue that Unilever’s core business makes a positive social contribution. Social achievements are grouped on

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the basis of stakeholder groups (employees, suppliers etc.) and types of commitments to stakeholders (e.g. sharing wealth, health and safety, dignity in the workplace, responsible promotion and a sustainable future). Profit is explained as ‘cash value added’ which is distributed amongst stakeholders, including employees (wages), governments (tax), providers of capital (dividend) and local communities (voluntary contributions) (Social Review, 2000, pp. 5 6). Unilever clearly wants to emphasise that it does not only create wealth for shareholders but also helps to ‘raise living standards and improve the quality of life’ (Social Review 2000, pp. 5 6) of all stakeholders. Although only 13% of Unilever shares are held outside Europe and the US, the report argues, there are about 20 countries where a much larger proportion of the population benefits from shareholder returns. For example in India, 48.5% of the shares of Unilever’s subsidiary Hindustan Lever are in the hands of a total of 360,000 local investors (Social Review 2000, p. 5). This change in the discourse on profit is a clear attempt to transform the negative perception of profit as something that only benefits the shareholders, into something that has a positive impact on a broad range of stakeholders. The first report (2000) explicitly mentions the large number of job-cuts as a negative but unavoidable social impact. The announcement of a worldwide reduction of about 25,000 workers in the next five years as a result of factory closures is introduced with the statement that ‘few companies these days can guarantee lifetime employment and factory closures are a fact of business life’ (Social Review 2000, p. 10). The responsible course of action is to do it but to handle such restructurings with ‘great care’, with generous compensation packages, counselling and training for the employees who are affected by the job cuts (Social Review 2000, p. 10). Reflections The two Chairmen during this era recognise there are no easy answers to the tensions between the commercial and the social: ‘If all commercial decisions had an obvious and indisputable social benefit it would be easy. But the reality is there are often tensions between commercial opportunity and social impact and sometimes tough trade-offs have to be made’ (Niall Fitzgerald October 2003 in a speech at the London Business School). They are open to a renewed and broader debate about Unilever’s social responsibility; they do not pretend to have all the answers and realise that tradeoffs have to be made. Simultaneously they build the case that MNEs are not all bad and irresponsible; the Social Reviews are a clear reflection of this. In the same speech to the London Business School, Fitzgerald quotes

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UN General Secretary Kofi Annan that ‘the poor are not poor because of too much globalisation, but because of too little’. This point is reiterated in the 2002 and 2004 Social Reviews. The company is more comfortable and thus forthcoming in addressing environmental issues, showing great commitment to work with partners to improve its impact on the environment. Social responsibility is framed as first and foremost a commitment to continue what the corporation is doing already and to do so with respect and integrity towards all its stakeholders and society at large. But the fact that the Social Review 2002 admits that the approach to CSR should neither be a top-down nor a compliancedriven approach, but based on empowering employees to apply, live up to and demonstrate Unilever’s shared business principles in practice (Social Review 2003, p. 6), shows a tacit awareness of the wickedness of CSR.

Unilever 2006 2008: The Cescau Era Defining CSR Already towards the end of the previous era, the term CSR was gradually being replaced by ‘sustainable development’, a term which at least on the surface prioritises environmental over other social impacts. Sustainable development refers to all the ‘key sustainability issues facing Unilever those issues which we have defined as our most material impacts’ (Sustainable Development Overview, 2007, p. 1). We observe a change in focus from enforcing a code of behaviour to responding to a strategic imperative: ‘Sustainable development has become the overarching goal for business and government. It demands that we meet the needs of society … [our emphasis]’ (Chairmen’s Introduction, Sustainable Development Report 2006). Social and environmental impact are no longer reported separately but reported in annual ‘Sustainable Development Overviews’. The overviews specify three types of issues: (1) those that impact the environment; in particular, climate change, water, packaging, and agriculture, (2) those that impact the health and well-being of customers and (3) those that impact the economic situation of all stakeholder-groups. Impact on the environment is measured over the total product life-cycle and thus includes the impact in the supply chain, during and after consumption. Social impact is primarily achieved through ‘value-led brands’, a term that often appears in the reports. Value-led brands are defined as brands that both satisfy the functional needs of consumers and address their concerns as citizens concerns about the environment and social justice

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(Sustainable Development Report 2006, p. 1). Such brands, the report claims, will lead to sustainable profitable growth. Economic impact is a result of wealth sharing, using a similar discourse as in the Social Reviews of the previous era. Overall, the reviews in the 2006 2008 era focus more on the identification of social benefits Unilever brands can offer to consumers to strengthen their social relevance, and thus to strengthen their consumer appeal. Another term that is now often appearing in the reports is ‘corporate citizenship’: ‘Our ambition is to be a respected corporate citizen’ (Sustainable Development Report, p. 1). During this era, Unilever is going through yet another major restructuring, leading to many job losses, and managing the corporate image is a serious concern. It is obvious from the reports that Unilever is keen to position itself as a good corporate citizen without losing sight of its business interests. The term CSR always had a strong connection with values and codes of behaviour, but in the 2006 2008 era this is replaced by sustainability and corporate citizenship with a clear link to customer demands and financial success: ‘As we come to understand better what sustainable development means for Unilever, we are increasingly finding it offers the key to our future prosperity’ (Sustainable Development Report 2006, p. 1). Corporate citizenship is a precondition for survival, not a moral code. The key to success is not behaviours but brands: ‘Successful brands of the future will be those that both satisfy the functional needs of consumers and address their concerns as citizens’ (p. 1). This integrated strategy is captured in Unilever’s Vitality Framework that is designed to direct brand strategy. In this framework each brand needs to specify how it creates social value, contributes to lessening environmental impact, and drives consumer vitality (i.e. health and well-being) (Sustainable Development Overview 2008, p. 8).

Governance Governance of Unilever’s social and environmental activities gradually starts to include a greater number of managers. For example, a Responsible Packaging Steering Team is created to define a revised packaging strategy (Sustainable Development Overview 2007, p. 20). An interesting development that reflects the change in approach to CSR is the fact that whereas the 2003 review still emphasised that the board had appointed a Code Committee to oversee the operation of the code of business principles throughout the business (Summary Social Review, 2003, p. 2), the 2006 review points to the ‘Board’s Corporate Responsibility and Reputation

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Committee’ which provides oversight and guidance on Unilever’s environmental and social impacts and policies (Chairman’s Introduction, Sustainable Development Report, 2006, p. 0). That means that corporate responsibility and reputation are now overseen by the same Board Committee. Partnerships With a global brand structure and a focus on ‘value-led brands’, many global brand teams start to form alliances with international NGOs to work together on social value creation. Unilever’s global dental category forms an alliance with the World Dental Federation to sponsor a campaign that communicates the importance of brushing teeth twice a day. Similar alliances are formed between Unilever’s heart-health margarines and the World Heart Foundation; anti-bacterial soap brands and UNICEF; food brands and the UN world food programme. Reporting Activities/Achievements As mentioned above, a significant change in reporting in this era is that from 2006 onwards, environmental and social impacts are no longer separately reported. The reports with regards to the environmental impact of Unilever’s manufacturing sites change little over time. Clear targets are set and consistent progress is made in terms of water consumption, energy consumption, CO2 emissions, hazardous waste reduction etc. We do note an increasing focus on the environmental impact of brands and branded reporting of this impact. Lipton tea is a clear example. In 2002 Unilever published its sustainable agriculture guidelines for tea cultivation that were communicated to most of the world’s global tea suppliers. Despite all the effort that went into this and the progress that was made, Unilever had not communicated any of this to its consumers. In 2007 Lipton entered into a collaborative agreement with the Rainforest Alliance, an independent NGO, to certify its tea supplies. This certification now allows Unilever to claim a unique market position for its Lipton brand as ‘Rainforest Alliance approved sustainable tea’. We notice a similar shift at the corporate level. Whereas in the previous era corporate sustainability initiatives were often designed to change industries, for instance the RSPO, the emphasis is now on initiatives that show Unilever’s individual progress in these areas. The reporting of social impact is consistent with the above. Until the start of the 21st century, Unilever’s corporate image was consciously kept very low (Jones, 2005). The combination of (a) a social demand for greater transparency and (b) the restructurings that have turned Unilever into

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a highly visible global corporation call for careful management of its corporate reputation. Unilever particularly needs to offset the potentially negative press that could be evoked by large scale factory and site closures that were a result of the restructuring. It is obvious from the reports that Unilever wants to demonstrate it is, and always has been, a ‘responsible corporate citizen.’ The link to the past, to one of the founders of Unilever, Lord Lever, as a businessman with a conscience who addressed the big social issues of his day, forms part of the discourse. As in the previous era, the social initiatives that are highlighted in the reviews tend to demonstrate how Unilever through its day-to-day business improves the lives of its stakeholders. There is no conscious search for possible negative impacts as is the case with the identification of environmental impacts. One exception breaks this pattern. The Sustainable Development Overview of 2007 declares: ‘We acknowledge the influence of marketing on consumers and take our responsibilities seriously’ (2007, p. 10). This leads to two initiatives: because ‘people in many parts of the world have concerns about advertising food to children’ (p. 10), Unilever makes a commitment not to advertise to children below six years of age and restricts advertising to children from six to twelve years old. The other initiative is a commitment to only use models in commercials with a healthy body mass index (p. 12). With regards to the social impact of the redundancies, the 2006 report focuses on the business need ‘to improve competitiveness and support growth’. For this purpose, the company has reduced senior management headcount in the reporting period (FY 2005 2006) by 30% whilst overall employment fell by 27,000, a reduction of 13%. The report acknowledges the concern this is causing amongst employees and guarantees the company has always ‘acted with integrity’ and has ‘treated those affected fairly’, helping them to find alternative employment (Sustainable Development Report 2006, p. 22). The report does not highlight the fact that by far the greatest reduction took place in developing countries, where employment went from 145,000 in 2002 to 96,000 in 2007 (Unilever Charts 2002 2011, p. 10). What this dilemma shows, but the report does not emphasise, is that trade-offs have to be made. To retain competitiveness and to continue to grow are imperatives for survival that, as Fitzgerald pointed out in his speech in 2003, unavoidably lead to difficult trade-offs. Whereas the era of Burgmans and Fitzgerald was characterised by experimenting and learning, we now see a lot of benchmarking and measuring of impact. To have a clear starting point for a sustainability strategy, Unilever initiates an impressive project of tracking and measuring the social,

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environmental, and economic impact of each of Unilever’s key brands along the total value chain. In measuring environmental impact, Unilever sets itself apart from its competitors that have often been accused of outsourcing the less sustainable steps in the value chain to look better themselves. Unilever instead, includes all stages of the value chain over the total lifecycle of its brands, including those during and after consumption. This ‘Brand imprint tracking process’ also tracks the external stakeholder expectations and demands on the brand. For each brand it records the concerns of consumers, key opinion leaders, and other interest groups. Results of this process are not published until 2010, but data collection started in 2006. Reflections The approach to managing Unilever’s role in society changes from a normative approach focused on values and behaviours, to a more pragmatic strategic marketing approach: identify the issues, and design products and brands that meet the new and emerging market demands. In other words, meeting sustainability demands is a way to build a reputation as a good corporate citizen and create consumer-preferred ‘value-led’ brands. Sustainability is gradually becoming a win-win strategy rather than a behavioural commitment to society. Fitzgerald’s acknowledgement that the tensions between commercial opportunities and social impact sometimes lead to tough trade-offs (2003) is gradually replaced by a growing confidence that commercial opportunities and positive social impact can go hand in hand. There is still a clear recognition that Unilever has much to learn, that this is a journey, but there is a growing confidence of what needs to be done, and that whatever is done, should not only benefit society now and in the future, but should also benefit Unilever. If the conclusion of the previous era was that there was some tacit awareness of the wickedness of CSR, what we observe here is a gradual taming of the wickedness. CSR is redefined as a construct that fits the existing way of understanding the role of business in society and is linked to good practice marketing and corporate reputation management.

Unilever 2009 2012: The Polman Era Defining CSR In November 2009 the new CEO, Paul Polman, lays out a clear vision for the future: to double the turnover of the company while reducing its overall

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impact on the environment. The vision is summarised in the catch phrase ‘we work to create a better future every day’ (Sustainable Development Overview, 2009, p. 6). It also includes the promise that ‘we will inspire people to take small, everyday actions that can add up to a big difference for the world’ (p. 6). In his opening statement Polman does not use terms such as CSR or corporate citizenship. Instead he speaks of sustainability as an imperative for future growth, and ‘shared value creation’ as a business approach that has been at the heart of Unilever since its inception (p. 1). The rhetorical argument in support of this strategy is laid out even more clearly in the official USLP, a strategic document that is launched in 2010. It states that ‘for Unilever the business case for integrating sustainability into our brands is clear and persuasive’ (USLP 2010, p. 5). The primary strategic goal is growth; ‘sustainability’ is identified as the 21st century way to achieve this goal. The USLP states that sustainability drives consumer preference, customer support, fuels innovation, grows markets in particular in developing countries, and generates cost benefits (2010, p. 5); a year later, in the 2011 update, a sixth benefit is added: ‘it inspires our people’ (USLP: Progress Report, 2011, p. 2). The USLP does not speak of a code of conduct or a strategy for greater sustainability; it speaks of a new model for business growth. Sustainability has become central to the business strategy and the means to achieve its core objective of growth. In 2012 this interpretation has undergone a shift. The plan is no longer presented as a business case. Instead, the language is concerned and in his opening statement Polman posits that ‘capitalism is not a panacea’ (USLP Progress Report 2011, p. 1). Rather than a single-minded focus on growth with sustainability as a growth engine, growth and sustainability are described as mutually supportive; sustainability enables growth, and growth in turn enables Unilever to invest in renewable energy, sustainable agriculture and product innovation (2011, p. 2). The USLP is presented as ‘our strategic response to the unprecedented challenges the world faces’ (USLP Progress Report, 2012, p. 1). The primary focus has shifted from the need for growth to the need to respond to these challenges and ‘to make sustainable living commonplace’ (2012, p. 1), a phrase that builds on the original purpose of 19th century founder William Lever, whose purpose was ‘to make cleanliness commonplace’ (p. 4). The language used indicates a greater recognition of the urgency of the social issues than in previous reports: ‘we cannot thrive as a business in a world where too many people are still excluded (…), where nearly 1 billion go to bed hungry every night, where 2.8 billion are short of water and increasing numbers of people are excluded from the opportunity to work’ (p. 3).

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Governance Governance remains in the hands of the Corporate Responsibility and Reputation Committee. Responsibility for implementation and delivery has become part of the core business structure and ultimately resides with the Executive team. For a growing number of managers, their contribution to sustainable business goals is linked to their individual rewards (USLP Progress Report 2012, p. 6). Proper application of the Code of Business Principles and Business Partner Code continues to be part of the committee’s task, but insurance of application of these principles is now considered part of risk management, a business area that is overseen by the Board’s Audit Committee. The Executive team is supported by the Corporate Responsibility Issues, Sustainability and Partnerships (CRISP) leadership team and continues to be advised by a group of external experts, the USDG. In addition there is a growing number of internal specialist teams, such as the Safety and Environmental Assurance Centre that now has around 200 scientific experts working in two of Unilever’s major R&D centres, the Agriculture Steering Group, the Global Health Partnerships Group etc. Partnerships Unilever acknowledges that to achieve its USLP commitments they will have to work in partnership with governments, NGOs, suppliers and consumers (USLP 2010, p. 3). In January 2012 Unilever announced the launch of the Unilever Foundation, dedicated to designing programs ‘to grow the business and achieve the USLP’s goal to help more than 1 billion people take action to improve their health and well-being’ (USLP Progress Report 2012, p. 7). The foundation is a global partnership with five of the world’s leading NGOs: Oxfam, Population Services International, Save the Children, UNICEF and the World Food Programme. These five partners ‘will also serve as our primary beneficiaries in times of disaster and emergency relief’. Reporting Activities/Achievements The USLP is built around three desired social outcomes for 2020: (1) ‘help more than a billion people take action to improve their health and wellbeing’; (2) ‘halve the environmental footprint of the making and use of our products as we grow our business’; (3) ‘enhance the livelihoods of hundreds of thousands of people as we grow our business’ (USLP Review 2011, p. 1). These three outcomes are translated into sixty measurable and timebound targets with interim milestones to track progress. Each quarter

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the Unilever Executive, led by the CEO, monitors delivery. Together, the plan does not only deliver growth for Unilever, it also contributes to internationally agreed targets, such as the millennium development goals and the international climate change commitments (USLP 2010, p. 23). All activity reporting is against the sixty targets. The most recent USLP Progress Report (2012) is an impressive 53-page document that outlines the above 60 targets in detail, describes for each target how Unilever has performed thus far, what the perspectives are and what future challenges remain. Jonathon Porritt, Founder Director of Forum for the Future UK and longstanding member of the Advisory Board calls the plan one of the most ambitious change management programmes going on in any big company today (2012, p. 50) and comments that ‘there is still a long way to go before the USLP is lived and breathed by every single part of the business’, but the report provides evidence of an unprecedented increase in awareness, collaborative partnerships, and initiatives to date.

Reflections The 2010 USLP turns social and environmental demands into a business opportunity. The tone is moving from corporate citizenship as competitive advantage, to sustainability as imperative to growth. Sustainability offers opportunities for innovation, and gives the corporation the licence to grow and to be a powerful player in modern society. There is recognition that this necessitates a new business model. What this model is, is not yet explicit, but in a press release that accompanies the launch of the USLP Polman is quoted as having said that ‘those companies that wait to be forced into action or who see [sustainability] solely in terms of reputation management or CSR, will do too little too late and may not even survive’ (Unilever press release, 25 February 2010). What stands out in the USLP and its subsequent reviews is the growing confidence and use of declarative statements. Opinions are presented as facts and the corporation as a unified group with shared beliefs such as: ‘we do not believe there is a conflict between sustainability and profitable growth’; or ‘the daily act of making and selling consumer goods drives economic and social progress’ (USLP 2010, p. 3). Such confidence is attractive, but in the context of a wicked problem, it is likely to evoke a strong reaction from proponents of alternative ideological views. This may explain why the 2012 review no longer uses such phrases but takes a much more careful and compassionate tone.

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The USLP continues to include the total product lifecycle in the assessment of Unilever’s environmental impact. It is important to note that this also relativises Unilever’s own contribution to the problem. For example, for most products water usage in the production process is negligible in comparison to water usage in other parts of the value chain. Most water is used in the supply chain in particular by farmers for agricultural crops, and in the consumption phase by consumers using Unilever’s detergents or bath and shower products. Targets to reduce water usage therefore focus on targets to change the behaviour of suppliers and consumers. In 2010 2011 Unilever collaborated with renowned psychologists to indentify ‘levers’ to change consumer behaviour.2 In the 2012 USLP Progress Report, we note not only a change in tone towards greater social concern, we also notice signs towards greater inclusiveness and openness for debate. The review reports that in 2012, Unilever ran public events to gather feedback on its plans in 25 countries and launched a so called ‘Sustainable Living Lab’, a 24-hour on line dialogue between Unilever managers and external experts (USLP Progress Report 2012, p. 52). Of course these meetings could be self promotion, but they could also be the first steps towards the more inclusive ‘political’ process that Ritter and Webber proposed.

DISCUSSION At the start of this chapter we introduced CSR as ill-defined and contested. We attributed part of the confusion around CSR to the fact that the nature of the problem CSR is addressing is poorly understood. We introduced the concept of wicked problems and positioned CSR as a prime example of a wicked problem. But as John Camillus pointed out, corporations struggle to deal with wicked problems. Wicked problems do not lend themselves well to the traditional strategic management approach with which managers are familiar (Camillus, 2008). What we observe in an analysis of the interpretation and implementation of CSR by Unilever is twofold. First of all, the structural and strategic changes that have taken place over the past twelve years are significant. ‘Sustainability’ is now part of Unilever’s core strategy. In the first two eras, CSR was often described as a journey, and there is no doubt that considerable learning has taken place. The company has moved from tracking the reduction in environmental impact of its factories, to reporting on its

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progress towards a wide range of targets across the entire life-cycle of its products. The internal group responsible for the implementation of social and environmental targets has evolved from a small group of senior managers to a large team with representatives in every business unit. The company is even taking the step of incorporating sustainability objectives into a growing number of employees’ KPIs. The shift to sustainability has involved large-scale collaborations with external parties, including actions to encourage behavioural change amongst its own suppliers and consumers. Second, we observe a step-by-step re-interpreting or sensemaking (Weick, 1995) of CSR towards less wicked constructs that enable the corporation to respond in ways it is familiar with. The assumptions underlying the shifts that have taken place in Unilever’s interpretation of its role and responsibility in society over the period we reviewed could be conceptualised as having moved from a normative and wicked to an instrumental and much tamer interpretation. The debate about the inevitable trade-offs the company will need to make when trying to reconcile commercial and societal demands has been replaced by an interpretation that claims the two go hand in hand. Initially, Unilever’s understanding and definition of CSR is communicated as a commitment to doing what is right for society (2000 2004). This sensemaking is gradually replaced by a sensemaking that justifies social investment as the right thing to do for the shareholders because it creates competitive advantage (2005 2008). In the following era, sustainability is defined as an opportunity for innovation and growth (2009 2011). More recently, we see a modification of this instrumental approach as sustainable development is defined as ‘both a duty and an opportunity for growth’ (2012). In the latest publications there are even some signs of a move towards a more inclusive approach as the organisation opens up for argumentation and dissenting voices. The initial interpretation of CSR, a commitment to doing what is right, ultimately allows for the wickedness of the problem. The first Social Review (2000) acknowledges the need for tradeoffs as corporations seek the balance between what is best for the corporation and what is best for society. Current definitions deny this challenge, with the risk of losing sight of wickedness. Unilever’s current interpretation of CSR can be summarised as ‘shared value creation’, to use the term that was popularised by Porter and Kramer (2006, 2011). Shared value creation is actionable because it ‘tames’ the trade-off: MNEs can collaborate with NGOs and governments to create a better society as long as this also benefits the core business. It does not address macro-concerns such as the increasing political power and dominance of MNEs, and leaves damaging effects of MNEs that

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cannot be addressed without a loss of profit outside the debate. The advantage of this tamer, instrumentalist definition of CSR is that it allows for a more traditional approach to implementation; one that the organisation is comfortable with and knows how to address. By a ‘traditional’ approach we mean the basic strategic logic of identifying the gap between the current situation and the desired future and putting a strategy in place that will close the gap. The problem of environmental sustainability has been more amenable to such a traditional approach, yet targets such as ‘sustainable supply chains’ or ‘no increase in our environmental footprint’ also pertain to the world of wicked problems. To illustrate the subjective and value-laden nature of such objectives, we point to the debate on sustainable palm oil. In an attempt to set clear standards for growers of sustainable palm oil, the RSPO issued 8 principles and 39 specific criteria. One of the criteria is that new plantations are allowed to remove forest as long as the land is not deemed ‘high-value conservation forest’. But who defines what a ‘high value conservation forest’ is? The Jakarta-based Center for Orang-utans Protection claims that the RSPO fails in its attempts to stop the clearfelling and that forests home to orang-utans are still being destroyed. So is the palm oil used in Unilever’s products sustainable or not? It is arguably more sustainable than it was maybe twenty years ago, not because the problem is solved, but because Unilever has joined the debate on the issue of sustainability and has been willing over the past 12 years to take multiple actions to try to tackle the problem. We argue that ultimately claims such as ‘by 2015 all our Palm Oil will be sustainable’ may backfire because they disregard the wicked nature of the problem. Unilever’s social (as opposed to environmental) impact on society has consistently been reported as positive. Initial responses emphasised Unilever’s commitment to conducting business ‘with honesty and integrity’ (Social Review 2000, p. 7), but the question of whether Unilever was maybe also creating negative social value was never raised in the reports. This lack of critique is not surprising given the fact that confidence that business is good for society lies at the foundation of our economic system. Questioning this means questioning these neo-liberal capitalist foundations. According to capitalist assumptions, social investment without positive impact on profit undermines the system and will ultimately disturb economic progress. Therefore it is not surprising that Unilever’s social reports during the Cescau era feel the need to justify social investment as good for brand and corporate reputation and thus good for profit; and later, during the Polman era, propose shared value creation in order to create

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sustainable growth. Sustainable growth is a rational proposition that does not challenge the economic foundations upon which corporations such as Unilever are built. There is an articulated understanding that shared value creation will re-legitimise large MNEs and thereby their neo-liberal capitalist underpinnings. In the words of Porter and Kramer: ‘Learning to create shared value is our best chance to legitimise business again’ (2011, p. 64). Unilever’s USLP is doing just that: selling anti-bacterial soap and toothpaste is reframed as contributing to an eradication of the world’s health problems. We do not deny this is true and that corporations like Unilever make important positive contributions to society. What we do argue is that constructs such as shared value creation are too tame for the wickedness of the problem. Like capitalism, shared value creation is not a panacea. In the face of wicked problems, nothing is.

CONCLUSION Whichever way CSR is now defined, the wicked challenge remains. The value of Rittel and Webber’s acknowledgement of the unique nature of wicked problems is that it encourages the development of more participative and ‘political’ approaches to addressing those problems that we recognise as wicked. Rittel was convinced that wickedness could only be approached argumentatively. Every attempt to address the issue with rationality and certainty would only lead to controversy. This would explain why, as Porter and Kramer (2011) report, the more corporations embrace corporate responsibility, the more they have been blamed for society’s failures. Like Hymer 40 years ago, we argue it is important to acknowledge the duality of the MNE. Large corporations such as Unilever make a significant positive contribution to society, but they also continue to grow into ever larger superpowers that collaborate with governments and NGOs to orchestrate the way we live, work, alleviate poverty, manage our natural resources, and consume. Some of the by-products of this are a continuing loss of jobs in the global productive system, diminishing cultural variety, and increasing dominance by a small number of corporations. What a better understanding of wicked problems can contribute to this seemingly paradoxical situation is that it shows the shortcomings of interpreting CSR as a tame problem that can be addressed with instrumental methods. Instead, understanding the debate about the role and responsibility of the MNE as a wicked problem could shift the debate from trying

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to find an absolute definition and problem solution, to a broader societal debate about the future social and political role of MNEs in society. Interpretations of this role are never value-free and will always need to be dynamic as the world continues to change. In the face of wicked problems, a demand for consistency and enduring definitions is detrimental. We hope Unilever remains flexible, supportive of debate and dialogue, and open to self-critique. Until 2011 the trend in Unilever was towards a continuous taming of the wicked problem by redefining it as a business proposition. But Rittel and Webber warned against pretending that social issues can and should be handled this way and to stop pretending that there are non-ideological (disinterested) acts and expressions. Instead, a more participatory and argumentative mode of thought and action (or what Scherer and Palazzo have called ‘politics’) is required to allow all the wickedness of the problems related to creating a better society to surface and be handled in a collaborative and constructive way.

NOTES 1. ‘Politics’ here is used in the Aristotelian sense of things concerning the ‘polis’, the city or state, rather than the individual or the family. Politics in this sense is strongly linked to ethics (what makes a better society?) and craftsmanship (how to create a better society?). A political process is democratic or authoritarian and by definition involves ideological differences and persuasion because neither form nor purpose are absolute. 2. In 2011 Unilever publishes a behavioural change model to encourage sustainable changes in consumer habits ‘Five Levers for Change’.

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UNILEVER REPORTS http://www.unilever.com/sustainable-living/news/publications/publicationsarchive/: Social Review 2000 2006 Environmental Performance Report 2000 2006 Sustainable Development Report 2006 2009 Sustainable Development Overview 2011 2012 Unilever charts 2002 2011 Unilever Sustainable Living Plan 2010 Unilever Sustainable Living Plan: Progress Report 2011 2012

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CHAPTER 13 MNE AND MULTIPLE EMBEDDEDNESS: A CASE STUDY OF MNE NGO COLLABORATION IN SAVING THE BALTIC SEA Tiina Ritvala, Per Andersson and Asta Salmi ABSTRACT Purpose This chapter analyses the multiple embeddedness of MNEs, and their participation in solving contemporary societal issues. We aim to increase understanding on the relational processes and network dynamics present in MNEs’ participation in cross-sector partnerships. Design/methodology/approach Our study addresses the issue of the poor ecological state of the Baltic Sea and illustrates the early developments in cross-sector collaboration. We build on a single exploratory case study of the cooperation of one MNE (IBM) with an environmental NGO (BSAG) in Finland. We analyse how participation in the crosssector collaboration manifests itself in the external and internal networks of the MNE. Findings We show that an initiative by the NGO to participate in environmental work was actively adopted within the MNE and led to

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network changes. These changes concerned both the activation of existing links and the establishment of new links with such actors as authorities and research institutes. The NGO acted as a catalyser and cultural mediator to create a bridge between the MNE and governmental actors. Research implications There is a need to investigate cross-sector collaboration in other contexts particularly from the perspective of MNEs and (international) business networks. Questions such as how do enduring (business and socio-political) relationships emerge from MNE’s participation in issue networks and how technology that has been developed to solve a specific societal issue may be translated into commercial solutions are especially promising. We also urge scholars to investigate the ties, texture and dynamics (including tensions) of business relationships with those of public actors and civil society. Practical implications Participation in cross-sector initiatives may grant an MNE a forerunner position in the creation of new sustainable markets and technologies. It may also create an opportunity to influence policymakers and build new socio-political networks. From the perspective of a subsidiary of an MNE, engagement with cross-sector partnerships may strengthen its voice within the MNE network. Originality/value Our study contributes to the understanding of the relationship dynamics between actors in cross-sector collaboration around a societal (environmental) issue. Our analysis illustrates the embeddedness of MNE networks, where actions in the regional and global networks (the representatives of the headquarters) overlap with and strengthen the local actions of the subsidiary. Keywords: Cross-sector collaboration; embeddedness; multinational enterprise (MNE); non-governmental organisation (NGO); societal issue; environment; Baltic Sea

INTRODUCTION In a globalising world, countries have become more interdependent and share intertwined economic and social interests and issues. Environmental problems are one of the major social issues which do not respect country borders. Solving or preventing such complex issues necessitates the

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mobilisation of multi-stakeholder networks, i.e. ‘networks in which actors from civil society, business and governmental institutions come together in order to find a common approach to an issue that affects them all’ (Roloff, 2008, p. 238). Multi-stakeholder networks are needed when an issue is too complex and costly to be addressed without cooperation across sectors and countries. From the perspective of companies, participation in multistakeholder networks may enhance their corporate image and, in addition, is a source of innovation and competitiveness. MNEs are embedded in multiple networks globally and locally (Andersson, Forsgren, & Holm, 2007; Dellestrand, 2011) and therefore may play a central role in advancing solutions to current problems. Despite their high societal and business importance, the dynamics of multi-stakeholder networks remain poorly understood. Indeed, although issue-based innovations have significant implications for business networks and relationship marketing, our theoretical understanding and analytical models have failed to adequately capture the full range of issues and relationships in such situations (Wilson, Bunn, & Savage, 2010). The proliferation of dramatic and urgent issues in the world, and the ensuing emphasis on the corporate social responsibility (CSR), has highlighted the urgency of enhancing our understanding of relationship dynamics among businesses, NGOs and government agencies. A rapidly growing body of literature has concentrated on ‘social partnerships’ or what has recently been called ‘cross-sector social partnerships’ between government, business and NGOs in providing public goods such as clean water (Seitanidi & Crane, 2009; Seitanidi & Lindgreen, 2010; Selsky & Parker, 2005, 2010; Reast, Lindgreen, Vanhamme, & Maon, 2010; Wilson et al., 2010). Notwithstanding the contributions of this broad literature, relatively little is still known about the relational processes that take place along the path of partnership formation, implementation and outcomes (Seitanidi & Crane, 2009). Furthermore, the motivations of MNEs in participating in cross-sector collaboration and the resulting network dynamics are little understood (Husted & Allen, 2006; Kolk & Pinkse, 2008). To address these gaps in the literature, we integrate insights mainly drawn from stakeholder theory (Roloff, 2008; Rowley, 1997; Rowley & Moldoveanu, 2003) and international business literature (Dahan, Doh, & Guay, 2006; Nell, Ambos, & Schlegelmilch, 2011) into the scant literature on cross-sector partnerships in business networks (Crane, 1998; Ritvala & Salmi, 2009, 2010; Welch & Wilkinson, 2004; Wilson et al., 2010). Our aim is to understand the multiple embeddedness (Meyer, Mudambi, & Narula, 2011) of MNEs and, in particular, the mechanisms through which MNEs

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may benefit local issue-solving, and how local learning that emerges from cross-sector partnerships is transferred within the MNE. Our study contributes to the understanding of the relationship dynamics between actors in cross-sector collaboration around a societal issue. The actor that we focus on is a globally operating MNE, and we analyse how participation in the multi-stakeholder collaboration manifests itself in the external and internal networks of the MNE. We use the term ‘external networks’ to refer to external relationships beyond the boundaries of the MNE and ‘internal networks’ to refer to internal MNE relationships among its subsidiaries, headquarters and other units. The study addresses the issue of the poor ecological state of the Baltic Sea, which is the most studied and protected, yet among the most polluted, seas in the world (Helsinki Commission, 2010). The Baltic Sea is an ecologically unique ecosystem with shallow bays, which makes it highly sensitive to the environmental impacts of human activities. Furthermore, the Gulf of Finland is among the most heavily trafficked sea areas in the whole world (Kuronen & Tapaninen, 2009), and increasing shipping and oil cargo activities have raised concerns about possibility of a large-scale oil accident. Many actors, including governments and environmental NGOs such as WWF, have for decades worked on the protection of the Baltic Sea. Alongside these traditional players, new types of actor (private foundations with political and business connections) are trying to tackle the issue in new ways by mobilising actors on several broad fronts to join these efforts (Ritvala & Salmi, 2010). This study is a part of a larger research project on the networks around the environmental state of the Baltic Sea, which started at the beginning of 2009 at Aalto University School of Business. The current study is a single exploratory case study of the cooperation of one MNE (IBM) with an environmental NGO (BSAG) in Finland. The remainder of the chapter is structured as follows. We start by introducing the theoretical foundations of our study. After describing our research strategy, we present our case study. This is followed by the analysis and discussion of the results. We conclude the chapter with managerial implications and suggested avenues for future research.

THEORETICAL FOUNDATIONS One of the key intellectual challenges of studying the dynamics of crosssector collaboration is the blending of multiple theoretical approaches

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(Bryson, Crosby, & Middleton Stone, 2006; Rethemeyer, 2005). In our analysis of the relationship dynamics between MNEs, NGOs and other actors in solving contemporary environmental issues, we apply three streams of literature: the business networks approach, stakeholder theory and literature on MNEs as inter-organisational networks.

