RCSS Policy Studies 20 · RCSS Policy Studies 20 Globalization and Multinational Corporations in...

Regional Centre for Strategic Studies

RCSS Policy Studies 20

Globalization and MultinationalCorporations in South Asia:

Towards Building a Partnership forSustainable Development

Arjun BhardwajDelwar Hossain

Published by:Regional Centre for Strategic Studies2, Elibank RoadColombo 5, SRI LANKA.Tel: (94-1) 599734-5; Fax: 599993; e-mail: [email protected]: http://www.rcss.org

© Regional Centre for Strategic Studies 2001

First Published: July 2001.

All rights reserved. No part of this publication may be reproduced, storedin a retrieval system or transmitted in any form or by any means, electronic,mechanical or photo-copying, recording or otherwise, without the priorpermission of the Regional Centre for Strategic Studies. It is distributedwith the understanding that it shall not, by way of trade or otherwise besold, lent, hired or otherwise circulated without the prior consent of theRCSS.

Views expressed in materials published in RCSS Policy Studies are ofcontributors, and not necessarily of the Regional Centre for Strategic Studies.

Printed by:Design Systems, Colombo 8.

ISSN: 1391-2933ISBN: 955-8051-21-7

In memory of Delwar Hossain’s father,the late Faizuddin Ahmed, who left for his heavenly abode

on 20 August 2000

Foreword

The concept of security has undergone major changes both globallyand regionally in recent years and particularly after the end of the ColdWar. Central to this question is what is it that we want to secure? In the eraof strong state nationalism, the answer was obvious. It was the territory ofthe nation state and national interests. This idea held sway till the end ofthe Second World War and even afterwards. It was common under theseconditions to expect the citizens of a nation to unquestionably lay downtheir lives, in defence of both these causes. This idea no longer holds at theend of the Cold War. The developed western countries today find it difficultto justify the loss of life of a single citizen whatever be the cause. This islargely because, security in the minds of people today have come to acquireentirely different connotations.

In truth security is far too interdependent and fundamental an issue,which cannot be defined in purely military terms. It is no longer my securityagainst yours, but my security AND your security, in a global environmentwhere all are equal stakeholders. With this concept has also developedgreater tendency for regional cooperation to further both national andregional interests.

It was with this aim and with support from the Ford Foundation, thatthe Regional Centre for Strategic Studies initiated a project on NonTraditional Security Issues in South Asia, as part of an Asia wideprogramme, to examine these emerging conditions of security. The topicsaddressed in this first phase were; Globalisation and Security, Governancein Plural Societies and Security and Environment and Security.

The principal studies on the above three topics were conducted byleading experts of South Asia and have resulted in independent books.Simultaneously, the RCSS also asked younger scholars to examine each ofthese issues from their own perspectives. The Centre decided to name thesecompetitive regional research projects as Mahbub Ul Haq Awards. ThisAward, which has led to three RCSS Policy Papers, is a comparativelysmall part of that overall programme. A unique feature of these Awardswas that scholars from two different countries of South Asia wouldcollectively address each topic. The extensive network developed by theRCSS made this possible.

We are indeed fortunate to be allowed to name these studies afterMahbub Ul Haq (1934-1998), a most distinguished South Asian scholar

of contemporary times, whose contribution to our understanding of‘development’ is internationally acclaimed and in particular his work onHuman Development Reports. He was a pioneer in the propagation ofthe concept of human development model, “the basic precepts of whichare to improve capabilities and expand opportunities of all people,irrespective of class, caste, gender and ethnicity.” Not only did he speak ofthe intensity of deprivation in the region, but also strived to bring to lightthe reason for such misery and mayhem. He was determined in his studyon South Asian countries to bring to light the oppressive political, economicand bureaucratic systems in the region. His work spanning over thirty yearswas dedicated to analysing how far governments affected the lives of itspeople-politically, economically and socially.

We humbly dedicate these three volumes to his name with the kindpermission of his equally well-known wife, Ms Kadija Haq, who continueshis work today.

This current work on Globalisation and Multinational Corporationsin South Asia, is by Delwar Hossain from Bangladesh and ArjunBhardwaj from India. It reflects their collective view on this issue ofmajor concern to the region.

Dipankar Banerjee June, 2001Executive Director

Preface

Globalization is not a new phenomenon. What is new is its speed andreflexivity given its complex nature and the gravity of impact on states andsocieties. Contrary to interdependence, it refers to a gradual and ongoingexpansion of interaction processes, forms of institutions, and forms ofconflict and cooperation, cutting across domestic and internationalboundaries. It covers the entire gamut of economic, political, social andcultural development across the world marked by the dramatic spread ofthe market economy and democracy in the post-Cold War period.Multinational Corporations (MNCs) are a driving force behind the processof globalization. The relationship between MNCs and globalization iscomplementary since one reinforces the other. Under the conditions ofglobalization, MNCs are increasingly becoming major players at bothdomestic and international levels. Many of the costs and benefits ofglobalization are closely linked with the operations of MNCs. On the otherhand, empirical evidence suggests that globalization is becoming both athreat and an opportunity for non-traditional security in many different ways.For example, threats are manifested (among other ways) by widening therich-poor gap, social instability and increasing environmental degradation,while opportunities have shown up in forms of faster economic growth,more technology transfer, and increased democratization. In this context,the imperative of sustainable development could address the pitfalls andpromises of the process of globalization.

We, therefore, argue that the phenomenon of globalization is stronglylinked to sustainable development, and we have analysed these linkages inthe context of the environment in South Asia. Sustainable developmentaddresses the problems of global security. Developing countries have alwaysclosely examined the costs and benefits of the entry of multinational firms.Before the 1990s, relations were antagonistic, driven partly by ideologicalconsiderations and partly due to irresponsible behaviour by many largecompanies which led to horrible industrial tragedies. In the 1990s, therehas been an increasing acceptance of MNCs in South Asia, and there havealso been concerns of building partnerships with MNCs and elicitingstronger participation from them in the sustainable development process.In our study, we focused on companies in India and Bangladesh and triedto identify the trends of foreign direct investment (FDI) as well as closelyexamine some of the development efforts of MNCs. We discovered theruthless decision-making processes in these companies and the pressureunder which professionals perform. Our search for role models of partnership

also led us to look extensively at the strong partnerships which theIndian company Tata Steel had created in the development process, withoutactually using too many of their own resources. We felt that managerialskills at MNCs could add great value to the processes of sustainabledevelopment.

When we took up this challenging assignment of identifyingpartnerships between MNCs and host governments in South Asia, inunderstanding the new emerging security paradigm and to focus onopportunities and areas of collaborative efforts between MNCs and otherstakeholders in the sustainable development process, we did not have toomany leads to follow. Scanning existing literature and talking to executivesacross the corporate sector, non-governmental organizations (NGOs) andpolicy makers helped us build a perspective on the ways these differentorganizations approached the prospects of being partners in the sustainabledevelopment process. We studied many MNCs and their efforts in thedevelopment process in the host nations, and discovered a few where wefound examples of remarkable collaborative efforts in which the corporatesector played an important role.

Contents

I Introduction 1

II Scope of the Study and Hypothesis 5

III Globalization, Security, andSustainable Development 9

IV Implications of Globalization:A Critical Overview 25

V Multinational Corporations: Changing Strategies 30

VI Multinational Corporations in South Asia 36

VII The Indian Example:Case Studies of Enron and Tata Steel 45

VIII A Case Study from Bangladesh 59

IX The Road Ahead 65

Notes and References 68

Bibliography 73

10 Arjun Bhardwaj / Delwar Hossain

Globalization and Multinational Corporations in South Asia 11

I

Introduction

With the process of globalization, the traditional power and authorityof nation states have come under scrutiny. As Edwards argues, changes inthe distribution of power and authority are characteristic of the processeswe call globalization.1 While the ‘globalists’ argue that globalization willcontinue until there is a “borderless or seamless” world in which the non-state actors will play a substantive role, the ‘internationalists’ feel that theprimary actors will continue to be nation states. Despite considerable debate,the fact lies that although the role of the state has not diminished, it haschanged to a great extent. Two non-state actors which structure globalpolitics and economics in the age of globalization are the private sectoractors of MNCs and NGOs. The rising power of MNCs, particularly, in thepost-Cold War era generates a paradoxical situation for governments ofdeveloping countries. On the one hand, they need to attract the capital,management skills, technology and global market access that MNCs canprovide. On the other hand, they need to be sensitive to the potential dangersof transfer of important assets from domestic hands to foreign control.2

The urgency of action is now particularly great: not only is the volume ofFDI booming, but the strategies being deployed by transnationalcorporations (TNCs) are also giving them increased leverage. Globally, thecorporate world is becoming increasingly intertwined. The MNC is both avehicle for generating FDI as well as a product of it. This trend towardsMNC-based foreign investment is likely to continue as a result of theglobalization of markets for goods, services, and capital.

In this context, the role of international financial and economicorganizations is vastly favourable for MNCs. The World Bank andInternational Monetary Fund (IMF) have systematically undertaken“structural adjustment programmes” around the world by attachingconditions to use their lending to help adjust economic structures of debtornations to suit the purposes of world development strategies with the aimof opening economies to markets. These programmes have clearly benefitedlarge multinationals, ruling elite, and the lenders themselves. The nationalresponse to the 1997–8 financial crisis in Asia is a good example. Despitethe crisis, economic, social and technological forces towards globalizationremain strong. The IMF-host country agreements reduced restrictions onforeign ownership of land and investment, placing forest and land resources


more directly under the influence of global market forces and foreigncorporations. In fact, much globalization is driven by MNCs. Competitionamong MNCs is intensifying at the global level, and the pressure to keepcosts down forces them to locate in or relocate to countries that offer first-class conditions. This will influence global investment patterns and hasimportant consequences for South Asia.

Concern about increasing corporate power was clearly voiced in the10th UNCTAD conference held on 12–19 February 2000 in Bangkok, whereAsian leaders talked about the growth and increasing power of huge MNCs.In a speech to at conference, Malaysian Prime Minister Mahathir Mohamadsaid he was “worried and frightened” by the speed at which companieswere merging to seek domination of some global industries. Chambersmaintains that in the 1980s and 1990s, the World Bank, IMF and otherbanks and donors set conditions for domestic economic policies in the Southto a degree unthinkable in the 1960s or 1970s. More than ever before, poweris concentrated in the cores of the North, including power to determinenational policies in the South.3 The 1999 Human Development Report states,“…the new rules of globalisation—and the players writing them—focuson integrating global markets, neglecting the needs of people that marketscannot meet. The process is concentrating power and marginalizing thepoor, both countries and people.” In addition, pressures from internationalfinancial institutions, trade organizations and international financial marketsseverely constrain the developing world governments’ ability to design theirown development strategies and to establish fair and equitable relationsbetween host countries and the multinationals.

Against this background, the developing world in general, and SouthAsia in particular has been facing a major policy dilemma in the area ofFDI arising from the challenges of globalization. This has larger implicationsfor the security of South Asia by way of their role in economic development,environmental security and social resilience. The MNCs could play asignificant role in the development process of the nation state by generatingeconomic growth, exemplified in the case of East and South-East Asiancountries since the 1970s. Also, under Cold War assumptions, countriesare always prepared for emergencies, but economic integration andglobalization are helping alter this. As globalization accelerates andeconomies get integrated, political and security relations too enter a newera.4 Capturing some recent trends, it may be argued that globalization has,at a certain level, helped countries like Singapore buy security insurance,and multinational presence is also helping countries like India and Chinagain greater bargaining positions when dealing with developed countries.


A case in point was the sanctions against India after the nuclear blasts,where, ironically, it was large multinationals with high commercial stakeslike Enron, Coke and Pepsi which emerged as the biggest post-Pokhranlobbyists for minimizing the negative impact of sanctions on India.

The MNCs continue to be at the centre of the debate regarding thecosts and benefits of their operations in the emerging economies of SouthAsia. Many concerns about the exploitation of the Least DevelopedCountries (LDCs) by multinationals are accentuated by such incidents asthe Bhopal gas disaster in India and the Magurchara tragedy in Bangladesh.Issues of social responsibility continue to centre on the poverty, lack ofequal opportunities, environmental and consumer concerns, and the needto make MNCs partners in sustainable development. The MNCs concentratetheir R&D in home countries, restricting the transfer of modern technologyand know-how to host countries. Environmentalists and labour rightsactivists sharply criticize MNCs for endangering the ecological balanceand human rights. All these generate a complex situation for South Asiancountries in formulating policies concerning FDI. As globalization spreadsfast and economies get integrated, political and security relations too entera new era. Ironically, tons of research work has been done on the ratherantagonistic relationship between MNCs and host countries, but not toomuch research has been done on building bridges for collaborative efforts.This is an area we feel needs to be studied in depth.

Given these emerging trends and the significant presence multinationalshave in these developing economies and the increasingly important rolethey play in both the security and economy of these countries, governmentsrealize that there is a need for establishing and strengthening partnershipswith them and making them part of the sustainable development processes.Faced with intense pressure from environmental and human rights groupsnot only in host countries and elsewhere, these companies, in order to protectthere long-term interests, have also been under pressure to reconsider theirearlier policies and to use their strengths in terms of skills, resources andpower and take initiatives to make a fair contribution to the developmentof host countries. That begs the question as to what role can be played byMNCs in South Asia in making a positive contribution to sustainabledevelopment. How would the regional host governments be involved inthis process? Will the South Asian states continue to criticize the role ofMNCs? Or will they welcome FDI uncritically? Will the malpractices ofMNCs be repeated in neglecting the development of host countries? Will itbe worse now since they have a more favourable climate to manipulatetheir corporate interests? It is against this backdrop that this study examines


the role of MNCs in South Asia, taking into account the regional and globalchanges under conditions of globalization. The study also explores whatrole models of MNCs and policy responses of host governments’ areappropriate for the development of this highly underdeveloped region.


II

Scope of the Study and Hypothesis

With the end of the Cold War, security assumes an integrated approachencompassing socio-economic, environmental and human factors, whichclearly establish the primacy of non-traditional security in the whole gamutof the global security structure. Presently, two different trends of securityexist: one is a paradigm shift from conflict-based security to cooperativeand common security, and the other is the deepening of the security concernsof societies against the backdrop of persisting environmental, economicand social problems under the process of globalization. Given the changingperspective of security, sustainable development can best serve the non-traditional security interests of nation states. As popularly understood, theoperations of MNCs in many cases imperil the three components ofsustainable development—sustainability of economic growth, of humandevelopment and of ecology. In reality, as indicated earlier, MNCs couldplay a substantive role in the whole development process of nation states.Recently, several MNCs like Enron, Levi, Nike and Novartis have beenengaged in sociocultural development programmes in many host countries.These companies are also giving more attention to environmental and humanrights concerns. Although South Asia finds it difficult to attract global capital,there has been a significant presence of MNCs in this region. With theglobalization process, MNCs have become an inevitable part of thedevelopment process in almost all the economies of South Asia. Therefore,the major imperative for South Asian countries is to make these MNCspartners for sustainable development in this region.

Against this backdrop, the basic question upon which the study is basedis to investigate how South Asian countries are facing the dilemma of makingthe multinationals part of the process of sustainable development and toestablish long-term constructive and mutually beneficial relationships whichwould ensure non-traditional security at regional, national and individuallevels. The underlying assumption is that the process of globalization hascreated a compelling ground for both MNCs and state actors to look forareas of partnership in order to achieve mutual gains. Although state actorsare considerably constrained in their actions, in most cases it is theemergence of civil-society movements (specifically in the South) that, inplace of states, puts tremendous pressure on the behaviour of MNCs.Competing relations between the two non-state actors (MNCs and civil-


society organizations, or CSOs) provide an important opportunity for statesto redefine their linkages with MNCs. The basic question will be addressedby answering the following questions.

• How do we conceptualize the process of globalization? To whatextent have its various dimensions changed the focus of security?Why is the issue of sustainable development important in thiscontext?

• How do MNCs influence the directions of globalization? How isFDI related to MNCs? What are the strategies of MNCs? How dothey affect the interests of host countries?

• What are the trends, composition and sources of FDI in SouthAsia? What are the problems of the operations of MNCs in thisregion?

• Is it possible for MNCs and host countries in South Asia to forgemutually beneficial relationships in order to achieve sustainabledevelopment, thereby ensuring non-traditional security?

By answering these questions and investigating the main hypothesis,we aim to achieve the following objectives.

• To conceptualize globalization in relation to security andsustainable development.

• To analyse the expectations and perceptions of host governmentswith special reference to development and security needs;

• To identify possible areas of partnership.

• To recommend a policy framework in order to cater to thedevelopment and security needs of South Asian countries.

The study makes some assumptions. (1) That, for better or worse,the position of MNCs has been strengthened in the age of globalization. Anumber of domestic and international regulations along with fundamentalglobal structural changes precipitated by the end of the Cold War contributedto increasing corporate power. For instance, the investment relatedregulations of WTO and the proposed Multilateral Agreement on Investment(MAI) strengthened the bargaining power of MNCs vis-à-vis host countriesof the developing world. (2) That although developing countries are keento attract MNCs, they can neither accept the ever-increasing power of MNCs,nor orchestrate necessary policy measures at domestic or multilateral levelsin order to restrict their behaviour. (3) That the role of MNCs is perceived


in the changing conceptualization of security and development. (4) Thatthe issue of sustainability can bridge the gap between MNCs and hostcountries in South Asia.

