Regulation and Corporate Activity in the Post-World War II era: A Tale of Two Regimes

Despite its status as the most deeply institutionalized era of global political-economic relations in history, the world order emergent at the end of the Second World War left the activities of Multinational Corporations (MNCs) largely unregulated. At first envisioned as a triumvirate of organizations – an International Bank for Reconstruction and Development (IBRD, better known as the World Bank), International Monetary Fund (IMF), and International Trade Organization (ITO) — the last of these institutions never materialized, leaving trade practices to the improvised arrangements of the General Agreement on Tariffs and Trade (GATT) until the birth of the World Trade Organization in 1995. While the ill-fated ITO envisioned measures for both the protection of investment and expansion of global commerce, the ad hoc arrangements of the GATT were unsuited to these functions, leaving both MNCs and their critics to fend for themselves.

It is important to emphasize that neither the proposed ITO, or eventual WTO, intended to do more than stimulate and expand trade and MNC investments, something the latter actors proved more than capable of doing on their own. At the international level, and among the industrialized states whose interests were best advanced by the postwar system, there would be no serious attempt to regulate MNCs again until the negotiation of a draft Multilateral Agreement on Investment (MAI) in 1995-1998. Negotiated between member states of the Organization for Economic Cooperation and Development (OECD) this ill-fated initiative signaled a desire to return to aspects of the project left incomplete by the collapse of the ITO 40 years earlier. To put it ironically, international investment appeared to be choking on its own success, and regulation contemplated as a way of ensuring a more predictable, systematic, and uniform set of multilateral rules in an increasingly unwieldy proliferation of MNC activities. The MAI, in other words, was a sort of regulatory framework premised on enshrining and stabilizing deregulatory values. One obvious and controversial way to make investment more predictable, for example, would be to protect the rights of MNCs from being infringed in the foreign jurisdictions in which they operate, effectively ending the capacity for signatory states to discriminate in favour of their own businesses.

Consistent with the qualified laissez-faire attitude of the embedded liberalism at the heart of their system, the affluent and dominant states of the postwar era have consistently construed “regulation” less as a control than an enabler, a synonym for efficiency, economic development, and expanded wealth. By definition, this sort of regulation cannot entail the control of MNC activities. However lamentable to its architects, nothing essential was lost with the death of the ITO or MAI. In fact, the continued perceived absence of an investment regime almost paradoxically signals the strength and presence of the investment norms preferred by the advanced industrial states. Following Stephen Krasner’s widely used definition, regimes constitute “principles, norms, rules, and decision-making procedures around which actor expectations converge” and, in the Anglo-American led world of MNCs, those expectations have consistently converged around the notion that big business should either be left to its own devices, or helped to be further left to its own devices.

This version of regulation stands in marked contrast to the notion that states, individually or in concert, have a right to curtail, control, or manage foreign corporate activities in their territory deemed inconsistent with national economic and political objectives. From this perspective the globalization of economic activity so clearly perpetuated by, and conducive to the interests of, MNCs is not inevitable but political; host governments retain both a right and responsibility to ensure that foreign companies contribute to national development. While the vast majority of MNC investments occur among and between the member states of the OECD, MNC activities were more overtly political in LDC states, and beginning in earnest in a 1964 United Nations Conference on Trade and Development (UNCTAD), a group of 75 developing states (known nevertheless as the Group of 77!) announced an agenda to promote equality in the economic and social order and advance the interests of the developing world. By the time these broad objectives crystalized in 1974 into a set of demands called the New International Economic Order (NIEO), MNCs had been identified as one of the greatest impediments to development.

It is important to remember that the “third” or developing world is not the monolithic bloc that appears in introductory international relations courses and textbooks. Singapore, for example, shares a Southeast Asian neighourhood with the Philippines and very little else; with the benefit of hindsight, this Asian tiger had no genuine interest in the confrontational rhetoric it endorsed in the 1970s. It is also important to be aware that OECD member states are not immune to the idea that MNCs pose challenges to national economic development and political autonomy: Canada, France, Mexico, and Japan have a history of screening, regulating, and even dissuading FDI. By the 1970s it was clear that MNCs were perceived as a potential threat by many states, and a necessary instrument of development by other states, and these competing evaluations of the question of regulatory control did not always fall neatly along the textbook divisions of international political theory. Not surprisingly, however, it was the major capital exporting states (the places from which the most influential and powerful MNCs came — the US, Great Britain, the Netherlands, and West Germany) that most clearly supported the status quo.

