Autor: Junior Tonett | Publicado: 2016-12-07T12:30:00-08:00


The Role of the TNC in Fulfilling the UN's Sustainable Development Goals


by William Kratzer and Junior Tonett

Prof. Dr. Johannes Stephan - International Business Management WS16/17

7 December 2016


The Sustainable Development Goals (SDG’s) were introduced by the United Nations to establish goals in 17 areas that would need to be met to achieve worldwide sustainable development. In order to achieve these goals, many actors have been called upon to participate and play a role. Furthermore, the UN has identified the funding needs of the worldwide community in order to achieve these goals. Of the various institutions that could provide funding, Transnational Corporations (TNC’s) currently provide the most funding in the form of Foreign Direct Investment (FDI) projects. The role of TNC’s in achieving the SDG’s is mainly to continue and increase these FDI projects. These FDI projects should be focus into non-sensitive sectors, allowing institutional funding to flow to more sensitive sectors like health and education.

Additionally, TNC’s should develop internal mechanisms to internalize the benefits of the achieving the SDG’s and the costs of ignoring the SDG’s. As the SDG’s are achieved at a long time horizon, TNC’s should shift investment assessment and managerial compensation to a similar long view. 

Despite being a necessary part of achieving the SDG’s, TNC’s are by no means the other actor contributing. In fact, much of their behavior and desired actions are, and will continue to be, determined by other forces. These are mainly come from governments and other institutions in the form of regulations and incentives aimed at the TNC and their investment dollars.



What are the Sustainable Development Goals?

Every fifteen years, the UN invites its member for a huge discussion of how the world should be and how to reach particular standards of development. This process began in 2001 when they agreed to the Millennium Development goals.These eight main goals included aims like ending extreme poverty and stopping the spread HIV/AIDS. The deadline for those goals were 2015. At this time, the members again started discussing of the future world and how they wanted to leave it for future generations. In September 2015, all 193 countries agreed &nbsp;to adopting a plan for a better future. This new agreement has 17 goals, ranges over more areas of impact. It is also much more specific. As before, the main and most important issues were economics, social, environmental and governance challenges. Major concerns include food security, human health, education and a special focus on climate change mitigation.

This agreement is meant to serve as a roadmap for governments and other stakeholders, guiding them on investments issues and on implementing public policy. It is important to note that the SDG’s are not international law, but rather a guide for policymakers to handle their national development in a sustainable manner. To achieve those 17 goals by 2030, governments need some special support, primarily in the form of funding and knowledge, and facilitated through information sharing between stakeholders. Importantly, a major funding gap has been identified. Based on UNCTAD studies, there will annual investment need of approximately $4 trillion (USD). Currently, there is investment of $1.4 trillion, so there is a gap of $2.5 trillion to fulfill the SDG needs. It is important to mention that governmental cannot (and should not) individually fund the SDG projects. It is necessary that governmental institutions and the private sector work together. This will include sharing risks, opening market by regulation or deregulation, and knowledge transfer. 



What is the responsibility of the TNC?

One of the most important responsibilities of the TNC in achieving the SDG’s is to act as a source of funds. The required funding estimated by UNCTAD to fill the current gap and achieve the SDG’s will come from multiple sources. Private sources of funding include (but are not limited to) bank assets, pension funds, insurance companies, TNC’s, and Sovereign Wealth Funds (SWF’s). (WIR 2014, pg. 156) Of these sources of income, TNC’s are not expected to the largest contributor of funding (though they currently are the largest source), but will remain a significant source of funding towards projects aimed at achieving the SDG’s. TNC funded projects will take the form of Foreign Direct Investment (FDI). It is estimated that, as of 2104, TNC’s have an estimated total combined stock of $25 trillion available for FDI. (WIR 2014, pg. 156) This includes all money that a TNC could invest in an FDI project, not just money already earmarked for FDI. Realistically, this pool will be divided into investment into a firm’s home market, FDI into projects that do not contribute to achieving the SDG’s and projects that do contribute to achieving the SDG’s. It is unrealistic to expect that the full $25 trillion will be annually invested into SDG’s compliant FDI projects but it remains important to note the total pool size and its potential.