Business Networks Approach Our perspective on networks builds mostly on the IMP (Industrial Marketing and Purchasing) approach to business markets, which focuses on the economic and technological factors that affect network dynamics (Brito, 2001). The IMP approach is particularly strong in analysing relationships between business actors, but its conceptual and empirical focus has also been broadened to cover networks involving a diverse range of socio-political actors such as governments, supranational authorities and trade unions (e.g. Hadjikhani & Ghauri, 2001; Hadjikhani & Lee, 2006; Welch & Wilkinson, 2004). However, only a few studies include NGOs in their empirical network analysis (Crane, 1998; Ritvala & Salmi, 2009, 2010). Within the relationship marketing literature, Wilson and colleagues (2010) have studied the anatomy of a cross-sector social partnership composed of NGOs, government agencies and business firms. Social partnership is a unique relational form, where the unit of analysis is the collectivity of organisations that come together to solve messy problems that cannot be solved by any one actor alone (Waddock, 2002; Wilson et al., 2010); hence, they correspond largely to the concept of a multi-stakeholder network. Waddock (1988, p. 18) defines social partnership as ‘a commitment by a corporation or a group of corporations to work with an organization from a different economic sector (public or nonprofit). It involves a commitment of resources − time and effort − by individuals from all partner organizations. These individuals work cooperatively to solve problems that affect them all. The problem can be defined at least in part as a social issue; its solution will benefit all partners. Social partnership addresses issues that extend beyond organizational boundaries and traditional goals and lie within the traditional realm of public policy; that is, in the social arena. It requires active rather than passive involvement from all parties. Participants must make a resource commitment that is more than merely monetary’. Cross-sector partnerships deal with complex and multi-faceted issues where actors may, at least initially, have diverging views of how the

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problems and issues should be defined and prioritised. Conflict in crosssector partnerships may also emerge from attempts to protect or magnify one partner’s control over the final outcomes of the collaboration (Bryson et al., 2006). Therefore, actors initially have to interact in order to create at least partially some common ground, norms, representations and pictures of the situation (Kjellberg & Helgesson, 2007). The solving of complex problems may present extensive implications for business networks, and may trigger the creation of new technologies, markets or entirely new industries (Ritvala & Salmi, 2010; Wilson et al., 2010). Andersson and Sweet (2002) propose a framework for ecological strategic change in business networks that involves the strategic actions of the firm and its network context. They argue that firms which implement new environmental strategies must often act in, and handle, different arenas with different network structures, technologies and institutional rules for behaviour.

Stakeholder Approach The stakeholder approach is an analytical framework that is frequently used in trying to understand how managers deal with the moral and normative issues that are increasingly present in their operating environments. Freeman (1984) argues that firms must consider not only the requirements of their shareholders but also those of a broad range of stakeholders who can affect or are affected by the achievement of the firm’s objectives. The theory assumes that managers are aware of stakeholders’ interests and can prioritise them based on the stakeholders’ power, legitimacy, and urgency, i.e. ‘the degree to which stakeholder claims call for immediate attention’ (Mitchell, Agle, & Wood, 1997, p. 865). Stakeholders are typically classified as primary stakeholders (e.g. owners, employees, customers and suppliers), and secondary stakeholders (e.g. NGOs, special interest groups and the media). Given that secondary stakeholders do not engage in direct transactions with firms, firms are not believed to be dependent for their survival on secondary stakeholders (Clarkson, 1995). The literature to date thus focuses on how firms react to their primary stakeholders, and less attention has been placed on understanding how secondary stakeholders may influence firms (de Bakker & den Hond, 2008; Eesley & Lenox, 2006). Secondary stakeholders are often seen as a relatively homogeneous group, guided by the predominately rational pursuit of their stake-defined interests (de Bakker & den Hond, 2008). Here, stakeholder interaction is seen as a potential source of both societal and business benefits.

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In contrast to traditional stakeholder literature, which is firm-centred and asks ‘Who is a stakeholder of the firm?’, we start by asking ‘who is a stakeholder of an issue?’ (Frooman, 2010, p. 161). Roloff (2008) suggests that companies practise two different forms of stakeholder management: organisation-focused (focusing on the organisation’s welfare) and issuefocused (focusing on an issue that affects their relationship with other societal groups and organisations). While organisation-focused stakeholder management focuses on the (mis)conduct of a single firm, issue-focused stakeholder management considers an issue that is relevant for several actors (ibid.). We are interested in finding out how issue-focused stakeholder management is reflected in a firm’s business and socio-political networks. Thus, we have contributed to studies that examine the broader networks in which a firm-stakeholder dyad is embedded (Rowley, 1997; Rowley & Moldoveanu, 2003).

The MNE as an Externally Embedded Organisation The growing influence of MNEs, which cooperate with other firms and NGOs, can be seen across the levels from local to global. While such behaviour is reflected in complex multi-level, multi-actor relationships, these have only recently begun to be explored by the International Business (IB) literature, which has tended to focus on bilateral relationships between firms and host governments (Dahan et al., 2006). Indeed, the relationships between MNE and NGOs at national and transnational levels have been neglected, with only a few exceptions (Dahan et al., 2006; Ramamurti, 2001; Teegen, Doh, & Vachani, 2004). There is, however, increasing interest among IB scholars in studying MNE as externally embedded organisations. Indeed, since the seminal work by Ghoshal and Bartlett (1990), a vast body of literature has focused on studying the embeddedness of MNE at multiple levels, including business and social networks. A key focus has been placed on investigating the role of subsidiaries’ local networks for increasing innovation through increased knowledge flows from the external environment (Andersson, Forsgren, & Holm, 2002; Jindra, Giroud, & Scott-Kennel, 2009). It is understood that subsidiary networks may be a source of innovation and renewal for modern MNEs. In a recent study by Nell and colleagues (2011), the predominant focus on the embeddedness of established subsidiaries into their local environment was shifted to headquarters’ linkages to the local context, which creates embeddedness overlap, i.e. simultaneous links from the parent and subsidiary to the same local actors.

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The authors argue that MNEs build and maintain more overlapping network ties when subsidiaries perform well, hold important resources, operate in turbulent environments and are closely connected to multinational actors instead of purely domestic ones (Nell et al., 2011). Subsidiaries, on the other hand, are constantly seeking for their parent’s attention and a better position from which to mobilise resources and power within the MNE (Birkinshaw, Hood, & Young, 2005). High embeddedness and integration in local institutional systems is one possible form of micro-politics within an MNE used in order to gain a more powerful position for a subsidiary (Morgan & Kristensen, 2006).

Analytical Framework This section integrates the central ideas from the discussed theoretical perspectives to our exploratory study of an MNE’s engagement with an

Fig. 1.

Analytical Framework: Embedded Cross-Sector Cooperation to Solve an Issue.

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NGO to solve a societal issue. The following analytical setting for research synthesises our conceptual ideas (Fig. 1). A common issue lies at the centre of our analysis. Contemporary major issues, such as environmental pollution, tend to be multi-sectoral and multi-level phenomena. It follows that their solving necessitates the mobilisation of diverse types of organisation, across levels from governmental to business and civil society, and across geographical space. While the issue under discussion is often a global one, it may have specific local features and ramifications. In the light of our theoretical reading, we suggest that the motives for participating in issue-solving and the network outcomes derive both from external and internal factors and relationships between actors. In an MNE context, this means investigating the internal and external networks of the company, both as they relate to the local subsidiary and to the headquarters. We are also interested in the features and possible challenges of this relational form, where participants are likely to have different organisational goals and diverging views on how the problems should be defined and acted upon. We contend that embeddedness is concerned with interdependence (Dellestrand, 2011).

RESEARCH STRATEGY We have followed a single in-depth case study approach, which is well suited to understanding complex interaction processes that are embedded in time (Woodside & Wilson, 2003; Quintens & Matthyssens, 2010) and managerial perceptions of networks. Single cases are also often used to extend existing theories and to build new theories (Dyer & Wilkins, 1991; Siggelkow, 2007) and are commonly used to study network dynamics (Easton, 1995; Halinen & To¨rnroos, 2005). Our analysis will concentrate on a subset of the overall network of actors protecting the Baltic Sea, on the ‘issue-based net’, that is, a web of relationships among actors who are concerned with a particular issue through mutual or conflicting interests (Brito, 1999, p. 92). Our case is formed by the cooperation between IBM, a global IT infrastructure, software and service provider, and an NGO engaged with saving the Baltic Sea. We selected the field of ICT where wireless technologies and applications can be used for sustainable value creation (Andersson, Sweet, & Rosenqvist, 2009). For instance, environmental sustainability may be increased through the benefits of monitoring and sharing information regarding the ecological state of

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the sea and enhancing maritime communication between vessels to avoid accidents. We focus on the cooperation between IBM and an NGO called the Baltic Sea Action Group (BSAG), and on how this cooperation is reflected in broader networks. Methodologically, this type of study calls for extensive information gathering and, often, a longitudinal approach, of which our rich case study is an example. Our key source of evidence was secondary data. We collected and analysed various forms of documents such as newspaper stories, articles appearing in the mass media, firms’ commitments given the high level summit, the Baltic Sea Action Summit (BSAS), held in Helsinki in February 2010, as well as press releases and corporate responsibility reports for the period between early 2009 and June 2011. Additionally, we analysed 28 webcasts from the BSAS, and 18 webcasts from the follow-up summit held in Helsinki in February 2011 (see Table 1). The speeches given at the two summits were transcribed before their analysis. The webcasts broadened our view, as they showed how different types of actor from different positions and across countries present themselves and their intentions to tackle the common issue. In this chapter, we focus on the speeches given by IBM and BSAG during the summit and its follow-up. We have triangulated our analysis of documentation with data collected through interviews. We conducted 11 semi-structured interviews with 10 informants between February 2009 and October 2012. The interviews lasted between 50 and 180 minutes, were conducted in Finnish (11) and English (1), and were all recorded and transcribed. Our key informants included

Table 1.

Secondary Data Sources.

IBM Finland

Baltic Sea Action Group

1. Baltic Sea Action Summit Data sources 1. Commitments given as part of Commitment Book http://www.bsas.fi/ the Baltic Sea Action Summit http://www.bsag.fi/commitments commitments (smarter maritime 2. Webcasts from the Baltic Sea Action communication at the Baltic Sea Summit, Helsinki, Finland, February and Algae Watch/Leva¨vahti) 2010 and Summit Follow-Up, 2. IBM corporate responsibility February 2011. http://formin.finland.fi/ reports, press releases, etc. IBM multimedia/bsas/videos/morning_ Finland and corporate plenary.html; http://formin.finland.fi/ webpages http://www.ibm.com/ multimedia/bass/videos/afternoon_ fi; http://www.ibm.com plenary.html; www.youtube.com 3. News stories and videos in (BSAS commitment follow-up) media 3. News stories and videos in media

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representatives of IBM (3), the BSAG (4), the VTT Technical Research Centre of Finland (1) and other key stakeholders (3). Most of our interviewees held managerial positions (CEO, Director of Innovation, Director of Corporate Communications, Project Manager, and three co-founders of an NGO). These different data sources enabled, for instance, cross-checking the exact actors and dates, and therefore enhanced the validity and reliability of the study. We conducted a thematic analysis of documentary, webcast and interview data to identify emerging themes concerning relationship dynamics and the motives and network outcomes of participation in multi-stakeholder networks. Simultaneously, we constantly compared the emerging themes with the existing literature. Accordingly, our analysis switched between the inductive and deductive modes. After several iterations between the theoretical and empirical worlds (Dubois & Gadde, 2002), we identified several emerging themes (e.g. access and shifting role positions) which helped us to understand the dynamics of multi-stakeholder networks beyond their structural characteristics.

EMPIRICAL CASE DESCRIPTION The Key Actors The NGO BSAG was registered in Finland in March 2008 by three individuals who wanted to depart from more traditional fundraising and awareness-raising campaign approaches to saving the Baltic Sea. While their backgrounds and social networks (reaching business and political leaders) were very different, they all shared a strong interest in saving the sea by means of an action-orientated approach. The foundation catalyses a variety of projects, which are expected to benefit both the actors involved (e.g. firms and NGOs), as well as the Baltic Sea. In spring 2009, the Baltic Sea Action Summit (BSAS) initiative, a platform for heads of state, companies, NGOs, and individual citizens to protect the Baltic Sea through concrete actions, was launched in association with Finland’s President and Prime Minister. The initiative called for a new type of collaboration between the public, private and civil sectors to save the sea. Unlike in typical high-level summits, all of the participants needed to have formulated a commitment to the Baltic Sea that best married their interests with those of the sea. The idea was that all of the commitments (over 170, originating

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from all 9 coastal countries of the Baltic Sea, the United States, Belarus, the Netherlands, Belgium, France, and Norway) are publicly visible (http:// www.bsag.fi/en/commitments/Pages/All-Commitments.aspx), and that this transparency makes public screening possible. The summit, which took place in Helsinki, Finland, in February 2010, was attended by state-level leaders such as the Prime Minister of Russia, Vladimir Putin, and the King of Sweden. The summit was praised by the media. It was reported in over 1,000 articles in 30 different countries; for instance, the Guardian titled its longish article: ‘Saving the Baltic sea. After the Copenhagen debacle, Finland has set a new standard for environmental action’. However, as the BSAG openly communicated, the idea of turning good intentions into concrete actions originates largely from the United States, where individuals with high media visibility, such as Al Gore and Bill Clinton (see, e.g., http://www.clintonglobalinitiative.org/commitments), have been active. In this case description, we focus on the commitment given by IBM Finland at the Baltic Sea Action Summit. IBM has been doing business in the field of information-handling for nearly 100 years. It also has a long history of participation in voluntary programmes and initiatives, and partnerships with governmental organisations and NGOs. It encourages its employees to support environmental efforts through IBM’s so-called On Demand Community, a global initiative to encourage and sustain corporate philanthropy through volunteerism. The initiative provides ‘IBMers’ (IBM’s employees and retirees) with a set of IBM technology tools to help the nonprofit sector (IBM, 2009). This community was established in 2003 by IBM’s Chairman and CEO, Samuel Palmisano, and by 2008, the community had more than 160,000 volunteers (www.ibm.com/ibm/ibmgives/grant/giving/demand.shtml). It is used as a platform to connect citizenship to corporate branding, e.g. through a campaign, ‘Be Blue Every Day’, aimed at getting the corporate brand behind employee volunteerism (Mirvis & Googins, 2006). In 2008, Palmisano introduced a programme called Smarter Planet in his speech given to the Council on Foreign Relations in New York City (www.cfr.org/technology-and-foreign-policy/smarter-planet-next-leadershipagenda-video/p17696). Palmisano described the complex interdependencies and problems of today and argued that these can only be solved by individuals with ‘courage and vision’ forming partnerships ‘outside their comfort zones’ with the help of intelligent systems. This, he claimed, requires globally integrated enterprises that transform themselves beyond traditional MNEs. This speech may be considered as a stepping stone towards a major shift of focus in the company strategy. Today, we see that IBM’s research activities

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and business development deal with complex ecosystems such as (smart) cities, which need to integrate various separate systems (transport, water, energy and communication). In Finland, the Smarter Planet programme was initiated in 2009. At the same time, IBM became engaged in helping to solve some of the major issues of the Baltic Sea.

IBM’s First Commitment to the Baltic Sea During spring 2009, the BSAG contacted IBM Finland in order to discuss the potential of IT solutions to help save the Baltic Sea. One of the central concerns that the BSAG had identified through its earlier discussions with the Finnish maritime authorities was the safety of maritime traffic on the Baltic Sea. The Gulf of Finland is among the most heavily trafficked sea areas in the whole world (Kuronen & Tapaninen, 2009), and the increasing shipping activity has raised increasing concerns, particularly about the possibility of a large-scale oil accident arising from the ever-growing numbers of oil cargoes. From the perspective of IBM, participation in the high-level summit around a cleaner Baltic Sea was considered a perfect fit to further IBM’s strategy to raise societal discussion around the untapped potential of IT to make the surrounding society smarter (Jokela, 2010), an issue and opportunity that Palmisano had previously raised in his speech. The link to IBM’s new strategic focus area (Smarter Planet) was also raised by Larry Hirst, Chairman of IBM Europe, Middle East and Africa (EMEA), in his speech given at the Baltic Sea Action Summit in February 2010: This development, ladies and gentlemen, is happening in a world of huge technological change. Supercomputing power is available in forms so small and so inexpensive that it is possible now to embed intelligence almost everywhere: transportation systems, supply chains, power grids, medical systems and buildings, but more importantly in natural systems like waterways and oceans.

As an outcome of a joint meeting between the BSAG and IBM Finland, the decision was made that IBM would participate in the initiative. The CEO of IBM Finland at the time concluded that this is a ‘good cause’, and the Director of Innovation (IBM Finland) was to lead the project from IBM’s side. Consequently, a commitment was made titled ‘Smarter Maritime Communication at the Baltic Sea’ (www.bsag.fi/ commitments/all-commitments/smarter-maritime-communication-at-thebaltic-sea). The initial meeting between IBM Finland and the BSAG kicked off collaboration between IBM, the VTT Technical Research Centre of

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Finland, the Finnish maritime authorities (Finnish Transport Safety Agency Trafi), the Finnish Meteorological Institute and the Finnish Shipowners’ Association to develop safer navigation. IBM, VTT and Trafi were the key partners in developing software based on open source and open standards technology. The division of work between these actors was initially relatively clear: IBM and VTT were responsible for technological matters, while Trafi took care of the official aspects concerning maritime safety (Jokela, 2010). The new so-called AIS + (automatic identification system) enables all vessels equipped with a PC to access messaging. The maritime authorities around the Baltic Sea had already started to cooperate on the new AIS system in 2006, which made the progress of AIS + smoother (Jokela, 2010). AIS is a standardised system mandated by the International Maritime Organization (IMO), but the new AIS + includes new maritime digital services, such as automatic weather and hazardous cargo information. The idea behind AIS + was to free up the ship’s crew from manual repetitive tasks in which traditional VHF voice radio was used to send information, so that captains and navigators can concentrate on navigation. The system also helps the authorities to react more effectively in the case of an accident. In terms of IBM’s motivation to join the initiative, the CEO of IBM Finland was quoted in a Finnish IT magazine: ‘We capitalize IBM’s international research organizations with thousands of scientists and mathematicians. A successful project in the Baltic Sea gives us an opportunity to utilize the solution developed here on a global scale, in other seas of the world’ (IT week, 16 April 2009). Participation meant a significant investment of IBM’s resources into a field (maritime systems) in which IBM has not traditionally been active. This was a high-risk, high-uncertainty project, as no guaranteed return was seen at the outset, as noted by our respondent: A kind of thinking frame where you try to make calculate beforehand ROI [return on investment] calculations beforehand for this does not work … You cannot possibly make such calculations when there are lots of uncertainties and risk taking. You just need to accept certain amount of uncertainty’. The first version of the AIS + has been successfully piloted since January 2010 on two Finnish passenger ferries, which operate the Stockholm Helsinki route, and it is expected to establish a new world standard for maritime communication. In practice, the software was developed according to open source principles. More than 40 volunteers within IBM from 10 countries (Argentina, Brazil, Finland, Hong Kong, India, Ireland, Russia, Sweden, the United

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Kingdom and the United States) participated in the development of the software. The coders were mobilised through IBM’s On Demand Community volunteer programme. Jolanda van Rooijen, an IBM Corporate Citizenship and Corporate Affairs manager in the Nordics, explains on the IBM corporate website: ‘IBMers are eager to help fix a problem anywhere on the globe in this case, the Baltic Sea. It shows our genuine will to make the world a better place, by doing what we are good at’ (www.ibm.com/ibm100/ us/en/service/stories/virtual_volunteering_mar_2010.html). Instead of giving money, IBM contributed technological competence. At the same time, this provided an avenue for developing IBM’s competence and networks concerning maritime systems. It turned out, however, that since the AIS protocol is very specific and less well-known, IBM’s global volunteer network was of limited use. Instead, VTT’s role and previous knowledge of AIS were critical in the development process of AIS + . In fact, VTT had already been working for decades to prevent the scenario of a major oil spill in the Baltic Sea. This work had involved cooperating with maritime authorities based in several Baltic Sea countries to develop the AIS protocol. When faced with the challenges for its volunteers of working with a somewhat unknown protocol, IBM Finland decided to take care of the technological documentation and user manual for the AIS + instead of the coding work. In 2012, after successfully piloting of AIS + and negotiations with IMO’s representatives, the AIS + protocol was still pending for the authorities to start sending the new AIS + enabled binary messages. It was evident that there was ambiguity in terms of the timetable for actual launch of the AIS + , as well as actors’ roles in influencing the maritime authorities during the process. IBM’s Second Commitment to the Baltic Sea The AIS + was introduced at the first Baltic Sea Action Summit. During his speech, Larry Hirst, acting as the representative of IBM, somewhat unexpectedly made another commitment on the Baltic Sea. According to this second commitment, IBM would share its learning from Galway Bay in Ireland and the competence of its R&D Lab in Hursley, UK and Strategic Centres for Water Research (in Dublin, Montpellier and Amsterdam) to benefit the Baltic Sea: I’m pleased and proud to announce today, in addition to the commitments, that we’ve already made, we’d like to make a further commitment. IBM is studying how some of

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these water management real-time analytics could benefit the Baltic Sea. I will commit that the IBM Finland team will bring up proposals for the Baltic Sea Action Group by end of summer this year [2010].

In practice, Hirst’s commitment meant that experts from Dublin came to Finland to share their experiences and to discuss possible new ideas for the second commitment with IBM Finland and the BSAG. Besides committing IBM’s competence in water management real-time analytics, Hirst also challenged other IBM subsidiaries around the Baltic Sea to participate in the BSAS process by making their own contributions to the Baltic Sea. A new project was soon kicked off. This project concerned the empowerment of individual citizens to act as sensors on the Baltic Sea, by enabling them to report their own observations of water quality when they spent time on the sea, with the help of location-aware mobile applications. The new commitment by IBM, VTT, the Finland Environment Institute (SYKE), and WWF, called ‘Algae Watch’, was published in June 2011. It encourages citizens to collect information on the occurrence of toxic blue-green algae (a sign of a sick marine environment) and bladderwrack blooms (a sign of a healthy marine environment). Citizens’ observations are saved on an online map, which can be accessed by everyone. SYKE and VTT were responsible for the content design of the application, as well as for data collection and visualisation, while IBM developed the communication tool for the iPhone (and VTT for Nokia and Android devices) (http://www.bsag.fi/en/ commitments/Pages/All-Commitments.aspx). For this task, IBM leveraged the ‘Creek Watch’ application developed by its Silicon Valley lab. Creek Watch enables iPhone users to help to monitor the water quality of creeks and alert the authorities to problems (http://www-03.ibm.com/press/us/en/ pressrelease/32912.wss). Algae Watch is a pilot project in citizen monitoring of the environmental state of the Baltic Sea, and its experiences will be utilised to develop smart phone applications to help to solve environmental problems.

Follow-Up After the first successful Baltic Sea Action Summit in 2010, cross-sectoral cooperation on the issue has continued. The BSAG continues to collect new commitments to revive the Baltic Sea. A follow-up summit was held in St. Petersburg, Russia, in April 2013, under the name Baltic Sea Forum. Participants included, among others, the Prime Ministers of Russia, Norway, Finland, Estonia, Latvia, Lithuania and Iceland, as well as the

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Deputy Prime Minister of Poland. The Forum was convened by Russian Prime Minister Dmitry Medvedev. Different speakers stressed the importance and continuity of the BSAS process as well as referring to the continuous need for international cooperation in addition to cooperation between the public and private sectors. The planning and implementation of the Baltic Sea Forum in St. Petersburg brought the BSAG new cooperation partners and relationships. IBM has also made a new commitment this time it was launched by IBM Sweden in March 2013: ‘Swedish coastal towns’ creative and sustainable relations with the Baltic Sea’ (http://www. bsag.fi/en/commitments/Pages/All-Commitments.aspx). This commitment involves workshops organised by IBM and the BSAG in cooperation with the local political leaders of coastal towns. The NGO’s (BSAG) cooperation thus started with the Finnish unit of IBM and continued (with a new commitment) with the Swedish unit (IBM Svenska AB). The dotted lines in Fig. 1 illustrate this emerging interaction. Different subsidiaries of the MNE were thus involved at different times: the Finnish unit ended the project once the goals of the first commitment(s) were fulfilled, and the Swedish unit became involved later on with a new project. A contributing factor for these developments was that the CEO of IBM Finland (who had been the first contact point for the BSAG at IBM) started to work as the CEO of IBM Sweden. These more recent developments are outside the scope of our analysis. However, they again illustrate overlaps of networks and how the influence of cross-sector cooperation may transfer within MNE networks and across geographical areas.

Case Synthesis The multi-stakeholder cooperation around the environmental issue (the poor state of the Baltic Sea) was initiated by the NGO (BSAG), which mobilised the local subsidiary of the MNE (IBM), as well as a number of other local actors (e.g. VTT and Trafi) to develop safer navigation. While the MNE’s participation was motivated by its global strategic agenda and CSR goals, its activities were initially local, and involved cooperation with mostly local actors. Indeed, international connections within the network were indirect at this stage. However, through the process of mobilising the global volunteer network, more global aspects were brought into the network. Also, the involvement of a regional level corporate leader (Hirst) as an issue sponsor (Dutton, 1993) opened up the global network of the MNE to

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participate in the issue solving. The network grew considerably geographically, but this growth mostly took place within the internal network of the MNE. The involvement of the MNE in the Baltic Sea initiatives secured its access to new networks, particularly in the domains of maritime information systems, authorities, research institutes and other firms participating in the Baltic Sea Action Summit. Our interviewee at IBM Finland explained: ‘When you get involved in these [initiatives] you start to build new networks, which have been beneficial. I admit this openly. You’ve met with new people, of course, it’s impossible to know beforehand what might emerge from these. But we have benefited from these’. This case demonstrates proactive strategic behaviour motivated by technological enablers as well as reputational and business benefits. Social and moral purposes also were strongly present. Our informant at IBM Finland also explained to us that many IBMers are sailors and that, in fact, the theme of IBM’s Global Innovation Outlook (which concentrates each year on one fundamental societal issue) in 2010 had been oceans of the world and water. The moral and social nature of the Baltic Sea issue was also raised by Hirst in his speech at the BSAS in 2010: Technology is not the issue in resolving the problems that we face in the Baltic Sea. In all my conversations with government and business leaders the questions I hear are about leadership. How do we build consensus? How do we start? How do we collaborate across international borders? Progressive world leaders like those that we’ve seen today don’t wait for international legislation to be passed. They reach out, take the initiative, and drive change. Change that reduces their carbon footprint and increases their community’s economic vitality. 500 years ago Leonardo da Vinci says people of accomplishment act in a different way: they don’t wait for things to happen to them, they go out and happen to things. Like all of you I believe that nothing is inevitable. So today, let us ensure that no one in this room ever has to say to their grand children: I knew the ‘European Dead Sea’ when it was known as the Baltic Sea.

Our focus in this case description has been to understand how this change in mindsets and participation in the multi-stakeholder network has been reflected in the internal and external networks of the MNE. We will next discuss the theoretical implications of the case, but before that we close this descriptive part of the study with a quote from Hirst’s retirement letter, which we think reflects the importance of the deeply embedded personal and organisational values motivating participation in multi-stakeholder collaboration: So ‘who da thought’ [i.e. who ever could have imagined? Yorkshire dialect, translated by Hirst] that this ‘kid from the back streets’ would follow Vladimir Putin onto a stage

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and present to a King, seven heads of state and 300 + business leaders in Helsinki about making the Baltic Sea cleaner and safer. This has been made possibly by the people and the institution of IBM. Great friends, great colleagues, great bosses, great mentors, great customers. When people ask me why I stayed 33 years I simply answer ‘Every day I got to work in a value system that matched my own, with outstanding people who became my dearest friends’. (August, 2010 Hirst, 2010)

ANALYSIS AND DISCUSSION While our case touched upon organisational and individual-level value drivers for participation in cross-sector collaboration, the core of our case study focused on the motives and network implications of participation in multi-stakeholder networks. We now discuss our empirical findings in three parts, comprising external network outcomes, internal network outcomes and technological enablers of participation.

External Network Outcomes: Entry into Political and Authorities’ Networks Our case suggests that engagement with cross-sector cooperation with civil society and governmental actors gives business firms access to international policy and other authority networks. Such accession is likely to enhance the power of participating firms in shaping and sometimes even manipulating and dominating transnational institutions, for example, concerning regulations (Dahan et al., 2006; Morgan & Kristensen, 2006). Participation in local (or regional) environmental initiatives may also reflect a conscious CSR strategy of responding to local social issues (Husted & Allen, 2006). From the case study firm’s perspective, participation in such initiatives is likely to lead to broader network pictures (Henneberg & Mouzas, 2006). It may also mean a change and overlap in actor roles enabled by environmental crisis (Fligstein & Mara-Drita, 1996), and enable opportunity building in networks with the aim of creating new markets for the company’s technology. As a result of participation, a firm’s perceived attractiveness as an exchange partner is expected to be higher owing to its unique set of connected relationships with authorities and NGOs. This gives a different perspective from the previous literature on (business) network identity, which tends to focus solely on relationships between firms.

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In our case, the MNE’s access to the multi-stakeholder network was enabled through the invitation of an NGO. The NGO acted as a catalyst to create common understandings, representations and pictures of the situation (Kjellberg & Helgesson, 2007). It acted as a ‘cultural mediator’ which reinterpreted and reframed (Crane, 1998, p. 572) the Baltic Sea issue to fit the strategies and values of the firms. This breaking down of the segregation between firms, public and third sector actors around the issue of sea pollution was important for creating mutually beneficial relationships (Googins & Rochlin, 2000). The common ground enabled the building of new resource interfaces between technological, economic, social and authority systems. In practice, this meant bridge-building between the MNE and its counterparts in technology development and legitimation by the maritime authorities. Furthermore, the MNE saw that there was enough overlap between the initiative and its business interests: the opportunity to build on its technological competencies made it receptive to the new initiative and the catalyst’s activities. Had the NGO solely asked for money for the common cause (for philanthropic reasons), the company would probably not have been interested in cooperating. However, the building of this cross-sector social partnership was not without its problems. Role ambiguity (particularly with regard to the authorities) and competition for positive recognition (over joint achievements) were present among the key actors. It may be that the actors involved had only limited prior experience with complex partnerships spanning government, business and nonprofit organisations, which may have made the division of responsibilities, as well as trust-building among the partners, more challenging (Reast et al., 2010; Selsky & Parker, 2005). However, the initial ambiguities around goals, preferences and interpretations of the environmental issues in focus can also be a driver for communication and goals development in the context of a more intense interaction between the stakeholders (March, 1988). In order to gain increased understanding, the various stakeholders had to engage in continuous interpretation of the context in which they were operating, the common context and the contexts of other actors (Ford, Gadde, Ha˚kansson, & Snehota, 2006). Hence, new crosssector cooperation can be driven by the process of gaining increased understanding, involving the formulation of assumptions about what the other stakeholders value and what needs to be done, the development of mutual problem-solving abilities, and the subsequent formulation of joint (and separate) intents and engagement in execution (Ford et al., 2006). From an organisational perspective, cross-sector partnerships appear to be challenging, because of the risk of an unclear division of roles and

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responsibilities between multiple project managers representing different sectors and organisations. On the other hand, sustainability alliances with public and third sector stakeholders seem to allow firms to become more involved in solving environmental problems, particularly those problems that transcend geopolitical boundaries and, as here, are poorly suited to command-and-control approaches.

Internal Network Outcomes: Global Leverage and Competence Deployment The mobilisation of internal competencies and the MNE’s network were central dynamics in this cross-sector collaboration. This mobilisation took place on an individual employee level, organisational level and spatial level, with high overlap between the levels (e.g. On Demand Community volunteers acting on behalf of themselves and the firm in a global virtual community). This internal mobilisation was accentuated by the participation of high status, visionary business leaders who acted as issue sponsors (Dutton, 1993) within the MNE. The visible participation of a high-level business leader increased embeddedness overlap (Nell et al., 2011), i.e. the participation of corporate-level actors besides representatives of the subsidiary. Such attention within the MNE gives legitimation to the local actions, and is also likely to increase the power and image of a subsidiary within the overall MNE network. Hence, a distributed initiative and authority, with a central leadership based on guidance, rather than formal authority, supported the complex multidimensional organisation that attempted to gain the benefits of global coordination and local initiatives (Child, 2005). New internal technologies became a support for organisational learning and innovation, backed by normative ‘control’ rather than formal, internal control. From the outset, the closeness of the issue to the key strategic focus area of the MNE was essential in order to legitimise its participation in the traditional realm of the public authorities.

Technological Enablers of Participation: Networks Without Boundaries Our case described how technology can act as a mediator and connector between dispersed actors and expand network boundaries, even globally.

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Internally, this meant, for instance, building new bridges within the MNE through mobilising a virtual global volunteer network. It also meant the transfer and translation of IT solutions created earlier within the MNE, and the building of new relationships between the individuals involved in these activities. In intra-organisational terms, the technology platform of the MNE allowed for a more ‘lean’ management structure with more horizontal interaction and coordination, allowing for processes to encourage the effective application and exploitation of existing and new emerging knowledge. It also allowed for the decentralising of initiatives to subsidiary teams and networks in order to promote creative synergy for exploring new possibilities and innovation (Child, 2005). Externally, such new solutions enable the mobilisation of individual citizens to participate in the protection of the sea. The connectivity offered by ICT solutions raises awareness of the issue and impacts on opinion formation, information sharing and activity regarding the environmental problem (Andersson et al., 2002). ICT platforms help to counterbalance the growing asymmetry of power between the managerial agents in charge of giant MNE corporations and other societal groups, including consumers and members of the local communities where the firms’ premises are located. This can also counterbalance potential accusations against powerful MNEs of unduly shaping public policy through their influence over both local and national politics and supranational institutions. The Internet and other means and platforms of mass communication can also help NGOs and others to mobilise, coordinate and communicate to local interest groups worldwide. Moreover, these ICT platforms also allow for the exchange and access to open information and knowledge for open innovation (Chesbrough & Appleyard, 2007), as here, in matters concerning technologies for sustainability. Existing literature on buyer seller technologies (e.g. Lee & Qualls, 2010; Zablah, Johnston, & Bellenger, 2005) tends to focus on technology adaptation in supply chain networks, while in multi-stakeholder networks, technological solutions need to reach a much broader range of actors. However, harnessing ICT to solve sustainability issues may also involve challenges. For instance, in our case, the AIS + protocol was somewhat unknown among the volunteers from the On Demand Community, which made their participation more difficult. Also, the issue of the poor state of the Baltic Sea may have been rather distant for some participating volunteers (possibly decreasing their contribution). Therefore, it appears that the leverage of ICT to solve social issues is easier; the more well-known the application is, and the more visible the issue is to the mobilised actors.