Methodological Considerations

To achieve the above-mentioned research goals, we need toconceptualize the basic phenomena properly and to choose an appropriatelevel of investigation for empirical grounding. In addressing the conceptualquestions, the study has developed some operational definitions of keyconcepts and has made some assumptions, as indicated earlier. Thetheoretical framework of the study depends on conceptualization of thekey concepts to understand the interconnection between the three variables:globalization, security and sustainable development. The research techniquethat is likely to prove the most meaningful to provide empirical evidence inour study is an investigation of specific countries to illustrate how MNCsand host governments in South Asia could forge partnerships for sustainabledevelopment. India and Bangladesh were selected as cases in point.Compared to global models, which are too aggregative and prone to leaveout important details, our technique of studying specific countries wouldprovide factual and detailed information of considerable significance incrafting future policy frameworks to meet the challenge of globalization.However, the research design will proceed with the analysis of three crucialfactors: theorization of key variables by examining the linkages betweenglobalization, security and sustainable development; the salience of FDI asa force behind globalization; and the analysis of trends and directions ofMNCs in the globalized world economy. Finally, the study will seek toidentify issues of partnership between MNCs and host governments in SouthAsia in order to develop new policy responses to globalization. Apart fromdiscussing case studies, we have made a substantive review of literature.As a result, the study draws on both primary and secondary sources ofresearch materials. A series of interviews were conducted with scholars,government officials, businesspersons and citizens’ groups in Bangladeshin order to provide more empirical basis to the study.

Organization of the Study

The study is divided into seven sections. The first section introducesthe conceptual framework of analysis through establishing the key linkagesbetween globalization, security and sustainable development. The secondtakes a critical overview of the process of globalization and itsinterconnection with MNCs, besides examining how MNCs as agents of


globalization can influence the non-traditional security concerns, particularlythose of developing countries. The third section deals with the changingstrategies of MNCs with specific focus on historical analysis of MNCs–host country relations and corporate behaviour. The fourth section highlightsthe operations of MNCs and current trends of FDI in South Asia. It alsodwells on the changing perspective of host governments and MNCs’relations in South Asia. The fifth section looks at case studies on Indiawhile the sixth section focuses on the case of Bangladesh. In the final section,we examine some future trends in order to build up collaborative relationsbetween MNCs and South Asian states.

Limitations Of The Study

The study does not claim to represent the views of the developed ordeveloping countries in general, rather it examines the research question inthe context of South Asia to reflect the scenarios of the South inconceptualizing the triangular relationship between globalization, securityand sustainable development. Although this study provides an importantstarting place to investigate the emerging relationship between globalizationand non-traditional security in the specific context of MNCs’ operations, ithas two limitations. First, the data that ground this study are inadequate,which may constrain the generalizability of their findings. Second, theframework of analysis is not fully specified. The constructs and theirunderlying relationships require greater precision in order to be predictive.To understand sustainable development-oriented MNCs, we need to furtherexplore the contexts that precipitate these motivations and their interactions.


III

Globalization, Security, andSustainable Development

In this section we introduce a wider theoretical postulation of the keyvariables in order to understand their complex linkages. The process ofglobalization is treated as an independent variable, while the concepts ofsecurity and sustainable development are regarded as dependent variables.Another dimension of understanding the process of globalization is therelationship between globalization and MNCs. Through the channel of FDI,the MNC has emerged as a driving force behind the process of globalization.

Globalization

Globalization is not a new phenomenon. What is new is its speed andreflexivity given its complex nature and the gravity of impact on states andsocieties. Some argue that globalization has existed for centuries. Whilecontemporary globalization started after World War II, the earlier versionwas observed before the war. Keohane states, “Economic globalisation tookplace between approximately 1850 and 1914, manifested in Britishimperialism and increased trade and capital flows between politicallyindependent countries.”5 Chomsky argued that contemporary globalizationis rooted in the mid-1970s since when exchange rates were floated andlimitations on capital flows were eroded.6 More importantly, theintensification of the process of globalization has been linked with the endof the Cold War. Some argue that it is the ending of the Cold War thatfinally released the forces capable of propagating new socio-political andeconomic movements in domestic or external contexts in the absence ofstrategic obsessions of the two superpowers—the United States and theformer Soviet Union. Thus, the demise of the Cold War in 1990 marks anera of rapid and extensive global change.7 The economic, political andstrategic implications of this change are enormous.

While conceptualizing globalization, it is clearly observed that thenotion of globalization is subject to various interpretations, diversetheoretical frameworks and different kinds of empirical evidence. AsFriedman observes, the notion of globalization has been “discussed so widelyin scholarly and popular circles that it has reached the ignoble status of‘buzzword’, familiarly used by many to refer to some fuzzy phenomenon


or trend in the world, but hardly understood by any.”8 Despite this debate,the literature on globalization continues to proliferate, and the notion itselfoccupies the centrality of contemporary social science. The literature onglobalization demonstrates two diametrically opposite extremes in thecontinuum. Some strongly advocate the benefits and its overwhelmingpower to change the existing social phenomena, most notably, the role ofthe state.9 Friedman, a supporter of extreme globalization, argues that it is“the overarching international system shaping the domestic politics andforeign relations of virtually every country, and we need to understand it assuch”.10 Some argue that it is a myth and has no significant role in alteringhuman relations, while some take a cautious approach in assessing the costsand benefits of globalization, as the process itself is unfolding.

All debates on globalization eventually come down to either narrowdisciplinary boundaries or major theoretical approaches. It is a rather futileexercise trying to find out the loci of the debate in the disciplinary context asthere are many branches of human knowledge. So, it is appropriate to addressthe contending theoretical approaches behind the conceptualization ofglobalization. In this connection, we observe three different approaches: theliberal/neo-liberal thread; realism/neo-realism; and historical structuralism.While the neo-liberalists perceive the process of globalization primarily asan economic phenomenon prompted by market ideologies creating aborderless global economy with a substantive role of non-state actors, neo-realists question the existence of this notion and feel that the primary actorwill continue to be the state. So the realists tend to identify the process ofglobalization as “internationalization”, or “openness in the internationaleconomy”. On the other hand, historical structuralism argues that globalizationrepresents a power-domination dichotomy reflecting hegemonic relationsbetween the North and South. It emphasizes the characteristic features of theglobal economic system, which demonstrates an inherently imbalanced patternof international interdependence leading to inequalities within and amongcountries, perpetuating the dominance of powerful states and strengtheningcorporate power. However, this debate is presented in the subsequent section.

As indicated above, various approaches to globalization reflect a limitedunderstanding of the reality, since they are confined within particular researchagenda. So the fact is that no single approach can capture all the complexitiesof understanding the process of globalization. Therefore, we are better offwith a diverse array of competing ideas rather than a single theoreticalorthodoxy. Thus, arresting the salient features of different contendingapproaches, it may be argued that globalization is the outcome of the infusionof diverse and complex social realities generating from economic, political


and cultural contours. Some neo-realist assumptions such as state-centrism,presence of anarchy, possession of military power, and ally-enemy rotationmake us think critically about the process of globalization from the realistpoint of view. Similarly, the neo-liberal approach has established some validgrounds to consider the notion of globalization, given the overriding emphasison market mechanisms, liberal democracy and non-state actors such MNCsand CSOs, signifying the differences of values and identities as stressed bythe realists/neo-realists. The structuralists have also made strong argumentsif globalization is seen from the “bottom”. It may be argued that the notion ofglobalization emerges as an inevitable outcome of systemic evolution morein economic terms, and its emergence would rather accentuate structuralchanges at domestic and global contexts. Therefore, it is best perceived as amultidimensional spatial phenomenon, which is not an “event”, but a gradualand ongoing expansion of interaction processes, forms of institutions, andforms of conflict and cooperation cutting across domestic and internationalboundaries. It refers to the set of economic, political, social and culturaldevelopments across the entire world, marked by the dramatic spread of marketeconomy and democracy in the post-Cold War period. It covers a broad rangeof material and non-material aspects of production, distribution, management,finance, information and communications technologies, and capitalaccumulation.11 As a dynamic process, it introduces transformational changesin a range of human activities, generating a set of new conditions. Arguably,these changing new conditions drive the national structure to integrate intothe global system on the one hand; it generates changes in the rules the ofgame in domestic and international contexts, on the other. Prakash and Hartargue that globalization processes are initiated and encouraged by fourcategories of factors: technological change, spread of market-based systems,domestic politics, and interstate rivalries that clearly establish it an independentvariable (Fig. 3.1).

Spread of market institutionsDemocratizationInformation communication technologyCivil-society movementsInterstate rivalry

Process of globalization

Institutions of governance

Fig. 3.1 Globalization as an Independent Variable


Now it is pertinent to identify what the factors are that have beencatalysing the process of globalization by way of introduction of changesin rules and regulations in domestic and global contexts. We conceive thatfinancial liberalization, openness in trade, degree of privatization, level ofdemocratization, access to information and communication technology(ICT) and activity of CSOs are closely enmeshed with the process ofglobalization.

Financial Openness

The major defining character of contemporary globalization is ever-expanding capital movement across borders caused by financial reforms.World financial flows are so large that the numbers are overwhelming.12

These flows are largely liquid and are attracted by short-term speculativegains, and can leave the country as quickly as they came. Besides currencytrade, new financial instruments such as bonds, mutual funds, junk bondsand derivatives have emerged in the recent past, which have furthercontributed to the globalization of finance. Behind this movement of capitallies the opening up of the financial structure of a country, which dependson a number of concrete economic measures. As the World DevelopmentReport 1989 suggests, the major components of financial reform specificallyin the context of developing countries are (1) financing fiscal deficits, (2)interest rate policy, (3) directed credit, and (4) institutional restructuring.13

However, in reality, it is the process of deregulation of domestic economyfrom the control of the state that opens up the financial sector. Technologygenerates the environment of deregulation in many countries. For example,the invention of the cellular phone through lowering the cost brings manycompanies together in carving out the global market. Moreover, exchangerate reform through currency convertibility and devaluation and pricereforms provide a major push to financial openness.

Trade Liberalization

Liberalists maintain that unrestricted international trade maximizes totalworld income and welfare from a fixed quantity of available resources andtechnology. By contributing to a more efficient use of the world’s resources,liberalization by any country contributes to gains from trade.14 So tradetransactions both at domestic and international levels must be liberalizedthrough the removal of tariff and non-tariff barriers, which ultimatelycontributes to opening up external markets. For example, the export-ledgrowth strategy that contributed largely to the spectacular economicdevelopment of East Asian countries depends on trade liberalization. In


addition to domestic policy changes, the international regime under therules of the World Trade Organization (WTO) promotes an externalenvironment in liberalizing trade policies in both developed and developingcountries.

Privatization

Privatization is another major component of the overall process ofglobalization that promotes an economy where goods and services areproduced and distributed by individuals and organizations that are not partof the government or state bureaucracy. The issue of property rights, whichdepends on three interrelated issues (the concept of property, exclusive rightsto own, and transferability) is at the heart of the privatization process. Inthe capitalist economic system, privatization refers to the establishment ofprivate ownership of property through denationalization and thedevelopment of private entrepreneurship. According to neo-liberalism, it isan effective economic strategy to increase efficiency and productivity indomestic economy, thereby increasing the wealth of the nation. In reality, itcreates a profit-making capitalist class that might not contribute to nationaldevelopment. In contrast to industrialized nations, the privatization processhas not been contributing to national economic development in manydeveloping and transitional economies. However, under conditions ofglobalization it continues to be an important factor for economic change.

Democratization

Academic literature traces two causal paths linking globalization anddemocratization. Along one path, globalization promotes growth, which inturn promotes democracy. Along another, globalization promotes inequality,which creates instability, lower growth, and a degradation of democraticinstitutions. Drawing on endogenous growth theory, it is argued that thepath that prevails depends critically upon the nature of domestic politicalinstitutions, and especially the quality of capital-market (both financial andhuman) institutions.15 As advocated by neo-liberal thinkers, democracypromotes peace and economic development. Although it is debatablewhether globalization thrives on democratic impulses, political globalizationis almost synonymous with the establishment of a multiparty liberaldemocratic system. Democracy is defined as a political system whichsupplies regular constitutional opportunities for changing governmentofficials. It is widely held that democracy creates the enabling environmentin which market forces can perform their functions properly. Therefore,democratization emerges as an all-important issue after the end of the Cold


War. The level of democratization may be considered as a significantcriterion to measure how far a country is experiencing the process ofglobalization in the political sense.

Information and Communication Technology

The hallmark of globalization is the ‘technologization’ of trade.16

Recently, ICT has emerged as a paradigm of development given itswidespread impact on different facets of human life, thus becoming animportant force behind the process of globalization. Some argue that it isthe technological revolution as envisaged by Toffler in his famous workThe Third Wave which has been making the difference between the earlierand contemporary phases of globalization. In fact, ICT is considered as themain engine of economic growth for developed countries, and more so inthe coming decades. For example, the Organization for EconomicCooperation and Development (OECD) recently claimed that ICT is anenormous instrument to bridge the divide between the rich and poor, notjust the “digital divide” between those who have access to the Internet andthose who do not.17 There are three main components of ICTs: computing;communications; and Internet-related communications and computing.Particularly, the growth of the Internet marks an important breakthrough inthe economic and political domains of a country. The emergence of virtualstates, e-governance, e-commerce and so on has been changing the waysand operations of human activities.

Civil-Society Movements

Like ICT, the emergence of civil-society movements both in thedomestic and international contexts leads to the intensification of humaninteractions beyond the formal governmental process. This is more explicitlylinked with globalization, both as a cause and a way out. On the one hand,globalization by its emphasis on market forces and devolution of powercreated a wider role for CSOs, on the other hand local communities areforming networks of CSOs to address common concerns generated by thesame globalization. Civil-society movements are generally attributed tothe emergence of NGOs, non-profit organizations (NPOs), citizens’ andprofessional groups that have grown remarkably in variety and number inthe past 25 years. Though estimations differ, the NGOs listed in suchresources as the OECD Directory of NGOs, the United Nation DevelopmentProgramme’s (UNDP) Human Development Report and research based onthe Yearbook of International Associations all indicate a significantexpansion of the NGO sector.18 It is increasingly becoming a strong


phenomenon to exert considerable pressure on states and internationalorganizations in order to operate transactions in a certain direction.Interestingly, although CSOs generally oppose the process ofglobalization—or at least do the same in certain sectors like environmentand labour—in reality, they have become a significant force behindglobalization.

Of course, the politico-economic factors (such as financial openness,trade liberalization, privatization and democratization) have long beendiscussed, mainly under the framework of new-classical economics andthe modernization project since the 1950s. During the Cold War era, theimperative of preserving the capitalist system against the threat of Sovietsocialism always prompted the Western world to advocate these issues allover the world. But the difference in the present period lies with the factthere has been a global dominance of neo-liberal ideologies that addedspeed and reflexivity to the whole process. Equally important, ICTs andcivil-society movements are relatively new phenomena, cutting acrossterritorial boundaries, and all these create conditions conducive toglobalization. The preceding analysis demonstrates that the basic nature ofglobalization is economic, with related spillovers in political, cultural andsocial arenas. The underlying mechanism is the system of transnationalintegration and convergence in multiple sectors—trade, finance,communications, culture and employment. The major actors are nationalgovernments, international organizations, MNCs and CSOs .

Rethinking Security

Security at either national, or regional, or global levels has been widelycontested in its meaning and scope. For several decades, the predominanceof the realist paradigm defines security under the rubric of power.Conceptually, it was synonymous with the security of the state againstexternal dangers, which was to be achieved by increasing militarycapabilities.19 This state-centric definition emphasizes “self-help” andinternational “anarchy” in addressing the so-called “security dilemma” ofnation states. Balance of power or deterrence was considered the mosteffective instrument for bringing stability at regional or global levels. Theemergence of the Cold War in the mid-1940s and its sustenance can beattributed to the realist/neo-realist world view of the great powers in general,and the superpowers in particular. This resulted in the escalation of thearms race, interstate conflict and confrontation all over the world. Mostimportantly, it heavily undermined the real security needs of the Third Worlddeveloping countries. As Ayoob makes it clear, the quest for systemic


security actually increased Southern insecurity.20 However, the end of theCold War and other related developments in the early 1990s opened upopportunities for expanding the definitional boundaries of security in thereal sense. The widening of the scope of security has been recognized to agreat extent. The phenomenon of globalization, global concerns forenvironmental degradation and widespread global poverty have posed majorchallenges to the statist view of security.

Akin to the dominance of the state as security provider, Buzan makesthe most important and comprehensive re-examination of security in thepost-Cold War period.21 He clearly broadened the sources of threat, whichwere hitherto monopolized by military considerations, by including political,economic, societal and environmental concerns. More so, the level ofanalysis has been expanded to individual needs that fairly justify theimportance of human security. It may be noted that the re-examination ofsecurity goes back to the concept of “common security”, “comprehensivesecurity”, or “cooperative security” introduced much earlier in the 1980s.Mikhail Gorbachev proposed a comprehensive system of internationalsecurity in the mid-1980s, which would include disarmament as well asglobal economic and ecological security.22 Subsequently, the critical andfeminist perspectives have made important contributions to the redefinitionof security.

The Bruntland Commission of 1987, the protracted North-Southnegotiations, the Earth Summit in Brazil in 1992, the establishment of theCommission for Sustainable Development (CSD) and the GlobalEnvironmental Facility (GEF) and the publication of the HumanDevelopment Report provided an institutional environment to rethink thetraditional, statist concept of security. Based on the preceding analysis, weconceive security as a multidimensional and multilevel concept thatembraces an integrated approach by addressing the threats of diverse sources.A clear shift may be observed in the security paradigm from the traditionalmilitary to a non-traditional orientation, generating a transformation of state-centric threat perceptions. Also, a strong notion has been established thateconomic strength has replaced military strength as the measure of globalpower.23 As a result, the imperatives of economic development,environmental protection and human development come to the centre stageof security thinking. Some even argue that we are finally moving from thesecurity of the sovereign state to the security of the entire globe. Militaryinvasion and deterrence as observed in the Cold War era have becomeirrelevant, if not obsolete, in national strategies of survival. Now, whetherwe use the term “economic security”, or “environmental security”, or even


“military security”, instead of physical protection, development becomesthe overarching goal of security at every level. The pursuit of developmentis clearly linked with human survival.

