Part III The Social Dimension, 15 Environmental Issues

This chapter assesses the third element of corporate social responsibility (CSR) applicable to multinational enterprises (MNEs): environmental sustainability. MNEs are active in industries that contribute not only to global heating but also, among other things, to environmental pollution, the production of toxic waste, the reduction of biodiversity, and the depletion of natural resources. In addition, traditional approaches to corporate governance and financial accounting focus narrowly on corporate profitability, externalizing the costs of environmental impacts to the wider community. On the other hand, MNEs are also the main repositories of modern, environmentally friendly, technology and expertise on environmentally sound management practices. Equally, new approaches that internalize environmental factors into corporate costs, decision making, and reporting are slowly emerging. Accordingly, the chapter considers not only the prevention of environmental harm arising from MNE activities, but also how MNEs might be encouraged to use the best technologies and managerial practices to enhance environmentally sustainable economic and social development. It outlines the core concepts informing the environmental responsibilities of MNEs and looks at the debate over MNE impacts—both positive and negative—on the environment, before focusing on the environmental regulation of MNEs.

Part I The Conceptual Framework, 4 Jurisdiction and MNE Regulation

This chapter investigates the legal basis for exercising extraterritorial jurisdiction over multinational enterprises (MNEs). The state’s exercise of extraterritorial jurisdiction rests on the international law rules relating to state jurisdiction. A state’s legal jurisdiction can be divided between the jurisdiction to prescribe laws, to adjudicate disputes and to enforce legal orders and judgments. This classification follows the traditional division of governmental authority between legislative, judicial and executive powers, though each branch of government can engage in any of the three. The chapter evaluates the three heads of jurisdiction in turn, relying to a large extent on US practice, which is the most developed in this field. In more recent years, not only the United States, but other global economic powers, have sought to avoid extraterritoriality conflicts though harmonization of regulatory standards and the development of cooperative regulatory structures.

Part III The Social Dimension, 14 Human Rights

This chapter evaluates another element of corporate social responsibility (CSR) applicable to multinational enterprises (MNEs): human rights. Historically, human rights have been used by corporations to protect their vital interests against state action, leading to human/civil rights protections for corporations. The chapter focuses on how far MNEs, and other business actors, should be responsible for human rights violations. This has been significantly influenced by the UN Guiding Principles on Business and Human Rights (UNGPs), endorsed in June of 2011 by the UN Human Rights Council, which implement the UN ‘Protect, Respect and Remedy’ framework. The UNGPs have created a framework for business and human rights that covers three pillars: the state duty to protect human rights, the corporate responsibility to respect human rights and access to remedy. The chapter then traces the development of concern for business and human rights, and discusses the justifications for holding businesses accountable for human rights violations, the establishment of business and human rights on the agenda of the UN and the principal areas in which business violations of human rights arise.

Part II Economic Regulation, 11 Competition

This chapter studies competition law (antitrust law in US terminology), which protects competition to maximize consumer welfare. Multinational enterprises (MNEs) may use their market power to distort competitive conditions. Unlike purely domestic firms, MNEs can do this in a transnational context. Therefore, regulating MNE competition involves not only substantive rules but also jurisdictional questions which have led to extraterritoriality conflicts. The chapter then examines the competition issues arising from the market power of MNEs operating global networks of production and distribution in often concentrated markets. It also assesses whether competition law should control MNE entry and establishment to preserve the national economy from harmful foreign competition, involving issues of industrial policy and national security. Moreover, MNE operations challenge the hitherto predominantly national approach to competition regulation. To date, there has been little progress towards global competition rules, but it remains a worthwhile question, especially in the context of sustainable development, which has been introduced into competition policy debates in recent years.

Part I The Conceptual Framework, 2 Business and Legal Forms of Multinational Enterprise

This chapter discusses the relationship between the business organization and the legal form of multinational enterprises (MNEs). It seeks to answer a crucial question for MNE regulation: where does enterprise control reside, and do MNE legal forms adequately reflect the allocation of decision-making power in the firm? Legal forms may not coincide with the business organization of the firm. This can lead to a mismatch between the firm’s control structures and the legal structures through which the firm is regulated. The chapter then provides an overview of MNEs as business organizations, stressing the rise of new forms of organization based on advances in information technology (IT) and collaborative arrangements between firms. It also considers the main legal forms of the MNE, centred on contractual and equity-based structures, looking at the limitations of these traditional legal forms as regulatory devices. Finally, the chapter studies the interaction between business and legal forms and the issue of regulatory control.

