11 LEARNING OBJECTIVES

Private Enterprise
and Development
Paul A. Haslam

To understand the importance of the private sec- To distinguish between the direct effect of the
tor in development and poverty alleviation. private sector on development and its indi-
To identify the roles of small-scale entrepreneur- rect effect as mediated by government regula-
ship and large firms in development. tion and in collaboration with other actors via
To differentiate between different kinds of strate- partnerships.
gies employed by multinational corporations and
their effects.

Olga Martinez at her outdoor workshop where she re-upholsters seats for vans and buses on Avenida La Castellana, south
of Guatemala City. Work in the informal sector occupies an important place in Latin American economies. | Source: ORLANDO
SIERRA /AFP/Getty Images

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11 | Haslam: Private Enterprise and Development 

The private sector is one of the most contentious, billions of dollars in profits every year. Some privately
maligned, and misunderstood actors in international funded organizations, such as corporate charities or
development. Important private-sector actors, particu- philanthropic organizations built on private fortunes,
larly multinationals, are often associated, in the pop- occupy an ambiguous position: insofar as they are in-
ular imagination, with various acts of malfeasance, dependent of corporate influence and pursue a social
including low wages and exploitation in sweatshops, purpose, we generally consider them civil society or-
environmental catastrophes, human rights abuses, ganizations, although they may retain the “can-do”
unethical practices, and corruption. And yet, the do- and entrepreneurial culture of their founders.
mestic private sector and foreign multinationals oper- It is important to remember that the private sector
ating in developing countries are responsible for much is the engine of capitalist economies, even where there
more investment and many more jobs than foreign aid is an important role for the public sector. Businesses
programs—and good jobs are ultimately what develop- make investments and hire people to make and sell
ment is about. At the same time, we can point to major goods and services at a freely determined price on the
multinationals, some of the same ones you might as- market (without significant government interference).
sociate with some of the negative consequences listed When they do well, growth, jobs, and usually develop-
above, that have also acted constructively to support ment are the result. When businesses do less well, or
local communities and economic development. fail, growth declines, jobs are lost, poverty increases,
Increasingly, governments and development agen- and individuals need the support of governments,
cies are looking at ways to leverage private-sector in- communities, and family members to survive. In this
vestment to contribute to more and better economic respect, creating an environment in which the pri-
development. And companies are beginning to realize vate sector can flourish and grow is essential to good
that being a responsible corporate citizen in developing development.
countries can be good for both profits and communi- Joseph Schumpeter (1883–1950) was the first to the-
ties. The picture, then, is complex. Although the role orize about entrepreneurship and its role in capitalist
of companies in development often generates heated economic development. For Schumpeter, the function
debate between those who view them as scoundrels of the entrepreneur was to innovate: he or she had a
and those who view them as heroes, this chapter aims kind of special ability to see new ways to put economic
to steer between these polarized positions to present a factors together to cause economic growth, such as new
balanced picture of the contribution the private sector products, new productive processes, or accessing new
can make to development, and how this role is affected markets. As an approach to explaining what pushes
by corporate strategy, the relations between firms and capitalism forward, his argument was agent-focused,
governments, and partnerships. rather than relying on abstract categories like “accu-
mulation of capital” or “investment.” Someone does
something with capital. In this regard, Schumpeter
ENTREPRENEURSHIP AND links the leadership of special individuals, innovation,
SMALL-SCALE ENTERPRISE and economic growth and development (Thomas, 1987:
174). However, it fell to later theorists to address what
In common parlance, when we refer to the “private conditions facilitated the emergence of entrepreneurs.
sector,” we generally include all privately owned or- The distinction between small entrepreneurs and
ganizations, the purpose of which is to make a profit larger firms is fundamental. In many developing econ-
for their owners or shareholders. In other words, we omies smaller firms are more likely to be locally owned,
would include in this definition the smallest entrepre- while large firms are more likely to be foreign. Formally
neur who sells coffee and fried food out of a shopping registered small and medium-sized enterprises (SMEs)
cart, a plumber, a web designer who works from home, face many problems in developing countries and gen-
a small shop owner, a medium-sized manufactur- erally fail to develop into larger enterprises, but they do
ing company with 20 employees, and a multinational have some access to financing. In the informal econ-
corporation that operates in 80 countries and makes omy, we find the micro-enterprises and independent

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 PART II | International Development Actors

entrepreneurs operating businesses that aren’t legally collateral to get a formal loan. From de Soto’s perspec-
registered, can’t get bank financing, don’t pay taxes, tive, property rights allow people to imagine the diverse
and don’t follow labour or health and safety regula- ways that capital can be employed, while creating the
tions. The informal economy is of principal interest for right incentives for individual productivity (provid-
this discussion because in developing countries, most ing collateral, individual accountability by association
entrepreneurial activity (in terms of employment) with a credit history, and protection from theft). In this
takes place in this sector, and it is often a survival strat- regard, the absence of enforceable property rights is a
egy for the very poor that is precarious and with little kind of “missing link” that condemns entrepreneurs to
potential for growth. small-scale, unproductive, and precarious investments
Recent thinking on how entrepreneurship is held (de Soto, 2000).
back in developing countries has focused on the prob- This line of thinking was taken up by a high-level
lem of informality. Hernán de Soto, in his classic text UN Commission on the Private Sector and Develop-
The Mystery of Capital, argues that poor entrepreneurs ment (2004), which proposed a set of reforms to make
are unable to convert the assets they control into capital business work for the poor. The Commission agreed
because of an inadequate property rights regime. Those with de Soto (who was a member) that widespread
working in the informal sector in developing countries informality and weak property rights were the root
often don’t have clear legal title to the assets they effec- causes holding micro-enterprise back in developing
tively control (such as a house built on unoccupied land countries. However, they also noted that the excessively
in a slum), and without legal title they don’t have the bureaucratic and costly process required to register a

IMPORTANT CONCEPTS

BOX 11.1 | Micro-Finance: Building Entrepreneurship?

One of the most widely used tools to promote entrepreneurship in developing countries is micro-finance:
the granting of small nominal loans to would-be entrepreneurs. Micro-finance came to worldwide atten-
tion through the work of Muhammad Yunus, who established the Grameen Bank in Bangladesh and won
the Nobel Peace Prize for his work in 2006. Yunus established a system in which small loans would be
granted to individual women organized within a larger group under the principle of collective responsibility
(if one failed to repay, they would all lose access to the loans). Repayment of the loan was a gateway
to more loans, and failure to pay resulted in exclusion from the system. The system also involved com-
pulsory savings by participants and intensive surveillance by caseworkers. This model of micro-finance
used collective responsibility to substitute for a lack of collateral or property rights. It also promoted the
empowerment of women in patriarchal societies by giving them access to loans and promoting solidarity
and friendships with other women (Yunus, 2003).
Micro-finance is not without its problems. On the one hand, it can create indebtedness that is diffi-
cult for the poor to escape if their businesses are unsuccessful. As micro-finance has been scaled up to
reach millions, there is also some evidence that normal financial criteria (such as having collateral) have
become more important, meaning that micro-loans are not reaching the extremely poor. Perhaps most
important is the gender critique (see Chapter 5), which points out that women are ideal clients for micro-
credit (more likely to repay) because they are disadvantaged by social norms (unable to move, dependent
on their husbands, and with limited property rights or alternatives). In this regard, the microcredit system
exploits the vulnerability of women while claiming to empower them. Studies have also shown that many
women lose control over the use of their loans to male relatives, while remaining responsible for repay-
ment (Goetz and Sen Gupta, 1996).

