The role of oil and gas multinationals in
achieving the SDGs
An institutional analysis
FritsThe role of oil and gas multinationals in
achieving the Sustainable Development Goals
An institutional analysis with a focus on Shell in Nigeria
MSc Thesis
T.W.L. Kuijten
Supervisor: Prof. Joyeeta Gupta Second Reader: Drs. Courtney Vegelin
I, Tessel Kuijten, have read and understood the University of Amsterdam plagiarism policy and I declare that this thesis is entirely my own work, all sources have been properly acknowledged, and I have not previously submitted this work, or any other version of it, for assessment in any other paper.
Signature Date
Table of content
Chapter 1: The role of oil and gas multinationals in achieving the Sustainable Development Goals 9
1.1. Introduction 9
1.2. Problem Statement / Gap in knowledge 10
1.3. Research Questions 12
1.4. Analytical framework 12
1.5. Outline of thesis 15
Chapter 2: Theoretical framework 15
2.1. Introduction: The role of MNCs in sustainable development 15 2.2. The impacts of MNCs on development in host countries 16
2.2.1. Positive impacts 16
2.2.2. Negative impacts 17
2.3. Contributing factors 21
2.3.1. Factors at the global governance level 21
2.3.2. Host country characteristics 24
2.3.3. Industry-specific factors 26
2.4. The driving forces of MNCs 31
2.5. Inferences 33 Chapter 3: Methodology 34 3.1. Introduction 34 3.2. Epistemology 34 3.3. Literature review 34 3.4. Document analysis 35
3.5. Case study: Shell in Nigeria 35
3.5.1. Introduction 35
3.5.2. Limitations of conducting a case study 36
3.5.3. Context and scope 36
3.5.4. Data collection 37
3.6. Operationalization 40
3.7. Ethical considerations 42
3.7.1. Informed consent 42
3.7.2. Privacy and confidentiality 42
3.7.3. Reciprocity 43
3.7.4. Managing expectations 43
Chapter 4: The role of SPDC in Nigeria’s pathway to SD 43
4.1. Introduction 43
4.2. Setting the context 44
4.2.1. Nigeria 44
4.2.2. The impact of Nigeria’s oil industry 45
4.2.3. SPDC 48
4.3. Nigeria’s institutions on SD: what role for the private sector? 50
4.4. Instruments emerging from the institutions 52
4.5. Shell/SPDCs driving forces 54
4.5.1. Profit 54
4.5.2. Reputation 55
4.5.3. Social license to operate 56
4.6. Inferences 57
Chapter 5: Impact and re-design of the instruments 57
5.1. Introduction 57
5.2. The JV agreement between NNPC and SPDC 57
5.3. Environmental regulations 60
5.4. The NEITI Act 69
5.5. SPDCs self-regulatory instruments 72
Chapter 6: Conclusions 76
6.1. Introduction 76
6.2. Reflection 76
6.2.1. On the methods 76
6.2.2. On the findings 77
6.3. Conclusions and recommendations 79
6.3.1. Conclusions 79
6.3.2. Recommendations 85
Bibliography 88
Appendix 1 – Literature review / key search terms 103
Appendix 2 – Nigeria and the Niger Delta 104
Appendix 3 – Categorization of respondents 105
Appendix 4 – Interview guides 106
Appendix 5 – Letter of Approval DPR 107
Abstract
For the next 15 years the Sustainable Development Goals (SDGs) are to provide guidance to the global community to advance sustainable development (SD). For the implementation, the contribution of the private sector, including multinational corporations (MNCs) is expected. There is a wide body of literature on the role of MNCs in development; it addresses the powerful and critical position of MNCs as economic actors vis-à-vis achieving SD, and shows their potential contribution, both positive and negative. Little research is done however on the implications thereof for the design of instruments that can enhance their contribution. The role of oil/gas MNCs is particularly relevant, since they supply energy, which is vital for development. However fossil fuels contribute to climate change, which negatively impacts prospects for achieving SD. Hence, this research addresses the question: under what circumstances – and through the use of what instrument or combination of instruments – can oil/gas MNCs contribute to achieving the SDGs? This question is examined by looking at multiple levels of governance, using an adapted version of Young's framework for institutional analysis. A case study was conducted on Shell's subsidiary SPDC, operating in Nigeria.
The findings can be summarized as follows. First, SPDC does not comply with formal national regulations. Second, SPDC takes a formalistic approach towards its obligations to contribute to achieving SD: (i) it does no operate in the spirit of informal commitments of the global community as a whole to achieve SD and to address climate change, and (ii) it violates informal global guidelines which address MNCs directly to contribute to SD (by protecting the environment, respecting human rights, and exercising transparency). Third, SPDCs CSR instruments do not contribute to SD.
The re-design of instruments that is suggested - taking into account SPDCs driving forces of profit and reputation – consists of: (a) independent regulatory oversight of the oil industry to ensure enforcement of laws; and (b) an extended scope of transparency obligations that guarantees public access to (i) contractual agreements governing oil extraction, (ii) oil companies’ calculations of costs, taxes and royalties payments, and (iii) documents on oil companies’ environmental performance. It should improve SPDCs performance by creating accountability and reputational risk vis-à-vis its performance, and ensure that the government receives its fair share of the resource wealth.
The research concludes that enhancing the contribution of oil/gas MNCs to achieving the SDGs also requires action at the global level in the form of: (1) commitments on the phase-out of fossil fuels with clear deadlines and targets, to decrease demand for oil – since oil/gas MNCs will continue extraction as long as it is economically viable, and (2) regulations that prevent tax evasion by (illegal) profit repatriation.
