According to John Dunning’s OLI theory, flawed property laws that are ineffective to protect undiffused property rights encourage MNCs to internalize their production. The MNCs can also internalize the market though the establishment of foreign subsidiaries (e.g. R&D centres) that may exploit the use of firm-specific proprietary knowledge and invent new sources of knowledge. However, I argue that the weak intellectual property (IP) protection in China discourages MNCs from investing in China, despite its attractive low labour costs.

     China has the most MNC R&D centres in the world than in any other locations. By 2012, more than 1,600 R&D centres were founded in China. There are many benefits that came along with this phenomenon. First of all, these centres result in knowledge spillover that strengthens the productivity of local Chinese manufacturers over time. Secondly, it expands the Chinese consumer market by developing new goods and services for local need. MNC R&D centres also provide relatively well-paying jobs for local citizens. Hence, these R&D centres are both important to the MNCs and China.

     However, there are many shortcomings too. For example, institutional IP protection is significantly lacking in China. Thus, MNCs in China face the risk of competitors (local and foreign MNCs) expropriating their core technologies at mere or even no legal consequences. As a result, weak IP protection in China erodes the capability for MNCs to internalize their proprietary knowledge, hence discourages MNCs from investing in China. Also, MNCs will need to resort to other more expensive routines and systems to safeguard their core knowledge, leading to even higher factor costs.

     The Chinese government did try to strengthen IP protection in the country. For example, it passed the Foreign Trade Law in 2004, which “empowers the investigation of IP violations and specifies penalties, including fines, confiscations, and suspension of trading privileges”. However, its legal institution is still not on par with the standards in developed economies, with enforcement and regulations being lax oftentimes.

     With that being said, the low labour and land costs in China no longer attract MNCs that much when the costs of weak IP protection are so high. In fact, China’s weak IP protection represents a locational disadvantage for foreign direct investment.

Source: Holmes, R. M., et al. “The Effects of Location and MNC Attributes on MNCs’ Establishment of Foreign R&D Centers: Evidence from China.” Long Range Planning, vol. 49, no. 5, 2016, pp. 594-613.

Corporate social responsibility (CSR) was shown in class to be a burgeoning field of ethics for MNCs to adapt to with varying effects. However, I want to highlight a new field of CSR concerning financial MNCs that have begun to transition them into a new era of responsibility.

Socially responsible investing (SRI)  is a result of financial firms choosing new approaches to how portfolios manage portfolios. They encourage strong practices that promote things like environmental sustainability, diversity and inclusion, and human rights. Traditionally, these exclude social “bads” such as firearm companies, tobacco companies, and fast food manufacturers to choose other stocks and bonds that have a gentler impact socially. This can be viewed as a new form of how corporations are looking to take responsibility for their firms investment procedures, as they understand their role in promoting problematic, or unsustainable business practices.

For such wealth management firms such as Wealthsimple,  they prominently use SRI in order to advertise their firm as different from others. They highlight the differences in a typical portfolio compared to their SRI portfolio, even stating that over a quarter of Wealthsimple clients have chosen an SRI portfolio. They tout the sheer number of funds invested in SRI around the world, which they label at $22 trillion but the number could be quite higher (Wealthsimple, 2019). For new investment firms, SRI is seen as a new way forward, breaking apart from the mould of older investment firms that both evasive in their ability to accept responsibility in the past.

While some see SRI as a new means for the firm to exercise responsibility, they really represent the individualization of investing but in a new way. Firms in the past through devolution and deregulation were able to move risk toward the individual as the hollowing out of the state occurred, removing responsibility from the state. The rise of SRI instead can be seen as the devolution of responsibility from the firm to the consumer, where it’s the consumer’s choice to make socially inclusive decisions (O’Rand and Shuey, 2007). For that reason, the actions of firms to offer SRI is a good step toward responsibility for their investment practices, but it shouldn’t be on the consumer to make those decisions; firms are still dodging the bullet.

While CSR is a new arena for the corporation, true responsibility will occur when the firm, not the consumer, takes the agency to move toward more sustainable business practices.

References

O’Rand, A. M., & Shuey, K. M. (2007). Gender and the devolution of pension risks in the US.Current Sociology, 55(2), 287-304. doi:10.1177/0011392107073315

Wealthsimple: Socially Responsible Investing. (n.d.). Retrieved from https://www.wealthsimple.com/en-ca/feature/socially-responsible-investing/