the role of beer multinationals IN ACHIEVING the

THE ROLE OF MULTINATIONAL CORPORATIONS IN ACHIEVING

THE SUSTAINABLE DEVELOPMENT GOALS

A CASE STUDY OF HEINEKEN, DIAGEO, BAVARIA AND BGI IN ETHIOPIA

Author: Tom Swinkels Supervisor: Prof. Joyeeta Gupta, University of Amsterdam Second reader: Dr. Courtney Vegelin, University of Amsterdam

November 2016

1

Abstract

In September 2015, the Sustainable Development Goals (SDGs) were adopted as the world’s leading

agenda for Sustainable Development (SD). The SDGs equally call upon all stakeholders, including

multinational corporations (MNCs), to contribute to the achievement of all seventeen global goals.

Whereas MNCs were previously regarded as tools that could be used to achieve SD, scholars

increasingly present MNCs as agents of SD. For example, at the SDGs summit in September 2015,

Heineken was praised for its African strategy to source raw materials locally from smallholder farmers.

It was argued that, by sourcing locally, Heineken alleviates rural poverty in countries such as Ethiopia.

The literature on the role of MNCs in SD is extensive; scholars have identified various positive and

negative contributions that MNCs can have on the global goals. However, whilst the literature has

identified different impacts, a comprehensive overview of how these impacts interrelate, why they

occur and how they can be improved is lacking. Considering the gap in knowledge and beer MNCs’

alleged potential to contribute to SD by alleviating poverty, this thesis attempts to answer the

question: how are beer MNCs contributing to SD and how can their contributions to the SDGs be

enhanced? To answer this question, a case study was carried out on Heineken, Diageo, Bavaria and

BGI’s subsidiaries in Ethiopia.

The findings show that beer MNCs need external incentives to contribute to SD. In effect, when

regulatory instruments are effective, beer MNCs can contribute to the SD by: (1) increasing the

incomes of smallholder cereal farmers (SDG#1), reducing farmers’ exposure to hunger (SDG#2) and

thus contributing to inclusive economic growth (SDG#8). Furthermore, beer MNCs can also (2)

introduce clean production technologies (SDG#12) that improve water consumption and reduce

pollution (SDG#6). However, the findings also show that beer MNCs engage in transfer pricing,

repatriate their profits and significantly reduce employment. As such, beer MNCs hinder SD by

perpetuating inequalities (SDG#10) and jeopardising the creation of decent work (SDG #8), which in

turn compromise beer MNCs positive contributions to poverty (SDG#1) and inclusive economic growth

(SDG#8).

Regarding instruments to enhance MNCs’ contributions, the findings first indicate that the public

subsidies towards MNCs need to be reconsidered. To elaborate, Heineken’s PPP with the Dutch

government (CREATE) is untransparent, unnecessary, and unfair towards other companies.

Nevertheless, the subsidy has made CREATE relatively effective at increasing smallholder farmer

incomes and thus alleviating poverty. Secondly, the findings indicate that forex regulations are an

effective instrument to enhance beer MNCs contributions to SD. Forex regulations have been

instrumental in encouraging beer MNCs to source locally and, in doing so, have reduced transfer

pricing. Furthermore, forex regulations also discourage the repatriation of profits.

Ultimately, this thesis concludes that beer MNCs will only contribute to the achievement of the SDGs

when external instruments like forex regulations create the right incentives. As an instrument, PPPs

can enhance MNCs’ contributions to SD, however, they need to be redesigned in terms of

transparency, purpose and fairness. Considering the imperative role of instruments, this thesis argues

that beer MNCs can only be regarded as tools and not as agents of SD.

2

Acknowledgements

I would like to thank my supervisor: Prof. Joyeeta Gupta, my second reader: Courtney Vegelin, my

parents, Alex Sanderson, Eva Johansson, Els Labberton, Willem Paulus and all my respondents for

pointing me in the right direction and assisting me both during my fieldwork and the writing of my

thesis.

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Table of Contents List of figures and tables............................................................................................................... 6

List of abbreviations ..................................................................................................................... 7

Chapter 1 The role of multinational corporations in sustainable development ............................ 8

1.1 Introduction ............................................................................................................................ 8

1.2 Problem statement/gap in knowledge ................................................................................... 8

1.3 Research questions ................................................................................................................. 9

1.4 Analytical framework .............................................................................................................. 9

1.5 Outline of thesis .................................................................................................................... 10

Chapter 2 Methodology ........................................................................................................... 11

2.1 Introduction .......................................................................................................................... 11

2.2 Literature Review .................................................................................................................. 11

2.3 Case study ............................................................................................................................. 11

2.3.1 Introduction .................................................................................................................. 11

2.3.2 Limitations of case study............................................................................................... 12

2.3.3 Context and scope ........................................................................................................ 12

2.3.4 Justification of case study ............................................................................................. 12

2.3.5 Data collection .............................................................................................................. 14

2.4 Operationalisation ................................................................................................................ 15

2.5 Epistemology and ontology .................................................................................................. 17

2.6 Ethical considerations ........................................................................................................... 18

Chapter 3 Literature review ..................................................................................................... 19

3.1 Introduction .......................................................................................................................... 19

3.2 Sustainable Development ..................................................................................................... 19

3.3 The Sustainable Development Goals (SDGs)......................................................................... 19

3.4 The role of multinational corporations in Sustainable Development .................................. 20

3.4.1 Relevance ...................................................................................................................... 20

3.4.2 Positive impact mechanisms ......................................................................................... 20

3.4.3 Negative impact mechanisms ....................................................................................... 23

3.5 Company decision-making .................................................................................................... 26

3.5.1 Introduction .................................................................................................................. 26

3.5.2 Motives ......................................................................................................................... 26

3.5.3 Determining factors ...................................................................................................... 27

3.6 Institutions ............................................................................................................................ 29

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3.6.1 Introduction .................................................................................................................. 29

3.6.2 National institutions ...................................................................................................... 29

3.6.3 International institutions .............................................................................................. 30

3.7 Instruments ........................................................................................................................... 32

3.7.1 Introduction .................................................................................................................. 32

3.7.2 Self-regulation ............................................................................................................... 32

3.7.3 Public regulation ........................................................................................................... 33

3.7.4 Multistakeholder Regulation ........................................................................................ 34

3.8 Inferences ............................................................................................................................. 38

Chapter 4 Case study: four international beer companies in Ethiopia ........................................ 39

4.1 Introduction .......................................................................................................................... 39

4.2 Context .................................................................................................................................. 39

4.2.1 Ethiopia's demographics and economic growth ........................................................... 39

4.2.2 Ethiopia’s institutions.................................................................................................... 40

4.2.3 The EPRDF’s development policies ............................................................................... 41

4.2.4 Ethiopia’s beer industry ................................................................................................ 42

4.2.5 The four companies ...................................................................................................... 43

4.3 The impact of the four companies ........................................................................................ 44

4.3.1 Introduction .................................................................................................................. 44

4.3.2 Employment .................................................................................................................. 44

4.3.3 Finance .......................................................................................................................... 46

4.3.4 Public revenue............................................................................................................... 47

4.3.5 Technology, knowledge and skill transfers ................................................................... 48

4.3.6 Linkages ......................................................................................................................... 50

4.3.7 Competitiveness ............................................................................................................ 54

4.3.8 Social and Environmental standards ............................................................................. 55

4.3.9 Summary of impact ....................................................................................................... 57

4.4 Rationales behind impact ..................................................................................................... 59

4.4.1 Employment .................................................................................................................. 59

4.4.2 Finance .......................................................................................................................... 59

4.4.3 Public revenue............................................................................................................... 59

4.4.4 Technology, knowledge and skills ................................................................................. 59

4.4.5 Linkages ......................................................................................................................... 60


4.4.7 Social and Environmental standards ............................................................................. 61

4.5 Inferences ............................................................................................................................. 61

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Chapter 5 Discussion: contributions to the SDGs ...................................................................... 63

5.1 Introduction .......................................................................................................................... 63

5.2 Beer MNCs contributions to the SDGs .................................................................................. 63

5.3 Enhancing the contributions of beer MNCs to SD in Ethiopia .............................................. 65

5.3.1 Employment .................................................................................................................. 65

5.3.2 Finance .......................................................................................................................... 66

5.3.3 Public Revenue .............................................................................................................. 66

5.3.4 Technology, knowledge and skills ................................................................................. 67

5.3.5 Linkages ......................................................................................................................... 68


5.3.7 Social and environmental standards ............................................................................. 70

Chapter 6 Conclusions ............................................................................................................. 72

6.1 Introduction .......................................................................................................................... 72

6.2 Conclusions and recommendations ...................................................................................... 72

6.2.1 Conclusions ................................................................................................................... 72

6.2.2 Recommendations ........................................................................................................ 74

6.3 Reflection .............................................................................................................................. 75

6.3.1 On the methods ............................................................................................................ 75

6.3.2 On the findings .............................................................................................................. 76

6.3.3 Further research............................................................................................................ 77

Chapter 7 Bibliography ............................................................................................................ 77

Chapter 8 Appendix ................................................................................................................. 87

8.1 Short history of international development ......................................................................... 87

8.2 Map of Ethiopia ..................................................................................................................... 88

8.3 Ethiopia’s comparative malt barley advantage .................................................................... 88

8.4 Obstacles faced in Ethiopia’s malt barley sector .................................................................. 89

8.5 Imported malt barley ............................................................................................................ 90

8.6 Malting factories ................................................................................................................... 91

8.7 Pre-financing ......................................................................................................................... 92

8.8 Excerpt from pre-financing contract ..................................................................................... 92

8.9 Marketing by beer MNCs in Ethiopia .................................................................................... 93

8.10 Food security ......................................................................................................................... 94

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List of figures and tables

Figure 1 Analytical framework ............................................................................................................... 9

Figure 2 The beer value chain. .............................................................................................................. 12

Figure 3 Beer MNCs target growth in the Global South ....................................................................... 13

Figure 4 Visualisation of SD as it is defined in the UN resolution on the SDGs .................................... 20

Figure 5 The seventeen Sustainable Development Goals (SDGs) ......................................................... 20

Figure 6 FDI is becoming an increasingly important source of finance for the Global South. ............. 21

Figure 7 Analysis of MNCs' motives and driving forces ........................................................................ 28

Figure 8 Ethiopia's growth compared with the Sub-Saharan African average ..................................... 39

Figure 9 Ethiopia's development plans ................................................................................................. 41

Figure 10 Ethiopia’s low beer consumption ......................................................................................... 42

Figure 11 Beer consumption is increasing with economic growth in Ethiopia ..................................... 43

Figure 12 Malt barley imports .............................................................................................................. 61

Figure 13 Map of Ethiopia ..................................................................................................................... 88

Figure 14 A comparison of international barley yields ......................................................................... 89

Table 1. Overview of interviewees........................................................................................................ 14

Table 2. Step 1: Operationalisation of SD ............................................................................................. 15

Table 3. Step 2: Identification of possible impact ................................................................................. 16

Table 4. Step 3: Evaluation of impact ................................................................................................... 16

Table 5. Step 4: Understanding rationale behind impact ..................................................................... 16

Table 6. Step 5: Operationalisation of instruments .............................................................................. 17

Table 7. Summary of possible positive impacts through which MNCs can contribute to SD ............... 23

Table 8. Negative impact mechanisms by MNCs on SD ........................................................................ 25

Table 9. The trade off in positive and negative impacts of MNCs ........................................................ 26

Table 10. Examples of National Institutions that govern MNCs ........................................................... 30

Table 11. Examples of international institutions that govern MNCs .................................................... 31