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CONCLUSIONS Our empirical study on multi-stakeholder networks illustrates early developments in cross-sector collaboration. It shows that an initiative by an NGO to participate in environmental work was actively adopted within the MNE and led to network changes. These changes concerned both the activation of potential and existing links and the establishment of new links with new actors, such as authorities and research institutes. Our analysis illustrates the embeddedness of MNE networks, where actions in the regional and global networks (the representatives of the headquarters) overlap with and strengthen the local actions of the subsidiary. We bring together ideas from separate areas of literature (business networks, MNEs as inter-organisational networks, cross-sector partnerships and stakeholder theory) to better understand the solving of pressing contemporary issues. Our case of an MNE’s participation in issue-solving provided a number of novel ideas. While cross-sector partnerships have become an increasingly popular vehicle for companies and communities to use to cooperate in addressing social and environmental issues over the past few decades (Googins & Rochlin, 2000), little systematic research has been conducted within the business networks and IB literature. In this study, we have started such a journey by specifically focusing on the social partnership between one NGO and one MNE and its outcomes on the MNE’s external and internal networks. We have identified access (to new networks) as a strong motivating factor for participation in issue-solving by the MNE. Such participation has meant role overlaps for the MNE between the business and social (environmental) arenas. In the actual partnership, we have also identified some role ambiguities between actors, particularly with regard to the maritime authorities. The NGO acted as a catalyser and cultural mediator to create a bridge between the MNE and governmental actors. Our study shows that cross-sector collaboration may trigger new innovative practices within MNEs. The existence of sufficient overlap between the issue and the global corporate agenda (Porter & Kramer, 2011) is essential to legitimise participation in the traditional realm of the public authorities. There were also strong mutual gains and strategy overlaps in the social partnership between the MNE and NGO. It can be assumed that the two actors engaged in interactions and joint representational practices (Kjellberg & Helgesson, 2007) to create a common representation of the environmental situation, which partly bridged the differences and distances between the actors. These representations of the situation can later be put

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to use in shaping subsequent actions, including new technology and business development in new exchange practices (ibid.). In addition, the actors also engaged in joint normalising practices, establishing joint guidelines for how the continued work with the Baltic project should be shaped, including efforts to shape voluntary standards, both private and official. Through the participation of a truly global MNE, the local/regional multi-stakeholder network gained a more global flavour. The simultaneous participation of representatives of the subsidiary and headquarters (i.e. embeddedness overlap) may also signal the continued mobilisation of the MNE in the social partnership and its willingness to transfer local innovations to the global arena. Our findings, hence, seem at least partly to challenge the argument of Kolk and Pinkse (2008) who argue that many MNEs still focus on their home regions when looking for private and public partners for the development of new technologies. Finally, the role of individual (and organisational) values and motivators seemed to be of high importance in building novel connections across sectors to save the common sea, and in nourishing the expansion of the network.

Managerial Implications Our study has showed that participation in multi-stakeholder networks may offer firms a number of benefits. Participation may not only be a part of a CSR or corporate citizenship rhetoric, but, more importantly, it can potentially bring some pioneering advantages and lead to quantifiable, green firm-specific advantages (Kolk & Pinkse, 2008). Being part of crosssector initiatives, sensing and acting on weak signals, may grant a company a forerunner position in the creation of new markets and technologies based on environmental issues. Besides the creation of new business and socially or environmentally more sustainable business models, it may also bring a significant opportunity to influence policymakers and regulators and open up new networks that were previously inaccessible to a firm. While this may even involve building entirely new ecosystems in which the company may possess a central role, it also involves much risk taking and potential failure. It also requires new competencies and willingness to take on board new roles in different networks. From the perspective of a subsidiary of an MNE, engagement with multi-stakeholder cooperation may strengthen its power and position within the internal network. This seems to be particularly the case with the participation of visible political and state leaders, who draw the attention of the MNE on a broader scale.

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Finally, we have also seen that the use of new technology in MNE organisations can support the reduction of hierarchical distance through devolving decision-making and initiative down the organisation to local units. One implication of this is that ICT platforms can allow for the increased circulation and transparency of information, and improve the ability of both central and local units to exercise their voice within and between organisations, as we have seen here in matters concerning sustainability issues.

Limitations and Future Research Directions The ideas discussed in this chapter should be regarded as a first attempt to understand the participation of MNEs in cross-sector cooperation from a mainly business networks perspective. Our empirical case has been used to illustrate the early network dynamics evident in such participation. Both primary and secondary data need to be collected over time to substantiate and deepen our analysis in terms of network evolution. The central questions are, for example, how does participation in cross-sector networks influence existing business and socio-political relationships and how do enduring (business and socio-political) relationships emerge from participation in issue networks? Our study was limited to one issue network comprising a limited number of actors. There is a need to investigate multistakeholder cooperation in other contexts including complex issue-solving similar to our study as well as less complex forms of cooperation. An intriguing research topic is to study how technology that has been developed to solve a specific societal issue may be translated into commercial solutions. From a business networks perspective, it is interesting to map network mobilisation and evolution, as well as possible tensions during such processes. Indeed, we are living in an interdependent and unsustainable world, and also in an era of technological development enabling the rapid mobilisation of society across different levels. Virtual world platforms for voluntary contributions and engagement seem to play an increasing role, particularly in targeting and mobilising the younger generation who have an increasingly environmentally conscious global mindset. It also offers increasing opportunities to combine sustainability and business goals, with interesting network implications. Finally, the solving of many major issues confronting our society today seems to require international crosssector cooperation. As a result, both sustainable value creation (Andersson et al., 2009) and ‘symbiotic value creation’ (Googins & Rochlin, 2000, p. 139) in cross-sector networks are increasingly prevalent phenomena in

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contemporary society. We urge scholars of business networks to investigate the ties, texture and dynamics of business relationships with those of public and civil society.

ACKNOWLEDGEMENTS The authors are grateful to the interviewees, at IBM in particular, for sharing their time and insights.

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This article has been cited by: 1. Asta Salmi, Katja Heikkilä. 2015. Managing relationships with public officials — A case of foreign MNCs in Russia. Industrial Marketing Management 49, 22-31. [CrossRef]

PART IV

CHAPTER 14 SHUDDER: THE CHALLENGES TO ‘INDUSTRIAL POLICIES’ IN THE EARLY 21ST CENTURY IN LOW- AND MIDDLE-INCOME ECONOMIES Raphael Kaplinsky ABSTRACT Purpose After some years in which industrial policy was frowned upon, it is now widely considered to be a legitimate arena for policy formulation. The danger is that policymakers will seek to return to previously implemented policies. However many elements of this historic policy agenda are not replicable because of changes in global governance regulations. But changing framing conditions in the global economy also mean that the historic agenda is no longer optimal. Methodology/approach This chapter discusses four disruptive structural changes which affect the industrial policy agenda the changing manufactures-commodities terms of trade, the centrality of global value chains in world industrial production, the growth of environmental

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externalities which affect growth and development, and the need to develop more inclusive patterns of growth. Findings The key findings are that there is scope for industrial policies to successfully confront these challenges, but that this will be contextual and may require a mix of policies designed to meet multiple objectives. Value/originality Significantly, industrial policy should be seen as a process aligning the operations of key stakeholders and subject to change as conditions alter, rather than as an industrial policy roadmap of the sort which frequently characterised policy in the past. Keywords: Industrial policy; terms of trade; global value chains; inclusive innovation; reen industrial policy

REPLACING THE LADDER: INDUSTRIAL POLICY IS (ONCE AGAIN) RESPECTABLE There is widespread recognition that to a greater or lesser extent, each of the currently industrialised economies benefitted from policy support in the development of their industrial sectors. This does not mean that all state support contributed to industrial development or to an optimum pace of industrial development, but rather it has historically proved to be a necessary condition for industrial growth, and particularly for rapid industrial development. Few contested the importance of industrial policies in the 19th century, particularly not in the European and North American economies seeking to replicate Britain’s pioneering industrial development. Between the 1920s and the 1970s, state supported ‘forced industrialisation’ in the Soviet Union. After the war, first European economies and then Japan and the ‘Asian Tigers’ (Hong Kong, Korea, Singapore and Taiwan) pursued industrial policies designed to close the gap with the United States. These developments placed industrial policy at the centre of the policy stage and many developing economies sought to learn from this experience. Dirigiste industrial policies were increasingly pursued in most of the decolonising economies in Africa and Asia (and particularly in China and India) as well as in Latin America. Yet, despite the demonstrated importance of policy support in the development of industrial sectors, industrial policy fell out of favour from

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the early 1980s. In part this was because the import substituting industrial policies in the postwar period were poorly designed, in many cases fostering monopoly, rent-seeking behaviour and inefficiency. But it also reflected the power of transnational capital seeking to open global markets in order to valorise rents on a wider global scale. Together with their governments and with support from the international financial institutions, they conspired to ‘kick away the ladder’ which they had used to promote their own industrial development.1 Two sets of related events have reversed this pessimism over industrial policy. The first has been the demonstrated success of China (and to a lesser extent other middle-income economies such as Brazil and India) which experienced very rapid and sustained industrial growth and structural change in a context of very active government support. The second was the growing recognition in the old industrial northern economies that they were falling behind middle income economies growth rates and in many sectors were losing their dominance, including in knowledge-intensive goods and services. This has led to a growing call for active policy support in high-income economies. From the developing country perspective, this has provided legitimacy for industrial policies and has opened up considerable policy space the ‘ladder’ is available for use again. However, it is clear that this new policy environment cannot lead to a re-imposition of the import substitution policies which had previously backed industrial development in both the northern economies in the 18th and 19th centuries, and in many developing countries between 1950 and the early 1980s. Nor will it be easy for newly industrialising economies to replicate the export-oriented success of China and other Asian economies. There are multiple reasons why policy cannot revert to the status quo ex ante, and these will be discussed in later sections. But, in addition, there have been important structural changes in the global economy over the past few decades which provide new opportunities and obstacles to industrial development in low- and middle-income economies. This chapter focuses on four structural changes which affect industrial policy formation in the early 21st century in low- and middle-income economies. These are the changing manufactures-commodities terms of trade, the centrality of global value chains (GVCs) in world industrial production, the growth of environmental externalities which affect growth and development, and the need to develop more inclusive patterns of growth. The latter two of these structural factors are not just relevant to industrial growth, but more importantly they affect the social and political structures which make industrial growth sustainable over time.

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SHUDDER: THE STRUCTURAL CHANGES WHICH CIRCUMSCRIBE INDUSTRIAL POLICY Changing Terms of Trade2 For many decades at least until the 1920s and probably as far back as the early 19th century the manufactures-commodities terms of trade have risen. This was a consequence of the relatively low growth elasticity of demand for commodities and the availability of low-cost supplies of commodities. Of course there were exceptions to this but in general this affected all three families of commodities soft (agricultural commodities), hard (minerals and metals) and energy (oil and gas) commodities. Between 1950 and 2002 there were two brief periods in which these terms of trade rose in favour of commodities. The first was in the early 1950s, affecting soft and hard commodities. Commodity price rises were a function of increased demand in a period of postwar reconstruction and the expectation (triggered by the Korean war) that prices would continue to rise. However this price surge was brief, and by 1953, declining commodity terms of trade had been resumed. The second interruption in this long-term price trend was between 1972 and 1975, predominantly affecting soft and energy commodities. The price surge reflected a sustained period of economic growth in the global economy, climate-induced interruptions to supply (in the Soviet Union, the United States and Asia) and geopolitical interruptions in supply (the Arab Israel war and the rise of OPEC). But, as in the case of the early 1950s commodities price surge, this boom did not endure, and within 3 years the historic price trajectory had resumed. However, after 2001, a third and much longer phase of commodity price boom emerged. With blips (during the financial crisis in 2008 and as global instability re-emerged in 2013), this post-2002 price boom has endured. The question is whether it will be sustained in the future. Here there are strong grounds for believing that the answer is ‘yes’. On the demand side, unlike the post World War II period in which global demand for commodities was driven by high-income economies, the early 21st century is likely to see a different motor of growth, that is demand-pull from low- and middleincome economies. Since the major sectors using most hard commodities and many energy commodities are infrastructure and construction (rather than, as is commonly believed, manufacturing), we are likely to witness substantial investments in these sectors in a number of rapidly growing and heavily populated middle-income economies such as Brazil, China, India and Indonesia. As incomes grow, demand for animal-based food is likely

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to expand disproportionately in these and other low- and middle-income economies. At the same time, the era of low-cost supplies of many commodities has been exhausted. In soft commodities high yielding land has been used up and irrigation requires very substantial investments. Technological change in agriculture has slowed and there are no informed expectations of a new surge of rapid productivity growth. Climate change and (especially) climate chaos threaten to lead to frequent interruptions to supply. In hard commodities, there are potential new sources of supply for many metals and minerals, but these investments have long gestation periods (in a period of financialisation in which long-term investments are discouraged by the market). Moreover, much of this supply is in high-political-risk economies with poorly developed infrastructure.3 In energy commodities, recent technological developments (gas fracking) do provide the potential for low-cost energy in North America (and perhaps in other countries such as the Argentina, Australia, Poland, South Africa and the United Kingdom, although this is by no means certain), but there is limited substitutability between oil and gas, and newly exploited deepwater deposits produce oil at a high cost. In all three families of commodities, the post-2001 price surge also reflected the loss of self-sufficiency in China (which is not just the largest global consumer, but also the largest global producer of most commodities), a phenomenon likely to be experienced in India in the coming decades). For all these reasons, low-cost commodities (and of course there are exceptions to this broad general statement) are likely to be a thing of the past.4 In itself this does not portend a rise in the commodities terms of trade since this is a ratio of commodities prices to manufactures prices. But the price of manufactures experienced a substantial change in trend after the late 1980s, largely due to the expansion of GVCs and the development of industrial capabilities across the world. There are now thus intense price pressures being experienced in most global markets for manufactures. The upshot of these price movements is that many commodity producers, such as low- and middle-income economies in Africa and Latin America, will be developing industrial policies in the context of sustained high commodity prices. At the very least, this means that resource producing sectors will continue to flourish in terms of production. But in many cases, where producers have production costs which are below the prices set by high cost marginal producers in tight global markets, this also provides commodity producing countries with significant rents which can be used to promote their industrial development.

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The Broadening and Deepening of Global Value Chains In 2009, the iPhone 4 sold in the United States for just under $500. It was ‘manufactured’ in China and exported at an fob price of $179. The value added to each iPhone in China was $6.50 (Xing & Detert, 2010). The WTO estimated that in 2012, 28% of global trade that is $4 tr of $19 tr was the double counting of intermediate products (such as the flat screens in the iPhone) subsequently incorporated in final products. These numbers the specifics in the case of the iPhone, and the general in relation to global trade witness a significant structural change in the production and exchange of globally traded goods and services over the past four decades. The origins are to be found in the 1970s, a period by which most of the currently high income economies had successfully recovered from the devastating consequences of the war. Per capita incomes were high and growing, and consumers were willing to pay a substantial premium for higher quality, differentiated and frequently changing consumer goods. Production technologies embodied in machinery and disembodied in forms of organisation were becoming increasingly complex and knowledge-intensive. Many sectors were experiencing heightening competition as post-war scarcity was overcome, and the retail sector was becoming increasingly concentrated. At the same time, capabilities were growing in many low-income economies, particularly in north eastern Asia. In the face of these developments, corporate strategies were in transition, away from the large integrated transnational firm which produced much of the value in its final products, to a specialisation in core competences. These competences reflected areas in which the firm had distinctive capabilities which were hard to copy and which were valuable to customers. Anything outside of these core competences was outsourced, often given improvements in logistics, communications and transport technologies, to suppliers across the globe. These developments have had profound implications for the comparative advantage of exporting economies, and the competitive advantage of individual firms. In previous decades these producing units were engaged in what might be termed ‘whole product’ production. Now they compete on the basis of increasingly specialised links in the value chain. To illustrate this we can compare two production systems the Ford River Rouge integrated production plant of the 1920s with the globally produced iPhone in 2009. The Ford plant was widely viewed as the apex of mass production organisation; the iPhone is an exemplar of contemporary production in GVCs.

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The Ford River Rouge auto plant in the United States was constructed between 1917 and 1928. It was ‘1.5 miles (2.4 km) wide by 1 mile (1.6 km) long, including 93 buildings with nearly 16 million square feet (1.5 km2) of factory floor space. With its own docks in the dredged Rouge River, 100 miles (160 km) of interior railroad track, its own electricity plant, and ore processing, the titanic Rouge was able to turn raw materials into running vehicles within this single complex, a prime example of vertical-integration production. Over 100,000 workers were employed there in the 1930s’ (http://en.wikipedia.org/wiki/Ford_River_Rouge_Complex). In 2009 the iPhone which retailed in the United States for just under $500, was assembled in China using flash memories, display modules and touch screens from Japan (combined value of $49.25), processors and memories from Korea ($22.96), baseband, camera module, RF transceiver, GPS transmitter and power functions from Germany ($28.85) and components from many other countries (Xing & Detert, 2010). Each of these components in turn generally comprised sub-components imported from plants in other countries. As observed above, of the final selling price of the iPhone of nearly $500, the assembly operations in China accounted for $6.50 of the final price, and more than $320 accrued to Apple as its margin over production costs. Millberg models this transition in production paradigm in relation to the degree of ‘vertical specialization’ (i.e. the slicing of the chain into very finer sub-processes (Fig. 1)). He argues that as firms enter GVCs, their degree of value added initially falls (as in the iPhone case), but as they consolidate their positions in the chain and upgrade by building their own distinctive competences, they become responsible for deeper levels of value addition. This position then plateaus and they find themselves in a world of growing competition, so that they learn to focus on distinctive core competences and to ‘lead’ the manufacturing processes by outsourcing non-core competences to chains which they learn to ‘govern’.5 The first lesson to be learned from this for industrial policy is that the critical component of success is the command of capabilities rather than the ability to produce ‘whole products’. The second and related lesson is that in the context of intense global competition, these need to be dynamic capabilities, subject to continuous processes of upgrading. The value chain literature has produced a distinctive take on upgrading, showing that it transcends the classic categories of traditional industrial policy (process and product upgrading) by identifying functional upgrading (changing the function in the value chain) and chain upgrading (moving to different chains or different market channels in existing chains) (Kaplinsky & Morris, 2001).

Vertical Specialization

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GVC Entry

Economic Upgrading

Middle Income Trap

Outsourcing/ Core Competence

GDP per capita

Fig. 1. Competitive Advantage and Corporate Strategy in the Context of Dynamic Global Value Chains. Source: Millberg, personal communication.

More recently, van Tulder and Barrientos et al. have argued that the longterm development of capabilities may require in some instances that in the short term firms move into less complex and less knowledge-intensive activities in the chain and subsequently develop the capabilities to deepen the knowledge intensity of their roles (Barrientos, Gereffi, & Rossi, 2011; van Tulder, 2013). These developments mark major changes in the character of competitive advantage and this, as we will argue below, have implications for industrial policy.

Environmental Externalities, Growth and Development For much of humankind’s existence, the environment has been seen as exogenous to the economy. It was viewed as ‘god-given’ or a ‘gift of nature’, a free resource open to exploitation (depending on belief systems). As recently as two centuries ago, David Ricardo built a theory of rent to explain differential incomes arising as a consequence of access to land of varying natural endowments. Gradually, the theory of rent has come to a rather different perspective, one in which the resource-pool is seen not just as arising out of natural endowments, but also as being affected by the application of capital and knowledge. Land can be improved by investments

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in irrigation, agricultural productivity can be enhanced by the introduction of new seeds, and mines can be made more productive by the use of technologies which allow thinner seams to be commercially exploited. The application of science and technology to the exploitation of resources has changed the nature humankind interaction from an exogenous (human activity drawing on nature) to an endogenous (human activity can change the gifts of nature) agenda. For much of the period of modern industrial development, this has been seen as a positive development, with industrial activity enhancing the ability of humankind to exploit the natural environment.6 Yet at the same time, it has also been clear that the endogenisation of the environment into human economic activity has had its darker side. Since many negative environmental spillovers involve externalities, the market provides poor signals for the husbandry of the natural world. The consequence is that we have been witnessing a range of environmental degradations which not only undermine the quality of human life, but are beginning to eat into the efficiency of the industrial sector itself, and to spill over into the efficiency of other economic sectors such as agriculture, services and tourism (which in turn feed back into the efficiency of the industrial sector since these sectors provide inputs for industry and use its outputs). These developments in humankind’s interaction with the environment have three important implications for industrial policy. First, a concern with the environment needs to be built into the industrial sector in order to reduce its costs of production. For example, there are important developmental concerns why green technologies should be promoted as a mechanism for promoting the efficiency of industry (UNIDO, 2012). The International Energy Agency calculated that between 1980 and 2003 the energy efficiency of global output increased by 23%, saving the equivalent of 5.5 gigatonnes of oil equivalent (cited in UNIDO, 2012). Similarly, water and waste treatment investments can promote cost reduction, particularly in the medium and long term. Second, the growing commitment to greening the economy provides substantial economic opportunities to provide technologies to meet these objectives. The United Kingdom’s Confederation of British Industry estimated the value of the green economy to be £122 bn, growing at 4.7% in 2011 and contributing 8% to the United Kingdom’s GDP.7 Finally, the rapid and geographically uneven degradation of the environment has important social and political implications, and these may have an impact on the sustainability of industrial development. For example, the forthcoming shortage of water in many countries (www.unwater. org) is likely to be associated with social and political unrest, undermining the environment in which industrial growth can be pursued.

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Industrialisation and Inclusive Growth The past two decades have witnessed a significant change in global patterns of growth. Between the industrial revolution and the early 1970s, the highincome northern economies grew much more rapidly than their low-income southern counterparts. After the 1970s, there was a rapid process of catchup in Hong Kong, Korea, Taiwan and Singapore, and after 1990 in China, India and their neighbouring economies. Since the turn of the millennium there has been rapid growth in many Latin American and African economies. For example, 6 out of the 10 most rapidly growing global economies since 2000 have been in Africa. However, this does not mean that there has been equivalent progress in global poverty reduction. Table 1 tells a compelling story. The first decade of the 21st century witnessed an acceleration of growth in many low- and middle-income countries. These rates were high by comparison with the last decade of the 20th century (and even more so in comparison to the lost development decades of the 1980s), and by comparison with global average growth rates in the same periods. Rapid and accelerating growth was most pronounced in China and India, but was also evidenced in middle-income countries as a whole, as well as in sub-Saharan Africa (SSA) which experienced a particularly rapid rate of growth after 2000. At the same time, the numbers living globally below the $1.25 per day Millennium Development Goal benchmark (hereafter referred to as MDG1) fell by 165 million between 1998 and 1990 and a further 454 million between 1999 and 2008. This is often taken to indicate progress in global poverty reduction. However there was a very pronounced bias to this performance. The decline in the poverty number in China over the whole period (510 million) comprised the bulk of the global total (619 million). In India, the absolute Table 1.

Annual Growth Rates and Numbers Living Below $1 per day, 1990 2008, 1990 1999 and 2000 2008. Change in Numbers ($1 per day) (million)

World China India SSA

Annual Growth Rates (%)

1990 1999

1999 2008

1990 2008

1990 1999

2000 2008

−165 −237 −35 87

−454 −273 24 9

−619 −510 −11 96

2.8 10.7 5.8 2.2

4 11 7.4 5.8

Source: Poverty numbers from Chen and Ravallion (2013) and Sumner (2010). Growth rates from WDI, accessed October 2011.

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numbers grew in the 1990s and fell marginally in the 2000s. In Africa, despite very impressive growth, the number living below $1 per day rose in both periods.8 Strikingly, despite rapid economic growth, there was more than double the number of the absolutely poor in middle-income countries, and currently more than 70% of those living below MDG1 live in this rapidly growing group of economies (Sumner, 2010). Three conclusions emerge from these data. First, there is no doubt that growth contributes to a reduction in absolute poverty. The fact that global population grew over the 1990 2008 period makes this growth contribution more impressive that the data in Table 1 suggest. But, second, current trajectories of growth continue to leave behind a large number of the global poor who continue to live in absolute poverty. The performance of SSA and India is particularly striking in this regard. Third, given that most of the global poor live in rapidly growing middle-income economies, the MDG agenda cannot be confined to least developed economies. What these numbers point to is the structural character of the dominant growth model in which, in many countries, a significant proportion of the population is being excluded from the fruits of growth. Thus the normative challenge which the industrial sector has to confront is how it can contribute to a more inclusive pattern of growth. But at the same time, as in the case of environmental externalities, the failure to build more inclusive patterns of development can undermine the capacity of the industrial sector to grow on a sustainable basis. The political turmoil in the Middle East and North Africa economies since 2009 is at least in part a consequence of the inability of these economies to develop more inclusive patterns of development. The ensuing and prolonged conflicts have major disruptive effects on industrial production and growth. Of course, the problems of social exclusion arise for multiple reasons, and many of the solutions lie outside of the industrial sector. But at the same time the industrial sectors’ trajectories have been a contributory factor, notably because of the capital intensity of much of production and the failure of industry to produce products which are affordable and relevant to the needs of the poor and the excluded.

SHUDDER: INHERITED INDUSTRIAL POLICIES HIT A WALL After a hiatus of more than two decades, industrial policy is now once again widely recognised as being an important component of industrial

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growth. From the perspective of low- and middle-income economies, there is however a danger of reinventing the past. The task is to avoid the example of repeated military policies in which heavy investments have been made in technologies which have been designed to win the wars of the past rather than those of the future. While there has naturally been a wide variety of industrial policies over the centuries and decades, a number of core elements stand out from historical experience. First, trade policies have played an important role. Import-substituting industrialisation was built around protecting domestic industry from competition, and more recently, export-oriented industrial policies have depended heavily on subsidies and specific regulatory regimes in export processing zones (EPZs). These provided exporters with exemptions from taxation and controls affecting producers for the domestic economy.9 A second weapon in the policy armoury was industrial licensing, targeting specific industries (and sometimes firms) for development and limiting the scale and scope of industrial investments in these and other sectors (and by non-favoured firms). Third, incentives were introduced to favour local suppliers, including through purchases by the state. Fourth, and related, many industrial policies targeted particular patterns of ownership. In some cases, this was biased in favour of foreign-owned firms, but more often these policies were designed to promote local ownership (e.g. ethnicity, as in Malaysia and South Africa, or size, as in India). The promotion of state-owned enterprises (SOEs) was in many cases an important element in the policy agenda. Fifth, the intellectual property rights regime provided scope to promote local firms and local innovative capabilities. And, finally, the recognition that market failures are endemic led to active policies in cross-sectoral sectors and activities, for example in skills formation, innovation policies, the promotion of research and technology organisations and infrastructural development. While some of this policy agenda will still be legitimate and appropriate to industrial policy in the 21st century (e.g. meeting market failures), other elements of this policy agenda are no longer admissible for economies participating in the WTO and other international agreements. These severely limit trade policy interventions, particularly those involving protection. They also limit local procurement and the intellectual property rights regime and many other policies designed to foster local and state ownership and local innovative capabilities. There are of course ways around these limits. For example, rather than China formally prescribing the presence of global mobile phone producers, it intervened in favour of local firms by changing the standards governing cellular networks, thereby undermining

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key elements of competitive strength of foreign firms such as Nokia. Similarly, some large developing countries such as India have been able to tweak intellectual property rights regimes to foster the development of local industry and to meet developmental objectives. But nevertheless, despite these exceptions, as a general rule there is much less freedom to draw on this inherited policy armoury than in previous decades, particularly for smaller and weaker economies who lack the global bargaining power of large economies such as China and India. Beyond the legality of this inherited policy agenda lies the issue of policy optimality. One of the important lessons of historical experience is that import substitution policies frequently led to monopoly or collusive oligopoly and the ensuing limits to competition dulled industrial productivity growth. Another important lesson is that industrial licensing limiting capacity is a blunt and often counter-productive instrument, particularly in diversified and specialised economies. With regard to export-oriented industrialisation, the very success of major exporting economies such as China inhibits the space for other economies to replicate their paths. Thus garments exports from China to the United States and the EU (and latterly from Bangladesh and other follower Asian economies) have severely constrained the possibilities for clothing exports from Africa (Kaplinsky & Morris, 2008). This is not to argue that all inherited policies are undesirable, suboptimal or inoperable. Many have been and are being used as individual economies find ingenious ways to circumvent constraining global agreements. But beyond this, it is important for the industrial policy agenda in the future to respond to the four disruptive challenges set out in the preceding sections. In what follows this chapter briefly sets out some potential industrial policy responses, but given length constraints and the immaturity of many of these policy responses, these are discussed in only the most general form.

Making the Most of Commodities: Building Linkages to the Resource Sector10 The inherited wisdom on the relationship between the industrial and the hard and energy commodities sectors is that there is a trade-off between resource exploitation and industrial development. A number of reasons are given for this pessimistic perspective. One core argument is that of the Dutch Disease (resource-intensive economies suffer from high exchange

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rates which disfavour traded goods sectors such as industry). A widely held view is that growth rates in resource-intensive economies have been lower than for comparative non-resource-intensive economies (Sachs & Warner, 2001). However, recent literature has contested this empirical finding, showing that if the measure of resource intensity used by Sachs Warner is changed, this adverse growth correlation vanishes (Lederman & Maloney, 2007). Related to this is the recognition that many of the now industrialised economies built their industrial sectors in a synergistic relationship with their resource sectors (Wright & Czelusta, 2004). The recent revival of energy-related industries in the United States consequent upon the discovery and exploitation of shale gas further evidences the potential for building industry on the back of the resource sector. Another widely held proposition affecting linkage development has been the enclave thesis. Based on the work of Hans Singer and others, this argued that lead commodity firms have little interest in backward linkages and, moreover, the technological and scale intensity of many commodity sectors put linkages beyond the reach of local suppliers. However, the developments in GVCs which we discussed above in relation to the industrial sector are now extending to the resource sector. Contrary to the enclave thesis, lead commodity producing firms are displaying an active interest in outsourcing and linkage development. If local suppliers are reliable and low-cost and produce to acceptable quality and delivery standards, they are a particularly favoured source of supply. Moreover, capabilities in many resource producing countries have grown immeasurably since Singer proposed his enclave thesis in the 1950s and 1960s. The consequence has been that many backward linkages to the commodity sectors have been driven by market forces. They have unfolded ‘below the radar’, and the extent of development has been largely unobserved and unrecorded, particularly in low-income SSA economies (Morris, Kaplinsky, & Kaplan, 2012b). Many developing-economy governments remain acutely suspicious of the motives of the lead commodity firms, and fail to recognise the structural shift in their sourcing strategies. Thus instead of introducing a suite of policies designed to broaden, deepen and speed up linkages by collaborating closely with lead firms, the hostile policy environment has often acted to narrow, shallow and slow linkage development. This is graphically developed in Fig. 2 which distinguishes between inputs which the lead firms are anxious to outsource, that is those outside of their protected core competences and those which they seek to hold onto and consolidate. It also shows the contrast between facilitative and obstructive policy environments.

Shudder: The Challenges to ‘Industrial Policies’ in the Early 21st Century Value added Inside core Competences - win-lose

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Deepening Speeding up

Shallowing Outside Mining Company core competences - win-win

Slowing down

Time

Fig. 2.

Different Trajectories of Linkage Development. Source: Morris, Kaplinsky, and Kaplan (2012a).

Detailed analysis of linkage development in nine African economies shows that the extent of linkages is a function of six factors. The first is that it is commodity specific (different sectors clearly have varying degrees of technological and scale intensity), and reflects the level of industrial development in the host economy. Second, there is considerable scope for backward linkages in all three families of soft, hard and energy commodities, but that forward linkages in hard and energy commodities face bigger obstacles. Nevertheless, most governments are fixated with ‘beneficiation’ (i.e. forward linkages) rather than backward linkages. And insofar as they do focus on forward linkages, these tend to be in large-scale and capitalintensive processes rather than in seeking to take advantage of niche markets being served by relatively small-scale producers (Perez, 2008). The third influencing factor is infrastructure, which affects not only the cost of exporting resources, but also the natural protection afforded to local suppliers and their costs of inputs and logistics.11 The fourth is ownership policies. These not only affect local versus foreign owners, but often different country sources of foreign owners. For example, in Zambia, Chinese copper firms are more likely to source locally than their northern counterparts, but are also more likely to bring their home-country suppliers with them and less likely to invest in supply chain development (Fessehaie, 2012). Individual firms, even from the same home country, also have different strategic strengths and weaknesses and there is scope for playing these firms off against each other as a way of speeding up linkage development. Fifth,

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policies designed to develop local skills not just professional skills but also many artisanal skills are critical to industrial linkages. Less critical in the short run but central to success in the long run is the development of the institutions in the national system of innovation. Finally, an important determinant of policy success is the formulation and delivery of policy itself. Linkages policies which were embedded in high-level strategy, embodied positive and negative sanctions, were consistent with other policies, were within the competence of the state apparatus and were backed by ‘policy will’ (a reflection of transparency and commitment) have been critical to the broadening, deepening and sped on linkage development.

Participating Gainfully in Global Value Chains A range of low- and middle-income economies built their industrial sectors by participating actively in GVCs. The most notable recent example of this has been China, whose accession to the global economy in the later 1980s led to vastly increased manufactured exports (often, as we have seen, with very thin levels of value added). These manufactured exports were an important component of both output and employment growth. However, one of the core lessons of GVC participation is that it is not so much a matter of whether to participate in GVCs, but how to do so. Unless attention is given to positioning in GVCs and in promoting the capacity to upgrade, then firms and economies can find themselves in a race to the bottom and locked into trajectories of immiserising growth (i.e. increased activity, but with declining returns) (Kaplinsky, 2005). From the perspective of industrial policy, four key agendas need to be addressed. First, the policy focus needs to switch from a focus on sectors to a focus on capabilities. For example, in the early 1990s the unit value of ‘shoe’ exports from the Dominican Republic (DR) EPZs was $0.23. The capabilities in which the DR was specialising in this period were confined to assembly every other input and part of the chain was imported and the economy was locked into competition with other Caribbean assembly economies. Industrial policy was driven by exchange rate policy with the competing economies locked into spiralling rounds of competitive devaluation (Kaplinsky, 1993). Instead, a more appropriate policy would be to seek to systematically upgrade process capabilities and to engage in functional upgrading with a view towards enhancing product development and ultimately introducing own designs and own brands. In the Sinos Valley in Brazil, exports grew rapidly during the 1980s and 1990s (at one stage Brazil

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accounted for more than 12% of total global leather shoe exports), but this success was short-lived as global buyers shifted their sourcing to China which both had lower costs and an impressive upgrading trajectory (Schmitz, 2000). Thus the second policy agenda is to assist firms to systematically upgrade their capabilities (i.e. building dynamic capabilities) and in particular to develop a pathway which allows them to encompass functional upgrading as well as process and product upgrading. Fig. 3 suggests a roadmap for this upgrading trajectory. This upgrading agenda is as relevant to firms operating in EPZs (as the Chinese have shown in some of their Special Economic Zones) as it is to firms operating in the wider and more regulated economy. Third, entry into GVCs at the low level (which provides the opportunity to create employment) is not just a function of low-wages costs. This is the lesson being learnt in SSA where many economies have lower labour costs than their Asian rivals. The wage competitiveness needs to be complemented with a low-cost and efficient infrastructure, including both transport logistics and ICT. Fourth, each of the major chains is driven by a ‘chain governor’. These lead firms determine which market the chain feeds into. This is important since different markets have different margins and this influences chain incomes. The chain governor also allocates roles in the chain, and Process

Product

Functional

Original design manufacture

Original brand manufacture

Chain

Trajectory Examples

Original equipment assembly (OEA)

Original equipment manufacture OEM Degree of disembodied activities

Fig. 3.

Moving chains – e.g. from black and white TV tubes to computer monitors

Disembodied content of value added increases progressively

A Roadmap for an Upgrading Trajectory. Source: Kaplinsky and Morris (2001).