The practical necessity of human life as embodied by “human security”becomes a fundamental issue in the whole security debate in the 1990s.The concept of “human security” is defined as the protection of humanbeings from material and non-material threats. It is an action-orientedapproach that focuses on the individual, more comprehensively covered bythe notion of “human development”.24 Emphasizing “growth with fairness”,Sen also stresses the need to ensure human security by creating scope forpolitical participation of the underprivileged, in addition to the achievementof economic and social security. Thus, human security and humandevelopment are linked in a way where the former is an end, and the lattera means. Both rely on the development of society. As Kaul states, humandevelopment and human security are the outcome of the sum total of ourdevelopmental activities—economic, social and political, as well as local,national and international.25 Specific areas identified as being closely linkedto human survival include poverty, the environment, health care, andhumanitarian assistance. Thus, educational development, technologytransfer and IT infrastructure combined with conservation of environmentare vital to the development of developing countries, thereby ensuring humansecurity. The actors for implementing the goal of security are no longermonopolized by the state; rather it includes non-state actors such as businesscorporations, international organizations, and NGOs. All these actors areto provide the necessary conditions for economic viability to each and everyindividual.

Sustainable Development

Sustainable development remains a contested concept in both thephilosophical and political senses. Its theoretical foundation is based oncontributions from ecology, economics, anthropology, sociology,psychology and politics. The concept of sustainable development dates backto the early 1970s, and the Club of Rome report, Limits to Growth, wasprobably the cornerstone piece of literature that contained a powerfulmessage about the impending environmental disaster in the world.26 TheUnited Nations Earth Summit in Rio de Janeiro (1992) is seen as the majorevent that organized coordinated efforts to focus on sustainable development.The international political salience of environmental issues arising fromaccelerating rates of environmental degradation, improved scientificknowledge and ecological imbalances facing humanity captures the


intellectual attention of thinkers and practitioners. In particular, the growth-based neo-liberal development paradigm has been questioned for creatingso much trouble with the environment. Melinda Kane states, “The field ofeconomics is perhaps most guilty of considering only its own scope ofactivity, assuming other layers (social, ethical, cultural) will operate by thesame rules because actors will always be rational in their decision making.”27

There are at least three different perspectives behind theconceptualization of sustainable development. First, most commonly,environmentalists perceive sustainable development as referring to thechallenge of taking environmental values, and incorporating them into thetraditional social and economic values that govern public policy and ourdaily behaviour. They emphasize the ecological sustainability of the worldwe live in. They argue that massive industrial growth and exponential riseof population are the root causes of most environmental degradation. Theworld economy, fuel consumption, industrial activities and energyconsumption have increased by as much as 20, 30, 50, and 80 timesrespectively during the last hundred years.28 So, according to this view,sustainable development is defined as development that meets the needs ofthe present generation without compromising the ability of futuregenerations to meet their own needs. Second, the economists’ view, oftentermed as the “growth is necessary school of thought”, highlights thenecessity of economic growth with fairness. They criticize theenvironmentalists for being obsessed with environmental values that ignorethe issue of prosperity for the current generations. They prefer to call it“sustainable economic development” by maintaining a balance betweeninvestment and the distribution of income (issue of per capita income).Finally, according to the advocates of human development, it focuses onpoverty and population. They argue that there are close links betweenpoverty, environmental degradation, and rapid population growth.29 Bysustainable development, it refers to the qualititative change in the humancondition by improving the basic indicators such education, health, foodand shelter. Despite differences in these views, there is consensus on oneissue: that the earth is endangered.

Each of the perspectives reveals a limited understanding of the reality.It also generates a dilemma of “sustainability” and “prosperity”. The issueof improving the standard of living must get due consideration in the wholegamut of the sustainable development debate. This requires striking abalance between the needs of economic prosperity and protecting theenvironment that will lead to crafting a policy to make prudent use of theearth’s resources, as well as an improvement in the quality of the


environment. Thus, arresting the central thrusts of these views, we mayargue that there are three broad components of sustainable development—environment, economic growth and population. So, we perceive sustainabledevelopment as a multidimensional concept, a pattern of development thatmaintains the integrity and long-term viability of the biosphere, but alsothat which is sustainable in economic, social, and political terms.30 It maybe noted that sustainable development has strong global dimensions bothbecause of the high levels of economic interdependence, and because offundamental concerns about the distribution of wealth, power and resourcesbetween North and South.31 The challenge for sustainability is to providefor those needs in ways that reduce negative impacts on the environment.But any changes made must also be socially acceptable and technically andeconomically feasible. It is not always easy to balance environmental, socialand economic priorities. Compromise and cooperation with the involvementof government, industry, academia and the environmental movement arerequired to achieve sustainability.

Conceptual Framework

The preceding theorization of the key variables clearly demonstratesthat globalization is closely interconnected with security in its changingfocus on the scope and agency of threat as well as with the constituents ofsustainable development. The whole process of interconnection is complexand complicated, with the involvement of intervening variables. While thetriangle of globalization–security–sustainable development represents acausal relationship, the security–sustainable development linkage is seenas an ends-means pattern (Fig. 3.2). Sustainable development is perceivedas an instrument to combat the threats to security, specifically in its humandimension. The relationship between globalization and MNCs is twofold,since one reinforces another. In a generic sense, the processes ofglobalization contribute to the ever-expanding role of FDI. On the otherhand, economic globalization itself is the outcome of internationalizationof production, capital and global trade.


Fig. 3.2 Triangular Relationship Between Globalization, Security andSustainable Development

Indeed, the processes of globalization have fundamentally changedthe way we think about security. This change may be conceived in terms ofboth agency and scope of threat. Non-state groups and individuals haveemerged as powerful agents of threat that have widened the scope ofsecurity.32 Thus, the concept of security embraces a broad-based, integratedapproach going beyond military orientation. A plethora of non-traditionalsources of threat manifested in economic, environmental and culturalspectrums constitutes the bedrock of security thinking in the present-dayworld. The spread of communication and Information Technology (IT),increased capabilities of drug smugglers and criminal organizations, identitycrises of disadvantaged nations and substate groups and aggravating globalpoverty are bound to exacerbate security concerns in any part of the world.Seen from this perspective, the operations of MNCs as agents ofglobalization have enormous implications for security.

Similarly, the scope of “sustainable development” has been deepenedand broadened in the age of globalization. Although the general awarenessabout environmental degradation was generated in the West in the 1970sthanks to green politics and grass-roots movements, it is only in the early1990s that it took a global dimension. A wide range of issues ranging fromenvironmental degradation and human development to income disparitieshas come to the centre stage of development thinking. Globalization oftrade and investment may be the most advanced form of social and politicaltransformation that increasingly influences land-use and land-cover changein different countries and regions, in part by changing government policyand offering economic incentives to farmers and land developers. More so,globalization has implications for environmental management capacities

Globalization

Security Sustainabledevelopment

MNCs


of states by restricting the public measures, on the one hand, by boostingthe influence of markets on social and economic outcomes, on the other.So, we may argue that the agenda of sustainable development must be linkedwith the process of globalization in order to achieve security anddevelopment goals at national or international levels.

Having conceptualized the triangular relationship betweenglobalization, security and sustainable development, we will explore thepossibility of partnership between MNCs and host governments in SouthAsia. A question may be raised as to why MNCs would be interested in thispartnership. Although sustainable development can be a common concernfor the two parties for its focus on the fundamental existence of the earth,the specific reasons may be to comply with legislation, to build betterstakeholder relationships, to acquire economic wealth and competitiveadvantage, and to maintain the ecological balance.

Fig. 3.3 Mutual Interdependence between MNCs and Host Countries

With this above-mentioned framework for analysis, we will examinethe cases of India and Bangladesh to illustrate how MNCs as the drivingforce of globalization and host countries of South Asia can develop mutuallybeneficial relations for sustainable development. Historically, both countriesfollowed relatively inward-looking public-sector dominated economicstrategies for decades. Financial and trade sectors were overregulated bythe imposition of several kinds of restrictions including licensing systemsand tariffs. India and Bangladesh started deregulating the industrial sectorin the mid-1980s, although the latter initiated an economic reforms processa bit earlier. The process of economic reforms received considerablemomentum in both countries in the early 1990s. Changes in the policyframework for attracting FDI are also almost similar. The incentive structure,regulations and organizational framework to facilitate FDI appear to bevery similar not only in these two countries, but also in the whole region. Itis true that because of the difference in the sizes of the economies of thetwo countries, there have been some variations while considering the detailsof policy and implementation. But the basic approach and policy responseto globalization of FDI are almost similar.

Globalization and FDI

The expansion of the role of MNCs through the mechanism of FDI in

MNCs Host countries


the world economy is the driving force behind globalization. As Janardhanstates, the engines that are driving the globalization process are MNCs.33

Financial liberalization enhances capital mobility. Human-capital formationin developing countries improves the conditions for FDI and for theproduction of manufactured goods and services in the South. Tradeliberalization, meanwhile, facilitates the exports of manufactured goodsand services. It influences a range of issues spanning financial liberalizationto ICT. Thus, firms increasingly have a choice of location, since transportand communications systems work smoothly and at continuously decreasingcosts. Simultaneously, governments are competing with each other to attractpotential investors by offerring tax breaks, infrastructure development, andoften also breaks in terms of environmental or social standards. However,the salience of FDI behind the process of globalization is widely recognized.As the World Investment Report 1997 states:

Foreign direct investment (FDI) continues to be a drivingforce of the globalisation process that characterizes the modernworld economy. With some $6.4 trillion in global sales in 1994(and estimated global sales of $7 trillion in 1995)—the valueof goods and services produced by some 280,000 foreignaffiliates—international production outweighs exports as thedominant mode of servicing foreign markets.

The establishment of the Bretton Woods financial system under USleadership in the post-War period facilitated the expansion of cross-bordercapital flows and trade through the operations of MNCs. The world is nowwitnessing a third-generation boom34 in FDI flows which began in 1995,setting a new record of around $350 billion in 1996, a 10 per cent increase.On the inflow side, 54 countries and 20 countries on the outflow side setnew records in 1996. The major feature of this boom is significantparticipation of developing countries on the inflow side, although it is drivenprimarily by investments originating in just two countries—the United Statesand United Kingdom. For example, among the world’s 44,000 parent firms,7,900 firms were based in developing countries in the mid-1990s, comparedto 3,800 in the late 1980s—exports continue to be the principal mode ofdelivering goods and services to foreign markets. The gross product offoreign affiliates, a measure of their output, almost tripled between 1982and 1994, and its share of world output increased slightly, from 5 per centin 1982 to 6 per cent in 1994. In developing countries, the output of foreignaffiliates has contributed (in 1994) more to gross domestic product than ithas in developed countries: 9 per cent compared to 5 per cent.35


Table 3.1 Outflows of FDI from Five Major Home Countries

Home Country 1985 1987 1989 1990(US$ b) (US$ b) (US$ b) (US$ b)

France 2.2 9.2 19.4 34.8Germany 5.0 9.2 13.5 22.5Japan 6.4 19.5 44.2 48.1United Kingdom 11.1 31.1 32.0 21.5United States 8.9 28.0 26.5 29.0Total 33.7 97.1 135.6 155.9Developed countries 52.1 132.6 187.1 216.7Developing countries 1.2 2.4 8.9 8.1

Source: John Dunning, Multinational Enterprises and the Global Economy,New York: Addison-Wesley Publishing, 1993, p. 19.

Table 3.1 shows how FDI flows have expanded over the years, markinga big transformation observed in 1990. For example, FDI outflows ofdeveloped countries jumped from US$52.1 in 1985 to $216.7 billion,signifying a more than fourfold increase.

The deregulation and globalization of financial markets and capitalaccount liberalization (as part of structural adjustment programmessupported by the IMF and the World Bank) in developing countries coupledwith lower interest rates and institutionalization of savings in developedcountries are the main factors behind rapid transborder capital mobility.Transborder mobility has been further enhanced and strengthened by thegrowing understanding and nexus of the national elite of developingcountries with global players of finance capital. It is the globalization processwhich enriches and reinforces the nexus between the national elite andinternational finance capital. The globalization of production and trade,and internationalization of financial transactions are organized largely bythe fast-growing MNCs. It is estimated that multinationals today accountfor a quarter to a third of total world output, 70 per cent of the world trade,and 80 per cent of direct international investment.36 The expansion of FDIis closely linked to three major phenomena: internationalization ofproduction, increasing global trade and financial flows.

The 1980s and 1990s have witnessed rapid expansion of the productionprocess all over the world, facilitated by market-oriented policies in theNorth, structural adjustment programmes in the South, and technologicaladvancement in general. The World Bank, IMF and GATT (later WTO)


provided institutional support for this neo-liberal transformation. The drivingforce behind the internationalization of production is FDI. Faced withstagnant demand and sharp rise in production costs in home countries, MNCsare shifting their production bases to foreign countries, where the domesticmarkets of goods and services are growing and production costs are muchlower, as raw materials and labour are very cheap. Second, there has beenan unprecedented growth of international trade—almost thirtyfold in thelast three decades—as a result of dramatic rise in global production.Although world trade is still concentrated among the industrialized countriesof the North—its share is more than 80 per cent—there has been spectacularincrease in South’s manufacturing exports to the North, indicating aglobalized pattern in global trade. Finally, the process of globalization offinance has assumed greater significance and power than that of production,specially in recent years. The volume and mobility of global finance capitalhas surprised many observers. In 1986, about $188 billion passed throughthe hands of currency traders in New York, London and Tokyo every day.By 1995, the daily turnover reached almost US$1.2 trillion.37 Historically,most trading in foreign exchange was the result of international trade, asbuyers and sellers of foreign goods and services needed another currencyto settle their transactions. But now, trade in currency has very little to dowith international trade, which accounts for just 2 per cent of global currencymovements. Added to currency trade, new financial instruments such asbonds, mutual funds, junk bonds, and derivatives have emerged in the recentpast, which have further contributed to the globalization of finance. Allthese form the bedrock of economic globalization stimulated by FDI.


IV

Implications of Globalization:A Critical Overview

Despite the prospects of benefits (as many argue), the process ofglobalization has unleashed a number of negative implications for nationstates (particularly those of the developing world) in many different ways.As a result, most developing countries, more specifically LDCs, arestruggling to cope with the new conditions in the global politico-economicarena. In identifying which the beneficiaries of globalization are, the UNDP-sponsored Human Development Report 2000 reveals that it is financialdealers, MNCs, tourists and highly-skilled labour who will be benefittedfrom the globalized world. Although it is identified as a group of people, itcould easily be inferred where those are people living. Even this concern ofexcluding the vast majority of people from the basket of benefits also reflectsin the deliberations of the G-7 summit.38 Though considered in the contextof industrialized countries, Rodrik’s observation reflects a verbatim picturein the South:

The cumulative consequence of globalisation will be thesolidifying of a new set of class divisions – between thosewho prosper in the globalized economy and those who do not,between those who share its values and those who would rathernot, and between those who can diversify away its risks andthose who cannot.39

Having seen the above, let us identify the specific areas ofimplications. First, the process of globalization exacerbates the existingpoverty and inequality situation within and among countries. It is oftenpointed out that globalization accounts for rising inequality in society.Charles Oman maintains that globalization today is accompanied by growinginequality, both within and between countries, and by a threat of exclusionfaced by many people.40 Some argue that globalization and liberalizationare precipitating a large-scale marginalization process. Historically, asWilliamson maintains, the inequality trends which globalization producedare at least partly responsible for the inter-war retreat from globalization[which appeared] first in the rich industrial partners.41 The situation becomesmore terrible in the South when this rising inequality conjoins with massive


poverty. Moreover, the issue of inequality also involves the functioning ofmultilateral organizations like the WB, IMF and WTO, which are maintainedthrough inequality and the will of their powerful members.42

Second, the issue of state autonomy figures prominently inunderstanding the political and economic implications of globalization. Stateautonomy is viewed as a situation at one end of the continuum in whichnational governments make decisions with little or no consultation and noexplicit cooperation.43 The process of globalization has enormous impacton the capacity of a state in exercising its autonomous power. Globalistspronounce the end of national economies, of geography and of the stateitself resulting from the growing transnational integration and rising powerof the market. Some hold to the view that, in conditions of globalization, itis precisely the state’s capacity to act strategically that has been eroded.44

Others insist that the state retains this capacity because of its location at theinterface between the international and the national.45 The reality is thatthe idea of a fully autonomous state is a problematic. The state is poised tomaintain a complex interplay between the civil society (inwards) and thecommunity of states (outwards). External sources of strength can buttressstates that are weak internally, but may also encourage them to pursuecoercive policies that weaken them further. Holsti dubbed it the “state-strength dilemma”.46 There are two extremes in this autonomy question—the state’s separateness from society, and its closeness to society.Globalization might destabilize states in the South, as it would expose theinternal problems and perennial tensions between state and society. In thecase of some of the weakest states of the South, strength may be generatedfrom social institutions within states in the absence of effective domesticsources of sustenance. State strength may be derived from the intensifiedintegration and interactions with external forces, particularly the weak andsmall states. But this is a remote possibility in the South. The issue thatfigures prominently in this part of the world is the weakening of the statesyndromes in the face of losing control over increasing pressures from withinand outside the state. External pressures have already curtailed the autonomyof the state in the South.

