THE MULTINATIONAL CORPORATION

The Multinational Corporation

Purpose
The purpose of this chapter is to define the multinational corporation (MNC)
and outline its major characteristics and challenges. Various strategies for entering
the international arena are delineated. The focus of this book will be on equity
modes of entry involving fully owned subsidiaries. First, we paint a broad picture
of the globalization of business, the significance of the triad economies and the
issue of national identity.

The Globalization of Business

The phenomenon of MNCs has been ascribed to a combination of two main
factors: the uneven geographical distribution of factor endowments and market
failure (Dunning, 1988). That is, because of their national origins, some firms have
assets that are superior to those in many other countries. Moreover, a substantial
proportion of these firms have concluded that they can only successfully exploit
these assets by transferring them across national boundaries within their own
organizations rather than by selling their right of use to foreign-based enterprises.
More recently, nationally endowed assets have been supplemented by MNCs
acquiring, developing and integrating strategically important assets located in
other countries, thereby making their national origins somewhat less significant.
To date, this combination of unequally distributed factor endowments
combined with difficulties in using market-based arrangements has yielded more
than 60,000 MNCs with over 800,000 affiliates abroad. On a global basis, MNCs
generate about half of the world’s industrial output and account for about
two-thirds of world trade. About one-third of total trade (or half of the MNC
trade) is intra-firm. MNCs are particularly strong in motor vehicles, computers

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0 10 20 30 40 50 60 %70

Ireland

Canada

Britain

France

Sweden

United States

Germany
na
Italy
1989
Japan 1996

Figure 1.1 Share of foreign affiliates in manufacturing output

Source: OECD © The Economist Newspaper Ltd, London, 8 January, 2000

and soft drinks, having on a global basis 85 per cent, 70 per cent and 65 per cent
of these markets, respectively. In some countries they are the dominant manufac-
turing presence. As figure 1.1 shows, in 1996, affiliates of MNCs accounted for
nearly 70 per cent of Ireland’s manufacturing output, and over 50 per cent of
Canada’s. A substantial proportion of manufacturing in Britain, France and
Sweden is also accounted for by MNCs. All the indications are that the level of
production undertaken by foreign-owned manufacturing will continue to rise.
For example, by 1998 for the EU as a whole a quarter of total manufacturing
production was controlled by a foreign subsidiary of an MNC compared to
17 per cent in 1990.
The advantages of becoming a global player in manufacturing are more obvi-
ous than for service-based firms. In the case of the former, the value chain can be
divided across many locations. Parts of the manufacturing process can be located
to low-cost countries, while R&D can be located in a region with specialized
competencies with its costs spread across many markets. In the case of service
firms, much of the value chain has to be generated locally: that is, there is little in
the way of opportunity to centralize activities to low-cost locations. To a greater
or larger degree, services have to be tailored for each client unlike, for example,
pharmaceuticals, which can be mass-produced. Sharing advanced knowledge is
also more problematic. In manufacturing companies it can be made available
through patented technologies or unique products. In service companies it has to
be transferred from country to country through learning processes. Nevertheless
with the liberalization of recent years, the share of services in foreign direct
investments (FDI) has risen significantly particularly within telecommunications,
utilities, investment banking, business consulting, accountancy and legal services.

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0 5 10 15 20 25 30 35 40
Financial services
Mining (including oil/gas)
Retail/wholesale trade
Property & business services
Chemicals and fuel products
Textile, wood, printing & publishing
IT & communications
Electricity, gas & water
Food products
Metal & mechanical products
Hotels and restaurants
Transport equipment (including cars)

Figure 1.2 Stock of foreign direct investment in Britain, end of 1997, £bn
Source: ONS © The Economist Newspaper Ltd, London, 22 January, 2000

Accenture, the management consultancy, for example, has a staff of 75,000 in

47 countries and the accountancy PricewaterhouseCooper (PwC) has 160,000
in 150 countries. The emergence of new services, such as software, back-office
services, call-centres and data entry, has also contributed to the relative growth of
services in FDI. At the broad sectoral level, the share of services in FDI now
accounts for about half of inward FDI stock in the world.1 Although Britain is by
no means representative of developed economies in terms of spread of foreign
direct investment, figure 1.2 nevertheless provides a useful indicator of the divers-
ity of sectors within which MNCs operate.
Despite setbacks such as the Asia crisis of the late 1990s, the long-term flow
of foreign direct investment (FDI) is one of inexorable increase. The annual
average FDI growth rate between 1986 and 2000 was 30 per cent or more for
65 countries including Denmark, Finland, China, Germany and Finland. Another
29 countries, including Austria, the Netherlands and Russia, had FDI growth rates
of 20–29 per cent. For 1999 and 2000 over three-quarters of global FDI inflows
went to the developed world partly because of intense cross-border mergers and
acquisitions activity. The major recipients at the end of the 1990s were the USA
and the European Union (EU), with Germany, the United Kingdom and the
Benelux countries figuring particularly strongly. Among developing countries China
(including Hong Kong) was by far the most important recipient: nearly 400 of
the Fortune 500 firms have invested in China to date.2
Within these recipient countries subsidiaries tend to cluster geographically in
and around areas with well-developed infrastructures including suppliers, skills
and innovative capabilities. In the USA, California, New York, Texas, Illinois and
New Jersey are the main magnets; in Japan it is Tokyo, and in China it is the
coastal regions.

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Country/block showing MNEs in 1999

US 179
EU 148
Japan 107
Canada 12
South Korea 12
Switzerland 11
China 10
Australia 7
Brazil 3
Mexico 2
Norway 2
Russia 2
India 1
Malaysia 1
South Africa 1
Taiwan 1
Venezuela 1
Source: Adapted from Fortune Magazine,
‘The Fortune Global 500’ 24 July 2000

Figure 1.3 The world’s 500 largest MNCs

Source: Rugman, 2001

Regional Boundaries
The ‘triad’ economies, the EU, the USA and Japan, have long accounted for the
bulk of global FDI. As figure 1.3 indicates, most MNCs are therefore from the
triad. Rugman’s (2001) analysis indicates that of the world’s largest 500 MNCs,
a total of 434 are from the triad. This total has increased from 414 in 1990
indicating the permanency of the triad hegemony. Together, the 434 triad MNCs
currently account for 90 per cent of the world’s stock of FDI meaning that
developed countries are the primary destinations for FDI. The 434 triad MNCs
carry out half of all world trade, often in the form of intra-company sales between
subsidiaries. However, it should be borne in mind that most of them first and
foremost operate in a strong triad home base. In other words, much of the pro-
duction, marketing and other business activities are organized by regional bound-
aries rather than being truly global so that the bulk of FDI is concentrated within
regions and neighbouring regions. For North America there are strong FDI
links with Latin America and the Caribbean, Japan with Asia, whereas for the EU
links are strong within Western Europe with some recent strengthening with
Central and Eastern Europe. Furthermore, MNCs generally have large portfolios
of purely domestic assets. Even the largest MNCs have on average nearly half
of their total assets in domestic assets whereas for many smaller MNCs the

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proportion is substantially larger. Rugman (2001: 10) may be overstating his case
somewhat when he concludes that:

There is no evidence for globalisation, that is, of a system of free trade with fully
integrated world markets. Instead the evidence on the performance and activities of
multinational enterprises demonstrates that international business is triad-based and
triad-related . . . European, North American and Asian manufacturing and service
companies compete viciously for market share, lobbying their governments for
shelter and subsidies.