Table 12. Examples of multistakeholder regulation ............................................................................. 36

Table 13. Classification of instruments ................................................................................................. 37

Table 14. Breweries per company in Ethiopia ...................................................................................... 44

Table 15. Summary of malt barley outgrower schemes ....................................................................... 53

Table 16. Water efficiency in Ethiopian breweries ............................................................................... 56

Table 17. Evaluation of beer MNCs’ impact ......................................................................................... 58

Table 18. Rationale per impact ............................................................................................................. 62

Table 19 Contributions of beer MNCs to the SDGs. ............................................................................. 64

Table 20. Recommendations to enhance MNCs contribution to SD .................................................... 71

https://d.docs.live.net/2f9edebab2ba6635/MSc%20Thesis%20backup/Thesis%20Writing/Final%20Thesis/Thesis%20Tom%20Swinkels%20ResMas%20IDS%20Final%20Nov%202016.docx#_Toc466859386











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List of abbreviations ATA (Ethiopian) Agricultural Transformation Agency

AMF Assela Malting Factory

BGI Brasseries et Glacières Internationales (a company)

CREATE Community Revenue Enhancement Through Agricultural Technology Extension

CSO Civil Society Organisation

CSR Corporate Social Responsibility

CSV Creating Shared Value

EPRDF Ethiopian People’s Revolutionary Democratic Front

ERCA Ethiopian Revenues and Customs Authority

FDI Foreign Direct Investment

GTP (Ethiopia’s) Growth and Transformation Plan

HBSC Heineken Brewery Share Company

IDA International Development Association (IDA)

IMF International Monetary Fund

M&As Mergers and Acquisitions

MABSC Meta Abo Brewery Share Company

MDGs Millenium Development Goals

MNC Multinational corporation

NGO Non-Governmental Organisation

ODA Official Development Assistance

OECD Organisation for Economic Cooperation and Development

PPP Public-Private-Partnerships

RBC Responsible Business Conduct

SD Sustainable Development

SDGs Sustainable Development Goals

SLO Social License to Operate

SMEs Small and Medium Enterprises

UNCTAD United Nations Conference on Trade and Development

UNDP United Nations Development Programme

UNEP United Nations Environemental Programme

UNGA United Nations General Assembly

UNGPs United Nations Guiding Principles on Business and Human Rights

Word count (excluding bibliography and appendix): 31,203

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Chapter 1 The role of multinational corporations in sustainable development

1.1 Introduction

In September 2015, the Sustainable Development Goals (SDGs) were adopted by the United Nations

(UN). The SDGs represent the post-2015 global agenda for sustainable development (SD) and are the

successor of the Millennium Development Goals (MDGs), which formed the SD agenda from 2000 to

2015. The MDGs consisted of eight goals that focussed on eradicating poverty in all its forms,

especially in poor countries (Sachs, 2012, p. 2208). The focus of the SDG agenda is broader. In total,

there are seventeen global goals and 169 targets that together form an action plan for people, planet,

and prosperity in poor, middle-income and rich countries (UN, 2015, p. 1). To achieve the targets, the

SDGs call upon governments, inter-governmental organisations, academics, civil society organisations

(CSOs), indigenous peoples and the private sector (UN, 2015; Scheyvens, Banks, & Hughes, 2016, p.

2).

As the world’s main source of economic activity, the private sector has an important role to play in

the SDGs (UN Global Compact, 2013, p. 16). However, in the past, dominant international

development theories have focussed on the role of governments and civil society rather than the

private sector. This was mainly due to public distrust vis-à-vis companies and the unwillingness to

make businesses responsible for development (Blowfield, 2012, p. 415; Knorringa & Helmsing, 2008).

One could argue that development theories saw business as a tool for development. The SDGs are

innovative because business is not regarded as a tool but rather as an agent for development

(Blowfield, 2012; UN Global Compact, 2013; Scheyvens, Banks, & Hughes, 2016).

The private sector is diverse; it consists of multinational corporations (henceforth MNCs), small and

medium enterprises (SMEs) and informal businesses. Whilst SMEs play a crucial role in Western

economies, large MNCs and small informal business characterise the economies in the Global South

(van Tulder & da Rosa, 2014, p. 205).

In 2014, the investments of MNCs in the Global South were worth USD 7.7 trillion. This makes Foreign

Direct Investment (FDI) by MNCs one of the largest sources of financial capital in developing countries

(UNCTAD, 2014, p. 156). In fact, in some developing countries FDI has begun to exceed the inflow of

Official Development Assistance (ODA) and remittances (UNCTAD, 2015, pp. 78-95; UN Global

Compact, 2013, p. 3). In addition to finance, FDI by MNCs is also argued to be an important source of

employment, public revenue, technology and knowledge (see 3.4.2). Considering this, MNCs indeed

have the potential to be important development agents in the Global South (Narula R. , 2014, p. 52).

The remainder of this chapter is structured as follows: firstly, the problem statement and gap of

knowledge are elaborated upon. Secondly, the research questions are presented. Thirdly, the

analytical framework is explained. Fourthly, the focus and limitations of this thesis are clarified and

lastly the outline for this thesis is given.

1.2 Problem statement/gap in knowledge

The SDGs expect the private sector to contribute to SD financially, through scientific research and

technology, by participating in partnerships for development, creating jobs and by boosting

productivity and inclusive economic growth (UN, 2015, p. 29) (see also 3.4.2). However, scholars

suggest MNCs can hinder SD in the Global South by cutting jobs, inducing capital flight, evading taxes,

crowding out smaller firms and exploiting weak social and environmental regulations (see 3.4.3). In

effect, the literature identifies numerous positive and negative contributions that MNCs can have on

SD (Blowfield, 2012, p. 416; Scheyvens, Banks, & Hughes, 2016; Frynas, 2008). Considering this trade-

off, scholars have studied a multitude of instruments that can be used to enhance MNCs contributions

to SD (Kolk & van Tulder, 2005; Utting P. , 2014; Braithwaite, 2006; Nadvi & Waltring, 2001)

9

Whilst the literature has elaborately studied how MNCs can contribute to SD and how they hinder it,

a comprehensive overview of how MNCs’ different contributions to SD interact, why they occur and

how they can be improved is lacking. Using the SDGs as reference, this thesis attempts to address this

scholarly gap in knowledge by: (1) identifying how MNCs contribute to the achievement of the SDGs;

(2) identifying the rationales behind their contributions; and (3) analysing how MNCs’ impact can be

enhanced using specific instruments. To analyse this, a literature review and case study on four beer

MNCs in Ethiopia have been undertaken (see Chapter 4).

1.3 Research questions

The research questions are:

Main research question: how are beer MNCs contributing to SD and how can their contributions to

the SDGs be enhanced?

(1) Identification: In theory, how can beer MNCs contribute to/hinder SD in the Global South

and what role do institutions play therein?

(2) Evaluation: How are beer MNCs contributing to/hindering SD in the Global South?

(3) Rationale: What are the driving forces behind beer MNCs’ impact on SD in the Global South?

(4) Enhancement: What instruments can be used to improve beer MNCs’ contributions to the

SDGs in the Global South and how can they be enhanced?

1.4 Analytical framework

The impact of MNCs’ is analysed using the following analytical framework:

Figure 1 Analytical framework

Figure 1 visualises the analytical framework. The framework is based on Young et al.’s (2005) but has

been adjusted. Rather than focusing on institutions and instruments, this thesis focuses on impacts

and how they can be enhanced. To clarify the analysis, each step of the analysis is explained.

Firstly, the SDGs are the point of departure because they envision an important role for the private

sector in SD (see 3.2 & 3.3). The SDGs envision an important role for the private sector in SD (see 0).

Secondly, the literature clearly identifies a trade-off between the positive and negative impacts that

MNCs’ can have. For example, MNCs have been known to contribute to SD by creating local jobs whilst

others have been known to hinder SD by cutting them. Several important impact mechanisms through

which MNCs can contribute to or hinder SD are inventoried using the literature (see 3.4.2 & 3.4.3).

SDGs

IDENTIFICATION

OF IMPACT

(Literature review)

EVALUATION OF IMPACT

(Case Study)

UNDERSTANDING RATIONALE BEHIND

IMPACT

(Case Study & literature review)

USE INSTRUMENTS TO ENHANCE IMPACT

(Case Study & literature review)

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Thirdly, considering the trade-off, the third step of the analysis uses a case study to evaluate the

performance of individual MNCs vis-à-vis the possible impact mechanisms.

Fourthly, after the impact of MNCs been evaluated, the rationale behind each impact is analysed.

Doing this, allows one to identify how positive impacts can be further improved and negative impacts

can be mitigated.

Fifthly, once the rationale behind an impact is understood, inferences can be drawn regarding how

MNCs’ decision-making can be influenced to improve specific impacts. Rationales can be influenced

using instruments, which in turn depend on institutions (see 3.7) (Young, et al., 2005, p. 38). Using

insights from the case study, the effectiveness of specific instruments in enhancing MNCs’ impact on

SD is discussed.

In summary, the SDGs envision an important role for the private sector in SD. Therefore, this thesis

focuses on enhancing MNCs’ contributions to SD. To answer the research question, possible impacts

by MNCs’ on SD are identified using the literature. Subsequently, using a case study, the performance

of MNCs vis-à-vis these impacts are evaluated. Thirdly, the rationales behind each impact are studied

to identify how instruments can be used to enhance MNCs’ contributions to SD.

1.5 Outline of thesis

Firstly, Chapter 2 sheds light on the methodology. Subsequently, Chapter 3 consists of the literature

review. In this chapter the discourse of SD (see 8.1, 3.2), the SDGs (see 3.3) and the role of MNCs

therein are debated (see 0). Furthermore, important impact mechanisms are delineated (see 3.4.2 &

3.4.3) and the decision-making structure of MNCs is briefly studied (see 3.5). Lastly, several types of

instruments aimed at enhancing MNCs’ impact are discussed (see 3.7). Chapter 4 presents a case study

on (the subsidiaries) of four beer MNCs (Heineken, Diageo, BGI and Bavaria) in Ethiopia. This chapter

evaluates the local impact of these companies’ subsidiaries (see 3.4.2 & 3.4.3) and discusses the

rationales that drive each impact (see 4.4). 0 analyses potential instruments that can play a role in

improving MNCs’ contributions to SD. Finally, Chapter 6 the presents the final conclusions and

recommendations.

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Chapter 2 Methodology

2.1 Introduction

This chapter presents the methodology that is used to answer research the questions. To recap, the

research questions are:

Main research question: how are beer MNCs contributing to SD and how can their contributions to

the SDGs be enhanced?

(1) Identification: In theory, how can beer MNCs contribute to/hinder SD in the Global South

and what role do institutions play therein?

(2) Evaluation: How are beer MNCs contributing to/hindering SD in the Global South?

(3) Rationale: What are the driving forces behind beer MNCs’ impact on SD in the Global South?

(4) Enhancement: What instruments can be used to improve beer MNCs’ contributions to the

SDGs in the Global South and how can they be enhanced?

To answer these questions a literature review (see Chapter 3) and case study (see Chapter 4) have

been undertaken. This chapter first discusses the literature review and then elaborates on the

methods used during the case study (see2.3). Subsequently, an operationalisation of the key concepts

is provided (see 2.4) Afterwards, the epistemological and ontological positions are clarified (see 2.5).

Finally, ethical considerations are reflected upon (see 2.6).