List of Figures, Tables and Boxes
Figures:
Figure 1. Analytical framework for institutional analysis
Figure 2. Institutional analysis of the JV agreement between NNPC/SPDC Figure 3. Institutional analysis of Nigeria’s environmental regulations Figure 4. Institutional analysis of the NEITI Act
Figure 5. Institutional analysis of SPDCs self-regulatory instruments Tables:
Table 1. Typology of instruments
Table 2. The contribution of MNCs to achieving the SDGs
Table 3. Global governance efforts to enhance MNCs contribution to SD Table 4. The relative power of MNCs vis-à-vis host countries
Table 5. Factors contributing to creating positive or negative impacts of MNCs in host countries Table 6. MNCs’ driving forces
Table 7. Operationalization of the institutions Table 8. Operationalization of the instruments
Table 9. Operationalization of the driving forces of Shell/SPDC
Table 10. Operationalization of the impact of the instruments on the three dimensions of SD Table 11. Instruments in Nigeria to enhance the contribution of oil/gas MNCs to SD
Table 12. The contribution of oil/gas MNCs to achieving the SDGs Boxes:
Box 1. The PIB
List of Abbreviations
AGRA Associated-Gas Flaring Reduction Act AI Amnesty International
AR Shell Annual Report boe barrels of oil
CCS Carbon Capture and Storage
COP Conference of the Parties to the Climate Convention CSR Corporate social responsibility
DC Developing country
DPR Department of Petroleum Resources
EGASPIN Environmental Guidelines and Standards for the Petroleum Industry in Nigeria EIA (A) Environmental Impact Assessment (Act)
EITI Extractive Industries Transparency Initiative ERA Environmental Rights Action
FoIA Freedom of Information Act FGN Federal Government of Nigeria
GMoU General Memorandum of Understanding
GP Greenpeace
IC Industrialized country IMF International Monetary Fund IOC International Oil Company JIV Joint Investigation Visit JV Joint Venture
LNG Liquefied Natural Gas LUA Land Use Act 1978
MDGs Millennium Development Goals MEnv Ministry of Environment MPR Ministry of Petroleum Resources
NACGOND National coalition on gas flaring and oil spill in the Niger Delta ND Niger Delta
NEITI Act Nigerian Extractive Industries Transparency Initiative Act NGO non-governmental organization
NRGI Natural Resource Governance Institute NNPC Nigerian National Petroleum Company
NOSDRA National Oil Spill Detection and Response Agency OML Oil Mining Lease
PPP Public-Private Partnership
RENA Remediation by Enhanced Natural Attenuation SACA Stakeholders Alliance for Corporate Accountability SAR Shell Annual Report 2014
SD sustainable development SDGs Sustainable Development Goals SDN Stakeholder Democracy Network SPDC Shell Petroleum Development Company CSV Corporate Shared value
SR Shell Sustainability Report 2014
UNEP United Nations Environmental Programme UNDP United Nations Development Programme
UNFCCC United Nations Framework – Convention on Climate Change
Acknowledgements
I want to thank my supervisor Prof. Joyeeta Gupta, my parents, Ellen Dupuis, Jip Kruis, Bert Ronhaar, Inemo Samiama, Pier Vellinga, Onno Blok, Prof. Fagbohun, Prof. Adejonwo-Osho, Toyin Akinosho, Femke van Zeijl, Mr. Legborsi, Pedi Obani, Mr. Kennedy, Surveyor Efik, Ishmael Atoridobu, SPDC, the Department of Petroleum Resources and especially Mr. Ene-Ita, Celestine Akpobari, Chief Eric Dooh, Prof. Naanen, Ferdinand Giadom, Prof. Chidi Ibe, Prof. Bamiro, Prof. Popoola, Wale Olayide, Onekachi Okoro, Father Obi, Anyakwe Nzirimov, Dr Odutte, Adetokunbo Lawrence, Prof. Enuvie, Prof. Ekanem, Dr. Dickson Achimota, Dr. Tari Dadiowei, Mr. Cyrus, Mr. George, Sylvester, Nedo Osayande, and Alagoa Morris. My gratitude goes out especially to SACA (Stakeholders Alliance for Corporate Accountability), including Father Kevin O'Hara, Chidi Usanga, Willem Schade and Mr. Aba for their warm welcome and very helpful assistance during my visit to Yenagoa. I should thank the many other inviting, hospitable people I have met during my fieldwork, who assisted in my research or made my stay otherwise an altogether unforgettable experience.
Chapter 1: The role of oil and gas multinationals in
achieving the Sustainable Development Goals
1.1. Introduction
“Many of the environment and development problems that confront us have their roots in this sectoral fragmentation of responsibility. Sustainable development requires that such fragmentation be overcome” (WCED 1987, 75).
During the last 15 years, the world has seen an increasing engagement of citizens, NGOs and government organizations around issues of development. In September 2015 the Sustainable Development Goals (SDGs) were adopted as the 'global agenda for change' for the coming 15 years.1
The SDGs are an initiative of the United Nations (UN), following up on the Millennium Development Goals (MDGs). The MDGs created momentum that brought the issue of development back on the international agenda; it mobilized public attention and overcame aid fatigue (Rippin 2013, 7). While the MDGs were mainly focused on lifting people in DCs from poverty,2 the SDGs aims to achieve 'broad-based’ sustainable development (SD) by promoting sustained and inclusive economic growth, social development, environmental protection and the eradication of poverty and hunger (UNGA 2015). The SDGs are integrated and indivisible (successes and failures in one goal are linked to other goals), global in nature and universally applicable (ibid, 13). They aim to tackle the root causes that prevent SD from materializing (UN 2015b).
While the primary responsibility for the implementation of the SDGs lies with national governments, the SDG framework stresses that implementation requires a concerted effort and active engagement of all stakeholders (UNGA 2014, 9; Lucci 2012, 2). The private sector is one of the stakeholders that shares responsibility for achieving the SDGs (see 1.2). Recognition of the important role of the private sector is well-established (WCED 1987; Humphreys 2014, 7), also illustrated by the many global initiatives that aim to enhance their contribution (see Table 2). As the SDGs, these initiatives mainly rely on MNCs' voluntary contribution and do not have the power to sanction non-compliance. Though they have created public awareness and transparency, thus increasing accountability of MNCs vis-à-vis their social performance, the negative impacts persist (see 2.3.1.). The SDGs promote multi-stakeholder partnerships for the implementation of
1 See http://www.un.org/sustainabledevelopment/development-agenda/ (accessed on 24 January 2016). 2 See: http://www.undp.org/content/undp/en/home/mdgoverview/post-2015-development-agenda.html (accessed on 31 December 2015).
the SDGs.3 However, public-private partnerships (PPPs, a.k.a. ‘Type II Agreements’), recognized as an important tool for achieving SD,4 which are supposed to address the three global governance deficits of regulation, implementation and participation (Bäckstrand 2006, 291) do not live up to expectations (Chan 2014; Pattberg et al. 2012). First, combining the goals of participation and implementation can be counter-productive: effective implementation requires like-minded partners that share common interests, but broad-based participation decreases the likelihood of such like-mindedness (Biermann et
al. 2007, 19); second, partnerships are mostly found in areas that are already heavily
regulated, thus contributing little to the regulation deficit (ibid, 20). Furthermore: (i) weak institutions at country level might impede creating an adequate risk-return; (ii) dilemmas might arise about the level of private ownership acceptable in public assets; and (iii) a lack of trust between partners may hamper the success of a partnership (UNGC 2015, 9).
This research focuses on the role of MNCs, which are prominent actors within the private sector: At the end of 2010, there were more than 100,000 MNCs controlling over 1 million foreign affiliates (UNCTAD 2011).5 MNCs have USD7.7 trillion invested in developing economies (UNCTAD 2014, 156).
The Chapter is structured as follows. Section 1.2. discusses the problem statement and the gap in knowledge this thesis addresses. In Section 1.3. the research questions are formulated; Section 1.4. explains the analytical framework that guides the analysis of the data. Section 1.5. provides the outline of this thesis.
1.2. Problem Statement / Gap in knowledge
The MDG/SDG project, some argue, forms the blueprint for transformation of the human condition (Sachs 2012; Hajer et al. 2015); it is necessary to stretch ambitions and mobilize political commitment (Fukuda-Parr 2008). Others are more critical, for its failure to address the real issues that stand in the way of achieving SD, such as global inequality and capitalism (Saith 2006).
The MDGs accomplished substantial progress in development: more than 1 billion people were lifted out of extreme poverty; Sub-Saharan Africa achieved a 20% increase in the net enrolment rate in primary school in 2000-2015 (compared to 8% in 1990-2000; UN 2015a, 4). Unfortunately, progress has been uneven and not all goals were achieved. In 2011, nearly 60% of the world’s 1 billion extremely poor people lived in just 5 countries (UN 2015a, foreword). The MDG on environmental sustainability remains a challenge as
3 Goal 17; see also the Preamble and para. 70 on the establishment of a multi-stakeholder platform on science, technology and innovation (UNGA 2015).
4 Confirmed at the UN Summit in Johannesburg in 2002 (Seck 2015, 384).
5 Sauvant (2015, 64) refers to UNCTAD WIR 2011; In 2013 total sales of MNCs’ foreign affiliates amounted to USD 35 trillion, while world exports were USD 23 trillion.
greenhouse gas (GHG) emissions have increased by more than 50% since 1990 (UN 2015a, 7).