However, Rugman’s perspective is a useful antidote to naïve notions of the

geographical scope of most MNCs, particularly smaller MNCs.

National Identity
Despite the increase in globalization most MNCs have home bases that give them
resolutely national identities. General Electric and Microsoft are clearly American
just as Honda and Toyota are Japanese. Only one in five of the boards of
ostensibly global US companies include a non-US national. Sixty per cent
of Honda’s sales are outside Japan, but only 10 per cent of its shares are held by
non-Japanese. Toyota has 41 manufacturing subsidiaries in 24 countries but no
foreign managers among its vice-presidents in Tokyo. Mergers and acquisitions
have little impact. Daimler-Chrysler, hailed in 1998 as a merger of equals, soon
became a German company with German executives taking control of the US
operation while many of Chrysler’s most senior executives either left or were
forced out. Even within Europe with its single market and single currency, pan-
European companies, free of national demarcations, remain elusive. One typical
variant is that pan-European ventures end up being dominated by one national-
ity. Thus Alstom, the transport and power engineering group, started out as a
British-French joint venture but is now dominated by French executives, with the
UK managers playing a junior role. The other typical variant is that management
structures are specifically designed to take into account constituent national sens-
itivities. For example, the European Aeronautic Defence and Space Company
(EADS) formed in 2000 through a merger of Aerospatiale Matra of France and
Daimler-Chrysler Aerospace of Germany with Casa of Spain as a junior partner,
has two chairmen (one German and one French), two chief executives (ditto) and
two headquarters (Munich and Paris).
There are exceptions such as Royal Dutch/Shell and Unilever, two long-
standing Anglo-Dutch groups with bi-national identities. But there are few com-
panies with genuinely multinational identities. The most obvious exceptions tend
to be located within professional services. The Boston Consulting Group has now
more partners outside the USA and also generates two-thirds of its revenues
outside the USA. However, these are nationally owned partnerships that confer a

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degree of local independence. Outside professional services multinational ident-

ities are more elusive. However, because an increasing number of MNCs have
more employees outside their home base country, creating some inclusive corpor-
ate identity is increasingly important in order to enhance knowledge flow from
subsidiary to corporate headquarters. ABB, the Swedish-Swiss engineering con-
glomerate, from its launch in 1988, has always insisted that it has no national axe
to grind. It has a tiny corporate headquarters of only 100 employees in Zurich,
an executive board comprising a variety of nationalities, and English as its work-
ing language. Swedish Percy Barnevik, ABB’s first chief executive, famously
insisted on fellow Swedes writing to him in English. And yet it took 14 years
from its inception and a substantial crisis before a non-Swede, Jürgen Dormann,
became its chief executive.

The Focus
MNCs have a number of advantages over local companies. Their size provides
them with the opportunity to achieve vast economies of scale in manufacturing
and product development. Their global presence also exposes them to new ideas
and opportunities regardless of where they occur. Moreover, their location in
many countries can be used as a bargaining chip in obtaining favourable condi-
tions from governments anxious to preserve inward investment and jobs. How-
ever, with all the advantages size confers, there are also the potential liabilities
of slowness and bureaucracy. MNCs are not necessarily successful. Indeed, the
Templeton Global Performance Index (2000, 2001) reveals that in 1998 while
the foreign activities of the world’s largest MNCs accounted on average for
36 per cent of their assets and 39 per cent of revenues, they only generated
27 per cent of their profits. Over 60 per cent of these companies achieved lower
profitability abroad than at home. The report concludes that many MNCs are not
particularly good at managing their foreign activities, particularly in regard to
digesting acquisitions, and that strong core competencies do not guarantee inter-
national commercial success. Furthermore, the gap between the best- and worst-
performing companies is growing.
Over 40 years ago Hymer raised the question of why MNCs existed at all
given that they are ‘playing away from home’ both in national and cultural terms.
Domestic companies have ‘the general advantage of better information about
their country: its economy, its language, its laws and its politics’ (1960/1976:
34). Certainly the liability of foreignness is particularly severe in the initial entry
phase. An MNC will often have to compete head on with domestic companies
that have a number of natural advantages. First, domestic companies have a
customer base they have cultivated and which is familiar with their brands. This
loyalty to a local player has to be overcome in such a way that it does not
evoke a nationalistic reaction. In the early 1990s, Norwegian ice cream manufac-
turers responded to Unilever’s entry into the Norwegian market by playing the

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nationalistic card. In an aggressive advertising campaign that featured Norwegian

national symbols, great emphasis was put on the intrinsic superiority of Norwe-
gian ingredients. The public turned its back on Unilever’s products and it with-
drew from the Norwegian market.
Second, local firms will also have developed supply chain relations that may
involve long-term contractual relationships that effectively preclude newcomers.
This has been a formidable barrier for companies entering the Japanese market.
A third entry barrier is that national regulators will tend to discriminate against
foreign subsidiaries. Except when they are so locally embedded that they are
perceived as domestic, foreign firms will be significantly more investigated, au-
dited, and prosecuted than their domestic counterparts (Vernon, 1998). Even in
the United States, officially committed to applying the same ‘national treatment’
to the offspring of foreign companies that they give to their own companies, it
has been empirically documented that ‘foreign subsidiaries face more labour law-
suit judgements than their domestic counterparts’ (Mezias, 2002: 239). As such
foreign MNCs such as Honda, Unilever and Novartis, have recognized the need
to form a body that monitors and responds to discrimination. The Organization
for International Investment (Offi) has found it must remain alert. According to
Nancy McLernon, Offi’s deputy director, ‘[Discrimination] can come from any
direction, any time.’ For example, in 1998:

someone at the US Interior Department had a bright idea – to conserve the increas-
ingly tight supply of irrigation water in 16 states in the west of the country by
forbidding its use to foreign companies . . . Bear Creek, a fruit and flower company
belonging to Japan’s Yamanouchi, lost its water rights for its roses. It was
10 months before Offi was able to get the Treasury and State Departments to
convince the Interior Department to turn the taps back on. (The Financial Times, 5
May 2000)

Finally, a fourth entry barrier is the lack of institutional and cultural insight.
When Wal-Mart moved into Germany it had little feel for German shoppers, who
care more about price than having their bags packed, or German staff, who hid
in the toilets to escape the morning Wal-Mart cheer. Added to that were two of
factors mentioned above, the inflexibility of local suppliers and the entrenched
position of local discounters such as Aldi, but also the strength of trade unions.
In the wake of losses of $300m a year, John Menzer, head of Wal-Mart Interna-
tional, admitted, ‘We screwed up in Germany.’
To overcome these disadvantages an MNC must possess some unique strategic
capability whether it is advanced technological expertise, marketing competencies
or scale economies. In addition, an MNC also has to have some form of organ-
izational capability that enables it to leverage more from its assets via subsidiaries
than it could through other entry strategies (see below). This capability and the
costs associated with developing it must not be taken for granted. Increasingly,
one of the most important aspects to this organizational capability involves the

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management of the knowledge base of the MNC. This comprises not only the
transfer of knowledge between the various parts of the MNC, but also the cre-
ation of new forms of knowledge by combining knowledge located transnationally
both within and beyond the MNC.
The focus of this book is on the managerial and learning challenges that
MNCs have to confront in order to create the necessary organizational capabil-
ities. Not only are these challenges substantial, they are also constantly evolving.
Even Coca-Cola, one of the most profitable foreign operations in the Templeton
Global Performance Index for 1998, acknowledges this. In an open-hearted essay
published in the The Financial Times (2000), Coca-Cola’s CEO Douglas Daft
revealed that:

Sometimes you have to stumble before you realise you have wandered off the right
path. That is what happened to our company in 1999. After 15 years of consistent
success, we endured a year of dramatic setbacks. Those events provided us with a
clear wake-up call that told us we had to rethink our approach for the new century.

