An examination of Foreign Investment on Human Rights: Is Humanity Collaterally Damaged?

An examination of Foreign Investment on Human Rights: Is Humanity Collaterally Damaged?

Abstract

With expanding global economy, a number of countries, especially developing countries have become an investment hub for many multinational companies investing money in various industries ranging from capital intensive industries to service-providing industries. For a long time, scholars have firmly believed that foreign investors ruthlessly exploit human rights of the host country to maximize their profits. However, one should not ignore the benefits and role of advanced technological facilities that multinationals bring with them. By using advanced technological facilities brought by MNCs, NGOs and local activist groups are able to create pressure on multinational companies for compliance with human rights and other necessary regulations. Since multinational corporations earn a global reputation amongst their customers, any act of human rights violations gains a lot of media attention that most of the times affect their profit figures and bring opposition from consumers/ customers situated worldwide. While commenting on the impact of FDIs on human rights, one should also keep in mind the kind of industry in which FDI is made as many a times impacts of FDIs made in service-providing industries or consumer product industries have shown otherwise impact on human rights of a country. Further, in many cases, companies themselves are cautious about the living standards as it affects their interests as well in certain ways.

I. Introduction

In the last few decades, the global economy has experienced an increase in foreign direct investment which gave rise to the idea of transnational corporations investing abroad in more than one countries. Transnational corporations represent cultural preferences and market trends of the economy in which they are established. The influence of foreign direct investment over human rights is a prominent issue which has been debated by many scholars. Critics argue that foreign investors turn insensitive to human rights while enforcing investment contracts in foreign counties. They argue that people at the lowest strand of society, especially the local groups, tend to suffer the most due to an inherently uneven relationship that exists between them and the foreign investors. They claim that the masses in developing countries have become a pool of cheap labor to foreign corporations and are often exploited by transnational corporations operating in their domestic countries. Even it is seen that the governments do not take human rights seriously when it comes to the operation of foreign investment contracts and in many cases are themselves involved in furthering the interests of multinationals at the cost of exploiting their own citizens. For instance, the unpaid Zara garment employees did not find any support from their government when the top cloth brand did not pay its workers for over a year.[1] One cannot even ignore the exploitative conditions inflicted by jobcentres and companies administering government’s welfare reforms where unemployed people are bullied into unpaid work in multinational corporations such as Tescom Asda, Primark, Hilton Hotels etc.[2]

It is often claimed that host countries get to hold an easy hand to the human right for attracting more and more foreign investments in their country. For a really long time, scholars have, thus, presumed that any link between foreign investments and human rights is going to be negative. They believe that foreign investments will meet the best results in those countries where governments have strict control over their labor force and create favorable conditions for foreign investors. However, the observers continue to debate over the effect of foreign investments on human rights and raise questions whether such investments increase the plight of host states or rather help them to boost human rights. When foreign investment contracts are enforced, foreign companies and local populations of host states get a close connection with each, allowing such companies to influence the environment. Human rights and foreign investments are complex to understand as both variables vary over time and from country to country. It means that assumptions such as “foreign investments naturally undermine human rights”, would be fallacious as we do not know what really happens to human rights when foreign investment contracts are enforced.

This article is going to consider a reverse possibility on the connection between foreign investments and human rights to argue that FDIs in developing countries rather acts as an engine of accelerating human rights either directly, resulting from firm’s actions, or indirectly, resulting from the conditions created by FDIs. This article suggests that with the incoming of transnational corporations, the inflow of information tends to increase which boosts human rights of a country. One of the ways to understand this can be the advent of internet which increases the reach of marginal groups within the societies. By using services such as inexpensive mailing campaign facilities, such groups can highlight abusive corporate practices and create pressure on the corporations to closely work in connection with human rights. This article is segregated into three broad categories. In the first part, I will be looking at the persistent traditional approach of understanding the relationship between foreign direct investments and human rights of the host state which understands these two categories as two sides of a coin. In the second part, I will look at reverse possibilities and draw conclusions on this relationship based upon several factors such as a change in the type of sector investments, for instance, a shift from capital-intensive sector to technology-intensive service sector. In the third part, I will specifically read the the impact on this relationship on the basis of worldwide international reputation earned by multinationals and draw reverse conclusions on the basis of how multinational companies sensitize themselves towards human rights in order to keep their image clean in the eyes of their consumers (customers) and international community.