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11 | Haslam: Private Enterprise and Development 

business made informality a logical choice for many buildings, technology, and labour, which are more
entrepreneurs. For example, in Peru it takes an en- costly to abandon.
trepreneur an estimated 278 days to formally register John Dunning, the pre-eminent authority on the
and open a business (de Soto, 2000). In this regard, the multinational corporation, defines it as an “enterprise
Commission insisted that three pillars were necessary that engages in foreign direct investment (FDI) and
to develop the entrepreneurial sector: a level playing owns or controls value-adding activities in more than
field with fair rules and enforcement (to permit busi- one country” (1993: 3). According to Dunning, the two
nesses to establish themselves easily); access to credit; key features of the MNC that distinguish it from other
and support for the development of skills and knowl- enterprises are that it co-ordinates value-adding activ-
edge (human capital). This meant that the state had to ities across national borders (that is, it creates some
work actively to create an enabling environment for kind of product based on bringing together produc-
entrepreneurship, including formalizing the economy. tive assets from different places in the world, including
The authors of the report also recommended that mul- capital, labour, technology, management expertise, and
tinational corporations work with governments to play know-how); and it internalizes the cross-border trans-
an active role in coaching smaller companies through fer of inputs used in the production process (in other
partnerships and developing skills. words, these transfers take place within the firm and
do not occur on the open market) (Dunning, 1993: 4).
In this respect, the MNC is a “hierarchy,” meaning it
WHAT IS A MULTINATIONAL has an organizational structure based on command
CORPORATION? and control, and is distinct from a market, in which
the price mechanism, not management, co-ordinates
While it is generally agreed that the promotion of small relationships.
enterprise and local SMEs is good for development, the Although the two principles identified by Dunning
role of multinational corporations (MNCs) is much apply to all multinationals, the reality of the universe
more contentious. Various terms are used to describe of over 82,000 MNCs and 800,000 foreign affiliates
multinational corporations and their activities, includ- is that their size and the degree to which they are
ing transnational corporations (TNCs), multinational internationalized vary greatly (Dunning, 1993: 3;
enterprises (MNEs), and foreign direct investment (FDI). UNCTAD, 2006: 10; UNCTAD, 2009: 223). Furthermore,
Overall, these terms can be and are used interchange- the top 100 of these corporations are highly concen-
ably. Differences between them stem principally from trated, controlling a significant proportion of total
disciplinary and institutional divides and practices: foreign assets, sales, and employment of all multination-
MNC is the most widely used term, employed by polit- als. Their proportion of sales and assets has increased
ical scientists, sociologists, and the media; TNC is the significantly over recent years, illustrating that the
preferred terminology of the United Nations system; world’s largest multinational corporations are growing
and MNE is used in international business studies. FDI relative to the rest of the pack. Furthermore, the world’s
is a catch-all phrase, often preferred by economists, 100 largest MNCs are also disproportionately from the
which refers to investment that is made across bor- developed countries: 89 come from the US, Japan, and
ders. The word “direct” in “foreign direct investment” Europe, and only eight are from developing countries
indicates that the investment has a physical presence (UNCTAD, 2013). Although multinationals from devel-
or corporate form (such as a branch plant) and differ- oping countries remain much smaller, they are rapidly
entiates this mode of investment from indirect invest- growing and becoming increasingly transnationalized
ment, also known as “foreign portfolio investment” (see Box 11.5).
or colloquially as “hot capital” flows, which include Contrary to popular belief, MNCs from rich coun-
the purchase of foreign debt, loans, and stock market tries historically have invested more in other rich
investments. Foreign direct investment is much more countries than in developing countries. However,
stable than portfolio investment, since it involves an in 2014, FDI to developing and transition countries
investment in physical and productive assets such as reached a historically high proportion, amounting

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 PART II | International Development Actors

to 55 per cent of total flows. FDI to Asia drove these 1,400,000

figures: that region received 68 per cent of the flows to
1,200,000
developing and transition economies, while Africa re-
ceived less than 8 per cent (UNCTAD, 2015a: 2–3). How- 1,000,000
ever, foreign direct investment constitutes the single

US$ millions
most important source of new money for developing 800,000
countries, with the possible exception of remittances
from migrant workers, about which there are few reli- 600,000

able figures. If we compare the net inflows of different

400,000
sources of capital to developing countries, FDI inflows
to developing and transition economies accounted for 200,000
US$681 billion in 2014, as compared to approximately
$135 billion in official development assistance (ODA) 0
(UNCTAD, 2015a: 3). These figures are in marked con-

90
92
94
96
98
00
02
04
06
08
10
12
19
19
19
19
19
20
20
20
20
20
20
20
trast to the beginning of the 1990s, when ODA, at just
FDI to Developed FDI to Developing
over $50 billion of net inflows, was twice as large as
FDI to Transition ODA
FDI, and commercial loans and portfolio flows were
at a similar level to direct investment (UNCTAD, 2006: | FDI and ODA Flows to Developed
5). In the least developed countries, total ODA (from and Developing Economies, 1990–2013
bilateral and multilateral sources) exceeds the value Sources: UNCTAD (2015b); World Bank (2015).
of FDI ($47 billion to $23 billion in 2013), but both
have doubled in value over the last decade (UNCTAD,
2015a: 78). Overall, foreign direct investment and the
activities of multinational corporations have become organizations and countries located abroad (known
relatively more important to many developing coun- as “round-tripping”) in order to benefit from preferen-
tries than other sources of capital over the past two tial incentives and protection offered by some govern-
decades. ments to foreign investors (UNCTAD, 2006: 12). Thus,
However, it must be stressed that most of the FDI the geographic concentration and the mode of entry of
inflows to the developing world are concentrated in massive inflows of money indicated by global figures
a handful of the more dynamic and industrialized can be somewhat misleading as to their developmen-
developing countries. Six countries—China, Hong tal impact. Such caveats about the available figures and
Kong (considered separately from China in FDI fig- their meaning point to the difficulty of evaluating the
ures), Singapore, Brazil, India, and Mexico—attracted effect of FDI on host economies.
over 60 per cent of all inflows to the developing world
in 2014 and have consistently done so for a decade
(UNCTAD, 2015a: 4). Furthermore, FDI figures do not WHAT MOTIVATES MULTINATIONALS
always indicate new productive investments, known as TO GO ABROAD?
“greenfield” investments, and thus should be viewed
with caution. Mergers and acquisitions (M&As), in Why firms internationalize by establishing branch
which a foreign company buys out a local company, plants or subsidiaries abroad, instead of by trade, is one
involve only a transfer of funds, not an investment of the most important questions in the study of multi-
in building new facilities or in employing more peo- national corporations. A second and related question is
ple. In 2005, cross-border M&As made up 78 per cent what effect this internationalization has on the politics,
of world FDI inflows; in 2014 they made up 36 per economy, and society of the host country. As in most
cent (UNCTAD, 2006: 9; UNCTAD, 2015a: 11). For- areas of the social sciences, the answers to these ques-
eign investment figures may also erroneously include tions vary according to the theoretical and ideological
domestic investment that has been routed through frameworks used to analyze them. At the risk of some