In essence the challenge for MNCs is to retain their size, which gives them
economies of scale and scope, and their global reach which enables them to
exploit new opportunities and ideas wherever they may occur. They also need
to maintain their multiple country locations that not only grant them flexibility in
deciding where they will source products, but which also enable them to bargain
with local governments. However, it is these strengths that also represent their
liabilities in that large, globally distributed companies can easily become bureaucratic
and therefore non-entrepreneurial and insensitive to the many different environ-
ments in which they operate (Birkinshaw, 2000). Indeed, some researchers claim
that there is a non-linear inverted U-shaped relationship between international
diversification and performance.3 Beyond a threshold of international expansion,
returns diminish due to the limits of the firm and its management. That is, at
some point the transaction costs involved in co-ordinating and controlling geo-
graphically dispersed units outweigh the benefits of international diversification.
Addressing these liabilities involves developing a corporate culture that stimu-
lates commitment to the company, entrepreneurial attitudes and a non-parochial
mindset. This must be supported by appropriate reward and career systems. Added
to this is the need for structures that match the strategic thrust of the company by
defining the basic lines of reporting and responsibility. However, unlike purely
domestic companies, the context within which MNCs operate involves national
cultural differences, distance and regulations that vary by national setting and
which may be biased against foreign companies.
In short, MNCs must have the capacity to respond to local conditions as well
as the ability to benefit from their size through the integration of their activities.
How much local responsiveness and how much global integration are needed may
vary but to a substantial extent they are the two most important issues MNCs with
say 200,000 employees and locations in 30 countries must respond to.

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Entry Strategy Alternatives

Once a firm has decided to enter the international arena it must make a choice
regarding the appropriate mode for organizing its foreign business activities. There
are a number of entry strategies available. These alternatives are not mutually ex-
clusive, indeed, large companies may employ them simultaneously in different
contexts. Choice of entry modes can be fruitfully divided into the following:

1 Non-equity modes:
– exporting,
– licensing,
– franchising
– contract manufacturing and service provision
2 Equity modes:
– joint ventures
– fully owned subsidiaries.

These modes vary in terms of the risk they involve. They also differ in terms of
their organizational, management and resource demands as well as the amount
of control that can be exercised over foreign operations.

Exporting

Exporting is a relatively low-risk entry strategy as it involves little investment and

exit is unproblematic. As such, it is an obvious alternative for firms lacking in
capital resources. An exporter is, however, entirely dependent on being able to
identify efficient and reliable distribution channels. Changing a distributor with
whom one is dissatisfied is often contractually difficult. Other critical factors are
import tariffs and quotas as well as freight costs.

Licensing

Licensing is another low investment, low-risk alternative that is a particularly

useful option in countries where regulations limit market entry or where tariffs
and quotas make export a non-viable strategy. It is also a preferred strategy when
the target country is culturally distant from the home country or there is little
prior experience of the host country. A licensing agreement gives a firm in a host
country the right to produce and sell a product for a specified period in return for
a fee. The main weakness with licensing is the licensor’s lack of control over the
licensee. This applies to quality standards that, if disregarded, can be detrimental
to the brand’s image. It also applies to the monitoring of sales that form the basis

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for royalty payments. Another risk is that the licensee may appropriate the com-
petence underlying the product, thereby becoming a direct competitor. That is
why licensing is primarily suitable for the mature phase of a product’s life cycle in
which the technology that is transferred to the licensee is older and standardized.
In other phases of a product’s life cycle direct ownership is a more viable strategy.

Franchising

Franchising is similar to licensing but more comprehensive. For a fee and royalty
payments the franchisee receives a complete package comprising the franchiser’s
trademark, products and services, and a complete set of operating principles
thereby creating the illusion of a worldwide company. Holiday Inn and, not least,
McDonald’s with its 29,000 restaurants in 121 countries are two familiar ex-
amples. Both of these franchisers place great emphasis on ensuring that quality
does not vary. However, beyond that, management control is so devolved that
McDonald’s chief executive Jack Greenberg characterized McDonald’s as in real-
ity being ‘an amalgamation of local businesses run by local entrepreneurs from
Indonesia to France.’4

Contract manufacturing and service provision

Nike distinguishes between design, product development and marketing, on the

one hand, and shoe and clothing manufacturing, on the other. The latter is not
integrated in Nike but is contracted out to independent plants in developing
economies such as China, Indonesia, Thailand and Vietnam, primarily for reasons
of cost. In Indonesia in 2001 its nine contractor factories paid base monthly
salaries slightly above the official minimum wage of about $28. The main benefits
to Nike are that it has none of the problems of local ownership, nor does it invest
its own capital in manufacturing. Nonetheless, various pressure groups have en-
sured that Nike has become a focus for international scrutiny because of allega-
tions of sexual harassment and physical and verbal abuse of workers at its contract
factories. Increasingly it has recognized that it cannot relinquish moral respons-
ibility for conditions at contractor manufacturers. It has even commissioned out-
side groups such as the Global Alliance for Workers and Communities to examine
conditions in its contractor plants as a means of improving conditions.
Mobile phone vendors, including Ericsson, Philips and Motorola, have applied
the same model to handset manufacturing. They outsource the production of
handsets to Asian companies, such as the Singapore-based Flextronics, on a con-
tractual basis while retaining control of research, design, branding and marketing.
The key advantage to mobile phone vendors in not owning their own factories
is that they have the flexibility to ramp production up or down in accordance
with extreme fluctuations in demand without long-term capital investments or an

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increase in their labour forces. The disadvantage lies in that they are handing over
control of a vital part of their supply chain. Not only is quality control more
problematic, there is also a dependency on the contract equipment manufacturer
(CEM) possessing or having access to the necessary parts. In 2000, Philips ran
into difficulties when it emerged that its CEM was lacking in flash memory chips,
thereby jeopardizing production of nearly 20 million handsets. It is these disad-
vantages that have caused Nokia to resist outsourcing beyond the manufacture of
assemblies.
Basically the task of the CEM is to manufacture products according to well-
specified designs provided by their clients. Their use is appropriate when techno-
logy is less important as a differentiator and value is derived from competing on
brand, distribution and style. In the case of mobile handsets, Motorola has con-
cluded that they are no longer complex products but merely commodities. Con-
tracting out involves therefore no loss of critical learning opportunities. In the
personal computer industry, the commodity model has been taken a step further.
Vendors not only contract out manufacturing but also a large proportion of the
work design is allocated to companies that offer original design manufacturing.
Distribution may also be outsourced. Contracting taken to this extreme means
that the MNC is not a firm in the traditional sense, that is a vertically integrated
organization, so much as a network of contractually determined market based
obligations that together constitute a complete supply chain. This emerging organ-
izational form makes for a new set of managerial challenges – the management
of contracts and relationships across borders. This is a theme we will return to in
the final chapter of the book.
Finally, it should be noted that contract arrangements are by no means con-
fined to manufacturing. Nearly half of the 500 largest MNCs regularly use Indian
IT service providers on a contractual basis because of their combination of low
costs and advanced processing skills. The contracts involve a spread of IT services
from low value work, such as systems maintenance, to the more lucrative develop-
ment of new applications such as Internet-based portals.