The SDGs are meant to complete the unfinished business of the MDGs and take into account the lessons learnt from the MDGs. For example they aim for a participatory approach as opposed to the top-down approach of the MDGs, which undermined ownership and commitment to the MDGs (Rippin 2013, 3; Fukuda-Parr 2008, 1).
The final resolution of the United Nations General Assembly on the SDGs (UNGA 2015) refers 15 times to the private sector; it does not assign responsibilities to the private sector with respect to specific goals, but explicitly mentions it as one of the stakeholders that is expected to contribute to the implementation of the SDGs. The private sector "ranging from micro-enterprises to cooperative and multinationals" (ibid 10) is expected to (1) provide financial resources (ibid 10), (2) enhance scientific research capabilities and technologies in industrial sectors, especially in DCs (ibid 28), (3) act as a driver of economic growth, productivity and job creation (ibid 29), (4) apply creativity and innovation to solve SD challenges, and (5) contribute to changing unsustainable consumption and production patterns (ibid 8).
There is a genuine concern though about the implementation of the SDGs, and in particular about how to get all stakeholders on board to contribute, since (1) the different interests and perspectives of the stakeholders are not easily reconciled (Kharas and Steven 2012, 13) and (2), the SDGs fail to assign concrete responsibilities to specific actors, which means no one can be held accountable for missing targets ('they merely form a wish list’; Pogge and Sengupta 2014, 3; also Hajer et al. 2015, 1657). It creates the risk that notably the most influential agents, best suited to advance the goals, will look away from their responsibilities (ibid. 4; also Quintos 2014). MNCs are one of those influential agents, for the considerable impact of their operations on development processes in the host countries they operate in (see 2.2.) and the power they enjoy at global governance level, and often also vis-à-vis host country governments (see 2.3.).
The literature review (see 3.2.) on the role of MNCs in development (see Chapter 2) shows that the expectations expressed by the SDG framework may in some cases materialize (see 2.2.1.). Their impact, if positive, tends to be concentrated in economic contribution (complementing government revenues, transferring technology, increasing competition and stimulating entrepreneurship; Oetzel and Doh 2009, 108). But it seems doubtful whether the SDG framework can accomplish MNCs’ contribution to achieving the SDGs voluntarily, considering the negative impacts on SD they also create (see 2.2.2), and since they are not driven by aspirations to contribute to achieving SD, but rather by profit (see 2.4.).
In sum, the implementation process of the SDGs needs to be strengthened by supportive mechanisms or government incentives (Kharas and Steven 2012, 13; Hajer et al. 2015, 1657). The literature does not provide an answer as to how to design mechanisms or incentives ("instruments", see 1.4.), so that they are effective in enhancing MNCs contribution to achieving the SDGs, given their driving forces. This thesis addresses this gap in knowledge.
Energy MNCs are particularly critical in development. They provide energy, which is vital for advancing SD (SDG 7; see 2.3.3.), but our current patterns of energy use are unsustainable (Vera and Langlois 2007, 875). Energy supply – mainly from fossil fuels – is the largest single source of GHG emissions,6 thus contributing to climate change, which in turn negatively impacts prospects for achieving SD (see 2.3.3.). The global fossil fuel industry is furthermore dominated by 5 to 7 major oil companies, also referred to as 'Big Oil', or: the 'supermajors', which strengthens their power and influence. Total revenues of the five major oil companies in 2011 amounted to USD1,838.6 billion (Pirog 2012).7
1.3. Research Questions
The main research question is: under what circumstances – and through the use of what instrument or combination of instruments – will oil/gas MNCs contribute to achieving the SDGs? This question will be researched by using Oran Young's framework for institutional analysis (see 1.4.), and by looking at the specific role of Shell/SPDC in Nigeria, the oil/gas MNC with the largest footprint in Nigeria (see 4.2.3.). The following subquestions will be examined.
1. What are the driving forces of oil/gas MNCs?
2. Which instruments exist to direct MNCs towards contributing to achieving SD, and could therefore be useful for achieving the SDGs?
3. What is the impact of those instruments on the three dimensions of SD, given the driving forces (the question of performance)?
4. How can we redesign instruments to increase their effectiveness in terms of their contribution to SD (the question of design)?
1.4. Analytical framework
IDGEC’s framework for institutional analysis of environmental change is grounded in a stream of analysis known as 'new institutionalism' that investigates how social institutions
6 26% of 2004 global carbon emissions was from energy supply; 19% of 2004 global emissions came from industry, which primarily involves fuels burned on-site at facilities for energy (IPCC 2007).
7 Shell accounted for USD 470.2 billion (Pirog 2012). In comparison: Nigeria's GDP in 2011 was USD 411.7 billion (WB data, retrieved on 11 December 2015).
determine societal outcomes (Young 2007, 6). Institutions are "a set of rights, rules and decisionmaking procedures that give rise to social practices, assign roles to participants in these practices, and guide interactions among the occupants of these roles" (Young 2007, 9). The framework was developed to examine the relationship between environmental institutions (and its institutional causes, e.g. incentives, penalties; Young 2005, 38), and organizations – i.e. material entities that have personnel, offices, equipment financial resources and (often) legal personality (Young 2007, 10) – to identify the mechanisms causing environmental change.
Young focuses on institutions since these are malleable (Young 2007, 18), which means that if the institutions generate impacts that are not as desired, a re-design might be able to bring improvements. This is not to say that the framework does not acknowledge that there are also 'other forces at work in human societies' (Young 2005, 38). In Young's research these forces are either an additional cause for environmental change just as the institutions are, or - as the institutions are rarely static and will not be immune to such forces - these forces could (also) change the institutions. Young refers for example to crony capitalism in DCs, creating 'rules' that bear little resemblance to the original institutional arrangements (Young 2005, 36).
The framework will be applied in an adapted version (Figure 1). Since the SDG framework requires implementation at national and local levels (see 3.5.), it will be applied in a case study context, to examine the interaction between the institutions at case study level that reflect the aspirations of the SDGs (upper middle box) and Shell/SPDC (see 4.2.3.) as the 'organization' (lower left box).
The instruments emerging from these institutions are the institutional causes (upper left box). The SDG framework uses goals and targets (see 1.2.) to realize implementation, but the toolbox of available instruments to direct the behaviour of MNCs is more diverse (see Table 1). The instruments can be divided into 4 categories. Public regulations are enacted by the state, self-regulatory instruments are designed and implemented by companies themselves, private instruments emanate from private actors, e.g. NGOs or civil society groups, while hybrid instruments involve the collaboration of public and private parties. A selected set of instruments (see 4.4.), considered most relevant in enhancing the contribution of the oil industry to SD, will be analysed (see Chapter 5).
A MNC’s behaviour is not only determined by the instruments, but also by its driving forces (see 2.4.). These will inevitably have a bearing on the impact of the instruments, and thus on SPDCs contribution to SD (see 2.5.). Driving forces are inherent
to any MNC and therefore treated as a ‘given’. Hence, they appear in the lower middle box as the ‘other than institutional causes’.
The instruments will be analysed by their impact on the three dimensions of SD (lower right box; see 3.6. for the operationalization); it will also be considered to what extent other forces in society have shaped the instruments (as per Young; see 2.3.1. and 2.3.2. for a discussion of the literature on possible forces in the context of this research). Once established what the impacts (lower right box) of the instruments are, given SPDCs driving forces, a re-design (upper right box) of the instruments will be considered in order to enhance their effectiveness.