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determines the capacity of individual firms to upgrade and the different upgrading paths which they can generate. The path of upgrading will again determine incomes in the chain. In most sectors, and particularly in consumer goods, chains governorship is becoming increasingly concentrated (Barrientos et al., 2011; Nolan, 2012) so that a core component of industrial policy is to assist domestic firms to develop strategic links with key lead firms. The capacity of the Brazilian government to induce Foxconn to assemble iPhones and other electronic goods in Brazil is a good example of this focused strategy. Finally, value chains selling into high-income markets under global brandnames are often very standards-intensive (Gibbons & Ponte, 2005; Kaplinsky, 2010; van Tulder, 2013). The development of the capabilities to meet these standards requires support. Often this support is provided by the lead firms’ supplier development strategies, but these tend to steer clear of small and medium-sized firms. Therefore policy needs to be developed to assist these excluded enterprises and to support the efforts of the included enterprises to develop the capabilities to meet the demands of an everchanging standards agenda.

Endogenising the Environment in Industrial Policy As observed above, two environmental challenges confront industrial development, not just in low- and middle-income economies, but globally. The first is to mitigate the harmful environmental outcomes of industrial activity. These arise in part because of externalities, that is it is difficult for producers to limit environmental impacts to their own operations. In addition, many inputs with harmful external impacts are not priced to reflect their real environmental cost to the community. This is notably the case with energy, but it also applies to other inputs such as chemicals. Endogenising these negative externalities into the price system by forcing producers to cover the costs of their spillovers and to limit the use of harmful processes is one way of meeting these policy objectives. Another way is through regulation, placing statutory limits on industrial operations. Some of this agenda is currently being pursued in high-income countries, but the consequence of this has often merely been to shift polluting activities to low- and middle-income countries. (Thus, much of the reduced energy intensity of GDP in the north reflects a process of increasing energy intensity in the south). This ‘global division of pollution’ should be resisted. Low- and middle-income countries are risking severe social and

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developmental outcomes in the future by postponing a more robust policy agenda. Moreover, the costs of ex-post cleanup can often dwarf those of ex-ante prevention. And, further, as unfolding events in China and many African economies (where agricultural output is affected by pollution) have shown, the failure to address these environmental issue may undermine security and the social legitimacy which underpin sustainable industrial growth. The second environmental challenge confronting industrial policy is to take advantage of the opportunities opened to add value in industry by developing the green economy. This is a path being pursued by a number of high-income economies, but the potential is not limited to these northern economies. There is considerable scope for doing so in low- and middleincome economies. For example, and although this is largely outside of the industrial sector, ecotourism is a high-margin service sector niche. In the industrial sector, Chinese and Indian firms are increasingly dominating wind power generation, and Chinese firms command the global solar photovoltaic sector. Some middle-income economies in Africa are also building green economy expertise, particularly in renewable energy. Industrial policy has a role to play in supporting the growth of these green economy activities.

Promoting a More Inclusive Industrial Sector The exclusion of considerable sections of the population from the growth process as a whole is of concern not just for developmental reasons, but also because it threatens to undermine the environment for (and hence sustainability of) growth, including in the industrial sector. While much of the explanation for these developments arises outside of the industrial sector, the nature of industrial development does play a causal role. Large-scale production concentrates the benefits in terms of geography and income recipients. Capital-intensive production limits the employment impacts of industry, and further acts to concentrate the rewards to a relatively small section of the population. Historically these problems have beset low- and middle-income economies, but they are increasingly also emerging in the north, particularly among the young population. (In 2013, around 60% of the under 25s in Greece and Spain were unemployed; in the EU as a whole the proportion was almost 20%). A more inclusive industrial trajectory will need to develop products which are more appropriate to meeting the needs of the poor and the

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excluded, and it will have to do so by developing processes and technologies which are more labour-intensive, smaller in scale and provide opportunities for the relatively uneducated to participate in production. There are important implications for innovation policy as well as for the promotion of relevant sectors and regions (Chataway, Hanlin, & Kaplinsky, 2013). How can this enormous task be achieved? One route, as discussed above in relation to the endogenisation of environmental concerns in industrial policy, is through the price system. Large-scale firms can be forced to pay for the congestion and infrastructure costs arising from their operations. Factors (such as labour) can be priced to more accurately reflect their opportunity costs. But this is a dangerous path, since a reduction of wages in many economies may further reduce the incomes of the poor and by simultaneously increasing profits, accentuate inequalities in income. A second route for policy designed to promote more inclusive development is to focus on the entrepreneurs responsible for industrial investment. Here we can distinguish large multinational enterprises (MNEs) (many of whom seek to target ‘the fortune at the bottom of the pyramid’), large local firms, domestic small- and medium-sized enterprises (SMEs), communitybased investors and public private partnerships (as in health-related sectors). Each of these has the potential to contribute to more inclusive patterns of growth, in some cases as part of their core growth agenda (e.g. community based investors) and in other cases as part of their wider operations (e.g. MNEs). Policies should be designed to specifically target the incentives and support provided to each of these categories of investors such that they consolidate their investments in more inclusive enterprises. A third arena for policy is to focus on innovation systems. These have historically produced capital-intensive and large-scale technologies, working predominantly with the formal sector and large-scale capital. Research and technology organisations (RTOs) and educational systems need to be reoriented to develop technologies which are more likely to foster inclusive growth, in relation to producing products appropriate for the poor and excluded, to include the poor in production and to involve the poor and excluded in the innovation system itself.

CONCLUSIONS How do we put the various elements of this story together? On the one hand we can observe a (re)new(ed) legitimacy for industrial policy. On the

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other hand, many of the policy instruments of previous generations of industrial policy are circumscribed by international agreements such as the WTO; moreover, some elements of the inherited policy framework have been proven to be suboptimal or inoperable. All of this occurs in the context of four disruptive factors which frame the contemporary industrial policy environment the commodities’ price boom, the onward march of GVCs, the need to endogenise the environment into the industrial sector and the critical need to develop more inclusive patterns of industrial growth. The first conclusion is that industrial policy is contextual. It varies not just over time (as we have seen), but also between economies and in the implications for individual sectors. There is thus no ‘one size fits all’ suite of policies to draw on, even though any particular policy ensemble will need to relate to the changing conditions for industrial sector development. The second conclusion is that the phrase ‘industrial policy’ is in fact a misnomer. As GVCs have fractured, many of the activities which were previously within the operations of industrial firms (e.g. design, logistics, marketing) have become specialised outsourced activities which are located in the service sector. Yet without them, industrial activities such as processing and assembly have little strategic substance. Thus instead of ‘industrial policy’ what is required is ‘productive sector policy’ affecting all sectors and the links between different economic sectors. The generalised agenda is the pursuit of rents through the development of dynamic capabilities rather than the promotion of individual ‘whole sectors’. Third, a lesson can be learned from the analysis of linkage development in Africa discussed above. ‘Policy’ consists of a series of discrete but related and integrated elements a strategic vision, individual policies which embody positive and negative sanctions, joined-up policies which are mutually supportive, policies which are within the ambit of government capabilities, and the ‘will’ and legitimacy to execute these policies effectively. A fourth and related conclusion from the analysis of linkage development in Africa is that these policies are not confined to government. Each of these policy challenges also involves the private sector as well as nonmarket actors such as civil society organisations and hybrid public private partnerships. Critical to this is the role played by lead firms, particularly when production occurs in the context of GVCs. This therefore requires a process of value chain alignment in which policy is developed and implemented by a consortium of actors within the value chain and in concert with the state and the national system of innovation. But this ‘concert’ requires a ‘conductor’, which in some cases might be the lead firm, and in other the state. Context matters in this orchestra.

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Fifth, some policies lie within the ambit of national governments, other within the reach of sub-national regional governments. But other policies require development at the supra-national level. For example, and with relevance to Africa, infrastructural development is necessarily pursued at the regional level (African Development Bank Group, 2009). In other cases, global agreement is required, particularly with respect to policy challenges involving external economies (notably with respect to energy and the environment), and those subject to a race to the bottom as countries engage in wars of incentives (e.g. competitive devaluations, fiscal policies and intellectual property rights). Sixth, depending on circumstances, productive sector policies may involve walking on more than one leg. Countries with few natural resources and large pools of low-cost and unskilled labour may place greater emphasis on participating in GVCs (subject to systematically promoting the capacity not upgrade); those with resource abundance and adequate size may favour to emphasise the linkage path. Other economies may choose to pursue both paths simultaneously. But all economies irrespective of size, resource endowment and location will perforce need to find ways of endogenising the environment into productive sector development, and to give explicit consideration to developing more inclusive patterns of productive sector development. Finally, policies designed to promote the productive sector are best seen as a ‘journey of discovery’ (Rodrik, 2004). It is a process which recognises the simultaneous existence of the government failures trumpeted by the critics of industrial policy (e.g. Bhagwati & Desai, 1970; Lal, 1983; Little, Scitovsky, & Scott, 1970), and the market failures highlighted by the proponents of industrial policy (e.g. Chang, 2002; Mazzucato, 2011; Mintzberg, Quinn, & Ghoshal, 1998) speak of the need to promote ‘emergent strategies’ in the corporate sector, a rolling plan reflecting a process of continuous review and adjustment as market conditions change. This applies equally to the productive strategy, but exercised at a large scale in which the key stakeholders align their individual endeavours to achieve collective efficiency.

NOTES 1. ‘It is a very common clever device that when anyone has attained the summit of greatness, he kicks away the ladder by which he has climbed up, in order to deprive others of the means of climbing up after him’ (List, 1885, cited in Chang, 2002, p. 4). 2. The discussion in this section is drawn from Farooki and Kaplinsky (2012).

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3. Prior to its public flotation in 2011, the CEO of Glencore (the world’s leading commodity traders) remarked ‘Unfortunately, God put the minerals in different parts of the world. We took the nice, simple, easy stuff first from Australia, we took it from the United States, we went to South America and we dug it out of the ground there. Now we have to go to more remote [and unstable] places [in Africa]’. 4. This does not mean the end of commodity price volatility, which might include periodic large falls in prices. Among other things, the financialisation of commodity markets since the 1990s has meant that long-term price trends are often swamped in the short term by excessive price volatility as speculative commodities trading leads to exaggerated price, augmenting price rises in periods of boom and price falls in periods of recession. 5. For a discussion of chain governance, see Gereffi’s seminal article Gereffi, Korzeniewicz, and Korzeniewicz (1994), Kaplinsky and Morris (2001) and Gereffi, Sturgeon, and Humphrey (2005). 6. In the United States in the 19th century, not only was industrialisation built on the back of the resource sector, but also the capabilities built in the industrial sector fed back into improved efficiency in the resource sector (Wright & Czelusta, 2004). 7. ‘Choice between “green or growth” is a false one, CBI chief says’, The Guardian, 5 July 2012. 8. SSA’s growth rate accelerated after 2002 rather than 2000. This had a marginal impact on the numbers in Table 1, with a fall in the MDG1 number by 4 million(s) rather than an increase of 13 million(s) between 2000 and 2008. 9. The very success of major exporting economies inhibits the space for other economies to replicate their paths. For example, garments exports from China to the United States and the EU have severely constrained the possibilities for clothing exports from Africa (Kaplinsky & Morris, 2008). 10. This discussion is drawn from Morris, Kaplinsky, and Kaplan (2012b). 11. These two factors often act against each other. While poor infrastructure often confers some benefits to local suppliers, more often it severely disadvantages them.

ACKNOWLEDGEMENTS I am grateful for comments from David Kaplan, Mike Morris and Rob van Tulder on an earlier draft.

REFERENCES African Development Bank Group. (2009). Program for Infrastructure Development in Africa (PIDA). AUC/NEPAD/AfDB, Infrastructure Consortium for Africa, Annual Meeting, Rome. Barrientos, S. C., Gereffi, G., & Rossi, A. (2011). Economic and social upgrading in global production networks: A new paradigm for a changing world. International Labour Review, 150(3 4), 319 340.

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Bhagwati, J., & Desai, P. (1970). Planning for industrialization: Indian industrialization and trade policies since 1951. Oxford: Oxford University Press. Chang, H.-J. (2002). Kicking away the ladder. London: Anthem Press. Chataway, J., Hanlin, R. E., & Kaplinsky, R. (2013). Inclusive development: An architecture for policy development. IKD Working Paper 65. The Open University, Milton Keynes, Buckinghamshire. Chen, S., & Ravallion, M. (2013). More relatively-poor in a less absolutely-poor world, Development Research Group. Washington, DC: World Bank. Farooki, M. Z., & Kaplinsky, R. (2012). The impact of China on global commodity prices: The global reshaping of the resource sector. London: Routledge. Fessehaie, J. (2012). What determines the breadth and depth of Zambia’s backward linkages to copper mining? The role of public policy and value chain dynamics. Resources Policy, 37(4), 443 451. Gereffi, G., Korzeniewicz, M., & Korzeniewicz, R. P. (1994). Introduction. In G. Gereffi & M. Korzeniewicz (Eds.), Commodity chains and global capitalism. London: Praeger. Gereffi, G., Sturgeon, T., & Humphrey, J. (2005). The governance of global value chains. Review of International Political Economy, 12(1), 78 104. Gibbon, P., & Ponte, S. (2005). Trading down: Africa, value chains and global capitalism. Philadelphia, PA: Temple University Press. Kaplinsky, R. (1993). Export processing zones in the Dominican Republic: Transforming manufactures into commodities. World Development, 21(11), 1851 1865. Kaplinsky, R. (2005). Globalization, poverty and inequality: Between a rock and a hard place. Cambridge: Polity Press. Kaplinsky, R. (2010). The role of standards in global value chains and their impact on economic and social upgrading. Policy Research Working Paper 5396. The World Bank, Washington, DC. Kaplinsky, R., & Morris, M. (2001). A handbook for value chain research. Retrieved from http://asiandrivers.open.ac.uk/documents/Value_chain_Handbook_RKMM_Nov_2001.pdf Kaplinsky, R., & Morris, M. (2008). Do the Asian drivers undermine export-oriented industrialisation in SSA. World Development, 36(2), 254 273 [Special Issue on The Impact of Asian Drivers on the Developing World]. Lal, D. (1983). The poverty of ‘development economics’. London: Institute of Economic Affairs. Lederman, D., & Maloney, W. F. (2007). Trade structure and growth. In D. Lederman & W. F. Maloney (Eds.), Natural resources: Neither curse nor destiny (pp. 15 39). Washington, DC: Stanford University Press and The World Bank. List, F. (1885). The national system of political economy. London: Longmans, Green. Little, I. M., Scitovsky, T., & Scott, M. (1970). Industry and trade in some developing countries: A comparative study. Oxford: Oxford University Press. Mazzucato, M. (2011). The entrepreneurial state: Debunking public vs. Provate sector myths, London: Demos. Mintzberg, H., Quinn, J. B., & Ghoshal, S. (1998). The strategy process. London: Prentice Hall. Morris, M., Kaplinsky, R., & Kaplan, D. (2012a). One thing leads to another: Promoting industrialisation by making the most of commodities in Sub-Saharan Africa. Lulu.com Morris, M., Kaplinsky, R., & Kaplan, D. (2012b). Introduction, special issue making the most of commodities: The determinants of linkages in Africa. Resources Policy, 37(4), 405–408. Nolan, P. (2012). Is China buying the world? London: Polity.

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Perez, C. (2008). A vision for Latin America: A resource-based strategy for technological dynamism and social inclusion. Globelics Working Paper Series No. 08-04. Rodrik, D. (2004). Industrial policy for the twenty-first century. Cambridge, MA: John F. Kennedy School of Government. Sachs, J. D., & Warner, A. M. (2001). The curse of natural resources. European Economic Review, 45, 827 838. Schmitz, H. (2000). Global competition and local cooperation: Success and failure in the Sinos Valley, Brazil. World Development, 27(9), 1627 1650 [Special Issue on Industrial Clusters in Developing Countries]. Sumner, A. (2010). Global poverty and the new bottom billion: What if three-quarters of the world’s poor live in middle income countries? Mimeo, Institute of Development Studies, Brighton. UNIDO. (2012). Industrial Development Report 2011: Industrial energy efficiency for sustainable wealth creation. The United Nations, Vienna. van Tulder, R. (2013). Chains for change: Escaping the middle income trap through value chain partnerships. Occasional paper. The Partnerships Resource Centre, Rotterdam. Wright, G., & Czelusta, J. (2004). The myth of the resource curse. Challenge, 47(2), 6 38. Xing, Y., & Detert, N. (2010). How the iPhone widens the United States trade deficit with the People’s Republic of China. ADBI Working Paper 257. Asian Development Bank Institute, Tokyo.

This article has been cited by: 1. Rob van Tulder Alain Verbeke Roger Strange Taking stock of complexity: In search of new pathways to sustainable development 1-20. [Citation] [Full Text] [PDF] [PDF]

CHAPTER 15 THE CLEAN DEVELOPMENT MECHANISM AND TECHNOLOGY TRANSFER TO CHINA Daniela Marconi and Francesca Sanna-Randaccio ABSTRACT Purpose
The purpose of this study is to analyse the role of the clean development mechanism (CDM) established by the Kyoto Protocol in channelling foreign technology to China. Appraising the experience of CDM remains of key importance when drawing lessons for the post-2012 climate regime. Methodology/approach
Descriptive analysis of the sources and the determinants of foreign technology transfer based on the examination of 1,355 registered projects. Econometric analysis of the probability of having a foreign supplier of technology in any project. Findings
The prominence of German firms as technology providers and the absence of a strong relationship between technology suppliers and credit buyers. The econometric analysis finds that project size and cost, project location, credit buyers’ and consultants’ characteristics, as well as technology diffusion are all relevant factors in determining the probability of having a foreign supplier of technology.

International Business and Sustainable Development Progress in International Business Research, Volume 8, 351
389 Copyright r 2014 by Emerald Group Publishing Limited All rights of reproduction in any form reserved ISSN: 1745-8862/doi:10.1108/S1745-8862(2013)0000008020

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Research implications
China is a particularly interesting case for analysing technology transfer in CDM projects since, after a slow start, the country has become the largest and most dynamic CDM recipient worldwide. Furthermore, the analysis of CDM projects may offer some insights into the complex web of technological links between Chinese and foreign firms. Practical implications
The transfer of emission-saving technologies to developing countries is expected to play a major role in addressing environmental problems worldwide. Originality/value
This study analyses the sources and determinants of international technology transfer in CDM projects in China, and offers some insights into how the characteristics of the major players and the links between them affect this phenomenon. Keywords: Technology transfer; clean development mechanism; climate change; China; foreign direct investment

INTRODUCTION The transfer of emission-saving technologies to developing countries is expected to play a major role in addressing environmental problems worldwide, and in this context it is important to assess the potential of a tool such as the clean development mechanism (CDM). The CDM was introduced under Article 12 by the Kyoto Protocol and became operational in late 2004; it allows emission-reduction projects carried out in developing countries to earn certified emission reduction (CER) credits. Each CER equals one metric tonne of carbon dioxide equivalent (CO2e). CERs can be traded and sold to developed countries that have signed the Protocol (Annex-I parties) to meet part of their emission reduction targets.1 Primarily aimed at promoting cost-effective greenhouse gas emission mitigation by Annex-I countries, the mechanism was also designed to foster sustainable development in the developing world by channelling new financial resources and encouraging the international transfer of environmentally sound technologies (UNFCCC, 2010). Appraising the experience of CDM remains of key importance when drawing lessons for the post-2012 climate regime.2 China is a particularly interesting case for analysing technology transfer in CDM projects since, after a slow start, the country has become the

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largest and most dynamic CDM recipient worldwide (Capoor & Ambrosi, 2008; Gemmer & Tong, 2008; Lewis, 2010). Furthermore, the analysis of CDM projects may offer some insights into the complex web of technological links between Chinese and foreign firms, and into the technology and industrial policies implemented by the Chinese authorities. Understanding the technological progress of China, and its mechanisms, is a central issue in the ongoing economic power shift from west to east. Previous studies on international technology transfer (ITT) promoted by CDM projects have mainly been conducted at a global level, and have sought to understand the characteristics of the projects (such as size and type) and of the hosting countries that have an influence on the probability of ITT being associated with CDMs (Dechezlepreˆtre, Glachant, & Me´nie`re, 2009; Doranova, Costa, & Duysters, 2010; Haites, Duan, & Seres, 2006; Schneider, Holzer, & Hoffmann, 2008; Youngman, Schmidt, Lee, & de Coninck, 2007). Limited attention has been given however to the different parties involved in CDM projects. A few studies have looked closely at the participants, but at a rather aggregate level (Dechezlepreˆtre, Glachant, & Me´nie`re, 2008; Schneider, Lazarus, & Kollmuss, 2010; Seres, Haites, & Murphy, 2009; UNFCCC, 2010). Such an aggregate multi-country approach, although offering interesting insights, does not allow the essential aspects to be captured, such as the characteristics of the main technology providers (local and foreign), the role of credit buyers and project consultants in channelling foreign technology, as well as the role of institutional and regulatory frameworks. These frameworks may vary considerably from country to country, while greatly affecting the pattern of foreign technology adoption in CDM projects. In this study, we analyse the sources and determinants of ITT in CDM projects in China and we offer some insights into how the characteristics of the major players and the links between them affect this phenomenon. The analysis is based on a careful examination of all relevant documentation attached to individual projects, such as the project design documents (PDDs) and the associated reports, which provide a wealth of information on both the technologies and the companies involved. We begin with a descriptive analysis which allows us to formulate hypotheses which in turn will be empirically tested. Compared with previous empirical studies, this one looks more deeply ‘inside the box’ of CDM projects in China using a large database and considering important characteristics, which hitherto have been neglected.3 Drawing on several descriptive papers on the implementation of this mechanism in China (such as Lewis, 2010; Wang, 2010; Wang & Chen, 2010), we investigate to what extent institutional factors have affected the pattern of CDM

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projects in China and the technology adopted; in doing so, we try to understand how China has shaped the use of this tool to finance costly investments or to acquire foreign technology in specific sectors. We further address the question of the origin of technologies adopted in CDM projects in China and the identity of the main (domestic and foreign) players. We also examine the main determinants of foreign technology adoption in CDM projects in China and consider the role of PDD consultants (PDDCs) and credit buyers in selecting the most appropriate technology (foreign vs. domestic). Several countries supply technology to CDM projects in China (mostly the European Union (EU), the United States and Japan). Germany has a prominent position in many respects: for example in terms of the number of projects, number of firms involved and breadth of technology portfolio. We find a clear specialisation among EU members between ‘mainly credit buyer’ countries (the United Kingdom and Netherlands) and ‘mainly technology provider’ countries (Germany, Spain and Denmark). Japan, however, has an important position in both roles and, in the case of several projects, one Japanese company occupies a double role. In the econometric analysis we find that the likelihood of having foreign technology providers in Chinese CDM projects increases with the total number of CERs issued by the project (abatement size) and with the cost of the project in terms of dollar per unit of CO2 abated. The probability of having a foreign technology provider is lower when projects are located in the poorest provinces of China, while the probability is higher when the credit buyer is also a consultant for the project or when the consulting process is controlled directly by the project owner. We also find a growing concentration of projects in wind power over time as well as a decreasing role of foreign technology as the number of these projects has expanded. The chapter is organized as follows. We first describe the dataset, then in the following section we outline the main features of the Chinese regulatory framework and present an overview of CDM projects in China. We present our empirical model and econometric strategy aimed at shedding some light on the determinants of ITT to China in the penultimate section, whilst the main conclusions are highlighted in the final section.

THE DATASET As at 2 June 2011, 1,355 CDM projects were registered in China, covering 19 out of 26 project types defined by the United Nations Environment

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Programme (UNEP) Risø Centre.4 We analysed these projects, collecting data on: ITT occurrence; the identity of foreign and domestic technology providers (TP); the identity of project owners (PO) and their sector of activity; the identity and sector of activity of credit buyers (CB), the identity of project consultants; the amount CERs to be issued by each project and the cost of the project (i.e. the cost of the investment measured as US $/tCO2e). We collected some of this information by carefully examining all the relevant documentation attached to the 1,355 individual projects, such as PDDs, validation reports, technical documentation and other internet resources.5 We merged these data with the information available from the UNEP Risø Centre Database. All project types are considered in the descriptive analysis. In our econometric analysis on the determinants of ITT, however, we exclude hydropower projects, as in this field there is a disproportionate number of projects and a negligible rate of ITT (see the Section ‘Descriptive Analysis’ below). We are then left with 715 projects. Our definition of technology transfer goes beyond what is declared in the PDD or in the validation report. These two documents often, but not always, explicitly state whether foreign technology transfer occurs or not in the project. For consistency purposes, according to our definition, technology transfer occurs any time we find explicit mention (in the PDD and/or the validation report) of a foreign firm’s involvement, either as a sole supplier of technology (equipment, knowledge, or both), or in the form of a joint venture with domestic suppliers, or as local subsidiaries of foreign firms providing technology for the project. In analysing the relevant documentation, we adopt a strategy similar to that described in UNFCCC (2010), but without distinguishing between different types of technology transfer (equipment and/or knowledge transfers), as such a distinction is only rarely obtainable and reliable.6 Rather, we collect data on countries and firms providing technology in CDM projects to uncover the pattern of technological linkages between China and foreign countries/firms.

DESCRIPTIVE ANALYSIS Before presenting an overview of our dataset we briefly discuss some key aspects of the regulatory framework in China.

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Key Features of the Regulatory Framework CDM projects in China are regulated by the Measures for the Operation and Management of CDM Projects in China (from now on the Measures) (see World Bank, 2010), issued by the National Development and Reform Commission (NDRC
China’s top planning agency) and other two ministries,7 which entered into force on October 2005 (see Schroeder, 2009; Wang, 2010). Below we will focus on some essential points: • Three priority areas have been set for CDM in China, in line with the more general national strategy for sustainable development: energy efficiency improvement, development and utilization of new and renewable energy, methane recovery and utilization (Article 4). • Differentiated project fees are established. Projects in the priority areas are subject to a 2 per cent tax on their CER revenue. The tax rises to 30 per cent for Nitrous Oxide (N2O) projects and up to 65 per cent for Hydrofluorocarbon (HFC) and Perfluorocarbon (PCF) projects (Article 24). • Eligibility requirements for project ownership are set by introducing a 51 per cent Chinese ownership rule. Article 11 provides that only ‘Chinese funded or Chinese-holding enterprises within the territory of China are eligible to conduct CDM projects with foreign partners’.8 For this reason, a foreign company cannot directly benefit from the CER revenue since it cannot be a project owner. This restriction is peculiar to China, as in other developing countries very often projects are implemented by subsidiaries of companies located in Annex-I countries. Still, foreign firms can participate as PDDCs and TPs. • Technology transfer. The Chinese Government is expecting CDM projects to promote the transfer of environmentally sound technology to China (Article 10). The CDM measures are part of a complex set of climate, industrial, trade and technology policies implemented to promote sustainable development and, more specifically, to foster renewable energy and energy efficiency. These policies, even when not focused specifically on CDM projects, have played a critical role in shaping the strategies of foreign and local firms involved in these projects. This may be illustrated by considering the case of wind power, an area in which several measures have been explicitly aimed at developing the local equipment manufacturing industry.9 Local content requirements were introduced by the NDRC with the ‘Wind Farm Concession Programme’ in 2003, establishing that wind farm projects

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of a relatively large scale should be subject to a public tender process. An important criterion for the success of a bid is the share of domestic components utilized in the wind farms. The local content requirement, initially set at 50 per cent, was raised to 70 per cent in 2005.10 This policy favoured the rapid expansion of Chinese-owned wind turbine producers and compelled foreign manufacturers to open local production units (see below). Domestic production was also supported by setting, in 2007, import tariffs which basically restricted the Chinese market for smaller turbines to domestic producers.11 In addition, various measures have been introduced to support R&D in the wind power sector and to promote the domestic industry (Liu & Kokko, 2010; Wang, 2010; Wang, Q., 2010; Wu, 2010; Zhang, Chang, Huo, & Wang, 2009; Zhao, Ling, Zillante, & Zuo, 2012; Zhao, Zuo, Fan, & Zillante, 2011).

Overview of CDM Projects in China Having taken stock of the key features of the regulatory framework in China, we now look at CDM projects registered so far in this country. When considering the composition by number and type (see Fig. 1(a)), CDM projects in China are heavily concentrated in areas related to renewable energy12 (82.4 per cent of the total number of registered projects), while the share of projects implementing energy efficiency in industry (EE own generation) is equal to 7.5 per cent; methane coal bed and methane avoidance projects jointly make up 6.9 per cent. Such a high concentration in renewable energy is specific to China.13 At the level of individual types, hydro projects are dominant (47.1 per cent), followed by wind power projects (29 per cent). The dominance of hydropower reflects the important role of this form of power generation in China.14 However, in terms of expected CERs, the picture is rather different (Fig. 1(b)).15 The share of projects involving the destruction of HFC-23 and N2O16 rises to almost 40 per cent of the total, notwithstanding the higher tax on CER revenues, while renewable energy projects account for only 37 per cent of expected CERs. Indeed, the dominance of HFCs and N2O projects emerges worldwide, due to the high global warming potential of these greenhouse gases. For instance, 1 tonne of HFC-23 is equivalent to 11,700 tonnes of CO2. Thus, these projects generate large numbers of CERs for relatively low initial investments and represent the ‘low-hanging fruits’ of CDM initiatives (see the European Commission, 2010, p. 10).17 It appears therefore that the Chinese authorities have been quite successful

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Biomass energy 3.2%

Cement 0.4%

Coal bed/mine methane 3.2%

EE own generation 7.5%

Fossil fuel switch 1.8%

Wind 29.0%

HFCs 0.8%

Solar 0.4% N2O 2.0% Methane avoidance 1.2%

Hydro 47.1%

Landfill gas 2.7%

Fig. 1a.

Share of CDM Projects in China by Type and Number of Projects. Source: Based on UNEP Risø Centre database (1,355 projects).

in channelling a large number of projects into the priority areas, although they have been unable (or unwilling) to discourage those undertaken by producers of industrial gases. We now turn our attention to the role of foreign technology in these projects (Table 1). By inspecting PDDs and sometimes also validation reports, we find out that 28 per cent of the projects involve foreign technology, accounting for 80 per cent of expected annual emissions reduction. The likelihood of technology transfer varies considerably across technology types, confirming the result obtained by Dechezlepreˆtre et al. (2008) at the global level. Hydro projects, with few exceptions, do not involve technology transfer. This is not surprising, since only small hydro projects are eligible for CDM funding,18 and small-hydro turbine manufacture represent the low margin segment of the market, which is dominated by Chinese producers.19 Furthermore, in recent years China has become quite advanced in hydropower technologies. In fact, when considering CDM projects worldwide, China is a major supplier of technology for hydro projects (UNFCCC,

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Biomass energy 1.7% Wind 13.4% Solar 0.1%

Cement 0.4%

Coal bed/mine methane 6.7% EE own generation 7.7%

N2O 8.5%

Energy distribution 0.2% EE Supply side 0.1% Fossil fuel switch 7.9%

Landfill gas 1.9% Methane avoidance 0.2%

Fugitive 0.1% Hydro 19.9% HFCs 31.2%

Fig. 1b.

Share of Expected CERs (2012 ktCO2e) by CDM Type. Source: Based on UNEP Risø Centre database (1,355 projects).

2010, p. 26). It thus seems that the large number of projects in this area is motivated by the desire to benefit from the financial opportunities created by the CDM, rather than by technological considerations. On the contrary, almost all projects aimed at destroying HFC-23 and N2O, as well as those concerning fossil fuel switch technologies, adopt foreign equipment and expertise. Moreover, in terms of average abatement, the data shown in Table 1 confirm that, in general, technology transfer occurs more often in larger projects (see also Dechezlepreˆtre et al., 2008, 2009; Doranova et al., 2010; UNFCCC, 2010). Wind power generation, methane avoidance and energy distribution constitute notable exceptions.

Project Owners and Technology Providers When considering the project owners’ sectors of activity, we see in Figs. 2(a) and 2(b) that power companies are the most involved in CDM projects. The large state-owned power generation companies (Huaneng, Datang,

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DANIELA MARCONI AND FRANCESCA SANNA-RANDACCIO

Table 1. China: Registered CDM by Type and International Technology Transfer. Type of Greenhouse Gas Emission Reduction Actions

Biomass energy Cement Coal bed/mine methane EE households EE own generation EE supply side Energy distribution Fossil fuel switch Fugitive HFCs Hydro Landfill gas Methane avoidance N2O PFCs and SF6 Reforestation Solar Transport Wind Total

Number of Projects

Percentage of Projects Involving Foreign Technology (%)

Average abatement (annual ktCO2eq) Foreign tech

Domestic tech

43 5 44 2 102 1 2 24 1 11 640 36 16 27 1 3 5 1 391

37 0 52 0 51 0 50 100 0 91 2 72 31 100 0 0 20 0 46

174 0 671 0 345 0 230 1017 0 6359 546 169 50 778 0 0 103 0 128

131 240 266 26 107 306 1971 0 291 2066 111 73 59 0 155 45 36 218 132

1355

28

477

123

Source: Based on UNEP Risø Centre database.

Guodian, Huadian and to a lesser extent China Power Investment Corporation) are very active, particularly in wind power projects.20 The large number and the characteristics of wind power projects represent one aspect of the dramatic growth of both wind power and wind turbine manufacturing in China which took place after the Renewable Energy Law was promulgated in 2005 (Liu & Kokko, 2010; He & Chen, 2009; Wang, 2010). Thanks to its consistent policy framework,21 China had become the world leader in terms of installed wind capacity by the end of 2010 (WWEA, 2010). Local wind turbine manufacturing and the development of Chinese-owned producers was also actively promoted by measures such as those discussed above. This policy framework, coupled with the size and growth potential of the Chinese market, encouraged the main

361

The Clean Development Mechanism and Technology Transfer to China

Transport Steel Power Other manuf Mining Chemical Cement Biomass Agriculture 0

200

400

600 N

800

1000

1200

Y

Fig. 2a. International Technology Transfer by Sector of Activity: Number of Projects. Source: Based on UNEP Risø Centre database. (1,355 projects).

Other manuf Transport Steel Power Mining Chemical Cement Biomass Agriculture 0

100000 200000 300000 400000 500000 600000 N

Y

Fig. 2b. International Technology Transfer by Sector of Activity: Expected CERs from Start to 2012. Source: Based on UNEP Risø Centre database. (1,355 projects).

foreign producers such as Vestas (Denmark), Gamesa (Spain), REpower (Germany), GE (the United States), Suzlon (India) and Nordex (Germany), to create local subsidiaries. These foreign companies have been important technology providers in wind power projects in China, at first exporting equipment and providing training, and then, more recently, setting up

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DANIELA MARCONI AND FRANCESCA SANNA-RANDACCIO

Chinese subsidiaries. At the same time, powerful Chinese-owned manufacturers emerged. Sinovel, Xinjiang Golwind and Dongfang, which entered the market by acquiring technology and intellectual property rights from European firms, rapidly gained a dominant position in the Chinese market.22 In recent years, these Chinese producers have occupied an increasingly important role as technology providers in wind CDM projects in China. Leading Chinese firms operating in emission-intensive industries such as cement, steel and chemical production have also played a significant role. In the cement industry, the top Chinese producer, the state-owned firm Anhui Conch, adopted waste heat recovery power generation systems in several CDM projects for cement plants provided by the Japanese company Kawasaki (Wang, 2010).23 In iron and steel, some major Chinese stateowned producers (such as Baosteel, Wuhan Iron and Steel, Anshan Iron and Steel) have been involved as project owners in several CDM projects and Japanese companies (such as Nippon Steel Corporation and Mitsubishi Heavy Industry) have played a major role as technology providers.24 Projects by chemical companies are mainly aimed at the abatement of HFC-23 and N2O. In the case of N2O, for instance, which is an unwanted by-product of adipic and nitric acid production, we find that the main Chinese producer of adipic acid (PetroChina) and the third Chinese producer (Henan Shenma Nylon Chemical) are both active as project owners. In the first case, technology is provided by the German BASF, while in the second by INVISTA Technologies (Switzerland), a fully owned subsidiary of the US company Koch Industries, the world largest adipic acid producer. As for nitric acid, the largest Chinese companies25 operate as project owners deploying technology provided by the Norwegian firm Yara, the world leading manufacturer of nitrous fertilizer. The overview of project owners and technology providers presented above allows us to grasp an important insight. In many areas, top Chinese companies have used CDM projects to adopt foreign technology provided by leading foreign firms. In the case of wind power, CDM projects have probably played a more complex role, helping to achieve the national priority of building a Chinese-owned turbine manufacturing industry.

