Every year, UNCTAD – the United Nations Conference on Trade and Investment – publishes the World Investment Report . The report for 2012 shows that the volume of foreign investment (long-term investment) has increased tenfold from 1990 to 2011. In the same period, the volume of international trade has tripled, while the world economy has “only” grown by about 80 per cent. Nearly a third of foreign investment takes place in developing countries . A few of these countries account for the largest share, namely countries in East Asia.
- Why do companies establish themselves in other countries?
- What are the driving forces behind the increase in global foreign investment?
- What human rights challenges are associated with this business?
- Can companies be held responsible for human rights violations?
2: Avoid taxes
The increase in foreign investment is certainly greatest in some Caribbean islands, such as the British Virgin Islands – a well-known tax haven. Direct foreign investment there has risen from $ 126 million in 1990 (on a par with Chad) to a whopping $ 289 billion in 2011 (more than India). The figures illustrate an explosive increase in companies’ use of tax havens.
A tax haven offers
- favorable establishment rules – without a requirement that the establishment is linked to starting production of goods and / or services
- a low tax level
- great degree of secrecy
There are also a number of European tax havens, including Switzerland and the City of London. When companies separate operations into different subsidiaries, they will want to seek to establish more of these in states with low tax rates. The subsidiaries can be established solely to be able to hide money, but they can also provide various services to the entire group. The subsidiaries are often given company names related to finance, marketing or enforcement of non-material rights.
Then a company often seeks to inflate the numbers for this business in low-tax countries (over-invoicing). In other words, turnover and income in tax havens appear to be much larger than they actually are . Or vice versa: In the overall company accounts (consolidated accounts), the registered turnover appears to be lower than it actually is in the states where the production of goods and services actually takes place.
In short, this trick means that the company as a whole pays less tax – and that the states where the production actually takes place are left with small or significantly less tax revenues than they actually and rightfully should have had. This means that these countries get less money to spend on unresolved human rights tasks within e.g. health and education. One means of overcoming this practice is to introduce so-called country-by-country reporting. A company must then report for each state in which they operate.
3: Cheap labor, access to markets …
As industrial production becomes more advanced and proximity to the markets becomes more crucial, companies choose to establish themselves where good conditions exist. A car manufacturer and a paint manufacturer will naturally consider market proximity and competent labor somewhat differently, but for both, access to a sufficiently strong purchasing power is crucial.
A producer of biofuels or a mining company would like to establish itself where raw materials are available. The products from there will almost exclusively go for export. For example, the EU has decided that by 2020, 10 percent of all fuel in the transport sector will come from renewable sources. The use of biofuels will then in all probability account for a larger share than the use of electricity – although electric cars will apparently be far more widespread than today. The conversion will require that areas larger than Norway be converted to grow plants that can be converted to biofuels.
In many countries, governments try to facilitate foreign investment as much as possible, although different types of activity can have very different development effects for the local and national economy. The human rights effects will be different, depending on whether we look at conditions in a workplace (micro level), conditions in a local community (meson level) or conditions in a country as a whole (macro level).
According to BEAUTYPICALLY, oil extraction has proven to be harmful to several oil-rich countries, since those in power often want to defend their positions and privileges by using violence. And armed conflicts are difficult to resolve. Large oil revenues have in several cases given weak accountability and little trust between the state and the citizen. Thus, the development of democracy has also been given more difficult conditions.
For development purposes – and thus human rights – production that provides the opportunity for ripple effects is the ideal – both backward linkages to the supplier industry and forward linkages to the processing industry.
Unfortunately, there are many establishments that do not promote such connections. Land is then drained of resources without any development effect taking place. It will not be easier to achieve a development effect when the World Trade Organization (WTO) prohibits states from making demands on foreign investors. However, a state can circumvent WTO obligations by claiming that a measure falls under exemption provisions.