2.2 Literature Review

A literature review serves to identify relevant theories and pinpoint gaps in knowledge (Bryman, 2012,

p. 8). The literature review undertaken for this thesis: (1) discusses SD and the role of MNCs therein;

(2) identifies how MNCs can have an impact on SD; (3) analyses the factors that can influence the

decision-making of MNCs; and lastly (4) identifies instruments that can influence MNCs’ decision-

making. The literature review presented in Chapter 3 was carried out using search functions in Google

Scholar, ScienceDirect and other academic search engines. Furthermore, a ‘snowballing’ technique

was used as academic references within articles were tracked down and used. This method proved

valuable in terms of identifying key scholars in the field of business and SD.

2.3 Case study

2.3.1 Introduction

Chapter 4 presents a comparative case study on four MNCs in Ethiopia. A case study is meaningful

because it elucidates complex relationships and adds real-life context to research (Yin, 1994).

Furthermore, case studies can be used to test theories and improve the validity of research (Tellis,

1997; Bryman, 2012).

Considering the research questions, the comparative case study carried out for this research is both

explanatory and exploratory in nature. To elaborate, the first two sub-questions aim to explain how

the actual impacts of MNCs relate to possible impacts identified by the literature. Key variables and

relationships (in this case MNCs’ contributions to SD) have already been identified and are being

tested suggesting that the research is explanatory (Tellis, 1997). However, the last two sub-questions

are more explorative in nature because key variables (in this case impacts and instruments) have

already been identified yet their relationship with each other has not (ibid). Additionally, the case

study is unique and revelatory in nature because it analyses a phenomenon that has previously been

inaccessible to scientific investigation (see 2.3.3 & 2.3.4) (Bryman, 2012, p. 70).

Lastly, as previously stated, the case study is also comparative. Following Bryman (2012), a

comparative design allows a researcher to understand social phenomenon better because it reveals

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relations between different cases (p.72). The cases that are compared are four different MNCs (see

4.2.5).

2.3.2 Limitations of case study

Case studies are often criticised for their lack of generalisability (Bryman, 2012, p. 70; Yin, 1994).

However, the first two sub-question test previously developed theories regarding the contributions of

MNCs to SD. As such, the case study can lead to analytically or theoretically generalizable findings

(Bryman, 2012, p. 71). The findings regarding the use of instruments to enhance MNCs’ contributions

are less amenable to generalisability but may nevertheless contribute to the theory on how MNCs’

contributions to SD can be enhanced (ibid). Ultimately, the findings of this research need to be

interpreted cautiously and tested further prior to findings can be generalised to other industries,

countries or MNCs in general. Nevertheless, they do generate theory out of the findings.

Another potential limitation of a case study is the internal validity or credibility (Bryman, 2012, p. 49).

Yin (1994) argues that the use of multiple sources ensures validity. As such, concerns about internal

validity relate mainly to data collection (see 2.3.5). Another potential issue during qualitative data

collection is researcher subjectivity (Bryman, 2012, p. 405). During fieldwork, concerns regarding

validity were addressed by neutrally formulating questions and collecting and triangulating data

through: multiple interviews (with different stakeholders), documents, direct observation and

quantitative databases.

2.3.3 Context and scope

One of the benefits of a case study is that it gives theory a concrete context (Yin, 1994). In this case,

the context of the case study is Ethiopia’s beer industry. In total, (the Ethiopian subsidiaries of) four

MNCs and are studied. These companies are: Heineken/Heineken Brewery Share Company (HSBC),

Diageo/Meta Abo Brewery Share Company (MABSC), Bavaria/Habesha and Brasseries et Glacières

Internationales (BGI)/BGI Ethiopia1 (see 4.2.5). Four different MNCs are studied to enable comparison.

Together these MNCs comprise much of the Ethiopian beer market. Due to time and data constraints,

only impacts that occurred upstream from the breweries are evaluated2. In effect, only the impact of

malt barley sourcing, malt factories and breweries are studied. Furthermore, three smaller beer

companies were omitted from this study3.

2.3.4 Justification of case study

In September 2015, the SDGs were ratified at the UN Sustainable Development summit in New York.

During this summit, the Dutch Prime Minister – Mark Rutte – appealed to the UN General Assembly

1 BGI Ethiopia is a subsidiary of BGI international, which in turn is a subsidiary of the Castel Group. 2 Activities upstream from the brewery include: malt barley sourcing, malting factories and breweries 3 Companies that were omitted are: Dashen, Raya and Unibra.

ConsumersCustomersDistributionPackagingBreweriesMalt

Factories

Malt barley sourcing

Figure 2 The beer value chain.

13

to involve the private sector in SD. In his plea, Rutte lauded several Dutch MNCs for demonstrating

how the private sector could contribute to SD4. Out of all the MNCs, Rutte arguably praised Heineken

the most. The beer company was complimented for its goal to source 60% of its African raw materials

locally5. In line with its Trade & Aid policy, the Dutch government has supported Heineken with more

than USD 7 million in Official Development Assistance (ODA)-related subsidies since 20086. However,

many have questioned the expenditure of ODA subsidies on a multibillion dollar beer company like

Heineken7,8. Considering this, important questions to be answered are: (1) are beer MNCs (like

Heineken) textbook examples of how MNCs can contribute to SD (like Rutte claims)? And (2) are ODA

subsidies on MNCs like Heineken then well-spent?

Furthermore, beer MNCs are worthwhile studying in the context of SD because their growth strategies

are aimed at the Global South. To elaborate, whereas beer consumption in Europe and North America

is stagnating, beer consumption in Asia, Africa and Latin America is growing rapidly9 (see Figure 3).

Source: Canadean (see footnote 9)

Ultimately, considering (1) the renewed role of MNCs in SD; (2) Rutte’s claims and subsidies regarding

Heineken’s exemplary contributions to SD; and (3) beer MNCs orientation towards the Global South,

beer MNCs are worthwhile studying in the context of SD.

Out of all beer markets in the Global South, the Ethiopian beer industry was chosen as case study

because: (1) the Ethiopia’s development plan is based on the SDGs (see 4.2.3); (2) Ethiopia is

4 Toespraak Rutte bij de United Nations Sustainable Development Summit, see the entire speech here: https://www.rijksoverheid.nl/regering/inhoud/bewindspersonen/mark-rutte/documenten/toespraken/2015/09/26/toespraak-van-minister-president-rutte-bij-de-united-nations-sustainable-development-summit (accessed October 5th, 2016). 5 Ibid. 6 Beantwoording Kamervragen over subsidie voor ontwikkelingsprojecten van Heineken in Afrika, see: https://www.rijksoverheid.nl/documenten/kamerstukken/2016/05/10/beantwoording-kamervragen-over-subsidie-voor-ontwikkelingsprojecten-van-heineken-in-afrika (accessed October 5th, 2016). 7 Heineken had an annual revenue of more than €20 billion in 2015 (see 4.2.5). 8 Effect van hulp via handel onduidelijk, see: http://zembla.vara.nl/dossier/uitzending/effect-van-hulp-via-handel-onduidelijk (accessed October 5th, 2016), see also: (van Beemen, 2015, p. 303). 9 Africa to become fastest growing beer market in the world by 2017, see: http://www.canadean.com/news/africa-to-become-fastest-growing-beer-market-in-the-world-by-2017/ (accessed October 5th, 2016) & ‘Africa: The fastest growing beer market’, see: http://www.beveragedaily.com/Markets/Africa-The-fastest-growing-beer-market (accessed October 5th, 2016).

-2%

0%

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Africa Asia Latin America North America Europe

Co

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Expected beer consumption in 2020 (litres)

Expected average annual consumption growth 2013-2017 (%)

Figure 3 Beer MNCs target growth in the Global South

https://www.rijksoverheid.nl/regering/inhoud/bewindspersonen/mark-rutte/documenten/toespraken/2015/09/26/toespraak-van-minister-president-rutte-bij-de-united-nations-sustainable-development-summit



https://www.rijksoverheid.nl/documenten/kamerstukken/2016/05/10/beantwoording-kamervragen-over-subsidie-voor-ontwikkelingsprojecten-van-heineken-in-afrika


http://zembla.vara.nl/dossier/uitzending/effect-van-hulp-via-handel-onduidelijk


http://www.canadean.com/news/africa-to-become-fastest-growing-beer-market-in-the-world-by-2017/

http://www.beveragedaily.com/Markets/Africa-The-fastest-growing-beer-market

14

witnessing rapid economic growth (see 4.2); (3) more than four foreign MNCs have invested in

Ethiopia since 2011 (this allows for comparison between MNCs)(see4.2.2); and (4) the Dutch

government’s subsidies (partially) address Heineken’s Ethiopian operations.

Where possible this research aims to compare the impact of each MNC. However, due to data

constraints not all companies are discussed in equal detail.

2.3.5 Data collection

For a period of three months, data was collected during fieldwork in the Addis Ababa region of

Ethiopia. Data was collected through: (1) semi-structured interviews; (2) participant observation; (3)

document analysis; and (4) collecting quantitative datasets. Every new source was used to triangulate,

complement and offset earlier findings (Bryman, 2012, p. 633). Triangulating findings was necessary

as MNCs were quick to make derogatory remarks about their competitors. By verifying and

triangulating statements the validity of the findings are improved (ibid).

Interviews

In total, 21 semi-structured interviews were conducted during fieldwork. The interviews were semi-

structured in the sense that an interview guide with flexible and sometimes open-ended answers was

prepared. This was done to allow interviewees to prioritise what they believed were important

impacts or governance factors. Interviews took place in the offices of the respondents or cafes and

were not recorded to create trust. All interviews were transcribed on the same day as the interview.

Interviewees were purposively selected based on their career and professional knowledge. After key

respondents had been interviewed, ‘snowball’ and ‘opportunistic’ sampling methods were used to

increase the number of respondents (Bryman, 2012, p. 419). All respondents spoke English thus no

translator was used during the interviews.

Table 1. Overview of interviewees

Contingency Number of interviews

Governments (Dutch & Ethiopian) 4

Companies (Heineken, Diageo, Bavaria/Habesha and BGI)

10

NGOs (Agriterra, Fair and Sustainable, ICCO, Technoserve)

5

IFC 1

Former company employee 1

Only one interview guide was used. Using the supply chain as reference, this guide focussed first on

potential impact mechanisms that MNCs could have on SD in Ethiopia. After impacts were discussed,

inquiries were made about MNCs’ driving forces and any relevant regulation instruments that might

have affected decision-making (see analytical framework in 1.4 ).

Participant observation

Data was also collected during visits to several breweries and a farmers’ field day. All breweries that

were visited were located near Addis Ababa (see appendix 8.2). The visits to the breweries were all

undertaken with permission from the respective companies and proved to be useful in terms of

evaluating resource efficiency and environmental pollution.

The farmers field day was an informative fieldtrip organised by Agriterra for farmers of two different

cooperatives. One farmer cooperative was contracted by MNCs whilst the other was not. The fieldtrip

15

served to give the non-contracted farmers an understanding of the benefits of growing malt barley

for a MNC. The farmer field day was a unique opportunity to observe the collaboration between

MNCs, Non-governmental organisations (NGOs) and smallholder farmers.

During these two events, field notes were written to record observations. The participant observation

was ‘open’ as I explicitly stated that I was doing research and ‘passive’ as I never participated actively

in the ongoing activities (Bryman, 2012, pp. 433-446). Essentially, I limited myself to asking questions.

Document analysis

To triangulate and complement interview data, document analyses were carried out (Bryman, 2012,

p. 633). These analyses focussed on: (1) annual reports by beer MNCs; (2) research reports by

companies, NGOs and governments; (3) government policy papers (e.g. national proclamations); and

(4) news websites. All documents served to identify impacts, understand MNCs’ driving forces and

possibly relevant instruments. Six of the reports that were obtained were confidential and kept

anonymous to protect the source.

