Stretching back millennia, the earliest international legal developments revolved around investment and trade. Foreign Investment Regulations, unlike trade regulations, remain a patchwork quilt of bilateral and multilateral treaties, without regulation by international treaty or universal charter.
Role of the UN
While many efforts have been made to have the United Nations as the primary oversight of international relations and law, investment law has primarily escaped UN regulation. While the UN hasn’t been able to provide comprehensive regulation in this area, several resolutions have significantly impacted the development of investment regulation in recent decades. These include:
- The Resolution of Permanent Sovereignty of States over their Natural Resources and Wealth (1962)
- The Charter of Economic Rights and Duties of States (1974)
- UN Commission on Transnational Corporations (1970s to 1990s)
As capitalism ascended following the fall of the Soviet Union and the goals of the NIEO passed, the UN’s willingness and focus shifted away from regulation in this area.
Changing Nature of Foreign Investment
As the 1990s dawned, the WTO, World Bank, and IMF backed off the idea that multinational corporations required regulation to protect host states. Further, as the NIEO faded, the socialist elements that backstopped the movement, including additional regulation on corporations, faded. Property rights became a more critical focus, protecting foreign investment from unilateral state action. The 1992 World Bank Guidelines and the OECD’s Draft Multilateral Agreement on Investment (MAI) in 2000 set the tone for reduced government oversight and regulation in favor of corporate interests.
Between the 2001 Doha round of WTO talks and the 2004 “Mid-Point Deal” of the WTO, a balance had returned to the dialogue, including provisions on human rights and environmental protections. However, the desire of the WTO to be the primary regulator of foreign investment was abandoned.
The Current Situation
Multinational enterprises (MNEs) dominate the international economic landscape. Since the ascendancy of capitalism as the dominant economic form in the early 1990s, they have enjoyed the relatively open exercise of economic activity. They can use the patchwork quilt of regulation and market conditions to design their structure to optimize business objectives. As non-state actors, they are not subjected directly to treaties or other international legal provisions. There are questions on the need to regulate MNEs as their ability to manage their way through the landscape begins to cross with technological advances in genetics, pharmaceuticals, GMO foods, environmental and worker protections, and human rights.
As with any excesses, the pendulum appears to be swinging toward the center, with the reemergence of socialism and, in the United States, “Democratic Socialism,” forcing the move back toward the middle. The question that impacts policymakers is how to regulate the MNEs utilizing the existing international legal structure; it is even practical to attempt to do so. While countries individually have been able to exert significant legal and societal influence on the behaviors of their domestic companies, the MNE is mainly free to operate for the pursuit of maximum profit without the same “community ownership” or influence that domestic companies experience.
Many look at what they believe is a tipping point when the creation of wealth moves from facilitating innovation, freedom, and civilization among humanity and tilts in the direction of inhibiting those values. Additionally, because any singular body of law does not regulate MNEs, they are perhaps the most potent international economic and arguably political actors today. From product design and distribution, agriculture, and aquaculture to pharmaceuticals and infrastructure, the MNE is often more influential than the state, with little ability to exert effective state control.
Other challenges to MNEs include a lack of transparency and accountability to shareholder ownership, a lack of cohesive regulations on activity, and the inability of states to effectively regulate or control their activity – allowing them to focus on profit to the exclusion of other elements – and essentially creating a “tragedy of the commons” situation where the MNE does not internalize the externalities and their costs.
Additionally, the recent strengthening of intellectual property rights through the WTO Agreement on Trade-Related Aspects of International Property Rights (TRIPS) further strengthened the MNEs by (particularly in the area of medicine) making it difficult to copy, clone, or leverage discoveries or processes that may assist developing economies.
One argument from the MNE side of the equation arguing for a global regulatory environment is the challenge of tailoring operations and compliance to the current patchwork regulatory environment. In many cases, the costs of maintaining multinational regulatory compliance are high in terms of intellectual and operational capital.
