This paper describes the relationship between Foreign Direct Investment (FDI) and Corporate Social Responsibility (CSR) in Latin America. This paper first presents the concept of Corporate Social Responsibility and defines Latin America's socio-political since the 1980s, explaining the FDI's rise in the region and how this led to the consolidation of networks Social Responsibility Networks (SRN). This paper provides insights for the region which could be explored in future comparative research amongst all Latin American countries.
Introduction
The link between foreign direct investment (FDI) and corporate social responsibility (CSR) has recently been made explicit by some authors (Frost & Ho, 2005; Goyal, 2006; Kolk & Tulder, 2010; Lévy, 2007; Marchick & Slaughter, 2005), who claim that there is an evident connection between the rise of CSR and the rise of FDI since the 1990s. For instance, Goyal (2006) suggests that maybe CSR could be result of the previous surge of FDI, as a business strategy to adapt to opportunities and challenges in their external environment.
Kolk & Tulder (2010) identified
According the a survey by the Political and Economic Link Consulting (PELC) and the Ethical Corporation magazine for the World Bank Group in 2003, it was found that CSR plays a significant role factor in determining the location of multinationals activities (FDImagazin, 2003). According to the interpretation of the agencies which carried out the survey, this study found that FDI improves environmental and labour standards and other national conditions as a consequence of CSR.
The social spill over of FDI in the form of the effects of multinational corporations on wages and working conditions in developing countries has been empirically tested by different authors (Brown et al, 2004). There is abundant academic and social activism literature concerning the exploitation and mistreatment of workers by multinational firms in developing countries. Still, there is not necessarily a consensus of causality amongst the papers between FDI and negative spillover (Lim, 2001). Nonetheless, some authors suggest that corporate social responsibility is one of the responses to the social disparities resulting from globalisation (Swift & Zadek, 2002).
The political economy context plays a relevant role in order to understand a country's behavior internally and internationally, and with those two aspects goes along a social structure that determines the needs and capacity of such policies. Due to certain expectations in the global arena and the internal demands on better social conditions arising from these context and structures, the development of Social Responsibility Networks (SRN) (Gonzalez-Perez & McDonough, 2007) finds its space to blossom. Gonzalez-Perez & McDonough (2007: 139) define SRN as the network of civil society actors (including primary and secondary stakeholders of private companies) and state agencies that together provide a platform for the design, implementation and monitoring of initiatives to readdress the negative effects of globalization.
The decade of the 1980s came as a lost decade in terms of economic growth for Latin America due to the external debt of the countries and its lack of capacity to increase growth. However, Santamaría-Vergara (2007) even highlights the fact that the countries came to the 1990s poorer than they were in the beginning of the 1980s, all of this not only because of the debt but mainly as a result of insufficient policies and limited solutions. The privatizations along with the welcoming policies to FDI allowed MNEs to acquire enterprises in Latin America that traditionally used to be governmental monopolies as the public services sector. Since the mid 1990s, Latin American governments looked forward to increase the FDI especially in telecommunications, health and public services sectors in order to improve the infrastructure and receive new technologies that allow better social conditions for their societies (Tresiman, 2003).
Nevertheless, not all these changes and FDI were planned focused on the improvement on social conditions. The fast changes and other interests made the dark side of globalization clearer in Latin America and pushed the societies, home enterprises and even some sides of the governments to look for alternative policies (Casilda, 2005).
Somehow, by the end of the 1990s and the beginning of the new millennium left oriented governments started to take over Latin America like the presidencies of Hugo Chavez in Venezuela and Rafael Correa in Ecuador, and as a consequence, it was shown restrictions to FDI, nationalizing and expropriating companies and focusing on domestic growth.
Globalization, new concerns on environmental sustainability and interests for the improvement of social structures had made MNEs, International Organizations and Governments move towards CSR, as an alternative to Stated-driven growth. Social Responsibility Networks (SRN) emerged in the region stronger under these contexts, where the companies, the government and the societies are evidently interconnected. Besides, pasts experiences in the region had shown that a market closure and a turned back to globalization can have more unfavorable results than the current policies, still if the downsides of globalization, economic policies and social inequities are known. SRNs emerged within the current international settings creating a new order where the governments are not the only ones responsible for the welfare of the population, but the enterprises must also mitigate the harm they cause and contribute to an improvement of the societies where they are.