II. The traditional understanding of FDI impact on human rights

In 1939, a Russian political theorist called Vladimir Lenin wrote a piece of work on imperialism.[3] Since then, critics have started to paint FDIs as a negative effect on human rights. According to Lenin, exploitation of foreign market is a necessary condition for expansion and development of capitalism. He argued that as profits in home countries will reduce, firms will be prompted to move abroad and exploit foreign resources for maintaining their own growth rate as opposed to the interest of foreign labor. Thus, the exploitative setup in which the firms operate will eventually broaden the class gap between the capitalist and the exploited.

Drawing his arguments on the same idea, Stephen Hymer in 1971 published an article which essentially criticized the idea of foreign direct investments vis-a-vis human rights of countries where such investments are made. He argued that in order to maintain their financial dominance, multinational corporations keep tight control on the poorest segment of the world, making them unable to rise against a system based on inequality.[4] For ensuring their interests, the multinationals get inclined towards supporting repressive regimes in host countries which return the favor in terms of soliciting the connections associated with FDI. In such a process, the human rights remain at stake as the masses of developing countries become a pool of cheap labor for foreign companies.

Hymer’s argument seems persuasive but one can question the empirical assumptions of his theory. Do multinational companies really support repressive regimes? Does foreign direct investment really lead to poor human rights in the host countries? For answering such questions, one should consider the change in nature and scope of foreign direct investment over a period of time. FDIs now spread across a wide range of industries and firms. The traditional resource extraction firms that operated transborder have now been joined by various other companies such as consumer product firms, manufacturing firms, and firms in service industries. It could be a possibility that these firms still behave in a manner suggested by Hymer and continue to repress human rights of the host country’s population. But with the change in FDI pattern, one can argue against the traditional persistent negative impact of FDI on human rights and can presume the plausible change in impact.

III. Analyzing the changing pattern of Foreign Direct Investments vis-a-vis its impact on human rights: Does the investment sector play a role?

For analyzing the relationship between foreign direct investment and human rights, it is important to differentiate between the varied motives with which foreign investments are carried out. Investment abroad can be guided by various motives: expand product market, reduce product cost by access to cheap labor, gaining access to resources etc.

When investments are guided by getting access to raw materials and resources, such as oil and natural gas, Hymer’s theory appears plausible. According to Debora Spar, when investment is made in extractive industries, such as natural resource extraction, access to natural resources is necessary for making profits. According to her, in such cases, the needs of the corporation are largely aligned with state interest.[5] Since such resources are owned by the state in some fashion, state approval is needed to make a successful investment. This means that from the very beginning, the corporations would invest time in forging good relations with state and obtaining a license for resource extraction. Once a mine or oil platform is set up, it becomes a useful asset to/ for both the investor and the state. The common concurrent interest thus tends to build a close relationship between the investor and the state. Naturally, this means that a very limited interaction with local groups as most of the interaction happens between the investor and the state. Naturally in such a scenario, there exist limited interaction between the investor and the local groups. As argued by Spar, in most of the cases where investment is made in natural resources, the locals will merely act as a source of labor and not a market or a customer base because most of the resources will be outsourced to the countries outside.[6] Thus there prevail relatively weaker chances of improving local conditions in these industries. Despite this, there may be slight possibility of some trickle-down benefits inflow within the domestic country such as an improvement in local infrastructure (roads, health care, water etc) in scenarios where the government does not follow a repressive regime and use the tax (taxes, production fee etc conferred on extractive investments) for public welfare.

Besides extracting oil, gold, and minerals, foreign investments are also driven by the search for incurring lower costs by access to cheap labor. When investments are guided by such motive, there is plausibility of a dynamic relationship between foreign investments and human rights. It is frequently seen that companies which are guided by expanding product market or incurring lower production cost tend to abide by local regulations are not much dependent on states (unlike resource extraction companies).[7] Following the theory proposed by Hymer, it is most frequently claimed that firms in search of lower wage cost will have deleterious effects on local population. Critics of FDI, such as Terry Collingsworth and Pharis J. Harvey claim that when an investment is made in third world countries, workers often have no choice but to work under any exploitative conditions offered to them.[8]