Host Country versus Home Country Regulation
One of the critical challenges MNEs and nation-states faces is the need to determine the regulatory framework in light of differing regulations from state to state. MNEs must legally conform to the nation’s laws in which it operates. However, this creates an incentive to pick and choose the regulatory environment that best suits the business objectives of the MNE.
It is difficult for the home state of the MNE to regulate its activities using extended arm provisions in its regulatory structure. The challenges include the costs and ability to enforce regulations in other nations, the willingness of the nation-state to serve as the “world’s policeman” in this context, and the creation of an incentive for nations to “race to the bottom” to attract corporate home offices. As a result, this approach, while often suggested, is not likely to work in practice.
Additionally, as part of their mandates approach when extending aid, the WTO, IMF, and World Bank have often required the deregulation of state controls and used the need for foreign investment as the rationale. Arguably, the weakening of the regulatory environment in these developing nation-states encourages MNE investment and shifts economic control from domestic enterprises to MNEs.
Attempts to regulate “long-arm” the behavior of MNEs with regulations such as the US Foreign Corrupt Practices Act of 1977 and the OECD Convention to Outlaw Bribery and Corruption of 1997 have had limited but positive success in trying to balance out the influence of MNEs on foreign governments.
Alternatively, MNEs may choose to self-regulate as their activities broadly are covered by treaties on human rights and environmental protections as enforced through their host and home states. Arguing for this point, the International Chamber of Commerce points out that community and international pressures will cause industries and organizations to self-regulate, fearing more decisive government action. While several examples of self-regulation at work appear successful, the implementation may have challenges as the MNEs become their judge and jury – subject only to the court of public opinion. Cynics point to MNE’s mission statements and ethics codes and their actual actions as a real-world examples of why self-regulation will be challenging and unlikely to work on its own.
International Law Regulation
The general approach to regulating with international law has its challenges. Enforcement is always conditioned on a state actor to mete it out. Because of sovereignty principles, international law only binds those states who voluntarily choose to be bound by it. There is some question as to how this would work for the MNE. In their areas, Postal Service, Aviation, and Telecommunications, however, a framework exists for international legal enforcement extended to the MNE – and generally in a successful manner. The Basel accords in banking are another example where international regulations may effectively assist in the MNE environment.
Additionally, Bilateral Investment Treaties (BITs) exist between nations that provide a regulatory framework between the signatories. Nearly 6,000 such treaties (trade and tax) are currently in place. There are concerns about negotiation, leverage, enforcement, and the “patchwork” nature of the BIT system. However, it does provide for regulation to address some of the most significant concerns about the societal and legal impacts of MNEs.
As part of the PSNR and the NIEO movements, many of these treaties tie back to nationalization and similar property rights/due process approaches to the MNE. Generally, the ability to nationalize must be in pursuance of a good-faith public purpose, be without discrimination, and be compensated. because much of the litigation and legal development from 1960-1990 was in this area, many treaties work to define terms such as “just compensation.” As the 1990s dawned, the focus shifted from nationalization concerns to attracting foreign investment, and recent treaties – particularly tax treaties – focused on these areas.
Regulation of the Multinational Corporation
In the 1990s, pressure came on the OECD to develop a Multilateral Agreement on Investment (MAI). The need for an MAI arose from a wave of foreign direct investment (FDI) generated following the fall of the USSR and was pushed by constituents like the World Bank. The purpose was to liberalize and make consistent the mechanisms governing FDI to encourage continued investment and consistency in approach to enforcement.
IN EFFECT, Article II of the MAI granted “most favored nation” status to investors, not allowing a bias for domestic versus foreign investment. Article IV of the MAI significantly enhanced the property rights of the FDI. Designed to be MNE-friendly (and derided by some as a “Bill of Rights for Big Corporations”), the MAI began to garner significant opposition in the late 1990s before ratification. In 2000, the OECD abandoned the MAI and adopted a much watered-down version. The 1999 failure of the WTO Session in Seattle, Washington, was endemic of a sea change from laissez-faire capitalism of the early ’90s and back to a middle ground.