International Joint Ventures (IJVs)

The establishment of IJVs have been an increasing trend since the 1970s. By the
1990s IJVs were the mode of choice about 35 per cent of the time by US MNCs
and in 40 to 45 per cent of international entries by Japanese multinationals (Beamish
et al., 2000). An IJV is an agreement by two or more companies to produce
a product or service together. It involves a much higher level of investment and
therefore of risk than the previous entry strategies. Generally, an IJV consists of
an MNC and a local partner. Equity proportions vary but usually relative owner-
ship approximates to 50–50, although there are many variations including IJVs
with more than two partners including relatively passive partners with minority
holdings. Control of the five to ten management positions that typically constitute

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the top management group of an IJV is a central issue in IJV negotiations,

particularly in regard to the top position of general manager. This position usu-
ally goes to the partner that has the dominant equity position or some other basis
of power such as critical technology. The partner that does not win the top
position will argue strongly for other slots that guarantee the desired level of
representation. Typically members of the management group of IJVs have two
agendas: on the one hand they are expected to commit themselves to the success
of the IJV, on the other they are ‘delegates’ of their respective parents. As legal
entities, IJVs have boards of directors who set strategic priorities and make deci-
sions regarding the use of profits and investment policy (Hambrick et al., 2001).
Until recently, an IJV was the only means of entry in India because local
participation was mandatory. In China, foreign retailers are barred from having
full control of mainland operations thus compelling retailers such as Carréfour of
France, Wal-Mart of the USA and Tesco of the UK to look for local partners.
However, even when local participation is not obligatory, an IJV may be appro-
priate because a local partner can provide intermediate inputs, such as local
market knowledge, access to distribution networks and natural resources, as well
as making the MNC an insider in the host country. When Tesco entered the
South Korean market in 1999, it chose to do so with Samsung, Koreas’s biggest
conglomerate and most powerful brand. By choosing to put Samsung’s name in
the joint-venture title first and by appointing a Samsung executive as chief execut-
ive, Tesco went a long way to diffuse potential criticism in a country dominated
by small, traditional shops. In addition it was helped by Samsung to develop a
hypermarket adapted to Korean tastes including assistants in traditional Korean
dress who bow to each arriving customer, and octopus, squid and lobster that are
plucked from tanks and chopped up alive, sushi-style.
The benefits of IJVs are that they provide a combination of rapid entry into
new markets, risk-sharing and increased economies of scale. The problem they
face relates to diverging expectations and objectives. Rarely are the two partners
equally matched with the MNC usually the stronger partner in terms of techno-
logy and management skills. The result is that the local partner may come to view
the MNC as overzealous in protecting its core technology and on imposing its
control on the joint venture, while the MNC finds it difficult to trust its local
partner. The friction that this generates is a major explanation of why many IJVs
result in partner dissatisfaction or outright failure. Indeed, some surveys have
suggested such outcomes for about half of MNCs with IJVs (Beamish et al.,
2000).

Fully owned subsidiaries

Disregarding local ownership restrictions imposed by host country governments,

preferring fully owned subsidiaries to IJVs is largely a product of an assessment by
the MNC of the transaction costs involved in obtaining intermediate inputs. Fully

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owned subsidiaries are preferred when these represent the most efficient solution,
a calculation that may well stem from problems in locating a reliable partner.
However, it is also to some extent a product of national culture. It has, for
example, been shown that all things being equal, the propensity for US firms
investing in Japan to choose joint ventures over wholly-owned subsidiaries is
substantially higher than for Japanese firms investing in the USA (Makino and
Neupert, 2001).
Fully owned subsidiaries can be divided into mergers and acquisitions (M&As),
on the one hand, and start-ups, on the other. Although it is often difficult to
distinguish between mergers and acquisitions in precise terms, mergers are usually
the result of a friendly arrangement between companies of roughly equal size,
whereas acquisitions are unequal partnerships, often the product of a hard-fought
battle between acquiring and target companies. The scale of M&As as a vehicle
for FDI has increased rapidly since the beginning of the 1990s. Most new FDI in
1998 was in the form of M&As. M&As have the advantage of providing rapid
entry into a market and therefore economies of scale. Established product lines,
distribution channels and insider status are all obtained. They can also be of great
value as a means of capturing new expertise. On the other hand the difficulties
encountered in integrating the acquisition into the culture and overall strategy of
the MNC should not be underestimated, particularly in the case of acquisitions
where there may be deep resentment amongst employees in the acquired unit.
Frequently, despite due diligence, the acquirer also lacks a proper understanding
of what has been acquired. A new identity for the acquired firm has to be
developed and as acquired businesses often involve a seat on the parent board,
there may be board-level disagreement as to precisely what that identity is. The
difficulties are such that as many as 50 per cent of M&As fail.5 However, as the
World Investment Report 1999 comments, MNCs do ‘not seem to be deterred
by the relatively poor results that have been observed with respect to M&As’
(UNCTAD, 1999: xxii).
Start-ups do not involve having to grapple with the problem of integrating
cultures and creating a unified purpose. Nevertheless, as an entry strategy it is
generally the strategy that carries the highest risk particularly in countries with
nationalistic attitudes toward foreign ownership. Start-ups also require the long-
est time to establish, and require the greatest contribution of know-how.
The choice of start-up versus acquisition tends to be affected by the industry
the MNC is operating in. MNCs operating in industries that are driven by unique
or superior technical expertise are characterized by a preference for start-ups since
they can build their operations in a way that minimizes the costs in transferring
their knowledge. An acquisition will often involve dealing with incompatible
methods for absorbing and processing knowledge and even a low motivation for
new knowledge. For example, Nokia, since it began to focus on mobile phones,
has expanded mainly through start-ups, whereas ABB, operating in established
technology sectors, has grown mainly through acquisitions. However, there are
also cultural factors at work in such a choice. Japanese firms tend to prefer entry

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 THE MULTINATIONAL CORPORATION

through start-ups rather than acquisition, whereas British firms are more comfort-
able with acquisitive entry. Harzing (2002a) has shown that differences in MNC
strategies also have an influence on the choice of entry mode. MNCs that are
particularly focused on adapting their products and policies to the local market
tend to prefer acquisitions because the acquired subsidiary will at the outset be
aligned with host country conditions, while MNCs that regard their subsidiaries
as pipelines for standardized, cost-efficient products will prefer start-ups. Finally,
there is the impact of prior experience. MNCs that have successfully employed
acquisitions will be more likely to choose acquisitions in subsequent entries (Chang
and Rosenzweig, 2001).

Collaboration or internalization?