Geography of Technology Supply and Credit Buying Going through the relevant documentation, we recorded all the foreign countries/firms involved as technology providers whenever such information

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was available.26 This analysis was conducted excluding hydropower projects, as their inclusion would probably distort the picture since, as Table 1 shows, in this field there is a disproportionate number of projects and a negligible rate of ITT. Excluding hydropower, we are left with 715 projects. Foreign technology is involved in 364 projects, belonging to 11 project classes out of 18. Three European countries play a prominent role as technology providers (Table 2). German firms supply technology in 26 per cent of the 364 non-hydro CDM projects in which foreign companies participate as technology providers, Danish companies in 20 per cent, and firms from Spain in 12 per cent of the cases. The EU total amounts to 68 per cent. An important role is also played by American (18 per cent) and Japanese firms (13 per cent). When considering the breadth of the technology portfolio and the number of firms involved (columns 3 to 5 in Table 2), it clearly emerges that Germany, the United States and, to a somewhat lesser extent, Japan are the main players. A large number of German firms (18) are active as technology providers, operating in a wide range of project types (8 out of 11), being however mainly concentrated in wind power (this type accounts for 63 per cent of the projects involving German firms as technology providers). The United States is also present with a large number of firms (15), managing an even more diversified range of technologies. Japanese producers, in turn, play a dominant role in the provision of technologies for energy efficiency in industry and in industrial gas reduction projects. These results are consistent with the findings of Dechezlepreˆtre, Glachant, Hacˇicˇ, Johnstone, and Me´nie`re (2011) that Japan, the United States and Germany are the three top inventor countries for a wide range of climate-change mitigation technologies, with Germany in leading position for high-value inventions. Danish and Spanish firms are involved in a narrower range of technologies. Spain is present almost exclusively in wind power, thanks to Gamesa and a few other producers; Denmark has a key role in wind, due to the leading turbine manufacturer Vestas, but also in biomass energy with BWE. Although present in only one class of projects, Norway too is quite important as a technology provider. The Norwegian producer Yara, the world-leading manufacturer of nitrous fertilizers, is the main supplier of catalyst technology to reduce N2O emission from nitric acid plants. It is worth noting the difference between Germany and other large EU countries. France accounts for only 2 per cent of the total number of CDM projects with a foreign technology provider, and the United Kingdom for

364

Country

Austria Canada Denmark France Germany Italy Japan Netherlands Norway Spain Switzerland United Kingdom United States Other or Unknown

Technology Providers (TP) by Country of Origin.

Number of projectsa

Share as TP (Percentage of totalb)

Number of different project types

7 2 72 7 96 2 48 2 10 45 8 16 65 21

2 1 20 2 26 1 13 1 3 12 2 4 18 6

2 1 3 2 8 1 6 2 1 2 3 5 8

Largest project type (as Percentage of country’s total number of projects) Landfill gas (86) Landfill gas (100) Wind (76) HFCs (71 Wind (63) Landfill gas (100) EE own generation (67) Methane Avoidance (50) N2O (100) Wind (96) EE own generation (50) N2O (44) Fossil Fuel Switch (25)

Number of firms involved as TP 1 1 7 2 18 1 10 2 1 4 3 8 15

a The column does not add up to 364 (the number of projects with foreign technology) as there are projects with multiple technology providers from different countries. b First column divided by the total number of non-hydro projects with foreign technology (364). Source: Based on UNEP Risø Centre database (715 non-hydro projects).

DANIELA MARCONI AND FRANCESCA SANNA-RANDACCIO

Table 2.

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365

4 per cent. Italy, which is quite active as credit buyer, has a very marginal role as a technology provider. Indeed, several policies adopted by the German government may have contributed to the prominence of German firms as technology providers in CDM projects in China. On the one hand, the German government, via restrictive measures and incentives, has implemented measures aimed at fostering the development and implementation of low-carbon technologies. Our evidence thus may suggest a sort of ‘Porter hypothesis’ effect.27 Secondly, Germany’s links with China go back to the 1970s and are stronger than those of other EU members. Thirdly, several measures have been taken to help German firms take advantage of the possibilities generated by the CDM. For instance, the German Ministry for the Environment, Nature Conservation and Nuclear Safety has undertaken a well-structured CDM initiative. As part of this action, it has published a series of studies on the opportunities for German know-how in CDM projects in different sectors in China (e.g. see Gemmer & Jiang, 2008). Turning our attention to the relationship between technology providers and CER buyers, we learned that only on a few occasions did the same firm play both roles. For instance, this is the case of Nippon Steel (CDM project 909, 2516), Mitsubishi (CDM project 1859) and Toyo (CDM project 2327). However, here we are interested in assessing to what extent the technology supply from one country is linked to credit buying from the same country. Such an analysis will offer some indications as to whether companies with the same ‘nationality’ but different specializations cooperate in the Chinese market.28 Having not signed the Kyoto Protocol, the United States cannot be considered here, even though its firms are quite important as technology providers in Chinese CDM projects. A first inspection of the data in Fig. 3(a) does not support the hypothesis of ‘national systems’, since the roles of countries as credit buyers and technology suppliers differ considerably. To start with, when considering the number of CDM projects by buyer’s nationality, the United Kingdom emerges as the most important CER buyer, while its firms have only a minor role as technology providers. Fig. 3(a) shows that UK firms participate as credit buyers in 46 per cent of the 364 projects with ITT, while they provide technology only in 4 per cent of these projects (Table 2). By contrast, Germany plays only a minor role as a credit buyer (2 per cent of the projects with ITT), notwithstanding its prominent position as a technology provider (26 per cent of the projects with ITT). The picture does not change significantly when considering the role of buyers in terms of the share of total expected CERs (Fig. 3(b)).

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DANIELA MARCONI AND FRANCESCA SANNA-RANDACCIO

ES 2%

Other Annex I 10%

DK 1%

SWE 2%

UK 46%

CH 19%

NL 9%

JP 9%

GER 2%

Fig. 3a. Buyers of CERs by Buyers’ Nationality: Share of Total Number in Projects with Foreign Technology Providers. Source: Based on UNEP Risø Centre database (364 non-hydro projects with ITT).

DK 0.3%

ES 0.2%

Other Annex I 10.4%

GER 0.7% UK 40.1%

SWE 1.1%

CH 25.4%

NL 8.4%

JP 13.4%

Fig. 3b. Buyers of CERs by Buyers’ Nationality: Share of Total CERs in Projects with Foreign Technology Providers. Source: Based on UNEP Risø Centre database (364 non-hydro projects with ITT).

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Our evidence for China seems to be in line with that reported in Dechezlepreˆtre et al. (2008), while it differs sharply from that of UNFCCC (2010) and Seres et al. (2009) as both find a close relationship between credit buyers and technology suppliers in worldwide CDM projects. Three groups of countries can be singled out. The ‘mainly credit buyer’ countries (the United Kingdom, Netherlands and Switzerland), whose role seems more related to their importance as financial centres than to national abatement objectives; the ‘mainly technology provider’ countries (Germany, Spain and Denmark) which operate as direct credit buyers only to a very limited extent, and Japan, which has an important role in both positions, credit buyer and technology supplier. In line with previous evidence in the literature and examining the identity of credit buyers for 715 no-hydro CDM projects in China (Figs. 4(a) and 4(b)), we find that ‘primary’ CERs are mainly bought by financial intermediaries (either banks, financial institutions or carbon market funds).29 In terms of project numbers, financial entities are buyers in 64 per cent of the cases, accounting for 58 per cent of expected CERs to be issued by these projects; manufacturing firms, in turn, buy CERs in 11 per cent of the cases. Annex-I power companies, such as Electrabel (Belgium), Endesa (Spain), Enel (Italy), RWE (Germany) and TEPCO (Japan),30 are also an important presence in the primary CER market, acting as buyers in 10 per cent of the cases, equivalent to 14 per cent in terms of volume of CERs, indicating that power companies are directly involved as CER buyers in large projects and are willing to bear the financial risks associated with No buyer 3% Industry 11% Power 10%

Public 12%

Fin 64%

Fig. 4a. Buyers of CERs by Buyers’ Organization Type: Share of Total Number of Projects with Foreign Technology Providers. Source: Based on UNEP Risø Centre database (715 non-hydro projects).

368

DANIELA MARCONI AND FRANCESCA SANNA-RANDACCIO No buyer 1% Industry 12% Power 14% Fin 58% Public 15%

Fig. 4b. Buyers of CERs by Buyers’ Organization Type: Share of Total Expected CERs to be Issued in Projects with Foreign Technology Providers. Source: Based on UNEP Risø Centre database (715 non-hydro projects).

them. It is also worth noting that, in the case of China, the percentage of projects with no credit buyers indicated in the PDD at the moment of registration (the ‘no buyer’ or ‘unilateral’ projects) is negligible (3 per cent of the projects, with almost no impact in terms of expected CERs).31

Project Design Document Consultants and Technology Transfer In order to gain some initial understanding of the role of individual players, we look more in depth at the major PDDCs. Project consultants are engaged in the overall development of the project.32 The first thing to note is that, since the adoption of the CDM instrument, the PDD consultancy industry has flourished in China. Today there are about 260 PDDCs based in China. Chinese PDDCs are very active, being involved in 62 per cent of the 715 non-hydro projects considered here. We can identify two groups. The first is composed of subsidiaries of leading state-owned power companies. The second group is composed of independent consulting companies. There are many differences between these two groups. The PDDCs owned by power companies have almost exclusively joined wind power projects, that is in an area related to the operations of the controlling company. Furthermore, these companies generally act at the same time as PDDC and PO. In contrast to that, the ‘purely’ consulting companies,

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while operating on a wider range of project types (especially in the case of Tsinghua University), are never involved as POs.33 No clear indication emerges from the above evidence as to whether being a PO and PDDC at the same time fosters a larger uptake of foreign technology. The capability of performing multiple roles, and thus dealing with complexity, might be expected to facilitate the adoption of foreign technology. We will try to shed some light on this issue in our empirical investigation. As to foreign PDDCs, three UK carbon trading companies (Carbon Resource Management, CAMCO and EcoSecurities) have a dominant role (Table 3). All of them are also important credit buyers. It is interesting to note that each of these UK companies specializes in different project types. Carbon Resource Management operates almost exclusively in wind. It is the main PDDC for the largest Chinese state-owned power company, China Huaneng Group. The latter, while operating in a large number of projects as PO, has not created its own PDD consulting subsidiary, unlike other important power companies such as Datang and Guodian. CAMCO’s main area of operation is energy efficiency for industry, with several projects Table 3. Top Foreign PDD Consultants (at Least 10 Registered Projects in China).

Carbon resource management (UK) CAMCO (United Kingdom) EcoSecurities (United Kingdom) Millennium capital services (Ukraine) Arreon carbon (United Kingdom) Climate experts (Japan) KOE environmental consultancy (Japan) WB-CF (United States) a

Number of Projects

Percentage of which also CB

Percentage of which ITT

Largest Type (as Percentage Total)

76

96

59

Wind (97)

52

90

60

EE own generation (40)

37

95

59

N2O (41)

24

0

42

Wind (50)

16

94

25

11

0

82

Coal bed/mine methane (25) N2O (73)

10

0

30

EE own generation (40)

10

0a

70

HFCs (20)

The World Bank acts as trustee of the Community Development Carbon Fund (partnership of different governments and companies) and of various national Carbon Funds. Source: Based on UNEP Risø Centre database (715 non-hydro projects).

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DANIELA MARCONI AND FRANCESCA SANNA-RANDACCIO

owned by cement and by iron and steel producers. An example of a project owner collaborating with CAMCO is Conch, the top Chinese cement company. EcoSecurities has had an important role in the case of N2O abatement, in association with major Chinese producers of adipic and nitric acid. It is interesting to note that the rate of ITT is above average in projects in which these large UK carbon traders are involved. This finding is in line with Wang (2010) who suggests that international carbon traders engaging in the overall development of the CDM process are more likely to adopt well-developed foreign technologies, in order to obtain a larger and more secure volume of CERs, as the additionality requirement will be more easily proven and project risks reduced. At the same time, international traders have the financial and technological capabilities to adopt foreign technology, being also in a position to negotiate more favourable terms with foreign suppliers. Two Japanese companies (Climate Experts and KOE) rank among the main PDDC in China. Unlike their UK counterparts, these two firms do not operate as credit buyers, however almost always in their projects the CER buyer is a Japanese firm. This is the case in 73 per cent of the projects which see Climate Experts as PDDC and in 90 per cent of the cases for KOE. In the group of the largest PDDCs in China we also find the World Bank Carbon Finance (WB-CF), which manages several carbon fund initiatives (such as the Community Development Carbon Fund, the BioCarbon Fund). Taking stock of all the evidence discussed so far, next section proposes an econometric analysis to test the determinants of technology transfer in CDM projects in China.

ECONOMETRIC ANALYSIS In recent years, as a growing number of CDM projects have been implemented and a considerable amount of data have become available, an empirical literature has started to flourish, examining whether CDM projects effectively promote the transfer of environmentally friendly technology from developed to developing countries and searching for project and country-specific characteristics favouring such a transfer. Table 4 summarizes the main contributions that have appeared on this topic. All the reviewed papers consider more than one hosting country, use similar estimation strategies (logistic models) and consider similar

Empirical Literature on International Technology Transfer in CDM projects.

Authors Dependent variable model

Independent variable Size Unilateral Subsidiary Number of previous projects Absorption capacity/ technological ability Country controls Type dummy Countries considered

DGM (2008)

Seres et al. (2009)

UNFCCC (2010)

ITT logit (yes = l; no = 0)

ITT logit (yes = l; no = 0)

+ − + −

+ No effect Not included −

Effect on ITT likelihood + No effect Not included −

+

Not included

Not included

−

YES YES 8 developing countries

YES YES World (26 developing countries) CDM pipeline June 2008/3296 projects (registered + at validation) 81

YES YES World

YES YES 36 countries

Registered projects as of June 2010/3530 projects

Registered projects up to 2007/497 projects

86.7

NA

Period/Number of projects

registered projects as of May 2007/644 projects

Percentage correctly predicted

80

ITT logit (yes = l; no = 0)

Doranova et al. (2010) Technology origin: local over foreign; combined over foreign multinomial logit (local = 1; combined = 2; foreign = 3) + Not included + −

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Table 4.

371

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DANIELA MARCONI AND FRANCESCA SANNA-RANDACCIO

independent variables. Some of these variables control for project-specific characteristics, others for country-specific ones. Among the project-specific controls, there is the size of the project, measured by the total amount of CER expected from the project. Such a variable indicates the estimated income from the project; larger projects, by making available greater financial resources, should facilitate the acquisition of state-of-the-art foreign technology. Another important characteristic usually taken into account is the distinction between unilateral and non-unilateral projects. The former consist of projects for which the credit buyer is not indicated or has not been found yet, while the latter consist of projects with at least one credit buyer already indicated in the project. Intuitively, having a credit buyer from the very beginning should ease the financial constraints eventually faced by the project owner, and therefore facilitate the acquisition of more efficient, though more expensive, foreign technology. Another important control often considered (Dechezlepreˆtre et al., 2008; Doranova et al., 2010) is given by a dummy variable that signals whether the project in the host country is carried out by a subsidiary of a company headquartered in an Annex-I country. The hypothesis is that when the project is developed within a subsidiary technology transfer from abroad should be easier. Finally, another important project-specific characteristic to control for is the number of previous projects of the same type in the host country. The hypothesis here is that when the number of similar projects grows larger, the rate of technology transfer decreases since the technology might have already been diffused in the host country. As for country-specific factors considered, some of the reviewed studies (such as Dechezlepreˆtre et al., 2008; Doranova et al., 2010) include indicators of absorption capacity or technological ability in the host countries (such as R&D expenditures, patent filing activity, and so on), as well as other country controls such as population, GDP, trade and FDI openness that can explain the likelihood of ITT. The findings are quite similar across the papers: the likelihood of ITT is greater for larger projects and for projects with at least one credit buyer. ITT occurs more often when the project is developed within a subsidiary of a foreign company; however, it tends to decrease as the number of similar projects in the hosting country increases. As for absorption capacity, while Dechezlepreˆtre et al. (2008, 2009) find that higher technological capacity in the host country favours ITT, Doranova et al. (2010) find instead that more technologically advanced countries show a preference for local or mixed (domestic and foreign) technologies over foreign technology alone.34

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373

Despite the good level of fit generally shown, some important limitations emerge from the existing empirical literature. First of all, the number of projects considered for each country appears to be very low. For instance, Dechezlepreˆtre et al. (2008) consider only 71 projects in China. Also, despite the extensive work carried out in analysing the relevant documentation, there is no effort to take into account the relationships between the main actors in CDM projects, such as credit buyers, PDDCs and project owners, and their role, if any, in favouring foreign technology transfer. In light of the evidence discussed above, we deem these aspects very important; hence, our aim is to improve upon the existing empirical literature in at least two directions: first, we concentrate on China, using a very up-to-date database, encompassing a longer time span, ranging from 2005 to 2011. This allows us to cover almost entirely the enforcement period of the Kyoto Protocol, deepening the analysis of the pattern of foreign technology adoption in China, the single largest host country, accounting for 46 per cent of world total CDM projects. Second, in our analysis we explore the relevance of all the information available on credit buyers, project owners and PDDC characteristics. The next section describes our estimation strategy.

Estimation Strategy and Variable Description In this section we use regression analysis to explore in depth the pattern of technology transfer in CDM projects in China. Our analysis is carried out on a sample of 715 registered projects, excluding hydropower projects. Our dependent variable is a binary variable, called ITT, which takes the value 1 if a foreign firm is involved as technology provider and zero otherwise. We model the probability of having a foreign supplier of technology in a CDM project using a linear model.35 Our regression is specified as follows: PrðITT i = 1Þ = TYPEj þ β1 logðproject sizei Þ þ β2 logðinvestmenti Þ þ β3 inlandi þ β4 northwesti þ β5 southwesti þ β6 ðNfracÞ þ βy ycommi þ β7 ðCBi Þ þ β8 ðCBi × LargeÞ þ β9 ðPOi Þ þ β10 ðCHIi Þ þ β11 ðlPDDCi Þ þ β12 ðmPDDCi Þ þ εi The explanatory variables considered here are the following: • TYPE: project-type dummy variable (with j = 1,… .18; see Table 1). • projectsize: total emission abatement expected by the project. • investment: US$ per unit of abatement, that is tonne of CO2e

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DANIELA MARCONI AND FRANCESCA SANNA-RANDACCIO

• Inland, Northwest and Southwest: dummy variables for project location. The location dummies are intended to capture the differential effect in the rate of technology transfer between less developed and more developed provinces (with the east coast as the control group). We expect that in the poorer provinces the likelihood of technology transfer is lower due to a lower absorption capacity, other things being equal. • Nfrac: the number of previous projects using the same abatement methodology. Contrary to what is usually done in the literature, we do not consider the number per se, rather we normalize it by the total amount of projects within the same type class, to better capture the relative position of a project within its type class. • Ycomm: time dummies to capture year-specific effects. Each project is dated according to the year in which it entered the pipeline, which coincides with the beginning of the validation stage.36 As the main novelties, we consider the relationships between the main participants in the project and their effects on the likelihood of having ITT: • CB: dummy variable that takes value 1 if the credit buyer is also a PDDC for the project and 0 otherwise. • PO: dummy variable that takes value 1 if the project owner is also a PDDC for the project and 0 otherwise. • CHI: dummy variable that takes value 1 if there is at least one Chinese project consultant for the project; zero otherwise. • sizePDDC: the size of the PDDC (size = m,l). We classify PDDCs as small, medium or large, according to the number of CDM projects developed in China; the small group is taken as the control one. Unlike other studies, we do not distinguish between unilateral and nonunilateral projects because for China such a characteristic is irrelevant, since only a tiny percentage of all the registered projects hosted in China can be classified as unilateral (about 3 per cent). Table A1 in the appendix describes our variables in more detail. Our investigation is driven by the following hypotheses: controlling for project type-specific effects, the probability of having a foreign technology supplier should be higher for larger and costly projects; it should also be higher in the richest provinces due to their greater absorption capacity and openness to foreign investment; the probability should decrease as the number of previous projects of the same type increases. This latter effect would reflect technology diffusion to Chinese firms and also the government’s requirement to increase the domestic technology content over time (see

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375

above). As for our special variables, we expect that the likelihood of technology transfer increases when a credit buyer also acts as a PDDC, due to larger incentives, as well as greater financial resources, to obtain foreign technology (see above); in the same vein, we expect that when the project owner develops its own project (as a PDDC) it might be more interested in acquiring foreign technology. Finally, we presume that the probability of having a foreign technology supplier is higher the larger the PDDC for the project. The idea is that larger consultants might enjoy a better knowledge of the most effective foreign technologies available and can facilitate the process of acquisition of those technologies; moreover, larger consultants, by having a better knowledge of CDM procedures in the host country, might facilitate project approval by claiming foreign technology transfer.37 We estimate and compare three models: linear probability, logit and probit. As the results are very similar we report only those for the linear probability model (LPM). We run three different regressions. The first one includes only the variables already considered in the existing literature; in the second regression we add our ‘relationship’ variables; and in the third regression we add a further control for wind power to capture differential effects in the absorption of foreign technologies in this sector (key priority area for the Chinese government, also in terms of technological development).

Base Regression Results The results of the LPM are reported in Table 5. As expected, regression I reveals that the likelihood of having a foreign technology provider increases with the total number of CER issued by the project (abatement size) and with the cost of the project in terms of dollar per unit of abatement (investment). The probability of having a foreign technology provider is lower when projects are located in the poorest provinces (Southwest and Northwest), confirming our intuition of a lower absorption capacity there.38 The rate of technology transfer decreases over time as indicated by year dummies, suggesting domestic diffusion and absorption of foreign technology through time.39 Contrary to previous findings in the literature, the coefficient on the variable that measure the relative position of a project within its group type (Nfrac) has a positive sign, although it is not statistically significant. Indeed, the diffusion effect is already captured by the year dummies. In fact, if we exclude these dummies, Nfrac becomes negative and highly significant (results are unreported but available from the authors upon request). In terms of goodness of fit, the models perform

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DANIELA MARCONI AND FRANCESCA SANNA-RANDACCIO

Table 5. Probability of Foreign Technology Transfers in CDM Projects in China: Results from LPM Regressions. Dependent variable: y = pr(ITT = 1) Independent variable Log(projectsize) Log(investment) Inland Southwest Northwest ycomm2 (2007) ycomm3 (2008) ycomm4 (>2008) Nfrac CB CB × Large

LPM (OLS) I

II

0.110*** 0.136*** −0.052 −0.127* −0.094*** −0.167** −0.388*** −0.488*** 0.081

0.084*** 0.130*** −0.073 −0.097 −0.102** −0.176** −0.400*** −0.511*** 0.104 0.030 0.261***

III 0.093*** 0.119*** −0.074 −0.090 −0.096*** −0.153*** −0.384*** −0.440*** 0.339** −0.006 0.276***

PO

0.181**

0.169**

CHI

0.088*

0.076

lPDDC

0.076

0.078

mPDDC

0.053

0.059

Wind

0.316**

Wind × Nfrac

−0.478*** −0.881***

−0.847***

Type_dummies Cluster Credit Buyers Number obs Percentage correctly predicted

YES YES 648 71.0

YES YES 646 71.8

YES YES 646 72.0

R2

0.22

0.26

0.27

Regression II

Regression III

Const

−0.983***

Likelihood-ratio test Regression I Log likelihood LR statistic (Restr. Reg I) Probability (LR stat) LR statistic (Restr. Reg II) Probability (LR stat)

−387.218 : : : :

−373.6387 −367.0153 27.1586 40.4054 Pr > χ2(6)= 0.000 Pr > χ2(7)=0.0000 : 13.2468 : Pr > χ2(1)=0.0003

Note: Asterisks indicate the significance level: *10 per cent, **5 per cent, ***1 per cent. Standard errors are robust to heteroskedasticity and adjusted for 32 clusters in credit buyers.

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quite well, the R2 is 0.22 and the percentage of correct predictions is 71 per cent. The latter measure is calculated at the 50 per cent threshold, which coincides with the average value of the dependent variable.40 In regression II we added our ‘relationship’ variables and we find that the probability of ITT is larger when the credit buyer is also a (large) consultant for the project; the same is true when the consulting process is controlled directly by the project owner. The latter finding confirms the importance of major consultants, whether foreign or Chinese, as only major Chinese consultants are project owners as well. The goodness of fit of our model improves both in terms of R2 (up to 0.26) and in terms of correctly predicted outcomes (up to 71.8 per cent). Compared with other studies, our results confirm the positive effect of size and cost variable; the coefficients, although not completely comparable, are reasonable in magnitude. As for the number of previous projects of the same type, we find that such a variable has a positive, though not significant, coefficient when we control for the year of entry into the pipeline. Our results differ from UNFCCC (2010), which finds instead a negative coefficient on the ‘number’ variable and positive ones on the year dummies. However, our results are not strictly comparable, since we have no crosscountry variability to explore. Finally, we show the importance of considering the relationship between the main participants in channelling foreign technology into the project; the relationship between credit buyers and PDDCs as well as that between project owners and PDDC is particularly important. This finding suggests that the availability of financial resources from the very beginning, secured by large PDDCs, is fundamental in accessing foreign technology. We perform a robustness check to explore further the negative time trend and the Nfrac variable and the differences in our findings compared with the existing literature in the next sub-section.

Robustness Check: the Wind Power Sector Given the relevance of wind power projects in China both in terms of number and in terms of CERs expected to be issued (Figs. 1(a) and 1(b)), and given the strategic role of this sector revealed also by the local technology content requirement imposed by the Chinese government (see above), it is worth considering whether the technology diffusion effect is driven by projects of this type. If so, we expect to find a faster rate of decay of foreign technology transfer as the number of projects in the wind power sector

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increases. In our database we have 391 wind power projects (out of 715), with an average probability of ITT of 0.45, compared with an average probability of 0.57 elsewhere. One way to capture such a differential effect is by making the wind dummy interact with the number of previous projects of the same type variable and see whether it makes a difference. We do so in regression III reported in Table 5. As expected, we find a significant difference in absorption capacity in the wind power sector: the interaction term is negative and highly significant, therefore as the number of projects of this type increases, the need for foreign technology declines. In particular, given the estimated marginal effect, we find that an additional project in the wind power sector improves (reduces) the overall likelihood of ITT if the project is below (above) the 66 per cent threshold of the total number of projects of the same type.41 Since the coefficient on Nfrac by itself is now positive and statistically significant, we might conclude that the same effect does not hold true for other types of projects, in which, controlling for all the relevant characteristics, the adoption of foreign technology tends to increase as the number of projects of the same type increases.42 Overall, we still find a decreasing rate of foreign technology over time, as the ycomm(i) coefficients retain their 250

Number of project

200 150 100 50 0

up to 2006

2007

2008

since 2009

Pipeline entry year Projects in Wind power sector

Projects in other sectors

Average ITT rate (%)

Fig. 5. CDM Projects by Type and Average Technology Transfer Rate in Pipeline Entry Year. Source: Authors’ elaborations on UNEP Risø Centre Database (715 projects).

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negative sign, although their magnitude is now slightly lower. In the case of China, this effect is mainly driven by the increasing number of projects in wind power and a decreasing number of projects elsewhere (Fig. 5). However, even excluding wind power projects from our sample, we are still Table 6.

Percentage of Correctly Classified Outcomes.

Classified + if predicted Pr(D)> = 0.5 True D defined as tt ∼ = 0 Classified

Regression I D

Regression II D

Regression III D

207 110 317

210 106 316

206 110 316

65% 76% 44% 56% 24% 35% 27% 30% 71.0%

66% 77% 44% 56% 23% 34% 27% 29% 71.8%

65% 78% 43% 57% 22% 35% 26% 30% 72.0%

+ − Total Sensitivity Pr(+|D) Specificity Pr(−|∼D) Positive predictive value Pr(D|+) Negative predictive value Pr(∼D|−) False + rate for true ∼D Pr(+|∼D) False − rate for true D Pr(−|D) False + rate for classified + Pr(∼D|+) False − rate for classified − Pr(D|−) Correctly classified

0.8 Nfrac

0.6 PO

0.4 0.2

CB l(projsize) l(invest)

CHI

mPDDC lPDDC

0 –0.2 –0.4 –0.6

Inland Northwest Southwest

Wind*nfrac

ycomm2 ycomm3

ycomm4

–0.8

Fig. 6. Marginal Effects from LPM Estimates (Point Estimate and 5 per cent Confidence Interval). Source: Authors’ elaborations on UNEP Risø Centre Database (715 projects).

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observing a decreasing rate of foreign technology adoption over time in CDM projects in China, indicating that the CDM tool has been increasingly used as a purely financial mechanism, possibly also reflecting the country’s technological progress. All the other explanatory variables retain their previous sign and degree of significance. In terms of goodness of fit, the model performs slightly better, both in terms of pseudo-R2 (now up to 0.27) and in terms of the overall percentage of correctly predicted outcomes (72 per cent). In all the regressions, the model performs better in predicting no technology transfer than it does in predicting a positive transfer (see Table 6). The likelihood-ratio test confirms the joint significance of all slope coefficients in regressions II and III (Fig. 6).

CONCLUDING REMARKS In this chapter, we examine the characteristics of CDM projects in China, looking also at the main players involved, and then testing the determinants of ITT associated with these projects. A key consideration in the case of China is that domestic regulations and policies have had a major impact on the development and characteristics of CDM projects. This influence can be traced back not only to regulations specifically aimed at CDM projects (such as the 51 per cent Chinese ownership requirement discussed above) but also at several measures intended to achieve the planned targets on renewable energy development and energy efficiency improvement. The distinguishing feature of Chinese CDM projects is that the process seems almost completely under the control of domestic entities and policies. Consistent with the above-mentioned government priority areas, CDM projects in China are heavily concentrated on types related to renewable energy and to energy efficiency in industry. Examining 1,355 registered projects, we find that in 34 per cent of the cases foreign technology is adopted and that the likelihood of technology transfer is unevenly distributed across project types. For instance, hydro projects, by far the largest group, implement almost exclusively domestic technology, indicating that the CDM instrument in China has also played an important role as a purely financing mechanism. In wind power, the second-largest type, CDM has been conducive to the local development of wind turbine manufacturing through various channels. It has promoted direct technology transfer via imports and training, and has favoured the setting-up of local production facilities by

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foreign manufacturers. Moreover, it has contributed significantly to renewable energy investment, and thus to the expansion of the local market, which has stimulated the rise of Chinese-owned turbine producers. As to the Chinese industries involved, a small group of emissionintensive sectors plays a major role. The leading Chinese power companies use CDM projects to expand in wind power and other renewable energy sources. The major iron and steel producers as well as cement companies implement projects to improve energy efficiency. Chemical firms undertake large projects to abate industrial gases. Our analysis shows that, in different sectors, a number of leading Chinese companies have been very active as project owners, deploying technologies provided by leading international firms. It is interesting to note that in each type of project we find a number of different technology providers, indicating that Chinese firms can choose at any time between several potential partners. Several countries supply technology to CDM projects in China (mostly the EU, the United States and Japan). Germany has a prominent position in many respects, in terms of the number of projects, the number of firms involved and breadth of technology portfolio. This is presumably linked to Germany’s sustained attempt to take the lead in green technologies.43 When assessing to what extent the technology supply from one country is linked to credit buying from the same country, we found a clear specialisation among EU members between ‘mainly credit buyers’ countries (the United Kingdom and Netherlands) and ‘mainly technology providers’ countries (Germany, Spain and Denmark). Japan, however, has an important position in both roles, and in several projects the same Japanese company acts in this double role. As to individual companies, we examined the main Chinese and foreign PDDCs, and found that Chinese consultants are very active; few of them though have a leading position. Among the largest consultants, three are owned by two major state-owned power producers. In the case of foreign PDDCs, a dominant role is played by three UK carbon trading companies, which are also important credit buyers. Our econometric analysis confirms some of the insights that emerged from the descriptive analysis. We find that the likelihood of having foreign technology providers in Chinese CDM projects increases with the total number of CERs issued by the project (abatement size) and with the cost of the project in terms of dollar per unit of abatement (investment). The probability of having a foreign technology provider is lower when projects are located in the poorest provinces of China, supporting the idea of a lower absorption capacity there. Such a probability is greater when the

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credit buyer is also a consultant for the project; the same is true when the consulting process is controlled directly by the project owner. Large PDDCs tend to encourage the adoption of foreign technology too. Finally, we find a significant difference in the absorption capacity between the wind power sector and other sectors. In the former, as the number of projects of the same type increases, the need for foreign technology declines and domestic suppliers become predominant, while the same effect does not hold true for projects developed in other sectors, such as chemicals or steel. This suggests that the absorption of foreign technology has been stimulated successfully by the Chinese policymakers in strategic sectors with high growth potential, such as wind power, while in other sectors, where the goal is simply to reduce greenhouse gas emissions, it seems more convenient for China to import end-of-pipe technologies from abroad. However, even excluding wind power projects from our sample, we are still observing a decreasing rate of foreign technology adoption over time, indicating that the CDM tool is being increasingly used as a purely financial mechanism, presumably also reflecting China’s technological progress.

NOTES 1. According to the United Nations Framework Convention on Climate Change ‘the purpose of the clean development mechanism is to assist Parties not included in Annex I to the Convention in achieving sustainable development and in contributing to the ultimate objective of the Convention, and to assist Parties included in Annex I in achieving compliance with their quantified emission limitation and reduction commitments under Article 3 of the Kyoto Protocol’. A technical description of the CDM is beyond the scope of this chapter (for more information see United Nations, 1998). 2. At the United Nations Climate Change Conference, held in Durban at the end of 2011, all the signatory countries of the Kyoto Protocol, with the notable exceptions of Canada, Japan and Russia, decided that ‘a second commitment period under the Kyoto Protocol shall begin on 1 January 2013 and end either on 31 December 2017 or 31 December 2020, to be decided by the Ad Hoc Working Group on Further Commitments for Annex I Parties under the Kyoto Protocol at its seventeenth session’. More recently, the importance of keeping the CDM alive was stated by the UNFCCC Executive Secretary Christiana Figueres, who said: ‘Wherever the future climate talks lead, private sector engagement will be essential, and as such so will mechanisms like the CDM’. 3. Dechezlepreˆtre et al. (2009) consider projects up to May 2007, with only 71 projects in China.