The various concepts constituting the framework are each units of analysis. The instruments emerging from the instruments are the focal unit of analysis: the research focuses on their impact and re-design.
Table 1. Typology of instruments
Category Public regulation Private
regulation Hybrid instruments Self-regulatory instruments
Hard Soft ('suasive') Instruments Command-and- control Economic/ market-based Transparen cy Codes of conduct Goals/ targets Codes of conduct Litigation Certification Private contracting PPPs (‘Type II’ Agreements) Global partnership arrangement s Corporate Social Responsibi-lity, i.e. philanthrop y Corporate Shared Value, i.e. main- streaming sustainability in business operations to create win-win situations
Examples Law that prescribes environ-mental impact assessment Taxes / subsidies National transparen cy regulations UN Guidelines (see Table 3) SDG frame work CERES principles (see Table 3) MSC certification, Fair trade label EITI, UNGC (see Table 3) Multi-stakeholder partnerships as advocated by the SDG framework Social projects to build schools, health centres etc. Increase resource efficiency, recycling, address bottom-of-the-pyramid with your products
Sources: Newell (2001), Bäckstrand (2006), Porter and Kramer (2011), UNGC (2015), Pesmatzoglou et al. (2014), Panatoyou (1998), Chan and Pattberg (2007), Oetzel and Doh (2009), Harvey and Bice (2014).
The framework is furthermore useful to examine the mechanisms between the different elements (institutions/instruments, driving forces and impacts), as “[..] the formulation of the SDGs and all implementation efforts should be guided by existing knowledge about the drivers, dynamics, and limitations of social change processes at all scales, from the individual to the global.” (Norstrom et al. 2014, 8). Knowledge on these mechanisms will
add to the understanding of the circumstances under which MNC will contribute to achieving the SDGs.
Figure 1. Analytical framework for institutional analysis
Adapted from: IDGEC Science Plan (Young 2005)
1.5. Outline of thesis
This thesis is structured as follows. Chapter 2 provides the theoretical framework. Chapter 3 concerns methodology. Chapters 4 and 5 discuss the research findings: Chapter 4 sets out the context of the case study to the extent relevant and addresses subquestions 1 and 2: SPDCs driving forces and the existing instruments. Chapter 5 analyses the impact of the instruments, given these driving forces, and examines their re-design (subquestions 3 and 4). Chapter 6 first summarizes both literature and case study findings, and ends with conclusions and recommendations.
Chapter 2: Theoretical framework
2.1. Introduction: The role of MNCs in sustainable development
This literature review provides the necessary theoretical knowledge against which the findings of the case study will be tested. It provides the state of knowledge regarding the impacts of MNCs on SD (see 2.2), to determine to what extent the expectations expressed by the SDG framework are realistic (see 1.2.). Section 2.3. discusses the factors that
contribute to creating these impacts: the factors that shape the institutional landscape in which MNCs operate, at global (2.3.1) and at host country level (2.3.2.); and industry- and MNC-specific factors; the potential for oil/gas MNCS to contribute to achieving the SDGs will be discussed in more detail (2.3.3). MNCs driving forces are considered in Section 2.4. Section 2.5. concludes with the inferences from this Chapter.
MNCs are defined as for-profit organizations that operate internationally, with subsidiaries based in different countries ('host countries') than their home country.
The most widely used definition of SD stems from the Brundtland Commission report (WCED 1987), which reads: "development that meets the needs of the present without compromising the ability of future generations to meet their own needs" (ibid, 16). The report presented a vision of a more sustainable form of development in which economic, social and ecological development were compatible (Van Alstine and Barkemeyer 2014, 4).
2.2. The impacts of MNCs on development in host countries
2.2.1. Positive impacts
The contribution of MNCs to the development of the host countries in which they operate is mainly economic, realized through a number of ways. First, MNCs may complement domestic savings by paying taxes (Oetzel and Doh 2009, 108; UNCTAD 2011, 163), thus providing for financial resources to advance development of the country.8 Second, the foreign direct investments (FDI) from MNCs represent the largest source of external finance for DCs (UNCTAD 2014, 156).
Third, MNCs can 'break the cycle of poverty' (Gereffi 2004, 15), by utilizing the cheap labour available in DCs, which often is their comparative advantage (Zhang and Markusen 1999). MNCs may also create job opportunities by integrating local companies in their value chain (Clay 2005).9
Fourth, the activity of MNCs can positively impact local productivity: spurring local firms to become more efficient (Blomström 2002; domestic firms may learn from MNCs’ marketing strategies; Clay 2005), stimulating competition among firms (Oetzel and Doh 2009, 108; Giuliani and Macchi 2014, 492), or enhancing local entrepreneurship. An example of the latter is Coca-Cola in Africa which adopted a manual delivery approach
8 For example: Shell paid USD3 billion of royalties and taxes to the Nigerian government in 2014 (SPDC paid USD1.8 billion; SNEPCo paid USD1.2 billion). Oil accounts for 79% of the FGN’s revenues (ADB Nigeria Country Strategy Paper 2013-2017, 2; see http://www.afdb.org/fileadmin/uploads/afdb/Documents/Project-and-Operations/Nigeria%20-%202013-2017%20-%20Country%20Strategy%20Paper.pdf (accessed on 17 February 2016).
9 Oxfam did make some critical notes stating that employment numbers cannot tell what people can actually do with it (ibid, 15), and that it is not clear whether UI is creating need by advertising, or meeting the existing needs of poor consumers (ibid, 20).
using local distributors, to deliver its products to small-scale retailers in difficult to reach (dense urban) areas. By giving ownership of its manual distribution centres to locals, the company promoted entrepreneurship while it benefited from being able to reach more people with its products (Lucci 2009, 7).
Fifth, MNCs have the capacity (management skills and financial resources; Lucci 2012, 5) to bring innovation, through knowledge or technology spill-overs, which is important in achieving the SDGs (UNGA 2015, para. 70; also SDGs 9 and 17). It may for example enhance the productivity of the local economy (Kumar 1999, 81).10 The concept of frugal innovation has gained prominence in recent years. Research on this topic focuses on the design of products so that they are less expensive, easier to use and less in demand of infrastructure, to better cater the needs of people in DCs at the bottom of the pyramid, thus contributing to inclusive development (Van Beers et al. 2014, 4).
Finally, MNCs may also positively contribute to the other dimensions of SD: e.g. by diffusing best practices through their supply chains (Clay 2005), elevating environmental and social standards (Oetzel and Doh 2009, 108), and improve human rights (Cernic 2008, 73; Aguirre 2004, 76). There is evidence that woman participation in paid employment increased, as a result of MNC investments in DCs, and that income distribution became more equal (Cagatay 2001, 20). Cadbury Cocoa Partnership in Ghana provided for the training of locals, to enhance the sustainable production of cocoa. It improved the income of farmers and promoted gender equality, while the company benefited from enhanced farm productivity (Davies 2011, 7).
2.2.2. Negative impacts
Despite empirical evidence of MNCs’ positive contributions, a range of negative impacts of MNCs in host countries are identified.
First, MNCs employ strategies like transfer pricing,11 profit repatriation, and secret contracting to maximize their profits, at the expense of government tax revenues (UNECA 2015).12 Oxfam (2014) estimates the unpaid tax liability of companies vis-à-vis DCs at USD
10 For example: China needs western knowledge and technology to increase the productivity of its agriculture: the country has 21% of world population but only 9% of the worlds' areable land. Urbanization in China decreases the land available. Hence state-owned ChemChina intends to take over Syngenta; see: NRC Handelsblad (Leonie van Nierop) 4 February 2016, p. 7 "Met China wil Syngenta wél",
http://www.nrc.nl/handelsblad/2016/02/04/met-china-wil-syngenta-wel-1584815 (accessed on 4 February 2016).