The Doha Round, in 2001, saw a middle round taken, led by the EU nations. The framework required negotiation and the use of the WTO to help interpret, enforce and resolve disputes. However, Doha did not tend to dictate economic terms as the original MAI had. As a democratic, one-nation, one-vote body, the WTO assumed the mantle of regulating international trade and investment. Some view that role as a contradiction, as the agency designed to promote free trade is also charged with its regulation. The WTO eventually abandoned this charge to regulate in 2004.
What are the Responsibilities of Multinational Corporations?
The consensus is that MNEs are responsible for adherence to universal human rights and environmental protections as attached to them by their host and home nations. However, the enforcement of those obligations remains tricky. The corporate veil may protect the actual human actors and shareholders behind legal violations.
Arguably, the best course of action for MNEs facing criticism is to self-govern and develop sticky codes of ethics and conduct. As discussed above, this approach has challenges in both enforcement and consistency. And while corporations may find it easier to operate under a uniform set of regulations than the current system, the ability to define and effectively enforce that set of regulations remains a significant challenge.
MNEs have often been accused of violating human rights – including using exploitative labor (children, women), low wages, safety and health standards, bribery, and corruption. The willingness of some MNEs to pay poverty-level wages in developing countries has been criticized for its impacts both in the home and host nations. While the International Labor Organization (ILO) treaties provide some protections, the ability to enforce those provisions is weak and limited in scope. The worker rights include:
• the freedom to bargain collectively
• the freedom of association
• the elimination of discrimination in the workplace
• the elimination of workplace abuse (e.g., forced labor and certain
types of child labor)
• adequate wages
• proper working conditions
• adequate social insurance rights
• no obligatory overtime work.
However, enforcement and implementation are through host country regulations, which are inconsistent.
The UN attempted to codify these in the CTC process discussed above. However, this was eventually abandoned. Current views that the development approach and the MNE must consider sustainability, human rights, and environmental factors are generally held but not effectively implemented legally.
The new 2000 OECD guidelines step up the requirements on MNEs, as do more recent developments in international law – holding MNEs and individuals responsible for human rights violations. However, the primary responsibility for enforcement remains with the host or home state.
Until national laws and incentives for enforcement are harmonized, the ability of the MNE to choose the environment, jurisdiction, venue, and approach to achieving business goals will remain largely unregulated. Market rather than regulatory forces are the primary determinant of MNE behavior in the international economy.
MNEs and Human Rights
MNEs are generally obligated to adhere to human rights conventions by attachment to the host or home country treaty signatories. However, the challenge here is that the scope and definition of “human rights” vary considerably from jurisdiction to jurisdiction, as does enforcement of those values.
Over the last 50 years, the focus on human rights has sharpened, and human rights elements are now tied into mandates from the IMF and World Bank. However, MNEs are not direct recipients of these funds or direct subjects of the mandates. The MNE can “forum shop” for favorable legal environments to do business – stretching the human rights requirements significantly.
Recent legal activity in the international economic environment is challenging the notion that private actors are not subject to international law provisions – attempting to bring the MNE under a more consistent level of global scrutiny. Once found “guilty,” states must impose sanctions under international law, including civil and criminal liability and recourse by others to the court system. This has been tried, tested, and enforced in the EU through the European Court of Justice, among other jurisdictions.
Additionally, courts are beginning to “lift the veil” and punish parent corporations and shareholders for the actions of their subsidiaries. Corporate officers are also in the cross-hairs, as personal liability may attach to torts and crimes against humanity. In 2011, the UN completed a multi-year project to develop an implementation framework entitled” ‘Guiding Principles on Business and Human Rights: Implementing the
United Nations “Protect, Respect and Remedy” Framework’.” This document contains a set of standards and is soft law for the intersection of human rights and business; it and maybe a helpful document for companies determining policies and courses of action for MNE operations to provide a legal and operational framework for defense.