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10.2478/v10103-012-0021-y
JANINA WITKOWSKA
*
Social Aspects of Transnational Corporations’ Activities
in the New EU Member States
Abstract
The aim of this paper is to examine main social aspects related to
activities of TNCs in the new EU Member States and to answer the question
whether TNCs could help solve some social problems of recipient countries or if
their activities are a source of additional imbalances in the social sphere. The
UNCTAD, OECD and CEIC statistics data bases are used to analyze and
evaluate the scale and consequences of TNCs activities in the new EU member
States. The empirical analysis is limited to four countries, i.e. the Czech
Republic, Hungary, Poland and Slovakia. The research results show that TNCs
can play a positive role in smoothing some social problems in host countries
which are unemployment, poverty and social exclusion. TNCs create and
maintain a vast portion of jobs in the new EU Member States offering higher
compensation for employees than domestic firms. The tendency towards regional
concentration of FDI in developed regions has an ambiguous impact on the
socio-economic cohesion of the enlarged EU examined at the regional level.
TNCs seem to stimulate disparities between regions of the EU and within these
regions. TNCs are corporate social responsibility leaders in the new EU
Member States.
*
Ph.D., Full Professor at the University of Łódź
144 Janina Witkowska
1. Introduction
Transnational corporations’ activities in the form of foreign direct
investment (FDI) cause both economic and social consequences for host
countries. While the impact of FDI on economy has already been widely
analyzed, social aspects of foreign investors’ activities are less recognized, even
though they are of paramount importance for the sustainable development of
host countries. Transnational corporations (TNCs) have an impact on some
characteristics of labor markets in recipient countries, they also influence social
inequalities in regions and introduce some corporate social responsibility (CSR)
practices often unknown or neglected in recipient countries.
The new EU Member States are in need of capital to modernize their
economies and they encourage TNCs to invest in their economies. Social issues
related to the activities of TNCs are also important to them because all the new
EU Member States experience social problems such as unemployment, poverty
in some regions, lack of adequate sources for education and healthcare systems.
These countries face serious imbalances of their national budgets and they have
little prospects of solving their problems by using public sources. Moreover,
they cannot use the social policy of the European Union as a remedy, as it is
only additional to the national policies.
The aim of this paper is to examine main social aspects related to
activities of TNCs in the new EU Member States and to answer the question
whether TNCs could help solve some social problems of recipient countries or if
their activities are a source of additional imbalances in the social sphere.
The more detailed tasks of the paper are as follows:
• to present theoretical issues of TNCs activities in the social sphere of
recipient countries
• to define main social problems of the new EU Member States
• to show a scale of the Europeanization of the social policy in the EU and its
relationship with national social policies of the Member States
• to examine the importance of TNCs for labor markets in the new EU
member States
• to evaluate the role of TNCs in creating/or smoothing social inequalities
between and within the regions
• to evaluate a scale and forms of TNCs involvement into corporate social
responsibility (CSR) practices in the new EU Member States.
The UNCTAD and OECD statistics data bases will be used to analyze and
evaluate the scale and consequences of TNCs activities in the new EU member
Social Aspects of Transnational… 145
States. The empirical analysis will be limited to four countries, i.e. the Czech
Republic, Hungary, Poland and Slovakia.
2. Theoretical aspects of TNCs activities in the social sphere of recipient
countries
TNCs activities in host countries bring both economic and social effects
although the latter seem to be less frequently examined. Social issues related to
TNCs’ involvement in recipient countries are broadly understood (Meyer 2004,
Jain, Vachani 2006). They embrace labor standards, functioning of institutions,
environmental issues, ethical questions, poverty reduction and social
inequalities.
This paper concentrates on some of these issues, i.e.:
• labor market issues
• regional social inequalities
• CSR practices as a part of business ethics.
The relationship between TNCs activities and labor market in host
countries is discussed in the context of direct and indirect effects on employment
and building skills in host countries (UNCTAD 1994, UNCTAD 1999). These
effects depend on TNCs entry modes into host countries (greenfield investment
or M&A), on a scale and branch structure of FDI, TNCs strategies and related
organizational structures as well as on policies of host countries towards foreign
investors. European integration processes modify, to some extent, effects of
TNCs activities on labor market. This modification is related to the stages of
integration processes and characteristics of TNCs (Witkowska 2001).
Regional development disparities existing in certain host countries are
influenced by TNCs’ activities. FDI tend to be located in relatively more
developed regions of host countries because of their stronger location
advantages. This is consistent with J.Dunnig’s eclectic paradigm of international
production (Dunnig 1977, 1979, 1988). Advanced integration processes enhance
spatial concentration of economic activities while free capital and labor
movements are established ( Molle 1995). This leads to stronger regional social
inequalities within host countries because of growing regional disparities in
employment, skills and incomes. The EU socio-economic cohesion policy can
only partly overcome regional differences in GDP per capita, employment rates
and innovation characteristics (Molle 2007).