Third, it is well recognized that the process of globalization has beengenerating tensions on the fault lines of social integration. This tension isobserved between markets vs stability on the one hand, and betweenuniversalism vs particularism in the social context on the other. Thisphenomenon is common to both North and South. Economically, the processthat has come to be called “globalization” is exposing a deep fault linebetween groups which have the skills and mobility to flourish in global


markets, and those who either don’t have these advantages or perceive theexpansion of unregulated markets as inimical to social stability and deeply-held norms. The result is severe tension between the market and socialgroups such as workers, pensioners and environmentalists, withgovernments stuck in the middle.47

As to the tension between universalism and particularism, FrancisFukuyama’s “end of history” thesis as a universalization of liberal marketideology, along with the globalization of multinational capitalism, markedthe dissolution of differences into sameness: an emergence of culturalhomogenization. On the other hand, particularistic conflictualities,nationalist or ethnic, began to dictate the mode of articulation of politicalpractices and ideological/discursive forms in global relations, that is, culturalheterogenization.48 Arjun Appadurai suggested in this context that “thecentral problem of today’s global interactions is the tension between culturalhomogenization and cultural heterogenization”.49 However, it would be amistake if we take a position of “presentism” to celebrate the process ofglobalization as a new epoch which marks the end of the old,50 becauseglobalization is characterized by contradictions between the universal andthe particular, and despite the promise of radical changes by the process ofglobalization, one cannot ignore “continuities”, as unequality andunderdevelopment on the world scale remains as a function of globalcapitalism. It raises the question as to how this tension generated. Rodrik(1994) suggests that there are three sources of tension, particularly on theeconomic front. One, reduced barriers to trade and investment accentuatethe asymmetry between groups that can cross international borders andthose which cannot. In the first category are owners of capital, highly-skilledworkers and many professionals, while the second category is that of theunskilled and semiskilled. Two, globalization engenders conflicts withinand between nations over domestic norms and social institutions that embodythem. Spread of globalization creates opportunities for trade betweencountries at very different levels of development. Three, globalization hasmade it exceedingly difficult for governments to provide social insurance.The welfare state has been further attacked.

Fourth, the process of globalization has enormous implications forlabour rights in domestic and international contexts. Neo-liberals argue thatglobalization has a positive relationship between trade and employmentopportunities. The fear that greater openness is creating severe adjustmentproblems for certain countries, and for particular groups within countries—such as unskilled workers—became a topic for discussion in the 1999 WorldEconomic Forum Meeting held in Davos, Switzerland, with the theme


“Globalization with a human face”.51 But it is mainly the developedcountries which benefit from this situation. Conventional wisdom says thatincreasing trade facilities could expand the labour markets of the developingcountries to the rich nations. But the paradox is that the developing countriesare surplus of unskilled labour, and there have been strict restrictions onimmigration in the industrialized countries, creating asymmetry betweenmobile capital (physical and human) and immobile “natural” labour. Underglobalization, the rich countries anticipate reduction in the number ofunskilled labourers from developing countries, causing adverse affects fortheir economies (though empirical studies suggest that international tradehas had only limited impact on wages).52 Another dimension of the trade-labour linkage is tension between trade and domestic social arrangements.International trade creates arbitrage in the markets for goods, services, labourand capital. But trade often exerts pressure on another kind of arbitrage aswell: arbitrage in national norms and social institutions. For instance, childlabour in international trade causes strain as it reflects on how trade meldsor otherwise with domestic norms and institutions.53 Workers experiencedifficulties in a globalized economy. The political salience of labour’s voiceis currently muted for three reasons. One, the same pressures that reducethe bargaining power of labour in the workplace also reduce its power inthe political marketplace. “Competitiveness” becomes another term forlabour costs. Two, the negligence of political parties in the domestic contextalso hampers their interests. Three, the receptivity of the general public tothe ideas of labour advocates is quite low.54

Fifth, globalization also raises security concerns in many different ways,such as increasing tensions, instability and sense of insecurity of nations,societies and individuals through increasing the propensity of intervention,resurgence of ethnic groups and communal feelings, poverty andmarginalization, replacement of traditional but stable value systems,proliferation of small arms, a fast-degrading resource base andenvironment.55 Although in the context of India, Chari deserves mentionhere.

The liberalization and globalisation policies currentlybeing pursued by India unleashed enormous economic andsocial forces that have greatly heightened expectations in thepeople. Their growing impatience with delays in improvingthe quality of their lives lends a new urgency to dealing withthese newer sources of insecurity. Otherwise, impatiencewould promote frustrations and lead on to violence.56

Moreover, globalization facilitates international crime by unleashing


electronic terrorism, which has a strong linkage with national security.Another way in which economic liberalization may lead to ethnic andcommunal or even intrastate regional tensions is commercial exploitationof natural resources threatening the natural habitat, culture and livelihoodof particular communities.57 In terms of political impact, advocates of the“loss of sovereignty” thesis argue that because of the globalization process,nation states, specifically small powers, are losing their economic, culturaland legal sovereignty. Economically, for most of the developing countries,globalization constrains the ability of a government to choose how best tomanage its resources for economic development. On the other hand,culturally, it poses a formidable challenge to preserve national identities ofsmall countries. In many cases, they are trapped in deeper identity crises,leading to social instability. In this context, the issue of “identityconstruction” has become a major challenge for society. Finally, revolutionin ICT has created a “digital divide”, since the vast majority of the globalpopulation are excluded from the benefits of technology. For example, it isestimated that only 2.4 per cent of the world’s population have access tothe Internet, while in South Asia it is just 0.04 per cent.58 This generatesconcerns for sociocultural advancements of nation states since their “softpower” is threatened. Thus, the socio-economic and politico-securityramifications as explained above clearly demonstrate that the process ofglobalization profoundly affects the agency and scope of threat, which haschanged in the direction of non-traditional factors such as economicdevelopment, environment, migration and human dignity.

However, some also argue that globalization strengthens the sense ofsecurity of states, societies and individuals through opening the path forexport-led growth, revolutionizing communication, promoting democraticvalues and practices worldwide, protecting human rights, replacing conflictsand use of force with cooperative international relations. Cooperativesecurity is promoted by shared interests and concerns, and by creating anexus of multilateral institutions. Interstate wars seem to have becomeobsolescent to the extent that people recognize that success in gaining worldmarket shares has replaced territorial acquisition as the means to survival.This is not to suggest that interstate wars are not occurring and will notoccur. To the old causes of conflicts are added newer ones like resourceexploitation, access to and sharing of water, and renewed ones likeirredentism. But the fact remains that equally forceful countervailing forceshave emerged to create disincentives for waging wars.


V

Multinational Corporations:Changing Strategies

An extensive review of the literature on MNCs demonstrates that awide range of theoretical and empirical studies has been done on theirmeaning, scope, strategies and operations, which nonetheless makes ourattempt to define MNCs a daunting task.59 However, “MNC” is taken hereto refer to an enterprise or company engaged in producing and selling goodsand services in more than one country. It ordinarily consists of a parentcompany located in the home country and at least five or six foreignsubsidiaries, typically with a high degree of strategic interaction among theunits. The operations of MNCs are closely linked with FDI, where the latteris seen as synonymous of the former in many cases. The overwhelmingfocus of both is on the instrument that has influence over the decision-making process or strategies within the enterprise. But FDI cannot beconfused with portfolio investment, which refers only to the movement ofmoney in order to raise capital (generally through stocks and bonds).

Contrary to traditional assumptions of the classical theory of tradedeveloped by Adam Smith and David Ricardo, the MNC is based on theinternational mobility of certain factors of production. Natural resources havelost much of their previous role in national specialization as advanced,knowledge-intensive societies move rapidly into the age of artificial materialsand genetic engineering. Capital moves around the world in massive amountsat the speed of light; increasingly, corporations raise capital simultaneouslyin several major markets. For example, to finance the acquisition of Germanequipment by a subsidiary in Bangladesh, a Swiss-based pharmaceutical firmmay use capital raised in London on the Euro-dollar market. The growth oftechnology and “ know-how” and cross-country labour movements havegenerated a new global environment for economic activities. “The neweconomy” or “economies of scale” are some of the new phenomena in thearena of business operations. Information technology also makes it possiblefor worker skills to flow with little regard to borders. As a result, the globaleconomy is faced with a dichotomy between international competitivenessand broad macro-economic differences among countries. Central to thesechanges are the operations of MNCs.

Historically, the MNC has been squarely criticized particularly in the Third


World and the ex-Communist world as an instrument of “neo-colonialism/imperialism”. Excepting the industrialized countries of the North, relationshipsbetween MNCs and host countries were very antagonistic. This has beenexacerbated by the process of nationalization of enterprises introduced in thenewly independent Afro-Asian and Latin American countries in the late 1950sand 1960s. Interestingly, since the late 1980s, fundamental political,technological, regulatory and economic forces have radically changed the globalcompetitive environment to the great advantage of the MNC. Broadly, the demiseof the Cold War, the so-called democratic revolution in East Europe, and thegrowing spread of market economy principles are the major factors in bringingin the changes. Let us identify these trends.

• Massive deregulation.

• The collapse of Communism and the command economy.

• Massive privatization through the sale of billions of dollars ofstate-owned firms around the world.

• The revolution of information technologies.

• The rise in the market for corporate control with its waves oftakeovers, mergers and leveraged buy-outs.

• Abandoning of “statist” policies by embracing free-market policiesin Third World countries.

• The unprecedented number of nations submitting to the exactingrigours and standards of the global market place.

• Political liberalization in the Third World.

These forces in combination have ushered in an era of acute price andservice competition. The prime transmitter of competitive forces in thisglobal economy is the MNC.

There are two distinct types of MNC strategies of selecting countries forinvestment:60 a North-South or “vertical” or “outsourcing strategy”, and a globalstrategy. The outsourcing strategy refers to the situation where MNCs aim tominimize their costs in investing abroad. They produce abroad in countrieswith lower labour costs, commodity prices, energy costs, and real estate prices.Two crucial assumptions have to be made for this strategy to work: transportationcosts and tariff barriers must be low. Another motivating factor as emphasizedby Porter is to have access to big consumer markets. The crucial assumptionsfor this strategy are that transportation costs and tariff barriers be high. On theother hand, Brainard and Markusen introduced a strategy called “globalstrategy”, combining both basic strategies (i.e., market-seeking and outsourcing)


at one location. The aim of such a global strategy is to shift FDI, guided bymarket-seeking and outsourcing motivations, on a regional basis. As a result ofthe availability of low-cost natural and human resources (the so-called Ricardianargument) and of economies of scale and product differentiation (the so-calledKrugmanian argument), the worldwide competitiveness of firms will increasetremendously. The successful implementation of a global strategy implies a setof preconditions: FDI localization characteristics; and a selective approach ofpotential host countries. Apart from this, Raymond Vernon in his internationalproduct cycle theory demonstrated that FDI was the most efficient tool fortransferring manufacturing activities from developed countries to developingcountries. Known as the “sectoral drift” strategy, it was based implicitly on theassumption that the whole planet was going to be involved in an industrializationprocess. Interestingly, MNCs do not follow the same strategy for all countries:they pursue different strategies for different countries based on their centralmotive of profit.

The underlying impact of the strategies of MNCs is the concentration ofFDI inflows into a handful of countries, as it is observed that it is a smallsubset of all the developing and transitional countries in which most MNCsare interested in investing. Among these countries, which number perhapsno more than 15 or 20, there may be some competition for FDI in the sensethat a project that is implemented in one of them may be at the expense ofanother (specially one in the same region). However, with very few exceptions,countries outside this “core group” are not competing with the core countriesfor FDI. An investment that goes to one of the core countries is not aninvestment that might have gone to one of the other developing or transitionalcountries. Most of the FDI that does go to countries outside the core group is“niche” investment that is attracted to some specific characteristic ofthe destination country, and in general would not have gone anywhere else.

Another dimension of their strategy is operational. Traditionally, thesecorporations would acquire land in a developing country and on this“greenfield” would build plants, create new employment and introduce newmachinery. They are still doing this. Besides, since the early 1990s, majorMNCs are entering growing numbers of developing economies following anew strategy of their operations that may seem threatening to developingcountries: now they are also rushing to buy existing companies. Thesepurchases should not be confused with mergers. Major MNCs from developedcountries are not forging partnerships of equals with companies in developingcountries. Instead the acquirer, mostly from western Europe or North America,buys ownership and takes control. The new foreign owner may cut theworkforce, use its power to curb domestic competition, break up the newly


purchased enterprise and divest itself of various parts. Sometimes, the purchasecan raise the prospect of foreign domination of key segments of an economy.

Evolution Of Mncs/Host Countries In The South

The strategies of MNCs and their actual behaviour in host countries ofthe South largely depend on the framework of negotiations that have changedover the years. Taking a close look, it is observed that there is a powerrelation between the two parties manifested in a continuous bargainingprocess. At the heart of this process are the regulations of the hostgovernments and the strategies of MNCs. The outcome of the bargainingprocess is determined by internal factors and the external environment. Inthis connection, it is worthwhile to provide a schematic overview ofconceptual and institutional elements centring on MNCs and host countries.

Table 5.1 MNCs–Host Country Relations

Continuationof bilateralmonopoly

Changingregulations

Financialderegulations

ModernizationEra

(1950s)

Nationalization(1960s)

Nationalizationand Bargaining

(1970s)

Bargaining(1980s)

Globalization(1990s)

Dependencytheory

Colonialism;exploitation;exportenclaveformation byMNCs

Importsubstitutionpolicy;transfer ofmoney frompoor to richnations

Poverty asthe result oflinkagebetweenpoor andrichmaintainedby MNCs

Diffusionistapproach

Growthorientation

Developmentthroughimitatingindustrializedcountries

Entre-preneurship

Managementcapability,technologyand capital

Bilateralmonopolytheory

Legal powerto changethebehaviourof MNCs;domestication

Bilateralmonopoly

Continuationof bilateralmonopoly

WTO

MultilateralAgreement onInvestment(MAI)

NGOs againstMNCs


Table 5.1 demonstrates that substantive changes took place in thebehaviour and attitude of both MNCs and host governments. With the failureof the so-called “de-link” hypothesis and persistent disruption ofmultinational interests, both corporations and most of the Third Worldcountries came to recognize the fact that they have mutual interests in forgingcooperative relationships. The popular criticism of “development ofunderdevelopment” or “dependent development” labelled on MNCs startedto lose ground since the mid-1970s. Development strategies had beenrestructured by shifting the focus from nationalization and importsubstitution to export-oriented industrialization. Instead of rejecting MNCs,many developing countries opted for introducing restrictive businesspractices for the operations of MNCs though enacting new regulations.These regulations include entry control, permission to operate for a certainperiod, joint venture requirements, local content, localization and phasingout of ownership.

Throughout the 1970s and 1980s, host countries of the South wereable to implement most of these regulations, but globalization has changedthe regulatory environment in favour of MNCs and their home countriessince the early 1990s. Economic globalization has been causing changes inthe domestic and global policy environments. Neo-liberal prescriptionsunder the framework of structural adjustment programmes have institutedderegulation, privatization and trade liberalization in the domestic context.Similarly, international financial architecture and several multilateralagreements have brought changes in the global environment concerningthe direction of economic liberalization. Thus, globalization has effectivelycontributed in reducing market and information imperfections, whichfacilitates MNCs in implementing their business strategies and instrengthening their bargaining positions. These factors have placedenormous pressure on developing countries in rethinking the regulationsthat changed their already precarious positions in bargaining relations. Theimpact of the position of developing countries in relation to resisting thedominance of MNCs is weakening.

Corporate Behaviour: Ethics, Social Responsibility And Profit

The issue of corporate behaviour is of utmost significance for hostcountries both in the North and South, however, many of the problems arerelated to their behaviour in developing countries. Several studies weredone over decades to frame guidelines for restraining corporate behaviour.Most notably, there were two historic attempts to codify their behaviour inorder to ensure the ethics and social responsibility of MNCs. One attempt


was made by the former United Nations Commission of TransnationalCorporations (UNTNC) and the other was by the OECD. The attempt ofthe UNTNC necessarily was more focused on the realities of the South,while the OECD study was biased on MNCs for obvious reasons, sincethese corporations are from the industrialized countries. The MNCs basicallyfollow the code of conduct set by the OECD, or their own rules. Despitepolitics with the code of conduct, the issue is that the operations of MNCshave substantially raised the questions of ethics and social responsibilitybecause of their mindless pursuit of profit, disregarding the developmentconsequences for host economies. For instance, one of the largest oilcompanies, Occidental, operating at the 1997 Magurchara accident site inSrimangal, Bangladesh, was also the operator at the Piper Alpha platformin the North Sea that blew out in 1988 killing 167 workers and causingdamage of billions of dollars. Allegedly, the company paid no compensationfor that incident. In 1997, another medium-sized US oil company biddingfor a key block in Bangladesh was fined millions of dollars for ignoringenvironmental laws for years and causing massive pollution in California.61

During the last decade, researchers concerned with organizations andthe natural environment have investigated that some firms embraceecologically responsive initiatives, while others in seemingly similarcircumstances do not even comply with existing legislation. Corporationscan adopt ecologically responsive practices merely to meet legislativerequirements, or could expose the mechanisms that foster ecologicallysustainable organizations, allowing researchers, managers and policy makersto determine the relative efficacy of command and control mechanisms,market measures, and voluntary measures. Several studies (Dillon andFischer 1992; Lampe, Ellis and Drummond 1991; Lawrence and Morell1995; Vredenburg and Westley 1993; Winn 1995) have identified motivesfor corporate “greening”, such as regulatory compliance, competitiveadvantage, stakeholder pressures, ethical concerns, critical events, and topmanagement initiative in sustainable development. Thus, the question ofcorporate behaviour is clearly enmeshed with the balancing act by MNCsbetween social responsibility, ethical concerns and the pursuit of profit.