11 As MNCs have multiple affiliates, they can trade intra-company at artificially low prices, ensuring that the profits accrue to the affiliate located in a low tax country.
12 See the documentary: "Stealing Africa: how much profit is fair?" (whypoverty.net), available at: http://www.whypoverty.net/video/stealing-africa/. According to global financial integrity, a non- profit advisory organization, every year approximately USD1 trillion flows illegally from DCs and emerging economies due to crime, corruption and tax evasion; which is more than these countries receive in FDI and ODA combined. It hampers the economic growth in these countries, see http://www.gfintegrity.org/about/ (accessed on 17 February 2016); UNECA estimates that between 2000 and 2008 Africa lost USD 50 billion
104 billion a year.13 In South Africa a MNC avoided paying USD2 billion in taxes based on its false argument that a large part of its business was located in the UK and Switzerland (UNECA 2015, 27). In Nigeria, the quantities of crude oil exported are underreported, while the government relies on the exporters' declarations of those volumes (ibid, 28). Similarly, in Mozambique official records show the export of 260,385m3 of logs and timber in 2012, while China alone imported 450,000m3 from Mozambique that same year. An example of unequal contracting comes from Guinea where a concession for iron ore mining with the potential of USD 140 billion was granted to a MNC for USD165 million, of which it subsequently sold off half to another firm for USD 2,5 billion (ibid, 31).
Second, MNCs may crowd out local firms (instead of stimulating competition), by increasing demand for skilled labour, driving up wages, with which local firms cannot compete (Barry et al. 2001, 14). Foreign firms may have a 'market stealing' effect, by reducing domestic productivity.14
Third, MNCs do not employ as many people as one would expect, relative to the volume of their economic activity. The top-200 MNCs, with revenues of 27.5% of world economic activity, employ only 0.78% of the world workforce.15 Furthermore, the role for MNCs to create employment is likely to decrease due to advancing technologies (Rotman 201316). The "fourth industrial revolution" - which refers to the digital revolution in which "a fusion of technologies is blurring the lines between the physical, digital, and biological spheres” - is expected to impact labour markets, e.g. by the displacement of workers by machines.17 Its exact consequences are insecure, but the types of jobs available are
undeniably changing: 14% of all factory workers globally have disappeared in the last seven years (Rotman 2013), while factories are traditionally an important provider of jobs for people in DCs that move to cities from the country side, when industrialization sets in.
Moreover, when MNCs crowd out domestic firms, they will adversely affect local employment (UN ECOSOC 2003, 9); and finally, supply chain integration (by which MNCs also create employment; see 2.2.1) is met with critique for the fact that MNCs often
annually (exceeding ODA at USD46.1 billion in 2012), due to 'illicit financial flows' (defined as ‘flows of money in violation of laws in their origin, or during their movement or use, and therefore considered illicit’) (UNECA 2015, 23).
13 A report by Christian Aid from 2008 found that DCs lost USD160 billion a year to tax evasion by MNCs. 14 See also: Kathuria (2000) on India's manufacturing sector; Aitkin and Harrison (1999) found that in Venezuela FDI negatively affected the productivity of domestically-owned plants.
15 Derived from a report by Global Policy Forum (2000); see
https://www.globalpolicy.org/component/content/article/221/47211.html (accessed on 17 December 2015).
16 Rotman refers to Brynjolfsson and McAfee of MIT Sloan School of Management.
17 The fourth industrial revolution was the main discussion theme at the World Economic Forum in January 2016, see http://www.weforum.org/agenda/2016/01/the-fourth-industrial-revolution-what-it-means-and-how-to-respond (accessed on 22 January 2016).
determine terms and conditions unilaterally which raises costs for local farmers if they are compelled to use certain seeds or products (Quintos 2015).
Fourth, there is empirical evidence that MNCs deliberately seek countries with low social (e.g. labour)18 and environmental standards (Humphrey 2014), to reduce operating costs and increase profit19 (Oetzel and Doh 2009, 108; Pesmatzoglou et al. 2014, 193), leading to human rights violations (Cernic 2008, 74), sweatshops20 and pollution havens (Tienhaara 2006). Violations in the extractive industry are also well documented, with Nigeria as the textbook example of how the environmental degradation caused by the oil industry led to human rights violations (e.g. Naanen 2013; AI 2013, 12).
Finally, MNCs’ role in innovation may be disappointing, if the technology transferred is not adapted to local needs (Haug 2012, 225). Small markets in DCs and the limited profit-making opportunities discourage MNCs to adapt technologies (Reddy and Zhao 1990). MNCs at times also actively prohibit technology spill-overs. MNCs use one-sided transfer agreements and patents to maintain control of their technology, leading to 'technological colonialism’ (Haug 1992, 212). Monsanto, a powerful MNC in the global seed market that aims to contribute to sustainable agriculture solutions,21 receives a lot of criticism for its monopolization of knowledge and technology ownership (Scoones 2008, 326). By patenting its seed (after genetic modification), Monsanto makes farmers dependent on its supply of the seeds at a price they cannot afford.22 So while (i) the transfer of technology is important for the development of DCs (UNGA 2015), (ii) most technology transfers take place through investments of MNCs (Haug 1992, 217; Kumar et
18 Apple was accused of dealing with suppliers in its global value chain that violate labour standards: e.g. NXP in the Philippines (see http://www.industriall-union.org/abuses-by-apples-supplier-nxp-get-worse-in-the-philippines ), and Foxconn in China (see: http://www.independent.co.uk/life-style/gadgets-and-tech/even-worse-than-foxconn-apple-rocked-by-child-labour-claims-8736504.html (accessed on 13 January 2016). 19 To illustrate: Adidas pays EUR1.5 million a year to Zinedine Zidane, while Asian workers making Adidas products are paid 0.47Euro/hour. Another example: in 2013 in Bangladesh, Rana Plaza collapsed – a building that housed clothing factories that produced for Western companies – Mango, El Corte Ingles - because the building was not suited for the drilling of heavy machines. These Western MNCs had failed to ensure the safety standards of their suppliers, causing the death of 1,134 people, and injuring over 2,000. After the incident, large textile companies allegedly did increase transparency in their production operations, but companies continue to increase profit by 'saving costs' on labour conditions, compounded by the circumstance that consumers are unwilling to pay a higher price. See: http://www.schonekleren.nl/campagnes/ranaplaza (accessed on 12 January 2016) and: https://www.oneworld.nl/business/positie-arbeiders-blijft-na-rana-plaza-onzeker (accessed on 12 January 2016); see also
http://www.retailwatching.nl/strategie/artikel/822ica_pQMm31VN1mEcuVw-230/is-de-modebranche-veranderd-na-rana-plaza.html (accessed on 12 January 2016).
20 Generally defined as a place where people work under socially unacceptable "slave" conditions" (Oxfam International 2006).
21 See http://www.monsanto.com/whoweare/pages/default.aspx (accessed on 20 January 2016).
22 In India, cotton farmers had to take out loans to purchase seeds, fertilizers, and pesticides, which made them vulnerable to bankruptcy affected by adverse weather, and the volatility of global cotton markets (Gutierrez et al. 2015). See also:
al. 1999, 82) and (ii) the inflow of FDI into DCs has increased significantly (Lucci 2012,
3),23 the positive impact on SD is not guaranteed.