The literature discusses CSR practices in the context of business ethics,
their relations with competitiveness of firms, costs –benefits of stakeholders,
146 Janina Witkowska
motives standing behind and international dimensions of these practices
(UNTAD 1999, UNCTAD 2001, Hopkins 2004, Porter, Kramer 2006). The
involvement of TNCs in CSR is growing which is confirmed by their
participation in global and regional initiatives and actions. The European
Union’s institutions support a participation of European enterprises in CSR
practices (Green Paper 2001, COM 2002, COM 2006). European integration
processes, nevertheless, don’t seem to influence specificity of CSR practices.
3. Main social problems of the New EU Member States and attempts to
solve them
A common feature of the new EU member States are social problems that
were caused by systemic transformation processes and adjustments to market
economy rules. There are: unemployment and its social consequences, poverty,
social exclusion, lack of adequate sources for education and healthcare systems.
The EU accepted a new strategy ‘Europe 2020’ oriented among others on
improving social cohesion of the EU. It is a daunting task because of social
disparities existing between developed and less developed Member States and
their regions. The EU statistical data illustrate the scale of these problems (The
European Commission 2010):
• Unemployment - since 2008, has risen dramatically in many Member States,
notably in Spain and the Baltic States, where average rates were around 20%
by early 2010. In February 2012, the average unemployment rate in EU27
amounted to 10.2%. Three of the new EU Member States (the Czech
Republic, Romania and Slovenia) accounted for the lower unemployment
rate than the average. In Poland this rate was the same as the average and the
other six new Member States experienced the higher unemployment rates,
ranging from 11% in Hungary to 14.6% in Latvia (See Graph 1).
• Regional disparities in unemployment have also increased since 2008,
although in 2000-2008 a significant decrease in unemployment rates in some
regions was observed. Eight of the ten regions in which the unemployment
rate decreased the fastest between 2000-2008 were located in the new
Member States, i.e. in Poland, Bulgaria and Slovakia.
• Poverty and social exclusion is highly concentrated in less developed
Member States and regions where up to a quarter of people are identified as
being severely deprived. The share of population with an income level that
puts them at risk of poverty (less than 60% of national median disposable
income) also differs markedly between countries and even more between
regions. For example one in four people is at risk of poverty in Romania but
Social Aspects of Transnational… 147
only one in ten in the Czech Republic. At a regional level the differences are
much wider. The list of the ten regions with the highest share of the
population with an at-the-risk-of-poverty income includes three regions of
the new Member States ( two in Romania and one in Bulgaria). At the same
time, 2008, there were six regions from the new EU Member States on the
list of the ten regions with the lowest share of the population with an at-the-
risk-of-poverty income.
• Life expectancy is relatively high in all the EU countries, nevertheless,
differences between the regions remain relatively wide. Infant mortality, for
example, is substantially higher in Romanian and Bulgarian regions, but also
in some of the more remote or economically depressed regions in the EU-15.
• ‘Early-school leaving’ defined as a percentage of young people aged 18–24
with no education beyond basic schooling occurs in one in four regions. The
‘Europe 2020’ target in this field is at most 10%. It is worth noting that the
ten regions with the lowest share of early school leavers in 2007-2009 were
located in Poland (five in ten ), the Czech Republic and Slovakia.
• The ‘Europe 2020’ target of increasing the proportion of those aged 30-34
with a tertiary education degree or equivalent to 40% has been reached in
less than one in six regions. The ten regions in which the share of tertiary
educated population (age 30-34) increased the fastest between 2000 and
2008 were located in the UK, Poland and Ireland.
As the analyzed countries face serious imbalances of their national
budgets the possibility of solving above mentioned social problems by using
public sources is strongly limited. The new EU Member States receive financial
support from the European Structural Funds and the Cohesion Fund. A vast
amount of these financial sources are used for economic and technical
modernization, environmental improvement as well as creating human capital.
The new EU Member States cannot, however, treat the EU policies and
their instruments as a remedy, because such EU policies as the social and
cohesion policies are only additional to the national policies. What’s more, the
Europeanization of the common social policy is not as advanced as in the case of
certain economic policies. The character of EU social policy is “looser” than
other EU policies and its range is limited to those fields where member states
were willing to surrender certain prerogatives to the European Union level
(Jovanović 2005; Witkowska, 2010, pp. 117-138). In the European integration
process, there is a strong asymmetry between policies promoting market
efficiency and policies promoting social security and equality (Scharpf 2002).
In this context, a question arises if it is justified to expect that TNCs
activities in the new EU countries could help solve or at least smooth some
social problems in these countries.