 Despite TNC investment not having the largest potential of expected private funding towards SDG projects (for comparison, in 2012, bank assets have an estimated pool of $121 trillion, or nearly five times greater than TNC’s), it is still a significant size and integral to the closing the funding gap. FDI already plays an outsized role in investment into developing countries and, as a whole, is the current largest source of investment. (WIR 2014, Box IV.3, pg. 148) Furthermore, the type of funding that TNC’s provide is materially different from other sources of funding. FDI, by its very definition, is comprised of TNC’s taking a long-term (ownership) interest in a project in a foreign country. It differs from the other sources of investment, for example the simple portfolio investment by SWF’s, “because [TNC] investors typically seek a long-term controlling interest in a project making their participation less volatile than other sources.” (WIR 2014, pg. 156) As the SDG’s are focused towards long-term growth and goals are set with a distant achievement horizon, the more stable investment provided by TNC’s and FDI are inherently the more favorable type of investment.

Stability is a crucial part of achieving the SDG’s and is a quality that TNC’s are uniquely able of providing. &nbsp;Furthermore, FDI into SDG achieving projects has another benefit that is distinct from other forms of investment by other actors. Besides pure funding, FDI very often brings technology and knowledge transfer into the host country. Adding to the total technology, knowledge and human resource stock of a developing host country adds to the ability of that country to achieve the SDG’s beyond the scope of a single FDI investment project. This multiplier gives FDI its advantage over other sources of investment funding from other actors. 

It is important to note that, despite the importance of TNC’s providing FDI towards the achievement of the SDG’s, FDI (even FDI into developing and Least Developed Countries (LDC’s) ) is not a new or novel activity for TNC’s. Though FDI is clearly an integral plank in the plan to achieve the SDG’s, the responsibility of the TNC in this area is to simply continue to engage in FDI. As providing a benefit and/or return to the parent company is a necessary requirement of successful FDI projects (whether they advance the SDG’s or not), TNC’s should continue to evaluate potential FDI projects on this basis. A project that may advance one SDG goal but does not provide a return to the parent company is not sustainable (and therefore will not truly advance the SDG’s in the long term). A company is therefore duty bound to continue evaluating FDI projects that advance their internal goals and meet their internal requirements for investments. However, a new responsibility of the TNC is to demand investment opportunities that internalize the benefits and risks of SDG projects. TNC’s have a responsibility to consider the broader benefits of a project that advances an SDG goal that possibly goes beyond a simple ROI calculation and threshold. For example, an infrastructure project which improves roads within an LDC may have an ROI to the firm building the road, but the firm will further benefit from more efficient transportation within the host country.

As it is difficult to calculate and internalize these benefits, TNC’s must demand from governmental and investment prompting agencies guidance for such projects. This can take multiple forms. First, TNC’s can demand that institutions package and channel SDG ready projects. Second, TNC’s can look to institutions for guidance in internalizing externalities, both positive and negative. This will allow them to better assess SDG compliant (or non-compliant) projects. A classic example of this would be for institutions to provide TNC’s with the total costs of carbon emissions and allow those TNC’s to utilize those costs in their ROI calculations and considerations. The important aspect is that TNC’s demand this guidance, that institutions provide it and that TNC’s include them into their internal decision making mechanisms.

Besides accounting for externalities, TNC’s can further modify their internal decision making mechanisms by re-orientating the time horizon for managerial compensation. As previously mentioned, the SDG’s and FDI projects both benefit from a long-term engagement. As such, managerial compensation and investment policies that favor short-term returns will fundamentally undermine both SDG’s and FDI projects (in the long-term). It is critical to the success of SDG achieving FDI projects that decisions be made for long-term growth. A bonus structure for TNC managers that rewards quarterly returns is a significant barrier to achieving investment into SDG projects. TNC have an interest in long-term projects and need to create internal compensation systems that reflect this interest. 

