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Technology, Business and Society Programme Paper 5: Regulating Large International Firms

1 Jan 2002

  • Author(s): E.V.K. FitzGerald

This paper explores existing arrangements for multilateral regulation of large firms. It argues balancing strengthened global corporate property rights with more explicit and enforceable social obligations. In a democratic market-based society, investors have legally enforceable rights but must also obey laws designed to protect workers, consumers and the environment.

Competition regulations are designed to counter market power and business taxes ensure the provision of public goods. Strengthened multilateral co-operation in three related areas-investment, tax and competition-is under way. Progress is slow and contested, but the distinct interests of host and home countries are clear and the "development dimension" is broadly recognized. In marked contrast, corporate conduct on labour and environmental issues is still almost exclusively regulated at the national level. Moreover, external standards of international corporate responsibility in developing countries are set by voluntary initiatives, with market incentives rather than legal norms constituting the basis for compliance.

Codes of conduct and other voluntary initiatives, however, have two weaknesses. First, to avoid the "free rider" problem, they should cover the entire sector, hence entailing compulsion. Second, there must be plausible penalties for violations, which can only be applied by governments or by legislation that empowers civil organizations, such as trade associations, to apply them. There is a need for international standards on labour and environment to be supported by intergovernmental agreements.

The paper argues for a multilateral definition of the obligations of international firms that is explicitly linked to the guarantee of property rights. These obligations might reasonably include international taxation, competition rules and stakeholder issues such as employment conditions and environmental protection. European integration, for instance, would present an opportunity for such a definition.

The paper notes that large international firms cannot be viewed as effectively "unbridled". There already exist strong measures between OECD countries to regulate them in the fields of investment rights, tax burdens and competition rules. But these systems must be extended to cover developing countries to support development. Also, there is an urgent need to define what a desirable regulatory regime might look like from the point of view of both middle-income and low-income developing countries.

E.V.K. FitzGerald is the Director of Financial Studies at the Finance and Trade Policy Research Centre, Queen Elizabeth House, University of Oxford, United Kingdom.

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