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4. The project participants must present a PDD compiled according to the UNFCCC CDM guidelines, that is which describes the proposed project. The PDD enters the CDM pipeline and is made available for public comments, going through a validation process to ensure that the project meets all the requirements. At the end of the validation process, the approved projects are registered by the CDM Executive Board. UNFCCC (2010, p. 14) classifies the projects according to ‘greenhouse gas emission reduction actions, sectors and technologies’ (see also UNEP, 2011). 5. As many players are involved, we focused on the PO (the company undertaking the project, which also owns the carbon credits), the PDD consultant (the firm that prepares the PDD and follows it through its overall development), the CB (the company buying the CERs generated by the project) and the TP (the company providing the technology). 6. It is worth noting that the distinction often made in the CDM literature between technology transfer as knowledge or as equipment is based on shaky information; the PDDs are rarely very accurate or clear on this point (see UNFCCC, 2010). 7. NDRC, MOST (Ministry of Science and Technology) and MFA (Ministry of Foreign Affairs) are co-chairs and vice chair of the National CDM Board. NDRC has also been selected as China’s DNA (Designated National Authority), which has the mandate to give host country approval to CDM projects (Wang & Chen, 2010, p. 1991). 8. These are enterprises with at least 51 per cent of the equity owned by Chinese entities or citizens (see Gemmer & Jiang, 2008, p. 11). 9. China’s grid-connected wind power started to develop in the 1980s. The first onshore wind power farm was constructed in 1988, funded by the Danish government. However, only after the landmark Renewable Energy Law promulgated in 2005 did investment in wind power generation and in the domestic turbine manufacturing industry start to grow dramatically in the country (He & Chen, 2009; Liu & Kokko, 2010; Wang, 2010). Renewable energy remains a top priority area in the 12th Five-Year Plan (2011
2016). 10. Although setting content requirements was a violation of the WTO rules, foreign multinationals did not complain to their home government, as they feared losing access to the booming Chinese wind farm market. Between 2005 and 2010, due to the extremely rapid growth of the Chinese market, the volume of sales of these foreign companies in China increased, even though their market share was shrinking relative to Chinese firms. Only in summer 2009 did officials from the Obama administration begin pressing China to repeal the wind turbine content requirements, and the Chinese government revoked this measure on 25 December 2009 (see New York Times, 2010). 11. The Ministry of Finance issued the ‘Guidelines on Adjusting Import Taxes on High Voltage Wind Turbines and Components’ (Liu & Kokko, 2010). 12. Including hydro power, wind power, biomass energy, landfill gas and solar power. 13. Renewables account for 52 per cent of the projects in Latin America and 42 per cent in Africa. 14. By the end of 2010 hydropower was the second most important form of generation in China, accounting for 22.4 per cent of the total cumulative installed

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capacity (966 GW). The major form of generation, coal-fired plants, accounted for 66.9 per cent and wind for 3.1 per cent (see Jiang et al., 2011). 15. Expected CERs are measured as the amount of CER expected to be issued by the end of first commitment period in 2012. 16. HFC-23 is a by-product of HFC-22 which is used as a refrigerant and as feedstock for the production of polytetrafluoroethylene. 17. In January 2011, the European Commission established that from January 2013 the use of CERs from projects involving the destruction of HFC-23 from HCFC-22 production and N2O from adipic acid production is prohibited in the EU ETS. It has been widely claimed that host countries have expanded HCFC-22 output primarily to profit from CER revenues and that the current incentives for HFC23 destruction undermine attempts under the Montreal Protocol to phase out HCFC-22 production (see European Commission, 2010). 18. Large hydropower projects, nuclear projects and carbon capture and storage projects are not eligible. 19. Foreign companies and major Chinese producers compete instead in the large hydro project segment of the market. Here, too, Chinese competition has become considerably stronger since the beginning of the century. 20. The main players in the power sector emerged in 2002, when the State Power Corporation was broken up to form five power generation companies and two grid companies (Musu, 2011, p. 161). 21. For instance, certain conditions were imposed on both grid companies and power generators. Grid companies were initially obliged to purchase all the electricity generated by wind projects, while after the 2009 amendments to the Renewable Energy Law a renewable power quota was introduced. Power generation companies are obliged to ensure that by 2020 at least 5 per cent of their total energy output will be accounted for by wind power (Liu & Kokko, 2010). 22. Sinovel acquired production licences from Fuhrla¨nder of Germany; Dogfang and Xinjiang Golwind acquired production licences from REpower of Germany (He & Chen, 2009). As a consequence, the share of foreign companies in newly installed wind power capacity in China decreased from 75 per cent in 2004 to 13 per cent in 2009 (Junfeng, Pengfei, & Hu, 2010). 23. In 1996 the Conch group was awarded a grant from the Japanese public agency NEDO (New Energy and Industrial Technology Development Organization) to deploy the Japanese cement waste heat recovery system in a demonstration project. In 2006 Conch implemented the same Kawasaki technology through its first CDM project. (See, for instance, the PDD for CDM project 3613). Subsequently a 50
50 joint venture, Anhui Conch Kawasaki Engineering, was formed. 24. With these projects, for instance, the coke dry quenching (CDQ) system, developed to recover waste heat during the quenching process, was transferred to China. 25. These companies are: Tianji Group (number 1), and Sichuan Golden Elephant Chemical Company (number 3), Shandong Huayang Dier Chemical Co. (number 9), Shijiazhuang Jinshi Chemical Fertilizer Co. (number 14) (see Research and Markets, 2010). 26. Generally, foreign and domestic technology providers are explicitly named; however, in a number of cases only the country of origin is known. On a few other

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occasions, however, even though technology transfer from abroad is claimed no further information is provided. 27. Porter (1991), challenging conventional wisdom, maintained that ‘Strict environmental regulations do not inevitably hinder competitive advantage against foreign rivals; indeed they often enhance it’. More stringent measures may stimulate innovation and upgrading, encouraging companies to re-engineer their technology, with the result being less pollution, lower costs or better quality. This idea, known as the ‘Porter hypothesis’, contradicts the so-called ‘pollution haven hypothesis’ which predicts that more restrictive environmental policies will have negative repercussions on the competitiveness of local producers. 28. We want to capture cases such as CDM project 2135 in which the German power company RWE is credit buyer and the German Nordex (wind turbine manufacturer) is the technology provider. Similarly in the CDM projects 238 and 1090 the Spanish ENDESA (power company) is the credit buyer and the Spanish Gamesa Eolica (turbine manufacturer) the technology provider. 29. In the primary market the project developer and the CER buyer agree on a price for the expected credits which depends on the characteristics of the project and its risks. In the secondary market, however, only credits already issued are traded, as are those with a guarantee of delivery from the seller (Green, 2008). 30. Regarding the increasing involvement of power companies with carbon trading, see Kolk and Mulder (2011). 31. The distribution does not substantially change when considering the 364 projects with ITT. 32. For a detailed description of the different stages, see Wang (2010) and Gemmer and Jiang (2008). 33. There are only two exceptions, in which Easy Carbon acts jointly with another consultant. 34. Doranova et al. (2010) analyses the pattern of technology sourcing in a sample of 460 CDM projects registered during the first two years after the Kyoto Protocol enforcement. They estimate the preference for local or combined (local and foreign) technology source over foreign technology alone, using a multinomial logit model. They consider, as key independent variables, the number of scientific publications in carbon-friendly technologies (CFT), the number of patents in CFT, the export volume of CFT and the share of renewable energy in total power generation. They also control for usual project-specific variables, such as size, subsidiary, number of similar projects and country-specific variables, such as trade, population, GDP per capita. They find that a better knowledge base is positively associated with a preference for local technologies. 35. Estimations on probit and logit models deliver the same results, available from the authors upon request. 36. The validation stage starts with a 30-day public comment period (see UNEP, 2008). 37. The knowledge of the regulatory framework for CDM approval is particularly important in the case of China, where country-specific ‘measures’ have been issued. 38. Of course, this result may also have different interpretations, such as the existence of an environmental Kuznets curve within China, by which in the richest

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provinces producers are keen to use cleaner technologies in response to higher environmental standards. Under the assumption that foreign technology is more advanced and environmentally friendly, the Kuznets curve hypothesis would induce a higher propensity to adopt foreign technology in the richest provinces. 39. Projects posted before 2007 are taken as the control group. Year thresholds are set so that each sub-period contains a similar number of projects. 40. Running the regressions, all the observations belonging to sectors with a rate of ITT equal to 0 or 1 are automatically deleted. Hence, we are left with 646 observations (out of 715), with an average rate of ITT equal to 0.49. dy 41. dWind = 0:316 − 0:478 × Nfrac > 0 if Nfrac < 0:66. 42. We confirmed this finding by interacting each type dummy with the Nfrac variable; we find that in all other typologies of CDM the effect is either always positive or non-significant. Results are available from the authors upon request. 43. In July 2011 the Chinese premier Wen Jiabao said green technologies made Germany ‘a very important strategic partner’ (see Financial Times, 2011).

ACKNOWLEDGEMENT We are grateful to the attendees of the International ICCG Workshop on ‘Foreign Direct Investment and Climate Change’ in Venice, of the 23rd CEA (UK) conference in London, of the 19th EAERE conference in Prague, and of the 38th EIBA conference in Brighton for their helpful comments and discussion. Usual disclaimers apply. The views expressed in this chapter are our own and do not necessarily reflect those of the Bank of Italy.

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APPENDIX Table A.1.

Variable Description.

ITT = 1 if there is at least one foreign technology supplier in the project; 0 otherwise log(Projectsize) = log(KtCO2e) log(Investment) = log(US$/tCO2e) Inland = 1 if the project is located in Anhui; Henan; Hubei; Hunan; Jiangxi; Shanxi. 0 otherwise. Northwest = 1 if the project is located in Gansu; Inner Mongolia; Ningxia; Quinghai; Shaanxi; Tibet; Xinjiang. 0 otherwise Southwest = 1 if the project is located in Guangxi; Guizhou; Sichuan; Yunnan. 0 otherwise. Nfrac = number of previous projects of the same type/total number of project in same type class ycomm2 = 1 if project entered the pipeline in 2007; 0 otherwise ycomm3 = 1 if project entered the pipeline in 2008; 0 otherwise ycomm4 = 1 if project entered the pipeline from 2009 onwards; 0 otherwise CB = 1 if at least one credit buyer among PDDCs; 0 otherwise CB × Large = 1 if at least one credit buyer among PDDCs and PDDC = lPDDC; 0 otherwise PO = 1 if PO among PDDCs; 0 otherwise CHI = 1 if there at least one Chinese PDDC in the project (excluding POs); 0 otherwise mPDDC = 1 if PDDC shows up in at least 10 projects and up to 47 (excluding CB); 0 otherwise lPDDC = 1 if PDDC shows up in at least 48 projects (excluding CB); 0 otherwise Wind = 1 if CDM is developed within the wind sector; 0 otherwise Wind × Nfrac = Nfrac if Wind = 1; 0 otherwise Source: Based on inspection of relevant documentation available at http://cdm.unfccc.int/ Projects/projsearch.html and UNEP Risø Centre database (715 projects).

CHAPTER 16 THE RISE OF ENTERPRISE REGIONALISATION IN ASEAN$ Hafiz Mirza and Kee Hwee Wee ABSTRACT Purpose This chapter analyses the how, who, where and why of rapid rise in intra-regional investment by companies from ASEAN since 2009. Methodology/approach The chapter analyses the push and pull factors of intra-regional investment in ASEAN, the resulting patterns of foreign direct investment (FDI) and the accompanying rise of strong regional players. Findings The region’s FDI landscape is changing in terms of investment sources, players, FDI trends and dynamics of the region. This trend is strongly affected by stepped up efforts by ASEAN governments to encourage their national companies to invest in the region and the influence of the ASEAN Economic Community. Implications Regional integration and emerging business opportunities are providing an impetus not seen before in driving intra-regional $

This article is partly based on elements of the ASEAN Investment Report 2012, written by the authors, which was published by the ASEAN Secretariat in Jakarta, Indonesia in 2013.

International Business and Sustainable Development Progress in International Business Research, Volume 8, 391 423 Copyright r 2014 by Emerald Group Publishing Limited All rights of reproduction in any form reserved ISSN: 1745-8862/doi:10.1108/S1745-8862(2013)0000008021

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investment. As more ASEAN companies position and prepare for AEC 2015, this intra-regional investment wave is likely to gather force. Originality/value The chapter lists the regional and global ‘footprint’ of the top 50 largest ASEAN companies by revenues. The thus identified companies include companies operating in oil and gas, mining, agri-business, telecommunications, food and beverages, manufacturing, banking, power generation, infrastructure, real estate and healthcare services Keywords: ASEAN; regionalisation; FDI trends; national FDI policies; regional players; intra-ASEAN investment; enterprise internationalisation; AEC; outward FDI

INTRODUCTION A key feature of the changing foreign direct investment (FDI) landscape in ASEAN is the recent rapid growth in enterprise regionalisation, often but not always associated with wider internationalisation. ASEAN companies are today investing in South East Asia to a greater degree than in the past. This wave of regional expansion is expected to continue, driven by regional integration, corporate strategies and increasing policy support from national governments. Enterprise regionalisation springs from increasing maturity of ASEAN companies, which aspire and are able to expand beyond their national borders. The list of ASEAN companies or ASEAN TNCs going abroad is expanding and many more are giving greater attention to emerging opportunities in the region. These companies are investing or taking steps to strengthen their regional presence, in order to benefit from stronger regional integration when the ASEAN Economic Community (AEC) is fully realised in a few years. Regionalisation by companies from ASEAN involves a wide range of firms in terms of size, type, industry and motives. They include large public listed companies, State-owned enterprises (SOEs) and Government linked companies (GLCs) and SMEs. Some enterprises already have the capacity and capabilities to venture abroad, but others have little choice because of factors such as a small home market, or limited amounts of land and labour that ‘push’ them to go beyond national borders. Some of these companies have started from humble beginnings, as contract manufacturers or

The Rise of Enterprise Regionalisation in ASEAN

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SMEs, and grew to become sizeable, formidable enterprises at home with capabilities that subsequently lead them to internationalise. Some evolved from national champions or leading public listed corporations that have significant investments in the region and aspire to establish a greater global footprint. Increasing costs at home has also pushed many companies to venture abroad, and geo-cultural proximity and affinity play an influencing role in location choice. Regional integration and the corresponding increase in business and investment opportunities in ASEAN have encouraged and inspired many to be regional players or increase their presence across the region. Some, who already have significant investments in the region, are making their presence more visible with further expansion across ASEAN. The growing number and size of cross-border M&A purchases made by ASEAN firms in recent years suggests their growing financial prowess and capacity to regionalise or internationalise. Member countries have also been actively encouraging their national companies to go regional in order to take advantage of the benefits of the forthcoming AEC. Whatever their reasons or backgrounds, these ASEAN companies, by investing in the region, play an important role in strengthening regional integration through their presence in other ASEAN countries, which helps to bolster trade, investment and production ties. When these companies internationalise beyond ASEAN, they also help the region better integrate into the global economy through participation in global value or supply chains. The rapid rise in intra-regional investment by companies from ASEAN is also changing the region’s FDI landscape in terms of investment sources, players, FDI trends and dynamics of the region (UNCTAD, 2012).

TRENDS AND CHARACTERISTICS OF ENTERPRISE REGIONALISATION IN ASEAN ASEAN intra-regional investment has been increasing steadily for many years, with a brief dip in 2009 because of the recent global economic crisis. Annual average intra-regional FDI between 1995 and 1997 (pre-Asian financial crisis period) was only $4.7 billion and $2.4 billion between 1998 and 2002 (financial crisis period), compared with $6.3 billion in 2003 2008 (recovery and growth period) and $20.3 billion in 2010 2011 (latest years) (Fig. 1). The latest wave has been encouraged by a stronger level of regional integration than was the case in the 1990s and 2000s.

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30000 New wave period

25000 20000 15000 10000

Asian financial crisis

Lingering impact of the 1997-1998 financial crisis

Recovery and growth period

5000 0

Impact of global economic uncertainties

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

Fig. 1. Rapid Growth in Intra-ASEAN Investment Flows, 1995 2011 (Millions of Dollars). Sources: ASEAN Secretariat, ASEAN FDI database and UNCTAD, FDI database.

Intra-regional investment was dramatically affected by the 1997 1998 Asian financial crisis, which saw annual intra-ASEAN FDI plummeting to as low as $853 million in 2000 (Table 1). Economic and business uncertainties, exposure to significant currency risks including a considerably reduced balance sheet and financial position of companies in ASEAN were the key reasons for the downturn. Companies in the region continued to feel the impact of the crisis throughout the early part of the 2000s. Intra-regional FDI only started to recover after 2006 (i.e. levels exceeded the earlier peak of $5.2 billion in 1997). In 2012, companies in ASEAN expressed a stronger interest in expanding or investing in the region because of increasing investment opportunities and promising regional prospects and benefits associated with the AEC, including the perceived benefits of FTAs with major partner countries such as China, India, Republic of Korea, Japan, Australia and New Zealand (AIR, 2012).1

Structure of Intra-Regional Investments A few countries dominate as host locations to intra-regional investment. Singapore and Indonesia were the two largest recipients between 1995 and 2011. They together accounted for about 52% of total intra-regional investment flows. Thailand and Malaysia respectively ranked third and fourth major recipients of intra-regional investment, followed by Vietnam. These

Table 1. Intra-ASEAN investment Brunei Darussalam Cambodia Indonesia Lao PDR Malaysia Myanmara Philippines Singaporeb Thailand Vietnam a

Intra-ASEAN Investment Flows, by Host Country, 1995 2011 (Millions of Dollars).

1995

1996

1997

1998

1999

4654.4

4271.8

5235.7

2730.8

1784.2

311.3

353.1

384.9

247.2

0.0 608.9 6.5 1676.5 96.7 241.6 1165.1 160.6 387.3

0.0 193.3 102.6 1475.8 228.6 74.9 1206.7 308.1 328.7

0.0 272.5 64.4 2261.5 323.3 142.9 941.6 297.5 547.2

0.0 −38.4 28.3 469.9 153.9 106.9 794.6 569.6 398.7

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

1995 2011

853.0

2541.4

4084.9

2831.1

3516.6

4210.6

8641.9

9113.0

9728.9

6300.2

14322.7

26270.7

111091.8

4.3

10.6

10.6

21.2

36.0

19.1

19.6

9.8

62.1

0.9

3.1

89.5

67.5

1650.7

0.0 −427.8 31.4 536.0 41.2 105.8 632.1 572.0 289.3

0.0 −232.6 13.7 258.1 74.0 125.4 12.3 389.0 202.4

37.2 −221.3 3.1 80.0 67.4 199.0 413.3 1710.7 241.5

8.5 1296.6 2.9 0.0 25.1 87.4 1034.3 1408.3 200.4

19.9 383.5 3.0 251.1 24.3 175.4 777.2 1060.4 100.4

31.9 204.2 7.8 980.2 9.3 71.1 1261.5 688.7 242.9

129.2 883.3 6.7 720.9 38.4 3.4 1143.1 1101.3 164.7

155.5 1353.9 10.6 461.6 71.0 705.4 1065.6 4626.5 182.0

271.2 1108.2 100.4 3780.1 93.5 −705.1 1366.8 2489.4 546.3

240.9 3398.0 47.7 1645.5 103.5 307.8 771.2 508.4 2705.0

174.0 1380.1 57.3 −60.2 67.8 −4.9 2791.1 1463.2 428.7

349.0 5904.4 135.4 525.6 171.7 40.2 4569.0 1236.9 1300.9

223.8 8338.2 54.0 2664.3 0.0 −107.0 13213.4 317.1 1499.4

1641.2 24405.0 675.6 17727.0 1589.6 1570.2 33158.8 18907.8 9765.7

Myanmar’s fiscal year starts on 1 April and ends on 31 March of the following calendar year. Data for 2011 is not available. Singapore’s data for 2011 excludes inter-company loans as geographical and industry breakdown are presently not available. Inter-company loans with intra-/extra-ASEAN breakdown for 2011 shown are estimated by the ASEAN Secretariat. Source: ASEAN Secretariat, ASEAN FDI database (extracted on 30 September 2012). b

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five ASEAN countries accounted for some 93% of intra-regional investment flows in the same period. A significant percentage of outward foreign direct investment (OFDI) from ASEAN countries is within ASEAN. More than 35% of Thai OFDI flows between 2006 and 2011 and about 40% of Malaysian OFDI flows in 2008 2011 are intra-regional. Nearly one quarter of Singapore OFDI stocks in 2010 are in ASEAN. A significant proportion of OFDI from Vietnam is in Cambodia and Lao PDR. About 33% of FDI flows into Cambodia and 25% in Lao PDR between 2008 and 2011 are from ASEAN. Intra-regional investment is concentrated in three key sectors manufacturing, real estate and finance which together accounted for at least 65% of total intra-ASEAN investment in the period 2002 2011 (Table 2). Singaporean and Malaysian companies dominated in intra-regional investments, in particular in finance and real estate. Among the top 10 ASEAN banks, all of them have a presence or are planning to strengthen their presence across the region (Table 3). Banking groups such as CIMB, Maybank from Malaysia and DBS, UOB and OCBC from Singapore have been actively investing and expanding across ASEAN. Among the top Thai banks, only Bangkok Bank has an extensive regional reach. However, many Thai banks are expanding or planning to expand their operations in ASEAN in anticipation of a surge in Thai OFDI in the region because of AEC.2 Krungthai Bank and Kasikorn Bank have each established an operation in Myanmar recently. Malaysian Hong Leong Bank has also done the same. Other ASEAN banks that are not in the top 10 list also have operations in other ASEAN countries such as Bank Central Asia (Indonesia). Some other banks such as Public Bank (Malaysia) and Siam Commercial Bank (Thailand) have also recently expressed interest in strengthening their foothold regionally because of market potential and economic integration. When banks from ASEAN countries expand regionally, they encourage their service providers to do so too. For instance, SMEs such as GHL (Malaysia) ventured into Philippines, Singapore and Thailand (and is planning to enter Indonesia and Vietnam) to follow bank customers that have done so. GHL provides solution to banks in hardware and software support in electronic payment system.3 Many major ASEAN companies operating in extractive industry have invested heavily in the region, as well as in other resource rich countries and regions as far afield as Africa, Canada and Australia. The need to secure natural resources does not limit their geographical reach. These companies include Petronas (Malaysia), Lion Group (Malaysia), PTT (Thailand), Banpu (Thailand), Lanna Resources (Thailand), Bumi

Intra-ASEAN Investment Flows, by Industry, 2002 2011 (Millions of Dollars).

Agriculture, fishery and forestry Mining and quarrying Manufacturing Construction Trade/commerce Finance Real estates Other services Others (not elsewhere classified) Unspecified Total

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2002 2011

175.1 145.0 3714.2 −22.0 870.6 1189.6 847.9 263.7 −3926.1

78.9 191.4 −33.1 119.9 812.5 377.7 788.6 160.7 37.7

105.1 44.0 558.7 8.5 449.4 −146.5 1398.2 198.9 238.5

29.6 37.5 1546.5 50.8 72.7 654.6 627.4 1075.2 −53.8 158.3

63.3 −70.1 1562.5 186.1 176.1 2826.6 958.5 491.7 1543.7 903.8

2103.3 718.3 2242.4 444.0 −232.6 2426.7 816.8 866.2 176.4 −448.6

297.3 768.2 3292.8 828.9 939.2 2348.2 1511.6 −630.8 205.9 167.5

101.3 304.5 871.9 136.1 −204.0 1546.2 3085.8 294.8 193.3 −29.6

373.6 608.4 2801.5 56.6 1637.2 2889.1 3750.1 2202.2 20.0 −16.0

443.8 772.1 5926.2 332.7 2488.3 2709.6 3937.0 302.0 99.9 9259.1

3771.3 3519.2 22483.6 2141.4 7009.4 16821.8 17721.9 5224.7 −1464.6 9994.5

3257.9

2534.2

2854.8

4198.8

8642.1

9113.0

9728.9

6300.2

14322.7

26270.7

87223.2

The Rise of Enterprise Regionalisation in ASEAN

Table 2.

Note: Unspecified refers to data where details breakdown by industry are not available. Sources: ASEAN Secretariat, ASEAN FDI database and UNCTAD, FDI database.

397

398

Table 3.

HAFIZ MIRZA AND KEE HWEE WEE

Top 10 ASEAN Banks with Significant Regional Presence, by Assets, 2012 (Billions of Dollars).

Bank

Total Assetsa

Market Capa

Home Country

DBS Group

294.2

29.5

Singapore

OCBC

235.2

27.0

Singapore

United Overseas Bank

198.6

24.9

Singapore

Malayan Banking

155.7

25.0

Malaysia

CIMB Group

105.0

18.5

Malaysia

Public Bank Bangkok Bank

88.2 76.6

18.3 11.9

Malaysia Thailand

Siam Commercial Krung Thai Bank Kasikorn Bank

70.5 67.9 65.1

19.5 8.5 15.4

Thailand Thailand Thailand

Operations in Selected ASEAN Countriesb Indonesia, Malaysia, Thailand, Philippines, Vietnam Brunei Darussalam, Indonesia, Malaysia, Thailand, Vietnam Brunei Darussalam, Indonesia, Malaysia, Myanmar, Philippines, Thailand, Vietnam Brunei Darussalam, Cambodia, Indonesia, Myanmar, Philippines, Singapore, Thailand, Vietnam Brunei Darussalam, Cambodia, Indonesia, Philippines, Singapore, Thailand, Vietnam Cambodia, Lao PDR, Vietnam Indonesia, Lao PDR, Malaysia, Myanmar, Philippines, Singapore, Vietnam Cambodia, Lao PDR Cambodia, Lao PDR, Singapore None, but plans to enter Cambodia, Lao PDR and Myanmar soon.

a

Data relates to 2011. Includes branches. Sources: UNCTAD, FDI database; Bloomberg and companies’ websites. b

Resources (Indonesia), Petron Corporation (Philippines) and Medco Energi (Indonesia). Faced with increasing cost pressures at home, many manufacturing companies in Malaysia, Singapore and Thailand have established production facilities in lower cost neighbouring countries. These companies operate not only in labour-intensive industries such as garments, but also in capital intensive ones such as semi-conductors. In services such as real estate, property developers from various ASEAN countries contributed to the steady growth in intra-regional real estate investment and development. They include, Malaysia: IOI, SP Setia, Glomac, UEM Group, Sime Darby, IJM Group, IGB Group, Lion Group; Singapore: City Development, CapitaLand, Keppel, United Overseas Land, GuocoLand Limited,4 Hotel

The Rise of Enterprise Regionalisation in ASEAN

399

Properties Limited and Far East Organisation Group; Indonesia: Lippo Group and Ciputra; Thailand: Preuksa Real Estate and Sansiri; and Philippines: Ayala Group. The top 10 Singapore corporations have a strong presence in ASEAN (Table 4), as is the case with the top 20 Malaysian companies (Table 5).

Regional Players Regional players in ASEAN vary in size, financial capacities and other capabilities, which determine their extent of internationalisation/regionalisation. They can be found in a wide range of industries, from agribusiness, healthcare, food and beverages, mining to construction and property development (Table 6). Both large companies and SMEs in ASEAN are investing across the region. The former are generally more internationalised and have a wider regional footprint, spanning many ASEAN countries. The latter tend to concentrate in fewer ASEAN countries and are more narrowly focused. Their lack of financial resources, and to an extent internationalisation experience or brand reputation, limits SMEs capacity to spread extensively across the region. Nevertheless they are driven by issues such as a necessity to expand their revenue and market base, as well as gaining access to resources in host countries (e.g. low cost labour and production inputs). Many ASEAN companies with revenues below $1 billion, as listed in Forbes Asia 200 in 2012, have operations in other ASEAN countries (Table 7). These companies are headquartered in Indonesia, Malaysia, Philippines, Singapore, Thailand and Vietnam; and some of them are subsidiaries of a parent company headquartered in another ASEAN country. A survey of some 1507 Singapore-based companies (mostly SMEs) that have overseas operations, or intend to venture overseas, indicated that 75% of them5 already have a presence in other parts of ASEAN; and the outlook for their further regionalisation is strong (IE, 2012). A recent UOB study on Malaysian SMEs concluded that these companies have resources favouring regional expansion.6

Regional factors driving intra-ASEAN investment Apart from corporate-specific and ‘push’ factors driving ASEAN companies to invest in the region, regional ‘pull factors are also contributing to

Rank

400

Table 4.

Singapore: Top 10 Corporate Brands with Operations in ASEAN, 2012 (Billions of Dollars). Companya

1 2

Singapore Airlines Wilmar International

3

DBS Group

4

Industry/Business Air transport Agribusiness, oil palm value chain Banking, finance

Brand Value Total Assets Operations in Selected ASEAN Countries 17.5 39.6

2.3

294.2

Singapore Telecommunications Telecommunication

1.7

32.2

5

United Overseas Bank

Banking, finance

1.6

198.6

6 7

Keppel Corporation OCBC

Conglomerates Banking, finance

1.4 1.3

24.5 235.2

8

Fraser and Neave

1.1

11.9

9

Sembcorp Industries

0.9

9.0

10

Olam International

Drinks, property, printing and publishing Energy, water and marine Agriculture products and food ingredients

0.6

10.9

Nearly all ASEAN countries. Indonesia, Malaysia, Philippines, Thailand, Vietnam. Indonesia, Malaysia, Philippines, Thailand, Vietnam.b Indonesia, Malaysia, Philippines, Thailand, Vietnam. Brunei Darussalam, Indonesia, Malaysia, Myanmar, Philippines, Thailand, Vietnam.b Indonesia, Malaysia, Thailand, Vietnam. Brunei Darussalam, Indonesia, Malaysia, Thailand, Vietnam.b Cambodia, Indonesia, Lao PDR, Malaysia, Myanmar, Philippines, Thailand, Vietnam. Indonesia, Philippines, Vietnam. Cambodia, Indonesia, Lao PDR, Philippines, Thailand, Vietnam (Plan to invest in Myanmar soon).

a The following corporate brand names were excluded because they were either a subsidiary of another company or that they are not indigenously Singapore company or the nature of their operations are almost entirely domestic. These corporate brand names include Genting Singapore, which was ranked 4: Great Eastern ranked 9; Asia Pacific Breweries ranked 10 in the Brand Finance 2012 ranking. b 2011 figures. Sources: UNCTAD, FDI database; Bloomberg and Brand Finance.

HAFIZ MIRZA AND KEE HWEE WEE

3.2 3.2

The Rise of Enterprise Regionalisation in ASEAN

401

Table 5. Malaysia: Top 20 Corporate Brand Names with Operations in ASEAN, 2012. (Billions of Dollars). Rank in Brand Values 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20

Company

Petronas Genting CIMB YTL Corporation Malayan Banking Sime Darby Public Bank Tenaga Nasional Malaysian Airline System Digi.Com Telekom Malaysia IOI Corporation Axiata Corporation RHB Capital AMMB Holdings Maxis Berjaya Corporation AirAsia Parkson Holdings** Plus Expressways***

Industry/Business

Total Assets

Oil and gas Conglomerate, leisure Banking Power, utilities Banking Conglomerate Banking Power, utilities Air transportation Telecommunication Telecommunication Conglomerate Telecommunication Banking, finance Banking, finance Telecommunication Conglomerate Air transportation Retail, supermarket Expressway operation services including design, construction, management, financing, operation, maintenance, and toll collection of expressways and highways.

145.5 20.5 105.0* 16.4 155.7* 15.3 88.2* 28.4 3.9 1.5 6.7 7.3 12.8 48.1 36.5 5.9 3.4 1.2 2.5 5.8

Notes: *2011 figures. **Parkson Holdings is a member of the Lion Group, which has operations in a wide range of industries. ***Plus Expressways is a member of the UEM Group. Ranking of brand names based on brand values. Sources: UNCTAD, FDI database; Bloomberg and Brand Finance.

the rise in intra-regional investment (Table 8). The former includes proprietary advantages and assets, home country economic policies supporting outward FDI or for national firms to go regional. The latter covers host country policies encouraging investment from other ASEAN countries, as well as broader regional integration policies. ASEAN’s regional integration presents companies with opportunities for an ultimate single market and production base. These regional policies

Table 6. Industry Agriculture & agri business

Food and beverages

Selected Non-Bank Regional Players in ASEAN in Selected Industry, 2012.

Companies Wilmar International Olam International

Home Country Singapore Singapore

Industry Healthcare and hospitals

Companies Bumrungrad Bangkok Hospital

Home Country Thailand Thailand

Vietnam Rubber Company

Vietnam

IHH

Malaysia

Sime Darby

Malaysia

KPJ Healthcare

Malaysia

IJM

Malaysia

BP Healthcare Group

Malaysia

IOI Corporation

Malaysia

Thomson Medicalb

Singapore

Felda

Malaysia

Singapore Medical Groupc

Singapore

Lion Group

Malaysia

YTL Mudajaya Group

Malaysia Malaysia Malaysia

PBB Group

Malaysia

CP

Thailand

S&P Thai Beverage

Thailand Thailand

Thai Union

Thailand

IJM

Thai President Foods

Thailand

Genting

Malaysia

Jollibee

Philippines

Thailand

San Miguel

Philippines

Electricity Generating Company Saha Union

Indomie Sukses

Indonesia

Hyflux

Singapore

Petrovietnam PTT

Vietnam Thailand

Lanna Resources

Thailand

Mayora Group

Indonesia

F&N Yeo Yiap Seng

Singapore Singapore

BreadTalk

Singapore

Power, electricity, utilities

Extractive

Thailand

Telecommunication

Manufacturing

Bee Cheng Hiang

Singapore

Banpu

RotiBoy

Malaysia

Petron Corporation

Philippines

Munchy Food

Malaysia

Pertamina

Indonesia

Old Town White Coffee

Malaysia

Viettel

Vietnam

Construction, property development and infrastructure

Thailand

Vietmindo Energitama

Indonesia

Petronas

Malaysia

Lion Group

Malaysia

Song Da

Vietnam

Axiata

Malaysia

Far East Organisation

Singapore

Singapore Telecommunication Telekomunikasi Indonesia

Singapore

Keppel Constructiond

Singapore

Indonesia

CDL

Singapore

Alita Group

Indonesia

Singapore Singapore Malaysia Malaysia

Siam Cement

Thailand

United Overseas Land GuocoLand Limitede SP Setia Parkson Holdingsf

Banpu

Thailand

IOI Group

Malaysia

Indorama Venture

Thailand

IJM Group

Malaysia

VC Fabric

Thailand

Sime Darby

Malaysia

Saha Union

Thailand

IGB

Malaysia

Micro Electronicsa

Philippines

Amata

Thailand

Flextronics

Singapore

Preuksa Real Estate

Thailand

Armstrong Industrial

Singapore

Sansiri

Thailand

Creative Technology

Singapore

Ayala

Philippines

Chartered Semiconductor

Singapore

Ciputra Group

Indonesia

Venture Corporation

Singapore

Lippo Group

Indonesia

Table 6. (Continued ) Industry

Companies Ingress

a

Home Country

Companies

Home Country

Semen Gresik

Indonesia

Hong Leong Group

Malaysia

Sinarmas

Indonesia

Top Glove

Malaysia

Engtek

Malaysia

YCL International

Malaysia

Globetronics

Malaysia

A subsidiary of the Ayala Group. A company of the Sasteria Group. c Through strategic partners, has presence in a number of ASEAN countries. d A subsidiary of the Keppel Group. e A member of the Hong Leong Group. f A subsidiary of the Lion Group. Source: UNCTAD. b

Industry

Malaysia

405

The Rise of Enterprise Regionalisation in ASEAN

Table 7.