Increasingly, CSR has become a buzzword, possibly because it means different things to different people, and because the concept of CSR is vague, ambiguous, multidimensional and changing (Bredgaard, 2003, 2004; Garriga & Melé, 2004). As described by Bredgaard (2003) CSR is a natural feature of political decision-making that secures political support from different corners, allows for compromises and makes it possible for different actors to read their interests into political programs. Social responsibility can be used in public relations to achieve better image and reputation; and economic and management research has identified an empirical correlation between CSR and economic performance (Ahmad, 2003; Carter, 2005; Gray & Smeltzer, 1989, Griffin & Mahon, 1997, McWilliams & Siegel 2000, 2001). However, the line of causation is unclear. Bredgaard (2004) wondered if companies behaved in a socially responsible manner because of their economic success or if they became economically successful because they behaved in a socially responsible manner.
MNEs, which by definition operate and are managed across national jurisdictions, are increasingly powerful and not always accountable entities. This power and lack of accountability is reflected both at international and national levels. In order to attract and maintain FDI nations have to create favorable conditions for foreign corporations. This conflict between FDI and national sovereignty may weaken national governments and limit their regulatory actions at both the national and transnational level, explaining the shift from nation-state regulation towards alternative forms of regulation. These alternative forms rely heavily on voluntary initiatives by the MNEs which are implemented and monitored within the civil society. However, it is important to highlight that, historically, voluntary initiatives have tended to evolve into mandatory form, enforced by the law.
Some authors suggest that CSR is one of the responses to the social disparities resulting from globalisation (Swift & Zadek, 2002). Hopkins (1999) suggests that in order to reverse the negative consequences of globalisation, there is a need for a 'planetary bargain' between the public and the private sectors. Continuing with the argument, Michael Edwards (2004) suggests that there is a mutual relationship between economic actors and civil society. Edwards (2004) states that no modern society can develop and maintain sustainable social goals without access to the surplus that market economies create, and he clarifies this further by saying that "a civil society cannot survive where there are no markets, and markets need a civil society to prosper" (Edwards, 2004: 50).
Political theories (Garriga & Melé, 2004) view CSR initiatives either as emanating from the bottom up, in which enterprises are initiators; or from the top down, in which governments are initiators; and according to their focus, either on societal responsibility or on labor market responsibilities. For instances, the term 'corporate citizenship' (CC) was introduced in the 1980s and since then it has gained recognition (Andriof, 2001; Matten et al, 2006; Crane, Matten & Moon, 2004; Maignan, Ferrell & Hult, 1999; Matten & Moon, 2004; Matten & Crane, 2005). Many authors (Andriof, 2001; Matten et al, 2003; Matten, 2005; Matten & Crane, 2005) recognize that the term corporate citizenship is problematic since the definition of citizenship implies a link with a politically bounded community which is generally framed within a particular nation-state. This view implies that corporations are legal and political entities in the countries in which they operate and moreover it implies that corporations have a set of political, legal and social entitlements in countries in which they operate (Marshall, 1965). Some authors (Crane et al, 2004; Oblesby, 2004; Matten, 2005; Matten & Crane, 2005) argue that the term corporate citizenship is legitimate since globalisation challenges the geographical, social, cultural and economic boundaries of nation-states, gives to corporations a pivotal role within economies and societies and challenges the role of state as the only guarantor of citizenship. The arguments emphasise that the process associated with globalisation requires a reshaping of the concept of citizenship (Crane et al, 2004; Matten & Crane, 2005).
Another angle explaining the relationship between corporations and society is the observation that the shareholders of multinational corporations include millions of working people around the world, who through retirement plans and mutual funds have their pensions and life savings invested in the shares of corporations. It has been suggested (Davis et al, 2006; Stiglitz, 2006) that if the level of awareness of this ownership is increased and a systematic accountable approach to collective ownership of corporations is taken it will have positive implications on the process of state and civic involvement.
The number of critical consumers, citizens and investors is increasing. Their use of information technologies has facilitated the exposure and dissemination of information on unethical civic, political, environmental and social behaviours of corporations (Smith & Higgins, 2000; Bredgaard, 2003, 2004; Becker-Olsen et al, 2006). This has increased the power of the media, both to expose and to defend business practices. For business CSR thus becomes a means to improve corporate image and reputation.
The business case for CSR has persuaded some enterprises to implement it since a positive or negative image of the company affects its value. Within the management literature the business case for CSR has become pivotal for encouraging, influencing, persuading, and leading business to implement it. Theories that support what is known as the "business case for CSR" see CSR a strategic means to achieve economic objectives (Friedman, 1970; Freeman & Liedka, 1991; Porter & Kramer, 1999, 2002, 2006; Crooke, 2005).