Initial entry mode choices are difficult to change without considerable loss of
time and money, making entry mode selection a very important strategic decision
for MNCs. In essence, the decision is whether to collaborate in some way with
local partners in the host markets or whether to internalize operations. Collab-
oration allows the firm to extend its competitive advantages into more locations
faster and with reduced cost and market uncertainty. This enables it to focus its
resources on further developing its core competencies. Another advantage is that
a local partner can provide knowledge of the local economy or product-specific
knowledge. Despite these benefits there is a high level of managerial dissatisfac-
tion with inter-firm collaboration. In part this is due to the costs associated with
training partners and providing technology and management assistance. More
important though are the costs involved in writing, enacting, and enforcing
contracts with partners. This is a particular problem in dealing with firms in
countries with low transparency, that is unclear legal systems and regulations,
macro-economic and tax policies, accounting standards and practices, and corrup-
tion in the capital markets. PricewaterhouseCoopers have produced an index that
weighs the effects of each of these factors for each of 35 countries. The results are
displayed in figure 1.4.
However, internalization involves the costs of additional payrolls and over-
heads, investments in plant, property and equipment and added administrative
costs. Because of this, in high-risk countries some form of IJV is often preferable
to full ownership (Gatignon and Anderson, 1988). Internalization also means the
loss of relevant market knowledge that a local partner might supply. This is
particularly valuable when socio-cultural distance is high, explaining why partial
ownership is preferred in settings that are regarded as very foreign (Gatignon and
Anderson, 1988).
In trying to understand the circumstances under which collaboration is efficient
or optimal it has been pointed out that because IJVs involve a partner and there-
fore considerable risks of free riding and other opportunistic behaviour, IJVs should
be avoided whenever there is a significant proprietary content to the intangible

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 THE MULTINATIONAL CORPORATION

The opacity index*

January 2001
0 20 40 60 80 100
China
Russia
Indonesia
Turkey
South Korea
Czech Republic
Romania
Kenya
Ecuador
Thailand
Guatemala
India
Poland
Venezuela
Pakistan
Argentina
Brazil
Taiwan
Colombia
Japan
South Africa
Egypt
Lithuania
Peru
Greece
Israel
Uruguay
Hungary
Italy
Mexico
Hong Kong
Britain
Chile
United States
Singapore
Source: PricewaterhouseCoopers *150 = Complete opacity

Figure 1.4 The opacity index

Source: © The Economist Newspaper Ltd, London, 3 March, 2001

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 THE MULTINATIONAL CORPORATION

assets, whether they be technology or brand loyalty. Indeed, empirical research

has shown that entry by full ownership is positively related to intangible assets
such as R&D intensity and advertising intensity (Anderson and Gatignon, 1986;
Gatignon and Anderson, 1988). Another aspect to collaboration concerns the
type of knowledge that is to be applied in a host market. Knowledge that is tacit
or poorly codified is difficult and costly to transmit across organizational boundar-
ies. In other words, MNCs should avoid collaboration if the international exploita-
tion of tacit knowledge is involved (Shrader, 2001).
In this book we will largely disregard the non-equity modes of entry, export,
licensing, franchising and contract manufacturing. Our primary focus is on firms
that have fully owned subsidiaries or management responsibility for IJVs. It is
these we regard as fully-fledged MNCs.
By MNC we therefore mean a firm which not only has substantial direct
investments in foreign countries, but which also actively manages these in an
integrated way. In other words, firms that simply export their products fall out-
side the parameters of this book, as do firms that license their products to foreign
firms. Applying these two criteria consequently means that MNCs are a relatively
recent development with most of them founded after World War II.

Summary
In this chapter we have defined what we mean by an MNC, i.e. actively managed
substantial foreign direct investment made by firms that have a long-term com-
mitment to operating internationally. We have thereby excluded several prevalent
forms of internationalization such as licensing and contract manufacturing. MNCs
are a historically recent phenomenon whose presence is particularly evident in
certain sectors. Despite local resistance, sometimes explicit and sometimes tacit,
MNCs have generally proved themselves, as their dramatic growth in numbers
and proportions indicate, to be highly robust, at least within the context of their
own triads. Nevertheless, their individual positions are always under threat be-
cause of their size and geographical dispersion, factors that make communication
and control problematic. Success for individual MNCs is far from guaranteed.
They are ‘playing away from home’ and must therefore have the organizational
capabilities that enable them to leverage whatever unique strategic capabilities
they possess. Increasingly these capabilities are knowledge-based. This book is
therefore about the managerial challenges involved in creating and sustaining that
necessary organizational capability that in turn enables the MNC to harness its
knowledge resources.
The case that follows traces the process of internationalization of Vita, a Euro-
pean financial services company. In terms of entry mode it chose, at different
times, both the acquisitions and start-ups route. The case illustrates the necessity
of responding to institutional and cultural conditions, in other words, the neces-
sity of some degree of local responsiveness. The issue of national identity is also a

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 THE MULTINATIONAL CORPORATION

feature of the case. Finally, Vita also serves as a precursor for a dominant theme
in this book, that of learning and the transfer of knowledge across boundaries.

Notes
1 UNCTAD (2001).
2 UNCTAD (2001).
3 See Geringer, Beamish and daCosta (1989) and Hitt, Hoskisson and Kim (1997).
4 The Economist, 3 November 2001.
5 Child, Faulkner and Pitkethly (2001).

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Codes of Conduct for Multinational
Corporations: An Overview

James K. Jackson
Specialist in International Trade and Finance

April 16, 2013

Summary
The U.S. economy has grown increasingly interconnected with other economies around the
world, a phenomenon often referred to as globalization. As U.S. businesses expand globally,
however, various groups across the social and economic spectrum have expressed their concerns
over the economic, social, and political impact of this activity. Over the past 20 years,
multinational corporations and nations have adopted voluntary, legally enforceable, and industry-
specific codes of conduct, often referred to broadly as corporate social responsibility (CSR), to
address many of these concerns. Recent events, primarily the 2008-2009 financial crisis and
related work by major international organizations, spurred Congress and governments in Europe
to increase their regulation of financial firms. Indeed, the growing presence and influence of
multinational corporations in the production of goods and services and in international trade
through value chains has prodded governments to adopt measures that enhance the benefits of
such activities through codes of conduct. Congress will continue playing a pivotal role in
addressing the various issues regarding internationally applied corporate codes of conduct.

Congressional Research Service

Contents
Background ...................................................................................................................................... 1
External Codes of Conduct .............................................................................................................. 2
Other Agreements ............................................................................................................................ 4
G-20 Investment Measures ........................................................................................................ 6
Corporate and Industry-Specific Codes of Conduct ........................................................................ 6
Concerns of Stakeholders ................................................................................................................ 7
Issues for Congress .......................................................................................................................... 8

Contacts
Author Contact Information............................................................................................................. 8

Congressional Research Service

Background
Over the last decade, international flows of capital have skyrocketed and now total over $6
trillion per day, or more than the total annual amount of U.S. exports and imports of goods and
services. These flows are the prime mover behind exchange rates and global flows of goods and
services. One part of these flows is foreign direct investment, or investment in businesses and real
estate. On a cumulative basis, direct investment in 2011 totaled over $20 trillion world-wide,
about 20% of which is associated with the overseas investment of U.S. firms, the largest share
held by the firms of any nation. Preliminary data for 2012 indicate that foreign investment flows
both into and out of the United States slowed in 2012, reflecting a similar trend in world-wide
investment data.