Again keeping in mind the plausible conditions, one can suggest that at times foreign investors may push down the wage rates but there is an equal possibility of an opposite outcome. Keeping in mind the desirable level of sustainable wages, the wage levels in developing countries could inevitably rise- not because the firms are generous to pay more but because of the demand and supply of labor force in a country. When the demand for labor force is more and the actual supply is less, the wages rise.[9] Even though one can argue that the rise in wages could be controlled by a repressive government in form of a mandatory wage ceiling, but evidence of such level of wage control is difficult to find. For instance, the Indonesian government under the control of President Suharto as well as the government of Caribbean was regularly criticized for enforcing lower wages and suppressing workers union, but evidence contradicts persistent prevalence of deregulated business environment for attracting more and more foreign investment. [10]

Some of the studies in this field prove that with the changing pattern of FDIs, foreign investors not always invest abroad for getting access to cheap labor but also keeping in mind the quality of labor available for them. For supporting this claim, one can rely on the findings of UNCTAD in World Investment Report 2017 which suggested that even though firms are interested in making investments in low-wage countries, their actual decision is based on the quality of labor, rather than the price. The study suggested that “low wages” might be desirable, “labor quality” becomes a key factor for attracting foreign investment inflow within a country. According to the findings of UNCTAD, multinationals prefer a productive and high skilled labor over lower wage labor for making maximum profits out of the investments made.[11] Further, scholars have pointed out that where investments are made in technology-intensive manufacturing and service industries, investors would make investment decisions keeping in mind the status of good human rights conditions of a country.[12] It means that even though the firms lower wages play a role in making investment decisions, multinationals would consider skilled and educated labor force as other important deciding factors. Thus for ensuring quality labor, the firms would invest in further training and health services of their employees and would be willing to pay higher wages for ensuring labor lock-in after providing such facilities to the employees.[13] It should be noticed that the firms do not train workers or give a higher wage out of generosity but such acts are purely driven by their own commercial interests. The end result, however, may result in enhancing working conditions.

At times it is seen that besides reducing costs, investments are made to gain access to foreign markets. It can be argued that when investments are driven to sell to local customers rather than to employ them or gain access to natural resources, their interests would stand in counter to the theory proposed by Hymer. In such cases, the firms would essentially be interested in raising the incomes in their target market for enabling people to buy their products. To sell lipstick in China or jeans in India, for example, firms would need not only a handful of elites or luxury customers but also a large consuming class. For making more profits, the firm would desire to class of people above the level of subsistence who would be eager to buy their items such as Colgate toothpaste, soft toys, soft drinks, Levi’s jeans. Although the capacity to consume these goods cannot be equivalent to an improvement in human rights, however, the ability of people to purchase these items is probably an indicator that the basic living conditions in these countries have gotten better or worse. This means that when firms are investing for expanding their sale market, Hymer’s zero-sum game analysis fails. Success of the firm no longer comes at the expense of local population as, contrarily, what is good for the foreign investor is good for the country as well. This relationship is empirically supported by data in Table 1 and Table 2.

The tables indicate a list of developing countries which received the highest amount of foreign investment scored well on world’s two most commonly cited measures of human rights. Table 1 lists down UN’s Human Development Index for the year 2000, 2010, 2017 and gives the impression that with more inflow of foreign investments in the listed developing countries, there has been a time to time increase in the human development. Table 2 lists down Political Terror Scale for the respective developing countries and indicates that with more inflow of foreign investment in these countries, there has been a decrease in the measure of terror inflicted upon the population. This table may not establish a direct relationship between the quantum of inflowing foreign investments and improving human rights of a country, however, a decrease in figures of PTS does indicate that the state authorities pay due attention to upholding human rights of their citizens.

There are a number of studies that reinforce the above observation. According to many scholars, foreign investment by multinationals is correlated with the growth of gross domestic product (GDP)[14] and a growth in GDP leads to improving human rights and enforcement of principles of democracy.[15] At this stage, I would want to clarify that this study need not strongly imply that FDIs have a direct result in improving the local conditions but can indeed contribute to the already improving political and economic situations within a country. However, in neither case, this suggests that an aggregate FDI leads to diminishing human rights of a host country.

TABLE 1 Human rights measurement of developing countries receiving largest foreign investment inflows between 2000- 2018

Human development index scale ranges between 0-1. The higher number represents that the country is the doing better in terms of ensuring better human rights to its citizens.

The following table is a measure of ‘political terror scale’ issued by Purdue University. PTS measures the extent of political terror inflicted by state. For the purpose of this study, PTS defines ‘terror’ as violations of physical and personal integrity rights by state or state agents. Analysis of a range of Political terror scale over a period of time is necessary for this study as one can figure out the extent of abusive practices followed and reiterated by the state authorities. Higher the number of PTS, more abusive treatment government inflicts on population; lesser the number, personal integrity is given more importance by the state authorities.

