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Columbia FDI Perspectives
Perspectives on topical foreign direct investment issues
No. 207 August 28, 2017
Editor-in-Chief: Karl P. Sauvant ([log in to unmask])
Managing Editor: Matthew Schroth ([log in to unmask])
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Contemporary public expectations that firms assume responsibility for societal deficiencies are inconsistent with the demand of long-term survival and profit maximization, representing a fundamental shift in the view of firms and their role in society. The economic power and visibility of multinational enterprises (MNEs), combined with their global scope and exposure to multiple and diverse stakeholders, have made them the major targets of these expectations.
Is this state of affairs, whereby firms are treated as social institutions expected to assume responsibilities traditionally held by governments, desirable? Does the creation of public goods by profit-maximizing firms generate the greatest societal return? In the contemporary enthusiasm for the engagement of firms with social causes, these questions are seldom asked.
Beyond adherence to the law, refraining from taking advantage of gaps in the law and abuses of failure to enforce the law, including attempts to influence the law to their benefits, and being accountable for their own externalities, firms have societal responsibility. Within this domain, they should confine their engagement to activities that generate proprietary benefits and improve long-term competitive advantage. These activities include the creation of public goods that generate proprietary value in excess of public value, and social activities for which stakeholders are willing to pay a premium.
Governments and non-governmental organizations (NGOs) are alternative providers of social services, with respective strengths and weaknesses. They should provide those services whose production is based on assets that are not core to firms, and whose externalities cannot become proprietary to firms, e.g., clean environment. These include services for which markets do not exist or are dysfunctional, either because self-coordination via price mechanisms is not feasible, or due to market failure. High-risk investments whose returns are uncertain or very small, such as pharmaceutical orphan drugs, are cases in point.
Firms’ investment in such causes puts them at a competitive disadvantage and harms their performance. Examples include UBS’s tree planting and recycling programs, Wipro’s program in Indian schools and colleges aimed at improving sustainability, and Indian Oil’s investment in drinking water and rainwater harvesting, as well as Coca-Cola’s investment toward cleaning China’s Yangtze River.
Engagement in such activities not only harms firms; it is also unwarranted for society. Firms are not democratically elected, and there are no formal institutions dictating the social causes they choose to address, undermining their legitimacy in this role. Firms’ dependency on profits implies that business considerations influence their social engagement in ways that may not be aligned with societal benefits. Furthermore, addressing societal causes divert resources away from firms’ core business, decreasing societal value.
Society has the power to shape firms’ social agenda and, in the contemporary world, uses this power to push firms into social engagement as an imperative for protecting reputation and brand name. These attitudes often originate in disregard of the societal value and positive externalities that firms generate, in the form of innovations and their commercialization, job creation, tax payment, and returns to shareholders.
The widely repeated and highly influential claim that firms should create “shared value” as a condition of legitimacy and credibility is similarly driven by a misconception of the relationship between firms and society. This claim is being met by default, in that firms’ success and survival are dependent on the strength and sustainability of their stakeholders. There is also a need to change the view of firms as the agents for compensating government shortcomings. What is needed instead is pressure on governments to perform their duties effectively. NGOs may be called upon to fill some of the gaps left by governments.
National governments and international organizations have put considerable pressure on firms to assume many social causes. These efforts should be informed by the opportunity cost of treating firms as a social institution and enticing them to engage in activities that bear no relation to their core assets and mandate to maximize profits. Instead, governments—on their own or in collaboration with firms—should provide these social services. Collaborative efforts between governments and firms could be appealing when governments offer firms proprietary gains but guard against social losses.
Firms, governments and NGOs have a shared responsibility for meeting societal demands, but are suited to different respects. Under certain conditions, investment by firms can cause a more efficient utilization of resources and generate societal value. Absent these conditions, social engagement by firms has debilitating consequences. The framework introduced in this Perspective should be employed by policy-makers to identify the types of social causes that should be addressed by firms, and distinguish these from other causes that are the realm of governments and NGOs (or could be addressed through collaboration between governments and firms). Policy-makers ought to use their legislative authority and soft power to instill this division of responsibilities and to champion the societal benefits it generates.
* The Columbia FDI Perspectives are a forum for public debate. The views expressed by the author(s) do not reflect the opinions of CCSI or Columbia University or our partners and supporters. Columbia FDI Perspectives (ISSN 2158-3579) is a peer-reviewed series.