VI

Multinational Corporations in South Asia

South Asia has been a region for the operations of multinationals forcenturies. The advent of the Dutch East India Company in the sixteenthcentury exposed this part of the world to foreign capital. Subsequently, theBritish Raj maintained relative economic openness of this colonial territoryas an economic unit in the imperial global order in order to facilitate itseconomic exploitation. However, following decolonization in the late 1940s,newly emerged independent countries of South Asia opted for inward-looking protective economic policies. Tariff, and even more importantly,non-tariff barriers were extremely high, state interventions in economicactivity had become pervasive, attitudes to foreign investments werenegative, often hostile, and stringent exchange controls were in place. As aresult, the activity of MNCs was very limited. But with changes in economicpolicies towards more liberalization, FDI started to reach this region. Thiswas pioneered by Sri Lanka, which started to change its economic policyin the late 1970s. Finally, it was from the early 1990s that the region as awhole really started to liberalize through removing important policy barriersto trade and foreign investment. This has resulted in increasing FDI inflows.However, South Asia belongs to the “peripheral” circle of countries basedon attractiveness as FDI locations in the world.62 Countries within thisgroup are able to attract FDI, but only in a very limited number of activities:most of them are active in the natural resources sector like mining andexport-oriented agribusiness, and have a very low-wage unskilled labourforce.

FDI Inflows In South Asia

FDI flows to South Asia started to pick up in the mid-1990s largely asa result of progressive liberalization of FDI policies in most of the countriesin the region, and the adoption of generally more outward-oriented policies.South Asia has improved its share in terms of total FDI inflows to the world,developing countries and Asia over the period 1980/85–1998.


Table 6.1 FDI Inflows(US$ million)

1980–5 1990 1995 1998

World 49,813.0 203,341 331,189 643,879Developing countries 12,634.0 31,345 105,511 165,936Asia 5,043.0 18,948 67,386 84,880SAARC 178.8 458 2,753 3,433Bangladesh -0.1 3 2 317Bhutan n a n a n a n aIndia 62.0 162 1,964 2,258Maldives -0.3 n a 7 7Nepal 0.2 6 5 9Pakistan 75.0 244 719 497Sri Lanka 42.0 43 53 345

Source: UNCTAD, World Investment Report, various years.

Nevertheless, the magnitude of inflows attracted by the region remainsrelatively meagre. In 1998, it was only US$3.43 billion, a mere 0.5 per centof global flows. In contrast, China received more than 10 per cent of allglobal inflows. The bulk of FDI to the SAARC region has come to India.Despite this growth, FDI as a proportion of the GDP of SAARC countriesremains very low. For example, in the mid-1990s, the share of FDI in GDPfor Pakistan and Sri Lanka was approximately 1 per cent, while thecorresponding figure for India was in the region of 0.5 per cent. During thesame period, Malaysia was attracting FDI equivalent to nearly 6 per cent ofits GDP, whilst the corresponding figure for China was approximately 5per cent of its GDP.

Table 6.2 Share of South Asia in FDI Flows(percentage)

1980–5 1990 1995 1998

World 0.36 0.23 0.83 0.53Developing countries 1.42 1.46 2.61 2.07Asia 3.55 2.42 4.09 4.04

Source: Computed from Table 6.1.


Table 6.2 shows a dismal picture when FDI inflows in South Asiaare seen as a percentage of world shares. A similar depressing result emergesif it is compared with other regions as mentioned above. Although its globalshare has increased from 0.36 per cent in 1980–5 to 0.53 per cent in 1998,it is negligible, and inconsequential in meeting the development needs ofthe countries. Besides, the share of South Asia even among the developingor Asian countries is exceedingly low (2.07 per cent and 4.04 per centrespectively). In terms of FDI share in their gross domestic products, theSouth Asian countries lag behind other countries in Asia (Table 6.3). Moreimportantly, some countries even witness a decline in FDI inflows. Forexample, FDI to Pakistan has declined from $918 million in 1996 to $531million in 1999.

Table 6.3 Foreign Investment in Select Asian Countries (1993)

Country FDI/GDP FDI/GDP

India 0.1 Vietnam 1.4Pakistan 0.7 Laos 3.6Bangladesh 0.0Sri Lanka 2.1Thailand 1.9 China 6.1Malaysia 6.7 Hong Kong 4.4Indonesia 1.4 Taiwan 3.4Singapore 70.9 South Korea 0.1

Source: Gerald Tan, The Economic Transformation of Asia, Times AcademicPress, 1997, p. 116.

Investment Climate In South Asia

Although the share of this region in global investment inflows is verylow, the governments of different countries pursue highly investment-friendly policies. Since the early 1990s, all these countries have radicallychanged their traditional development strategies. They have almost similarFDI policies, along with relevant changes in trade and financial sectors.First, they have established an open investment regime offering verygenerous packages of incentives to attract foreign investors. Second, foreignand domestic private entities are free to establish and own businessenterprises in virtually all sectors of the economy, with the exception ofcertain sensitive areas such as defence production, etc. Third, the legalsystem protects and facilitates the acquisition and disposition of property.Fourth, there is adequacy of laws and regulations governing commercialtransactions. Fifth, export processing zones/foreign trade zones/free ports


have been established. Sixth, the regulations regarding performancerequirements/incentives and local content components are highly negotiable.Seventh, a greater degree of transparency of the regulatory system has beenensured. Eighth, there is an abundance of labour. Ninth, conversion andtransfer policies are favourable for investors since there is a liberal foreignexchange regime with few restrictions on holding foreign exchange andbringing it in or out of the country. Tenth, FDI is protected againstexpropriation by the Foreign Private Investment (Promotion and Protection).Finally, dispute settlement has been made easier and efficient.

Changing Sources And Composition Of FDI In South Asia

The share of FDI in total fixed investment in South Asia has remainedrelatively low and stable, but the composition and sources of FDI arechanging (Table 6.4).

Table 6.4 Country-Wise Major Investors in South Asia(% of total FDI in individual country)

Source Bangladesh India Nepal Pakistan Sri Lanka

USA 29.5 22.1 4.4 41.6 —Japan 7.6 4.4 6.1 14 11.6Germany 1.9 3.8 — 6.2 7UK 13.9 7.6 6.2 22.7 1.4France — 2.5 — 2.2 —Korea, Rep. 2.8 4.5 — 1.6 32.7Hong Kong 7.5 — 2.1 — 11.9Malaysia — 2.75 — — —Singapore 5.9 — — — 6.4Australia 3.0 — — — 15.0Mauritius — 10.4 — — —China 1.3 — 7.5 — —Bermuda — — 14.6 — —Denmark — — 3.1 — —New Zealand — — 2.1 — —

Source: “FDI and Economic Integration in the SAARC Region”. Paperpresented at the 2nd Conference of SANEI, Kathmandu, August 2000,Institute of Policy Studies of Sri Lanka, pp. 15–16.

Generally, the OECD countries have the largest share of FDI–led MNCsin South Asia. Table 6.4 reveals that the USA, Japan and UK have FDIoutflows to all South Asian countries; some Asian Newly Industrializing


Countries (NICs) like Hong Kong, Singapore, Korea and Malaysia have asizeable presence in different countries at individual levels. For example,in Sri Lanka, Korea is the largest source of FDI, while in Bangladesh,Singapore and Hong Kong account for a significant level of FDI. As tosectors of FDI, differences are observed across the countries of the region.For example, the garments sector in Bangladesh has attracted a highproportion of FDI (28 per cent of approvals) and Sri Lanka (16 per cent ofrealization). In the case of India, infrastructure (including public utilities)has attracted the bulk (56 per cent) of approved FDI, while in Pakistan, thepower sector alone accounts for nearly 40 per cent of approved investments.In many countries, as in Sri Lanka, the public utilities, such astelecommunications and gas, have received significant FDI, driven by thetrend towards privatization of public utilities and other state-ownedeconomic enterprises. Significant amounts of FDI are coming in to exploitthe low labour cost advantages of South Asia, and to utilize them as exportplatforms.

Having analysed the FDI inflows, sources, and sectors in South Asia,we now briefly deal with the specific problems with the operations of MNCsthat are posing threats to human security. While the process of globalizationcreates increasing pressure to generate a more investment friendly climate,there is no reason to overlook the negative implications of FDI for theoverall development of host economies. No significant change of corporatebehaviour is observed in host countries. So, MNCs continue to be at thecentre of the debate regarding social responsibility and the costs and benefitsof their operations in the emerging economies of South Asia. Governmentswhich once played a pivotal role in the resistance movements against thenegative effects of MNCs’ operations are now effectively marginalized.The over-enthusiasm or hesitance in wooing FDI does not reflect the realdevelopment or security needs of the society. Generally, the increasingpressure for transnational integration and convergence, and partly theimperatives of regime consolidation play crucial roles in determining thepolicy responses to the process of globalization. In this connection, takingthe opportunities of IT and the failure of governments in delivering publicgoods, CSOs have made significant strides in exposing the dangers ofMNCs’ operations. Although globally, the issues of concern with theoperations include a wide range of diverse orientations, in South Asia it ismainly focused on industrialization, environmental degradation, workers’rights and resource exploitation. However, CSOs perceive it from twoextremes—business versus people’s interests. The major criticism againstMNCs may be seen in two broad categories—economic and environmental.


Techno-economic Implications

It is generally assumed that MNCs contribute to domestic economiesthrough capital formation, employment creation, and transfer of technology.Tons of theoretical and empirical studies demonstrate that developingcountries desperately require those elements for industrialization. The caseof NICs of East and South-East Asia is repeatedly illustrated to showempirical evidence behind the proposition that FDI contributes todevelopment of host countries. The situation becomes bewildering whenwe observe that the countries of Latin America, South Asia and Africa havingbeen exposed to MNCs’ operations for decades, failed to flourisheconomically. The FDI/MNCs that made an important contribution to themiraculous economic development of East Asia have failed to do the samein other countries. Let us identify the specific areas of the problem relatedto MNCs in South Asia.

Table 6.5 Economic Costs and Benefits of MNCs

Benefits Costs

Economic growth Economic dependencyTechnology transfer Limited technology transferEmployment generation UnemploymentTrickle down effect Disappearance of local firmsMarket competition Enclave effectCapital formation Foreign market dominated by MNCsAccess to foreign markets Abuse of dominant positionBreaking monopoly International cartels

Technological acquisitionResource exploitation

Table 6.5 shows that MNCs could facilitate economic development aswell as create hindrances for it in many different ways. Most of the negativetechno-economic implications for domestic economies have long beendiscussed in various studies (Barnet and Muller 1974; Cox 1979; Lall 1983;Akinsanya 1989; Frank 1981; Spero 1984; Kumar; Wilber; Mazrui). Theseare not new in any case. The fact is that they continue to exist, so are notirrelevant. Rather, the process of globalization draws our attention to theseissues more pointedly. Now the question is as to how these problems aregenerated by MNCs. A variety of reasons are responsible. Williamson,Buckley and Casson demonstrated that MNCs can internalize markets withinthe industrial organization through their capabilities of using information.This establishes the superiority of MNCs vis-à-vis domestic firms in the


market. It reduces transaction costs, creates market imperfections in theirfavour, and confines valuable technology within their organizations. In manycases, this results in the disappearance of domestic firms. Second, mostMNCs indulge in the strategy of transfer pricing to evade tax in hostcountries. “Transfer pricing” is the process of transforming financialresources by overcharging or undercharging the exchanged commodities.The unfair practice of transfer pricing deprives host economies of receivingrevenue. Third, MNCs make the process of transfer of technology difficult,if not impossible, by imposing higher prices and creating unnecessarybarriers to local acquisition of technology. They concentrate their R&D inhome countries, restricting the transfer of modern technology and know-how to host countries. In many cases, they enter these markets throughoutright purchase rather than developing new production facilities in hostcountries.

Last, multinationals are charged with resource exploitation disregardingthe economic and social consequences for host countries. The oil and gassector is a classical case in point. Most recently, they are charged with bio-piracy: stealing genetic materials and traditional knowledge from indigenouscommunities and patenting them. For instance, India’s neem tree is thesubject of 35 patents, mainly for the pesticide properties of the plant. Localusers who have long known and benefited from the tree’s properties getnothing for the appropriation of this knowledge by European and US firms.Plant-derived sweeteners long nurtured by Indian farmers and painkillersdeveloped in China have been stolen by MNCs. As a result, various localcommunities are actively engaged in campaigns in order to free “geneticresources” from the exploitation of transnational agribusiness corporations.

Environmental Effects

By their extensive operations all over the world, MNCs have emergedas the major polluters of the environment in the present-day world. It isestimated that MNCs are responsible for 50 per cent of global CO2 emissionand 20 per cent of global warming, the causes being as follows.

• Transboundary pollution.

• Environmental hazards.

• Transboundary exports of hazardous things.

• Problem of health and safety of workers.

• Inadequate disaster preparedness.


From the above, it can be observed that the operations of MNCs havedeeper implications for the environments of host countries. The categoriesof environmental effects differ based on the nature of an MNC’s activity,and the strategies and behaviour of the companies. In South Asia, most ofthese categories are seen. Pollution, inappropriate disaster preparednessand inept waste management are the major environmental concerns relatedto the operations of MNCs in this region. The environmental NGOs inSouth Asia target all kinds of MNCs, particularly those in the oil and gassector as destroyers of the ecological balance, thus depicting thesecorporations as threats to sustainable development. The Bhopal tragedy of1984 in India, the Magurchara accident in 1997 in Bangladesh,63 and acouple of other cases show us how MNCs can create environmentalproblems and health hazards. One MNC, Monsanto Chemical Corp., sellsDDT to many foreign importers, even though its use in the US has beentotally banned.

Social Effects

The social effects of the operations of MNCs are enormous, generallyobserved in the creation of inequalities, curbing of labour rights and changinglocal institutions and values. The MNCs are considered responsible foraggravating poverty, and to be major instruments for the rich-poor gap atnational and global levels. They give rise to demand for luxury goods at theexpense of essential goods. This problem is created in two ways. First,tobacco and such other products divert scarce money from food andessentials, particularly in developing and backward economies, and bycreation of a small group of wealthy people in host countries due to theiroperations. Second, many MNCs are engaged in exploiting labour in hosteconomies. Nike, the giant athletics wear company, indulges in massiveexploitation of labour in various factories situated mainly in the Asiancountries, including Bangladesh. In moving to low-wage countries, thesecorporations even fail to ensure the minimum secure environment forworkers. Third, there are also groups like public health activists, whoadvocate that MNC products like tobacco, baby foods and other exportablefood items generate serious health hazards in host countries. Fourth,extensive advertisement of the products of MNCs in the electronic andprint media manipulates the choices and judgement of the mostly semi-literate or illiterate consumers in South Asia. Subsequently, it createstremendous cultural pressure on the preservation of values and norms ofthe local people and as a result, instead of “modernization”, distortion isobserved among the people at all socio-economic levels.


All these effects in combination pose threats to the non-traditionalsecurity of host countries and raise genuine concern in them. Moreimportantly, these are going to be accentuated in the era of globalization.As indicated earlier, although the state actors in South Asia are generallypassive about these issues, they are quite aware of the impact on society.The CSOs have been sustaining a struggle against powerful corporations.Globally, the recent movement against the MAI process has been markedby tremendous success. Thousands of activists gathered in Paris in October1998 to create pressure for not concluding MAI by the OECD members.The two-day negotiations were reduced to one, and downgraded to“consultations” after France announced its decision to abandon the OECDMAI proceedings and called for their transfer to the WTO agendas.Subsequently, the same popular movement disrupted the WTO proceedingsin 1999 in Seattle, Washington.

The continuing massive poverty and the spread of CSOs with increasingawareness among consumers could destabilize the highly profit-orientedoperations of MNCs in South Asia. It is argued that the process ofglobalization has created a “globalization gap” caused by uneven distributionof opportunities and wealth. The MNCs cannot turn a blind eye to theseproblems with which their corporate interests are linked. Thus, issues ofsocial responsibility, lack of equal opportunities, environmental andconsumer concerns call for making MNCs partners in sustainabledevelopment. Despite their massive strength in terms of skills, resourcesand power, they do establish partnerships for sustainable development inthese countries.

Despite the criticism of MNCs’ operations by governments or CSOsin recent times, there is no question of the doors of South Asian countriesbeing closed to FDI/MNCs. It is important for both MNCs and hostgovernments in South Asia to work together for economic development inorder to alleviate poverty, thereby increasing the purchasing power ofconsumers. The dilemma facing emerging economies is how to make thempart of the process of sustainable development and to establish long-termconstructive and mutually beneficial relationships which would ensuresuccess for these corporations and sustainable development for the hostcountry.


