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Reflections on Foreign Direct Investment and Development with Reference to

Non-Governmental Organizations and Corporate Social Responsibility
Rumy Hasan
Crit Sociol 2013 39: 37 originally published online 25 October 2011
DOI: 10.1177/0896920511414067
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CRSXXX10.1177/0896920511414067HasanCritical Sociology

Article

Reflections on Foreign Direct

Investment and Development
with Reference to NonGovernmental Organizations and
Corporate Social Responsibility

Critical Sociology
39(1) 3743
The Author(s) 2011
Reprints and permission:
sagepub.co.uk/journalsPermissions.nav
DOI: 10.1177/0896920511414067
crs.sagepub.com

Rumy Hasan

University of Sussex, UK

Abstract
It is clear that the process of globalization has presented acute economic challenges to developing
countries. Great importance has been accorded to foreign direct investment (FDI) as a driver of
development, a consequence of which is the further empowerment of transnational corporations
(TNCs). Competition for FDI prevents host governments from implementing tough regulatory
measures. In their stead have stepped in non-governmental organizations whose lobbying has had
an appreciable impact on TNC activities and strongly contributed to the rise of corporate social
responsibility (CSR). The article posits the concept of an efficiency CSR hypothesis. Though
CSR is a positive outcome, it does not detract from the profound problems of development
for the weakest developing countries via the route of inducing FDI in a globalized economic
environment. Contrary to expectations, the increasing interdependence in the world economy
presents formidable challenges to development and poverty alleviation for such economies.
Keywords
corporate social responsibility, efficiency CSR hypothesis, foreign direct investment, nongovernmental organizations

Introduction
After the epithet being in vogue for some two decades, and the phenomenon widely accepted as a
reality, it is clear that the process of globalization, the essence of which is a thoroughgoing opening up of the global economy, has presented acute economic challenges to less developed countries
(LDCs). It would not be a misrepresentation even to critics to suggest that for all economies,
including LDCs, the theoretical appeal of globalization or, more specifically, a liberalized investment and trading regime as implied under a neoliberal framework, was significant. Indeed for
Corresponding author:
Rumy Hasan, SPRU, Freeman Centre, University of Sussex, Brighton, BN1 9QN, UK
Email: r.hasan@sussex.ac.uk

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Critical Sociology 39(1)

many it remains so despite the financial crisis and attendant global economic slowdown of 20089.
This appeal rests on the standard neoclassical assumptions that globalization expands the markets
for the products and services of LDCs, improves the international division of labour and, therefore,
more effective exploitation of comparative advantage and the gains from trade. In turn, for those
countries implementing liberalization measures, these processes should increase GDP and average
per capita incomes, thereby raising living standards and reducing poverty.

FDI as a Driver of Development under Globalization

Contrary to theory, experience has shown that exporting products and services into the global market
place is by no means straightforward. The capabilities required to produce, distribute, and market
products and services are often not available to LDCs and so have to be acquired as resource transfers
from other countries. The dominant conduit for this is foreign direct investment (FDI) via transnational corporations (TNCs) (Balasubramanyam et al., 1996). It is precisely because FDI is potentially
able to aid the raising of domestic capabilities and efficiencies that it has become so desirable for
LDCs writ large although competition for FDI is also intense amongst developed countries.
It naturally follows that if the opening up of LDCs can generate such transfers implied in, and
via, FDI, then the theoretical appeal can be translated into a very positive outcome. Alas, however,
the reality for most LDCs especially for the poorest has not taken this path over the past two
decades. A fundamental problem is that FDI invariably requires very exacting standards: notably,
low cost but literate and numerate labour, plentiful natural resources, proximity to large markets,
good communication and transport infrastructure, low levels of corruption, and macroeconomic
and political stability. Evidence demonstrably shows that relatively few LDCs are able to offer
these requisites to prospecting TNCs and it this that helps explain why FDI into the developing
world is dominated by East and South East Asia; and the amount flowing into small and vulnerable
economies (for whom this represents a high proportion of gross fixed capital formation) remains
very small (UNCTAD, 2010, xixxxii).
Paradoxically, the result of increasing liberalization for many of the poorest LDCs has also been
contrary to what theory predicted, namely stagnant, even declining, levels of FDI and trade. It is
evident that not only do these countries lack the requisites to induce FDI, they also lack capabilities
for technological upgrading and enhanced efficiencies (UNCTAD, 2010). In contrast, East Asian
economies, above all, have managed to achieve sustained growth since independence and during
an increasingly globalized economy centring on export-oriented industrialization with FDI often
playing a pivotal role. Moreover, (excluding the peculiar example of Hong Kong) the role of the
state was of fundamental importance to what is termed the developmental state model (two classic works on this are Amsden [1989] and Wade [1990]; Chang [2003] provides a good general
analysis of the issues). True, the 1997 East Asian financial crisis was severe but the rebound was
astonishingly speedy and sustained.
A crucial reason why such a developmental path has been problematic for so many developing
economies is that growth does not generate universal benefits; on the contrary, it tends to exclude
certain segments of the population (such as minority groups or those who are highly unskilled) and
hence, accentuates inequalities. Moreover, some of those elements of the population residing near
to a new investment (or on the site of a planned investment) can be subjected to great hardship with
the risk of having their homes and livelihoods severely disrupted. We can argue that it has been the
work of non-governmental organizations (NGOs) that has brought to bear this uncomfortable reality of even those economies that have achieved rapid growth rates (for a good survey of the issues,
see Arenas et al., 2009; Schepers, 2006; Teegen et al., 2004).

