Foreign Direct Investment, Political and Civil Liberties: The role of Business Education in shaping the current paradigm

Dr Fragkiskos FilippaiosKent Business SchoolUniversity of Kent

Business Week 2011

Outline

• Current Paradigm Role of Foreign Direct Investment Some Cases An empirical explanation

• The role of business education Current situation Changing the paradigm

• Final thoughts

Motives for Foreign Direct Investment

• Motives for FDI in Developing countries different from OECD countries Structure of economy and Institutions in Developing

countries Wide interest on the Political Environment

• Rodrik (1996), Harms and Ursprung (2002), Busse (2004)

• Does Democracy stimulate or impede FDI?

Is this a trivial question?

• Same question for many other economic outcomes (growth, government spending etc.) (Barro, 1997) Overall results inconclusive

• For FDI the issue seems to be resolved: FDI is not attracted “by societies in which political

rights are repressed and workers’ representation is curtailed” (Harms and Ursprung, 2002, Rodrik, 1996, Busse, 2004)

Some Interesting Cases

• Nike

• June 1996 – LIFE Magazine case

• Child Labour in Pakistan

• $10 -12 million a year spent on Corporate Social Responsibility

Coca Cola

• The US-based International Labour Rights Fund, and the US United Steelworkers filed a lawsuit against Coca-Cola accusing its franchised bottle plant in Colombia of using paramilitaries to suppress union activity

• The lawsuit filed in Miami in 2001 alleged that the company "maintains open relations with murderous death squads as part of a program to intimidate trade union leaders."

• Coca-Cola said it could not be held responsible because the plants were not directly under its control

McDonalds

• In the 1990s McLibel case, McDonalds were found to "exploit children", be "culpably responsible for animal cruelty", and have "advertisements, promotions and booklets which have pretended to a positive nutritional benefit which their food did not match"

• Its record of labour, working conditions, unionism and pay was criticised.

Democracy

• Democracy consists of:

• Political Liberties

• Civil liberties

• Electoral Control

• Organisation and Economic rights

The two dimensions

Political Liberties

• “Rights to participate meaningfully in the political process. In a democracy this means the right of all adults to vote and compete for public office, and for elected representatives to have a decisive vote on public policies.”

Civil Liberties

• “Civil Liberties are rights to free expression, to organize or demonstrate, as well as rights to degree of autonomy such as provided by freedom of religion, educations, travel, and other personal rights.”

Gastil Index of Civil and Political Liberties (Gastil, 1982)

How liberties influence FDI?

• Higher civil and political liberties imply better democratic institutions

• No reason to expect that these two liberties affect the investment motives alike

• Civil liberties refer to the workplace environment and the organization rights of the workers and to various economic rights

• Political liberties refer to the decision-making process in the country and the way the government chooses which policies to implement

Effect of Political Liberties

• Political liberties’ repression effect to FDI comes through the economic policy channel.

• Elections act as a disciplining device for the policymaker. When elections are free and fair, voters will punish the officeholders that deliver “bad” economic outcomes (Ferejohn, 1986; Drazen, 2000).

• Non-democratic autocratic rulers have a shorter time horizon since policy changes, e.g. due to a violent revolution, are more frequent in non- democracies (Olson, 1993, McGuire and Olson, 1996)

Effect of Civil Liberties

• High repression of civil liberties is expected to exert a negative effect on the productivity of the workforce

• An increase in economic rights and civil liberties may stimulate the working of the free market, providing better outcomes for productivity and growth (Friedman, 1962).

• Adverse powers may come into play. Labour unions and special interest groups begin to form and gain power increasing their ability to extract rents from the multinationals.

What does the data imply?

• US Foreign Direct Investment abroad

• 105 countries (mostly developing)

• 20 years (late 1980s till mid 2000s)

• There is a point of civil liberties where multinationals would be happy to have a slight suppression of those in order to extract higher profits

So what needs to be done?

• The data reflects reality and contradicts what the academic literature has claimed up to this point

• Business education should respond to reality and not stagnate in ideas of the past

• What is the current situation?

Current Situation

• In a recent Wall Street Journal article, Psychology professor Steven Davis argued that cheating by high school students has increased from about 20 percent in the 1940’s to 75 percent today.

• “Students say cheating in high school is for grades, cheating in college is for a career.”

How does education respond?

• Many institutions of higher education have instituted policies regarding ethics education

• Faculty Handbook of the Mays Business School at Texas A&M University includes the following statement:

• “Therefore, faculty and staff have a responsibility for creating an academic environment that promotes honest academic inquiry and teaches students ethical behavior in the process.”

This is not enough...

• Teach courses such as Business & Society, Business Ethics, Social & Regulatory Issues

• Integrate business ethics into core curriculum

• Learning about Business Ethics and Corporate Social responsibility does not change attitudes

We are responsible...

• Faculty members need education & support to achieve the above objectives

• We should assume responsibility for educating our students about corporate responsibility, business ethics & social responsibility

• Lead by example not words…

Thank you

References

• Adam, A. and Filippaios, F. 2007 Foreign direct investment and civil liberties: a new perspective, European Journal of Political Economy, 23(4), 1038-1052

• Busse, M., 2004. Transnational corporations and repression of political rights and civil liberties: an empirical analysis. Kyklos 57, 45-66.

• Barro, R.J., 1997. Determinants of Economic Growth: A Cross-Country Empirical Study. MIT Press, Cambridge, MA.

• Freedom House, 2002. Freedom in the world. Freedom House, New York.

• Friedman, M., 1962. Capitalism as freedom. University of Chicago Press, Chicago.

• Gastil, D. R., 1982. Freedom in the world. Greenwood Press, Westport CT.

• Harms, P., Ursprung, H.W., 2002. Do civil and political repression really boost foreign direct investments? Economic Inquiry 40, 651-663.

• Rodrik, D., 1996. Labour standards in international trade: Do they matter and what do we do about them?, in: Lawrence, R., Rodrik, D., Whalley, J., (Eds), Emerging agenda for global trade: High stakes for developing countries, Overseas Development Council, Washington, DC, pp. 35-79.

• Spar, D., 1999. Foreign Investment and Human Rights. Challenge 42, 55-80.

• United Nations Conference on Trade and Development (UNCTAD), 2003. World Investment Report 2003: FDI Policies for Development: National and International Perspectives, United Nations, Geneva and New York.