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11 | Haslam: Private Enterprise and Development 

TABLE 11.1 | Largest Multinational Corporations by Assets, Including from Developing

Countries, 2012 (US$ millions)
Foreign Total
Rank Corporation Country Industry Assets Assets
1 General Electric USA electrical 338,157 685,328 49
and electronic
2 CITIC Group China diversified 71,512 514,847 14
3 Volkswagen Group Germany motor vehicles 158,046 409,257 39
4 Toyota Motor Japan motor vehicles 233,193 376,841 62
Corporation
5 Royal Dutch Shell UK petroleum 307,938 360,325 85
6 Exxon Mobile USA petroleum 214,349 333,795 64
Corporation
7 EDF SA France utilities 103,015 330,582 31
8 BP plc UK petroleum 270,247 300,193 90
13 Vodafone Group UK telecom 199,003 217,031 92
24 Petronas Petroleum Malaysia petroleum 38,907 150,435 26
28 Statoil ASA Norway petroleum 71,127 140,511 51
30 Nestlé SA Switzerland food, 132,686 138,212 96
beverages
34 Vale SA Brazil mining 45,721 131,478 35
35 BHP Billiton Group Australia mining 62,284 129,273 48
50 Hutchison Whampoa Hong Kong diversified 85,721 103,715 83
60 Vattenfall AB Sweden electricity, gas, 54,165 81,269 67
and water
68 Hon Hai Precision Taiwan electrical and 65,471 70,448 93
Industries electronics
70 América Móvil SAB de Mexico telecom 32,694 67,590 48
CV
81 VimpelCom Ltd Russia telecom 33,381 55,360 60
82 AstraZeneca PLO UK pharmaceuticals 41,218 53,534 77
83 China Ocean Shipping China transport 40,435 52,230 77
(Group) Company
(COSCO)
86 Teva Pharma-ceutical Israel pharmaceuticals 37,394 50,609 74
Industries
89 Barrick Gold Canada mining 45,335 47,282 96
Corporation
97 Koninklijke Phillips Netherlands electrical and 35,937 38,434 94
Electronics electronics
99 Cemex S.A.B. de Mexico mining 30,730 36,808 83
Mexico
Source: UNCTAD (2013). Reprinted with the permission of the United Nations.

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 PART II | International Development Actors

simplification, we can point to three main approaches maintaining high-value-added manufacturing in the
to understanding the internationalization of the mul- developed countries with similar exploitative effects.
tinational corporation: a critical approach inspired by Baran also pointed to the political alliances formed
Marxism; the mercantile or nationalist approach; and between multinational corporations and local elites
the liberal or international business approach. Each uninterested in the social welfare of the poor in their
approach reveals different facets of the MNC and its countries. He described this alliance as a “political
activities. and social coalition of wealthy compradores, powerful
monopolists [MNCs] and large landowners dedicated
to the defense of the existing social order” (as cited in
Dependency and Critical Approaches Evans, 1979: 20).
Generally speaking, authors in the Marxist-inspired In this respect, multinational corporations change
or critical tradition have tended to view multinational how countries (or rather, elites in those countries) per-
corporations as representatives of the global capital- ceive their interests. When multinational corporations
ist system and therefore as having a negative impact control the major industries and a national bourgeoisie
on the developing countries in which they invest. The is absent, weak, or co-opted by MNCs, autonomous
dominant current in this approach has been depend- local development is impossible. That is, the logic of
ency theory, although to be fair, dependency exhibits industrialization follows the needs of external agents,
a wide range of attitudes towards foreign capital, some not internal ones (Amin, 1990: 11). This may lead
of which are quite ambivalent as to its beneficial or de- to business choices that are dysfunctional for local
structive effects (see Chapter 3). Much recent writing by development. For example, it is argued that foreign
activist scholars critical of the exploitation of workers export-oriented multinationals are not interested in ex-
and the environment by multinational corporations, panding local markets or in the buying power of local
although no longer embedded in Marxism, continues consumers (beyond sales to elites), use capital-intensive
to be inspired by the vision if not by the letter of this productive processes that create few jobs, have few links
perspective and its critique of global capitalism (see with local firms, and bring with them a cultural demon-
Klein, 2015; Korten, 2015). stration effect that encourages conspicuous consump-
The pioneers of dependency theory attributed an tion by elites.
important role to multinational corporations in the More sophisticated dependency analyses pointed
maintenance of underdevelopment in the periphery. out that a specific kind of development and industri-
The structuralist critique in its original formulation by alization can occur under the aegis of multinational
Raúl Prebisch was a trade-based explanation of under- corporations in the larger Third World economies—
development (see Chapter 3). Later variations, drawing what Cardoso and Faletto called “associated dependent
more explicitly on Marxism, focused on the role of development.” Peter Evans (1979) made this argument
multinational corporations in organizing this trading most forcefully by pointing to the “triple alliance”
relationship and their impact on the productive struc- among the Brazilian state, multinational corporations,
ture of developing countries. Paul Baran argued that and locally owned firms. He argued that the state can
multinational corporations, through the international act as an autonomous class actor or state bourgeoisie
division of labour (IDL), in which high-value manufac- by creating its own state-owned firms and promoting
turing remained in the core countries and commodity joint ventures involving the state, multinational corpo-
and resource extraction was conducted in developing rations, and local firms. In this way, the state pushes
countries, maintained and deepened the underdevel- industrialization forward by benefiting from the tech-
opment of the periphery. Profits made in the periphery nology, management skills, and capital contributed by
were sent back to the head offices in the core coun- foreign firms. Evans argued, however, that this indus-
tries of the North. Subsequent versions of this idea, trialization has its limits, since it is oriented towards
known as the new international division of labour production for upper-class consumption needs. It is
(NIDL), argued that manufacturing MNCs sought out therefore inevitably elitist and excludes the popular
Third World locations for their low-cost labour while masses (Evans, 1979: 38).