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Given that LDCs are characterized by insufficient domestic savings, resource transfer via FDI
has inevitably become a crucial determinant of development in an increasingly open world economy. Hence, the development challenge is not only to attract FDI, but also for it to generate significant positive multiplier effects. In other words, investment has to be appropriate in the sense of
having a labour-using bias yet being efficiently deployed. Two sets of factors interplay in this
regard. The first encompasses the host countrys legal and regulatory structures, overall infrastructure, fiscal and financial policies, and political stability. The second concerns the nature of the
investment and the linkages it generates. Thus, the first set of factors can attract or deter FDI
whilst the second set determines the effectiveness of FDI for the host country.
We can postulate that it is because for so many economies the gains from globalization have not
materialized indeed for many of the least developed there has been deterioration that there has
arisen in the epoch of globalization a groundswell of opposition to neoliberalism. Much of this
has emanated from NGOs in both the developing and developed world and was accorded the
umbrella term anti-globalization movement (see, for example, Stiglitz, 2002).
During the mid-1990s, there was an attempt to develop a global set of rules for FDI the
Multilateral Agreement on Investment (MAI) under the auspices of the OECD which its proponents believed would provide a level-playing field for all countries and lead to increased FDI flows
globally, including to LDCs. The Fitzgerald Report (Fitzgerald, 1998) acknowledged the need for
assistance from OECD countries if the poor countries were to embrace the MAI. However, critics
argued that the MAI was, in fact, a charter for increasing the rights of TNCs at the expense of
smaller countries, labour, and the environment (see, for example, Gilpin, 2000). Under pressure
from a wide array of NGOs, the MAI was shelved in 1998. This was a unique phenomenon: for the
first time, NGOs had blocked a proposal that had been backed up by the worlds richest countries
and the largest corporations. In 1999, NGOs were instrumental in halting World Trade Organisation
negotiations in Seattle. It became clear that NGOs were beginning to have a significant impact on
the international competitive environment, and indeed on the process of globalization itself which,
in turn, was inevitably going to affect the global strategies of TNCs. Moreover, we can also argue
that without campaigning by environmental NGOs, the agenda on climate change and measures to
curb global warming would not have achieved such prominence this notwithstanding the failure
of the Copenhagen conference in December 2009 to achieve an internationally binding treaty
(though an accord was achieved [UNFCC, 2009]).
For many NGOs, the neoliberal Washington Consensus was firmly rejected as the optimal path
to development and poverty reduction in LDCs. Instead, there was the desire to replace it with a
better alternative: one rooted in enhanced democracy and human rights, and tackling poverty and
inequality by more direct, interventionist, means. The hypothesis of this article chimes with this
reasoning, that is, globalization has to date negatively impacted on many developing (especially
the poorest) countries ability to drive forward the development process and deal effectively with
their internal poverty problems.

NGOs and the Rise of Corporate Social Responsibility

The liberalization of the global economy, in combination with the increasing importance attributed
to FDI as a conduit for development, has directly led to the rising prominence of TNCs. Debates
regarding the potentially negative effects of foreign investments by TNCs had been prominent during the 1960s and 1970s with respect to third world development (see, for example, Todaro, 2000;
also see Fuchs, 2010, for a useful recent survey of global FDI from a critical perspective). However,
in the past two decades, among policy makers and government advisers, there has been unanimity

