Multinationals for Poverty reduction? Are you serious?

0By Shankhajit Sen, Calcutta University (shankhajitsen@outlook.com)

For Citation: SITE4society Brief No. 6-2018
Related to Sustainable Development Goal # SDG 1 (No Poverty)
SITE Focus:  Innovation in Governance
Country Focus: Developing countries
Based on: ‘On Nudging MNE toward SDG 1: A Policy Perspective’ by Shyama V. Ramani, Rushva Parihar and Shankhajit Sen. Chapter 5 of ‘Multinational enterprises and sustainable development’, International business & management volume 33, 2017. Emerald Publishing, Pages 89-129.

Context: In 2015, at the United Nations, world leaders adopted 17 goals, referred to as the Sustainable Development Goals (SDGs), to serve as guideposts for sustainable development. Sustainable development refers to the process of economic growth and development wherein the needs of the present are met without compromising the ability of future generations to meet their own. In 1987, Gro Harlem Brundtland, Head of the UN commission on Environment and development, released a document “Our Common Future” that coined the term sustainable development. This document emphasised that poverty is among the root causes of environmental degradation. No wonder then that the United Nations SDGs assigned ‘No Poverty’ as Goal 1 for sustainable development.

While governments all over the world have vowed to attain the SDGs, they recognize that  2they cannot mobilize the necessary resources and capabilities to fight diverse obstacles to sustainability like poverty, inequalities, and climate change alone. Hence, governments are calling for multinational enterprises (MNEs) to take responsibility and strive to contribute to the SDGs, as MNEs are important private carriers of global economic growth and have substantial economic power. However, such policy outreach of the government is being met with varying degrees of success in different parts of the world. Thus, in order to understand the ways by which policy can nudge MNEs to contribute to the first pillar of sustainable development, namely SDG1—to end poverty in all its forms everywhere, we undertook an extensive literature survey.

Research Questions

  • Can policy influence the ways by which MNEs affect poverty?
  • If yes, what are the conditions under which it can be positive and what are the conditions under which it can be negative?

 

Motivation: The area requires further study as firstly, interrelationships between SDG1 and MNEs are far from clear, and there are no statistics on how they have influenced poverty across countries. Secondly, recognition of the need or willingness of MNEs to adhere to sustainable development is not yet accompanied by a clear understanding on the part of either the firms or the state as to how this can be best achieved. Thirdly, there is ample evidence that MNEs can have a negative impact on the economic development of the host country as a function of various contextual variables.

Methodology: A two-stage methodology was applied to infer answers to our research questions from the literature. The corpus of articles was compiled applying the research query ‘Multinational’ AND ‘Poverty’ on Scopus the standard abstract and citation database of peer-reviewed literature. First, a scoping review was carried out to map the eco-system of the MNE in the context of poverty and identify the broad pathways by which MNEs attempt to contribute to poverty reduction. Second, these frameworks were refined through a meta-analysis of the abstracts of our corpus. Developed by Glass (1976), a meta-analysis serves to examine a large collection of study results and integrate their findings in conceptual frameworks to answer specific research questions.

3Main Findings: The activities of MNEs and their impact are processes within an ecosystem as shown in Figure 1. Strategies of MNEs are not formulated in vacuum but as responses to possible strategies of other stakeholders in the system. Thus, the operations of MNEs in developing countries are influenced by the state, along with other stakeholders like local firms, targeted consumers, media, public agencies, NGOs, Public university and labs, and the Base of the income Pyramid communities or BoP population. It is a complex system because of the presence of many actors, whose strategies are based on guesses about the actions of others, who affect each other in diverse processes, wherein no single economic actor can control systemic outcomes (such as impact on poverty) completely or perfectly.  

Figure 1: The Business Eco-System below illustrates the diversity of local stakeholders interacting with MNE in developing countries

7
Further, within this ecosystem MNEs influence the poverty reduction process through six different modes or pathways, as illustrated below in Figure 2.

Figure 2: The six pathways by which MNEs can contribute to poverty reduction
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FDI or foreign direct investment refers to capital and technology flows and is a major component of global trade. On the other hand, PPP or public private partnerships are enterprises co-owned or co-operated by state and private organizations. PPP are increasingly initiated to restructure large public sector entities. CSR or corporate social responsibility programs to reduce poverty mainly take the form of product and service provision and capabilities creation that directly improve the lives of the targeted BoP communities. Finally, knowledge transfer refers to transfer of knowledge or skills to BoP communities to enhance their capabilities.  The positive outcomes of these MNE strategies are summarized in Table 1.