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11 | Haslam: Private Enterprise and Development 

The Mercantile Approach respectively, of the EU, the United States, Canada, and
Brazil. Multinationals in extractive industries continue
and the National Interest
to play an important role in guaranteeing supplies of
Another common approach to the multinational cor- needed raw materials for resource-poor countries, as
poration is to see it as a representative of the political illustrated by the internationalization of Brazil’s Petro-
and economic interests of its home country. This ap- brás, Malaysia’s Petronas, and China’s China National
proach has been particularly important in the study of Petroleum Company.
US-based multinationals by both advocates of US he-
gemony and its detractors. But it is also seen elsewhere
in the nationalist literature of all countries (particularly
International Business Perspective
in Japan and South Korea), which advocates the forma- Whereas the mercantile and dependency approaches
tion of large domestic firms or national champions ca- tend to view multinationals as homogeneous actors
pable of internationalizing and competing at the world that are structurally determined by the global distri-
level. Robert Gilpin argued that the era of multination- bution of power and wealth, the international business
als corresponds with the era of American hegemony. perspective views them as differentiated actors with di-
The US actively promoted the expansion of its firms, verse strategies. From this perspective, the dominant
particularly oil companies, for a number of reasons: to explanation for the characteristics and international-
establish a safe supply of natural resources (a strategy ization of multinational corporations is the “eclectic”
currently being copied by India and China); to supply or OLI paradigm developed by John H. Dunning. This
cheap petroleum to fund its political–military Western approach turns around two questions: (1) Is there a
alliance during the Cold War; to create a worldwide lib- common nature or feature of the multinational that
eral and business-friendly culture; and to improve its distinguishes it from other kinds of firms? (2) What
balance of payments and fund its military spending by explains the myriad forms of internationalization cho-
means of repatriated profits (Gilpin, 1975). sen by multinationals (subsidiary, joint-venture, equity
Beyond these general goals, evidence suggests that participation, licensing)? One question gets at the mul-
US administrations during the Cold War used their tinational as institution and the other as actor.
connections with certain multinational corporations According to the OLI paradigm, the multina-
to pursue specific foreign policy objectives in the de- tional corporation is distinguished by ownership (O),
veloping world, including US attempts to undermine location-specific (L), and internalization (I) advantages.
or overthrow “unfriendly” governments. Two cases in Ownership advantages are those elements unique to the
particular reinforced this opinion, the CIA-sponsored firm in question and generally not available to other
coup d’état in Guatemala (1954), which was often por- firms, such as patents, processes, organizational abili-
trayed as defending the interests of the United Fruit ties, marketing and management, and access to capital,
Co., and the contacts between the CIA and Interna- resources, and markets. Location-specific advantages
tional Telephone and Telegraph (ITT) in Chile in the are those factors in a country where the investment
period 1968 to 1970, which preceded the overthrow of takes place that work with the firm’s other advantages
socialist President Salvadore Allende (see Sagafi-Nejad, and may include political (stability, political access and
2008: 41–7). In the contemporary period, this perspec- coverage, investment regime and protection), social
tive remains relevant. Close ties between large multi- (cultural, linguistic, ethnic commonalities), and eco-
nationals and their home countries continue to exist, nomic (market size, market access, resources, work-
and many governments seek to support the activities force) factors. When location-specific assets abroad
of their firms internationally. Most countries con- add something truly important to the firm’s activities,
tinue to build “national champions,” subsidize them then it will internationalize (become multinational)
through various means, and defend their companies at instead of simply trading with that country (Dunning,
the World Trade Organization—well illustrated in the 2000: 164).
aircraft industry, where Airbus, Boeing, Bombardier, Internalization advantages are the advantages
and Embraer have become the national champions, of co-ordinating production within the hierarchical

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 PART II | International Development Actors

governance structure of the firm instead of buying corporation is often represented as the paragon of
and selling the parts needed to produce any given free markets, in fact the very existence of the multi-
product through arm’s-length market relationships. national proves that “free” markets are imperfect and
Indeed, one of the key reasons why multinationals in- inefficient!
vest in production across borders is because interna- However, as globalization has intensified, many
tional markets are overwhelmed by a vast number of transportation, communication, and organizational
market imperfections (known as transaction costs). By costs (i.e., important transaction costs) have declined,
organizing production inside the multinational, sell- and companies have become more experienced with
ing and buying from itself through administratively international production. As a result, companies are
determined transfer prices, it benefits from lower now more likely to take on a networked structure where
transaction costs and is able to fully exploit ownership many key relationships are governed by the market
advantages without losing control of them on the open (like subcontracting to suppliers outside the corporate
market. Open market relationships are much more structure), and only the most important core compe-
likely to allow competitors to copy key ownership ad- tencies remain internalized, such as design, research,
vantages like product design, technology, and indus- technology, and software development. Thus, although
trial processes and are thus avoided (Dunning, 1993: modern multinationals rely on outsourcing more
76–9; Eden, 1991: 204–7). Although the multinational than their predecessors, functions that are essential to

IMPORTANT CONCEPTS

BOX 11.2 | Global Value Chains and the New International Division of Labour

In the 1970s, multinationals started to move some of their manufacturing processes to the developing
world. The production process, co-ordinated by MNCs, became increasingly globalized and hierarchical—
low-skill and labour-intensive processes were located in low-wage developing countries, while high-skill,
high-wage activities remained at home in the North. This phenomenon, known as the new international
division of labour, was characterized by the fragmentation of the production process across borders
(Ietto-Gilles, 2005: 206). theory emerged in the early 1990s to better understand
this globally fragmented process in which different companies in different countries provided distinct
inputs into the production of a single product. It described the interconnections between companies in-
volved as suppliers and contractors to a lead firm—usually a multinational corporation—that are neces-
sary to bring a product to market. It also established a clear hierarchy of activities within the chain, with
a multinational co-ordinating, or governing, the multitude of relationships between separate companies
(Gereffi and Sturgeon, 2005).
One of the most interesting contemporary questions about value chains is whether local firms in
developing countries that supply particular parts within the value chain of an MNC can learn from the
lead company over time and upgrade their technological and management capabilities, become more
competitive, and move up the value chain into higher-value-added activities. When companies move up
the value chain, it is expected that they will contribute more to the development of their national econ-
omies by increasing employment, developing the skills of their workforce, and exporting. The evidence,
thus far, on upgrading is mixed. The ability of a firm to upgrade (move up the chain) depends to some
extent on its prior capabilities and its pattern of learning, as well as the governance structure used by
the multinational co-ordinating the chain. A governance structure that is more open, more akin to a mar-
ket or a network, rather than a hierarchy, is usually more conducive to upgrading (Gereffi et al., 2005;
Giuliani et al., 2005).