Annual reports that were studied included both sustainability and financial reports by Heineken,

Diageo, and Bavaria10. BGI does not publicly disclose any information. The fieldwork reports that were

studied were produced by Agriterra, ICCO, Technoserve, Fair and Sustainable and the Ethiopian

Agricultural Transformation Agency (ATA). Lastly, a feasibility report by one of the MNCs was studied.

Finally, both Dutch and Ethiopian policy papers were studied. The Dutch policy papers were studied

to investigate the subsidies to Heineken. Meanwhile, numerous Ethiopian Proclamations were studied

to understand national development policies and the local regulatory regime. Lastly, newspaper

articles from Ethiopian, Dutch and English sources were used to inquire about developments in the

Ethiopian beer industry.

Quantitative data

Lastly, quantitative data on imports and exports were collected from the Ethiopian Revenues and

Customs Authority (ERCA). These data were used to verify whether MNCs were importing large

quantities of inputs from abroad11.

2.4 Operationalisation

Below the five stages of the analytical framework (see 1.4) are operationalised. This is done by

breaking down the concept to variables and indicators (Bryman, 2012, p. 165). The operationalisation

is broken down into five different steps. Each step clarifies how a concept is defined and measured

(ibid).

Firstly, this thesis aims to draw conclusions about how MNCs’ contributions to SD can be enhanced.

SD is operationalised using the SDGs is assumed to consist of three dimensions (i.e. economic, social

and environmental). The SDGs were officially adopted by the UNGA in September 2015 and comprise

a new global framework with 17 goals aimed at realising SD (see 3.3).

Table 2. Step 1: Operationalisation of SD

Concept Dimension Variables Indicator

Economic SDGs

10 BGI did not publicly disclose any relevant information 11 Ethiopian Revenues and Customs Authority, see also: http://www.erca.gov.et/index.php/import-export-information?view=importexport (accessed November 5th, 2016).

http://www.erca.gov.et/index.php/import-export-information?view=importexport


16

Sustainable Development (SD)

Social How are MNCs expected to contribute to the SDGs?

Environmental

Secondly, possible economic, social and environmental impacts by MNCs are identified using the

existing scholarly literature. Impacts were identified along the three pillars of SD (see 3.3). Both

possible positive and negative impacts are identified (see 3.4.2 & 3.4.3).

Once the possible positive and negative impacts by MNCs on SD are inventoried, they are evaluated

in practise and compared among the four companies. Due to data constraints, not all impacts are

discussed in equal detail. Furthermore, due to data constraints, only the impact along the first three

stages of the value chain are studied (see 2.3.3).

Once the impact of each MNC has been evaluated, the rationale behind each impact is studied per

MNC to understand why impacts occur and if they differ between MNCs.

Table 5. Step 4: Understanding rationale behind impact


Table 3. Step 2: Identification of possible impact

Concept Dimension (Possible) Variables Indicator

Impact Economic FDI

Taxes paid

Profit repatriation

Linkages

What does the literature say on how MNCs can contribute to/hinder SD economically?

Social Jobs

Health

Gender inequality

What does the literature say on how MNCs can contribute to/hinder SD socially?

Environmental Water use

Pollution

Energy use

What does the literature say on how MNCs can contribute to/hinder SD environmentally?

Table 4. Step 3: Evaluation of impact

Concept Dimension Variables (same as step 2) Indicator

Impact Economic FDI

Taxes paid

Profit repatriation

Linkages

How does the MNC perform on each variable in comparison to its competitors?

Social Jobs

Health

Gender inequality


Environmental Water use

Pollution

Energy use


17

Driving Forces

Economic motives

Profit

Efficiency

Competitiveness

Size

Strategic resources

Brand

Why did the MNC make the decision that led to the impact?

Social motives Reputation

Social License to operate

Normative motives

Compliance

Lastly, once the decision-making process behind each impact is understood, inferences are made

regarding how each impact can be improved using instruments. Instruments emerge from institutions,

which are the ‘the rules of the game’ that determine social practices (Young, et al., 2005). Therefore,

instruments can be seen ‘institutional causes’ or tools. Various types of instruments have been

identified in the literature (see 3.7). These instruments are linked to the rationales identified in step 4

to draw conclusions about how the impact of MNCs on SD can be enhanced using specific instruments.

Table 6. Step 5: Operationalisation of instruments


Instruments Self-regulation CSR

CSV

Voluntary guidelines

How can self-regulatory instruments be used to improve MNCs’ impact?

Public-regulation Law

Licenses

Subsidies

Taxes

How can regulatory instruments be used to improve MNCs’ impact?

Multistakeholder regulation

Covenants

Roundtable certification

PPPs

How can multistakeholder instruments be used to improve MNCs’ impact?

2.5 Epistemology and ontology

An epistemological issue addresses the question of what knowledge is (Bryman, 2012, p. 27). Out of

the various epistemological positions, critical realism arguably reflects the essence of this research

best. To elaborate, critical realism entails that:

“…the world exists largely independently of our knowledge of it, but our descriptions of it do not”

(Sayer, 2006, p. 98)

In other words, we can only understand and change the social world by identifying the structures at

work that generate those impacts (Bryman, 2012, p. 29). This research is compatible with this view as

it is aimed at enhancing the contributions of MNCs to SD. To do this, the underlying rationales that

govern MNCs’ decision-making processes are studied.

Ontological issues address the question of what reality is (Bryman, 2012, p. 32). This research adheres

to the ontological position of constructionism that entails:

18

“social phenomena and their meanings are continually being accomplished by social actors” and

therefore “researchers always present a specific version of social reality rather than one that can be

regarded as definitive” (Bryman, 2012, p.33).

This ontological position is compatible with the analytical framework that is used. To elaborate, the

rationales of MNCs are social constructs as they may differ per firm (see 3.5). Furthermore, the

instruments that can be used to influence MNCs’ rationales can also be considered social constructs

as they emerge from institutions, which in turn are not seen as material entities but rather as social

constructs that ‘set the rules of the game’ and give rise to the social practises ( (Young, et al., 2005, p.

23). Ultimately, the analytical framework used in this research acknowledges social constructs and

allows for different interpretations of MNCs’ rationales and instruments.

2.6 Ethical considerations

Ethical considerations are important for the integrity of research. Following Bryman (2012), important

considerations are: (1) safety of participants; (2) informed consent and invasion of privacy; and (3)

managing expectations (p.135).

To guarantee the safety of my participants I have ensured that all respondents remain anonymous.

Individual’s responses have been anonymised to company level. I always adhered to the AISSR Ethics

Procedure and Questions that the University of Amsterdam provides to researchers. Before every

interview I verified whether respondents were willing to be interviewed.

I had informed consent from all respondents to interview them. Similarly, I also had consent from

companies to visit their breweries. I explained that I was a master’s student at the University of

Amsterdam and made clear the purpose of my research. The Ethiopian beer industry is highly

competitive and several respondents indicated that information they provided was sensitive. I have

ensured these data are anonymised and that the respective respondents remain anonymous. I always

made clear that I was interested in the impact of beer MNCs and did not intend to ‘name and shame’

or ‘know and show’ individual companies. It is important to note that none of the four MNCs have

required me to sign any disclosure agreements.

Managing expectations and avoiding deception among respondents was achieved by emphasising the

academic nature and scope of the research. All my respondents were professionals and did not have

any expectations regarding reciprocity or impact of my research. In fact, most respondents were often

keen to accommodate me in their offices and assist my efforts. Many also demonstrated interest in

the final research findings, which I am happy to share. During my interaction with smallholder

farmers, I was accompanied by NGO representatives and therefore did create any unwarranted

expectations.

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Chapter 3 Literature review

3.1 Introduction

This chapter discusses the connection between MNCs and SD. First the historical context of the

development paradigm is explained. Special emphasis is placed on SD and the SDGs. Secondly, the

possible impact mechanisms that MNCs can have on SD are discussed. Thirdly, the decision-making of

MNCs are analysed. Lastly, possible instruments that can be used to enhance the contributions of

MNCs to SD are presented.

3.2 Sustainable Development

In 1987, coinciding with the implementation of the Washington Consensus, the Brundtland

Commission presented its report: “our common future”. The report pointed out that the path of

industrialisation and economic development pursued by both the developed and developing nations

was unsustainable and jeopardised the ability of our planet to sustain future generations (WCED,

1987). The report presented a global agenda for change that sought “to meet the needs and

aspirations of the present without compromising the ability to meet those of the future” and called it

“sustainable development” (i.e. SD) (ibid).

In the late 1990s, spurred by the failure of the Washington Consensus, the discourse of SD gained

popularity. For the first-time scholars began to present non-economic development theories (see 8.1).

Examples of notable development theories that emerged during this time were ‘human development’,

‘participatory development’ and ‘capability’ approaches’ (Thorbecke, 2007; Sen, 1999; Chambers,

1997) . These theories highlighted the importance of social and human capital, good governance,

freedom and empowerment (Gupta, Pouw, & Ros-Tonen, 2015, p. 543). Additionally, in 2000, the

Millennium Development Goals (MDGs) were implemented. The MDGs mobilised the international

development community around eight tangible goals on poverty, education, gender, child mortality,

diseases, environmental sustainability and a global partnership for development (Sachs, 2012).

Ultimately, SD represents development that focusses on a wide array of economic, social and

environmental criteria instead of just economic growth.

3.3 The Sustainable Development Goals (SDGs)

After the Brundtland report, three major UN conferences on SD were held in: Rio de Janeiro in 1992,

Johannesburg in 2002 and at the Rio+20 conference in 2012 (Scheyvens, Banks, & Hughes, 2016, p. 2).

Following years of consultation with national governments, business leaders, CSOs, academics and the

general public, the SDGs were adopted by the UN General Assembly (UNGA) in September-2015

(Kharas & Zhang, 2014; Scott & Lucci, 2015; UN, 2015, p. 3). The SDGs build on the MDGs, which were

essentially the SD agenda from 2000 to 2015, and provide a guiding framework for international

development cooperation between 2015 and 2030 (Scott & Lucci, 2015). While the MDGs consisted

of 8 goals that focussed on eradicating poverty in all its forms, the SDGs form a broader action plan

that consists of 17 global goals and 169 sub-targets that address multiple themes such as poverty,

inequality, climate change and consumption patterns in developed and developing countries alike

(UN, 2015). As such, the SDGs are a universal action plan for people, planet, prosperity, peace and

partnerships (UN, 2015, p. 2).

As far as the implementation of the goals is concerned, national governments are primarily

responsible for following up on the goals in their countries. However, for the actual implementation,

the SDGs seek the active involvement of all stakeholders (UN, 2015, p. 11). To realise this, the SDGs

emphasise the importance of partnerships between governments, international institutions, civil

society, the scientific and academic community, indigenous people and the private sector (ibid, p.12).

The SDGs are unique in the sense that all stakeholders are equally called upon to contribute to the

20

goals. Therefore, the post-2015 agenda provides a new way of thinking about development

(Scheyvens, Banks, & Hughes, 2016).

In summary, the SDGs focus on the holistic achievement of economic development, social inclusion

and environmental sustainability – i.e. the so-called triple bottom line approach to SD (Sachs, 2015).

Regarding their implementation, the SDGs seek partnerships wherein all stakeholders are equally

responsible (Scheyvens, Banks, & Hughes, 2016, p. 2).