Another important role that TNC’s need to play to achieve the SDG’s is to crowd-out traditional institutional spending in non-sensitive sectors so that institutions have greater funding for sensitive sectors. If TNC’s were to more heavily invest in a non-sensitive sector like infrastructure development that would allow for a LDC government to put more funding into sensitive sectors like education and health. &nbsp;Public opinion and national laws will always limit the amount of private sector involvement in some industries. Many populations are wary of private sector involvement in areas like health and it is therefore the responsibility of TNC’s to focus their investments on areas like climate change mitigation so that institutions have more funds to put into health, education, etc. 

This is evidenced by UNCTAD’s estimates that projects in sectors like Power and Climate Change Mitigation will require approximately $480 billion per annum respectively. This is in stark comparison to their estimates for Education and Health sectors of $40 billion and $110 billion per annum respectively. (pg. 146) This is not to show that the funding needs of the Health and Education sectors are a fraction of the Power and Climate Change Mitigation needs. It simply is not desirable and, in some cases, possible for private investment in these sectors. As such, the burden falls entirely on institutions, like government, to meet the funding gaps in these sectors. The TNC responsibility here is to over invest in the non-sensitive sectors to allow for institutional funding to flow to the sensitive sectors. 



Are there other actors and, if so, what are their responsibilities?

As mentioned before, to fulfill sustainable development goals would involve many actors, everyone with specific roles, and sometimes, cross-role deviations. One of them who plays quite important role is the government. They are important for the country on how the investors (private sector) sees the country itself. That means, the more reliable is the government and policies, the better and qualify investment they receive.

 Government’s main role is finding the right balance between attracting FDI and protecting national interests, because, foreign direct investment goes where the better opportunities are, and we may never underestimate their way of making money (profits), so, the government and policymakers are usually struggling on the line of how much openning the country to foreigners and on the other hand is how much the government will not lose control of their own country deviating it to private sector. Those questions hunt governments because there are sensitive areas which they are not allowed or willing on loosing control, such as oil, water, minerals, health and so many others. That was quite interesting in our research (Unctad), that those areas are also interesting for private companies to invest, because in the short term, they are profitable, but maybe they will not achieve best country interests. 

When we think in national policy, we intend to believe that only developing countries regulate their state or deregulate at the point of losing control. As we could read in UNCTAD’s 2014 report, France for example, issue a law on national interest which forbade foreign companies to invest in some sectors as security, water and so on, delivering the final word to the ministry of foreign affairs. Brazil also forbite companies to invest in armored cars services, because for them is a matters of national security - companies like that are allowed to have their trucks as secure as tanks, and the guards are allowed to carry heavy guns. It is easy to imagine what would happen in a small country, with companies taking over their own country because they simply could. Another good example was Sri Lanka, who forbade foreigners of owning land, but on the other hand we have Peru who issue a law for privatization of &nbsp;49% of their state firm Petroperu. With those examples we can see that regulation and deregulation is important to attract foreign direct investment, but there is something else. They might have more elements on attracting them, and the question come up to governments who need to think in term of long run for the country: how do we provide also mechanisms for funding, and that way showing the country as a candidate to receive foreign direct investments? Trick question for governments of developing countries, because either they don’t have the expertise to do so, nor the money to give to finance large projects, specially when they come from abroad and also nor the transparency enough to sell themselves as good countries to invest. So, how do governments attract FDI? Well, according to Unctad’s report on the subject, there are three main policies governments use to attract foreign direct investment; (a) financial benefits; (b) fiscal benefits; (c) regulatory benefits; when the government issue financial benefits, they aim companies who could bring some expertise to the country but are not willing to spend the money in a green field project, or buying a factory to invest on it, so governments try to persuade them by letting them not paying rent for 30 years, for example, or in the case of Brazil, financing them with little or no interest by their special investment bank. Fiscal benefits are by large used to attract foreign direct investments, and usually preferable for companies who are really interested in investing abroad. It is important to say that foreign direct investment usually deals with long term projects, as ports, airports, roads, and so on, and at those economies, companies have already their own funding available and risk calculated to get into the game. That is why they mostly expect fiscal benefits, by not paying taxes. We must take in considerations that taxes in developing countries tend to be high and usually the government is efficient in collecting them, but not in spending the, correctly in areas which could bring benefits at the long run, like sanitation for example. Another very well utilized case for bringing investment to the country is the traditional regulation of an industry or deregulate it. Both cases play the same importance, but governments need to take care on this issue, because it plays important role in the long run, and sometimes even when they want to make a good thing, it may turn out in a disaster for the country and its people. Regulate an industry means that you create rules to the market, and it may at many cases, take some companies of their own country out of the business, because tight lich means more control. On the other hand, deregulate an industry means that policymakers untight the lich, making rules more flexible, which also may take some companies out of the market, because they do not have how to deal with flexibility as foreign companies do.

