The Downward Spiral and the US Model Business Principles -- Why MNEs Should Take Responsibility for the Improvement of World-Wide Social and Environmental Conditions(1)

By Scherer, Andreas Georg; Smid, Marc | Management International Review, October 2000 | Go to article overview

The Downward Spiral and the US Model Business Principles -- Why MNEs Should Take Responsibility for the Improvement of World-Wide Social and Environmental Conditions(1)


Scherer, Andreas Georg, Smid, Marc, Management International Review


Abstract

* Nation states and intergovernmental organizations do not have enough power to control the rules of the economic system. The stability of the world order is threatened by a downward spiral of social and environmental standards.

* Under these conditions, the economic power of multinational firms could be used to enforce humane working conditions world-wide. The US Model Business Principles are based on this idea.

Key Results

* For maintaining global peace and stability, joint efforts by governments, MNEs, intergovernmental organizations, and NGOs are necessary. MNEs are key actors in this endeavor.

Introduction

In the course of globalization, different locations compete for investments and jobs. The reduction of trade and capital transfer barriers, the new possibilities offered by information technologies, the reduction of transport costs, as well as the improved infrastructure and educational standards in many countries of the world enable a high mobility of capital and investments. These conditions permit multinational enterprises (MNEs) to create supply chains on a world-wide basis or reallocate resources within a short period of time. It is a consequence of the market economy that capital seeks out the cheapest offers of factors of production. In the wake of this development, the business activities of MNEs are gradually distancing themselves from the regulatory limits of individual nation states, without a sufficient legal system being established at a transnational level (Ohmae 1995, Orts 1995, Reich 1991, Thurow 1996).

Many regions in the industrialized countries have experienced factory closings in entire branches of their industries. Many businesses have either moved abroad or have declined. This can partly be explained by the lower production costs in non-industrialized countries. The textile and sports utility industries, the steel industry, ship-building, and the computer and semi-conductor industries are but a few of the examples which can be mentioned here (Greider 1997, Longworth 1998). However, it is not only the lower labor costs that attract capital into other countries. Many emergent and developing countries have conditions where regulations on safety and health at work, trade union activities, co-determination, and environmental protection are unknown, where wages are below the subsistence level, and where child labor and discrimination against women and ethnic minorities are the rule. These conditions are an additional attraction for investment, because they reduce costs in those industries where largely semi-skilled workers are used (Greider 1997, Martin/Schumann 1996).

The power of individual nation states to define the rules of the economic system and to influence the policy of MNEs is fading (Vernon 1998). At the same time, the efforts of intergovernmental organizations such as the United Nations, the International Labour Organization, or the World Trade Organization have not yielded much progress in enforcing social and environmental standards for business world-wide. Though paperwork has been done for decades, these organizations are still unable to enforce and control business conduct effectively because they depend on the executing bodies of individual nation states. In many cases, nation states have no interest in monitoring the behavior of multinational firms, because they want to hold or lure foreign investments. Because of these difficulties, the US government proposed the so-called Model Business Principles in the summer of 1995. These principles state that MNEs should use their economic power and political influence to create humane working conditions world-wide. The idea of these principles is that the multinational firm should behave as a moral actor, as long as there is no political world order available that defines and enforces social and environmental standards.

In this paper we will consider the process of globalization and the role that MNEs are playing in this process.

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