3.4 The role of multinational corporations in Sustainable Development

3.4.1 Relevance

Past development theories tended to focus on the role of governments and civil society rather than

business (Blowfield, 2012, p. 415). Yet over the past decades, many governments in the Global South

have liberalised their economies to attract FDI (Narula & Pineli, 2016). FDI is mostly carried out by

MNCs, which can be defined as companies that engage in value-adding activities in more than one

country (Abdul-Gafaru, 2009). MNCs are particularly relevant for SD because they govern global value

chains through their subsidiaries and outsourcing agreements (Narula R. , 2014, p. 58). If managed

appropriately, MNCs may – through several mechanisms– act as catalysts for economic growth (see

3.4.2). However, if managed inappropriately, MNCs are also capable of hindering SD (see 3.4.3) (Abdul-

Gafaru, 2009, p. 51; Oetzel & Doh, 2009, p. 108; Knorringa & Helmsing, 2008).

3.4.2 Positive impact mechanisms

Below, seven potential contributions (i.e. positive impacts) by MNCs on SD are discussed. These

positive impacts are by no means exhaustive (see 6.3.2). Nevertheless, they give an indication as to

how MNCs can contribute to SD.

Firstly, MNCs can contribute to SD by creating jobs in recipient countries (Bandick & Karpaty, 2011;

UNCTAD, 2015, p. 67; Javorcik, 2014). In theory, it is beneficial for firms to move their operations to

developing countries where costs of production are low (Doh, 2005, p. 696). Consequently, MNCs have

been known to outsource their labour-intensive operations to countries such as India and China –

where labour is well-educated as well as cheap (ibid). It is argued that FDI is most likely to create new

Figure 4 Visualisation of SD as it is defined in the UN resolution on the SDGs

Figure 5 The seventeen Sustainable Development Goals (SDGs)

21

jobs through Greenfield projects12 (Ernst, 2005, p. 14). Such projects usually imply long-term

commitment and thus create stable employment (Jenkins, 2006, p. 116). To illustrate, two large

Greenfield projects by foreign MNCs (worth $500 million each) in 2014 created a total of 20,000 new

jobs in the Ethiopian cotton and textile industry (UNCTAD, 2015, p. 81). In addition to creating jobs,

MNCs are also likely to pay higher wages and offer better work satisfaction than domestic firms

(Javorcik, 2014, pp. 25-26).

Secondly, MNCs also finance SD through FDI (Narula R. , 2014, p. 52). Relatively underdeveloped

economies are characterised by low saving rates as poor people generally do not earn enough to

allocate money towards savings. As a result, banks lack the capital that is needed to finance

entrepreneurs who want to start or expand their business. Therefore, economic activity and

employment levels remain low – i.e. a country remains impoverished (Narula R. , 2014, p. 50). In

theory, external financial capital is needed to break this so-called poverty trap. Of all the international

capital flows towards developing countries, FDI is the largest13 (see figure 5). In total, it amounts to

more than official development assistance (ODA), remittances and portfolio investments (UNCTAD,

2014, p. 148). Furthermore, it is also an attractive source of finance for governments as it does not

generate foreign debt for the host country (UNCTAD, 2007, p. xxiv). In short, it is argued that – through

FDI – MNCs create a burst of economic action that improves local incomes, increases saving rates and

ultimately stimulates further economic activity (Narula R. , 2014, p. 52). In short, FDI is an important

source of finance for SD.

Thirdly, MNCs boost government revenue through tax payments. Approximately 37% of all business

activities in low income countries are carried out by large MNCs. SMEs represent another 15% while

48% of all business is carried out by small informal businesses (van Tulder & da Rosa, 2014, p. 205).

MNCs are an important source of public revenue because informal businesses usually do not pay taxes.

In other words, MNCs are important tax payers (UNCTAD, 2015, p. 176). This tax money is needed to

finance public development schemes, for e.g. infrastructure projects or education programmes (ibid).

12 A form of FDI where a parent company starts a new venture in a foreign country by constructing new operational facilities from the ground up. 13 In fragile states FDI is not the biggest source of external finance. In these countries ODA and remittance flows are still relatively large (World Bank, 2013, p. 16).

External finance to developing and transitioning economies (billions of USD)

Source: (UNCTAD, 2014, p. 148)

Figure 6 FDI is becoming an increasingly important source of finance for the Global South.

22

In addition to creating jobs and providing financial benefits, MNCs can also stimulate SD by sharing

technology, knowledge and skills through so-called ‘spill over effects’ (Haskel, Pereira, & Slaughter,

2002; Narula R. , 2014; Marin & Sasidharan, 2010). MNCs possess technology, knowledge and skills in

their home country and apply these factors to their activities in host countries. There, spill over effects

occur when superior technology and knowledge are leaked to or shared with domestic firms. This can

occur through workers who switch jobs or through buyer-seller relationships (Kneller & Pisu, 2007, p.

108). If domestic firms absorb these benefits it can result in capacity building and more productive

and sustainable business practices. It is argued that these benefits are most likely to be shared in asset-

augmenting industries (Narula R. , 2014, p. 54). The former refers to companies who seek to invest in

domestic assets by for example investing in R&D and the training of local employers (Narula R. , 2014,

p. 54; Yamin & Sinkovics, 2014, p. 236). For example, China initially relied on FDI for the import of

clean energy technology but after absorbing technological spill over effects from FDI, the country

developed its own autonomous clean energy industry (Marconi & Sanna-Randaccio, 2014). This

example illustrates that aside from introducing efficient technology, MNCs can also introduce more

environmentally friendly and safe technology (see below). In effect, FDI can result in technology,

knowledge and skill transfers especially in asset-augmenting industries. Domestic firms can absorb

these spill overs and improve the productivity and sustainability of their business practices (Narula R.

, 2014; van Tulder & da Rosa, 2014).

Fifthly, MNCs can create linkages with domestic firms and stimulate local innovation and

entrepreneurship. As large global buyers, MNCs govern global value chains (Humphrey J. , 2014;

Gereffi, Humphrey, & Sturgeon, 2005). This means that MNCs largely determine which suppliers and

distributors can partake in in their supply chain (van Tulder & da Rosa, 2014, p. 209). MNCs thus have

the capacity to include small-scale suppliers and distributors in global value chains and provide them

with access to global networks and markets (Humphrey J. , 2014, p. 95; Javorcik, 2004). To partake in

these markets, it is important that domestic suppliers and distributors meet quality standards (Gereffi,

Humphrey, & Sturgeon, 2005, p. 85). By forcing domestic companies to raise their production

standards, MNCs stimulate suppliers to innovate and improve their capabilities (van Tulder & da Rosa,

2014, pp. 209-210). In short, MNCs can stimulate entrepreneurship and innovation and convert

primitive markets into a competitive private sector (Prahalad, 2011). A robust private sector is key in

addressing SD related issues such as economic growth, poverty and environmental degradation

(Sachs, 2012, p. 2210).

In addition to creating linkages, MNCs also have the capacity to enhance SD by breaking the of

monopolistic structures. Markets at the bottom of the pyramid are often dominated by inefficient

rent-seeking moneylenders, middlemen, state-owned enterprises and other MNCs (Prahalad, 2011;

Narula R. , 2014, p. 54; World Bank, 2013). These entities benefit from their monopolistic position and

are keen to maintain their exploitative position. Consequently, they create cartels which coerce

suppliers and consumers and create high entry barriers for new entrepreneurs (World Bank, 2013).

Unlike small entrepreneurs, MNCs have the capacity to overcome these high entry barriers and

increase competition in domestic markets (Rust & Hall, 2011; de Backer & Sleuwaegen, 2003). For

example, western retail MNCs such as Mark & Spencer, Ahold and Tesco have managed to apply their

superior management, technology and sales strategies to circumvent rent-seeking middlemen in

South East Asia. The companies did this by investing in completely new distribution networks. Being

able to circumvent rent-seeking middlemen allowed the MNCs to make distribution cheaper for

domestic suppliers and retailers (Andrews, Chompusri, & Baldwin, 2003, pp. 288-289; Clay, 2005, p.

18). Ultimately, MNCs can increase the competitiveness of host country markets because they have

the capacity to overcome high entry barriers set by dominant value chain actors. Breaking these

23

inefficient power structures creates a level playing field that allows for more inclusive growth and SD

(World Bank, 2013).

Lastly, MNCs are also capable of contributing to SD by raising social and environmental sustainability

standards (Christmann & Taylor, 2001). Over the past decade, large MNCs have been known to adopt

multiple voluntary sustainability standards such as the UN Global Compact (UNGC), OECD Guidelines

for Multinational Enterprises and the ISO 26000 (Schouten, Vellema, & Van Wijk, 2014). These

guidelines force MNCs to carry out due diligence across their entire supply chain, provide access to

remedy and disclosure about their social and environmental performance (Clay, 2005, p. 57). When

operating in regulatory voids (i.e. areas where social, environmental regulation is weak) MNCs can

integrate sustainability standards into the codes of conduct and contracts and thus force domestic

suppliers and distributors to raise their social and environmental performance (Oetzel & Doh, 2009,

p. 108). Furthermore, MNCs have been known to make considerable investments in cleaner

production technologies. For example, the Eastman Kodak company invested more than USD478

million on pollution prevention and waste treatment in a period of three years (Rondinelli & Berry,

2000, p. 82). MNCs can go even further and support their value chain partners in enhancing their

performance by sharing technology, best practices and facilitate or finance capacity building activities

(Clay, 2005, pp. 62-65). For example, Unilever Indonesia forces all its suppliers to pay more than 10%

more than minimum wage and furthermore sets environmental, health and safety standards. Aside

from strictly monitoring and penalising partners for non-compliance, Unilever also provides training

and technical assistance to assist suppliers in meeting the standards (ibid). Ultimately, MNCs can raise

social and environmental performance of domestic businesses by forcing and assisting its partners to

adhere to codes of conduct.

3.4.3 Negative impact mechanisms

Whilst some researchers are optimistic about the role of MNCs in SD, others are more sceptical.

Sceptics argue that the positive impacts described in the previous section cannot be guaranteed and

that MNCs can also have an adverse impact on SD (Oetzel & Doh, 2009, p. 108; Stiglitz, 2007, p. 188).

Ultimately, aside from contributing to SD, MNCs are also very capable of impeding it. Seven possible

negative impacts through which MNCs can hinder SD are discussed below.

Table 7. Summary of possible positive impacts through which MNCs can contribute to SD

Positive impact mechanism

1. Creates jobs

2. Is an important source of external finance

3. Is an important source of public revenue

4. Creates technology, knowledge and skill transfers

5. Creates linkages between domestic firms and international markets

6. Increases competitiveness of domestic firms

7. Raises social and environmental standards

24

Firstly, whilst MNCs create jobs through Greenfield projects, they are less likely to do so through

mergers and acquisitions (M&As) (Ernst, 2005; Jude & Silaghi, 2016). In fact, M&As might even result

in employment loss (Ernst, 2005, p. 13). This is attributed to the fact that foreign MNCs tend to be

more capital intensive than domestic firms and thus require less labour for production (Jenkins, 2006,

p. 132). Thus, when a MNC acquires a stake in a domestic enterprise it might replace jobs with

technology to enhance productivity and reduce costs (Jude & Silaghi, 2016, p. 43; Jenkins, 2006, p.

132). This is demonstrated in Vietnam where domestic firms appear to be five times more labour

intensive than foreign MNCs (Jenkins, 2006, p. 132). In light of this, one could argue that MNCs can

create jobs as well as destroy them (UNCTAD, 2007, p. 12).