ASEAN SMEsa Listed in Forbes Asia, 2012. (Millions of Dollars). Country

Sales

Net Income

Market Valuesb

Harum Energy MSM Malaysia Holdings UEM Land Holdings London Sumatra Indonesia Mudajaya Group Lanna Resources Lian Beng Group SM Development Philex Mining Hartalega Holdings Resource Alam Indonesia

Indonesia Malaysia Malaysia Indonesia Malaysia Thailand Singapore Philippines Philippines Malaysia Indonesia

805 725 537 517 425 412 411 369 349 304 235

161 83 95 188 73 33 39 95 132 66 50

1603 1,148 2,802 2,112 468 279 165 1,353 2,719 1,016 453

Xingquan International Sports Holdings UOA Development Miclyn Express Offshore Sino Grandness Food Industry Group Kreuz Holdings SKP Resources DHG Pharmaceutical Societe De Bourbon Tay Ninh Lam Son Sugar Consciencefood Holding Jaya Agra Wattie Benalec Holdings Tecnic Group Metropolitan Land Workpoint Entertainment Jasuindo Tiga Perkasa Tan Binh Import-Export Boilermech Holdings United Palm Oil Industry Digistar Vietnam Container Shipping Mekong Fisheries Philweb M-Mode Master Ad

Malaysia Malaysia Singapore Singapore Singapore Malaysia Vietnam Vietnam Vietnam Indonesia Indonesia Malaysia Malaysia Indonesia Thailand Indonesia Vietnam Malaysia Thailand Malaysia Vietnam Vietnam Philippines Malaysia Thailand

231 194 175 153 149 137 118 97 96 82 71 70 66 60 58 56 50 49 47 31 31 30 27 24 20

39 121 57 23 26 12 20 26 20 14 20 32 6 17 10 9 5 6 12 6 9 3 21 4 3

85 548 529 93 120 99 187 107 58 54 150 293 52 345 218 74 23 63 107 30 39 12 505 20 27

Thanh Nam Construction & Investment CBSA Binh Dinh Minerals Sub Sri Thai EA Holdings Qualitech

Vietnam Malaysia Vietnam Thailand Malaysia Thailand

19 17 15 13 12 11

2 4 4 13 3 3

3 27 28 104 15 23

Name

a Companies with less than a $ billion revenue. Some of these SMEs are subsidiaries of large companies such as MSM Malaysia Holdings and United Palm Oil Industry (Thailand). Some of these SMEs have parent companies headquartered in another ASEAN countries. b Values calculated July 2012. Source: Forbes Asia, “Asia’s 200: Best under a billion.”

Table 8.

Intra-Regional Investment in ASEAN: Drivers and Motivations; ‘Push’ and ‘Pull’ Factors.

Drivers (‘Push’ factors)

Motives

Motivations (‘Pull’ factors)

↓ Proprietary Advantages & Assets (Factors of the Firm) Financial prowess & strong balance sheet

↓ Environment Setting at Home

Increasing cost

Regional Development & Integration

Host Country Specific Factors

Need to diversify revenue and market growth

Regional market size, growth potential & AEC factors

Availability of competitive resources (land, labour, oil & gas, coal etc)

Inducive opportunities

Economic and locational complementation

Opportunities for investment

Liberalisation & integration single market & production base environment.

Availability of strategic local partners

Limited labour force Brand names, business reputation & recognition

Limted land

Market saturation Rapid growth and success at home

Slow economic growth

Strategic alliances & networks benefits

Slow growth & competition at home Aspiration to be regional players or internationalise Maturity and readiness to internationalise or regionalise Networks and personal connection, alliances

Increasing competition

Need to survive & increase competitiveness

Increasing cost

Availability of strategic assets (e.g. established distribution networks, hospital chains) Secure production inputs & natural resources

Integrated regional production networks opportunities

Home country measures, support & encouragement

Opportunities to develop and tap into regional value chains, and linking to China, India & globally

Availability of strategic assets for M&As, which brings synergy

Member of a large corporate group

Success of others Follow customers & operate close to them

Gateway to other larger markets and resources (e.g. China & India) through FTAs

Language skills & work cultures Talent pools & skilled labour

Environment suitable to transfer or replicate success at home in host country To gain contracts in host market Geo-cultural proximity and affinity Easier to build brand names in less developed member countries.

To move up or downstream to be an integrated business group

Economic and political stability Offers low internationalisation risks Overall conducive investment environment Increasing affluent consumer base Rapid economic growth

Source: UNCTAD.

408

HAFIZ MIRZA AND KEE HWEE WEE

are also seen by TNCs as contributing to lowering the cost of doing business and operation in the region especially by lower tariffs/non-tariff barriers, and providing an environment that facilitates more efficient regional operations and value chains. A number of specific economic agreements of ASEAN have contributed to an improved regional investment environment over the years (Box 1). The AEC 2015 in particular is a ‘powerful regional pull’ factor that is increasingly influencing more ASEAN companies to invest in the region and to think regionally (Box 2) (UOB, 2012; Wong & Wirjo, 2012). Some specific regional factors encouraging intra-regional investment include internal tariff rates not exceeding 5%; indeed a majority of tariff lines in the region already have a 0% rate for goods traded under ASEAN Free Trade Area (AFTA), which has recently been replaced by ATIGA. In 2012, some 99% of tariff lines under the ATIGA schedule had tariff rates between 0 5% for intra-ASEAN trade (Table 9).7 Apart from tariff liberalisation, the region has been implementing trade and investment facilitation measures, which include the harmonisation of Table 9. Number of Tariff Lines at 0 5% in the ATIGA Tariff Schedule of 2012. Country

Brunei Darussalamc,d Indonesiac Malaysiac Philippinesc,d Singaporec Thailandc ASEAN-6 Cambodia (AHTN 2007) Lao PDRc,d Myanmarc,d Vietnamc CLMV TOTAL ASEAN a

Number of Tariff Lines 0 5%

>5%

9,844 9,899 12,242 9,759 9,558 9,558 60,860 8,160 9,110 9,496 9,234 36,000 96,000

NA 17 13 35 NA NA 65 140 361 NA 134 635 700

b

Total

0 5%

>5%

Other

Total

72 96 82 27 NA NA 277 NA 87 62 190 339 616

9,916 10,012 12,337 9,821 9,558 9,558 61,202 8,300 9,558 9,558 9,558 36,974 98,176

99.27 98.87 99.23 99.37 100.00 100.00 99.44 98.31 95.31 99.35 96.61 97.37 98.66

NA 0.17 0.11 0.36 NA NA 0.11 1.69 3.78 NA 1.40 1.72 0.71

0.73 0.96 0.66 0.27 NA NA 0.45 NA 0.91 0.65 1.99 0.92 0.63

100 100 100 100 100 100 100 100 100 100 100 100 100

Items with no tariffs. Items that have moved from GEL/SL/HSL into IL. c AHTN 2012. d Tentative. Source: ASEAN Secretariat. b

Percentage

Other

a

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standards and quality in a range of product categories and services and in the area of customs. The realisation of AFTA in 2010 has and ATIGA will continue to influence firms to think regionally based on the benefits that AFTA ATIGA brings which includes doing business in a zero ASEAN tariff environment. In addition, an integrating ASEAN provides a market of over 600 million people with a combined GDP of $2.2 trillion (in 2011), which consists of rapidly growing economies with rising purchasing power and an increasing number of affluent consumers. By 2015, the region’s market size will be about 630 million people with a combined GDP of over $2.5 trillion. Furthermore, ASEAN has established FTAs with a number of major Asian countries, Australia and New Zealand (AIR, 2012), and is negotiating similar arrangements with its other major Dialogue Partners. These factors and a rapidly integrating ASEAN help attract market-seeking and efficiencyseeking intra-regional investment with a wider potential. Regional investment agreements have also led to the faster opening up of a growing number of industries for investment. Under the ASEAN Investment Area (AIA) Agreement, and today the ASEAN Comprehensive Investment Agreement (ACIA), member countries have continuously taken collective and individual measures to improve the investment environment and to meet a commitment to liberalisation, facilitation, promotion, transparency and information provision. The opening up of industries under ACIA and AFAS has also brought about a rapidly improving policy environment and opportunities for investments. Various regional investment promotion and facilitation measures taken over the years have helped improve the overall FDI environment. The ongoing implementation of measures to realize the AEC will continue to shape the future FDI landscape in the region. Moreover, while companies in some member countries are faced with ‘push’ factors to go abroad because of limited land and labour including rising cost, others are able to offer an investment environment that can help them address such economic constraints faced at home. For instance, a number of countries in the region are resource rich and are attracting sizeable intra-regional resource-seeking investment. These countries include Indonesia, Lao PDR, Malaysia and Myanmar. This locational and endowment (resources, labour and agricultural land) complementation is encouraging a greater intra-regional investment and industrial activities in a regional integrating setting. Intra-regional investment is also accentuated by “follow-the-competitor” and “follow-the-customer” drive. When some ASEAN companies go regional, they in turn encourage their suppliers, competitors or suppliers at

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Box 1. Selected Major Economic Agreements of ASEAN with Important Implications on Investment. Investment: The ASEAN Comprehensive Investment Agreement (ACIA) This Agreement was signed on 26 February 2009. ACIA superseded the former ASEAN Agreement for the Promotion and Protection of Investment, which was signed on 15 December 1987 and the Framework Agreement on the ASEAN Investment Area (AIA), signed on 7 October 1998. ACIA is today the main regional agreement governing investment matters in the area of liberalisation, facilitation, promotion, protection and institutional cooperation. Services: The ASEAN Framework Agreement on Services (AFAS) This agreement was signed on 15 December 1995. AFAS cover liberalisation of the services sector and facilitates trade in services in the region.a On 28 October 2010, a Protocol to Implement the Eight Package of Commitments under AFAS was also signed. Trade in Goods: The ASEAN Trade in Goods Agreement (ATIGA) ATIGA was signed on 26 February 2009. This Agreement superseded the Agreement on the Common Effective Preferential Tariff (CEPT) Scheme for the AFTA signed in January 1992. ATIGA also covers customs facilitation and the mutual recognition of standards. ASEAN Economic Community (AEC) The Declaration on the AEC Blueprint was signed on 20 November 2007. The AEC is to be established by end of 2015. It presents the realisation of the end goal of ASEAN’s economic integration, encompassing ASEAN as a single market and production base; a competitive economic region; equitable economic development; and integration into the global economy. Note: a The broad areas of services covered under AFAS include business services, communication, construction and related engineering, distribution, education, environmental, financial, health-related and social services, transport, tourism and travel-related services, and recreational, cultural and sporting services. Source: ASEAN Investment Report 2012.

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Box 2. ASEAN Economic Community (AEC): Key Characteristics and Elements. AEC represents the region’s full economic integration by year end 2015. It deepens and broadens the economic integration of member countries based on the principles of an open, outward-looking, inclusive and market-driven economy consistent with multilateral rules and adherence to rules-based systems. The AEC will have the following key characteristics and elements: • a single market and production base, which promotes a free flow of goods, services, investment, skilled labour and a freer flow of capital. • a highly competitive economic region, that supports and facilitates competition policy, consumer protection, intellectual property rights, infrastructure development, bilateral agreements on avoidance of double taxation and e-commerce. • a region of equitable economic development, involving SME development and initiatives for ASEAN integration to narrow the development gap within and outside the region. • a region fully integrated into the global economy, by making ASEAN a more dynamic and stronger segment of global supply chains, and by ensuring that the region remains attractive for foreign investment. It also entails adopting a coherent approach towards external economic relations. Many specific programmes and measures have been and are being implemented to realize the AEC. An AEC Scorecard system has been introduced to monitor the implementation of the many targeted measures under each of the above 4 AEC pillars. Source: ASEAN Secretariat (2011).

home to follow them to host ASEAN countries. Firms in service industries such as banking, consultancy and IT solution providers follow their customers abroad so as to better serve the needs of their clients and to keep their business. Geo-cultural affinity and proximity favours investment by ASEAN companies in the region. This proximity factor is more important for SMEs

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than large companies. SMEs from Indonesia, Malaysia, Singapore and Thailand tend to invest regionally in nearby host countries where costs of production are lower and the environment culturally similar.

Home Country Policies and Measures Governments in the region have stepped up efforts in recent years to encourage their companies to invest in ASEAN. Policy liberalisation on OFDI (e.g. exchange controls) and institutional support from home country can play an important role in supporting and facilitating outward FDI by national companies. Some countries have also introduced specific promotion activities such as information provision and organise seminars on investment opportunities in the region. A number of countries have taken steps to provide institutional support (e.g. Malaysia, Singapore, Thailand), organise outward FDI missions to target host countries and provide market intelligence information (e.g. Singapore, Thailand) to help their firms invest in the region and in other overseas locations. Singapore is traditionally the largest investor in ASEAN due to its small market size and limited opportunities for growth at home. Apart from these factors, the country’s OFDI policy supporting Singaporean firms to go abroad has played an important role. For instance, International Enterprise (IE) and Standards, Productivity and Innovation Board (SPRING) of Singapore frequently organise seminars and provide information on investment opportunities in prospective host countries in support of Singapore firms’ internationalisation efforts. In 2012 alone, IE assisted over 15,500 companies in their internationalisation drive, of which some 85% were SMEs.8 The services provided by IE and SPRING go beyond just providing information. They also include business missions, capacity building, manpower development and counselling support for Singapore companies planning to venture abroad for the first time or to expand their existing overseas operations.9 The Government of Singapore through various agencies also provide advisory services including access to funding to support the growth of local businesses and their internationalisation.10 IE has established seven overseas centres in ASEAN to facilitate and support Singapore investment, and the latest being the IE Overseas Centre in Yangon, Myanmar in early 2013.11 In 2012, about 6,000 companies benefitted from IE’s incentive schemes to develop and grow overseas market.12 IE helps Singapore companies manage political risk as they internationalise.13 While MIDA (Malaysia) also provides market information to Malaysian

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companies wishing to invest abroad, it does not provide the scope of support as IE. Malaysia and Singapore were the two earliest countries to provide visible institutional support to their respective companies to venture overseas. Malaysia and Singapore also cooperate to assist their respective companies to jointly identify investment and business opportunities in third countries through the Malaysia Singapore Third Country Business Development Fund.14 On the other hand, Thailand and Vietnam have only in more recent times taken some concrete steps to support and facilitate outward investments to other ASEAN countries and further afield. For instance, Thailand in 2012 introduced new measures such as relaxation of approval requirements on foreign exchange to support OFDI from the country (AIR, 2012). The Thai BOI has taken an active role in supporting and facilitating Thai overseas investments in particular in ASEAN in recent years. The measures include investment seminars, missions to target host countries and provision of information including counselling services. The Ministry of Commerce also support Thai trade and investment in ASEAN through (i) information provision and counseling services and (ii) setting up of trade offices in border provinces.15 In addition, Thai private-sector associations have also played a role in encouraging Thai investors to go regional. For instance, the Thai Chamber of Commerce encourages investors to go to Myanmar16 and the Thai EXIM bank promotes and supports through credit facilities Thai investments in ASEAN.17 The Ministry of Planning and Investment of Vietnam provides support for Vietnamese investment abroad through information on prospective host countries. Indonesia is encouraging Indonesian companies to invest in the region. One such measure is the consideration to establish SOE incorporated in target host country to collect market information and to facilitate Indonesian investments in the newer ASEAN member countries.18 The private sector in ASEAN is increasingly and more visibly play an important role in promoting and facilitating intra-regional investment. This includes promoting a greater awareness of the AEC and investment opportunities in the region. The ASEAN Business Advisory Council (ASEAN BAC) and the various regional industry clubs have taken steps to promote the region’s improving investment environment to their members. For instance, the ASEAN BAC organizes annual ASEAN Business and Investment Summit (ASEAN BIS) to discuss policy issues with Leaders and high-ranking officials. The ASEAN BIS also provides a platform for dissemination of investment information to both ASEAN and non-ASEAN business communities. Some of the private sector and

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industry clubs at national level also publish and disseminate information to help increase awareness of opportunities in an integrating ASEAN. Private-sector cooperation and networking in the region contributes to intra-regional investment, including by the Malaysian South-South Corporation Berhad (MASSCORP), the Thai Chamber of Commerce and the Singapore Business Federation. Commercial and EXIM banks in the region also contribute to facilitating intra-regional investment (UNCTAD, 2007; Wee, 2007).

SELECTED ASEAN COMPANIES AND THEIR REGIONAL AND GLOBAL FOOTPRINTS Almost all of the top 50 largest ASEAN companies by revenues have a presence overseas and across the region (Table 10). They include companies operating in oil and gas, mining, agri-business, telecommunications, food and beverages, manufacturing, banking, power generation, infrastructure, real estate and healthcare services. The top 50 are dominated by Thailand, Singapore, Malaysia and Indonesia in that order. SOEs from Vietnam are adding to the list of internationalised ASEAN companies, with a significant of their investments regionally focused in neighbouring countries such as Cambodia and Lao PDR. Most of the companies in the top 50 list have major subsidiaries, which in turn also have extensive overseas operations. All of these are public listed companies and major local players in the industry at home. Some of them are also government linked companies (GLCs), with strong resource-backing from their respective governments, including the availability of finance to expand abroad. Many of the top 50 ventured abroad a long time ago and have, over time, expanded their operations overseas to a global level. Such companies include Sembcorp, Singapore Telecommunication, Keppel, Neptune Orient, Olam, Wilmar, Sime Darby, CIMB, SP Setia, IOI Group, Maybank, Petronas, San Miguel, Ayala, Jollibee, Ciputra, Lippo, Pertamina, PTT, Thai Beverage, Bangkok Bank, CP and Saha Union. Many have a significant percentage of their assets, sales and employment generated outside the home country. The top 13 largest non-financial ASEAN TNCs are dominated by companies from Singapore and Malaysia (Table 11). Almost all of them have a transnationality index greater than 30%, which is calculated based on the average ratios of foreign assets to

Top 50 listed Companies in ASEAN with Overseas Operations, by Revenues, 2012a (Millions of Dollars).

Company nameb

1 Petronas 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25

PTT Wilmar International Flextronics International Singapore Telecommunication Thai Oil Sime Darby Olam International San Miguel Corporation Siam Cement Tenaga Nasional Neptune Orient Lines Telekomunikasi Indonesia IRPC Public Company Limited Keppel Corporation DBS Group Malayan Banking Sembcorp Industries Charoen Pokphand Petron Corporation Genting YTL Corporation Bank Mandiri Bank Rakyat Indonesia Indorama Ventures

Malaysia Thailand Singapore Singapore Singapore Thailand Malaysia Singapore Philippines Thailand Malaysia Singapore Indonesia Thailand Singapore Singapore Malaysia Singapore Thailand Philippines Malaysia Malaysia Indonesia Indonesia Thailand

Business/industry

Sales

Assets

Total Employees

Foreign

Total

Foreign

Total

NA 33,372 14,573 9,258 NA 9,499 8,627 NA NA 0 6 691 0 NA 1,949 2,246 1,263 3,433 2,553 642 3,720 4,847 13 9 NA

76,962 43,206 30,126 14,336 14,144 13,863 12,873 12,217 11,682 10,797 8,901 7,858 7,825 7,776 7,453 7,218 6,977 6,532 6,247 6,170 6,079 6,002 5,947 5,898

NA 8,654 1,009 27,126 NA 2,532 1,242 NA NA 0 351 0 NA 1,955 99,236 NA 3,086 NA NA 8,063 5,997 1,309 738 NA

43,838 39,424 11,590 30,558 4,898 13,987 10,213 20,119 11,756 25,002 6,959 11,358 4,189 18,881 262,752 141,914 9,017 5,024 4,008 17,097 15,985 60,446 51,532 4,622

1,820 0 1,710

5,890 5,856 5,805

67,885 0 80,389

182,489 23,136 4,809 6,071 214,178 22,892

Fully integrated oil and gas corporation

Petroleum refining Agribusiness group Electronic components and accessories Telephone communications Petroleum refining Conglomerates Food and agriculture commodities Food and beverages Industrial organic chemicals Electric services Sea transportation Telephone communications Petroleum refining Ship building, repairing and engineering Commercial banks Commercial banks Ship and boat building and repairing Conglomerate, agri-business Petroleum refining Hotels, resorts, plantations, electricity Electricity services and infrastructure Commercial banks Commercial banks Plastics materials and synthetic resins & rubber Singapore Commercial banks Philippines Electric services Singapore Commercial banks

22,010 90,000 176,000 NA 816 100,000 17,000 12,566 34,725 31,000 11,388 26,023 5,327 31,914 18,000 NA NA 24,743 2,111 58,000 NA 27,907 40,044 8,741

415

26 United Overseas Bank 27 Manila Electric 28 OCBC

Country

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Table 10.

Company name

29 30 31 32 33 34 35

48 49 50 a

Business/industry

Assets

Total

Foreign

Total

Total Employees

Malaysia Malaysia Malaysia Thailand Indonesia Singapore Singapore

Commercial banks Real estate agents and managers Telephone communications Petroleum refining Food preparations and kindred products Food & beverages, property Aircraft and parts

1,091 3,600 2,925 NA 547 3,127 1,870

5,540 5,350 5,189 5,027 4,999 4,815 4,620

30,278 1,725 NA NA NA 1,955 NA

94,685 6,493 12,693 1,947 5,836 10,558 5,625

40,244 NA NA NA 67,581 NA 22,193

Indonesia Malaysia Thailand Thailand Thailand Indonesia Indonesia Philippines Malaysia Thailand Thailand Philippines

Cigarettes Motor vehicles and equipment Gaskets, packing, and sealing devices Beverages Communications services, NEC Bituminous coal and lignite mining Bituminous coal and lignite mining Department stores Commercial banks Commercial banks Commercial banks Telephone communications

0 310 1,644 155 NA 0 NA NA 314 NA NA NA

4,619 4,270 4,238 4,190 4,008 3,871 3,857 3,786 3,732 3,678 3,654 3,571

0 673 191 NA NA 3,667 NA NA 5,967 NA NA NA

4,307 3,307 1,264 3,155 2,544 7,387 5,668 10,224 78,664 59,519 66,780 8,885

44,669 NA 6,214 NA 9,540 6,969 7,476 NA 17,511 NA 21,503 34,116

Singapore Thailand Indonesia

Engines and turbines Mining and power Commercial banks

3,372 3,546 2

3,567 3,563 3,497

1,096 3,130 38

4,136 7,132 42,030

NA 6,477 19,962

Based on 2011 revenues. Some of the companies are subsidiaries of a group of companies. Airlines are excluded from this list. Sources: UNCTAD and Bloomberg. b

Sales Foreign

HAFIZ MIRZA AND KEE HWEE WEE

36 37 38 39 40 41 42 43 44 45 46 47

CIMB Group IOI Corporation Axiata Group Bangchak Petroleum Indofood Sukses Makmur Fraser and Neave Singapore Technologies Engineering Gudang Garam UMW Holdings Sri Trang Agro-Industry Thai Beverage Advanced Info Service Bumi Resources Adaro Energy SM Investments Corp Public Bank Siam Commercial Bank Bangkok Bank Philippine Long Distance Telephone Hong Leong Asia Banpu Bank Central Asia

Country

(Continued )

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Table 10. b

Top ASEAN Non-Financial TNCs, Ranked by Foreign Assets, 2010a (Millions of Dollars and Number of Employees).

Ranking by: Foreign assets

Corporation

Home economy

Industryc

TNIb 13

Petronas - Petroliam Nasional Bhd Singapore Telecommunications Ltd Wilmar International Limited Genting Bhd CapitaLand Ltd

2

5

3

3

4 5

4 8

6

1

7 8

2 6

Flextronics International Ltd Axiata Group Bhd Fraser and Neave Ltd

9 10 11

10 7 12

Sime Darby Bhd City Developments Ltd Keppel Corp Ltd

Sales

Employment Foreignd

Foreign

Total

Petroleum expl./ref./distr. Singapore Telecommunications

35,511

145,099

31,563

76,822

8,325

41,628 28.5

25,877

31,134

8,759

13,563

10,417

23,000 64.3

Singapore Food, beverages and tobacco Malaysia Other consumer services Singapore Construction and real estate Singapore Electrical & electronic equipment Malaysia Telecommunications Singapore Food, beverages and tobacco Malaysia Diversified Singapore Other consumer services Singapore Transport and storage

17,280

33,969

22,934

30,378

85,705

88,000 74.6

11,938 11,748

15,896 24,622

2,539 1,600

4,703 2,481

32,352 3,093

43,077 68.1 6,482 53.3

11,539

11,633

28,102

28,680

171,901

176,000 98.3

10,205 5,083

12,356 10,273

2,741 2,579

4,849 4,034

21,250 8,412

25,000 74.7 17,000 54.3

4,493 3,845 3,546

11,536 10,969 16,296

6,526 976 1,853

9,711 2,295 7,395

25,432 16,576 20,453

100, 000 43.9 19,668 54.0 36,718 34.2

Malaysia

Foreign Total

Total

TNI (Per cent)

417

1

Assets

The Rise of Enterprise Regionalisation in ASEAN

Table 11.

Table 11.

Foreign assets

Corporation

Home economy

Industry

TNIb

12

11

13

9

Assets Foreign

Sembcorp Industries Limited Neptune Orient Lines Ltd

Singapore Utilities (electricity, gas and water) Singapore Transport and storage

418

Ranking by:

(Continued ) c

Sales

Total

Employment

Foreign Total

Foreignd

Total

TNI (Per cent)

2,585

8,459

3,326

6,427

4,561

13,415 38.8

2,444

6,451

7,210

9,422

3,532

11,257 48.6

a

HAFIZ MIRZA AND KEE HWEE WEE

All data are based on the companies’ annual reports unless otherwise stated; corresponds to the financial year from 1 April 2010 to 31 March 2011. b TNI, the Transnationality Index, is calculated as the average of the following three ratios: foreign assets to total assets, foreign sales to total sales and foreign employment to total employment. c Industry classification for companies follows the United States Standard Industrial Classification as used by the United States Securities and Exchange Commission (SEC). d In a number of cases foreign employment data were calculated by applying the share of foreign employment in total employment of the previous year to total employment of 2010. Source: UNCTAD based on ‘The top 100 non-financial TNCs from developing and transition economies, ranked by foreign assets, 2010’ listed in the World Investment Report 2011.

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total assets, foreign sales to total sales and foreign employment to total employment (WIR, 2011). The recent list of Singapore’s International 100 companies also lends support to the increasing transnationality of Singapore companies. The list shows an increasing level of revenues generated from the overseas operations of these firms; on average overseas sales accounted for 30% of their total revenues in 2012. A majority of the annual revenues of companies such as Eu Yan Sang and Transview Golf came from their overseas operations.

DRIVERS AND MOTIVATIONS A key driver of OFDI by developing country companies is competitive pressure (WIR, 2006). In a rapidly globalising world, companies can no longer count on their home markets as a relatively secure base or source of profits (UNCTAD, 2007). Competition is everywhere through imports, inward FDI and non-equity forms of participation. Going abroad can become an important aspect of survival and to increase corporate competitiveness. While in the past the main motives to internationalise by ASEAN companies were largely related to efficiency-, market- and resource-seeking reasons for going abroad, in recent years, strategic motives (i.e. the acquisition of assets in regional and international markets that provide access to brand names, technology and skills, including strategic business networks) have come to the fore (Mirza & Giroud, 2004; Mirza, Giroud, & Wee, 2011; WIR, 2006, 2008). The ability to develop brand names and reputation at home has also become an important driver for ASEAN firms to internationalise or regionalise. For instance, some property developers and construction companies from Malaysia, Singapore and Indonesia have ventured abroad aided by the experience, reputation and brand name built at home. S&P and Siam Cement from Thailand invested abroad partly to exploit their brand names or increase brand awareness (Wee, 2007). Internationalising hospitals and healthcare groups from Malaysia, Singapore and Thailand have also built on their reputation. The drivers to internationalisation by ASEAN firms vary by firm, home country and industry. SMEs from ASEAN are less internationalised compared to large companies, which have greater access to internal and external resources. ASEAN SMEs are more regionally oriented and a significant basis for this is geo-cultural proximity and affinity. Companies from various home countries also differ in their reasons for going overseas. For instance, companies in Malaysia and Singapore have a strong urge to invest abroad because of a relatively small home market size, saturated markets,

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limited opportunities for growth and the need to secure resources, including agricultural land and labour. Similarly, companies in different industries are driven by varying factors for going abroad. For example, companies in the extractive industries such as Petronas (Malaysia), Pertamina (Indonesia), Banpu (Thailand) and PTT (Thailand) are concerned to access or secure natural resources in the region and further afield. They are increasingly using M&As to gain access to natural resources, such as oil and gas, and the mining of other natural resources. Further, ASEAN TNCs operating in agriculture are compelled to go abroad in order to access agricultural land and low-cost labour. Some Malaysian plantation companies have invested in Indonesia, Thailand and Vietnam; Vietnam’s Rubber Companies have invested in Lao PDR and Cambodia; and palm oil companies from Singapore (Wilmar) and Malaysia (Sime Darby, IJM, PBB, IOI) have spread to Indonesia. As indicated earlier, companies in the healthcare industry, such as IHH (Malaysia), Raffles Group (Singapore), Bangkok Hospital (Thailand), Singapore Medical Group, Bumrungrad Hospital (Thailand) and KPJ Healthcare (Malaysia), are involved in OFDI to grow by exploiting brand reputation built up at home. In some cases this is by acquiring existing medical facilities in host countries. For example, IHH’s (Malaysia) acquisition of Parkway Group (Singapore) helped the Group establish a strong regional footprint in the healthcare industry faster. Infrastructure, real estate and construction companies are venturing overseas to diversify their markets and revenue base, including by building up their land bank. This move is supported by their expertise accumulated at home in building roads, power plants, industrial estates, prime property and mega township development. These companies have the aspiration to replicate their success at home in new markets. Examples include, SP Setia, IOI Group from Malaysia; Lippo and Ciputra Group from Indonesia; Far East Organisation and Keppel Construction from Singapore; Amata and Preuksa Real Estate from Thailand; Ayala Group (Philippines) and Song Da (Vietnam).

CONCLUDING REMARKS Companies from ASEAN countries are increasingly going regional and global. ASEAN Governments, directly or indirectly, through the provision of institutional support and policies, are encouraging their firms in this move. Some, such as Malaysia and Singapore, offer extensive support and facilities to help their firms venture overseas, including in the region. A few

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other countries have recently taken more concrete steps to support their firms to go abroad, primarily regionally. Myanmar have also become significant target host countries for ASEAN and non-ASEAN investors in the region. This has expanded the scale and scope of intra-regional FDI. Complementary locational advantages and endowments of ASEAN countries is providing a further push in regional integration through business and investment ties. An integrating ASEAN is also enticing companies in different ASEAN countries to think regionally in the context of an ultimate potential market of exceeding 600 million people. Some companies have been regional players for some time, but are now strengthening their presence in ASEAN. Home and host country policies, as well as regional economic integration and regional economic agreements such as AFTA, ATIGA, AFAS and ACIA, are important factors contributing to the present wave of intra-regional investment. The rise of OFDI (including intra-regional investment) contributes to the changing geography and investment landscape in ASEAN. There are challenges to internationalisation or in going regional. Success is not automatic. Companies need to do their homework and identify the risks, including knowing how to manage or mitigate them. Governments and regional institutions can also play a role in reducing such risks through greater transparency and dissemination of information, including measures to facilitate intra-regional investment flows. However, the numbers of success stories on internationalisation by ASEAN companies are steadily increasing. These stories are inspiring others to go regional, and the AEC framework is hastening the process. The prospect for further enterprise regionalisation in ASEAN is promising, given the increasing capacities and a wider pool of firms aspiring, willing and able to invest in the region. Going regional increases their market reach and customer base, as well as opportunities to tap into locational complementation available across ASEAN. Regional integration and emerging business opportunities are providing an impetus not seen before in driving intra-regional investment. As more ASEAN companies position and prepare for AEC 2015, this intra-regional investment wave is likely to gather force.

NOTES 1. Thai banks expand networks ahead of ASEAN integration. The Nation, 7 January 2013. Available at http://www.asianewsnet.net/Thai-banks-expand-

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networks-ahead-of-Asean-integrat-41027.html; AEC: Opportunities, challenges lie ahead. The Nation, 7 May 2012. Available at http://www.nationmultimedia.com/ business/Opportunites-challenges-lie-ahead-30181409.html; ASEAN offers firms chance to expand. Bangkok Post, 22 November 2012. Available at http://www. bangkokpost.com/business/economics/322468/asean-offers-firms-chance-to-expand; Maybank steadily building pan-ASEAN business. Bangkok Post, 21 January 2013. Available at http://www.bangkokpost.com/business/news/331868/maybank-steadily-building-pan-asean-business. 2. Thai banks expand networks ahead of ASEAN integration. The Nation, 7 January 2013. Available at http://www.asianewsnet.net/Thai-banks-expand-networks-ahead-of-Asean-integrat-41027.html. 3. See GHL plans for expansion in ASEAN, goes for M&As. Star Online, 3 December 2012. Available at http://biz.thestar.com.my/news/story.asp?file = /2012/ 12/3/business/12388462&sec = business#1355837681081821&if_height = 880. 4. A member of the Hong Leong Group. 5. Representing 91% of the 1507 respondents in the survey. 6. Malaysian SMEs optimistic about expansion plans. UOB News Release, 25 September 2012. 7. The newer member countries (i.e. Cambodia, Lao PDR, Myanmar & Vietnam) have until 2015 with flexibility up to 2018 to bring their tariff levels to 0%. 8. Singapore companies continue to invest overseas. EnterpriseOne, 25 January 2013. Available at http://www.enterpriseone.gov.sg/en/News/2013/Jan/130125% 20Singapore%20Companies%20Continue%20To%20Invest%20Overseas.aspx. 9. See IE ‘Global Company Partnership’. Available at http://www.iesingapore. gov.sg/wps/wcm/connect/d9a73e804d405ee69196db42b053eda3/GCP_Brochure_ Oct2012.pdf?MOD = AJPERES. 10. Singapore: SMEs Toolkit (Financial Assistance Schemes). Available athttp:// singapore.smetoolkit.org/singapore/en/content/en/3604/Financial-Assistance-Schemes 11. See Deeper Singapore-Myanmar economic ties with opening of IE Singapore overseas centre in Yangon. IE Media Release, 4 April 2013. Available athttp:// www.news.gov.sg/public/sgpc/en/media_releases/agencies/ie%20singapore/press_ release/P-20130404-2/AttachmentPar/0/file/MR00913_IE%20Singap%20ore%20 Yangon%20OC%20Opening_2013%2004%2004.pdf. 12. Singapore firms continue to increase investment overseas. channelnewsasia. com, 24 January 2013. Available at http://www.channelnewsasia.com/stories/singaporebusinessnews/view/1249902/1/.html. 13. See IE Singapore’s new scheme to help companies manage political risk as they internationalise. 29 October 2012. Available athttp://www.iesingapore.gov.sg/ wps/portal/WCMPreview?WCM_GLOBAL_CONTEXT = /wps/wcm/connect/ie/My + Portal/Main/Press + Room/Press + Releases/2012/IE + Singapores + new + scheme + to + help + companies + manage + political + risk + as + they + internationalise. 14. Available at http://www.mida.gov.my/env3/uploads/Publications_pdf/ MALAYSIA-SINGAPORE_ThirdCountry/MSBDF_brochure09.pdf 15. Sakuntanaga, Nuntawan (2013), ‘Policy of Thai government to support and promote the investment of Thai operators for trade and investment in ASEAN’. Available at http://www.kpmg.com/TH/en/Events/Documents/AEC-Summary-EN. pdf.