Table 2 below compares the SDG expectations vis-à-vis the private sector’s
contribution to achieving the SDGs, to the findings from the literature.
Table 2. The contribution of MNCs to achieving the SDGs
SDG expectations (UNGA 2015)
Findings from the literature on MNCs’ contribution to development in host countries
"Provide financial
resources" (para. 41,43) - Of the 100 largest economies in de world 51 are corporations, 49 are nations (see footnote 43); - In 2010 over half of global foreign direct investment (FDI) inflows were
going to DCs; But:
- MNCs are involved in creating illicit financial flows constituting a loss of (tax) revenue for DCs (UNECA 2015).
"Enhance scientific research, capabilities and technology in industrial sectors" (para. 28)
- MNCs bring technology which may spill over onto local companies, increasing domestic capabilities (UNCTAD 2011, 163; Lucci 2012; Blomström 1998);
But:
- MNCs fail to adapt technology or actively (Madu 1989) prohibit transfer (Haug 1992).
"act as a driver of economic growth, productivity and job creation"
(para. 67)
- FDI leads to economic growth, employment, infrastructure (UNCTAD 2011, Gereffi 2004);
- MNCs stimulate entrepreneurship, local competition (Lucci 2012; Davies 2011; Clay 2005)
But:
- MNCs only employ a relatively small portion of the global population (Global Policy Forum 2000);
- Replacement of workers by technology leads to fewer job opportunities for low-skilled workers (Rotman 2013);
- Industries that rely on capital-intensive technology (Madu 1989) cannot use cheap labour which is generally the competitive advantage of DCs (Gereffi 2004);
- MNCs crowd out other firms (Barry et al. 2001). "Apply creativity and
innovation for solving SD challenges" (para. 27, 67)
- MNCs possess the management skills and financial resources to bring innovation (Lucci 2012; Beers et al. 2014 on ‘frugal innovation’)
"Contribute to changing unsustainable consumption and production patterns" (para. 28)
- MNCs may raise environmental standards applied by domestic firms in the supply chain (Clay 2005);
- MNCs may elevate labour conditions or human rights standards (Oetzel
23 Over half of global foreign direct investment (FDI) inflows are going to developing countries: a total of USD574 billion in 2010 (four times larger than official development assistance).
and Doh 2009, Cernic 2008, Dowell et al. 2000, Wheeler 2001; Clay 2005);
But:
- MNCs may also neglect environmental standards in host countries (Humphrey 2014) and abuse lower labour/human rights standards (Sethi 2002).
2.3. Contributing factors
This section discusses the literature on the factors that contribute to creating MNCs' impacts on SD in host countries. Some factors concern the current design of global governance (2.4.1.); in addition domestic characteristics of the host country play role (2.4.2.), as well as industry- or MNC-specific factors (2.4.3.).
2.3.1. Factors at the global governance level
The global trade regime offers little support to DCs to effectively regulate MNCs (Graham and Woods 2006, 860; Wade 2003). The options for firms from ICs to enter and exit markets are expanded, while DCs are pressured to recognize and protect rights of foreign investors. On the hand, the regime ensures ICs' appropriation of technological rents (Graham and Woods 2006, 869), on the other, it limits export growth for DCs due to tariff barriers in sectors of their interest, and WTO environmental regulations which local companies in DCs are unable to meet (Angel et al. 2007, 309). Hence, the global trade regime is characterized by 'asymmetry' (Graham and Woods 2006). It can be explained by the doctrine of neoliberal economics (Aguirre 2004, 53), which determines policies of organizations like the WB, IMF, OECD and WTO (Aguirre, ibid; TNI et al. 2015; Wade 2003, 622). It allows for MNCs to lobby for their interests, which thus enjoy considerable influence on economic and social agendas of these organisations, as well as in national governments (TNI et al. 2015; Aguirre ibid).
At the same time, there are no binding regulations at the global level that regulate MNCs with regard to human rights and social/environmental impacts; global regulations of such issues are generally directed at states (Riddell 2015, 54). Tax regulation of MNCs is predominantly regulated at national level, though calls for global arrangements are growing stronger (UNECA 2015), in view of the significant illicit financial flows (UNECA 2015, 31, see 2.3.2.).24 The international nature of their operations (Lucci 2012, 3) allows
24 ICs even facilitate this: e.g. Belgium (The European Commission recently sanctioned Belgium for a tax rebate regime for MNCs, that the EC considers in violation of competition rules. Belgium must now recover EUR 700million; see Stéphane Alonso, NRC Handelsblad 12 January 2016 "Multinationals kregen in België illegale steun", http://www.nrc.nl/next/2016/01/12/multinationals-kregen-in-belgie-illegale-steun-1576841 (accessed on 7 February 2016). The regime entailed that MNCs did not pay tax on their ‘excess profits’, as to "not punish them for operating transnationally". But the companies, to be eligible for the rebate, did not even have to prove that this excess profit was already taxed elsewhere.), and also the Netherlands: see
MNCs to take advantage of this fragmented landscape (Sauvant 2015, 68; see 2.2.2. for ensuing negative impacts).
This is not to say that at the global level MNCs are not regulated at all in terms of their contribution to SD. The recognition of the relevance of MNCs in achieving SD led to numerous organizations aiming to engage MNCs in SD and to enhance their behaviour, which resulted in a large number of guidelines and codes of conduct (see Table 3). Most of these are limited in scope, geographically or thematically (with the exception of the UN "Ruggie" Guidelines). Though some create binding commitments (e.g. the EITI25), they all
lack a sanctioning mechanism.
Such guidelines and codes of conduct express a common view on standards for behaviour (Newell 2001, 909). They have created public expectations, and have induced MNCs to report about their practices, thus increasing transparency. It has also enhanced MNCs' social awareness (Wright and Rwabizambuga 2006, 89) and (in some cases) their efforts to improve the sustainability of their operations.26
But their effectiveness has also received critique (i) for not changing corporate behaviour (Doane 2005; Lenox 2003); (ii) companies only implement them if it is in their self-interest to do so (Graham and Woods 2007, 870), or (iii) use them to avoid government regulation (Frynas 2005, 597). Moreover, (iv) some are designed without sufficient participation of those that are meant to be protected, meaning that their needs are insufficiently incorporated (Newell 2001, 911).
The OECD Guidelines by exception have an implementation process, but it suffers from a disparity in governments’ commitment to implementation (Cernic 2008, 72), the absence of a proper sanctioning mechanism (ibid, 96), and the unwillingness of the National Contact Points27 to declare violations in claim procedures (Riddell 2015, 57).
http://www.dutchnews.nl/news/archives/2015/11/after-starbucks-brussels-looks-into-dutch-tax-deals-with-microsoft-kraft/ (accessed on 29 February 2016).
25 For companies operating in EITI implementing countries, EITI reporting is mandatory, see: https://eiti.org/faqs#voluntary (accessed on 2 February 2016).
26 See https://www.unilever.com/sustainable-living/the-sustainable-living-plan/; Unilever is industry leader on the Dow Jones Sustainability Index, see https://www.unilever.com/news/press-releases/2015/Unilever-named-as-an-industry-leader-in-DJSI.html (accessed on 29 February 2016).
27 NCPs are agencies established by adhering governments to promote and implement the Guidelines. They assist companies and stakeholders to take appropriate measures to further the observance of the OECD Guidelines. They provide a mediation and conciliation platform for resolving practical issues that may arise with the implementation of the Guidelines; see http://www.oecd.org/investment/mne/ncps.htm (accessed on 12 February 2016).