Secondly, while attracting FDI can improve the liquidity of recipient markets in the short-term, it can

also facilitate capital flight in the long run. MNCs do this by repatriating profits rather than reinvesting

them (UNCTAD, 2006; UNCTAD, 2007). Data shows that since the mid-1990s, MNCs from developed

countries have repatriated more than 50% of their profits (UNCTAD, 2006, p. 186). In the long-term,

this repatriation of profits may result in a net-outflow of capital, which is disadvantageous for host

country development (Latorre, Bajo-Rubio, & Gomez-Plana, 2009; UNCTAD, 2007). This trend is

common in the natural resource extractive industry as developing countries frequently fail to profit

from the revenue generated by the industry (World Bank, 2013, p. x). Ultimately, FDI may boost

finance in the short-term. However, in the long run profit repatriation and disinvestment may lead to

a net outflow of capital. This outflow of capital negatively affects domestic investment and

development (World Bank, 2013; UNCTAD, 2007).

Thirdly, MNCs impede SD by evading taxes (Hollingshead, 2010). Developing countries are especially

susceptible to tax avoidance by MNCs as they lack the sophisticated political and economic institutions

that are needed to govern the private sector (Stiglitz, 2007, p. 150; Alfaro, Kalemli-Ozcan, &

Volosovych, 2006). Unlike profit repatriation, tax evasion is illegal. MNCs can avoid tax payments

through bribing tax officials, transfer pricing mechanisms and illicit financial flows (IFFs) (Mehta, 2009;

World Bank, 2013, p. 14). Estimates suggest that developing countries lose between $98 billion to

$106 billion worth of tax payments every year (Hollingshead, 2010). Other research by Global Financial

Integrity estimates that developing countries lost $5.86 trillion through IFFs between 2001 and 2010

annually (World Bank, 2013, p. 14). This outflow reduces the tax base and the capacity of governments

in developing countries to invest in SD (ibid).

Furthermore, MNCs can hinder beneficial spill over effects. Narula (2014) argues that spill over effects

are unlikely to occur in asset-exploiting industries (p.54). These are industries that typically refrain

from domestic capacity building and whose primary purpose is to extract rents using low technology

and cheap unskilled labour (Marin & Bell, 2010, p. 919). An example of such an industry is the (natural

resource) extractive industry – i.e. mining and petroleum companies tend to refrain from adding value

in recipient countries because they seek quick extraction rather than long-term integration (Narula R.

, 2014, p. 55). Unfortunately, natural resource-seeking FDI still represents a significant amount of FDI

in developing countries (UNCTAD, 2016, p. 75). Moreover, when a MNC is asset-augmenting, it may

want to refrain from sharing technology, knowledge and skills to curb competition within its sector

(Kneller & Pisu, 2007, p. 109). Ultimately, recipient countries still need to possess a minimum level of

knowledge and technology to be able to absorb the spill over effects (Narula R. , 2014, p. 57).

Unfortunately, developing countries tend to lack this absorptive capacity (ibid, p. 58). Altogether, FDI

does not necessarily generate technology, knowledge or skill transfers.

Fifthly, instead of creating local linkages and improving innovation and competitiveness, MNCs can

also crowd out domestic firms, especially in the short-term (de Backer & Sleuwaegen, 2003). To

elaborate, MNCs have grown tremendously in terms of size and resources (UNCTAD, 2014). MNCs’

25

resources have allowed them to attract the best personnel in the countries in which they operate. This

has resulted in the drainage of high-skilled personnel and thus productivity from domestic companies

(Fortanier & van Wijk, 2010). Furthermore, MNCs may crowd out local investments by gaining

privileged access to finance and institutional support thus making it more difficult for local firms to

gain access to capital (OECD, 2001, p. 8). Additionally, MNCs tend to have more bargaining power than

domestic suppliers and thus have the power to drive down prices to the extent that local suppliers

may be worse off (Meyer, 2004, pp. 268-269). Furthermore, MNCs’ power can reduce competitiveness

and create dependency. To elaborate, Gereffi et al. (2005) make a distinction between five different

forms of value chain governance. They argue that if power asymmetry is large, MNCs can hold

domestic suppliers and distributors captive to the extent that local markets become dependent on

the MNC. According to Doh (2005), this draws parallels with dependency theory, which argues that

the development of the industrial north occurs at the cost of the global south (p. 697). Ultimately,

rather than improving the capabilities of domestic firms, MNCs can also force them out. Furthermore,

MNCs are becoming larger and increasingly powerful to the extent that economic activity can become

entirely dependent on them. As such, it is argued that MNCs have become new agents of imperialism

(Calvano, 2008, p. 798).

Subsequently, while MNCs can improve the competitiveness of domestic markets by breaking

monopolistic structures, they are also capable of reducing competitiveness (Blomström & Kokko,

1997). MNCs are frequently the lead firm in a value chain because (1) they are positioned at the

lucrative buyer-end of the chain and (2) have the capacity to internalise suppliers and distributors

(Gereffi, Humphrey, & Sturgeon, 2005; Humphrey J. , 2014). This dominant position allows MNCs to

control upstream and downstream value chain partners (van Tulder & da Rosa, 2014, p. 209).

Consequently, if MNCs internalise domestic suppliers and distributors or use their bargaining power

to drive down prices, domestic firms may not be able to compete with the MNC (Meyer, 2004;

Blomström & Kokko, 1997, p. 29). This decrease in competitiveness may result in new oligopolies that

are worse than the ones they replaced (Blomström & Kokko, 1997, p. 29). Ultimately, MNCs can break

down monopolistic structures but are also very capable of perpetuating them.

Lastly, globalisation sceptics argue that MNCs have instigated a global race to the bottom by relocating

their production to developing countries where social and environmental regulation are weak (Porter

G. , 1999; Hilson, 2012, p. 132). This has resulted in so-called “pollution havens” in developing

countries (Christmann & Taylor, 2001, p. 440). Experience shows that MNCs can have negative social

and environmental impact in their host countries (Abdul-Gafaru, 2009). For example, mining

companies in Congo have recently polluted rivers with their effluent, exploited (child) labour and

operated in areas without gaining prior and informed consent by local communities (SOMO, 2015).

Ultimately, cases such as these demonstrate that MNCs are still inclined to compromise on weak social

and environmental regulation if it maximises profits.

Table 8. Negative impact mechanisms by MNCs on SD

Negative impact mechanisms

1. Cut jobs

2. Drain capital

3. Evade tax payments

4. Prevent technology, knowledge and skills transfers

5. Crowd out local firms, create dependency

26

6. Perpetuate monopolistic markets

7. Exploit weak social and environmental regulation

3.5 Company decision-making

3.5.1 Introduction

Thus, MNCs have positive and negative impacts through which they either contribute to or hinder SD

(see 0). Whether positive or negative impacts occur depends on the decisions that are made at the

firm. This section sheds light on the decision-making process in to understand how instruments (see

3.7) can be used to improve impact.

According to Nielsen & Parker (2012), the driving forces of companies and their managers consist of

economic, social and normative motives. These motives depend, among others, on: the personal

motivations of managers; the industry that the company is active in; corporate institutions; the

structure and resources of the company; and (regulatory) instruments (Nielsen & Parker, 2012;

Gonzalez-Benito & Gonzalez-Benito, 2006).

3.5.2 Motives

Firstly, economic motives refer to how committed a firm is to maximising its economic or material

utility (Nielsen & Parker, 2012, p. 431). A firm’s economic motives can consist of targets based directly

on its profitability, size, efficiency, strategic resources, competitiveness and/or reputation (Dicken,

2003, p. 110; Dunning & Lundan, 2008, p. xxv; Verbeke, 2009; van Tulder R. , 2015). Whilst some

scholars believe businesses are entirely economically motivated (Friedman, 1970), others believe

companies also have social and normative motives (see below) (Nielsen & Parker, 2012).

Secondly, social motives refer to how committed a firm is to earning the respect of others and building

a good reputation (Nielsen & Parker, 2012, p. 440). Those who believe businesses have social motives

argue that businesses are run by managers who are above all social creatures (Nielsen & Parker, 2012,

pp. 431-440). In addition to respect and reputation, social motives are based on maintaining good

relationships with stakeholders and earning a social license to operate by meeting public expectations,

even if it involves doing more than the law requires (Gunningham, Kagan, & Thornton, 2004).

Table 9. The trade off in positive and negative impacts of MNCs

MNCs’ impact on host

country:

Positive Negative

1. Employment Create jobs Cut jobs

2. Finance Deliver capital Drain capital

3. Public revenue Increase tax base Deteriorate tax base

4. Technology, knowledge and

skills

Create transfers Prevent transfers

5. Value chains (i.e. domestic

firms)

Create linkages with

international markets

Crowd out local firms, create dependency

6. Competitiveness Increase competitiveness of

domestic firms

Perpetuate monopolistic markets

7. Social and Environmental

Standards

Raise standards Exploit low standards

27

Thirdly, normative motives refer to how committed a firm is to obeying regulations (Nielsen & Parker,

2012, p. 431). Normative motives are based on a firm’s acknowledgment of these regulations even

though it may not necessarily agree with its content. In other words, normative motives appeal to a

firm’s self-bound duty to comply with regulation (ibid, p.432).

It is argued that MNCs are motivated by a unique constellation of all three motives, which are closely

interwoven (Nielsen & Parker, 2012, p. 434). For example, social motives arguably affect economic

motives because a good social reputation attracts more customers (Porter & Kramer, 2011; Prahalad,

2011). Similarly, one could argue that normative motives address economic and social motives

because complying with regulations avoids fines and arguably allows a company to meet public

expectations (Nielsen & Parker, 2012, p. 433). Ultimately, each firm is driven by a unique combination

of motives. These motives determine the impact of MNCs.

3.5.3 Determining factors

Each firm’s unique constellation of motives is determined by several factors that need to be

considered when applying instruments to enhance MNCs’ impact.

A firm’s motives are likely to be aligned with those of its (senior) managers (Nielsen & Parker, 2012;

Gonzalez-Benito & Gonzalez-Benito, 2006, p. 93; Banerjee, 2001). Each manager has their own

personal constellation of economic, social and normative motives. Whilst some managers prioritise

economic motives, others attach more value to social or normative ones (ibid). It is important to note

that managers’ decisions, in turn, are largely determined by the wishes of shareholders who, in the

cases of publicly-listed firms, are dissociated from business activities and consequently judge

managers on their ability to maximise profits and dividends (Dodd, 1932). Ultimately, the behaviour

of a firm depends largely on the personal preferences of managers and shareholders.

Another determinant of a firm’s motives is its position in the value chain and the type of industry it

belongs to (Banerjee, 2002). The literature makes a distinction between business-to-business (B2B)

and business-to-consumer (B2C) industries. It is argued that B2B companies are less exposed to public

scrutiny and thus less susceptible to social pressure (Gonzalez-Benito & Gonzalez-Benito, 2006, p. 93).

Other scholars argue that motives vary more per industry. For example, Banerjee (2002) empirically

demonstrates that industries perceive environmental issues differently. The variance within industries

depends on various factors such as the degree of competitiveness and the nature of the business

(Gonzalez-Benito & Gonzalez-Benito, 2006, p. 95). In short, the constellation of motives differs per

position in the value chain and type of industry.

Furthermore, motives are influenced by cultural institutions. This may relate the national institutions

in a country (e.g. rule of law) (Gonzalez-Benito & Gonzalez-Benito, 2006, pp. 95-96) or to corporate

cultures. For example, van Tulder & da Rosa (2010) demonstrate that the degree in which firms engage

in partnerships with CSOs varies geographically. The authors show, among others, that Europe has the

highest number of partnerships with CSOs per company and that American firms appear to attach less

value to the role of stakeholders (van Tulder & da Rosa, 2010, pp. 21-23). Ultimately, the host and

home country institutions of a MNC affect corporate motives.