Table 1: MNE Action Pathways to reduce poverty 

Pathways Input from MNE Impact on SDG1
FDI in mainstream industries Capital and technology inflow Economic growth and subsequently poverty via trickle down effects.
FDI directed toward the BoP Higher employment for BoP by MNE Poverty reduction through improved livelihoods
Public–Private Partnerships  (PPP) in mainstream industries Bridging capabilities and infrastructure gap Strengthening of weak public sector units leads to higher GDP and possibility of trickle down effects
PPP directed toward the BoP Provision and  facilitation of adoption of pro poor  innovations Better access and increased choices for goods and essentials for BoP
CSR Investment in local development Improves quality of life of BoP
Knowledge transfer Linkage to global knowledge network Improve information dissemination to BoP

 

6Please note that ample skepticism remains regarding trickledown effects, a term first coined by the great American intellect and humorist Will Rogers. It embodies cynicism about the premise that government policies promoting big business will benefit all sections of society in the long run. 4
From the analysis we find there is a tri-polar division among scholars, for, against and undecided on whether MNEs can be impactful in reducing poverty via the said pathways owing to systemic challenges from other players or forces in the host country. The table below shows the possible cases where MNE intervention might not prove fruitful. The impeding factors might deter the above outcomes or might even generate negative effects. For instance, negative effects on indigenous artisans can reverse higher employment from MNE intervention through FDI in BoP.

 

 Table 2: Systemic Challenges noted in the literature

Pathways Impeding factor Nature of Impediment 
All pathways Corruption in the host nation General culture of corruption among policy makers and regulatory officials in developing countries
All pathways Economic reforms in the host country Opening and restructuring of the host economies inadequate or inappropriate to generate significant positive returns from MNE investment (Examples cited from Mexico and Brazil during the 1970s)
FDI in mainstream
industries
Anti-state conflict Political unrest or terrorist activities in developing countries   
PPP in mainstream
industries
Unequal partnership
 
A large MNE consortium in a small country can put the government of the small country in a weak bargaining position.
PPP in mainstream 
industries
Success of MNE in developing country The success of MNEs in a host country can lead to job closures in the mother country of the MNE
PPP directed toward the BoP Unplanned privatization Unplanned privatization of an essential service can lead to worsening of state for BoP in terms of affordability and access (Example cited in water Privatization in South Africa).
CSR Investments in local development Voluntary codes of conduct and protocols may not result in real gains without implementation of international governance (Coffee sector of The Piedmont Triad, North-central region of the U.S. state of North Carolina).

 

Policy Recommendations5
To conclude, government policies of a host country can influence the design and impact MNE strategies to address SDG1. Table 3 summarizes our recommendations for the four pathways.

Table 3: Objectives and Recommendations for the four pathways

Pathway Objective Recommendation
FDI in BoP and/or main stream State: Maximize investment
Firm: Maximize profit
State: Examine if and how existing stakeholders can accommodate MNEs.
Firm: Avoid regions of political unrest 
PPP Both: Maximize returns from partnership State: Formulate fair contracts that also punish opportunism. Monitor the efforts of all partners closely.
CSR State: Maximize investment in national missions
Firm: Maximize brand equity
State: Monitor and evaluate the after effects of CSR interventions to avoid evasion and negative externalities.
Firm: Invest in poorest to maximise marginal utility and visibility of impact.
Knowledge transfer State: Improve access to global knowledge networks
Firm: Maximize brand equity
State: Ensure network access to all BoP and avoid concentration in pockets
Firm: Create physical networks for mobile and internet availability for BoP

 

Sources of photos:
Google search term: Multinational and poverty
Google image search: multinational and poverty
Google image search term: Trickledown economics
Google image search: Serving the world’s poor, profitably

  1. All English Matters

    I’m sceptical about the role of MNEs in alleviating poverty. Take PPPs in Britain for example and how it has resulted in the draining of resources as MNEs raise prices for consumers (of water for example in the case of Thames Water) and share the profits with distant shareholders.
    Are there examples of positive MNEs? I’d like to see one where the bottom line is alleviating poverty in a profitable way.

  2. Shankhajit Sen

    Hello Sir, thank you for your comment!
    Yes, as noted in the article, there remains ample scepticism about the nature of impact of MNEs intervention. As in the case you cited, the problem of draining of resources by MNEs, via rising prices in PPP can be fought by proper framing and design of the contract between state and MNE.
    And as for positive effect of MNEs, in a congenial setting, as was the case of Thailand in 1999, It is observed that nurturing public sector enterprises with proper financial and technological support from MNEs through FDI and/or PPP actually helps in poverty alleviation and also strengthening of the economy.
    – Shankhajit Sen

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