VII

The Indian Example: Case Studies of Enronand Tata Steel

As mentioned earlier, the intensification of the process of globalizationhas been linked to the end of the Cold War, and it was during this time thatthe first serious and significant efforts of economic restructuring in Indiatook place. The country was on the brink of a serious economic crisis andthe foreign exchange reserves has dipped to perilously low levels. It wasunder tremendous pressure from the World Bank that the Indian governmenttook its first step at economic reforms. Prior to that, MNCs had been athree-letter word for a long time in most Indian minds and evoked passionsof extreme nationalistic variety across the political spectrum. Historically,the establishment of British rule had its roots in the British East IndiaCompany, and imperialism had strong linkages to corporate hegemony inthe minds of the Indian people since the birth of the freedom movement.After Independence in 1947, for the first two decades the economic policiesof the country reflected the ideology of two of the most significant leadersof the freedom movement in India, Gandhi and Nehru. Prime MinisterJawaharlal Nehru was strongly influenced by socialism and had a strongbelief in the role the public sector was to play in the development of thecountry, particularly in the infrastructure sector. From power totelecommunications to steel, the government made huge investments ofpublic money to develop these industries in the state sector. The“commanding heights” of the public sector were coupled with the Gandhianvision of flourishing small-scale industries, and this sector was givenextensive protection by the state. During this period, MNCs did not have asignificant role to play in the economy, and there were serious concernsabout the motives and benefits of MNC investments in a poor country likeIndia. In 1977, the Congress party, which had been ruling the country sinceIndependence, witnessed its first political defeat at the national level at thehands of the Janata Party. Buoyed by a strong socialist and nationalist lobby,the new government was extremely suspicious of MNC investments, andin the same year the aggressive Minister of Industry, George Fernandes,threw out two of the largest multinationals that were operating in India,Coca Cola and IBM. The sentiment that economic development should beled by domestic companies and the public sector was particularly strong atthat point of time, and the feeling then was well summed up by the US


Secretary of Agriculture who led a business delegation to India in 1977 andsaid, “In my opinion the biggest barrier is the feeling that foreign investmentis not welcome or not wanted here.”64

The decade of the 1980s witnessed the return to power of the Congressparty, the assassination of its leader Prime Minister Indra Gandhi and thetaking over of the reins of power by her son Rajiv Gandhi in 1984. A fewsignificant events would help us understand the perceptions on MNCinvestment at that point of time. One of the most significant MNCinvestments was made by the Japanese automobile manufacturer Suzukiwhich set up a joint venture with the Government of India to manufactureMaruti Suzuki small cars in India. At that point of time, the Indian automobileindustry had been stagnating with no significant technological upgradationfor the preceding two decades, and the strong regulatory and protectionistenvironment making life cozy for the existing automobile manufacturersin India. By the 1980s, there was a strong feeling for the need to induct newtechnologies in this sector, and this naturally would come about with thehelp of a major MNC investment. The Indian automobile industry wasindeed galvanized by the entry of Suzuki and the subsequent entry of globalcompetition in the following decade. With the nation witnessing the benefitsof MNC investments in the automobile sector, the country also came to seethe darkest side of the activities of MNCs in what has been described asone of the biggest industrial disasters mankind has ever witnessed, thetragedy of the Bhopal gas leak at the Union Carbide plant in the capital ofthe Indian state of Madhya Pradesh. The two events together made a mixedbag of emotions regarding the acceptability of multinational investment inthe country, and before we move to the next decade, which in many waysestablished the inevitability of globalization and multinational investmentin emerging economies like India, it would also be important to point outone other significant trend which began in the 1980s. The decade witnessedthe growth of domestic companies like Reliance which were globallycompetitive and highly efficient, and had the potential of themselvesemerging as MNCs across the developing world.

At the beginning of the 1990s, India was faced with a huge economiccrisis. With foreign exchange reserves dipping to incredibly low levels, thecountry was on the verge of defaulting on its payment obligations when Indiaundertook the first round of a structural adjustment programme under FinanceMinister Manmohan Singh. This led to opening up of investments by MNCsin many sectors from oil drilling to the power sector. It has been a long journeyfor India and most other developing countries in South Asia. Significant MNCinvestment moved into these countries, and an increasingly significant role


in these economies is expected. India has witnessed increasing FDI, and nowthe focus of debate needs to shift from whether these countries should allowFDI investment and be part of globalization, to how can these companies bemade partners in the process of sustainable development.

Let us briefly examine the trends and the sectoral distribution of FDIinvestments in India over the last decade, and then establish the areas forconstructive partnership with MNCs in the process of sustainabledevelopment.

Table 7.1 Foreign Investment Inflows

Year Direct Portfolio Total (A + B)Investment (A) Investment (B)

(Rs. (US$ (Rs. (US$ (Rs. US$crore) million) crore) million) crore) million)

1990–1 174 97 11 6 185 1031991–2 316 129 10 4 326 1331992–3 965 315 748 244 1,713 5591993–4 1,838 586 11,188 3,567 13,026 4,1531994–5 4,126 1,314 12,007 3,824 16,133 5,1381995–6* 7,172 2,144 9,192 2,748 16,364 4,8921996–7* 10,015 2,821 11,758 3,312 21,773 6,1331997–8* 13,220 3,557 6,696 1,828 19,916 5,3851998–9* 10,358 2,462 -257 -61 10,101 2,4011999–2000* 9,338 2,155 13,112 3,026 22,450 5,181

* Includes acquisition of shares of Indian companies by non-residentsunder Section 29 of FERA. Source: Handbook of Statistics in India 2000,Reserve Bank of India, Table 139.

As would be clear from Table 7.1, inflows of FDI which had averaged$234 million during the period 1988–9365 had moved up to peak of $3,557in 1997–8. We are considering only the direct investment, and not portfolioinvestment, which moves in and out of an economy fast and where investorscannot be tied to being partners in any sustainable development efforts.

Although there has been some fall in the flow of FDI over the lastcouple of years, we have stressed earlier that the long-term flow is going toget considerably higher as MNCs move more funds into the emergingeconomies. This trend is confirmed by the fact that UNCTAD in its worldinvestment report (2000) said that in the longer term the subregion hasconsiderable potential.66 This is also reinforced by the fact that although


total inflows may have been affected by regional economic crises, thepercentage of approvals to actual FDI inflow has improved considerablyover the years, and more and more MNCs are turning their approvals intoactual investments in the country.

Table 7.2 Actual Inflow of FDI into India

Year Amount Approved Actual Inflow(Rs. crore) (Rs. crore)

1991 534 3511992 3,888 6751993 8,859 1,7871994 14,190 3,2891995 32,070 6,8201996 36,150 10,3891997 54,891 16,4251998* 30,810 13,3401999* 23,795 11,093

Total 205,187 64,170

Source: Estimate of Union Budget 1999–2000, Ministry of Finance,Government of India. Upto October, totals may not tally because ofrounding off on an annual basis.

This may not appear impressive compared to the volumes attracted bymany other countries, but it represents a dramatic increase from earlierlevels and it is growing. The change in the foreign investment environmentin India is reflected in the fact that a large number of Indian companieshave sought foreign joint venture partners, while major foreign investorshave focused on India for the first time. The latter category includes severalof the Fortune 500 companies, such as General Motors, Ford, Merck, Sony,Honda Motor, Coca Cola, Hewlett Packard, Texas Instruments, LGInternational, Fanuc, Samsung, Du Pont, AT&T, BT, Enron, Shell and ahost of others. The amounts invested in most cases are as yet small, but theentry of such investors holds out the potential for substantially larger inflowsin the years ahead.67

Given this trend, it would be important to examine the sectoral trendof investments, as we believe that industries in the infrastructure sector andwith long-term investments in the country would be more willing to becomepartners in the process of sustainable development. At this point in time, itis imperative to point out two significant trends as we develop our guidelinesfor building these partnerships. First is what we mentioned earlier that many


of the big names amongst MNCs have moved into India (although most ofthem with a low quantum of investment at present) but with high potentialfor the future. The second—and surprising to many—is the fact that whenwe compare them with domestic companies, the performance of MNCs inIndia has not been spectacular. While in 1978 there were 25 MNCs amongthe top hundred Indian companies, the number had come down to 12 in1998.68 The companies that have succeeded are primarily the ones whichhave focused on building a local managerial pool. Coupled with relativelypoorer performance, these MNCs in India have consistently been accusedof irresponsible social behaviour, with strong allegations of manipulationof the government and the bureaucracy. Their social commitment andbuilding of partnerships with the community has left a lot to be desired.

The other interesting fact is that developing countries seek investmentsin the infrastructure, capital goods and machinery sectors, as theseinvestments (unlike more ephemeral ones) bring long-term benefits to thenational economies (Table 7.3).

Table 7.3 Sectoral Distribution of FDI Inflows into India

Sector No of No of Amount of SectoralFTI FIA FDI share

approved in totalapprovals(per cent)

Core and infrastructure 743 1,353 116,384 57. 7Capital goods andmachinery 2,857 3,221 21,848 10. 8Consumer goods 672 1,786 25,961 12. 9Miscellaneousindustries 1,499 1,532 17,879 8. 9Services 271 1,665 19,761 9. 8Strategic goods 4 1 3 0Total 6,046 9,558 201,836 100

In India, as we can clearly see from Table 7.3, given the sectoralincentives, a significant 68.5 per cent of FDI approvals have been in thecore infrastructure and capital goods and machinery sectors; there are somein the non-core sectors too. This is an interesting trend, and as we believe itoffers great potential opportunities for building long-term partnerships withthese investors, we will look closely at the activities of one such investor,Enron, which has set up huge power plants in western India.


Before we explore the opportunities and move out of the oft takenpath of criticism of MNCs, let us briefly enumerate some of the trends wehave identified in India.

• Multinational investments have continued to increase; althoughthere have been some aberrations in 1998, these activites wouldcontinue to get significantly better in future.

• The percentage of approvals to actual investments has beenincreasing since the beginning of the decade.

• Many of the big names have made investments in India in the lastdecade, although the quantum has been limited in most cases.

• The profitability and growth of MNCs has, surprisingly, been lesscompared to domestic companies.

• In India, a significant percentage of the investments have beencoming in in areas the government would have desired them tocome.

• The Bhopal gas tragedy and charges of corruption againstcompanies like Enron have significantly tarnished the reputationof MNCs in India.

But instead of taking off on a path of criticism, we wanted to studytheir activities and then also look at some of the successful Indian corporatesand create a model for multinationals operating in this region, to createsustainable partnerships given the constraints of various players to buildwin-win situations for ecologically balanced development. We looked atthe social and community development activities of Enron, one of the mostcontroversial companies of recent times, and then studied in depth one ofthe most successful companies in corporate India, Tata Steel, which has anincredible record of creating partnerships for sustainable development. Theargument we developed was that the antagonism against these MNCs createsignificant costs for MNCs, besides for other stakeholders. But in Tata Steelwe saw a model of partnership that can be created without the need toactually make huge financial commitments. But before that, it is importantto briefly mention an important incident which in recent times has beenone of the root causes for strong feelings about the exploitative nature ofthese companies in India: the Bhopal gas tragedy. It is also important inhelping us understand how the minds of MNCs operate, and how sheergreed drives their operations in these countries.

We briefly look at the tragedy through the eyes of Dominique Lapierre,


the author of Freedom at Midnight and City of Joy and of a new book onthe Bhopal tragedy, because it clearly explains the reasons why UnionCarbide managers and engineers had acted so irresponsibly. The BhopalTragedy was one of the biggest natural disasters and one of the terribletragedies that emanated out of irresponsible multinational activity in India.

I think that the Bhopal gas tragedy should never beforgotten at least for two reasons. One, because what happenedon the night of December 2 to 3, 1984, in the capital of MadhyaPradesh is not one of these tragic fatalities that shake the worldpermanently such as the earthquakes which recently hit Gujarator Salvador, or the floods which devastated parts of Bengal orcentral China some time ago. The Bhopal tragedy is theapocalyptic fruit of man’s megalomania, greed, incompetenceand negligence. The second reason is the large number ofvictims who still fight for their survival 16 years after thedisaster.69

Over the years, there has been intense speculation on the irresponsibleattitude of the company, and one of the big revelations of the book is thefact that the Bhopal plant was extravagantly oversized simply because theUS engineers who were in charge of designing it were paid according tothe magnitude of the installation they were conceiving. The system wasknown as “Hay’s points”. As a result, the plant was designed to produce atleast twice the amount of pesticide that the Indian market could absorb.This meant that huge quantities of highly toxic gas were to be producedand stocked in the plant itself to manufacture the pesticide, instead of beingimported in small quantities from the US to meet the market demand.70

The other interesting point which comes out is the desperate strugglethat Union Carbide’s American representative in India, Eduardo Munoz,had with his superiors in New York to force them to take into account thepeculiarities of India’s climate, which dramatically affects the sales ofpesticides. But nobody in New York listened to his appeals. This was coupledwith the fact that the Bhopal planning commission was irresponsible enoughto authorize Union Carbide to build their plant in the heart of such a denselypopulated area. As for the tragic cost-saving policy engaged in by Carbidewhen the plant began to lose money and which finally led to disaster, thebook talks about the extraordinary document which gives one of the reasonswhy Carbide let the plant slowly become a potential new Titanic: fourmonths before the tragedy, the US multinational decided to dismantle itsBhopal installations to relocate them in Brazil and Indonesia.


The arrogance and the indifference of the company and the terribleimpact of the tragedy is summed up beautifully by Lapierre.

…to me, it’s above all the fact that some hundredthousands innocent victims still suffer from the consequencesof man’s insanity that should keep the Bhopal tragedy ineveryone’s conscience. That fatal night, the wind blew fromnorth to south. This accounts for the fact that the toxic cloudfirst hit thousands of poor people living in the bustees andslums built alongside the walls of the plant. And it’s a well-known fact of our arrogant societies that the voices of thepoor are not worth very much. The result is that today, 16years after, thousands and thousands of men, women andchildren are still suffering from respiratory illnesses,precocious blindness, cancers and so many other relatedailments for which they receive no adequate treatment.71

This definitely is a story of one of the most irresponsible acts of anMNC in the developing world and forms the background for the deepantagonism people carry against many MNCs. We thought it was alsoimperative to talk about this tragedy as a starting point to understand therealities of how decision making is done in these MNCs, and what changeswould have to come about in attitudes before we can work with them forbuilding partnerships in sustainable development. We refer extensively tothis incident because in a way it reveals the true intentions of multinationalsin Third World countries, and it is from here that we have to start on theagenda of building partnerships.

With this, we move ahead to look at some of the activities of one ofthe most famous MNCs of contemporary times, Enron and its powercompany in India, the Dabhol Power Company. Enron, which after theliberalization of the Indian economy beginning in 1991 created excitingopportunities in the infrastructure sector, became the first MNC to make ahuge infrastructure investment in India by setting up a power plant in Dabholin Ratnagiri, Maharashtra. The parent company Enron is a 23-billion-dollarcompany, and had been known as an extremely innovative company in theWest. Over the last decade, it combined the best minds of the financial andoil industries to produce a whole new world of financial derivative productsin the oil industry and saw a phenomenal growth in its revenues. It hasmajor interests in the oil and power sectors, and some current acquisitionsin water management. The Indian project, since its conception nearly adecade ago, has generated more problems than power. Dabhol and its mainshareholder, Enron Corp., based in Texas, were accused of bribing Indian


officials in order to get the project approved, and of tolerating police brutalityto get it built.72 The power plant in India has been mired in controversyfrom the beginning and it is a widely held belief that the brilliance of thenegotiators with Enron helped in getting an “unfair deal”. According to atop Indian official, “India had no experience in negotiating, Enron was asavvy negotiator.” The process was secret, deepening suspicions.73

It would also be important to point out that the World Bank refused tofinance it, saying that Maharashtra could not absorb the additional powerat the price that Dabhol would charge. Yet in 1996 the new, ostensiblyanti-Dabhol government approved a 740-megawatt plant costing $1.1 billionthat went into operation in May 1999 (Phase One), and a second, 1,440-megawatt plant costing $1.9 billion, which is 80 per cent built (Phase Two).74

Given this background, Enron has been notorious for getting a lot ofbad press, and this was possibly one of the reasons why it started its socialinitiatives to improve its image and to build a relationship with the localcommunity.

We will begin by briefly outlining the activities of Enron in this areaand then move on to study the initiatives of a very successful companyIndian company in this area, Tata Steel. After comparing and contrastingthe activities of the two companies, we will come back to structure somelessons that can be learnt from the Tata experience, and try and provide aset of recommendations for MNCs on the basis of our study of what weconsider to be a role-model company in the area.

Enron’s key social initiatives revolve around building bridges offriendship with the local community. The key projects in this regard havebeen a hospital, a greenhouse and a school.

Commissioned on 15 November 1999, the 50-bed community hospitalexamines an average of 200 patients daily and has many departments,including an OPD, general medicine, obstetrics, pediatrics, a blood bankand ophthalmology among others. It has been built in an area where “havinga doctor to attend to one is a luxury”. The hospital is supposed to offer onethe best facilities in a rural setting, and has a paramedical and a medicalteam that has initiated a “Gram Arogya Scheme” in which teams from thehospital visit the surrounding villages and explain how the community canbenefit from the facilities at the hospital. Another four-year-old initiativeof the Dabhol Power Company is the Hospital on Wheels, a mobiledispensary that visits eight villages twice a week. The day-to-daymanagement of the hospital is done by the trust called the Jnana PrabodhiniMedical Trust, which runs other hospitals in the Indian city of Pune also.


The other major initiative of the company is the greenhouse projectthat has been conceived as an extension of its horticulture initiatives. In theKonkan region, farming has traditionally been a seasonal activity; restrictedmainly to paddy cultivation during the monsoons. The nitrogen-starvedporous soil cannot hold water, hence the land lies unused for the rest of theyear, forcing migration to urban areas in search of better opportunities. Thegreenhouse project is addressed to encourage agriculture as a perennialrather than a seasonal occupation. The last initiative has been the setting upof a school by the company.75

After we studied a few MNCs, many questions arose. The Bhopaltragedy had revealed the extent to which maniacal greed drives thesecorporations, and even for Enron, although the initiatives were appreciable,we asked whether they were sufficient given the size and the resources ofthe company, and whether they were, in a way, being thrust upon thecommunity, or they were creating genuine partnerships with the localcommunity.

Our search for an answer to some of these questions took us to one ofthe exemplary companies in corporate India, one which had the mostoutstanding record of local community partnership and sustainabledevelopment initiatives. The study promised to be rewarding because werealized that in studying the company we would—if things went well—beable to develop some kind of a role model along with a set ofrecommendations for MNCs which wanted to participate in partneringsustainable development in the future.