In addition to foreign direct investment in which firms take a direct equity stake in an investment
project, multinational corporations are engaging in a broad array of activities, referred to as non-
equity modes (NEM) of investment, that include partial ownership, joint ventures, contract
manufacturing, services outsourcing, contract farming, franchising and licensing, and other forms
of contractual relationships through which firms coordinate and control the activities of partner
firms.1 The United Nations estimates that NEM investment generated $2 trillion in sales in 2010.
While NEM investments can enhance the productive capacities of developing countries through
integration into global value chains, employment in the affected industries can be highly cyclical
and easily displaced.2 Foreign investment spans all countries, industrial sectors, industries, and
economic activities and has become a major conduit for goods, capital, and technology between
the developed and the developing economies. Foreign direct investment has become a much-
needed source of funds for capital formation in developing countries and foreign investment
accounts for important shares of employment, sales, income, and R&D spending in developing
countries.3

The United States is the largest recipient of foreign direct investment and is the largest overseas
investor in the world, owning about $4.5 trillion in direct investment abroad, or more than twice
as much abroad as British investors, the next-most active overseas investors. This international
expansion of business activity and overseas presence, however, often leads to a clash of cultures
and values. In addition, conflicts are rising within the United States and within other developed
countries over what role these global corporations should play in their respective home countries
and over whose interests the corporations should serve. Traditionally, corporations have served
the economic interests of a narrow group of shareholders by maximizing the return to the
shareholders, or by maximizing the overall profits of the firm. Now, a broader group of
“stakeholders,” including customers, employees, financiers, suppliers, communities, and society
at large, is pressing for comprehensive codes of conduct that recognize their interests.

Defining codes of conduct is difficult, because such codes encompass a broad range of issues and
myriad types of official and corporate activities that have defied attempts to reach a common
agreement on the composition and nature of the codes. One way to view codes of conduct is by

1
Non-Equity Modes of International Production and Development, World Investment Report 2011, United Nations
Council on Trade and Development, 2011, pp. 123-176.
2
Ibid, p. 123.
3
World Investment Report 2012, United Nations Council on Trade and Development, 2012, p. 173.

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 Codes of Conduct for Multinational Corporations: An Overview

grouping them into three main categories: (1) externally generated codes of conduct that are
developed by governments or international organizations, (2) corporate codes of conduct that
represent individual companies’ ethical standards, and (3) industry-specific codes.4 These
categories often overlap and some codes that initially were adopted voluntarily by companies or
industries have been incorporated into law by governments. In other areas, there are notable gaps
in the coverage of codes of conduct. Since congressional activities relate most specifically to the
first type of codes, or externally generated codes of conduct, they receive the greatest emphasis in
this report.

Congress has periodically considered issues related to corporate codes of conduct. In the 106th
Congress, for instance, the House considered a measure (H.R. 4596) that would have required
U.S. firms to adopt a Corporate Code of Conduct that covered a wide range of workers’ rights and
environmental issues, similar to the set of “model business practices” the Clinton Administration
proposed in March 1995.5 Similarly, the Senate approved and the President signed on December
2, 1999, the Convention on Child Labor,6 which addresses various issues related to children in the
workforce.7 The 106th Congress also considered a number of measures that addressed issues of
child labor and the importation of goods produced with child, sweatshop, and prison labor. In the
108th, 109th and 110th Congresses, Congress considered various measures to protect children
affected by poverty and natural disasters from trafficking, to protect children and minors from
abusive labor practices, and to advance women’s rights in developing countries. In the 111th
Congress, Representative Maloney and Senator Boxer introduced companion pieces of legislation
(H.R. 606 and S. 230, respectively) that would have promoted the international protection of
women’s rights. In the 112th Congress, Representative Maloney introduced H.R. 418 to promote
the international protection of women’s rights.

External Codes of Conduct

Since the 1970s, public and private expectations of multinational corporate behavior have grown
commensurate with the boom in foreign investment. This change in expectations, however, has
not resulted in a clear-cut set of directions for governments or businesses to follow in developing
codes of conduct. At times, purely voluntary codes evolved into codes that subsequently were
adopted as national legislation. For instance, in 1977, the United States adopted the Sullivan
Principles and the Foreign Corrupt Practices Act (FCPA).8 Initially, the Sullivan Principles
provided a voluntary set of standards for firms to follow to pressure the apartheid government of
South Africa to improve the living conditions of black workers, their families, and their

4
Another way of categorizing business standards was developed by the United Nations, which uses four categories: 1)
intergovernmental organization standards derived from universal principles; 2) multi-stakeholder initiative standards;
3) industry association codes; and 4) individual company codes. Promoting Standards for Responsible Investment in
Value Chains: Report to the High-Level Development Working Group, Inter-Agency Working Group on the Private
Investment and Job Creation Pillar of the G-20 Multi-Year Action Plan on Development, September 2011.
5
Administration’s Draft Business Principles. Inside U.S. Trade, March 31, 1995.
6
Convention (No. 182) Concerning the Prohibition and Immediate Action for the Elimination of the Worst Forms of
Child Labor, Geneva, June 17, 1999, entered into force November 19, 2000.
7
For additional information, see CRS Report RS20445, Child Labor and the International Labor Organization (ILO),
by Lois B. McHugh.
8
P.L. 95-213, Title I; 91 Stat. 1494, December 19, 1977. See also CRS Report RL30079, Foreign Corrupt Practices
Act, by Michael V. Seitzinger.

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 Codes of Conduct for Multinational Corporations: An Overview

communities. In 1986, Congress adopted the Sullivan Principles as law.9 The FCPA followed a
series of congressional hearings and legal actions against numerous U.S. corporations,10 and
specified legal standards and penalties that were meant to prevent U.S. firms from bribing foreign
officials in order to gain economic advantages. Following the financial crisis of 2008-2009, the
United States adopted the Dodd-Frank Wall Street Reform and Consumer Protection Act to
address issues of governance and regulation of the financial sector, and the European Union has
similarly adopted wide-ranging directives to improve oversight of the financial sector and to
provide guidance on executive compensation. Also, as the United Nations has noted, “codes of
conduct have become increasingly significant for international investment, since they typically
focus on the operations of large multinational corporations which, through their foreign
investment and global value chains, can influence the social and environmental practices of
businesses worldwide.”11

While there appears to be a general consensus in the United States and abroad that favors
international standards governing corporate business practices, attempts to reach an agreement on
specific standards have proven to be less promising. In some cases, these efforts have fostered
competition among countries for investment projects, have highlighted the remaining differences
in national policies regarding foreign investment, and have created differences in the goals and
objectives of negotiations between the developed and the developing nations. Most developed
economies favor international rules, or codes of conduct, that could promote a “level playing
field,” or an environment in which investment decisions are based solely on competitive market
factors. Developing economies, however, often view such efforts as attempts by the developed
countries to promote rules and codes of conduct that effectively allow them to hoard foreign
investments for themselves and to deny the developing countries the means to compete
internationally for new investment projects.

These and other differences have spurred nations and international organizations to adopt various
approaches in order to promote international rules on foreign investment. One approach has been
to negotiate legally binding agreements, whether they are narrowly or broadly cast, that impose a
set of standards on multinational firms and that bring a large number of countries into compliance
simultaneously. For example, after the United States adopted the FCPA, it supported efforts
within the OECD to adopt the Convention on Combatting Bribery of Foreign Public Officials in
International Business Transactions (Convention on Bribery), which focuses on a narrow set of
issues related to bribing public officials.12 Since the convention entered into force on February 15,
1999, 40 countries13, including the United States,14 have passed national legislation implementing
the convention.