** Lilac Nachum ([log in to unmask]) is Professor of International Business at Baruch College, City University of New York. The author is grateful to Ana Escobedo, Aneel Karnani and Hafiz Mirza for their helpful peer reviews. The full paper on which this Perspective is based is available at https://www.linkedin.com/in/lilacnachum.
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The material in this Perspective may be reprinted if accompanied by the following acknowledgment: “Lilac Nachum, ‘How much social responsibility should firms assume and of which kind? Firms, Governments and NGOs as Alternative Providers of Social Services,’ Columbia FDI Perspectives, No. 207, August 28, 2017. Reprinted with permission from the Columbia Center on Sustainable Investment (www.ccsi.columbia.edu).” A copy should kindly be sent to the Columbia Center on Sustainable Investment at [log in to unmask].
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For further information, including information regarding submission to the Perspectives, please contact: Columbia Center on Sustainable Investment, Matthew Schroth, [log in to unmask].
- No. 206, Victor Steenbergen and Ritwika Sen, “Increasing vertical spillovers from FDI: ideas from Rwanda,” August 14, 2017.
- No. 205, Jing Li and Jun Xia, “State-owned enterprises face challenges in foreign acquisitions,” July 31, 2017.
- No. 204, David Bailey, Nigel Driffield and Michail Karoglou, “Inward investment will fall in the UK, post Brexit,” July 17, 2017.
All previous FDI Perspectives are available at http://ccsi.columbia.edu/publications/columbia-fdi-perspectives/.
Other relevant CCSI news and announcements
- On September 19, 2017, CCSI will will launch its Fall 2017 International Investment Law and Policy Speaker Series. We’re delighted to announce that this year’s speakers will include Laurence Boisson de Chazournes, Vladimir Khvalei, Annette Magnusson, Fuad Zarbiyev, Adrian Jones, and Carlos Correa. This fall, the series will again be co-sponsored by Crowell & Moring LLP and Baker & McKenzie LLP. The series will be moderated by Ian Laird, Grant Hanessian and Kabir Duggal. All talks will take place at Columbia Law School. Select presentations will be webcast; please see our website for the schedule and more details. No registration is required.
- On September 20, 2017, CCSI and the UN Sustainable Development Solutions Network (SDSN), under the guidance of Prof. Jeffrey Sachs, Special Adviser to the UN Secretary-General on the SDGs, and Laurent Fabius, President of the Constitutional Council of the French Republic, will host a one-day conference to present and discuss the blueprint for a Global Pact for the Environment. Coinciding with the 72nd Session of the UN General Assembly, this Conference will offer a high-level opportunity to explore the complex legal and political challenges of the Global Pact in light of existing agreements and soft law principles on the environment, and the current global political scene. Distinguished panelists include International Union for Conservation of Nature President Zhang Xinsheng, UN Environment Program Executive Director Erik Solheim, and President of the National Green Tribunal for India, the Honorable Justice Swatanter Kumar. The event is free and open to the public, but advance registration here is required. For more information, please visit our website here. Delivering a message to government and business leaders at the Paris launch of the Global Pact for the Environment on June 24, 2017, Prof. Jeffrey Sachs affirmed the critical importance of the Global Pact for the Environment to put the protection of the environment on a rigorous, sound, clear and universal legal basis. View the video here.
- On September 21, 2017, CCSI, the UN Sustainable Development Solutions Network’s Thematic Network on Good Governance of Extractive and Land Resources (‘SDSN Thematic Network’), GIZ, the International Council on Mining and Metals (ICMM), the Responsible Mining Index, the Intergovernmental Forum on Mining, Minerals, Metals and Sustainable Development (IGF), and the Prospectors & Developers Association of Canada (PDAC), and the University of Cape Town will host a strategic meeting to take stock of initiatives seeking to operationalize the Sustainable Development Goals (SDGs) for companies and other relevant stakeholders, assess whether and how private sector reporting mechanisms and frameworks are or should be aligned with the SDG Indicator framework and how they could be harmonized, and identify next steps for advancing the various efforts being undertaken to improve the contribution of the extractive industries to sustainable development.The event is free and open to the public, but advance registration is required. To register, please contact Nathan Lobel at [log in to unmask]edu. For more information, please visit our website here.
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Karl P. Sauvant, Ph.D.
Resident Senior Fellow
Columbia Center on Sustainable Investment
Columbia Law School - Earth Institute
Ph: (212) 854-0689
Fax: (212) 854-7946
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