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their competitiveness remain tightly guarded secrets because they often operate as enclaves with few links to
internalized within the corporate structure (Buckley, the rest of the economy. Efficiency-seeking MNCs that
2014: 232). look for low-cost labour can increase employment, but
The other very important contribution of inter- the wages, working conditions, and benefits are rela-
national business studies is the recognition that mul- tively poor. Market-seeking MNCs depend on skilled
tinational corporations can have four very different workers, pay higher wages, and can contribute to a
strategies when they go abroad to seek location-specific healthy domestic economy. The most beneficial MNC
assets: strategy for development is strategic asset-seeking, as it
offers the potential for research and development activ-
Resource-seeking strategy: MNCs require specific ities, highly skilled jobs, and substantial growth.
resources that are only available abroad. Typically,
these resources may include natural resources or
agricultural goods, desirable services that can only RELATIONSHIP BETWEEN STATES
be accessed locally, and specific managerial or AND MULTINATIONALS
technical skills.
Efficiency-seeking (or cost-reducing) strategy: MNCs The strategies of multinationals alone do not determine
plan to make their global operations more efficient their effect on development. A crucial part of the im-
through exploiting differences in the availability pact of MNCs on development is how governments me-
and cost of labour, capital, and resources. The loca- diate this relationship. The historical record is full of
tion of light manufacturing and assembly plants in small states that have succeeded in getting important
low-wage countries is an example of this strategy. concessions from big firms—as well as big firms that
Market-seeking strategy: MNCs establish a sub- appear to have had their way with small states. The ob-
sidiary to serve the consumer demand of a local solescing bargaining model offers a dynamic and flex-
market directly instead of by trade. FDI is chosen ible approach to state–firm relations in that it allows for
over trade because it is required by law to enter the the reality that both firm and state strength (and ability
new markets, permits the product to be adapted to to get what they want) vary by country, firm, sector of
local conditions, is less expensive, or is a strategic activity, and the historical conjuncture (Vernon, 1971).
response to competing firms. Direct investment The obsolescing bargaining approach assumes that
in small market-seeking factories was a common each actor—state and firm—wants to capture a greater
response to import substituting industrializa- share of the benefits of the foreign investment. That is,
tion (ISI) policies, which tended to restrict trade the firm wants more profits and the government wants
through high tariff barriers. to increase the developmental spillovers of the invest-
Strategic asset-seeking strategy: MNCs buy up assets ment. Thus, multinationals and governments can bar-
of other corporations as part of a global strategy gain over a wide range of issues.
to improve their competitiveness. Such a strategy The outcome of this bargaining is affected by their
may generate benefits such as “opening up new relative bargaining power (the resources each controls
markets, creating R&D synergies or production that are desired by the other party and not available
economies, buying market power, lowering trans- elsewhere), strategy (how the investment fits into the
action costs, spreading administrative overheads, firm’s and the country’s economic strategy), and con-
advancing strategic flexibility, and enabling risks straints (the existence of alternatives and pressure from
to be better spread” (Dunning, 1993: 57–61). domestic and international actors). The model gener-
ally assumes that firms hold the upper hand when they
Although it is important to consider the role of first invest, because governments try to out-compete
government policy, as we do in the next section of the other potential locations by offering attractive condi-
chapter, it is generally thought that corporate strategies tions. Once the investment is sunk, however, and the
do affect development outcomes. Resource-seeking company cannot easily leave, the bargaining power
MNCs are thought to have the least beneficial effect, begins to shift towards the government. At this point,

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 PART II | International Development Actors

CRITICAL ISSUES
BOX 11.3 | Women and Export Processing Zones
Export processing zones (EPZs) are specially designated manufacturing-for-export areas in developing
countries that attract efficiency-seeking FDI through offering a regulatory regime favourable to multina-
tional corporations. Typically, EPZs allow duty-free imports and exports, have lower corporate taxation
rates, may be exempt from minimum-wage legislation, and do not permit unionization of the labour
force. Figures for 2007 from the International Labour Organization suggest that the EPZ labour force is
66 million worldwide (40 million in China alone), some 70 to 90 per cent of whom are women (Wick,
2010, citing Milberg and Amengual, 2008). In this respect, female labour is the backbone of the light
manufacturing export industries based in developing countries (particularly in electronics, garments, and
footwear).
There is a significant and unresolved debate about whether the employment of women under these
conditions is liberating or exploitative. EPZ jobs involve low wages, long hours, and frequently poor work-
ing conditions. A spate of suicides by workers in Chinese plants drew media attention to these problems
in 2010. On the one hand, entry into the wage labour force may allow women to escape the restrictive
moral code of traditional households and cultures, form friendship and political networks, increase their
power relative to men because of their contribution to household income, and provide a nest egg that
increases their individual opportunities for advancement and education later on. On the other hand, light
manufacturing firms may also reinforce gender stereotypes by selecting employees based on racialized
or gendered characteristics, such as the “nimble fingers” that facilitate detail work, docility, youth, and
marital status (Elson and Pearson, 1981). Young women also are considered “secondary wage earners”
and therefore are paid less than men. Furthermore, the literature has recorded cases of factories us-
ing gender to control women: male floor managers; a paternalistic discourse to convince families that
their daughters are being well looked after (and controlled); allocating “less-skilled” jobs (like sewing) to
women while other “skilled” jobs (cutting) go to men; and beauty contests to reinforce traditional female
norms. Evaluating whether EPZs liberate or exploit women is therefore a difficult question to resolve (see
Wick, 2010).

the government may change the rules of the game and multinational corporations and doing very little to bar-
try to extract more benefits from the firm. The classic gain with them once they were established (Haslam,
example of the obsolescing bargain can be found in 2007). Gone were the battles over ownership and per-
the mining industry, which is a nationalist lightning formance requirements typical of the 1960s and 1970s.
rod for those who decry multinational investment as Some suggested that the obsolescing bargaining model
exploiting the national patrimony belonging to all citi- had itself obsolesced as the overall mood in the 1990s
zens (Moran, 1974; Kobrin, 1987). became a co-operative one and governments and for-
During the 1990s, analysts increasingly questioned eign corporations sought to complement each other in
the relevance of the obsolescing bargaining model. On order to improve their ability to compete in world mar-
the one hand, firms proved they could protect them- kets (Ramamurti, 2001; Stopford and Strange, 1991).
selves using political risk insurance and prominent Others argued that bargaining was counterproductive
financiers like the World Bank, or the protection of anyway, and policies to encourage firms to integrate
bilateral investment treaties (see Box 11.4) (Moran, backwards with local suppliers had failed.
1998). It also appeared that states, under the influence Theodore Moran argued that the greatest spill-
of neoliberal ideology, were giving a lot away to attract overs in the local economy occur when the MNC is

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11 | Haslam: Private Enterprise and Development 

Jessica Liu/iStockphoto
| Workers in a garment factory, Southeast Asia.

robas/iStockphoto

| Open-pit mine in the Atacama Desert, Chile.