We could check that governments have many ways to make their countries seems betters for investment, and so, they expect private investors bring all their money to national projects, but why do policymakers use so many tactics to bring foreign direct investment? Some reasons are that they try to compensate investors by their deficiencies in the investment climate. Lack of transparency, weak infrastructure, low risk return, managerial deficiencies, workforce education and low expertise in dealing with long term projects.

By playing the card, the policymakers expect something in return for the country as a whole. The main expectations are job creation, because with jobs comes a better life for families, for the commerce to elevate sales and the whole economy turns into a forward positive wheel. They consider more according to UNCTAD report. Expectation among technology transfer, exports, linkage with home country industries, skill labor development, and others spillovers.



Conclusion

As shown above, there are many actors in achieving the Sustainable Development Goals and providing the funding required to fill the current gap. The TNC certainly has a role to play, but it is firmly a secondary role in comparison to other entities like governmental institutions. These institutions are the ability to regulate and provide incentives that case TNC’s to react. TNC’s will fundamentally act in the interest of profit and it is up to the institutions to set the “rules of the game” that the TNC’s must follow. If the investment scenario is set up in a favorable way, then the FDI will follow. 

Governmental institutions and TNC’s are ultimately interdependent. TNC’s need the governmental institutions to create a favorable investment climate while governments need TNC’s to provide the necessary funds to achieve sustainable development. Each one plays an important role on achieving SDG. The question at this point is how fast can policymakers act to regulate/deregulate and incentivize by fiscal policies their economy so that TNC could come and fill the gaps. Governments do not want to lose power over their own country, so we conclude that the process will continuously be slow, with late reforms, and governors who only care about reelection instead of projecting their countries for the next 20 or 30 years ahead and promote what is necessary to get there. It seems by our point of view that it is a two way road, the more companies invest, gain power over government, the more governments try tighten the lich over the market, like an endless game, and on the other hand, the more they tighten, the less investors see the country as a good investment opportunity, so money shrink. The point is finding balance between policymakers and TNC, so that way both working together may achieve their own goals, and there is where UN and their special agency UNCTAD come with some solutions, like linking both, providing reliable reports, exercising leadership and bringing the topics to a higher discussion, that is, how to achieve development sustainable goals for the next 15 years, and leaving for the next generations a better world with less discrepancies between the humankind.



 

References

Trade and Development report, 2016, United Nations conference on trade and development, UNCTAD/TDR/2016

World Investment Report 2014 - Investing in the SDGs: An Action Plan, United Nations conference on trade and development.

The Impact of Foreign Direct Investment on Sustainable Development, Economic Insights - Trands and Challenges Vol. IV(LXVII, No 3/2015, Marian Catalin, Mirela Panait, George Alin Haralambie

Business and MDGs, Fighting Poverty: A Business Opportunity, Report of the 10th International Business Forum

Multinational Corporations and Spillovers, Stokholm School of Economics, Magnus Blomstrom and Ari Kokko, Journal of Economic Surveys, vol.12 No.2

http://unctad.org/en/Pages/DIAE/ISAR/ISAR-Corporate-Transparency-Accounting.aspx

https://www.theguardian.com/global-development/2015/jan/19/sustainable-development-goals-united-nations


http://www.preservearticles.com/2012020122383/what-is-the-role-of-mncs-in-developing-countries.html