TABLE 2: Developing countries receiving largest foreign investment inflows and Human Rights Measurement between 2000- 2018

Political terror scale ranges between 1 -5. 1 indicates no political terror while 5 indicates high levels of political terror.

The above table shows a decrease in number of political terror scale with the exception of Thailand and India where PTS either remained the same or increased a bit. However, on the basis of these three countries, the overall picture of improvement in the measure of political terror scale in other developing countries cannot be completely regarded redundant.

IV. The Name-Shame Phenomenon

Another factor that could influence the impact of foreign investment on human rights is the degree to which a company seeks social acceptance and credibility in its host country. In certain cases, firms seek social license in order to recruit skilled workers, promote sale of goods/ services in the domestic market or to avoid conflict with local social groups. While investing abroad, multinationals take a substantial amount of capital, technology as well as their brand names and reputations i.e. they carry an international image which expands the power and profits of their companies. As a matter of fact, multinational companies are scrutinized more than local firms. When local investors in developing countries abuse the rights of workers are fewer cases grab attraction of media as compared to the criticism that any multinational may face even for less grave violations such as the mere purchase of products from abusive suppliers. Multinationals such as Nike, for instance, has been criticized for making a purchase from abusive factory suppliers,[19] Nestle, for making certain fake marketing claims to increase the product sale.[20] So have Royal Dutch Shell faced huge criticism for environmental negligence in Nigeria, GAP and H&M have faced criticized for harassing women garment worker in Asian industries to meet fashion deadlines,[21] GAP even admitted violation of child labor regulations in outsourcing factories.[22] A glance at such instances can make one assert the theories of Lenin and Hymer, however, this also indicates a dramatic new trend. Since multinationals have earned their name worldwide, any violations or negligence by foreign sub-contractors of multinational companies is associated with the act of the company itself.

As the public becomes aware of issues of human rights, the spotlight phenomenon brings more attention to the effect of human rights violation. The reporting and knowledge of such instances become possible only due to the presence of technology that a multinational might or might not bring with it. The advent of internet, for example, enables NGOs and local activist groups to create pressure on multinational companies for compliance with human rights and other necessary regulations. The spotlight makes it even more difficult for companies to get away with human rights violations at arm’s length. This forces multinationals to comply with various regulations and ensure better monitoring on their sub-contractors not because of sanction by law but because of market sanctions resulting from personal trade barriers by partner companies, damage to their reputation, reduction in stock value; or in terms of ‘audience costs’ resulting from opposition by consumers. Consequently, the firms will adhere to better conditions and cut off relationship with abusive suppliers for ensuring their own financial interest. The spotlight phenomenon or the name-fame phenomenon does not change the moral basis of multinational companies but it definitely does change the bottom line interests with which multinational companies make investments in foreign countries.

V. Conclusion

Traditionally advocates of human rights have had seen themselves on a different pedestrian from foreign investment executors. They argued that interests of business executives stand parallel to human rights as they are merely interested in multiplying profits by exploiting resources of the host country. One should not completely negate the possibility that in present global economy, the interest of these two groups might coincide in certain domains. One can possibly argue that strong public pressure on multinational investments cannot achieve the kind of results that could be achieved by international regulatory bodies such as the World Trade Organization. Yet there are ways in which multinationals can contribute to creating better living conditions in a host country. Simply by investing in a country, multinational corporations bring with them a lot of raw materials such as capital and technological know-how. These factors may not result in the growth of a country directly but their presence can result in one step ahead in the right direction. One cannot overlook the advent of internet facilities and other improved technological facilities that companies from developed countries bring with them to developing countries. By using advanced technological services within their country, the citizens get a chance to improve their existing skills and perform better at the workplace. Further availability of technological services, provides a means to local activist groups and various NGOs to raise their voice against multinationals in case they indulge in any kind of exploitative practices.

