Poverty In Developing Countries

Introduction

Poverty in developing countries has been a major focus of research in the past five decades, and a major interest of the public policy. Poverty is a state of existence characterized by deprivation, vulnerability, and powerlessness (Khan, 2000).

It is important to examine economic and social aspects of governments, markets, households and communities to be able to understand poverty. Poverty differences cut-across gender, ethnicity, age, location (rural versus urban), and income source. Women and children suffer more than men in house holds. Differences exist in communities as rural poor suffer more than urban poor, and amongst the rural group, wage workers who do not own property suffer more than small landowners or tenants, religious groups or minority ethnics suffer more than majority group. These differences among the poor reflect highly complex interactions of cultures, markets, and public policies. Economic growth can be considered necessary to reduce poverty, and persistent poverty can have adverse affects on the potential for economic growth. (World report, Khan)

Foreign Direct Investment

Definition of foreign direct investment

Foreign direct investment, foreign portfolio investment, and loans have been considered amongst the major methods of capital transfer between countries. Foreign direct investment is defined as an investment involving a long term relationship and reflecting a lasting interest and control of a resident entity in the source country (foreign direct investor or parent firm) in the host country (Razin and Sadka,2007). Foreign Direct Investment is defined by different authors as cross border expenditures to acquire or expand corporate control of productive assets (Froot, 1993), and the acquisition and control by a home-country parent corporation of physical assets such as plant and equipment located in foreign countries (Stanley, 1990).

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Reasons for Foreign Direct Investment

Worldwide economic activity is at a new stage with global production, strategic alliances, and worldwide distribution. Foreign direct investment is driven by both policy and non-policy factors. Non-policy factors include: market size, distance, factor proportions and political and economic stability. Policy factors include: openness, product-market regulation, labour market arrangements, corporate tax rates and infrastructure. (Federrke and Romm,2006). Many firms undergo FDI in order to internationalize their operations, with their strategy based on market opportunities, natural resource availability and cost, political and economic stability of countries, and international debt position of the host country.(Konopaske,2002,Beamishe et al,1997)

Human Resource Management and Foreign Direct Investment

One of the major issues confronting the multinational enterprise when trying to implement its FDI strategy is executing the recruitment policies of the parent country. This recruitment procedure is an important method to establish and sustain the organizational integration and control over its international growth activities. Parent country nationals can be assigned to foreign subsidiaries and maintaining a certain percentage of parent country national in management team(Konopaske,2000,Luo,1999) When the entry into a host country is complemented by a proper staffing strategy, the FDI venture will be likely to succeed better than if there was a misalignment between the two.

As foreign firms increase their involvement in host countries, they will need to build capabilities and utilise local competencies. Knowledge of human resource management and of the factors that impact this practise is very critical to the way business will be done, which will ultimately define their success. MNEs should maintain a balance between their implementation practices and local values, customs, and the overall external cultural environment. In most cases these social, human, and environmental factors are as important as the financial and marketing considerations upon which decisions to undertake multinational ventures depend (Pawan et al,2001, Bowling et at., 1999). Since economic, social, political and legal environments influence the conduct of HRM policies and practises, there is a necessity for significant historical and cultural insight into local conditions. This is in order to understand the philosophies, processes and problems of national modes of HRM (Pawan et al,2001, Hofstede,1993)

Potential of FDI for poverty reduction

FDI and growth

Economic development can be induced by transfer of knowledge and best practise between countries. Developing countries can imitate and benefit from the technologies and organizational operations of foreign countries, and grow further.

FDI is considered one of the major means of this transfer. Foreign firms are normally more powerful and successful than domestic ones, so tend to produce higher quality products and export more. This can have a positive influence on the economy of the country, and stimulate the local firms to benefit and learn.(Klein et al,2000).

FDI can play an important role in creation of job opportunities in the host country by three methods. Foreign MNEs employ people for their operations in the host countries, FDI-related industries expansion and economy growth leading to more employment opportunities, or job opportunities in enterprises that are suppliers, subcontractors, or service providers to them. (Sun, 2002). No comprehensive data is present regarding the employment generated by FDI in developing countries. Estimates put the direct employment created by foreign affiliates at less than two percent of the labour force in most developing countries although the share would be higher when only formal employment is considered and it is often substantial in the modern manufacturing sector. FDI in Thailand account for about 17 percent of the total manufacturing employment in the late 1980s, as well as a growing share of new employment generation in the poorer provinces far away from Bangkok.(Brimble and Sherman,1998)

FDI and poverty reduction

The scarcity of research on the direct effect of FDI on poverty is due to the fact that the major contribution of FDI to poverty is by its impact on growth. Some authors suggest that economic growth remains a necessary ingredient for poverty reduction, suggesting that the growth tends to lift the incomes of the poor proportionately with overall growth (Klein at al2000, Dollar and Kraay, 2000). FDI can help in the process of poverty reduction by stimulating growth and economic development. However,

Others disagree, suggesting that the success is dependant on the local policy framework and on local capabilities to absorb FDI. (Jenkins,2005). FDI alone is not enough to affect poverty; education, infrastructure (Klein et al 2000, Borenzstein, De Gregoria and Lee, 1998), and competition in domestic market (Klein et al,2000, Borenzstein, De Gregoria and Lee, 1998) are need to complement this process. Nevertheless, if FDI does lead to higher growth, and provided that this is not offset by increased income inequality, then increased FDI will lift some people out of poverty (Jenkins,2005).