Lastly, the size and ownership structure of a company also affect its behaviour. Firstly, large MNCs

have more prevalent activities and therefore have a relatively large impact on society and the

environment. As such, large MNCs are more exposed to more public scrutiny compelling them to

adjust their behaviour (Gonzalez-Benito & Gonzalez-Benito, 2006, p. 91). However, simultaneously,

large companies have more resources at their disposal allowing them to spend more on addressing

social and environmental issues (Gonzalez-Benito & Gonzalez-Benito, 2006, p. 92). Furthermore, the

28

ownership structure of a firm also determines the behaviour of MNCs. To elaborate, a company can

be publicly (e.g. owned by the state or quoted) or privately owned (e.g. family-owned or unquoted).

As was argued above, publicly-traded firms are more likely to have shareholders that are dissociated

with daily business activities and therefore predominately interested in a firm’s financial performance

(Dodd, 1932). This is backed by research that shows family-owned firms are better at maintaining good

relationships than non-family-owned firms (Breton-Miller & Miller , 2006). Furthermore, a firm’s

degree of internationalization also determines its motives in a similar manner. For example,

subsidiaries that have been acquired by foreign MNCs may be subject to strict internal targets, codes

of conducts, due diligence processes and audits that compel it to make decisions it otherwise would

not (Gonzalez-Benito & Gonzalez-Benito, 2006, p. 91).

Lastly, a MNCs’ constellation of motives can also be influenced by instruments (Nielsen & Parker, 2012,

p. 450; Young, et al., 2005). Previous studies have shown that instruments such as inspection efforts,

sanctions and social pressure influence the behaviour of regulatees (Simpson, 2002; Stigler, 1971;

Winter, 2002). For example, over the course of thirty years, society’s norms and standards regarding

environmental values have not only improved businesses’ impact on the environment, but also

enhanced businesses’ own environmental norms and standards (Hoffman, 1997). This demonstrates

that instruments and institutional changes can play an important role in extrinsically motivating a firm

to enhance its impact when it is not intrinsically motivated to do so (van Tulder R. , 2015).

In summary, companies have economic, social and normative motives. A constellation of these

motives determines MNCs’ whether MNCs are intrinsically (pro-active) motivated or extrinsically

(reactive) motivated to improve their contributions to SD (Nielsen & Parker, 2012; van Tulder R. ,

2015). The literature suggests differences in motives can been attributed to factors such as: (1) the

preferences of managers and shareholders; (2) the type of industry the firm is active in; (3) its country

of origin or the geographical location it operates in; (4) a firm’s size and structure; and (5) (regulatory)

instruments (Gonzalez-Benito & Gonzalez-Benito, 2006; Nielsen & Parker, 2012; van Tulder R. , 2015).

Figure 7 Analysis of MNCs' motives and driving forces

29

3.6 Institutions

3.6.1 Introduction

Whereas most determinants described above are intrinsic motivations, instruments can be used to

extrinsically motivate a MNC to enhance its contributions to SD. Instruments emerge from institutions

(Young, et al., 2005). Therefore, institutions are discussed below. Instruments are studied in detail in

sub-section 3.7.

Institutions play an important role in influencing MNCs’ behaviour (Peng, Wang, & Jiang, 2008; Kolk &

van Tulder, 2010, p. 124; Fortanier F. N., 2008, pp. 267-273; Acemoglu & Robinson, 2012; Nielsen &

Parker, 2012). Institutions are defined as:

“systems of rules, decision-making procedures, and programs that give rise to social practices, assign

roles to participants in these practices, and guide interaction among the occupants of the relevant

roles” (Young, et al., 2005, p. 22).

Institutions can be both formal and informal (North, 1990). Formal institutions comprise of political

and judicial institutions that complement or supersede informal institutions, which comprise of social

norms (North, 1990, p. 499; Peng, Wang, & Jiang, 2008, p. 922; Hoffman, 1997). Formal institutions

are particularly important for creating certainty in the cases where informal institutions cannot ensure

that actors will not infringe social norms (North, 1990).

This thesis specifically addresses the institutions that give rise to the instruments that influence MNCs’

contributions to SD. A distinction is made between international and national institutions.

3.6.2 National institutions

A country’s political and economic institutions play an important role in achieving SD. In effect, they

determine whether economic growth is inclusive (and thus sustainable) or extractive (and thus short-

lived) (Acemoglu & Robinson, 2012). Regarding MNCs, a nation’s institutions are important because

they determine: (1) to a large extent, whether a MNC contributes to or hinders SD; (2) the degree to

which MNCs and governments can be held accountable for adverse impacts; and (3) whether a MNC

will invest in a country (Fortanier F. N., 2008, pp. 29-30).

Firstly, a country’s institutions comprise of its political and judiciary systems, which are important

because they manage societal issues such as the redistribution of welfare (e.g. through taxes and

education) and political inclusiveness (Acemoglu & Robinson, 2012; North, 1990). A country with

developed institutions is more capable of profiting from MNCs’ positive impacts and mitigating their

negative impact. For example, studies show that countries with the “right” institutions in place are

more likely to absorb the external knowledge and skills that MNCs introduce and create more spill

over effects (see 3.4.2) (Lorentzen, 2005; Narula R. , 2014). Similarly, countries with relatively weak or

extractive institutions are more likely to be exploited for their natural resources or as used “pollution

havens” (see 3.4.3) (Christmann & Taylor, 2001; Narula & Pineli, 2016).

Secondly, a nation’s institutions largely determine the rule of law in a country (Peng, Wang, & Jiang,

2008, p. 922). A high rule of law implies that all entities, including both governments and MNCs, can

be held effectively accountable for any adverse impacts that occur14.

Thirdly, institutions play an important role in attracting FDI. To elaborate, a high rule of law has been

associated with the willingness of MNCs to invest in a country because it protects their property rights

14 Rule of law can be understood as “the legal and political framework under which all persons and institutions, including the state itself, are accountable” (UN, 2016)

30

and contracts (Kinoshita & Campos, 2003; Acemoglu & Johnson, 2003). Ultimately, national

institutions have a considerable effect on whether MNCs contribute to or hinder SD in a country.

Table 10. Examples of National Institutions that govern MNCs

Type of institution Institutions Administering organisation(s)

Formal Judiciary, political and economic systems Parliament, government, judiciary courts

Informal Social norms

Communities

3.6.3 International institutions

In today’s globalised world, value chains often transcend national boundaries. As a result, MNCs have

become detached from national institutions (Gereffi & Mayer, 2004, p. 21). Studies show that MNCs

have become adept at using ‘tricks’ such as empty-shell subsidiaries and transfer pricing mechanisms

to evade accountability at the national level (Cotula, 2010, pp. 34-37; O'Rourke, 2003, p. 21). This lack

of accountability is often called the ‘global governance gap’ (Gereffi & Mayer, 2004; Ruggie, 2008) and

is one of the reasons why MNCs have moved their production facilities to areas where national

31

institutions are weak or extractive15 (O'Rourke, 2003; Hilson, 2012, p. 132; Acemoglu & Robinson,

2012).

To halt this so-called ‘race to the bottom’, governments, CSOs and ethical companies have begun to

collaborate at the international level to improve MNCs’ contributions to SD (Gereffi & Mayer, 2004;

Porter G. , 1999).

The international organisations listed in table 11 have facilitated the transition towards a more

sustainable private sector by stimulating MNCs to meet specific standards (Schouten, Vellema, & Van

Wijk, 2014). Ultimately, these organisations have brought about an institutional change; many

business leaders are now more concerned with contributing to SD than they were a few decades ago16

(van Alstine & Barkemeyer, 2014; Hoffman, 1997).

15 It is argued that MNCs exploit weak social, economic and environmental regulation (i.e. governance gaps) to

cut costs of production (van Alstine & Barkemeyer, 2014, p. 132). 17 See SDGs: https://sustainabledevelopment.un.org/?menu=1300 (accessed on October 8th, 2016) 18 See UNGPs: https://business-humanrights.org/en/un-guiding-principles (accessed on October 8th, 2016) 19 See UNGC: https://www.unglobalcompact.org/what-is-gc/mission/principles (accessed on October 8th, 2016) 20 See GRI: https://www.globalreporting.org/information/news-and-press-center/press-resources/Pages/default.aspx (accessed on October 8th, 2016) 21 See WBCSD: http://www.wbcsd.org/pages/edocument/edocumentdetails.aspx?id=219&nosearchcontextkey=true (accessed on October 8th, 2016) 22 See IFC principles: http://www.ifc.org/wps/wcm/connect/115482804a0255db96fbffd1a5d13d27/PS_English_2012_Full-Document.pdf?MOD=AJPERES (accessed on October 8th, 2016) 23 See OECD: http://www.wbcsd.org/pages/edocument/edocumentdetails.aspx?id=219&nosearchcontextkey=true (accessed on October 8th, 2016) 24 See EC: http://ec.europa.eu/growth/industry/corporate-social-responsibility_en (accessed on October 8th, 2016) 25See WTO: https://www.wto.org/english/thewto_e/whatis_e/tif_e/agrm1_e.htm (accessed on October 8th, 2016)

Table 11. Examples of international institutions that govern MNCs

Administering organisations Institution(s)

United Nations General Assembly Sustainable Development Goals17 Guiding Principles on Business and Human Rights (UNGPs)18

United Nations Global Compact (UNGC) Ten principles on human rights, labour, environment and corruption19

Global Reporting Initiative (GRI) GRI reporting standards20

World Business Council on Sustainable Development (WBCSD)

A coalition of international companies that share a commitment to the principles of SD21

International Finance Corporation (IFC) (i.e. World Bank Group)

IFC environmental and social performance standards22

Organisation for Economic Cooperation and Development (OECD)

OECD Guidelines for multinational enterprises23

European Commission (EC) European Commission Strategy on CSR24

World Trade Organisation (WTO) WTO rules (e.g. GATT, GATS, TRIPS)25

United Nations Conference on Trade and Development (UNCTAD)

Global Standards and Policy guidance

https://sustainabledevelopment.un.org/?menu=1300

https://business-humanrights.org/en/un-guiding-principles

https://www.unglobalcompact.org/what-is-gc/mission/principles

https://www.globalreporting.org/information/news-and-press-center/press-resources/Pages/default.aspx

https://www.globalreporting.org/information/news-and-press-center/press-resources/Pages/default.aspx

http://www.wbcsd.org/pages/edocument/edocumentdetails.aspx?id=219&nosearchcontextkey=true

http://www.ifc.org/wps/wcm/connect/115482804a0255db96fbffd1a5d13d27/PS_English_2012_Full-Document.pdf?MOD=AJPERES

http://www.ifc.org/wps/wcm/connect/115482804a0255db96fbffd1a5d13d27/PS_English_2012_Full-Document.pdf?MOD=AJPERES

http://www.wbcsd.org/pages/edocument/edocumentdetails.aspx?id=219&nosearchcontextkey=true

http://ec.europa.eu/growth/industry/corporate-social-responsibility_en

https://www.wto.org/english/thewto_e/whatis_e/tif_e/agrm1_e.htm

32

3.7 Instruments

3.7.1 Introduction

Thus, both national and international institutions determine whether MNCs contribute to or hinder

SD. Considering the importance of institutions regarding MNCs’ impact, this sub-section focuses on

how institutions can influence MNCs’ behaviour using specific instruments. Three types of instruments

are discussed; (1) self-regulation; (2) binding regulation; and (3) multistakeholder regulation.

3.7.2 Self-regulation

Self-regulation is the voluntary adoption of responsible business standards by companies (Hemphill,

1992). Self-regulation can be implemented at firm and industry level and can serve to assist companies

in complying with or complementing binding regulation (ibid). Several different forms of self-

regulation can be identified namely: adopting voluntary codes of conduct, Corporate Social

Responsibility (CSR) and Creating Shared Value (CSV).