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 PART II | International Development Actors

the most free to take the productive decisions that Dunning, 2008: 89–123). Their importance, however,
make sense in terms of the company’s global strat- was found in the counteroffensive it provoked from
egy. Companies not regulated by government are the rich countries to protect the rights of foreign in-
more likely to be larger (up to 10 times larger than vestors in the developing world.
import-substituting plants), to use more advanced This counteroffensive took place on several
technology, to develop and coach local suppliers to fronts: (1) a campaign was launched to sign bilateral
improve their product and production processes, and investment protection agreements with developing
to use professional management techniques (Moran, countries; (2) investment issues were included in the
2005). Moran’s thesis is contentious and may be most GATT negotiations; and (3) corporate social respon-
relevant to high-tech products like automobiles. Cer- sibility was promoted as a way to improve corporate
tainly, in the early years of the twenty-first century, the behaviour in lieu of state regulation. The first two of-
pendulum seems to be swinging towards more state fensives sought to build a body of international law
regulation of MNCs, especially in the resource sector. based on the principle of protection for foreign direct
In Latin America, since the early 2000s, left-of-centre investors.
governments have successfully put pressure on min- The first efforts in this direction involved the ne-
ing and petroleum producers to contribute more to de- gotiation of bilateral investment treaties (or BITs)
velopment (Haslam and Heidrich, 2016). Indeed, the between developed and developing countries. Such
question “to bargain or not to bargain” may itself be agreements typically enunciated principles of treat-
too simplistic. Most of the literature on the successful ment that foreign investors were entitled to receive
developmental states of Southeast Asia points to the from host governments, such as most-favoured-nation
need for a close and supportive working relationship and national treatment (the same treatment as that
between foreign and domestic firms and governments accorded to the firms of any third country or locally
(see Chapter 7). owned firms), just and equitable treatment, full protec-
tion and security (from expropriation), and the right
to sue host governments in international tribunals for
INTERNATIONAL REGULATION OF MNCs breach of obligations. The first BIT was signed between
Germany and Pakistan in 1959, but the web of agree-
The state–firm relationship is no longer determined ments had expanded to approximately 3,271 worldwide
simply by the willingness of states to pursue either a by 2014 (UNCTAD, 2015a: xii). Few developing coun-
co-operative or a bargaining strategy. Increasingly, tries are not caught in this web, and many signed such
international agreements limit the range of policy agreements in the hope that demonstrating the “right”
choices open to governments in their relationships attitude towards foreign investors would encourage
with multinational corporations. In the 1960s and increased FDI inflows. Thus far, the evidence that in-
1970s, developing countries organized themselves in ternational investment agreements contribute to in-
the United Nations General Assembly and the Group creased investment flows is mixed.
of 77 (G77) to demand changes to the world trade re- At the global and regional levels, rules to protect
gime that would be “fairer” for developing countries foreign investors were included in trade agreements.
(see Chapters 10 and 15). These demands, inspired The Uruguay Round (concluded in 1994) of GATT ne-
by nationalist and mercantile ideas, included con- gotiations added agreements protecting the rights of
trols on the activities of multinational corporations. foreign investors, the most notable of which are the
The major projects of this period that reflected these TRIPs (Trade-Related Aspects of Intellectual Property
concerns were the Charter of Economic Rights and Rights) agreement requiring respect for intellectual
Duties of States (1974) and the Draft Code of Conduct property and the TRIMs (Trade-Related Investment
on Transnational Corporations. The draft code nego- Measures) agreement forbidding the use of certain
tiations dragged out into the mid-1980s before being performance requirements (policies that imposed de-
abandoned (UNCTAD, 2004: 9–11; Sagafi-Nejad and velopmental obligations on MNCs). Since that time, a

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11 | Haslam: Private Enterprise and Development 

CRITICAL ISSUES
BOX 11.4 | Investor–State Dispute Settlement
A major question related to international investment agreements (IIAs), such as bilateral investment
treaties (BITs), is whether they restrict the or the policy options open to governments in
their dealings with multinational corporations (Gallagher, 2005: 10–12; Sánchez-Ancochea and Shadlen,
2008: 11–14; Van Harten, 2008). Most IIAs include investor–state dispute settlement provisions. These
provisions permit a foreign corporation (but not a domestically owned firm) that believes its rights under
an investment agreement have been violated to take the host government to “court” in binding interna-
tional arbitration. Frequently, multinational corporations will claim they have not received “fair and equi-
table treatment” or that a particular governmental measure has affected their profitability to the extent
that it may be considered “tantamount to expropriation.” Known arbitration cases have skyrocketed from
a total of 14 in April 1998 to 608 by the end of 2014, with some resulting in major damage awards, such
as the US$834 million award against Slovakia in 2004 (UNCTAD, 2010: 1; UNCTAD, 2015a: xii). Argentina
alone has faced over 40 known cases, most of which were related to its financial crisis and currency
devaluation of 2002. This may represent the tip of the iceberg, since several of the arbitration venues
open to investors conduct the proceedings in secret. Environmental and social activists have been par-
ticularly concerned that such investment protection could limit the ability of governments to make policy
in the public interest if the interests of multinational corporations were damaged in the process, or that
a could result in which a government never implements good public policy for fear of
being sued by affected foreign investors. For example, most developing countries have private health-
care delivery, but it might be too expensive to move to a universal public system if doing so damages the
profits of multinational corporations and causes them to sue.

number of regional free trade agreements, such as the regulation of the activities of MNCs. Corporate so-
North American Free Trade Agreement, have included cial responsibility, broadly speaking, is the idea
investment disciplines. The Doha Development Round that corporations have a responsibility beyond their
(2001–present) also had investment on the agenda, shareholders to a broader set of “stakeholders.” Such
although it was dropped in 2005 because of opposition stakeholders include any group that is affected by the
from developing countries concerned about its effect activities of the firm, including employees, local com-
on their policy space. As a result of this legalization munities, groups sharing the same resources (such as
of the rights of foreign investors, multinational cor- water), indigenous communities, and people involved
porations now enjoy more protection from govern- in nearby economic activities (such as farming). CSR
ments and civil society groups than at any other time is a voluntary commitment of firms to improve the
in history. quality of their relationship with stakeholders. It is
presented both as a moral argument that companies
should behave ethically and as good business because
CORPORATE SOCIAL RESPONSIBILITY it reduces operational risk, improves worker commit-
ment, increases efficiency, and promotes profitability.
The third element of this counteroffensive is the The contrast between rights and obligations should
promotion of corporate social responsibility (CSR) as be immediately apparent: on the one hand, corpo-
a way of forestalling or deflecting calls for government rate rights have been enhanced through international

