The Changing Political Economy of Foreign Investment: Finding a Balance Between Hard and Soft Forms of Regulation

John H. Dunning and Sarianna M. Lundan

in The Evolving International Investment Regime

Published in print April 2011 | ISBN: 9780199793624
Published online May 2011 | e-ISBN: 9780199895205 | DOI:
The Changing Political Economy of Foreign Investment: Finding a Balance Between Hard and Soft Forms of Regulation

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This chapter argues that in addition to the risks present in the physical environment of firms—comprising the resources, capabilities, and markets available to them—the sources of potential conflict are increasingly likely to involve aspects of the human environment. The human environment refers to the range of institutions underpinning the cross-border activities of multinational enterprises (MNEs) that consist of the framework of formal rules, as well as the prevailing informal norms and values, and their methods of enforcement. In order to explore how the issues affecting the human environment differ from those related to the resources, capabilities, and markets of firms, the first part of the chapter examines how the rules-based structure of international agreements and organizations has responded to the changes in the political economy of foreign investment. Specifically, it discusses how the system of “hard” regulation, mainly concerned with the resources, capabilities, and markets accessed or controlled by firms, has responded to the perceived loss of sovereignty of home and host countries on the one hand, and to the widening range of extraterritorial policies of home countries on the other hand. The second part illustrates how voluntary efforts or “soft” regulation have sometimes superseded “hard” regulation, particularly in those areas where conflicts have arisen in the human environment. To this end, it examines how MNEs have responded to the issues related to corporate social responsibility (CSR) in their cross-border operations. The concluding section offers some guidance as to a desirable balance between these two forms of regulating the conduct of MNEs in the global economy.

Keywords: multinational enterprises; international investment; hard regulation; soft regulation; corporate social responsibility; international agreements

Chapter.  14250 words. 

Subjects: Public International Law

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