Tata Steel, established in 1907 by J. N. Tata, is a thriving, vibrant,steel enterprise. It is Asia’s first and India’s largest integrated private-sectorsteel company76 with operating profit of approximately 300 million dollarsin the year ended 31 March 2000.77 It is an amazing company not only interms of its diversified business strength and the power of its brand in India,but more importantly for us because of its outstanding record in communitydevelopment activities since the beginning of the twentieth century. Inlooking at Tata Steel, we found an excellent model we could examine closelyand then build a set of recommendations for MNCs to follow if they wantedto create genuine and lasting partnerships with the community.

Role Model: Tata Steel

The best way to sum up the activities of the Tata group would be aquote from its late chairman, J. R. D. Tata.


I do believe that we in the group have held a view andheld a sense of purpose that our companies are not in existencejust to run our business and to make profit and that we areresponsible and good corporate citizens over and above ournormal operations. By that, I mean that we play a part in thecommunity and we shoulder community responsibility as partof social responsibility of our nation. And these responsibilitiesare not to be confused by employee welfare, but they arebeyond our employees and in fact concentrate on thecontribution to the nation.

The initiatives at the company are spread across many areas.78

• Building a green millennium.

• Empowerment of women and youth.

• Development initiatives with the urban community.

• Family initiatives.

• Promoting sports.

• Rural development.

• Tribal and harijan welfare.

In our study, we focused our research on the rural-developmentinitiatives of the company. These activities of Tata Steel are managed bythe Tata Steel Rural Development Society. The philosophy and thecommitment of the company to these initiatives can be beautifully summedup in the advertisement slogan of the company some years back, “We alsomake steel”, which highlights its community and social developmentactivities.

The scope of activities of Tata Steel Rural Development Service(TSRDS) ranges from building rural infrastructure to promoting art andculture and spotting and nurturing of sporting talent in the villages;construction of link roads and culverts; developing water resources bothfor irrigation and domestic use; drilling tube wells; assisting farmers toadopt improved methods of cultivation; animal husbandry; repair andconstruction of school buildings and community halls; promotion of ruralindustry and entrepreneurship; adult literacy; empowerment of women andyouth; medical services and rural sanitation; and promoting rural handicrafts.Besides these, it also operates regular mobile medical services and conductsfamily planning and eye care camps at different village sites. It has alsoembarked upon scientific programmes for the rehabilitation of the visually


and the physically challenged.

We found that it has an incredible range of activities: more importantly,it had a strong realization that partnering sustainable development was acritical role to be played by the organization. It is this realization that is thekey first step to building sustainable partnerships. Our study and interactionwith the executives consistently revealed that in many MNCs there wasstill a superficial appreciation of these actions. In the following pages, wewould look more closely at the activities of Tata Steel.

The most important fact which came out from our study of the TSRDSoperations was the fact that source of funding was not only the company’sresources, but also resources from international development agencies, mostcritically, resources from the communities themselves, which was the crucialfactor to show how integrated these operations were, and the extent to whichthey had made the community part of the development process. To elaborate,we identified four sources of revenue for the rural development programme.

• Grants from the company: Initially set up with a grant of Rs.12.87 lakh, at the time of the study the grants were in excess ofRs. 3 crore.

• Resource mobilization from state and central governmentagencies.

• National and international funding agencies which helped TRSDSleverage huge resources from international donors.

• Community participation, which was the most powerful statementon how involved the community had become with the programme.Initially, TRSDS also started functioning like other corporateinitiatives involving conceiving schemes, funding andimplementing them. But then it went much beyond to create asustainable and lasting development programme based onstakeholding consciousness among the recipients. They made aconcerted drive to generate direct and indirect stakeholding.Beneficiary communities also responded because they appreciatedthe efforts of the programmes of TRSDS, and in the precedingsix years had contributed Rs. 153 lakh towards various projectsundertaken by TRSDS in the form of cash, kind and labour.79

It was intense community involvement, which we had seen in veryfew corporate efforts, which was really the creation of a genuine partnershipwith the community for sustainable development.


The TRSDS had not only created professional partnerships with bothnational and international governmental and non-governmental agencies,it had created a wide array of networks where they worked closely together,and were even entrusted with huge funds and other resources to impact onand build the capabilities of the community. The TRSDS had also takeinitiatives to build linkages between the NGO sector and the government.Such linkages promoted the long-term view of corporate-sponsored NGOsin rural development, where they were able to play an increasingly enablingand catalytic role. The most interesting fact was that, since the early 1980s,the company had launched a practice of undertaking social audits.

To summarize, at Tata Steel, unlike at other corporate efforts, we foundan intense participation by the community and stakeholders, and alsopartnerships across government and non-government agencies. Thisintegrated approach had produced spectacular results with the ruraldevelopment programme being awarded by various agencies across theworld. It was an effort where we spent considerable effort and time andrealized that strong, sustainable partnerships driven by the corporate sectorwere clearly a winning possibility.

What is important is that companies like Enron and most othermultinationals should create two-way processes instead of making socialdevelopment expenditure singlehandedly without involving the community.If community involvement is encouraged and sustainable partnershipsestablished, then the results are dramatic. The synergies between thesepartners help create outstanding success. What was important was that thecorporate was playing a role in terms of getting these partners togetherusing its management skills, and not necessarily making huge expenditureitself.

The Bhopal tragedy was the epitome of irresponsible MNC behaviour,and obviously these actions may help squeeze short-term profits but createlong-term antagonism which has disastrous costs for the company and thehost country in the long term. The MNCs should clearly avoid such short-term myopic views if they want to create an environment where they cansustain their profit generating companies. From our study of Enron, wefound that companies are slowly realizing this and also making tokencommitments to the development of local communities. What isunfortunately not happening in most of these efforts of MNCs is the creationof true partnerships across community, government, non-governmentorganizations and international development agencies. We saw that one ofthe leading companies in India, Tata Steel, has been able to create anenvironment where significant synergies were being realized through the


rural development programmes that were true examples of sustainabledevelopment. What the Tata Steel example also shows us is the fact thatMNCs do not need to make huge financial commitments themselves, butcreate linkages and partnerships and bring together the stakeholders ofsustainable development..In doing this, MNCs would also be able to improvetheir dismal record, but also create a situation where all benefit.


VIII

A Case Study from Bangladesh

The operations of MNCs in Bangladesh are very limited compared toother developing countries, particularly the dynamic Asian economies.Despite instituting far-reaching economic reforms in recent years, FDIinflow into Bangladesh remains scanty.80 As seen from Table 8.1, FDI inflowinto Bangladesh started in 1977 following the bloody change of regime in1975. But until the early 1990s, it remained negligible. The expansion ofFDI is clearly related to the speed of economic liberalization that tookmomentum under the Khaleda Zia regime. While looking at the nature ofFDI, it is observed that it mainly takes the form of joint ventures with localinvestors. The MNCs which have formed joint ventures with local investorsinclude: Fisons, Rhon-Poulenc, General Electric Co., Reckit and Colman,Lever Brothers, Glaxo, ICI, Berger Paints, Avery, and Burmah Eastern fromthe UK; Singer, Squibb, Pfizer, and the producers of Coca Cola and Pepsifrom the US; Bata and Milners from Canada; Siemens, BASF, and Hoechstfrom Germany; Philips and Organon from the Netherlands; and SwedishMotors from Sweden.81 In addition, there were “100 per cent equity”, “non-equity” and “licensing” forms of foreign investments in Bangladesh.

Table 8.1 Flow of FDI into Bangladesh(in million US$)

Year Amount Year Amountsanctioned sanctioned

1972 Nil 1991–2 251975 Nil 1993–4 8041977 0.68 1995–6 1,5161980 3.48 1996–7 1,0541983 25.62 1997–8 3,4401985 6.21 1998–9 1,9261987 51.96 1999–2000 2,1191990 60.27 — —

Source: Board of Investment, Government of Bangladesh, unpublisheddocuments; Reza and Rashid, p. 186.

Table 8.2 reveals that the commodity-wise composition of FDI hasundergone significant changes over the years. Since 1991 when there was


significant rise of FDI, the sectoral composition fluctuates in different years:FDI has not been confined to a certain sector for any considerable period.Another interesting observation is that FDI in the manufacturing sector isvery low, while it is booming in the service industries.

Table 8.2 Commodity Group-Wise FDI in Bangladesh(US$ million)

Commodity group 1991–2 1993–4 1995–6 1997–8 1999–2000

Agro-based 0.665 16.75 46.258 8.652 6.46industries

Food and allied 11.075 3.425 32.865 377.618 2.62industries

Textile industries 7.325 360.275 96.367 101.124 44.58Printing and 0.050 1.1 0.993 0.00 0.2

publishingTannery, leather and 3.125 4.850 16.202 22.989 0.68

rubberChemical industries 0.125 372.050 561.443 58.697 1,045.78Glass, ceramics and 0.00 7.90 47.033 108.315 154.44

non-metallicEngineering 1.175 24.1 162.146 11.573 22.8

industriesService industries 0.00 9.075 62.630 2484.18 837.76Miscellaneous 1.900 4.6 490.361 266.831 3.48

Source: Board of Investment, Government of Bangladesh, unpublisheddocuments.

With regard to the inflow of FDI into Bangladesh, it is observed that inthe 1970s, the Western industrialized countries dominated foreigninvestment, while in the late 1980s and the 1990s, the Newly IndustrializingEconomies (NIEs) of East Asia made significant strides. However,Bangladesh presently receives FDI significantly from both Western andAsian sources.

Having discussed the extent of MNCs’ operations and FDI inflows inBangladesh, we briefly examine the impact of FDI on Bangladesh.Historically, like many conservative developing nations in Latin America,Africa and Asia during the 1950s and 1960s, Bangladesh maintained aconsiderably regulated environment for MNCs’ operations. Even the Ershadregime (which was famous for implementing World Bank–IMF guidedStructural Adjustment Programmes (or SAPs) in Bangladesh) was suspicious


about the operations of MNCs. For example, in the mid-1980s, the Ershadregime introduced a new Drug Policy prohibiting production of severalmedicines/tonics mainly manufactured by MNCs, which has undoubtedlydiscouraged foreign investment in the pharmaceutical industry.82 As alreadynoted, the significant expansion of MNCs’ operations through FDI tookplace in the early 1990s. The concentration of FDI is in a few sectors likereadymade garments, textiles and knitwear operating in the exportprocessing zones. Theoretically, FDI is supposed to contribute to theeconomy of Bangladesh as a recipient country in various ways. Most notably,transfer of technology appears to be contributing to the economicdevelopment of Bangladesh. Interestingly, as foreign investment inBangladesh is largely labour-intensive, it has very limited contribution totechnology transfer. As Reza and Rashid claim, only 4 per cent of FDIcomes in the form of capital equipment.83 Another rationale for attractingFDI is to fill the resources gap in Bangladesh between desired investmentand local savings. In other words, the imperative of capital formation playsa critical role in wooing FDI. However, in reality, Bangladesh has not beensuccessful in this effort given the very low level of FDI inflows into thatcountry. But the greatest contribution of FDI in Bangladesh lies inemployment generation. Since the most attractive comparative advantagefor Bangladesh is the abundance of low-cost labour, it receives increasingattention of MNCs. As a result, because of the small volume and highlylabour-intensive nature, FDI has failed to play an important role in economicdevelopment as observed in the case of late industrialized countries.However, in the pursuit of market economy under conditions ofglobalization, Bangladesh is increasingly dependent on FDI inflows forachieving the desired economic development. More significantly, dwindlingforeign aid compels the country to look for FDI more and more. Theincentive structure for attracting FDI reveals the fact that unlike past regimesof the 1970s and 1980s, present political regimes take a highly positiveapproach towards MNCs. All controversy and debate centring around theoperations of MNCs are a matter of the past.

Ironically, for MNCs, the reality is somewhat paradoxical. Theoperations of MNCs have been generating new questions on the extentMNCs could contribute to the development of Bangladesh. It is true thatthe process of globalization empowered MNCs with more globally bindingrules and regulations for host countries as successfully architectured by theOECD, World Bank, World Trade Organization, etc. Unlike the Cold Warera, MNCs are now guided by self-regulation or the regulations created bythe OECD.84 Amid such growing power of MNCs, Bangladesh faces the


daunting task of making sense from the increasing involvement of FDI inthe Bangladesh economy in the changed global environment. In this context,the issue of sustainable development becomes a major concern for thiscountry. While it is undeniable that MNCs have a positive impact oneconomic development, their unfettered activity could jeopardize theinterests of the country. A case in point is the Magurchara gas explosion.We examine this case to illustrate how the operations of MNCs generatethe imperative for sustainable development to ensure mutual gains.

THE MAGURCHARA GAS FIELD DISASTER

The oil and gas sector in Bangladesh has seen rapid development withgovernment as well as private-sector investments already having been madeand many more in the immediate pipeline. One of the issues facing all theinvestors in the oil and gas sector is the appropriate environmental guidelinesthat need to be followed.85 A few years ago, with the bidding process ondifferent gas and oil blocks under way, there was tremendous optimismover Bangladesh’s economic future. The country looked set to “emerge asSouth Asia’s next success story”. The gas production that came on linerecently under a previous Production Sharing Contract (PSC) appears to becosting the country millions of dollars instead of making money. One ofthe major causes behind such pessimism is the experience of the Magurcharagas explosion.

The Magurchara gas field disaster illustrates the necessity of sustainabledevelopment in the operations of MNCs in host countries. This disasterwas the result of a massive explosion of a gas well when the multinationaloil company Occidental started drilling its first well at Magurchara,Moulavibazar. The accident that took place on 15 June 1997 is a great tragedyin the history of MNCs’ operations in Bangladesh. Magurchara gas field issituated in block no. 14 of Surma basin, which is very rich in hydrocarbonreserves. Occidental discovered the Magurchara gas field in 1989. PetroBangla signed a production-sharing contract with the OccidentalInternational Exploration and Production Company, USA in January 1995.86

After necessary survey of the geophysical condition of the area, the companystarted drilling its first well.

Why did the Explosion Take Place?

Although Occidental termed it “human error” or “simply an accident”,experts in Bangladesh considered the probable reason behind this disasteras lack of sufficient precaution by Occidental when it started drilling sucha huge and costly gas well. The company has been held responsible for


negligence in the blowout. According to a local expert, usually in thissituation, heavy mud or chemical substances are used to prevent the upwardflow of gas. Probably Occidental could not do it properly. According toanother expert, the cementing operation at the time of drilling was faulty. Itwas seen at the time of accident that one pump was operating erratically.The explosion was caused by lack of proper management skills of OccidentalCo. while embedding mechanical installations at a depth of 950 metres.

Damage

The explosion caused multifarious damage to the environment,economy, and society of Bangladesh. The Magurchara gas well blazes costBangladesh an entire gas reserve of approximately 700 million cubic feet,the current price of which is estimated at more than Tk 20,000 crore. Withthe direct damage of 52.53 crore taka, the total damage came to 176.97crore taka.87 It caused severe damage to the tribal habitat. The MagurcharaKhasi Punji, a tribal group, was the worst (and only) affected inhabitationby the gas explosion. Five houses including all the belongings of sevenfamilies were burnt to ashes with the heat of the fire. In addition, the firedamaged Khasi pan jhums on 50 acres of land. About 400 Khasis of 40families live in Magurchara Punji, which is adjacent (around 200 yards) tothe gas field. The gas fire affected every family. On the part of Occidental,the loss is quite high. They also incurred a huge loss due to the accident.Furthermore, they had to pay hundreds of crores of taka for the damage.

Environmental Effect and Occidental’s Responsibility

Apart from damage to the economy and human settlements, theexplosion had a disastrous impact on ecosystems of the surrounding regionby destroying the dense natural forests, apart from damaging part of theDhaka–Sylhet railway track and the highway. The greatest detriment aroundthe area of the explosion is to the soil. The soil has not only lost its fertility,but has also become inappropriate for construction of any heavy structure.The gas fire denuded the surrounding 700-acre reserved forest, rich in floraand fauna. The land will be no good for trees, tea, crops and vegetables for50 years, according to soil scientists. Environmentalists said Bangladeshwas facing a very serious loss of green cover and extinction of wildlifespecies. The damage to the environment was multiplied due to the prolongedperiod for which the fire continued: for 17 days according to official reports,and for 21–60 days over a range of 2–3 km according to the local people,journalists and NGO activists.

Coming to the question of the responsibility of Occidental, it appears


that the company was unaware of the legal bindings about gettingenvironmental clearance before starting exploration work at Magurchara.The company had, in fact, flouted the Environment Conservation Law andRules, and tried to prove its innocence after the accident took place at theMagurchara well. Previously, Occidental had applied for the requiredclearance and had submitted an Environmental Impact Assessment (EIA)report to the Department of Environment (DOE). However, before receivingfinal clearance from the Government of Bangladesh, the company startedits exploration activity, in violation of environmental regulations. Followingthe accident, Occidental regretted that they were not aware of the mandatoryenvironmental clearance. It is ironical that a company like Occidental was‘unaware’ of the environmental effects of such extensive explorationoperations. Even more surprisingly, it started operations without observingthe environmental regulations of the host country. It clearly demonstratesthe necessity of driving home to MNCs their social responsibility whiledoing business in developing countries like Bangladesh.

The lesson for Bangladesh is that although the country needs foreigninvestment in the energy sector, the government should meticulously framedeals or PSCs with private companies, which will force them to followstrict precautionary measures in the exploration work. Environmentalpollution, accident prevention, use of scarce agricultural land resource, etc.,are of serious concern. Bangladesh needs to partner with companies withadequate finances, technology, environmental and social commitment—and, of course, an acceptable record in refraining from political meddling—with a strict framework defined for them to operate within.88 Above all,this is an eye-opener for both the host country and MNCs to be concernedabout sustainable development.