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 PART II | International Development Actors

law and binding dispute settlement (Box 11.4); on PARTNERSHIPS FOR DEVELOPMENT
the other, corporate responsibilities remain purely
voluntary. Up to this point we have been discussing the largely
The immediate response of the OECD club of rich accidental developmental effects that occur from self-
countries to the Draft Code of Conduct on Transna- interested behaviour by companies, sometimes mediated
tional Corporations was the Guidelines for Multina- by the intervention of governments. Increasingly, however,
tional Enterprises (1976). To this day, these guidelines private actors are purposefully playing the role of develop-
constitute the most significant corporate social respon- ment agents. One of the most important vehicles for these
sibility effort by developed countries, requiring each actions has been partnerships with governments and civil
OECD country to establish an institution, the National society organizations. As of yet, there is no consensus defi-
Contact Point, to promote the guidelines and medi- nition for the term “partnership” and it is used in many
ate disputes involving investors from that country. ways by different authors. Nonetheless, a broad definition
Another prominent international code is the Global of the term is currently in vogue that sees it as synonymous
Compact, an initiative of former UN Secretary-General with “cross-sectoral alliances,” meaning co-operation that
Kofi Annan. Each set of codes advocates different bridges the governmental, corporate, and civil society sec-
principles, implies obligations for different actors, and tors (Jamali and Keshishian, 2008: 279). The classic defini-
involves different standards of verification and com- tion from Waddock (1991) argues that different actors get
pliance. The Global Compact, for example, requires together to “cooperatively attempt to solve a problem or
companies to voluntarily adhere to a set of 10 princi- issue of mutual concern that is in some way identified with
ples on human rights, labour standards, environmental a public policy agenda item” (cited in Kolk, 2013). Utting
stewardship, and anti-corruption. However, there is no and Zammit (2006) add that within such alliances, actors
independent audit or verification of company efforts, have “a common purpose, pool core competencies, and
unlike codes that require “triple bottom-line account- share risks, responsibilities, resources, costs and benefits.”
ing” (quantification of economic, social, and environ- Therefore, the key features of a partnership are as follows:
mental impacts). (1) collaboration between business and other social actors;
Most multinationals have developed their own (2) a social or public purpose (such as responding to a
codes of conduct, as well as adhering to global codes policy or development problem); and (3) it should, ideally,
promoted by international organizations. Yet there is a be beneficial for all the partners.
debate as to whether CSR is appropriate for the devel- There were four main reasons for this move towards
oping world. Much of the thought on CSR was created partnerships. First, as many development agencies and
in developed countries where a strong legal and social civil society organizations saw their budgets stretched
framework already forces high standards of responsible (or reduced) as needs grew, it was thought that the pri-
behaviour by corporations. In the Third World, where vate sector could help fill the gap by mobilizing resources.
this framework is often either absent or not enforced, Second, it was thought that the efficiency and specialized
the appropriateness of putting the accent on voluntary skills of private companies could create synergies with de-
efforts may well be questioned. Furthermore, there is lit- velopment agencies to do development better—sometimes
tle systematic evidence on the consequences of corporate known as “creating shared value.” Third, many large com-
social responsibility for development in poor areas. The panies began to see doing development as integral to their
argument for its value has mostly progressed through own activities, corporate image, and profitability. And,
advocacy and case studies of good citizenship. None- fourth, for ideological reasons, some development agen-
theless, most world surveys of MNCs show an increasing cies and governments were willing to spend money to pro-
uptake of CSR norms and practices by firms operating in mote partnerships with the private sector. Of course, these
the developing world. In this respect, the contribution of changes occurred after neoliberalism, which was favour-
CSR to development may improve with time. able to private enterprise, had become well entrenched.

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11 | Haslam: Private Enterprise and Development 

CRITICAL ISSUES
BOX 11.5 | The Changing Face of FDI: The Third World Multinational
In recent years, some developing countries have established homegrown multinationals—
(EMNCs) —that invest in other developing countries and in the OECD countries.
This change may prompt us to re-imagine some of the more simplistic approaches to the relationship
between multinationals and developing countries. At the very least, it makes it harder to represent mul-
tinationals as simply the North exploiting the South.
Since some multinationals now call developing countries their “home,” the issue of the impact
of FDI on development is an issue of its impact not just on host countries but also on home coun-
tries. FDI from developing countries offers a number of potential benefits for the home country, such
as increased profitability and competitiveness, access to foreign financing (in developed-country
markets), technology transfer (especially if internationalization occurs through merger and acquisi-
tion of developed-country firms), integration into global production and distribution networks, secure
supplies of natural resources, and spillovers for local firms. Indeed, it appears that Third World
multinationals are expanding in a different way than American multinationals did in the 1950s. They
are expanding more quickly, their ownership advantages are weak, they are used to unstable environ-
ments, they expand simultaneously in developed and developing countries, and frequently they use
mergers and acquisitions as vehicles (Guillén and García-Canal, 2009: 26–30). Indeed, perhaps the
most important and unique characteristics of Third World multinationals is that they seek to absorb
First World technology and managerial practices through expansion, unlike First World MNCs, which
seek to protect their ownership advantages from competitors (UNCTAD, 2006: 169–83; Hennart,
2012). Case studies suggest that EMNCs from India and China have been able to use expansion or
participation in Western MNCs’ global value chains (see Box 11.2) as a way of improving their global
competitiveness and capabilities—in other words, to “absorb, adapt and build on technologies im-
ported from abroad” (Kumar, 2007: 7). In both cases, the government has helped support the inno-
vation capabilities of local MNCs by forcing foreign firms to establish relationships with local EMNCs
(often in the geographic proximity of science parks) as the price of entry to the Chinese or Indian
market (Altenberg et al., 2007). In addition to the impact on their home countries, Third World EMNCs
also may be beneficial for other developing countries, as they frequently internationalize to poorer
countries in their immediate regional environment. As a result, investment from developing countries
is particularly important to nearby economies that are relatively unattractive to First World MNCs. In
this way, South Africa is a source of more than 50 per cent of investment inflows in neighbouring
southern Africa (UNCTAD, 2006: 120).
The relatively recent emergence of South–South FDI flows means that it is hard to judge whether
this new phenomenon will have different developmental effects from those of North–South flows.
Some possible benefits have been noted above. On the other hand, FDI from larger economies like
China and India has shown little interest in the direct or indirect human rights violations (such as in
Sudan) that might accompany their investments, and little permeability to pressure from domestic
and transnational NGOs and civil society groups. This may represent a setback for activists who have
successfully pushed Western MNCs to act more seriously regarding their responsibilities of corporate
citizenship.

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 PART II | International Development Actors

CRITICAL ISSUES
BOX 11.6 | Private Foundations and Development
Private foundations have emerged as important actors in international development. Strictly speaking,
such civil society foundations are legally and financially independent from the companies that founded
them, yet many retain an entrepreneurial culture that promotes innovative problem-solving and techno-
logical solutions. One of the most influential is the Bill & Melinda Gates Foundation, which has net assets of
US$42.9 billion, spends annually up to US$3.9 billion (2014), and has disbursed a total of US$33.5 billion
(www.gatesfoundation.org). The Foundation is well-known for its innovative, out-of-the-box thinking and its
encouragement of partnerships. For example, the Gates Malaria Partnership (GMP) supported a program
led by the London School of Hygiene and Tropical Medicine to research existing malaria tools, develop
new tools, and build the capacity to do malaria research in Africa. The program developed a collaborative
approach with African institutions, founding a Ph.D. program for African scholars, supporting two research
laboratories in Africa, and establishing malaria training and advocacy centres (Greenwood et al., 2006).
Table 11.2 compares the development spending of some notable private foundations and selected coun-
tries and international institutions.

