Multinational Corporations: A Key to Global Poverty Reduction – Part I

The legitimacy of multinational corporations has been increasingly questioned in recent years. In this two-part series, Harvard professor George C. Lodge and International Finance Corporation economist Craig Wilson argue that multinational corporations (MNCs) have contributed enormously to reducing global poverty. MNCs exist to provide value for their shareholders, but are also in a position to serve as driving engines of social change, even in countries troubled by corruption and mismanagement. In Part II, the authors propose the creation of a new institution, the World Development Corporation, which could harness the capabilities of MNCs to confront global poverty while at the same time reviving their legitimacy and maintaining shareholder value. The authors develop these thoughts further in their book, “A Corporate Solution to Global Poverty: How Multinationals Can Help the Poor and Invigorate Their Own Legitimacy,” to be published in March 2006 by Princeton University Press. – YaleGlobal

Multinational Corporations: A Key to Global Poverty Reduction – Part I

George C. Lodge
Monday, January 2, 2006

BOSTON, Massachusetts, and DHAKA, Bangladesh: The world’s multinational corporations – 63,000 of them at last count – frequently find themselves the target of criticism by the world’s anti-globalization protesters. MNCs, the protesters charge, are principally responsible for the impoverishment of many of the world’s six billion people.

While global corporations have unquestionably brought greater wealth, power and opportunity to the poor world, especially China and India, according to the World Bank some two billion people still live in countries or regions that have been left behind, becoming in fact less globalized. In these places trade has diminished in relation to national income, foreign investment and economic growth have stagnated, and poverty has risen. Most Africans were better off 40 years ago. The average per capita income of Muslims – from Morocco to Bangladesh and beyond to Indonesia and the Philippines – is half the world average. Thus while globalization has benefited many, one-sixth of the world’s people live in what the International Finance Corporation calls “deep poverty,” as described in a 2004 speech by Peter Woicke, then IFC’s executive vice president.

The causes of poverty are many and varied. Rightly or wrongly, many blame the corporations that drive globalization. Belligerence is escalating. For example, at a recent meeting of the World Economic Forum anti-globalization protesters waved signs reading: “Our resistance is as global as your oppression.”

Farsighted corporate executives are aware of their vulnerability. They know that the twin ideas of property rights and marketplace competition, the old basis for corporate legitimacy, are inadequate. To regard shareholders as owners of the corporation is to employ a legal fiction that defies reality. They do not “own” in the sense of controlling, directing or taking responsibility for the corporation. They are investors pure and simple. If the corporation does not serve their interests, they invariably move on. Investors select management only theoretically; generally, the corporate hierarchy from the chairman down is self-appointed. For the most part, the system is efficient, but lacks legitimacy.

Similarly, the idea of deriving legitimacy, or acceptability, from competing to satisfy consumer desires in an open market becomes unreliable when the sum of consumer desires fails to meet community needs - clean air, pure water, and the reduction of poverty. Thoughtful managers recognize the value of heeding community needs, yet encounter another legitimacy problem. The definition and attainment of a community’s needs are supposed to be the job of government. But many governments, especially in the poor world, fail to meet expectations. As a result of this governance failure, MNCs often find themselves playing the role of government: for example, Nestlé with its rural development work in India and Brazil, and Shell with its education programs in Nigeria.

However, this decline in corporate legitimacy, coupled with governance failures, need not prevent actions by MNCs to reduce global poverty. Indeed, we argue that such challenges make those activities all the more critical. Without harnessing the support of the world’s great MNCs, the UN’s Millenium Development Goal to halve the number of people living on less than $1 a day by 2015 will be difficult to attain.