A similar approach that failed to gain agreement was a comprehensive agreement on foreign
investment, known as the Multilateral Agreement on Investment (MAI). The MAI was expected
to be a broad, legally binding, multi-faceted agreement that would have established an
international set of rules on a wide range of foreign investment issues. Support for the agreement

9
Although adopted informally in 1977, the Principles were incorporated as Sec. 208, Title II of the Comprehensive
Anti-Apartheid Act of 1986 (P.L. 99-440, October 2, 1986) as amended.
10
CRS Report RL30079, Foreign Corrupt Practices Act, by Michael V. Seitzinger.
11
World Investment Report 2011, United Nations Conference on Trade and Development, 2011, p. 111.
12
See http://www.oecd.org/daf/anti-bribery/anti-briberyconvention/38028044.pdf.
13
See http://www.oecd.org/daf/anti-bribery/antibriberyconventionratification.pdf.
14
P.L. 105-366, November 10, 1998.

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 Codes of Conduct for Multinational Corporations: An Overview

eroded over the course of the negotiations, which focused on provisions that proved to be too
divisive to resolve. In addition, citizen and consumer groups opposed the proposed agreement,
in part because they viewed it as too favorable to multinational corporations, and because of
their concerns regarding what they believed would be the social, economic, and political impact
of the agreement.15

In lieu of negotiating comprehensive multilateral agreements, many countries have resorted to

adopting narrowly focused bilateral investment treaties that contain codes of conduct. Often,
these codes resemble a general set of investment-related provisions and corporate “best
practices,” rather than a legally binding agreement. According to the United Nations, by year-end
2011, 174 countries had concluded 3,164 investment treaties and 2,833 bilateral investment
treaties (ITs). Bilateral agreements dominate the number of new and existing investment
agreements, but regional agreements are becoming more significant in terms of economic
impact.16 Often these treaties are accompanied by some form of codes of conduct that are
negotiated to cover a particular investment project or sector and tend to be highly specific to a
company, project, or location.

Other Agreements
Some nations have used other types of multilateral treaties to promote codes of conduct for
multinational firms. One type of agreement attempts to bring greater conformity in the treatment
of foreign investment by prescribing changes in national laws governing foreign investment as
one component of a broader arrangement that is geared toward economic cooperation and
integration, such as the treaties that established the European Community and the North American
Free Trade Agreement. There are other, legally non-binding, arrangements which cover foreign
investment, the most prominent of which are: the OECD Guidelines for Multinational
Enterprises;17 the OECD Principles of Corporate Governance;18 OECD Guidelines on Corporate
Governance of State-Owned Enterprises;19 Code of Liberalization of Capital Movements
(covering both long- and short-term capital movements);20 and the Code of Liberalization of
Current Invisible Operations (covering cross-border trade in services).21 The OECD Guidelines
comprise a set of voluntary recommendations in all the major areas of corporate citizenship,
including employment and industrial relations, human rights, environment, information
disclosure, combating bribery, consumer interests, science and technology, competition, and
taxation. The 2011 update of the Guidelines included new recommendations on human rights and
corporate responsibility for their supply chains, the first such agreement in this area.22

15
For additional information, see CRS Report 98-569, The Multilateral Agreement on Investment: A Brief Analysis of
the Current Status, by James K. Jackson.
16
World Investment Report, 2012, p. xx.
17
http://www.oecd.org/daf/inv/mne/48004323.pdf.
18
http://www.oecd.org/daf/ca/corporategovernanceprinciples/31557724.pdf.
19
http://www.oecd.org/daf/ca/corporategovernanceofstate-ownedenterprises/34803211.pdf.
20
http://www.oecd.org/daf/inv/investment-policy/capital%20movements_web%20english.pdf.
21
http://www.oecd.org/daf/fin/private-pensions/invisible%20operations_web%20english.pdf.
22
Promoting Standards for Responsible Investments in Value Chins, p. 6.

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 Codes of Conduct for Multinational Corporations: An Overview

In addition, the OECD has issued a basic statement on foreign investment, The Declaration on
International Investment and Multinational Enterprises,23 which is a general statement of policy
regarding the rights and responsibilities of foreign investors. The World Trade Organization
(WTO) also supports the concept of a common set of rules on international corporate investment.
In addition, the International Labor Organization’s (ILO) Tripartite Declaration of Principles
Concerning Multinational Enterprises and Social Policy provides detailed guidance on the ways
firms, both domestic and foreign, can maximize their contribution to economic and social
development and minimize any negative effects.24

The United Nations lists ten major principles that are recognized by international declarations and
agreements that have been developed by the three main organizations, the UN, the ILO, and the
OECD. These main principles comprise the UN Global Compact which covers four main areas:
human rights; labor standards; environment; and anti-corruption. The ten principles of the UN
Global Compact are:
1. Businesses should support and respect the protection of internationally
proclaimed human rights.
2. Businesses should make sure that they are not complicit in human rights abuses.
3. Businesses should uphold the freedom of association and the effective
recognition of the right to collective bargaining.
4. Businesses should uphold the elimination of all forms of forced and compulsory
labor.
5. Businesses should uphold the effective abolition of child labor.
6. Businesses should uphold the elimination of discrimination in respect of
employment and occupation.
7. Businesses should support a precautionary approach to environmental challenges.
8. Businesses should undertake initiatives to promote greater environmental
responsibility.
9. Businesses should encourage the development and diffusion of environmentally
friendly techniques.
10. Businesses should work against corruption in all its terms, including extortion
and bribery.25
As part of the 1994 Uruguay Round on multilateral trade negotiations, the WTO adopted the
agreement on Trade-Related Investment Measures (TRIMs), which recognized that certain
investment measures restrict and distort trade; required signatory countries to apply national
treatment; and required countries to provide a framework for reducing restrictions on foreign
investment. In 1996, the WTO established a working group on investment, which has been
studying the issue of investment rules, including technical regulations and standards that govern
trade and investment. The Doha Declaration set out the goal of addressing foreign investment

23
http://www.oecd.org/daf/inv/investment-
policy/oecddeclarationoninternationalinvestmentandmultinationalenterprises.htm.
24
http://www.ilo.org/wcmsp5/groups/public/@ed_emp/@emp_ent/documents/publication/wcms_101234.pdf.
25
World Investment Report, 2011, p. 112.

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 Codes of Conduct for Multinational Corporations: An Overview

issues following the conclusion of the Fifth Ministerial in Cancun in September 2003. So far,
these efforts have not succeeded in achieving the stated goal of developing a “multilateral
framework to secure transparent, stable and predictable conditions for long-term cross-border
investment, particularly foreign direct investment.”26

G-20 Investment Measures

During the early stages of the 2008-2009 financial crisis, national leaders, generally political
heads of state, met as the Group of Twenty, or G-20,27 to address the crisis and to develop a
reform agenda. As part of that agenda, the leaders committed to keeping markets open and
liberalizing trade and investment. In addition, the G-20 leaders tasked the World Trade
Organization (WTO), the Organization for Economic Cooperation and Development (OECD) and
the United Nations Council on Trade and Development (UNCTAD) to monitor developments and
report to the G-20 on a semi-annual basis on the progress in maintaining open markets.28 At the
G-20 meeting in Los Cabos, Mexico on June 19, 2012, the G-20 leaders indicated that they had
grown “concerned about rising instances of protectionism around the world,” and that they
viewed regional and global “value chains” as relevant to world trade and that recognized “their
role in fostering economic growth, employment and development” and the need to enhance the
participation of developing countries in value chains.29 The latest joint OECD-UNCTAD report
on investment measures concluded that G-20 members “have continued to honor their pledge not
to introduce restrictive measures. Nevertheless, the report warned that, “Despite this encouraging
finding, persistent high unemployment, turbulence in financial markets and a weak economic
recovery put intense pressure on governments to grant assistance to individual domestic
companies and to preserve jobs. As a result, governments may resort to policies or practices that
discriminate against foreign investors or discourage outward investment.”30