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of the view that the benefits of FDI overwhelmingly outweigh any costs (see Hasan, 2008, for the
example of China). It is for this reason that the trend has uniformly been of countries imposing
fewer and fewer restrictions on TNCs, so that we may think of them as being the real winners
under globalization. Given the reluctance of LDC governments to carefully monitor and regulate
TNCs on the contrary, they give priority to facilitating TNC operations it has largely been left
to NGOs to provide close scrutiny.
Though there is no generally accepted definition of NGOs, the following used by the World
Association of Non-Governmental Organizations (WANGO website) captures the key elements well:
A non-governmental organization (NGO) is generally considered to be any non-state, nonprofit, voluntary
organization. As a non-state entity, an NGO is generally independent from government influence it is not
a part of or controlled by government or an intergovernmental agency. As such, an NGO is either not
established by a government, or intergovernmental agreement, or, if established in such a manner, is now
independent of such influence. As a nonprofit organization, an NGO is not operated for the primary
purpose of carrying on a trade or business, although profits may be generated for the mission of the
organization. A more accurate term may be non-profit distributing, in that any surplus that is generated is
to be used solely to help the organization fulfill its mission and objectives, with no part of the net earnings
of the NGO to be distributed to the benefit of the directors, officers, members, or employees of the NGO,
or any private persons, other than reasonable compensation for services rendered. As a voluntary
organization, an NGO is not required to exist by law, but is formed by private initiative, resulting from
voluntary actions of individuals.

In effect, NGOs are organizations that are not part of the government sector or part of the business
sector. For such reasons, they are sometimes referred to being part of the third sector in society.
It is a demonstrable proposition that TNCs are more likely to take account of the wishes of civil
society in developed countries than in developing countries. One reason for this is that the lobbying power of civil society in general, and of NGOs in particular, is greater in the former countries
than in the latter. But what has come to the fore in the age of globalization is the lobbying and
campaigning by NGOs in TNCs home (i.e. developed) countries and against the harmful effects
of TNC operations particularly in LDCs with weak civil societies. The effectiveness of this lobbying has, in turn, given prominence to NGOs, so much so that in many key issues of social and
economic justice, they have become a vital social force which governments and businesses have
been forced to take account of. Such issues include child labour, very low pay, poor (sweatshop)
working conditions, excessively long work hours, and sexual harassment.
One important consequence of this has been the creation of a whole new dimension of TNC
activity, that of corporate social responsibility (CSR) where TNCs attempt invariably owing to
pressure put upon them to take account of their wider social obligations (see the papers in
Kakabadse and Morsing, 2006; also see Matten and Moon, 2008; Reynolds and Yuthas, 2008;
Markovitz, 2008). It is important to note, however, that there is an increasing body of literature that
adopts a critical approach to CSR (see Shamir, 2004; Banerjee, 2008) and the attempts by governments to improve corporate governance (see, for example, in regard to the Sarbanes-Oxley Act in
the US, Soederberg, 2008).
It is important to note that this is by no means a uniform phenomenon; indeed great variations exist
among TNCs regarding their approach to CSR. Indubitably, however, TNCs manufacturing operations in the developing world have been at the forefront of this lobbying and campaigning by NGOs.
The nexus of NGOs and TNCs became clearest in East Asia, especially in special enterprise
zones or export processing zones. As noted above, concern for poor pay and working conditions,
including sweatshop conditions obtaining especially in supplier companies, the incidence of child

