Bhagwati on MNCs

In his book, In Defense of Globalization, Jagdish Bhagwati devotes quite a bit of attention (11% of the book's total length) to the role of corporations. In general, Bhagwati argues that foreign corporations have a positive impact on the developing nations in which they set up operations, though this impact could be enhanced. However, corporate lobbying activities in their home countries with regard to trade rules in their home nation and international bodies can have a negative impact on developing nations. Some of his key points are listed below.

Big Corporation vs Small Countries: Bhagwati argues that the image of small nations facing big corporations, to the extent that it based on comparisons of the sales volumes of large corporate sales to the GDPs of small nations, is fallacious. He notes that sales volumes are gross figures while GDP measures value added in an economy, which is just portion of the gross activity in a nation. Therefore, comparing corporate sales to national GDP is comparing apples to oranges. A corporation's value added is only a fraction of its gross sales and, if these figures are compared to national GDPs, the supposed size disparity diminishes considerably.

Exploitation of Workers: Bhagwati argues that there is no evidence that multinational corporations  pay workers less than the prevailing wage or seek out nations with poor labor rights. To the contrary, he points to empirical research that shows that the opposite occurs. As discussed in a previous post, multinational corporations pay a wage premium of about 10% (and US affiliates can pay from 40-100%) over local wages. Other research by David Kucera shows that nations with higher unionization rates and less episodes of labor repression tend to have higher inflows of foreign direct investment. Noting research into the effect of environmental policies on multinational investment ( Smarzynska & Wei, and  Levinson) that finds little evidence of these corporations locating in places with lower environmental standards, Bhagwati argues that multinationals are not engaged in the 'Race to the Bottom' that they are often supposed to be in.

In discussing the question of hours and working conditions in foreign owned plants that violate international norms,  he notes that domestic regulations and common practices may may be more lax for good reason. Here he cites Kristof and WuDunn's NYT article "Two Cheers for Sweatshops" that described workers in so-called sweatshops as very happy to have a job for what they considered to be good pay and an opportunity to earn more of it by working long hours.

Spillover Effects: Bhagwati argues that multinational have what are called spillover effects when local firms learn better production techniques and management practices from multinationals. This occurs through observation,word of mouth, and, more importantly, from  workers and managers moving between domestic and foreign owned firms.

Effect of Bad Politics: Many of the supposed bad effects of multinationals are, in Bhagwati's view, the result of bad policies in the host nation. He notes that there are two dominant practices regarding social legislation in developing nations. The laws are either practically nonexistent, or they are excessively generous with little or no effort made to enforce them. In the latter case, the laws may have been only symbolic in nature when passed, or they may simply be out of date and are no longer considered desirable. Yet, they remain on the books because it is not worth the political cost to change them. Therefore, when a seemingly lenient set of rules is established for multinationals, say as is the case in an export promotion zone, it may represent a politically expedient means of policy change or experimentation.

Bhagwati sees  policies aimed at inward growth or import substitution as another example of bad politics. When governments try to encourage foreign direct investment aimed at supplying products to the domestic market (usually one protected by import tariffs and/or quotas) as opposed to the global market, they create a situation in which less employment and spillovers will occur. Multinationals, viewing the direct investment as a path around the tariffs and quotas, will seek to minimize the amount of work done in the host nation (perhaps assembling  the minimum number of imported parts to qualify as "domestic" production) and will not need to bring in their most productive techniques and practices.

Corporate Lobbying at Home: This is where Bhagwati sees corporations as having a more malign effect on developing nations. Corporate political influence in their home nations is more of a problem because their home governments tend to be fairly powerful, especially in the case of the US. Also, in this venue, the developing nations are at a disadvantage because they are largely shut out from the home nations' political process. Bhagwati points to the push to have protections for intellectual property included in the WTO as a trade-related issue. He sees this as an opening of the doors for other lobbying groups to have their issues labeled as trade-related and to take advantage of the WTO's enforcement mechanisms to coerce the governments of developing nations. This will not only force developing nations to acquiesce to unfavorable policies on the trade-related issues, but threatens to undercut the WTO's main efforts on trade liberalization itself.

Improving the Effect of Corporations: Though he argues that corporations tend to have a benign effect on developing nations, Bhagwati argues that these benign effects can be improved (and the occasional malign effects lessened) by improving corporate social responsibility. This can be done by employing a combination of three mechanisms:

1. Social Norming: This occurs when corporations sign on to uphold sets of broadly defined goals. While they do not agree to take concrete steps and face no enforcement mechanism, the act of agreeing to certain social goals (and not others) focuses the corporation and its critics on what the corporation intends to accomplish.
2. Voluntary Codes: These codes entail better defined obligations that the corporation agrees to meet if it signs on the code. One of the key aspects of voluntary codes, in Bhagwati's view, is that there is a diversity codes promoted by different groups from which to choose. This will allow codes that represent the developing nations' point view to compete with those promoted by western groups. 
3. Mandatory Codes:  These are national codes that regulate how a nation's corporations act in other nations.  Though Bhagwati expects these to vary across nations, he expects that best practices will emerge over time and this may lead to the emergence of more universal mandatory code.