FDI in China

The dramatic growth in the Republic of China has led to many studies trying to explain this phenomenon. China’s record on reducing poverty is enviable, and this accompanied the rapid economic growth happening in the country. The number of people in poverty fell from 250 million in 197 to 34 million in 1999 since reforms and opening-up started (Zhang,2006, World Bank 2002). Many empirical studies have been performed to assess the effect of FDI on poverty reduction .The contribution of foreign direct investment in China’s post-1978 economic development was through increasing the resources available for capital formation, and contributing in the export earnings (FDI’s share of total exports was 30% in 1993) (Chen et al, 1995).

According to Zhang (2006), FDI seems to contribute to China’s economic growth through direct effects (such as raising productivity and promoting export) and positive externality effects (such as facilitating transition and diffusing technology). The most prominent contribution of FDI to the Chinese growth has been expanding China’s manufacturing exports, raising capital formation, increasing industrial output, generating employment, and adding tax revenue.

China illustrates the role of FDI in setting new employment norms and higher labour standards in industries where it is implemented. A new form of labour contract system was introduced in early 1980s which related the salaries and bonuses with labour productivity. This was successful enough to lead to a country wide wage and labour market reforms.(Sun,2002)

However, there were negative social implications for the FDI investments in China. A gap was established between the salaries of employees in FDI firms as opposed to domestic ones. This increased the inequality in income distribution in the country.

Although FDI led to political risks in the country in the post-1978, it was argued to have benefited the people economically. Overall, the impact of FDI on China’s post-1978 economic development has on balance been beneficial (Zhang, 1995). However, the actual impact on poverty reduction could not be definitely concluded, especially that the majority of poverty in China exists in rural areas, and more FDI should be attracted to that area. (Zhang, 2006)

Corporate Social Responsibility

Definition of Corporate Social Responsibility

“Identifying every aspect of society on which a company has an impact, through its non-core as well as core activities”(Edward and Rees) . UK’s Department for International Development (DFID) states: “By following socially responsible practices, the growth generated by the private sector will be more inclusive, equitable and poverty reducing.“ (Jenkins, 2005). CSR is “a concept whereby companies integrate social and environmental concerns in their business operations and in their interaction with their stakeholders on a voluntary basis“(Bhusan,2006).

Human Resource Management and Corporate Social Responsibility

Human resource departments are involved to a major extent in CSR issues. All employment relations matters are prominent in debates around CSR. Gap has around 80 employees worldwide whose job is to make sure that the factories obey the rules and ethical sourcing criteria.

Labour issues are the most frequent issue related to human resource management, having to ensure no work discrimination, proper working conditions, health and safety, pay, no child or forced labour, and being free of associations and collective bargaining. (Edward and Ress). Nicaragua provides an example of bad labour conditions where women in banana plantations work for long hours and are not able of taking care of their children. In addition, their daughters’ schooling have to be terminated so that they can look after their younger siblings.( Bhushan).

Some companies use their appraisal and pay systems to encourage responsible behaviour by their staff. The chief executive of Norway’s largest oil company, Statoil, gets bonus payments dependant on the outcomes of indicators on health and safety, the environment and employee satisfaction (Maitland 2003)

Corporate Responsibility for working conditions in developing countries

One of the major focus of current social corporate responsibility is the improvement of factory and agricultural workers in developing countries. For the past two decades, western manufacturing companies have been pushed strongly into taking account and responsibility of the working conditions of their suppliers.

Corporate social responsibility and growth

A core of CSR is the focusing on long term plans (to success and profit) rather than pursuing short term goals. There is no agreement on the effect of CSR on growth.

It is argued that any diversion from CSR will lead to undermining of business and impairing company’s recruitment and retention of staff. Nike has been in a number of scandals, especially child labour, which disrupted the company’s image.

Corporate social responsibility and poverty

With the increase in foreign direct investment in some developing countries, the

promotion of private sector development and the rise of the CSR discourse, international aid agencies such as the UK Department for International Development

and the United Nations Commission on the Private Sector and Development. (Bhushan)

Business now is being geared towards providing solutions for the poverty problem rather that being the cause of it. These problems were due to pollution, violence, land right claims, and corruption. Now, it is the corporate social responsibility of the business that is concerned with doing the right thing rather than causing more trouble. Business is being portrayed as being part of the poverty solution by promoting free markets and incorporation of small and medium sized enterprises in global supply chains production and marketing. (Bhushan)

The relationship between business and poverty has been criticized due to short comes in understanding the meaning of development and poverty, and lack of analysis of publications on relationships between economic growth and living standards. There should be more attention into work done concerning this issue. The problem with CSR is lack of methodologies to assess the impact of CSR and its effect on poverty reduction, environmental pollution and working conditions. There should not be complete reliance on the code of conduct, since it represents a ‘window’ but go beyond that and study that actually impact of these codes.(Bhushan)