It is often seen that multinationals, especially the ones from developed countries bring with them a lot of reputation to their brand names with a strong desire not to engage in any such activities that would harm their public image. They even bring with them management techniques which frequently are better than the ones prevailing in developed countries and a bunch of managers who are eager to work upon social improvement alongside the financial investment in order to create and maintain a positive image of the company. This does not, however, mean that multinationals invest abroad with the intention of improving conditions of developed economies. They invest to increase their own financial benefits which may occasionally result in advancing human rights of the host country. Improvements in human rights are in many cases beneficial for the business itself which would further encourage acceleration in pursuit of human rights. It has further been established that countries that pay considerable attention to upholding human rights attract more foreign investments especially from those industries which require considerable technical knowledge among labor.

[1] Jasmine Garsd, In Istanbul outrage over Zara not paying garment workers, PRI (Nov 9, 2017), https://www.pri.org/stories/2017-11-09/istanbul-outrage-over-zara-not-paying-garment-workers

[2] Unemployed people ‘bullied’ into unpaid work at Tesco, Primark and other multinationals, Corporate Watch (Aug11, 2011), https://corporatewatch.org/unemployed-people-bullied-into-unpaid-work-at-tesco-primark-and-other-multinationals/

[3] Vladimir Ilyich Lenin, Imperialism: The Highest Stage of Capitalism (New York: International Publishers,1939)

[4] Stephen Hymer,The Multinational Corporation and the Law of Uneven Development,inThe Multinational Corporation and the Law of Uneven Development 325-352 (John Letiche 1982).

[5] Debora Spar, Foreign Investment and Human Right, 42 (1) Taylor and Francis, 55-80 (1999)

[6] Ibid 3

[7] Ibid 3

[8] Terry Collingsworth, J. William Goold and Pharis J. Harvey, Labor and free trade: Time For a Global New Deal, 73(1) Foreign Affairs, 8-13 (1994)

[9] For instance: Robert C. Feenstra and Gordon H. Hanson, Foreign Direct investment and Relative Wage: Evidence from Mexico’s Maquiladoras, 42 Journal of International Economics, 371-393 (1997); John R. Hanson II, Is Cheap Labor a Magnet for Capital?, 26(2) Journal of Economic Education, 150-156 (1995)

[10] Debora Spar, Trade, Investment and Labor: The Case of Indonesia, 31(4) Columbia Journal of World Business,30-39 (1996); David Kowalewski, Transnational Corporations and Caribbean Inequalities, 77(4) American Political Science Review,128-38 (1982)

[11] World Investment Report 2017, Unctad.org (2018), https://unctad.org/en/PublicationsLibrary/wir2017_en.pdf (last visited Nov 9, 2018), pn7

[12] Shannon Lindsey Blanton and Robert G. Blanton, A Sectoral Analysis of Human Rights and FDI: Does Industry Type Matter?, 53(2)International Studies Quarterly, 469-493 (2009)

[13] Ibid 3

[14] World Investment Report 2017: Investment and the Digital Economy, pp 4-5 (2017), https://unctad.org/en/PublicationsLibrary/wir2017_en.pdf ;

[15] Kathleen Pritchard, Human Rights and Development: Theory and Data, in Human Rights and Development, 329-345 (David Forsythe 1989)

[16] World Investment Report: Annex Tables, FDI inflows |By region and economy (1990- 2017), https://unctad.org/en/Pages/DIAE/World%20Investment%20Report/Annex-Tables.aspx (last visited Nov 9, 2018)

[17] UN Human Development Reports, Human Development Data ( 1990-2018)| Human Development Reports, http://hdr.undp.org/en/2018-update (last visited Nov 9,2018)

[18] The Political Terror Scale, http://www.politicalterrorscale.org/ (last visited Nov 9 , 2018)

[19] Gareth Davies and Liam Quinn, ‘Hypocritical’ Nike is slammed for politically correct ad which promotes diversity despite claims that the firm mistreats its workers in poor countries, Daily Mail Online (Feb 13, 2017), https://www.dailymail.co.uk/news/article-4220316/Nike-slammed-hypocritical-equality-ad.html

[20] Arthur Neslen, Nestle under fire for marketing claims on baby milk formulas, The Guardian (Feb1, 2018), https://www.theguardian.com/business/2018/feb/01/nestle-under-fire-for-marketing-claims-on-baby-milk-formulas

[21] Kate Hodal, Abuse is daily for female garment workers for Gap and H&M, says report, The Guardian (Jun 5, 2018), https://www.theguardian.com/global-development/2018/jun/05/female-garment-workers-gap-hm-south-asia

[22] David Teather, Gap admits to child labour violations in outsource factories, The Guardian (May 13, 2004), https://www.theguardian.com/business/2004/may/13/7