148 Janina Witkowska
4. The importance of TNCs for labor markets in the new EU Member States
An evaluation of an impact of TNCs on labor markets in the new EU
Member States encounters a serious setback because of incomplete databases.
Nevertheless, accessible OECD data for 2002-2007 show that TNCs activities
influenced to a large extent employment and compensation of employees in
these countries before the global financial crisis.
The shares of TNCs in the national total number of employees were
growing in the Czech Republic and Poland. These shares increased in the Czech
Republic from 17.7% in 2002 to 33.1% in 2007 and in Poland from 16.6% to
23.3% respectively ( see the Graph 2). It means that almost one third and one
quarter of jobs respectively was created or maintained by TNCs in these
countries.
Data also show that in all the analyzed countries the shares of TNCs in the
national total number of employees in manufacturing were increasing while in
services some mixed tendencies were observed. This issue is illustrated by
Graph 3 and 4.
It is worth noting that the position of TNCs in some manufacturing
branches is prevailing. In all the analyzed countries there are branches in which
the shares of TNCs in the overall number of employees amount to over 50%.
In some branches these shares are even higher and range from:
• 73% to 84% in a motor industry (Poland and the Czech Republic
respectively)
• 71% to 82% in the branch “Radio, TV and communication equipment”
(Poland and Slovakia)
• 58% to 75% in the branch “Electrical machinery and electronic equipment”
(Poland and Hungary).
The same branches are strongly export-oriented. For example, TNCs
account for over 80% of export from these branches in the case of Poland. This
implies that TNCs use the new EU Member States as an export platform for
goods being motivated by their relatively cheaper labor force. Nevertheless,
TNCs create and maintain a vast portion of jobs in the new EU Member States.
Existence of some branches is totally dependent on foreign investors.
A withdrawal of foreign investment from these countries may cause serious
economic and social troubles, especially at regional and local levels where firms
with foreign participation are major employers. For example, some
disinvestment occurred in some regions of Slovakia in 2009-2010.
Data on compensation of employees show that TNCs’ shares in the
national total remuneration payable to employees in the analyzed countries were
Social Aspects of Transnational… 149
increasing in 2002-2007. In manufacturing, they ranged from 52% to 59% in the
Czech Republic, Hungary and Slovakia in 2006-2007. At the same time TNCs
accounted for 37% - 51% of the national total number of employees in
manufacturing. The comparison of these data allow to conclude that TNCs pay
higher wages and salaries in manufacturing, in cash or in kind as well as the
social contributions than domestic firms. In services, the same tendencies were
observed although the discussed shares were lower, except the case of the Czech
Republic. The graphs 5 and 6 illustrate this observations.
Taking into account the social problems of the new EU Member States
referred above, the activities of TNCs could diminish a danger of the growing
unemployment and reduce a risk of poverty in some social groups.
5. The role of TNCs in dealing with regional social inequalities
The new EU Member States countries are characterized by both economic
and social internal regional inequalities. The experience of these countries shows
that TNCs locate their foreign direct investment in the relatively more developed
regions of host countries and less in the lagging regions. This was confirmed by
the data both before and during the EU membership. For example (CEIC data
basis and own calculations):
• in the Czech Republic, 47% -54% of the annual FDI flows were located in
the Capital City Praha region in 2000-2009
• in Hungary, about 68% of the annual FDI flows were located in Central
Hungary region, 10%-11% in Western Transdanubia and 6%-8% in Central
Transdanubia in 2000-2008 respectively
• in Slovakia, about 68% -74% were located in Bratislava region in 2007 -
2009.
In Poland, the capital city region (Mazowieckie) accounted for 56% of
inward FDI stock in 2003 and 49% in 2009 (GUS 2004, 2010 and own
calculations).
The relatively high degree of regional concentration of FDI in developed
regions combined with the higher compensation of employees offered by TNCs
have an ambiguous impact on the socio-economic cohesion of the enlarged EU
examined at the regional level. FDI seem to stimulate disparities between
regions of the EU and within these regions. It consequently makes catching up
processes of lagging regions even more difficult.
150 Janina Witkowska
6. TNCs involvement into corporate social responsibility (CSR) practices in
the new EU Member States
TNCs are involved into CSR practices in the new EU Member States
more intensively than domestic firms. This is confirmed by the UNDP survey
(UNDP 2007), data on the participation of TNCs in the Global compact
initiative (www.globalcompact.org.pl) and case studies. In the new EU Member
States, in their earlier phase of development when the systemic transformation
underwent, less attention was paid to social and environmental issues (CSR
Europe 2010).Within restructuring processes, post –socialist firms got rid of
some social functions, developed in the period of centrally planned economies,
treating them as a burden. Although no deeper expectations were raised towards
foreign investors with regard to CSR practices, they introduced them into the
recipient countries following parent companies’ strategies in this field.
