Regulating Large International Firms

This paper explores the existing arrangements for multilateral regulation of large firms, and makes the case for balancing strengthened global corporate property rights with more explicit and enforceable social obligations. In a democratic market-based society, investors have legally enforceable rights but must also obey laws designed to protect workers, consumers and the environment. Competition regulations are designed to counter market power and business taxes ensure the provision of public goods. Strengthened multilateral co-operation in three related areas—investment, tax and competition—is under way. Although progress is slow and contested, the distinct interests of host and home countries are clear and the “development dimension” is broadly recognized. In marked contrast, corporate conduct on labour and environmental issues is still almost exclusively regulated at the national level. Moreover, external standards of international corporate responsibility in developing countries are set by voluntary initiatives, with market incentives rather than legal requirements constituting the basis for compliance.

Codes of conduct and other voluntary initiatives, however, have two weaknesses. First, to avoid the “free rider” problem, they should cover the entire sector, which would require an element of compulsion. Second, there must exist some plausible penalty for breaking rules—these can only be applied by governments or by legislation that empowers civil organizations, such as trade associations, to apply such penalties. In other words, if they are to be effective there is a need for international standards on labour and environment to be supported by intergovernmental agreements—as are property rights, tax liability and competition rules (however imperfectly). Reliance on the presumed effect on asset (brand) value of consumer awareness of production conditions in developing countries is not sufficient.

A better approach would be a multilateral definition of the obligations of international firms that is explicitly linked to the guarantee of property rights. These obligations might reasonably include international taxation, competition rules and stakeholder issues such as employment conditions and environmental protection. The ongoing process of regional integration—particularly in Europe—could present an opportunity for such a definition.

It is clearly incorrect to regard large international firms as effectively “unbridled”. There already exist strong measures between OECD countries to regulate these firms in the fields of investment rights, tax burdens and competition rules. The problem is that these systems have not yet been extended to cover developing countries in a way that supports development. There is therefore an urgent need to define what a desirable regulatory regime might look like from the point of view of both middle-income and low-income developing countries.