In the 1960s and early 1970s the Realist notion that international relations existed as an anarchical system in which states were left to their own devices was yet to be seriously questioned, and the idea that states should control and confront MNCs in order to promote national interests could appear as conventional wisdom. It was obvious, however, that most industries were oligopolistic, with powerful MNCs in oil, bauxite, copper, plantation crops, and a host of other industries figuratively (and literally?) holding producer states over a barrel. The Westphalian guarantee of juridical independence was cold comfort to states that either lacked genuine autonomy, or pushed back against and/or nationalized MNC operations only to find that these giants could prevent newly indigenous production from making it to market, and might even push to undermine or change the policies or leadership of a host state. In Chile, both of these things happened.


Unilateral Regulation

Nevertheless, the 1970s was a decade of largely unilateral confrontation with MNCs, fueled by the development of strong nationalist sentiments in many countries, some of which invoked memories of past corporate interference, and others which sought to use MNCs as an expedient distraction for unpopular government policies or leaders. In developed economies MNCs were sometimes used as a rallying call for nation-building, and Canadian Prime Minister Pierre Trudeau was particularly fond of this strategy. In France and Japan, inward FDI could pose threats to national champions and import substitution industrialization respectively. Each of these countries demonstrated reservations about unregulated inward FDI, but only Canada (National Energy Policy 1980) was willing to move in the direction of nationalization. In LDC states, however, confrontations were often more overt, and between 1960 and 1976 71 countries nationalized 1,369 enterprises in a range of industries, but concentrated in extractive sectors.


Multilateral regulation

Less frequently states can combine to present a common, typically regional, response to MNCs, the classic example of which is the robust code of conduct embedded in the Andean Pact 1969. By the late 1980s, the Andean Pact was evolving into a Regional Trade Agreement (RTA) with a more pragmatic attitude toward MNCs, and a growing interest in political integration among the member states of Bolivia, Colombia, Peru, and Ecuador, as signaled by its new characterization as the Andean Community (1996). In the 1970s, however, the Pact was the best example of how the perils of unilateral confrontation with MNCs could be mitigated by the simple principle of strength-in-numbers.

Other multilateral initiatives exist, including the OECD code (Guidelines for Multinational Enterprises 1976) but this initiative is not strictly regional, and is aimed less at curbing unsavory MNC activities in host states than ensuring that MNCs from (and in) OECD countries can be as unfettered as possible in pursuing their business objectives.
Universal Codes     

The holy grail of international regulation might be described as a mandatory, enforceable set of rules applicable to all areas of MNC activity, and presided over by a near universally-membered intergovernmental organization like the UN or one its affiliated bodies. The International Labor Organization (ILO) with its systematically articulated codes might be the nearest available approximation to this vision, but its lack of enforcement capacity give it all the authority of Sisyphus commanding his boulder to roll to the top of the mountain. More optimistically, and pragmatically, it has been suggested that, while such a regime might never be attained, regulations might emerge on an industry-by-industry basis creating a patchwork of norms that could eventually create a more universal normative framework. The World Health Organization/UNICEF code on breast milk substitutes in the wake of the Nestlé case is sometimes offered as evidence for such optimism. For all practical purposes, however, universal codes remain more an ideal than reality. But the UN system has proven adept at helping to shape and ground a universally available framework for reconciling human rights and MNC activities, as demonstrated in the modest gains of the Global Compact and the evolving “UN guiding principles” advanced by special envoy John Ruggie. But this initiative is better understood in the evolving notions of MNC responsibility discussed below, and not in the essentially outmoded idea of governmental or intergovernmental management.


The New Pragmatism

Prior to the 1980s, the failure to achieve effective regulation of MNCs at the international level led numerous states, unilaterally or multilaterally, to impose controls of their own on foreign corporations operating in their territory. This had led to confrontation and some gains, the most obvious of which were OPEC and the International Bauxite agreement, outcomes that demonstrate that the MNC oligopolies in some industries (in these cases oil and aluminum) could be challenged. But in most industries and cases states were left to fend for themselves, and their unilateral policies seldom achieved their objectives. The era of confrontation had seemed to run its course, and the tide shifted away from a perceived need to keep MNCs at bay, to a recognition that they were often the only viable source of foreign capital.