Part I The Conceptual Framework, 3 Regulating Multinationals

This chapter examines the interaction of multinational enterprises (MNEs) with the political communities in which they operate. It first maps the actors involved and identifies their respective roles and interests. The chapter then considers the effects of MNEs on home and host communities and economies. This involves ideological themes that have influenced the regulatory debate not only historically, but also for the present and future. The chapter also explores the principal levels and methods of regulation, discussing the relationship between formal regulation by state bodies and informal regulation by non-state actors; outlining the available sources of regulatory rules and practices; and assessing the choices of legal jurisdiction between the national, bilateral, regional and multilateral levels. Integrated global production, dominated by MNEs, has led to changes in international and national regulatory environments away from ‘investor control’ towards ‘investor promotion and protection’. At the same time, with the end of the Cold War and the disintegration of the socialist system, there appears to be no serious alternative to the corporate capitalism espoused by MNEs, backed up by the ‘neoliberal’ system of market-led globalization. However, recent challenges to the ‘neoliberal’ ascendancy come from economic nationalism and protectionism as well as greater concern for corporate social responsibility and accountability.

Part II Economic Regulation, 6 Liberalization and Promotion of Inward Investment

This chapter focuses on policies of investment liberalization and promotion, both at the host state and at the bilateral, regional and multilateral levels. In all cases, the aim has been to remove barriers to inward foreign direct investment (FDI) in the belief that this will offer positive economic gains to states and to the global economy. However, the removal of host state controls cannot automatically guarantee adequate levels, or useful kinds, of inward investment. Nor will it guarantee an equitable international distribution of its benefits. Moreover, competition over investment incentives between states may create economic distortions between them, with little positive gain. The reduction of barriers to direct investment, and the use of investment incentives, stand to benefit multinational enterprises (MNEs), as they can establish operations over a wider geographical space and can enjoy reduced investment risks. Against this background, the major home states of MNEs have placed the reduction of barriers to FDI onto the agendas of regional and multilateral economic organizations, with some success.

Part II Economic Regulation, 5 Control of Inward Investment

This chapter describes the major techniques of inward investment control used by host states. Such techniques were at the forefront of the policy response to multinational enterprises (MNEs) in the 1970s, when levels of foreign investment in host states were reasonably high but economic nationalism and self-determination were influential. However, as economic globalization evolved, the cost of economic nationalism became too great to sustain, given the resulting loss of access to investment capital and the most modern productive technology. Increasingly, both developed and developing countries have turned away from the strict regulation of foreign investment and are permitting it on less stringent terms. Given the widespread adoption of privatization programmes, the range of industrial sectors reserved for public ownership has decreased. While reservations and controls over levels of foreign investment in privatized companies are a common feature, in many countries, the very purpose of privatization was to increase the overall level of inward foreign investment in the economy. Ultimately, the main prohibitions on foreign investment are to be found in sectors of the national economy relevant to national security. In recent years the number of such prohibitions has risen.

Part II Economic Regulation, 7 Taxation

This chapter assesses how the integrated operations of multinational enterprises (MNEs) offer opportunities for tax avoidance not open to domestic firms, and how national tax authorities control this. The international character of the income-generating activities of MNEs, the national reach of individual tax administrations, increased international competition over attracting inward FDI and the need to obtain sufficient revenue from MNEs, many of which now operate as digital platforms without any physical nexus with the taxing jurisdiction, has led to calls for the reform of the international tax system. The need for greater international coordination of tax policies is clear. For now, however, national tax authorities remain the main regulators, still applying systems of taxation designed to deal with the international economy of the past, based on the arms-length principle and on the legal separation of companies in the MNE group. However, as the reality of national tax base erosion (base erosion and profit shifting, BEPS) becomes increasingly stark, alternative approaches are becoming politically acceptable, and both states and international organizations are beginning to grapple with the development of a new global model of international corporate taxation based on revised nexus and apportionment rules.

Part II Economic Regulation, 8 Multinational Group Liability and Directors’ Duties

This chapter addresses the impact of the multinational enterprise (MNE) group on company law, considering the themes of corporate control and liability. The existence of group enterprises challenges the basic legal characteristics of the corporation: separate legal personality; directors’ duties to the company; the integrity of corporate capital; and protection of shareholders against liability for corporate debts. Corporate legal separation also hides the underlying group enterprise, reducing accountability for group actions and impacting various classes of potential claimants. The chapter then offers a historical analysis of the corporate legal form as a regulatory device for transnational corporate groups. It looks at the limits of group liability towards voluntary and involuntary creditors in equity-based groups, and in contract-based transnational network enterprises. The chapter also discusses reforms that could enhance MNE group liability and examines the group liability of directors, covering protection of minority shareholders in subsidiaries and compensation of creditors on the insolvency of affiliates.