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16. See Thai Chamber of Commerce encourages investors to go to Myanmar. Thai Financial Post, 28 February 2013. Available at http://thaifinancialpost.com/ 2013/02/28/thai-chamber-of-commerce-encourages-investors-to-go-to-myanmar/. 17. Thai EXIM bank, ‘Business direction and plan for 2013’. Available at http:// www.exim.go.th/en/about_exim/policyTarget.aspx. 18. Indonesian SOEs to invest in Myanmar. Jakarta Post, 13 March 2012. Available at http://www.thejakartapost.com/news/2012/03/13/indonesian-soes-investmyanmar.html.

REFERENCES AIR. (2012). The changing FDI landscape. ASEAN Investment Report 2012. Jakarta: ASEAN Secretariat. ASEAN Secretariat. (2011). ASEAN economic community blueprint. Jakarta: ASEAN Secretariat. IE. (2012). IE Singapore: Internationalisation survey Corporate sentiments towards internationalisation 2011/2012. Retrieved from http://www.iesingapore.gov.sg/wps/wcm/connect/ 40b928004b552747ab3cbf01b73b1320/intenational_survey2012.pdf?MOD = AJPERES Mirza, H., & Giroud, A. (2004). An analysis of benefits from FDI in ASEAN economies with special reference to Vietnam. Asian Development Review, 21(1), 66 98. Mirza, H., Giroud, A., & Wee, H. K. (2011). Emerging multinational enterprises (chapter 2). In B. Louis (Ed.), The emergence of southern multinationals: Their impact on Europe (pp. 13 41). Basingstoke: Palgrave McMillan. ISBN: 0-230-23557-3. UNCTAD. (2007). Global players from emerging markets: Strengthening enterprise competitiveness through outward investment. New York, NY: United Nations. UNCTAD. (2012). A background note on global challenges and changing FDI landscape in ASEAN. Prepared and Presented at the Second ASEAN Investment Forum, 16 November 2012, Phnom Penh, Cambodia. UOB. (2012). Malaysian SMEs optimistic about expansion plans. News Release, 25 September 2012. Wee, K. H. (2007). Outward foreign direct investment by enterprises from Thailand. Transnational Corporations, 16(1), 89 116. Wong, M.-H., & Wirjo, A. (2012). Findings from 2011 2012 ASEAN-BAC survey on ASEAN competitiveness. Jakarta: ASEAN Business Advisory Council. World Investment Report (WIR). (2006). FDI from developing and transition economies: Implications for development. New York, NY: United Nations. World Investment Report (WIR). (2008). Transnational corporations and the infrastructure challenge. New York, NY: United Nations. World Investment Report (WIR). (2011). Non-equity modes of international production and development. New York, NY: United Nations.

CHAPTER 17 MULTISTAKEHOLDER REGULATION OF BUSINESS: ASSESSING THE PROS AND CONS Peter Utting ABSTRACT Purpose This chapter seeks to understand the emergence of new institutions of business regulation, standard-setting and governance commonly referred to as multistakeholder initiatives (MSIs), and to consider their implications both from the perspective of regulatory effectiveness and sustainable development. Methodology/approach The analysis synthesizes the findings of a review of 20 such initiatives. It draws on a wide body of literatures and conceptual insights to understand the emergence of these new approaches to international business regulation. The assessment of their emergence, performance, and impacts highlights the complex dynamics of regulatory change. Findings The findings caution against simple generalizations about the positive or negative outcomes of these new forms of collaborative governance. Their somewhat mixed record can be partly explained by the diverse set of interests, preferences, and agendas of the actors involved;

International Business and Sustainable Development Progress in International Business Research, Volume 8, 425 446 Copyright r 2014 by Emerald Group Publishing Limited All rights of reproduction in any form reserved ISSN: 1745-8862/doi:10.1108/S1745-8862(2013)0000008022

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variations in institutional learning, capacities, and power relations; as well as how such initiatives are nested in broader institutions and structures. This points to the need, raised in the conclusion, for intellectual pluralism in advancing knowledge of the effectiveness of new regulatory institutions. Originality and value The analysis aims to go beyond studies that (i) tend to focus on just one or a few cases; (ii) that ignore the implications of such initiatives for development in the Global South; and (iii) draw on narrow bodies of theory and literature to understand complex issues. Keywords: Business regulation; regulatory governance; multistakeholder initiatives; civil society; sustainable development; corporate social responsibility

INTRODUCTION As globalization and liberalization have proceeded apace in recent decades, so too has the development of new regulatory institutions that establish rules and standards aimed at shaping business behavior. This chapter considers a particular category of institutions that has gained regulatory prominence since the early 1990s. Their distinctive features are (i) they are concerned with setting “ESG” standards associated with environmental and social dimensions of business performance, as well as aspects of “good governance,” including transparency and accountability; and (ii) they involve non-state actors nongovernmental organizations, trades unions, firms, and business, industry, or producer associations as central players in both governance structures and various regulatory functions.1 The latter include agenda-setting, design, implementation, enforcement, oversight, assessment, review, and redress. Several labels have been used to describe these forms of “private,” “civil,” “non-state,” “co-regulatory,” or the term used here “multistakeholder regulation,” which simply expresses the fact that multiple actors tend to be involved in both the governance and regulatory functions associated with particular initiatives. The chapter begins by examining why this new set of regulatory institutions has emerged. This analysis reveals a diverse range of contextual factors and drivers that cautions against broad generalizations and points to very different agendas and interests. Drawing on a review of multiple multistakeholder initiatives (MSIs),2 it goes on to assess their strengths and

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weaknesses from the perspective of both regulatory efficacy and more “integrative” approaches to development associated not only economic, social, and environmental objectives, but also political dimensions related to rights, participation, and empowerment. The chapter ends with a reflection on the implications of this analysis for “triangulation” and the question of whether the promise of “societal triangulation” (van Tulder, 2012) the coming together of different actors (state, business, civil society) to find solutions to complex problems and fill institutional voids is being realized and the crucial role of “scientific triangulation” the coming together of different methods, theories, and disciplines in advancing knowledge of MSIs and cross-sector social interactions more generally. The Rise of Multistakeholder Regulation Before turning to an assessment of multistakeholder regulation it is important to first examine why this approach to regulation arose in the first place. Such an analysis provides various pointers to the different logics, agendas, and interests associated with different MSIs. This is important for understanding their preferences, approaches, and objectives. MSIs have arisen in the context of institutional and political changes under conditions of globalization and economic liberalization, as well as growing recognition of the limits of the early corporate social responsibility (CSR) agenda associated with corporate self-regulation. Particularly relevant are (i) the changing nature of the state and governance, (ii) changes in the nature of corporate capitalism and “the logic of capital,” and (iii) societal responses and pressures fueled by economic liberalization the polanyian “double movement” manifested in civil society contestation and service delivery. Key elements of each relate to the following conceptual and analytical insights derived from diverse scholarly literatures. State restructuring and “new governance” (i) The rise of the “competition” (Cerny, 2000) or “regulatory” state, which decentralizes and delegates regulatory authority to non-state actors (Braithwaite, 2005). (ii) The need to fill institutional gaps that have arisen under globalization and with the expansion of global value chains (Mayer & Gereffi, 2010), and in view of the limited scope, reach, and capacities of both intergovernmental and government agencies, as well as other traditional

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regulatory institutions such as trades unions (Haufler, 2001; Held & Koenig-Archibugi, 2003; Reinicke & Deng, 2000). The so-called shift from government to governance (Rosenau & Czempiel, 1992) or “new governance” (Pierre & Peters, 2000), involving multiple actors and soft law, as well as the rise of particular modes of governance associated with networking (Keohane, 2002; Piccioto, forthcoming) and corporate hierarchy (Crouch, 2010). Greater understanding of the potential of partnerships (van Tulder, 2010) and “polycenticity” whereby public, private, and community or civil society institutions do and can work together in ways that are complementary and synergistic rather that confrontational to solve complex problems (Ostrom, 2009). Trends associated with cosmopolitanism (Beck, 2005), “Third Way” or “post political” discourse and practice (Mouffe, 2005), involving consensual politics centred on dialogue, partnership, and collaborative governance (Garsten & Jacobsson, 2007). The need to share knowledge and competencies, and for reflexive learning, under conditions of increasing complexity and risk (Beck, 2005; Freeman, 1984); the enhanced problem-solving capacities of non-state actors; and increasing recourse to “experts” in policy or decision-making processes and epistemic communities (Braithwaite & Drahos, 2000; Haas, 1992).

The logic of capital and “smart” business (i) The growing “market for virtue” (Vogel, 2005) which demands ethically produced goods and requires that global corporations engage in risk and reputation management to protect brands and gain competitive advantage through CSR. (ii) Recourse to standards-based regulation as a means of managing and controlling value chains and reducing transaction costs related, for example, to the proliferation of codes of conduct (Cragg, 2005; Gibbon, Ponte, & Lazaro, 2010). (iii) The need to craft a stable regulatory (coordination) regime through codification, formalization, and harmonization (Zadek, 2001), that can be sustained over the long term, as in previous “Fordist” or corporatist eras (Jessop & Sum, 2006; Palpacuer, 2010). The “double movement” (i) The role of civil society organizations and social movements in efforts to re-embed liberalism in order to address “market failure” and

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negative externalities associated with economic liberalization (Ruggie, 2003). (ii) New forms of contentious politics, associated with a contemporary “double movement” (Polanyi, 1944) and counter-hegemonic globalization (Evans, 2008),which targets multinational enterprises (MNEs) (Conroy, 2007; Gereffi, Garcia-Johnson, & Sasser, 2001; Klein, 2000; Korten, 1995). (iii) The broadening portfolio of social action involving “confrontation,” “collaboration,” and eclectic tactics (Utting, 2012b). These include the enhanced role of professionalized NGOs in service delivery, knowledge networks, and policy processes (Heap, 2000), and the rise of new social movements concerned with global justice issues, such as corporate accountability and fair and ethical trade (Bendell, 2004; Broad & Cavanagh, 1999; Jaffee, 2007; Soule, 2009).

NEW APPROACHES TO CSR In the 1980s and early 1990s, ideas and practices associated with CSR and corporate self-regulation took off as a means to kill three birds with one stone: through CSR, high-profile global brands sought to address problems of legitimacy and coordination within supply chains, and position themselves strategically in relation to the “market for virtue.” Major weaknesses and contradictions soon became apparent with corporate self-regulation, which centered on company codes of conduct, internal (as opposed to independent) monitoring, and “glossy’ social and environmental reporting that was weak on substance and measurement. Early CSR was associated with the proliferation of unconnected, often competing, initiatives; picking and choosing among standards; weak implementation procedures; ineffective remedy; lack of credibility of CSR initiatives; and a largely top-down and Northern-driven reform agenda (UNCTAD, 2011; UNRISD, 2010). More generally, it was apparent that corporate self-regulation was doing little to “re-embed” liberalism (Ruggie, 2003) in order to minimize social and environmental contradictions and contestation that targeted MNEs. Ongoing corporate scandals, involving not only so-called CSR laggards but also leaders, fueled a corporate accountability movement calling for harder and more comprehensive regulatory approaches. Business actors themselves were concerned about the proliferation of codes, which rather than

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facilitating intra- and inter-firm coordination, were often complicating it. Civil society actors too were evolving, adopting a broader portfolio of actions to engage corporations and transform business practices. These involved protest, advocacy, watch-dog oversight, and critical research and evaluation. They also involved diverse forms of collaboration via technical assistance, project partnerships, and participation in knowledge networks or so-called epistemic communities that informed both public and corporate policy. Such developments ushered in a new phase of CSR that involved a shift from a narrow focus on codes of conduct to “MRV” monitoring, reporting and verification.3 Against this backdrop emerged a new set of multistakeholder regulatory initiatives,4 prominent features of which included some combination of: • multistakeholder dialogue and governance structures; • a more systematic approach to the design and application of standards; • strengthening and integrating different components of regulation, including design, promotion, implementation, disclosure, monitoring, verification, certification, and complaints procedures; • emerging collaborations and complementarities between “private” and “public” governance, or voluntarism and public policy or law. From the early 1990s numerous MSIs were created (see Table 1). Some such as the United Nations Global Compact, ISO14001 and SA8000 (environmental management and labor standards certification, respectively), and the Global Reporting Initiative (GRI) adopted a global or multi-sectoral focus; others concerned themselves with specific commodities (e.g., Roundtables on Sustainable Palm Oil and Soy), sectors or industries (e.g., GlobalG.A.P., the Forest Stewardship Council (FSC), Marine Stewardship Council (MSC)); while others addressed particular issues (e.g., child labor (Atlanta Agreement), conflict diamonds (Kimberley), corruption in extractive industries (EITI), carbon mitigation (The Gold Standard), or Fair Trade (FLO)).

Appraising MSIs The coming together of different actors to set ESG standards and promote or oversee their implementation can be seen as part of the broader dynamic of cross-sector collaborations or “partnerships” which aim to address complex problems associated with unsustainable development and fill

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The Expanding Arena of MSIs (A Timeline of Selected Initiatives). Name

1993

Forest Stewardship Council (FSC)

1995

ISO 14001

1997

Global Reporting Initiative (GRI) Social Accountability (SA) 8000 Marine Stewardship Council (MSC)

FOCUS Forestry standard/certification & eco-labeling Environmental management standard/ certification Company sustainability reporting indicators; application checks Labor standards/certification

EurepG.A.P/GlobalG.A.P

“Sustainable” fisheries/certification & eco-labeling Food industry standards/certification

Atlanta Agreement on Child Labor

Child labor Fair trade/agro-ecology; certification

1998

Fair Labelling Organizations International (FLO) (now Fairtrade International (FLO) and FLO-CERT) Ethical Trading Initiative (ETI)

1999 2000

Fair Labor Association (FLA) UN Global Compact

OECD Guidelines for Multinational Enterprises revised Extractive Industries Transparency Initiative (EITI) Kimberley Process

Agri-food supply chain standards; reporting Labor standards/assessments 10 environment, labor, human rights, and anticorruption principles; communications on progress Labor standards; investigation of complaints Global ESG standards, complaints procedure Revenue transparency in extractives; disclosure and monitoring “Conflict diamonds”; certification

2003

Common Code for the Coffee Community The Gold Standard

Standards in the coffee chain Carbon mitigation standard; certification

2004

Roundtable on Sustainable Palm Oil

2006 2010

Round Table on Responsible Soy ISO 26000

Standards in palm oil production; certification Standards in soy production; certification Guidance standard on social responsibility

Worker Rights Consortium

2002

institutional gaps (van Tulder, 2012). The above analysis of the institutional and political drivers and contexts of multistakeholder regulation points to the very different agendas, actors, and interests involved. Not surprisingly, different MSIs yield quite different balance sheets in terms of

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achievements and limitations. On balance, however, there are several areas where some degree of generalization is possible.

SIGNS OF PROGRESS From the perspective of both regulatory effectiveness and sustainable development, several areas of progress have been noted.5 These relate to (i) discursive and normative shifts that place social and environmental issues more centrally on the development agenda, (ii) a degree of institutional thickening to fill certain regulatory gaps, (iii) improvements in relation to specific “outcome standards,” (iv) broadening the stakeholder base, (v) ongoing ratcheting-up of standards and implementation procedures as a result of contestation, bargaining, and “learning by doing,” and (vi) a degree of “maturing” of voluntarism in terms of complementing rather than seeking to be a substitute for public governance and law. Awareness-Raising At the normative level, multistakeholder regulation has played a key role in raising awareness of social, environmental, human rights, and governance problems associated with contemporary patterns of production, investment, trade, consumption, corporatization, and self-regulation. Some initiatives, such as the United Nations Global Compact, have achieved considerable convening power and global reach, and through numerous events and extensive networks spread the word about CSR. The role of MSIs in facilitating learning via stakeholder dialogue often emerges as a key impact. Indeed, as Auld and Cashore note in relation to the FSC, impacts related to “transparent learning processes” are often far more obvious that those related to “problem amelioration.” Specific “Outcome Standards” At the micro level of the enterprise or production unit, gains have been reported in certain value chains and countries in specific issue areas related to child labor, improved compliance with minimum wage legislation, improved prices for smallholders through Fair Trade schemes, anticorruption, enhanced environmental protection, and improvements in human

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rights situations in some conflict zones and areas of natural resource extraction.6 As Barrientos and Smith (2012) note in relation to the Ethical Trading Initiative (ETI), MSIs and participating firms have tended to pay more attention to the implementation of such “outcome standards” than to “process rights.” An important exception, of course, involves various initiatives whose starting point or core objective relates to worker or producer empowerment. These include, for example, the Worker Rights Consortium and International Framework Agreements signed by global union federations and MNEs, which focus on workers’ rights and redress, and several Fair Trade schemes, which promote not only the payment of premium prices to small producers but also their social organization and empowerment.

Gradually Widening the Stakeholder Net In relation to regulatory approaches associated with CSR and corporate accountability, the focus on engaging larger corporations has, to some extent, broadened, with more attention to small and medium-sized enterprises (SMEs). Initiatives like the GRI, SA8000, and the United Nations Global Compact have introduced or supported differentiated procedures that take into account the context and constraints of SMEs or, in the case of GlobalG.A.P., small agricultural producers. The MSC’s new strategic plan for 2012 2017 aims to engage more with small-scale fisheries. Some initiatives are attempting to correct the tendency of standards-based initiatives in the extractive industries to neglect artisanal miners, for example, in the cases of gold and diamond mining, discussed by Hilson and Kamlongera (2012) and Smillie (2012), respectively.

Ratcheting-up Considerable regulatory dynamism is evident in the sense that many initiatives evolve, mature, and gradually raise the bar in terms of standards and procedures. This ratcheting-up is apparent in terms of adopting additional standards, as well as strengthening specific mechanisms and procedures to enhance implementation and oversight, for example, in relation to transparency, disclosure, and complaints procedures. Several initiatives have enhanced the quality of specific tools, such as monitoring, social auditing, certification, and sustainability reporting, by addressing weaknesses that

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were apparent when these practices first emerged. Initiatives such as the EITI, GRI, FSC, MSC, and SA8000 have become more inclusive of a broader range of standards, procedures, and stakeholders. A complex set of factors and conditions underpin progressive incremental change. In addition to intra-organizational learning, interactions with other institutions and policy instruments, bargaining within MSI governance structures (Abbott & Snidal, 2009), and contestation associated with civil society activism both inside and outside MSIs have played an important role (Utting, 2012b).

Institutional Thickening As noted in the first section, the raison d’eˆtre of MSIs related partly to the perception or reality that neither states (including intergovernmental organizations) nor self-regulating markets and corporations and other firms had the will or capacity to regulate under conditions of globalization and liberalization. MSIs aim to fill such gaps. Institutional thickening is also apparent in other respects. MSIs are often associated with regulation that is becoming multi-scalar, that is, regulatory functions are carried out at global, regional, national, and local levels. They involve actors and institutions that often complement those operating at the national level by focusing on both the micro level of the factory, mine, or farm, and the global level involving international norms or agreements with corporate headquarters related to their global operations. Initiatives such as International Framework Agreements (Hammer, 2012), for example, mark an initial step in crafting forms of regulatory governance adapted to globalization and that respond to the inability of national-level institutions (e.g., collective bargaining, arbitration and mediation) to address cross-border issues. Furthermore, some MSI are now proactively coordinating with others. The ISEAL Alliance, for example, seeks to harmonize the approaches of various standards initiatives, developing guidance aimed to strengthen effectiveness and impacts. Among the 11 full members are the FSC, MSC, the 4C Association, and Fairtrade International. Formal collaborations now exist between initiatives like the United Nations Global Compact, the GRI, and the OECD Guidelines for MNEs. These initiatives are positioning themselves (or being positioned by others) as the leading global institution in relation to particular regulatory functions, be it promotion of CSR principles and agenda-setting (Global

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Compact); reporting indicators (GRI), or complaints mechanisms (OECD National Contact Points). Such collaboration among leading standards initiatives raises the question of whether an incipient form of transnational regulatory governance may be emerging where a limited number of global institutions assume a key role in relation to specific regulatory functions, and are coordinated and organized in an internationally networked division of labor.

Complementarities Between Private and Public Governance Multistakeholder regulation has advanced thinking and policy on what constitutes effective regulation. Some initiatives are going beyond the narrow compartmentalization of “voluntary” versus “mandatory” regulation, by promoting hybrid forms of regulation where voluntary standards (i) are based on international labor, environmental, human rights, and other law; (ii) serve as benchmarks for national law and public policy; (iii) involve not only business entities and civil society organizations, but also governments and intergovernmental organizations; or (iv) are mandated by laws which oblige companies to report using “voluntary” standards.

LIMITATIONS AND DILEMMAS From the perspective of effective regulation and sustainable development, MSIs confront several important limitations related to questions of scale, the tension between “quantity” and “quality,” implementation gaps, the implications of MSIs for development in the Global south, imbalances in stakeholder representation, and structural constraints that limit the scope for progressive change.

Limited Scale What is often billed as the world’s largest CSR initiative, the United Nations Global Compact has approximately 7,000 participating companies, including several hundred MNEs. Such figures pale in comparison with the 100,000 MNEs, nearly 900,000 affiliates recorded by UNCTAD,7 let alone the millions of suppliers. While environmental certification under

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ISO14001 has extended to 250,000 facilities, this is less than a quarter of the facilities that are certified for quality management under ISO 9000. Labor standards certification under SA8000 involves about 3,000 entities. GRI records some 4,000 organizations that apply the GRI reporting indicators. FSC certification covers about 11%of commercially used forests (UNCTAD, 2011), while MSC certification covers 8% of global fish landings (MSC, 2012). Such figures reveal the wide gap between the universe of commercial enterprise and the sub-universe of corporations, suppliers, and enterprise activities actively engaged with MSIs. Some schemes have an initial boost of energy, quickly gaining adherents, but then taper off. After 2005, the rate of expansion of SA8000 certification, for example, dropped substantially (Rasche and Gilbert, 2012).

Quantity Versus Quality There is often a tension between quantity, in terms of numbers of participating companies, and quality, in terms of rigorous and comprehensive standards, implementation procedures, and compliance. While schemes like the Global Compact, GlobalG.A.P., and MSC have grown fairly rapidly, they experience significant limitations in terms of substance and scope. The Global Compact, which requires very little in terms of MRV, has been continually plagued by free-riding. GlobalG.A.P. tends to prioritize standards or issues of concern to Northern corporations and consumers, such as food safety, and pay less attention to other social and environmental issues. Focusing on commercial fisheries in the global north, MSC has grown a $3 billion dollar market for certified seafood (MSC, 2012) but has paid little attention to aquaculture, social issues, and small and marginalized fishers (Auld, 2012). And the reverse applies. Schemes noted for more rigorous standards and methods, for example, the Worker Rights Consortium, engage with only a handful of companies. Some schemes such as the Forest Stewardship Council, which over time have raised the bar in terms of standards, confront difficulties in scaling-up. In the case of FSC, competing certification schemes, which are less demanding, have emerged (Auld & Cashore, 2012). The tension between scale and quality has also affected the fair-trade certification system. Indeed it underpins the split within the fair-trade movement in 2011, when the national labeling organization Transfair USA (now Fair Trade USA) split from the global body Fairtrade International (FLO). Transfair USA chose the route of growing market share by engaging

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large plantations and corporations, and promoting CSR. FLO stuck to the original Fair Trade goals of promoting small producer empowerment through collective organization and agro-ecology (Reed, 2012; Utting, 2012c). Implementation Gaps Lack of systematic review of compliance, and ineffective grievance procedures and remedy, emerge as key limitations in several initiatives (e.g., the United Nations Global Compact, the GRI, OECD Guidelines, SA8000, the Kimberley Process, and FLO). This often results from the combination of resource constraints; technical complexities associated with monitoring and verification; and imbalances in power relations and influence favoring certain business interests or governments. Civil society activism, organizations, and networks are increasingly directing their energies toward strengthening such aspects, as seen in the case of NGOs and trade unions that are testing the complaints procedures of the OECD Guidelines for Multinational Enterprises (OECD Watch, 2010; Utting, 2012a) and the Permanent Peoples’ Tribunal in Latin America (Saguier, 2012). Processes of monitoring and verification, which potentially could empower workers, tend to engage more with management than workers. This, in turn, may create suspicion of auditors among the workforce, and limits the capacity of auditing to identify issues of concern for workers. Weak transparency and disclosure associated with schemes, such as the United Nations Global Compact, GRI, and SA8000, inhibit the capacity of NGOs and trade unions to monitor and act as watchdogs. As in the case of SA8000, some social auditing and certification schemes that require the audited enterprise to pay the auditors remain compromised by conflicts of interest, lack of independence, and weak disclosure. A technocratic and managerial approach to compliance often sidelines issues of empowerment and process rights of workers and small producers. As a result, embedded social or commercial relations that can undermine labor and other standards in value chains are often ignored (as in ETI and SA 8000) (Barrientos & Smith, 2012). Development for Whom? Economic development dimensions and the fact that there may be winners and losers within supply chains are often ignored. Indeed, limited attention to impact assessment is a widespread feature of multistakeholder

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regulation. Of particular concern are the cost implications of multistakeholder regulation for small suppliers and workers, and the capacity of large corporations to use their market power to transfer the costs of raising standards and risks to weaker stakeholders in supply chains. Productivity gains may materialize, as predicted in some CSR theory. Furthermore, there is a tendency for standards regimes to favor concentration of economic power at different levels of the value chain. Standards-based initiatives may facilitate market access for some enterprises and work more as a protectionist barrier to trade for others. With some notable exceptions (e.g., FSC, Balanco Social in Brazil, Comercio Justo Me´xico), most MSIs were generally designed in the North and are often perceived locally as externally driven initiatives. Some schemes have marginalized key development issues in their fields, for example, aquaculture and small-scale fisheries in the case of the MSC or, in the case of “fair trade gold” schemes, poverty and conflict-related issues affecting artisanal gold miners. There is sometimes also limited attention to local solutions to specific problems. And there is the question of how to sustain externally driven regulatory initiatives once donor resources are withdrawn emerges. The neglect of development dimensions is also reflected in, and a product of, the marginalization of Southern actors and stakeholders in the design of standards, monitoring, implementation, and the governance structures of various initiatives. This has been noted in relation to ISO 14001, SA8000, GRI, ETI, FLO, GlobalG.A.P., and IFOAM. Where both Southern and civil society participation are substantive, there may be a tendency on the part of organized business interests and governments to craft alternative schemes that are seen as more business-friendly or where business can exert more control. This occurred, for example, in reaction to the FSC, and was also been apparent in the shift from “civil-led” to “business-led” social reporting schemes in Brazil (Gomes & Kirschner, 2012).

Structural Constraints Multistakeholder regulation is constrained by a range of structural conditions and the fact that MSIs are nested in broader institutions associated with capitalism, namely, the profit motive, shareholder primacy (Levy & Brown, 2012), consumer culture, and the “structural, instrumental, and discursive power” of business elites (Fuchs, 2005; Marques & Utting, 2010). Such conditions can impose severe limits on the scope for internalizing social and environmental costs, redistributing income and value, and

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lessening regulatory capture. Indeed, they underpin countertrends associated with the so-called “race to the bottom” in labor standards and precarious employment, and enhance the capacity of large corporations to transfer risk and costs associated with standards along the value chain. The changing structure of global production, notably the rise of emerging market economies and their national (corporate) champions, has resulted in situations evident in the case of the extractive industries where a multistakeholder initiative may seem out of step, focusing on the old, as opposed to the new, guard. Both the nesting of multistakeholder regulation within broader institutional structures and the considerable influence of corporate interests in regulatory design, implementation, and other policy processes can severely constrain the potential of such initiatives to transform business practices, core product and market strategies, and patterns of corporate governance. Achievements are often not replicated in more informal and casualized segments of the value chain; indeed, standards regimes can fuel informalization as firms outsource as a means to bypass regulation and reduce costs. Within some export-manufacturing chains, women have been particularly affected by this situation. In mining, certain initiatives have until recently ignored the situation of millions of informal sector miners. As explained by Hilson and Kamlongera (2012), such neglect may be reinforced by government policies that restrict land rights and licences and render artisanal mining illegal. Such structural conditions not only constrain the potential of multistakeholder regulation; several standards-based initiatives have failed to interrogate these conditions. The cases of the Global Compact, GRI, and GlobalG.A.P., for example, reveal that the process of enlisting support from corporate interests may involve explicit or implicit compromises that dilute some aspects of regulation or keep certain issues off limits. Similarly, the relatively participatory process put in place to design the ISO 26000 guidance standard agreed early on to focus broadly on “organizational” rather than “corporate” social responsibility in an effort not to single out MNEs.

CONCLUDING REMARKS: IMPLICATIONS FOR “TRIANGULATION” MSIs that promote, design, and implement ESG standards are a prominent feature of contemporary societal “triangulation,” where different actors

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come together in an attempt to address complex “wicked” social and environmental problems (van Tulder, 2012) and fill institutional gaps that have emerged in contexts of globalization and state restructuring. The above analysis, however, cautions against romanticizing the potential of societal triangulation or overstating the importance of particular features of partnerships. The literature on partnerships often highlights gains associated with democratic legitimacy and political opportunities that derive from dialogue and collaboration, as well as enhanced technical capabilities that derive from both pooling competencies and organizational and social learning. Several of the achievements noted above, such as awareness-raising, ratcheting-up, implementation of specific outcome standards, and complementarities between private and public governance, are indeed closely related to these attributes. But “win-win” perspectives can’t explain the “wicked” problems that characterize MSIs themselves: key blind spots may exist in terms of issues and stakeholders that are marginalized; the distributional consequences of standards schemes may be unfair; stakeholder representation and influence within governance structures may be skewed toward certain interests; having a formal voice within governance structures may not translate into influence; contestation and bargaining are key for ratcheting-up standards and procedures; and that the way MSIs are nested in broader societal structures and institutions constrains both scaling-up and ratcheting-up. In terms of developmental and regulatory models, MSIs can be pulled in very different directions. In broad terms, these can be characterized in terms of (i) mainstream CSR, (ii) corporate accountability, and (iii) social economy (Reed & Mukherjee-Reed, 2012; Utting, 2012b). Mainstream CSR conforms more to the logic of capital criteria noted in the first section, that is, risk and reputation management, competitive advantage, and coordination of inter- and intra-form relations and stabilized regulation regimes. Corporate accountability is driven more by the “double movement” and the quest to re-embed markets and corporations in societal values of equity and justice. The social economy approach is more concerned with issues of distributional justice, empowerment of workers and smallholders, and alternatives to corporate capitalism. Issues of structure, agency, power relations, institutional dynamics, and distributional consequences, then, are key in understanding variations in the developmental and regulatory orientation of MSIs and changes in orientation through time. This suggests that the type of “best practice” analysis and learning that makes up much of the literature on partnerships needs to be complemented by “critical thinking” (Utting & Zammit, 2006).

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A critical or political economy perspective on MSIs would likely reveal significant imbalances in power relations, even within seemingly equitable consultative and decision-making processes; regulatory capture by particular interests; myriad forms of “structural, instrumental and discursive power” (Fuchs, 2005); and the way in which contestation both within and beyond MSI governance shapes regulatory priorities and approaches. Such a perspective would also reveal that MSIs are nested in, or bounded by, other institutions which, in effect, set limits on both the types of issues addressed and the procedures that are adopted. Examining relations with other institutions may also highlight the importance of “polycentricity” (Ostrom, 2009) and the importance of combining private and public governance, voluntarism, and law, in ways that are complementary and synergistic, rather than seeing these as alternative regulatory approaches. While MSIs evolve and adapt, path dependency, organizational cultures, and professional mindsets and worldviews intervene to shape their orientation and outputs. Critical analysis would reveal not only gaps between MSI discourse and objectives, on the one hand, and implementation and compliance, on the other hand, but also contradictory impacts of MSIs from the perspective of sustainable and inclusive development, the fact that there will be winners and losers, and that the losers may well be vulnerable stakeholders such as small producers and enterprises. To understand the potential and limits of MSIs inquiry needs to engage far more with “scientific triangulation” (van Tulder, 2012) that draws on multiple bodies of knowledge. Much of the literature on partnerships, MSIs and CSR more generally, is theoretically thin (Utting & Marques, 2010). It relies heavily on organizational theory which provides important insights into intra-institutional change, and governance theory which facilitates understanding of collaborative approaches for managing common and complex affairs. The above discussion of the limitations of MSIs suggests that various other bodies of theory can usefully inform analysis. Particularly relevant are: sociological theory (structure and agency); social movements theory (contestation; political opportunity structures ), “new institutionalism” (social embeddedness of institutions; relations between organizations and their institutional environment); “radical” and international political economy (distributional conflicts); neo-Gramscian analysis (cultural political economy; hegemony); Foucauldian analysis (controlling systems of power and knowledge); and development theory (pathways, means, and impacts of societal change).

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Overcoming theoretical thinness and recognizing the need for intellectual pluralism is a key challenge for scholarly analysis of the potential and limits of MSIs and other cross-sector collaborations.

NOTES 1. See, for example, Bernstein and Cashore (2008); Frynas and Newell (2007); Mattli and Woods (2009); O’Laughlin (2008); Prakash and Potoski (2006); Rittberger and Nettesheim (2008); Tallontire (2007); Tamm Hallstro¨m and Bostro¨m (2010). 2. Most of the initiatives referred to in this chapter are examined in the book coedited by this author, Business Regulation and Non-State Actors: Whose Standards? Whose Development? (Reed, Utting, & Mukherjee-Reed, Routledge, 2012). 3. Also often defined as “measurement, reporting, and verification.” 4. Some such institutions existed prior to the 1990s, notably the International Organization for Standardization (ISO), although its focus on auditable environmental management systems (ISO 14001) dates from the early 1990s. Others included the International Federation of Organic Agriculture Movements and the predecessor of the World Fair Trade Organization, the International Federation for Alternative Trade. 5. This analysis draws largely on Utting, 2012a. 6. This has been noted, for example, in relation to the ETI, Atlanta Agreement on child labor, EITI, Kimberley Process, FLO, ISO14001, SA8000. 7. Available at www.unctad.org/wir. Accessed on May 20, 2012. UNCTAD statistics for 2010 record 103,786 parent corporations and 892,114 affiliates worldwide.

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