Table 3. Global governance efforts to enhance MNCs contribution to SD
Organization
/Initiator Established ‘’Institutions” derived from it
ILO
(International Labour Organization)
1919 Its International Labour Standards promote opportunities for women and men to work under conditions of freedom, equity, security and dignity.28
IFC (World Bank
Group) 1956 "It blends finance, with advice and resource mobilization to help the private sector advance development";29 its Environmental and Social Performance Standards30 are a pre-condition for the IFC’s financial support.
IPIECA (the global oil and gas industry association, founded in 1974)31
1974 IPIECA helps the industry to improve its environmental (impact on biodiversity, climate change) and social performance. It promotes best practices, based on members' experience and expertise. IPIECA's Voluntary Principles for Security and Human Rights are “a helpful reference guide”32 for its member companies in maintaining the safety and security of their operations while respecting human rights and fundamental freedoms. One of its reported successes is (in collaboration with UNEP)33 to ban leaded fuels.
OECD 1976 The OECD Guidelines for MNEs concern human and labour rights, environmental degradation and corruption, with human rights as key priority (Riddell 2015, 56); the Guidelines also apply when MNCs from State Parties operate in non-State Parties.
UNCTAD (United Nations
Conference on Trade and Development)
1980 The Restrictive Business Practices Set is a multilateral agreement on competition policy, to enhance the effectiveness of trade liberalization and FDI (revised every 5 years). 34
CERES 1989 The CERES principles35 (or Valdez principles, named after the Exxon Valdez disaster in 198936) provide criteria for auditing the environmental performance of large companies. NGOs lobby for companies to pledge compliance; companies then need to report annually on the implementation. The principles are used to foster shareholder pressure (Wapner 1995).
WBCSD (World Business Council on Sustainable Development)
1992 The WBCSD was founded to ensure the business voice was heard at the 1992 Rio Earth Summit. It is a CEO-led initiative. It promotes multi-stakeholder partnerships, and inter alia creates action plans as frameworks for business action.37
Extractive
Industries 2003 The EITI is a public/private partnership and an international standard for openness around the management of revenues from natural
28 See: http://www.ilo.org/global/standards/introduction-to-international-labour-standards/lang--en/index.htm (accessed on 20 January 2016).
29 See http://www.ifc.org/wps/wcm/connect/corp_ext_content/ifc_external_corporate_site/home (accessed on 30 December 2015).
30See
http://www.ifc.org/wps/wcm/connect/corp_ext_content/ifc_external_corporate_site/about+ifc/organization. 31 IPIECA's membership covers over half of global oil production; it is the industry' principal channel of communication with the UN; see http://www.ipieca.org/about-us. (accessed on 20 January 2016).
32 See http://www.ipieca.org/publication/voluntary-principles-security-and-human-rights-implementation-guidance-tools (accessed on 21 December 2015).
33 Only a handful of countries remain to use leaded petrol; the ban of leaded petrol avoids 1.2. million deaths a year and also creates economic benefits. See http://www.ipieca.org/united-nations-partners (accessed on 27 December 2015).
34 See http://unctad.org/en/pages/MeetingDetails.aspx?meetingid=609 (accessed on 18 January 2016). 35 See: http://www.ceres.org/about-us/our-history/ceres-principles (accessed on 12 January 2016).
36 This oil spill occurred in Alaska in 1989: an oil tanker struck a reef, spilling 11 to 38 million of US gallons of crude oil. It was one of the most devastating human-caused environmental disasters (until the Deepwater Horizon oil spill in 2010).
Transparency Initiative (EITI)38
resources. Governments disclose how much they receive from extractive companies operating in their country and these companies disclose how much they pay. Its primary goal is to eradicate corruption and indirectly supports SD in DCs, by making sure revenues are not embezzled for private gain.
Private sector
banks 2003 The Equator principles are used by banks and investors to assess major development projects around the world and to manage social and environmental risks in project financing.39
GRI Global Reporting Initiative
1997 GRI’s reporting standards on sustainability permit consumers or investors to make a reliable comparison of the performance of companies (Graham and Woods 2001, 874).
UNGC (United Nations Global Compact)
2005 The UNGC is a voluntary public private initiative: governments work with the business towards 'a sustainable and inclusive global economy that delivers lasting benefits to people, communities and markets'.40 Companies should abide by Ten Principles concerning human and labour rights, environmental degradation, and corruption
UN (United
Nations) 2011 The Guiding principles on Business and Human rights ("Ruggie" principles) recognize ‘the role of business enterprises as specialized organs of society performing specialized functions, required to comply with all applicable laws and to respect human rights (UN Guiding Principles 2011, 13).
Finally, The UN launched an initiative, as far back as 1976, to formulate a code of conduct for MNCs. The code was meant to be a multilateral framework, defining the entirety of relations between governments and MNCs, comprehensive both in geographical and topical coverage (Sauvant 2015, 10), but was never adopted. The project turned out to be too ambitious, in the attempt to combine both protection - DCs wanted to control the behaviour of MNCs in their country - and liberalization - ICs wanted rules on investments to legitimize MNC operations in DCs (Sauvant 2015, 17).
2.3.2. Host country characteristics
First, the bargaining power of host countries, especially DCs, vis-à-vis MNCs (Sethi 2002) is often weak due to their desire to attract MNCs and the inflow of FDI (Aguirre 2004, 56): MNCs often possess more financial resources than DCs themselves: 41 it is not exceptional
for the annual revenues of a MNC to exceed the annual GDP of the countries in which they operate (see Table 4 below). Hence, DCs expect MNCs to be able to give an impetus to economic growth. To that end, DCs resort to offering favourable legal conditions at the expense of the SD of their country (SOMO et al. 2015, 4; Newell 2001).42 The number of
38See https://eiti.org.
39 As of January 2016, 82 financial institutions have adopted them; see http://www.equator-principles.com/ (accessed on 13 January 2016).
40 See https://www.unglobalcompact.org.
41Of the 100 largest economies in de world, 51 are corporations, 49 are nations. See: www.globalissues.org (accessed on 18 December 2015). In 1991 3 MNCs were among the top 28 economies in the world (with Shell at #29), compared to 15 MNCs in 2000; see http://www.ratical.com/corporations/NvC.html (accessed on 22 December 2015).
42 A recent ActionAid briefing (January 2016) “Leaking revenue: how a big tax break to European gas company has cost Nigeria billions”, is a charge against tax holidays granted by the FGN to big oil companies.
Bilateral Investment Agreements (BITs) between governments has grown in number over the years.43 BITs aim to provide security and predictability for foreign private sector investors, but generally favour investor interests, reducing the grip of DC governments over MNCs in their country (Emeseh 2006, 24), and restricting the ability of host DCs to regulate negative human rights and environmental impacts of MNCs (referred to as 'policy freezing'; BothENDS et al. 2015, 4).
