A large part of the international discussion on the role of FDI in developing countries concerns the social responsibility of MNCs, which has recently received increased attention. The debate focuses on whether foreign investors help to improve national environmental and social issues and thereby contributing to the development of the host country.

Social responsibility covers a number of issues such as development and socio-political obligations; environment; human and labour rights; consumer protection; corporate governance; and ethical business standards. There is a growing expectation that MNCs can play a role in reaching development goals by contributing to public revenues; creating employment opportunities and upgrading linkages with local enterprises; raising skills levels; and transferring technology. The International Standards of Accounting and Reporting (ISAR) is an additional area where MNCs can contribute to development, for example, by integrating environmental costs and liabilities into financial statements.      

Environmental and social issues are mainly formulated in corporate codes of conduct, which vary a great deal in their scope and purpose. In this context, an important global instrument available is the OECD Guidelines for Multinational Enterprises (MNE), which is the only comprehensive set of voluntary principles for international business collectively endorsed by governments. Thus, the OECD MNE Guidelines can serve as an important benchmarking tool for companies as they develop their internal management systems. The OECD has reviewed 246 voluntary codes of conduct from companies, associations, partnerships of stakeholders and international organisations, and which showed that the codes were dominated by labour and environmental concerns, consumer protection, bribery, and corruption.  

This section focuses on the environmental and social impact of FDI in developing countries. More information on the literature related to the OECD guidelines for MNEs can be found in the section on Corporate Social Responsibility available on this website.

The global labour standards controversy: critical issues for developing countries, Ajit Singh and Ann Zammit, SouthCentre, October 2000

The study addresses the arguments that trade with developing countries is the main source of the troubles afflicting large numbers of workers in the North and that low wages in developing countries give developing countries an unfair competitive edge over business in the North. The policy study attempts to clarify the analytical, empirical, and policy issues involved in the international debate on this subject and goes on to outline a constructive way forward, which would help improve labour standards both in the North and the South. The authors do not use the conventional theory of welfare economics or that of international trade, but base their arguments are on (a) cost-benefit analysis (predicated on maximizing the long-term rate of productivity growth) and (b) standard Keynesian economic theory.

• Introduction: compulsory labour standards and globalisation;
• Imposing labour standards on the South. The north’s case;
• Competition from developing countries and labour market outcomes in developed countries: an assessment;
• Labour standards and economic development;
• Low labour standards and competitiveness in developing countries;
• Economic growth and a new global economic order.

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Do Corporate Global Environmental Standards in Emerging Markets Create or Destroy Market Value, Glen Dowell, Stuart Hart and Bernard Yeung, Working Paper Number 259, June 1999

Arguments can be made on both sides of the question of whether a stringent, global corporate environmental standard represents a competitive asset or liability for multinational enterprises (MNEs) investing in emerging and developing markets. This paper seeks to answer this question by analyzing the global environmental standards of a large sample of US-based MNEs in relation to their market performance. The authors find that firms adopting a single, stringent global environmental standard have higher market values, as measured by Tobin’s q, than firms defaulting to less stringent, or poorly enforced host country standards. Thus, developing countries that use lax environmental regulations to attract FDI end up attracting poorer quality, and perhaps, less competitive firms. The results also suggest that externalities are incorporated to a significant extent in firm valuation, and the plausible reasons for this observation is discussed.

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Foreign Direct Investment and Relative Wages: Evidence from Mexico's Maquiladoras, Robert C. Feenstra, Gordon H. Hanson, NBER Working Paper No.W5122, May 1995 (this paper was also published in: Journal of International Economics, Vol. 42 (1997): 371-394)

In this paper, the increase in relative wages of skilled workers in Mexico during the 1980s is examined. The authors argue that rising wage inequality in Mexico is linked to capital inflows from abroad. The effect of these capital inflows, which correspond to an increase in outsourcing by multinationals from the United States and other Northern countries, is to shift production in Mexico towards relatively skill-intensive goods thereby increasing the relative demand for skilled labour.

The paper examines:

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Initiatives for Corporate Responsibility and Economic Development, Chapter V New Horizons for Foreign Direct Investments, OECD Global Forum on International Investments, 2001

This Chapter covers the effects of FDI on sustainable development related topics such as environmental concerns about renewable resources and degradation of the ecosystem; marginalisation of the poorest countries and of unskilled workers; respect for core labour standards; and increasing income inequality. The paper also examines firm level responses related to corporate codes of conduct, environmental management systems, environmental reporting practices, and the promotion of responsible corporate behavior.

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New Paths to Business Value: Strategic Sourcing-Environment, Health and Safety, David Cross and Jim Dray, GEMI, March 2001

Generally, multinational enterprises apply uniform environmental and personnel practices in the different locations in which they operate. According to a study by the Global Environmental Management Initiative (GEMI), in many cases they apply higher standards than those required by the host government or followed by local companies.

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