MNC involvement is crucial to poverty reduction for two reasons: First, the reduction of poverty depends on the growth of business, especially small, domestic businesses. And increasingly for a local business to flourish it must have access to the world: to markets, credit, and technology, all facilitated by MNCs. The second reason is less obvious and more controversial: Poverty reduction requires systemic change, and MNCs are the world’s most efficient and sustainable engines of change. They provide political leverage with local governments; they offer opportunity for people who are convinced there is none; they motivate the young to learn and organize to gain power; they build roads and hospitals and other infrastructure. MNCs in developing countries are often the first choice for private sector jobs by young people, who are attracted by the higher salaries and the learning opportunities. And wise governments get the private sector to do as much spending on infrastructure as possible in order to protect their own treasuries.

Many of the world’s poor live in countries where governments lack either the desire or the ability to raise living standards on their own. Financial assistance to such countries– some $2.5 trillion has been provided in the last 50 years – has often not helped neediest citizens. In fact, it may have worsened their plight by sustaining the corrupt or otherwise inefficient governments that contribute to their misery, by leaving nations with mountainous debt.

In such mismanaged countries – as many as 70 around the world – a way must be found to change the basic system. Many multinationals have done just this, as a matter of course, while at the same time making the profits upon which their survival depends. Nestlé and Unilever in India, Coca-Cola in Venezuela, Intel in Costa Rica, and Land O’ Lakes International in Albania are but a few examples. Their initiatives not only provide jobs and raise incomes; they also improve education and give individuals motivation to pursue it. Education, after all, requires more than just buildings, teachers and texts. In much of the developing world, the poor lack faith that change is possible; few believe in the existence of a social or economic ladder that, with proper education, they can use to climb out of poverty.

A number of years ago, one of the authors and his students worked in Veraguas Province, Panama, to help a progressive bishop, Marcos McGrath, establish credit and marketing cooperatives to raise the incomes of desperately poor subsistence farmers. Only after the people realized that change was possible did they see the value of education. They created their own school, and engaged a teacher who taught children how to fix refrigerators acquired from the Canal Zone. Education had begun. The bishop’s cooperative movement was an engine of change. It was resisted by the status quo. A priest was killed, but nevertheless the movement survived and today runs the biggest chicken factory in Central America.

In the province next to Veraguas, Nestlé followed much the same procedures as the bishop and his young organizers, agitating, motivating and organizing farmers for milk production. The difference was that Nestlé made a profit. Church money, charity or tax revenue alone cannot bring about the change required to reduce global poverty. Sustainable change requires profit-seeking ventures.

The success of a DaimlerChrysler project in Brazil’s poverty-stricken northeast provides another example of a corporation changing the system to reduce poverty. In 1992, under pressure from the Green Party in Germany, DaimlerBenz, as it was then known, looked for ways to use renewable natural fibers in its automobiles. At the same time, the Brazilian government demanded that manufacturing facilities in the country increase their local content. To address both problems, the head of Daimler in Brazil arranged with POEMA, a local anti-poverty program in Belem, to construct a modern, high-tech factory that would make headrests and seats out of coco fibers from locally grown trees. As of today some 5,200 people are employed in this project. For these formerly impoverished Brazilians, life dramatically changed for the better: Children attend school, people are active in local politics, and health facilities have improved.

MNCs have the unmatched power and competence to reduce global poverty. Increasingly, world opinion, as well as the inclinations of their own managers and staff, urges MNCs to use that power more effectively. But MNCs lack a vehicle to make that transition in a sustainable and legitimate way.

George C. Lodge is the Jaime and Josefina Chua Tiampo Professor of Business Administration Emeritus at Harvard Business School. In 1958, President Dwight D. Eisenhower named him Assistant Secretary of Labor for International Affairs, a position to which President John F. Kennedy reappointed him several years later. His books include “Managing Globalization in the Age of Interdependence,” “Tthe New American Ideology” and “The American Disease.” Craig Wilson is an economist with the International Finance Corporation. He is currently based in Bangladesh where he manages a program aimed at improving the investment climates in South Asia.

© 2006 YaleGlobal Online


i'm interested to learn about MNC and affect caused FDI in developing country. nice to found this article