Table 4. The relative power of MNCs vis-à-vis host countries
MNC Ranking MNC "Value" in USD Host Country Ranking host
country Revenues (USD billion) / GDP Shell #27 on World's top 175 Economic Entities (2010) 378.152 billion
(revenues 2010) Nigeria 56 on World's top 175 Economic Entities (2010)
193.669
BHP
Billiton #139 on World's top 175 Economic Entities (2010)
247 billion (2010
market value) Papua New Guinea x GDP in 2010 was less than 11
Rio Tinto #31
on Global 500 list (2011)
144 billion (2011
market value) Madagascar x GDP in 2011 was less than 9
Newmont
Goldmining #338 on Global 500 list (2011) 26 billion (2011 market value) Ghana x Average annual GDP = 37 Source: Hilson 2012, 33
A second important factor is the domestic regulatory framework in the host country; which, if weak, tends to induce negative impacts. DCs often lack the capacity - instruments and knowledge - to enact effective legislation; regulatory agencies lack resources and adequate support from the judicial system (UNECA 2015, 36; see also 2.3.3. for the link between regulatory/governance structure and the ‘resource curse’’). MNCs, outcompeting DCs in legal expertise, look for loopholes in legislation for their own benefit. They circumvent existing legal provisions for the payment of royalties and taxes (UNECA 2015, 31), or use bribery and secretive deals to optimize profit (UNECA 2015, 43; Ayodele et al. 2013, 147; see .2.2.2). It leads to unfair pricing and inefficiency, and undermines the rule of law and transparency (HIGJ 2013; UNECA 2015, 20). Dowell et al. (2000, 1059) find that DCs with lax environmental regulations are more likely to attract 'poor quality’ MNCs that abuse low standards.
Third, the role or attitude of the government in the host country vis-à-vis achieving SD, is of influence. A MNC's contribution to SD is likely to be enhanced in case of strong ownership by the government of development plans (Davies 2011, 15; Dobers and Halme 2009). Most empirical studies of self-regulatory regimes adopted by MNCs in an effort to
43At the end of 80s 371 BITS existed, and by the end of the 90s 1,862. By the end of 2013 there were 2,902 BITS and 334 other international investment agreements in place (Sauvant 2015, 5).
contribute to SD, agree that such regimes require specific conditions of transparency, monitoring and enforcement to be effective (Graham and Woods 2001, 877). In the absence of these circumstances, the risk of greenwashing is real. Companies change their discourse, but not their actual operations (Utting 2005, 383); "[..] companies that have polluted and neglected local communities to maximize profit, do not suddenly morphe into philanthropic organizations" (Hilson 2012, 132; also Adegbite 2012, 269).
Public pressure can also enhance MNCs' behaviour (Graham and Woods 2006, 882, Emeseh 2006; Giuliani and Macchi 2014, 490), but civil society will need a supportive government (e.g. one that ensures freedom of association and speech) to be able to yield enough power vis-à-vis MNCs (Newell 2001, 910; Emeseh 2006, 600).
Fourth, the level of absorptive capacity plays a role (Holger and Greenaway 2001). DCs often struggle to connect to the global value chain or to benefit from spill-overs due to poor infrastructure, lack of distribution network, high operating and trading costs, limited human capital and shortage of local partners (Giuliani and Macchi 2014, 500). The absorptive capacity in a country depends on a conducive government policy (e.g. a strong local content policy) but also the technology gap.44 Spill-overs mainly occur in sectors where this gap is relatively small (Kathuria 2000, 344). Host DCs are more likely to be able to absorb labour-intensive technology, than capital-intensive technology (Madu 1989). Finally, when MNCs compete with domestic firms, technology spill-overs are more likely to occur (Giuliani and Macchi 2014, 493; Aitkin and Harrison 1999) than in the case of MNCs operating in an ‘enclave sector’ focused on export (Ackah-Baidoo 2012; e.g. the extractive industry in West-Africa; also Morrissey 2012, 29).
2.3.3. Industry-specific factors
Positive impacts are more likely to materialize if the MNC has a commercial imperative to align its operations with development objectives (Lucci 2012, 1); philanthropic contributions tend to end up becoming a marketing strategy (ibid), or to generate only short-term and unsustainable effects (Davies 2011).
For example: a MNC might be interested in contributing to the well-being of the local population if it depends on it for the supply of labour and inputs. A MNC might also create local benefits in an attempt to develop new-markets among low-income consumers (Davies 2001, 8). It gives MNCs a long-term interest in the SD of the host country, associated with their positive impacts (see 2.4.1 above). For example: Unilever will profit from an increased sale of its hand soap, which at the same enhancing hygiene and public
44 The gap between the level of technology transferred by a MNC, and the level of technological development in the host country.
health.45 Climate change can be a driver to manage resources sustainably to protect the company from future shocks (Lucci 2012, 6), while at the same time reducing costs for the company.
For the oil/gas industry it is complicated to align its interests with SD. On the hand, fossil fuels are the main source of energy and people, notably in DCs, need energy to develop (UNDP 2014a, 17; ODI 2015, 28). It is essential for building enterprises and creating jobs. It improves health and education, and reduces the human labour required for cooking and meeting other basic needs. It thus contributes to eradicating poverty (WWI n.d., 7).46 It also enhances social inclusion and gender equality (UNGA 2012, para 2.5).47 On the other hand, there are two factors complicating the contribution of the oil/gas industry to SD.
First, the continued use of fossil fuels as a source of energy is not compatible with climate change: 60 to 80% of the known fossil fuel reserves are 'unburnable' if carbon emissions are to be reduced sufficiently to limit global warming to 20Celsius48 (Carbon Tracker 2013, 4; McGlade and Ekins 2015). Climate change in turn negatively impacts prospects for SD (IPCC 2007, 17). Moreover, DCs tend to be more vulnerable to the negative impacts of climate change since (i) many people in DCs depend on the ecosystem to sustain their livelihoods (Wright et al. 2015, 1), and (ii) DCs lack sufficient capacity to confront the consequences of climate change (Ribot 2015, 672; WB 2015).
At the global level the call for the energy transition, signifying the phase-out of the fossil fuel industry, is growing stronger.49 The Paris Agreement is a clear commitment of the global community towards a fossil-free future.50 The risk of the ‘carbon bubble’51 for the economy at large is increasingly acknowledged.52 Not only is the energy transition
45 see: https://www.unilever.com/sustainable-living/transformational-change/achieving-universal-access-to-water-sanitation-and-hygiene/ (accessed on 19 January 2016).
46 http://www.worldwatch.org/system/files/ren21-1.pdf
47Yet, globally over 1.3 billion people are without access to electricity and 2.6 billion people are without clean cooking facilities. More than 95% of these people are either in sub-Saharan Africa or developing Asian countries, and 84% are in rural areas, see http://www.iea.org/topics/energypoverty/ (accessed on 3 January 2016).
48 The Copenhagen Accord (2009) identified a temperature rise of two degrees Celsius as the danger tipping point for the planet - i.e. the threshold for dangerous human interference in the global climate system – which was recently adjusted to 1.50C.
49 E.g.: The Guardian 'keep it in the ground' campaign, Urgenda, 'Follow This' (see https://follow-this.org/; a campaign that advocates buying Shell shares to become so strong a shareholder to be able to force Shell to become a company in renewable energy), 350.org.
50 The Paris Agreement has the ojective of bringing down global concentrations of greenhouse gases (GHGs) to a level consistent with 1.5- 2°C rise in temperature when measured from pre-industrial levels ( Article 2). 51 The carbon bubble refers to the overpricing of fossil fuels reserves. If the global community commits to leaving 80% of known fossil fuel reserves in the ground, these reserves run the real risk of becoming stranded resources /assets, reducing their value to 0. It impacts the value of the company but also creates wider economic impacts: e.g. people with pension savings invested in fossil fuels are at risk of losing those savings. 52 Also the financial sector now acknowledges the 'carbon bubble' and ensuing risks for the economy at large: De Nederlandsche Bank in a recent report: Tijd voor Transitie, 4 March 2016; also the Bank of England, BlackRock, ABP).