To what extent was this shift a function of empirical realities? to what extent was it a function of ideology? Had the world changed as much as the rhetoric of globalization suggested, or were states being persuaded to accept a policy of increased corporatization of the world as a necessary fact? Whatever the truth, it seemed clear by the 1980s that states had lost the political capacity, economic power, or ideological freedom to act and think in a manner contrary to the perceived wisdom that corporate expansion was at best a panacea for all economic woes, and at worst a necessary evil. This “consensus” had begun to transcend US or British foreign economic policy, and was becoming part of the mantra of increasingly influential IGOs like the IMF, World Bank, and soon to be reborn GATT. By start of the 1990s, Bill Clinton was able to proclaim that “globalization is not a policy choice” but a “fact,” Tony Blair’s to advance the notion that globalization is both “irreversible and irresistible,” and Susan Strange compelled to assert that “the only thing worse than being exploited (by MNCs) is not being exploited.” This “new pragmatism” did not derive from a sudden affection for MNCs. Nor did it need to involve a capitulation to the politically expedient rhetoric of economically dominant states. It spoke as much as anything to the perception that the confrontations of the past had achieved nothing, and that MNCs were a crucial, and often only, source of development capital.


Where are we now?

The 1960s and 1970s was an era of MNC expansion and conflict in host societies, centred mainly in the less developed world.  The 1980s, by contrast, was characterized by a new pragmatism that pushed hitherto suspicious states into closer collaboration with foreign companies. Whether expressed for or against greater openness to FDI, debates from 1945 onward were framed by assumptions for or against the continued relevance of a state-centric paradigm. But by the 1990s, the globalization of production and finance (itself largely a product of MNC activities) appeared to place states and MNCs on a more or less equal footing. With power comes responsibility, and MNCs were now being pushed to recognize a greater role in confronting global issues. Corporate Social Responsibility (CSR) became the catch phrase for this new ethos. For the first time MNCs were being asked to do more than desist from creating or exploiting inequities in host societies: they were being asked, and in some cases asking themselves, to address and help rectify social ills.

One symbol and catalyst for this change was the United Nations Development Program’s 1994 Human Development Report. In this report the traditional Realist notion of international security was challenged by a much more amorphous “human security” paradigm. It had become obvious that the footloose MNC was far more adapted than the state to thrive in an era of globalized economic networks. It was now acknowledged that MNCs, like other nonstate actors, were also better suited than states to the emerging idea that the proper focus for security should be the individual and that striving for national, regional, and global stability made as much sense for business as it did for foreign policy. Clearly the potential for MNC abuses is large in weak states and/or zones of conflict (e.g. the eastern margins of the Democratic Republic of Congo, Nigeria, Sudan, Irian Jaia, Colombia, Ecuador, Angola, New Guinea). But just as clearly, it is argued, MNCs can and should be part of the solution and in many instances are one of the only effective institutional entities present. Companies like Talisman, Shell,  Occidental, Texaco, Barricks, DeBeers, and Freeport-McMoran, accused in the past of exacerbating conflicts and inequalities,  now show an increased willingness to cooperate with governments, civil society, and the UN in implementing business strategies that reconcile profits with sustainability, development, and human rights.

There is little evidence of altruism in this shift. Just as numerous LDCs in the 1980s came to see MNCs as the only dance partners available (however often or clumsily they landed on their toes) MNCs since the 1990s have shown an increasing pragmatism. There are strong political and economic incentives at play reflecting the reality that the very successes of MNC expansion have unleashed many of the forces that can now be arrayed against them. The advent of global communications, for example, itself largely a product of corporate innovation, is a double edged sword, enabling on the one hand unprecedented and worldwide corporate control and coordination of industrial production, while on the other hand giving rise to social media and civil society networks well placed to monitor, and increase public awareness about, working conditions in what was once the shadowy periphery of global business. The notion of CSR has had less to do with the awakening conscience of global commerce than its growing realization that MNCs are increasingly vulnerable to bad press. Long before the world wide web, the successful consumer campaign against Nestlé (by revenue the biggest food company on the planet) had shown this vulnerability. Confronted with increasing advocacy campaigns and lawsuits – many in the context of the widening application of a long disused piece of American legislation called the Alien Tort Claims Act—MNCs have never had more compelling reasons to understand their human rights obligations.

Now, as always, MNCs inspire the creation of numerous voluntary codes of conduct. What has changed is that the number of codes has increased dramatically, and many of them promulgated by MNCs themselves. These codes, led first by US MNCs, are wide ranging but place a particular emphasis on the social and environmental impact of business activities. There are many sorts of codes, with a wide array of stakeholders, and recent scholarship has catalogued a complicated typology ranging from vague declarations of corporate norms, to fairly robust and precise principles of self-regulation. Not surprisingly, there is much discussion surrounding the limitations, implementation, and motives of these codes, which now (as always) remain voluntary. For one thing the sheer number of MNCs means that, for the time being, codes must be limited to sectors where MNCs are most likely to be American or European, particularly sensitive to brand image and corporate reputation, and whose business activities have a high level of visibility in the developed countries from which they derive. The bottom line, however, is that there is more than one bottom line, and that one of the prices of increased power for MNCs is increased responsibility.