Should FDI be linked directly to engagement in CSR activities?

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Companies that engage in foreign direct investments (FDI) in developing countries should at least some degree have sustainability approach to their business processes or should they?

When we do our every day purchases in stores and shops in our local neighborhood there is a high possibility that we will be buying wares produced in a developing country. Some of the thing we buy will be as bought on the open market on the commodities such as a lot of Fruit, Cacao or Coffee etc. while others are produced, manufactured and exported as part of the same corporate supply chain. These production facilities are being put in place in order for the parent company (normally in a developing country) to save costs on procurement, wages and in order to better control their supply chain (upstream vertical integration).

FDI is characterized as an investment that is made in another country or territories, between a parent company and its subsidiary. Normally we will look at two types of FDI outward and inward.

An outward FDI is an investment that is backed by the government against all types of associated risks. This form of FDI is also closely related to governments export subsidies, partnerships like strategic philanthropy Risk and different forms of government aid in relation to establishing corporate presence.

When governments want to attract investments then they can use different forms of economic factors in order to encourage inward FDIs. These can include low interest loans, tax breaks like in special low tax areas, grants, subsidies, and the removal of different forms of restrictions and limitations. Factors detrimental to the growth of FDIs include necessities of differential performance and limitations related with ownership patterns.

Link between CSR and FDI

We would like to believe that we are serious about our efforts to develop and create a basis for sustainable business, but how could we encourage and facilitate such a process. In India there are concerns that the CSR movement will make life harder for companies trying to export seeing CSR as a threat to FDI because it puts pressure on some of the areas were developing countries are actually able to compete such as wages, working environments, labor rights etc.  

“Indian authorities think that the ISO standards could be used by developed countries as a way to decrease trade coming from developing countries. India has appealed that the ISO-26000 should not be deemed an international standard, guideline or recommendation to follow.” India Briefing News

This statement is to a large extent in contrast to the popular thinking that CSR is something that is welcomed in the developing world. The CSR standard is being developed by the International Standards Organization (ISO) to encourage more corporations to implement socially responsible practices in among other places their supply chain.

“The whole idea behind the move seems to be to achieve factor price equalization by imposing minimum wage standards on developing countries,” Biswajit Dhar, director general of Research and Information System for Developing Countries told the Economic Times.

The question is we morally obligated to implement the same standards as we would at home as we do abroad?

What if we turn the tables and tell companies that if they want to benefit from the economic advantages that come with setting up a business in a developing country, they will have to apply the same sustainability standards which are present in the region they come from. So for example if a local garment company sets up a factory in Bangladesh in order to get access to cheap labor it should as a minimum live up to the same standards as it is under in a local context in order for them to export garments back to the country of origin. Or if on IT-company sets up operations in Mumbai, India it would have to employ IT professionals at the same terms that they do it home.   

It’s a tempting thought that some of the social dumping issues that are part of the FDI thinking could actually be tackled through the active utilization of CSR.