Nowadays, TNCs are CSR leaders in the new EU Member States and some
domestic firms started following them.
TNCs enter into complex social relations in the new EU countries and try
to shape them according to their needs (Witkowska 2011, pp.515-528). This
allows TNCs to avoid social conflicts that might threaten their interests.
Furthermore, TNCs use social relations management as an instrument of
increasing company competitiveness. For the new EU Member States, the
involvement of TNCs in social issues is beneficial as well. First of all, they
diminish a deficit of decent work in these countries. Then, through sponsoring
and patronage, they have participation in financing of some events and actions in
the cultural or educational sphere that could not be financed from national or
local budgets because of a shortage of sources.
7. Conclusions
1. Theoretically, TNCs can play a positive role in smoothing some social
problems in host countries which are unemployment, poverty and social
exclusion. European integration processes can modify only to some extent
an impact of TNCs on labor market and regional disparities.
2. TNCs create and maintain a vast portion of jobs in the new EU Member
States offering higher compensation for employees than domestic firms.
In some branches, TNCs are dominant as employers.
3. The high involvement of TNCs in export from some analyzed countries
imply that they are treated as an export platform. Relatively higher
Social Aspects of Transnational… 151
compensation for employees does not constitute a barrier to strongly export-
oriented investors.
4. The tendency towards regional concentration of FDI in developed regions
has an ambiguous impact on the socio-economic cohesion of the enlarged
EU examined at the regional level. TNCs seem to stimulate disparities
between regions of the EU and within these regions.
5. TNCs are corporate social responsibility leaders in the new EU Member
States. In the social sphere, they are strongly involved in sponsoring and
patronage actions. They diminish a deficit of decent work in these countries
being involved in different programmes for their workers.
GRAPHS:
Graph 1. Unemployment rates in the EU, EA and the selected EU Member States, 2011, %
Source: Unemployment rates, seasonally adjusted, February 2012.png - Statistics Explained
(2012/4/3)http://epp.eurostat.ec.europa.eu/statistics_explained/index.php?title=File:Une
mployment_rates,_seasonally_adjusted,_February_2012.png&filetimestamp=201204020
81419 and own presentation.
152 Janina Witkowska
Graph 2. The shares of TNCs in the national total number of employees, 2002- 2007, %
Source: OECD database.
Graph 3. The shares of TNCs in the national total number of employees in manufacturing,
2002-2007, %
Source: OECD database.
Social Aspects of Transnational… 153
Graph 4. The shares of TNCs in the national total number of employees in finance,
insurance, real estate, business activities, 2002- 2007, %
Source: OECD database.
Gaph 5. TNC’s shares in the national total compensation of employees in manufacturing,
2002-2007, %
Source: OECD database.
154 Janina Witkowska
Graph 6. TNC’s shares in the national total compensation of employees in finance,
insurance, real estate, business activities, 2002-2007, %
Source: OECD database.
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Streszczenie
SPOŁECZNE ASPEKTY DZIAŁALNOŚCI KORPORACJI
TRANSNARODOWYCH W NOWYCH KRAJACH CZŁONKOWSKICH
UNII EUROPEJSKIEJ
Celem artykułu jest zbadanie głównych społecznych aspektów związanych
z działalnością korporacji transnarodowych w nowych krajach członkowskich Unii
Europejskiej (UE) oraz próba odpowiedzi na pytanie, czy korporacje transnarodowe
mogą pomóc złagodzić społeczne problemy występujące w krajach goszczących, czy też
są źródłem dodatkowej nierównowagi w sferze społecznej. Analiza i ocena skali
zaangażowania korporacji transnarodowych w nowych krajach członkowskich UE
została przeprowadzona z wykorzystaniem bazy danych UNCTAD, OECD i CEIC.
Analiza empiryczna obejmuje cztery kraje, tj. Czechy, Węgry, Polskę i Słowację. Wyniki
badań wskazują, że korporacje transnarodowe mogą odgrywać pozytywną rolę
w łagodzeniu społecznych problemów w krajach goszczących, którymi są bezrobocie,
ubóstwo i społeczne wykluczenie. Korporacje transnarodowe tworzą i utrzymują
stosunkowo duża liczbę miejsc pracy w nowych krajach członkowskich UE, oferując
wyższe wynagrodzenie pracownikom, niż firmy miejscowe. Ich skłonność do koncentracji
bezpośrednich inwestycji zagranicznych w rozwiniętych regionach ma jednak
niejednoznaczny wpływ na spójność społeczno-ekonomiczną poszerzonej UE, badanej na
poziomie regionalnym. Korporacje transnarodowe wydają się stymulować nierówności
na poziomie międzyregionalnym i wewnątrz regionów. Jednocześnie korporacje te są
liderami społecznej odpowiedzialności w nowych krajach członkowskich UE.