The partnership ideal is best expressed in the with the purpose of addressing social problems, and
concept of shared value developed by Harvard Busi- redefine their relationship with suppliers and clusters
ness School professors Michael E. Porter and Mark to work constructively with small local firms in order
R. Kramer, who argue that businesses should focus to improve their performance and skills and to develop
on how they can combine enhancing competitiveness the communities in which they are located (Porter
with addressing the “needs and challenges” of society and Kramer, 2011: 68–73). In other words, investing in
(Porter and Kramer, 2011: 64). The argument is a re- working with partners is not just a charitable act, but
sponse to fears that business has lost respect and legit- is good for the competitiveness and profitability of all.
imacy in the public eye. The authors distinguish their An example of such a partnership is found in the culti-
idea from philanthropic activities, seeing these as only vation of fair trade coffee suppliers by Starbucks. Con-
redistributing wealth. Instead, they argue that compa- cerned that it would be the target of a sustained activist
nies should creatively rethink products and markets campaign, the company developed a partnership with

TABLE 11.2 | Development Spending in Billions of US$, Selected Foundations, Countries,

and International Organizations, 2014

Bill & Melinda Gates Foundation 3.9 Australia 4.50

Open Society Foundation 0.82 Canada 4.42
Ford Foundation 0.56 New Zealand 0.49
W.K. Kellogg Foundation 0.34 United Kingdom 18.08
John & Catherine McArthur Foundation 0.23 UNDP 4.24*
Rockefeller Foundation 0.14 ***
WHO 5.31**
*
UNDP provisional (April 2014); WHO total funding 2014–15;
**
2011 figures.
***

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11 | Haslam: Private Enterprise and Development 

the Ford Foundation, Oxfam America, and the Oaxa- MNC strategies and different firms have different ef-
can State Coffee Producers Network (CEPCO) in order fects on host countries), and second, the policy regime
to source fair trade coffee. This partnership allowed and bargaining outcomes vary greatly among states.
Starbucks to help raise the quality of CEPCO’s coffee, In other words, some MNCs are better for development
improve the skills of small farmers, and encourage the than others, and some states are simply better at get-
dissemination of knowledge to other co-operatives, all ting the most out of multinationals. In this regard, it
while fulfilling the American company’s commercial is essential to evaluate the effects of individual invest-
objectives (Argenti, 2004). ments both for their economic contribution to capital
But the practice of partnership is more contentious inflows, exports, government revenue, and spillovers in
than the idea itself. On the one hand, partnerships, es- the wider economy (Sumner, 2005: 277–81; UNCTAD,
pecially those known as public–private partnerships 1999: 279–83) and for their political, cultural, and so-
(PPPs), can be very similar to privatizations, in which cial impact.
a company is contracted and partially subsidized to Above all, the chapter has sought to demonstrate
provide a public service, such as building roads, elec- that the private sector is not a monolithic, homoge-
trification, or providing water (van der Wel, 2004). neous actor whose effects are structurally determined
More problematically, the conditions for a truly suc- and easily characterized as good or bad. Instead, pri-
cessful and equitable partnership are rarely realized. vate enterprises are diverse and complicated actors ap-
When corporations provide resources to civil society plying a wide range of strategies. Their developmental
organizations to perform some kind of social service, effects depend on the particular nature of their engage-
it can be a unidirectional relationship, where the firm ment with governments, international organizations,
controls the money, objectives, and ideas (Jamali and and civil society actors. Multinationals, which are often
Keshishian, 2009: 278). NGOs often enter partnerships the focus of criticism, are neither entirely responsible
as subordinates or philanthropic subcontractors chas- for the successes of development nor can they simply
ing the next paycheque, and can be pulled away from be blamed for its failures. UNCTAD (1999: 149) has ex-
their core mission. At the same time, NGOs may be plained that multinational corporations “do not sub-
leery about their engagement with companies, fear- stitute for domestic effort: they can only provide access
ing that the partnership might harm their legitimacy to tangible and intangible assets and catalyse domestic
and reputation (Kolk, 2013). A substantive partnership investment and capabilities. In a world of intensifying
requires a good fit between the strategic objectives of competition and accelerating technological change,
the different partners, as well as significant resources, this complementary and catalytic role can be very
a high level of ongoing collaboration, and frequent and valuable.”
high-level management interaction (Jamali and Kesh-
ishian, 2009: 281). In this regard, partnerships are not
a panacea for development problems, but have to be SUMMARY
carefully constructed and implemented, drawing on
the core competencies of every partner, to work prop- This chapter introduced one of the most important
erly (Kolk, 2013). and yet most misunderstood and under-analyzed
actors in international development—private enter-
prise. After reading the chapter, the student should
CONCLUSION be able to differentiate between small and large firms,
and the different roles they play in development.
There is general agreement that the promotion of en- Entrepreneurs, especially those in the informal sector,
trepreneurship is good for developing countries (if very face important challenges related to a lack of property
difficult to attain). But it is difficult to evaluate whether rights and government support, which can hamper
multinationals are good or bad for poor and developing economic development. Multinationals also should
countries, for two principal reasons discussed in this be regarded as differentiated actors that apply a wide
chapter. First, FDI is extremely heterogeneous (different range of strategies with diverse effects on development.

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 PART II | International Development Actors

However, the chapter also underlined the need to con- corporate social responsibility programs that engage
sider the role of the state as a mediator. How well the communities and by forming partnerships with gov-
state regulates and bargains with firms has a signifi- ernment agencies and civil society organizations to
cant effect on whether they have a good or bad effect address development problems. In brief, the effects of
on development. Some states are better at getting more private enterprise on development depend on the size
from multinationals than others. However, the stu- of the company, the strategy it employs, mediation by
dent should note that international investment agree- the state, and the way the company engages other ac-
ments sometimes reduce the policy space available tors such as civil society. Companies, by themselves,
to governments. In recent years, multinationals have are not entirely responsible for the successes or the
begun to act directly as development agents, through failures of development.

QUESTIONS FOR CRITICAL THOUGHT

1. How important is it to encourage small-scale entrepreneurship in developing countries?
2. If some multinationals do not adequately contribute to development, is it their fault or the fault of host gov-
ernments that fail to regulate them?
3. Can corporate social responsibility contribute to good developmental outcomes? Why or why not? What are
its limits?
4. Why would the emergence of Third World multinationals change how we evaluate MNCs’ effects on develop-
ing countries?
5. Can MNCs successfully act as “aid agents” through partnerships with governments and civil society
organizations?

SUGGESTED READINGS
Dunning, John H., and Sarianna M. Lundan. 2008. Development: Lessons from Latin America. New York:
Multinational Enterprises and the Global Economy. Anthem Press.
Cheltenham, UK: Edward Elgar. Sagafi-Nejad, Tagi, and John H. Dunning. 2008. The UN and
Eade, Deborah, and John Sayer, eds. 2006. Development and Transnational Corporations: From Code of Conduct to
the Private Sector: Consuming Interests. Bloomfield, Global Compact. Bloomington: Indiana University Press.
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