Corporate and Industry-Specific Codes of Conduct

A broad range of factors are influencing firms to adopt codes of conduct. Some firms see it as
enlightened self-interest, while others see it as a necessary part of risk management.31 Corporate
codes of conduct and industry-specific codes now exist in one form or another among most large

26
http://www.wto.org/english/thewto_e/minist_e/min01_e/mindecl_e.htm#tradeinvestment.
27
The Group of Twenty, or G-20, is an informal forum for advancing international economic cooperation among 20
major advanced and emerging-market countries, consisting of the following members: Argentina, Australia, Brazil,
Canada, China, France, Germany, India, Indonesia, Italy, Japan, Mexico, Russia, Saudi Arabia, South Africa, South
Korea, Turkey, the United Kingdom, the United States, and the European Union. The G-20 was originally established
in 1999 to facilitate discussions among G-20 finance ministers. The prominence of the G-20 increased with the onset of
the global financial crisis in the fall of 2008, and the G-20 started meeting at the leader level, generally the political
head of state. In September 2009, the G-20 leaders announced that, henceforth, the G-20 would be the “premier” forum
for international economic cooperation. In its current form, the G-20 leaders meet annually, while finance ministers and
central bank presidents meet in the spring and the fall prior to the annual leaders’ meeting. On-going work of the G-20
is conducted by representatives of the national leaders, referred to as Sherpas. Russia assumed the Presidency of the G-
20 on December 1, 2012, and will host the next meeting of G-20 leaders on September 5-6, 2013 in St. Petersburg.
28
The G-20 Seoul Summit Leaders’ Statement, November 11-12, 2010
29
The G-20 Los Cabos Summit Leaders’ Statement, June 19, 2012.
30
Eighth Report on G-20 Measures, Organization for Economic Cooperation and Development and the United Nations
Council on Trade and Development, October 31, 2012, p. 4.
31
A Stitch in Time, The Economist, Special Report on Corporate Social Responsibility, January 19, 2008, p. 12.

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multinational corporations and among most of the developed countries. A recent study by the
OECD concluded that most corporate codes tend to be highly specific and to deal with the
idiosyncrasies of a particular company, project, or location.32 Industry-specific corporate codes
dealing with environment and labor issues appear to be the most common, and most U.S.
manufacturers and retailers in the apparel industry have adopted corporate codes that prohibit
using child, sweatshop, or prison labor. U.S. companies in such diverse industries as footwear,
personal care products, photographic equipment and supplies, stationary products, hardware
products, restaurants, and electronics and computers have adopted corporate codes of conduct.

Multinational corporations generally support the concept of codes of conduct that standardize
rules of corporate behavior across a broad range of countries and industries. While the motivation
behind adopting corporate codes of conduct can be quite complex, multinational firms generally
adopt codes of conduct because they believe they represent good business practices. Generally,
multinational corporations desire national treatment as a basis for any investment agreement, but
are concerned that standards negotiated in one agreement could be applied to their worldwide
operations, regardless of the disparity in economic conditions between locations, local customs,
jurisprudence, or differences in local business practices. Some firms also argue that codes which
allow foreign groups to submit complaints to U.S. regulatory bodies concerning the overseas
operations of the subsidiaries of U.S. firms could be used as a competitive tool to damage the
worldwide reputations of U.S. firms.

Industry-specific codes of conduct are as varied and as extensive as the multitude of industries
they cover. Labor and environmental issues, however, are the two most frequently covered areas
in the codes, regardless of industry. Environmental standards often comprise commitments from
firms to be open to the concerns of the communities in which they locate. The most common
labor codes include commitments for firms to provide a reasonable working environment,
provisions against discrimination and a commitment to obey laws regarding child labor and
compensation. Concerns over child and sweatshop labor, in particular, have spurred some public
groups to take action on their own. The Workers’ Rights Coalition,33 an alliance of 67 universities
and colleges, pressured Nike and Reebok to investigate allegations of sweatshop labor conditions
in a Mexican apparel factory.

Concerns of Stakeholders
While traditional economic theory holds that corporations strive to maximize their profits to
benefit the stockholders, a broad group of “stakeholders” is pressing to have their interests
represented as well. These stakeholders argue that corporations have responsibilities beyond the
narrow scope of their legal charters, or that they should abide by a “social contract” that reflects
society’s changing social and cultural mores. The size of the group of stakeholders and the social
responsibilities they expect varies with the size of the firm, the industrial sector it is involved in,
and its products and operations. This group of stakeholders and the associated social
responsibilities also become vastly larger for firms that operate in more than one country and can
include issues beyond the common areas of workers’ rights, environmental concerns, and
business production or financing operations. At times, the issues sought by stakeholders in one

32
Gordon, Kathryn, and Maiko Miyake. Deciphering Codes of Corporate Conduct: A Review of Their Contents,
OECD Working Papers on International Investment, Number 992. OECD, October 1999. pp. 5-7.
33
For additional information see the organization’s website, http://www.workersrights.org/.

Congressional Research Service 7

 Codes of Conduct for Multinational Corporations: An Overview

country can clash with those sought by stakeholders in another country, for instance when
workers in developed countries push for job security, health care and other benefits, and
environmental issues, while workers in developing countries push for more local jobs and local
managers, worker training and education, technology transfers, and higher levels of local
production.

Issues for Congress

Governments, corporations, and the public generally support the concept of corporate codes of
conduct. The complexity of the issue and the diversity of foreign investments, however, make it
difficult in practice to negotiate international agreements with legally binding codes of conduct
and likely will present Congress with at least two large, competing groups of interests. These
groups basically represent the difference between economic efficiency as represented by
corporations and equity, or social justice, as represented by a broad coalition of social and public
groups. Generally, economic analysis indicates that legally binding codes of conduct that
eliminate market-distorting activities promote market efficiency and, thereby, provide positive net
benefits to consumers and to the economy as a whole. In most cases, however, there is a
mismatch between those who benefit from greater market efficiency and those who bear the costs
of economic adjustment. As a result, those who bear the highest costs are likely to be the most
vocally opposed and to voice that opposition to Congress, whereas those who benefit are less
likely to be motivated to express their support due to the perceived limited value of the benefits.

There is no clear-cut method for determining the most equitable distribution within the economy
of the costs and benefits associated with international investment. A broad coalition of public and
social groups increasingly have come to view negatively the global spread of economic activity
and to argue that voluntary corporate codes of conduct accomplish little. Beyond a narrow set of
issues, there is less agreement on how Congress should proceed. Numerous labor and
environment-related measures that garner support within the United States are opposed abroad,
often by the very countries and groups the measures are intended to help. Moreover, consumer
and labor groups have grown uneasy about their own economic well-being as a result of the
recent slow-down in the rate of growth of the U.S. economy. As a result, they are arguing for
including labor and environmental provisions in free trade agreements that are under
consideration, and they may well urge Congress to adopt more restrictive measures concerning
the labor and environmental impact associated with imports and foreign investment as a means of
protecting domestic U.S. jobs.