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labour, and the impact of TNC operations on the environment have all brought TNC activities into
the global limelight, with a concomitant response from a plethora of NGOs across the globe (Klein,
2000). The role of NGOs in exposing oppressive practices has been central. Paradoxically, however, the workplaces in which abusive working practices have occurred are usually not owned by
the TNCs themselves but rather by sub-contracting domestic companies. Yet, the effectiveness of
NGO campaigning has resulted in the affixing of social responsibility for these sub-contractors
onto TNCs they supply and making illegitimate the argument that such suppliers are independent
firms whose relationship to TNCs is based on normal external market transaction, that is, on the
basis of price, quantity, quality, delivery schedules, etc.: the key business criteria. By so doing,
TNCs have been forced to become more socially responsible, and not by any voluntary act based
on a notion of ethical business practice.
The crux of the matter is that NGO activity was badly damaging the reputation and, crucially,
brand names of those TNCs that were using suppliers resorting to unacceptable working practices
(see Klein, 2000; Campbell, 2007; Schepers, 2006). Indeed there is little difference in the conscience of the discerning consumer between arguing, for example, that Nike resorts to sweatshop
practices in East Asia and Nike uses sub-contractors who resort to sweatshop practices in East
Asia. The image of Nike will inevitably suffer under both. And Nike and other TNCs have understood this well and responded by being prepared to take meaningful actions regarding their wider
social responsibility. Four key novel developments have occurred which can be considered the different constituents of CSR (Merk, 2004): (i) adoption of codes conduct; (ii) setting up departments
that specialize in social responsibility issues and which ensure that such conducts are adhered to
by the organization as a whole; (iii) benchmarking of social standards ensuring that there is parity
with rival organizations; and (iv) involvement of external parties to help achieve (i)(iii).
Just by the creation of these, it is clear that the competitive environment of TNC activities in
developing countries, above all, has been altered. The question naturally arises as to the extent of
this. NGOs taken as a collective whole are not consciously attempting to change the competitive
environment but their actions taken together have had precisely this consequence. One can, however, think of NGO pressure against TNCs as being a countervailing pole to that of lobbyists acting
on behalf of TNCs vis-a-vis governments.
It needs stressing that the very rise of NGOs contra TNCs and their sub-contractors indicates
the weakness and often the complete absence of organized labour in many developing countries.
That is, NGO activity particularly in regard to the working environment is, de facto, trade union
work even though workers affected by their actions have not been active. Denial of trade union
recognition by TNCs is an attractive inducement for FDI investment and consequently, LDC governments often consciously give this assurance. This presents an ethical problem, that is, can lobbying by NGOs in developed countries be construed as paternalistic behaviour towards workers
and citizens in developing countries? It certainly can, but this would be a mistaken inference; a
more accurate view would be to think of it as a combination of moral, economic and political solidarity. The impulse behind those involved in NGOs from the developed world (often in conjunction with NGOs in LDCs) is surely to show solidarity with those less well-off and more oppressed
in other parts of the world.
Increased CSR is a costly exercise. The question therefore arises as to what extent should TNCs
accede to NGO demands, and at what point should they stop. TNCs resort to CSR to prevent loss
of consumers, sales and profits. Totally ignoring NGO demands is likely to generate adverse publicity, consumer alienation, and loss of sales, and hence no longer seems a viable option. Conversely,
increased CSR leads to strong customer loyalty, and the possibility of consumers switching from
other substitute products produced by less socially responsible firms although consideration

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needs to be given to the fact that only a certain proportion of customers of, and investors to, a firm
will be responsive to CSR issues.
Yet, complying with all NGO demands must inevitably lead to rising costs and the corollary of
the weakening of the competitive position to the point where additional ethical customers run out
so that there reaches a point of zero marginal revenue from the adoption of ever-increasing socially
responsible behaviour. In the manner of the efficiency wage hypothesis, we can postulate an efficiency CSR hypothesis. Under the former, increasing wages is thought to increase worker productivity (and less shirking) and increased loyalty to the employer, with a concomitant long-term
improvement in profitability. The optimum is to move to the point where the marginal wage does
not elicit increased productivity. Similarly, firms will adopt CSR standards up to the point where the
notional marginal CSR standard does not induce additional customer loyalty. All this, however, is
predicated on isolating the CSR effect in reality this is likely to present considerable problems.
Hence, adherence to CSR may be more to do with economic necessity than on ethical grounds
so that it does not contradict the imperative of profit maximization. We can postulate that it has
become a sine qua non for TNCs to research the precise types of CSR activities that affect their
operations and products and services regarding social issues, labour rights, transparency, environmental protection, supplier practices, etc. and then quickly act upon the findings. The more
carefully TNCs attempt to fulfil all these factors, the greater will be the cost incurred. In regard to
operations in LDCs, the NGOs might insist that standards should be similar to those obtaining in
TNC operations in developed countries. But the reality is that TNCs, not required to do so by host
LDC governments, or constrained by global investment standards, will in all likelihood implement
standards that fall short of those in DCs. An efficient CSR regime will, therefore, lie between that
obtaining in advanced economies and the minimum in the poorest developing economies.

Concluding Remarks
To conclude: there has been a powerful trend towards deregulation and removal of restrictions on
TNCs in developing countries. A corollary to this is that TNCs are tempted to cut corners, suppress
workers rights including trade union recognition, curtail the rights of indigenous people and adopt lax
environmental standards all of which would not be legal or tolerated in developed countries. During
the period of globalization, NGOs have been the most vociferous and determined campaigners to force
TNCs to comply with ethical standards over such issues and, by so doing, provide an alternative, ad
hoc regulatory framework a crucial by-product of which has been the rise of corporate social responsibility. This is a positive outcome yet it does not detract from the profound problems of development
for the weakest developing countries via the route of inducing FDI in a globalized economic environment. Contrary to expectations, the increasing interdependence in the world economy presents formidable challenges to development and poverty alleviation for such economies.
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