IX

The Road Ahead

The trends of globalization have been established clearly and thesecurity needs of the countries are changing in this emerging global order.There are new relationships and partnerships that are emerging whichsignificantly impact the security environment of developing countries. Insome instances, it has been MNCs that have helped countries tide overstrong sanctions and to carry out their security agenda, as brought out vividlyafter the nuclear blasts in India and Pakistan. Complex new patterns areemerging, whose outlines are not very clear yet. The last decade has seensignificant growth of civil society and NGOs. Newly emerging economicparadigms and pressures from world economic organizations have broughtin significant structural adjustments in the economies of the developingworld. Foreign direct investments and the activities of MNCs have increasedsignificantly in the last decade. Although South Asia is not a significantrecipient of FDI funds as yet, significant long-term growth in theseinvestments in this region is expected. The multinational presence has grownsignificantly in this region, and governments are offering incentives toMNCs for investing in sectors they believe are crucial for the progress oftheir countries, and where MNCs would make long-term commitments.The Indian example shows that governments have been successful to alarge extent in their efforts in this direction. New areas of partnership arebeing forged to make these companies partners in the sustainabledevelopment process, but there are many constraints also.

The profitability of MNCs in South Asia has not been very high andtheir decision making is governed purely by economic motives, as ourexposition on the Bhopal gas accident in India and Magurchara gas explosionin Bangladesh (among others) has clearly revealed. This was also broughtout clearly in our discussions with corporate executives in many countriesin South Asia. Despite this, many MNCs realize that there is significantantagonism against them, which affects opportunities to create wealth, andalthough most decisions follow a totally economic rationale, they have feltthe need to become partners in sustainable development processes to mitigatesome of this anger.

This gives governments, international organizations and otherstakeholders to seize the opportunity to make use of the competencies andmanagerial talents of these companies and make them become significant


players in the sustainable development process. The wonderful partnershipbetween Tata Steel, a diversified India conglomerate, and other stakeholdersin the sustainable development process helps us see a wonderful future forusing the strengths of MNCs to create a brighter future for the deprived inthis region. The Tata example shows that in a country where, according toformer Prime Minister Rajiv Gandhi, only 15 per cent of the allotted fundsreach the rural poor, there are vast opportunities to make use of the skills ofMNCs in delivering results to improve this record.

On a broader plane, striking a balance between the costs and benefitsof MNCs’ operations is the real policy challenge for host countries. Theoutright rejection of MNCs by many Third World countries (including India)in the 1960s, is not feasable in the 1990s. Health care, the environment,and IT must be related to human opportunities. Since advances in IT areintended to increase the capacity of people and society, it should be used toeliminate poverty. Under the framework of sustainable development, thepossible areas of partnership between MNCs and host countries of SouthAsia would be largely confined to three sectors: ecology, economicdevelopment, and human development. In order to integrate the long-terminterests of multinationals with the policy initiatives of South Asiangovernments, serious and deliberate efforts could be made in the aboveareas for using the unique strengths and management skills of MNCs andto turn them into sustainable development partners.

Besides collaboration at project implementation level of building roads,schools and hospitals and participating in rural development activities andother development projects, we feel that there are many areas of collaborativeeffort between MNCs and host governments. One area of strong possiblecollaboration is environmental regulation.

There is a need for strict environmental regulations in some vital areasof FDI, like gas and oil exploration, and infrastructure (the Jamuna bridge,and KAFCO in Bangladesh). Strong adherence to these regulations couldbenefit both MNCs and host countries, as losses from industrial disastershave had tremendous impact on the bottom line of MNCs. The importanceof legislation in inducing corporate ecological responsiveness has beenwidely recognized (Lampe et al. 1991; Lawrence and Morell 1995; Post1994; Vredenburg and Westley 1993). Escalating penalties, fines, and legalcosts have underlined the importance of complying with legislation(Cordano 1993). Furthermore, firms can avoid expensive capital refits bykeeping ahead of legislation (Lampe et al. 1991). Stakeholders have alsobeen instrumental in inducing corporate ecological responsiveness.Customers, local communities, environmental interest groups, and even


the natural environment itself encourage firms to consider ecological impactsin their decision making (Berry and Rondinelli 1998; Bucholz 1991;Lawrence and Morell 1995; Starik 1995). Managers are able to avertnegative public attention and build stakeholder support by being responsive(Cordano 1993; Dillon and Fischer 1992). Given the advantages to thecorporate world and the stakeholders, this is definitely an area of futurecollaboration between MNCs and other stakeholders in the sustainabledevelopment process.

Other areas include ecologically responsive behaviour and the economicopportunities they offer. Revenues can be improved through greenmarketing, the sale of waste products, and outsourcing a firm’senvironmental expertise (Cordano 1993). Rent-earning firm-basedresources, such as corporate reputation (Hart 1995; Russo and Fouts 1997),learning capabilities (Bonifant, Arnold and Long 1995; Hart 1995), andproduct quality (Shrivastava 1995) can be developed through corporateecological activities, and given the advantages accruing to multinationals,this could be an area where they would have strong interests in collaboration.

We believe there are tremendous opportunities for moving ahead onthe path of sustainable development by continuous and intensivecollaboration between multinational companies, host governments and otherstakeholders. Traditionally, antagonistic relationships have the potential ofturning into great partnerships and to build on role models that companieslike Tata Steel have established in India. It will be a brave new world ofgrowth and progress for all.


NOTES AND REFERENCES1 Michael Edwards and Gita Sen, “NGOs, Social Change and the Transformation of HumanRelationships: A 21st-Century Civic Agenda”, Third World Quarterly, vol. 21, no. 4, August2000, p. 1.2 Karl P. Sauvant, “FDI and Aggressive TNCs: Challenge Before Third World Economies”,Independent (Dhaka), 18 October 2000.3 Robert Chambers, Whose Reality Counts: Putting the First Last, London: IntermediateTechnology Publications, 1997, p. 4.4 Kenichi Ohmae, The Borderless World: Power and Strategy in the Interlinked World,London: Harper Business, 1990, p. 5; also Kenichi Ohmae, The End of the Nation-State,New York: Free Press, 1995.5 Robert O. Keohane and Joseph S. Nye, Jr. “Globalisation: What’s New? What’s Not?(And So What?)”, Foreign Policy, Spring 2000, p. 104.6 “Marginalizing the Masses”, Journal of International Affairs, vol. 53, no. 2, Spring 2000:Noam Chomsky interviewed by Robert A. Schupp and Richard L. O. Hlemacher.7 Some also argue that the Cold War ended in 1989 following the fall of socialist regimes inEast Europe.8 Victor D. Cha, “Globalisation and the Study of International Security”, Journal of PeaceResearch, vol. 37, no. 3, 2000, p. 391.9 Ohmae, Reich and Thomas L Friedman strongly advocate the diminishing role of the state.10 Thomas L. Friedman, The Lexus and the Olive Tree: Understanding Globalisation, NewYork: Archer Books, 2000, p. xx.11 See, for details, V. Birchfield, “Contesting the Hegemony of Market Ideology: Gramsci’s‘Good Sense’ and Polanyi’s Double Movement”, Review of International Political Economy,vol. 6, no. 1, Spring 1999, p. 30.12 For example, the volume and mobility of global finance capital has surprised manyobservers. In 1986, about $188 billion passed through the hands of currency traders in NewYork, London and Tokyo every day. “Presently, $1.5 trillion is traded on the foreign exchangemarkets—as few traders seem to determine the economic fate of nations.” See, for details,David Held and Anthony McGrew with Goldblatt, D. and Perraton, J. “Globalization”,Global Governance, vol. 5, 1999, p. 493.13 See, for details, the World Development Report 1989, World Bank, pp. 128–9. This reportdiscusses different dimensions of financial liberalization.14 Beth V. Yarbrough and Robert M Yarbrough, “Cooperation in the Liberalization ofInternational Trade: After Hegemony, What?”, International Organization, vol. 41, no. 1,Winter 1987, pp. 12–13.15 Ethan Kapstein, “Globalisation and Democratization: Friends or Foes?”, 5 May 1999,http://www.worldbank.org/poverty/inequal/themgrp/seminars/1999.htmno._Toc440950986(14 February 2001).16 Jeffrey Hart and Aseem Prakash, “Introduction”, in Globalisation and Governance, ed.Jeffrey Hart and Aseem Prakash, New York: Routledge, 1999, p. 17.17 Daily Star (Dhaka), 19 January 2001.18 The UNDP report of 1993 cites 50,000 NGOs worldwide. Between 1980 and 1990, theOECD reported an increase from 1,600 to 2,500 organizations in its 24 member countries.


19 J. Ann Tickner, “Re-visioning Security”, in International Relations Theory Today, ed.Ken Booth and Steve Smith, Cambridge: Polity Press, 1995, p. 176.20 Ibid., p. 179. See, for details, Mohammed Ayoob, “The Security Problematic in the ThirdWorld”, World Politics, vol. 43, 1991, pp. 257–83.21 For details, see Barry Buzan, Peoples, States and Fears: An Agenda for InternationalSecurity Studies in the Post Cold War Era, Boulder: Lynne Rienner Publishers, 1991; JessicaMethews, “The Environment and International Security”, in Michael Klare and DanielThomas (eds)., World Security: Trends and Challenges at Century’s End, ed. New York: St.Martin’s Press, 1991.22 Tickner, op. cit., n. 19 above, p. 182.23 Institute for National Strategic Studies, Strategic Assessment 1999, p. 30.24 According to the UNDP Human Development Report 1994, “human development” isdefined as the widening of people’s choices, viz. people’s capability to be healthy and tolive longer, to be educated, to be properly housed, or to participate in economic, politicaland social life, while “human security” means people’s protection from sudden and hurtfuldisruptions in the pattern of their daily lives—whether in their homes, communities,environment or work.25 Inge Kaul, “Globalisation and Human Development: Challenges for A New Century”,Office of Development Studies, United Nations Development Programme, New York, http://www.unu.edu/unupress/planet.htmlno.Human (17 February 2001).26 In 1972, the Club of Rome published a report titled Limits of Growth. The central messagewas that the world was heading for disaster because of unfettered population growth andindustrial expansion, exhaustion of stocks of natural resources, environmental destruction,and food shortages.27 Jorg Kohn, John Gowdy, Friedrich Hinterberger and Jan van der Straaten, eds.,Sustainability in Question: The Search for a Conceptual Framework, Northampton, Mass.:Edward Elgar Publishing, 1999.28 Daily Star (Dhaka), 6 June 1999.29 Maurice Scott, “What Sustains Economic Development”, in The Economics of SustainableDevelopment, ed. Ian Goldin and L. Alan Winters, New York: Cambridge University Press,1996, p. 83.30 Andrew Hurrell and Ngaire Woods, “Introduction” in Inequality, Globalisation and WorldPolitics, ed. Andrew Hurrell and Ngaire Woods, Oxford University Press, 1999, p. 42.31 Ibid., p. 131.32 Victor D. Cha, “Globalisation and the Study of International Security”, Journal of PeaceResearch, vol. 37, no. 3, May 2000, pp. 391–3.33 V. Janardhan, “Globalisation of Capital, Multinational Corporations and Labour: Towardsa Perspective”, Economic and Political Weekly, 30 August 1997, pp. 1–2.34 The two previous investment booms took place in 1979–81 and 1987–90 (the first onebeing led by petroleum investments in oil producing countries, and the second one beingconcentrated in the developed world). See, for details, World Investment Report 1997,UNCTAD.35 Ibid., p. 6.36 Ataur Rahman, “Beyond Nation State: Globalisation and Regionalism in South Asia”, paperpresented at the Regional Workshop on Globalisation and Security in South Asia, organized


by the Bangladesh Institute of International Studies (BIISS), Dhaka, 25–7 May 1999.37 David Held and Anthony McGrew, with David Goldblatt and Jonathan Perraton,“Globalisation”, Global Governance, vol. 5, 1999, p. 491.38 Dani Rodrik, Has Globalisation Gone Too Far?, Washington D.C.: Institute forInternational Economics, 1997, p. 3. In the June 1996 G-7 summit at Lyons, the leadersrecognized that globalization raises difficulties for certain groups, and wrote: “In anincreasingly interdependent world we must all recognize that we have an interest in spreadingthe benefits of economic growth as widely as possible and in diminishing the risk either ofexcluding individuals or groups in our own economies or of excluding certain countries orregions from the benefits of globalization.”39 Ibid., pp. 6–7.40 Charles Oman, “Globalisation, Regionalization and Inequality”, in Inequality, Globalisationand World Politics, ed. Andrew Hurrell and Ngaire Woods, Oxford and New York: OxfordUniversity Press, 1999, p. 37.41 Rodrik, op. cit., n. 38 above, p. 8.42 Andrew Hurrell and Ngaire Woods, “Introduction”, in Hurrell and Woods, op. cit., n. 40above, p. 3.43 Richard N. Cooper, Environment and Resource Policies for the World Economy, WashingtonD.C.: The Brookings Institution, 1994, p. xxii.44 Ian Clark, Globalization and International Relations Theory, London: Oxford UniversityPress, 2000, p. 56.45 Ibid., p. 57.46 Kalevi J. Holsti, The State, War and The State of War, Cambridge: Cambridge UniversityPress, 1996, p.117.47 Rodrik, op. cit., n. 38 above, p. 2.48 Fuat Keyman, Globalization, State, Identity/Difference: Toward a Critical Theory ofInternational Relations, New Jersey: Humanities Press, 1997, p. 165.49 Ibid.50 Ibid., p. 209.51 Ethan B. Kapstein, “Winners and Losers in the World Economy”, InternationalOrganization, vol. 54, no. 2, Spring 2000, p. 360.52 Paul Krugman, Technology, Trade, and Factor Prices, NBER Working Paper No. 5355.Cambridge, Mass.: National Bureau of Economic Research, 1995, pp. 2–3. Quoted in Rodrik,op. cit., n. 38 above, p. 13.53 Extensively discussed by Rodrik, ibid.54 Ibid., p. 77.55 Abdur Rob, “Globalisation and Security Linkages in the Coming Millennium”, DailyStar (Dhaka), 1 July 1999.56 See, for details, P. R. Chari, Newer Sources of Insecurity: The Crisis of Governance inIndia, RCSS Policy Studies 3, http://www.rcss.org/publications/policy/ps-3.html (10 October2000).57 Rob, op. cit., n. 55 above.58 Times of India, 22 July 1999.


59 Evolutionary theory of Perlmutter, Ghoshal and Bartlet; Vernon’s product cycle model;Kojima’s flying geese model; Industrial organization approach; Internalization theory ofBuckley and Casson; John Dunning’s eclectic theory; Williamson’s transaction cost theory;Zjack and Olsen’s transaction value analysis. In addition, there are three schools of thoughtwith regard to conceptualization of MNCs—structural, performance, and behavioural. Whilethe structural school emphasizes ownership and national competition, the performance schoolfocuses on earnings, sales and asset. The behavioural school looks at how managers think inan MNC.60 Based on Brainard and Markusen, who suggested a transposition to FDI flows followingthe Krugman approach for trade.61 Ahmed Badruzzaman, “Oil and Gas Exploration in Bangladesh: The Moment ofReckoning”, http://www.dailystarnews.com/199811/11/n8111109.htm (18 March 2001).62 There are four circles of countries for attracting FDI: “core” (North America, Europe,Japan and the first wave of NICs); “new frontier” (Malaysia, Indonesia, Brazil, etc.);“potential” (Russia, Egypt, etc.) and “peripheral”.63 The lack of disaster preparedness by Occidental Company caused a human tragedy in1997 in the adjacent area of one its gas wells located in Sylhet, Bangladesh.64 Abhijit Roy, Arjun Lahiri, Alok Majumdar and Indranil Ghosh, “Mostly Not-WantedCompanies”, Business India, 9–22 March 1998.65 “FDI Flows to India down in 1999: Unctad Report”, Business Line, 4 October 2000.66 Ibid.67 Montek Singh Ahluwalia, India’s Economic Reforms: An Appraisal, Planning Commisionof India, available online, http://planningcommission.nic.in/artf.htm (18 March 2001).68 Roy et al., op. cit., n. 64 above.69 Dominique Lapierre, “No Freedom from that Fretful Midnight”, http://www.timesofindia.com/130301/13home2.htm (14 March 2001).70 Times of India web edition71 Ibid.72 “Enron in India: ‘Generation Gaps’ ”, available online, http://www.economist.com/displayStory.cfm?Story_ID=473117 (23 February 2001), The Economist, 11 January 2001.73 Ibid.74 Ibid.75 Sulekha Nair, “Dhabols’s Social Initiatives Captivate Villagers, Financial Express (India),20 August 2000.76 Web site tatasteel.com77 Figure converted from annual report.78 Tata Steel Corporate Report 1999–2000.79 Report on the TRDS programme submitted to the Federation of Indian Chambers ofCommerce and Industry (FICCI).80 Sadrel Reza and M. Ali Rashid, “Foreign Direct Investment: Problems and Prospects”, inBangladesh Economy in Transition, ed. M. G. Quibria, Dhaka: The University Press, 1997,p. 184.81 Ibid., pp. 188–9.


82 Ibid., p. 193.83 Ibid.84 The proposed Multilateral Agreement on Investment (MAI) is an example.85 Mizan Khan, NEMAP Newsletter, April–June 1999.86 “Magurchara Gas Field Disaster”, http://server1.hypermart.net/shakti/articles/petro/mazhar1.htm (18 March 2001).87 Study report on the “Magurchhara Gas Explosion” by the Ministry of Environment andForestry and BELA (Bangladesh Environmental Lawyers’ Association), 18–19 June 1997.88 Badruzzaman, op. cit., n. 61 above.


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