This instrumental view of CSR has been termed enlightened self-interest (Gray, 1972; Keim, 1978). This is the idea that social responsibility is in the long-run in the best interests of the firm. This enlightened self-interest view has positive and negative dimensions. On the positive side, it can be argued that anything a firm does to produce a better environment will be of long-term benefit to it. A similar justification can be applied to corporate expenditure for urban/environmental rehabilitation, vocational training, cultural programs, and other areas of social concern. In addition, the improvement of internal opportunities and the creation of better labour conditions represent more traditional expressions of this philosophy.
Company involvement in social concerns may also lead to the discovery of profitable market opportunities, and publicized social expenditure and activities tend to improve a firm's public image. It is difficult, however, to measure the extent of economic benefits that might thus be accrued These activities may be viewed as a form of corporate advertising that favorably projects the firm's name to the public and thereby improves its long-term scale potential. Additionally, a firm recognized for its social programs is likely to have an advantage in attracting recruits. Image-enhancing social programs also tend to give the company's employees a sense of pride in their company, which may result in higher morale and greater efficiency.
Projects and programs demonstrating enlightened self-interest can also be implemented to avoid negative consequences. In the early part of the twentieth century, worker-compensation laws were enacted as a direct result of employer indifference to the needs of injured workers. Insensitivity to social needs can lead to the imposition of government regulations. Pollution-control and product-safety regulations also represent examples of this. Furthermore, effective social involvement may also avert harassment by social action groups and other critics. Marketing initiatives that reflect society's concerns for social and environmental issues have increased in importance since the late 1980s and early 1990s in the United States (Menguc & Ozanne, 2005; Scott, 2005; Chamorro & Bañegil, 2006).
Other authors (Swift & Zadek, 2002; Porter & Kramer, 2002, 2006; Werther & Chandler, 2005) suggest that CSR needs to be linked to strategic planning; therefore there is a requirement for a specialised CSR agenda and management for each company. Porter and Kramer (1999, 2002, 2006) argue that CSR initiatives could be seen as a competitive advantage for a particular company if it is appropriate to the specific market context of the firm. Porter and Kramer (2006) argued that companies have inevitable demands made on them by media, activists and governments to be accountable for their actions and that each company requires specialised responses. They add that the capacity to anticipate the effects of particular actions or campaigns on public perception will act as a competitive advantage.
Since the 1990s, the global market has required suppliers to comply with increasing regulatory and voluntary standards, imposed on supermarkets' global value chains (Barrientos & Kritzinger, 2004; Codron et al., 2005; Tallontire & Greenhalgh, 2005). The process of deregulation, the shrinking role of the state, the national effort to attract Foreign Direct Investment (FDI), flexible policy arrangements towards Transnational Corporations (TNCs) and challenges to conventional trade-union strategies and practices since the 1980s in many ways provide the preamble for the emergence of Corporate Social Responsibility (CSR) in the 1990s. This emergence is manifested in the proliferating of codes of conduct and other voluntary standards reflecting environmental and social commitments. Many of these standards have resulted from a civil-society backlash reflecting concerns about social, economic and environmental conditions of production (Dombois, 2003; Jenkins, 2001, 2002; Maitra, 1997).
Three factors have facilitated the development of the current era of CSR:
The formulation of the field of 'Business Ethics' by academics, policy makers and business firms since the 1960s.
The perceived decline in state influence in the public sphere and the consequent transposition of governing power to civil society (which has traditionally acted in the private sphere).
Rapid economic globalisation with its effects on societies, the environment, and business strategy.
Since the 1990s the discourse about CSR has become more prominent in managerial, governmental, policy analysis and civil society publications (Michael, 2003). During the 1990s, some firms began to recognise their role in the social welfare of their stakeholders and assume greater responsibility towards development.
An Empirical Examination of the Relationship between Foreign Direct Investment and Corporate Social Responsibility: Latin America and Colombia
The relationship between Foreign Direct Investment (FDI) and CSR is shown in Figure 1 within the framework of analysis of the present research. This relationship is especially important in the case of policy recommendations.
Goyal (2006) suggests that the relationship between FDI and CSR has been long neglected, although it can have important consequences, as for instance CSR can serve as a signaling device, changing the under-efficient outcome of a Prisoners' dilemma to cooperation as the final equilibrium outcome for companies entering the country.
It is clear that both CSR and FDI are expected to be endogenous, because a higher level of FDI can have an increase of responsible business practices, but a higher level of social responsibility within a country can increase its attractiveness for FDI inflows.
Figure 1: CSR Analysis Framework
