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.

     In short, the Global Compact is a set of principles modelled to a substantial extent of the Geneva Convention on human rights protection. More importantly, it is an attempt to create a new mode of global governance by bringing together MNCs into the human rights and global governance discourses. It poses as a partnership between states and MNCs, in which the Compact encourages good social, political and economic behaviours not only from the states, but from MNCs as well. The Compact serves as a contrast to the traditional realist attitude, in which the states serve as the centre of the global governance discourse. As we move to the contemporary era with more MNC involvement, global institutions like the UN are looking to cooperate with MNCs too. In other words, MNCs are now partnered with states to deal with global issues as they have risen to become important social, political and economic actors.

     However, like many other attempts to instil corporate social responsibility in MNCs, the Global Compact is voluntary, meaning that it is non legally-binding. It is because the UN is not granted with any legal power to enforce and coerce law-binding behaviours on its member states. The world is an anarchical system, which makes monitoring efforts nearly impossible.

     Due to the voluntary nature of the Global Compact, the realists think that it can be effective if only the signatory states want its principles to matter and make an effort to enforce them. According to the constructivists though, they think the Compact matters and can be effective because it can change how MNCs, and global citizens as a whole, the way they look at the world in the long haul. In other words, they argue that norms matter in international law. I agree that the Global Compact is hopeful in bringing a positive impact on corporate social responsibility because norms are subject to change, so there is much room for progress. Similarly, the way we look at security has changed: now it is fashionable to talk about human security, which differs from national security that focuses on states (we tended to talk like this as the realist model was dominant).

     What is your take on the effectiveness and future of the Global Compact?