Firstly, since the 1970s, a plethora of voluntary standards, principles, codes of conduct and guidelines

have been created to stimulate Responsible Business Conduct (RBC) (see table 11). The voluntary

codes that seek to enhance MNCs impact on SD are diverse; some are drawn up by international

organisations, governments and CSOs whilst others are formulated by trade associations or companies

themselves (Kolk & van Tulder, 2005, p. 11). Most companies draw up and commit themselves to their

own codes of conduct, yet it appears these are often weak in terms of compliance and specificity

(Abdul-Gafaru, 2009). In comparison, RBC codes prescribed by CSOs, governments or international

organisation are more specific and have good compliance mechanisms. However, companies are

generally reluctant to adopt these (Kolk & van Tulder, 2005, p. 11).

Voluntary codes on RBC are a self-regulatory instrument because they assist companies in raising their

(internal) social and environmental standards (Kolk & van Tulder, 2005). They are argued to be

effective because they raise companies’ awareness on the importance of RBC (Kolk & van Tulder,

2005, p. 4). Raising companies’ awareness may prove to be more effective than coercing them into

adhering to binding regulation because companies have limited normative motives and thus tend to

resist binding regulation (Drahos & Braithwaite, 2001; SER, 2014; Rondinelli & Vastag, 1996; Rondinelli

& Berry, 2000; Hawkins & Hutter, 1993, p. 206). As such, voluntary codes on RBC are effective

instruments to improve MNCs contributions to SD in areas where legislation is weak (e.g. in the Global

South) (Christmann & Taylor, 2001; Abdul-Gafaru, 2009, p. 61).

Secondly, Corporate Social Responsibility (CSR) is a self-regulatory instrument that involves a company

undertaking voluntary initiatives outside its core-business to improve its social and environmental

record (Utting P. , 2005; Dahlsrud, 2008). Essentially, CSR is public-relations instrument that is based

on the premise that managing a firm in socially responsible manner increases its competitiveness

(Carroll A. B., 1999). The concept of CSR arose in the 1960s when various civil right, women’s right,

consumer right and environmental movements put pressure on MNCs to deal with their agendas

(Carroll & Shabana, 2010, p. 87; Kolk & van Tulder, 2010). Later, the discourse developed in response

25See WTO: https://www.wto.org/english/thewto_e/whatis_e/tif_e/agrm1_e.htm (accessed on October 8th, 2016) 26 See ISO: http://www.iso.org/iso/home/standards/iso26000.htm (accessed on October 8th, 2016) 27 See ILO: http://www.ilo.org/global/standards/information-resources-and- publications/publications/WCMS_318141/lang--en/index.htm (accessed on October 8th, 2016)

International Standardisation Organisation (ISO) ISO 26000 Guidance on Social Responsibility26

International Labour Organisation (ILO) ILO Labour Standards27

https://www.wto.org/english/thewto_e/whatis_e/tif_e/agrm1_e.htm

http://www.iso.org/iso/home/standards/iso26000.htm

http://www.ilo.org/global/standards/information-resources-and-%20publications/publications/WCMS_318141/lang--en/index.htm

http://www.ilo.org/global/standards/information-resources-and-%20publications/publications/WCMS_318141/lang--en/index.htm

33

to Friedman’s infamous plea (Friedman, 1970). Since then, CSR has become a well-known concept that

is sometimes considered synonymous with RBC. However, this thesis perceives CSR as an instrument

that is used by some companies to offset adverse impacts and contribute to SD (Brooks, 2010; Carroll

& Shabana, 2010). Considering that CSR initiatives offset rather than mitigate adverse impacts, critics

argue that CSR is a “window dressing” and “greenwashing” strategy aimed at improving a firm’s image

and mitigating binding regulation rather than a true commitment to SD (Utting P. , 2005; Porter &

Kramer, 2011; Campbell, 2012).

Thirdly, Creating Shared Value (CSV) is an instrument that is based on the premise that companies can

enhance their competitiveness by advancing the economic, social and environmental conditions of

the communities in which they operate (Porter & Kramer, 2011; Prahalad, 2011). As such, CSV is similar

to CSR. However, whilst CSR places social and environmental objectives at the periphery of business

strategies, CSV places them at the core (ibid). Ultimately, CSV is a business strategy that focuses on

creating mutual benefits between business and society (ibid).

In summary, self-regulatory instruments such as guidelines on RBC, CSR and CSV are argued to be

effective because: (1) they can hold companies publicly (albeit not legally) accountable vis-à-vis

guidelines and principles (Abdul-Gafaru, 2009, p. 61); (2) raise the awareness of MNCs regarding SD

issues (Kolk & van Tulder, 2005, p. 4); and (3) they look for win-win opportunities and allow MNCs to

take the lead in enhancing their own contributions to SD. Proponents argue that this approach is

effective because it ensures MNCs are committed to (rather than coerced into) enhancing their

contributions to SD (SER, 2014, p. 13). Furthermore, it allows them to take credit for positive impact

(ibid). Ultimately, the laissez-faire instruments described above are suasive and correspond well with

MNCs economic motives (Porter & Kramer, 2011). In contrast, sceptics argue that self-regulation is

ineffective because it does not hold MNCs accountable for their impact and blurs the government’s

‘duty to protect’28 (Kolk & van Tulder, 2005; Gunningham, Kagan, & Thornton, 2004; Campbell, 2012).

3.7.3 Public regulation

Public regulation is defined as the governance of business by government institutions. Governments

have the power and duty to coerce MNCs and hold them accountable for their adverse impact (Stigler,

1971; Ruggie, 2008). Governments can use legal instruments (e.g. the law and licenses) and economic

instruments (e.g. taxes and subsidies) to coerce MNCs into improving their impact.

Firstly, legal instruments create a system of rules within a country or area that determine the actions

of people and companies within that area29. Traditionally, governments are responsible for enforcing

the law upon private entities (Habermas, 1991). More specifically, in the context of SD, governments

are tasked with regulating markets (for e.g. through licences) and enforcing social and environmental

legislation (Hawkins & Hutter, 1993). If companies violate the law, a licence can be retracted and/or a

coercive penalty can ensue (Stigler, 1971). For example, after the Deepwater Horizon oil spill in the

Gulf of Mexico in 2010, the company British Petroleum (BP) was found guilty of gross negligence.

Consequently, it was forced to pay a penalty of $5.5 billion US dollars under the Clean Water Act of

America30 (excluding clean-up costs). The ability of the governments to hold MNCs accountable and

penalise them for their negative impact makes the law a unique instrument. No other instrument has

the power to levy fines and coerce MNCs into maintaining social and environmental standards (Stigler,

1971).

28 See; Ruggie, 2008 29 See definition here: http://www.merriam-webster.com/dictionary/law (accessed September 13th, 2016) 30 ‘BP: Into uncharted waters’, see: https://www.ft.com/content/0a71ce8c-24b9-11e5-9c4e-a775d2b173ca (accessed September 13th, 2016)

http://www.merriam-webster.com/dictionary/law

https://www.ft.com/content/0a71ce8c-24b9-11e5-9c4e-a775d2b173ca

34

Secondly, governments can also use economic instruments to regulate MNCs. To elaborate, economic

instruments such as taxes and subsidies can be used to influence corporate behaviour (Andersen,

1999; KPMG, 2013). Whereas taxes penalise MNCs for unsustainable behaviour, subsidies create

monetary incentives for MNCs to improve their impact (Stigler, 1971). Taxes and subsidies can affect

MNC behaviour directly or they can be used to influence consumer behaviour. For example, the

government of China is subsidising MNCs directly for resource efficiency. In effect, companies are

rewarded for using less coal in their production (KPMG, 2013, p. 13). Meanwhile, the German

government subsidises households that use sustainable solar heating technology (OECD, 2008, p. 18).

The latter benefits solar technology companies indirectly as the government essentially compensates

customers for purchasing their product. Ultimately, economic instruments such as taxes/(subsidies)

either penalise/(reward) MNCs for unsustainable/(sustainable) behaviour.

However, while public regulation is an effective instrument for holding MNCs accountable, there are

several shortcomings. Firstly, the processes of enforcing laws and administering taxes and subsidies

can be costly and time consuming for both companies and governments (Hawkins & Hutter, 1993;

Drahos & Braithwaite, 2001). To elaborate, over time, laws, taxes and subsidies can create a complex

legal framework that both civil servants or companies struggle to understand (Andersen, 1999).

Similarly, companies tend to resist excessive regulation and frustrate public servants by continuously

avoiding, delaying or doing the bare minimum to comply (Hawkins & Hutter, 1993, p. 206; Kolk & van

Tulder, 2005, p. 4). Secondly, MNCs are international organisations and cannot always be held

accountable in national court of law (Kettlewell, 1992). Thirdly, governments and parliament are often

reluctant to take measures that enhance corporate sustainability at the cost of national economic

competitiveness. In effect, public regulation is rarely as stringent or effective as CSOs believe it should

be (Kolk & van Tulder, 2005; Jenkins, Pearson, & Seyfang, 2002, p. 15). For example, BP initially faced

the maximum US$13.7 billion penalty for its role in the Deepwater Horizon oil spill. However, the

company argued that a severe penalty would jeopardise the continuity of the company and the 18,000

jobs that it creates in the USA. As a result, the BP and the US government struck a deal that included

a relatively low monetary penalty (US$5.5 billion) that allowed BP to continue its activities in the Gulf

of Mexico12.

In summary, public regulation entails the use of both legal and economic instruments to regulate

MNCs. While the law conclusively draws the line between what is legal and illegal corporate behaviour,

taxes and subsidies create monetary incentives for MNCs to improve their impact (Stigler, 1971). On

the one hand, public regulation is considered effective because it is legally binding and thus holds

MNCs accountable. On the other hand, public regulation can be costly and time consuming for both

MNCs and governments (Hawkins & Hutter, 1993; Drahos & Braithwaite, 2001). Moreover, in the

absence of authoritative international institutions, public regulation does not adequately address the

international activities of MNCs (Kettlewell, 1992; Gereffi & Mayer, 2004). Lastly, public regulation is

rarely stringent because governments and parliament are wary to jeopardise the competitiveness of

their national economy (Kolk & van Tulder, 2005). Finally, whereas legal instruments appeal strongly

to a MNC’s normative motives, economic instruments entice MNCs’ economic motives (Nielsen &

Parker, 2012).

3.7.4 Multistakeholder Regulation

The third type of regulatory instrument discussed in this thesis is multistakeholder regulation.

Multistakeholder regulation is defined as the co-regulation of MNCs by public (i.e. governments),

private (i.e. companies, trade associations) and civil society actors (i.e. trade unions and NGOs). It is

argued that partnerships between these actors are effective at governing global value chains because

they build trust and create collaborative advantages – i.e. all stakeholders have something to offer

35

and gain by cooperating (Utting P. , 2014; Kolk & van Tulder, 2010; Schouten & Glasbergen, 2012, p.

74). To elaborate, by partaking in partnerships with CSOs and governments, companies can gain public

legitimacy, access to new customers, support from CSO networks, diplomatic assistance, legal backup,

security and knowledge about how to address social and environmental issues (Rivera-Santos, Rufin,

& Kolk, 2012; Kolk & van Tulder, 2005). Similarly, CSOs benefit from partnerships because companies

and governments can offer them business insights, financial support, access to technology and

technical and managerial expertise (ibid). Lastly, governments benefit from an independent and

effective regulatory framework that improves business conduct without compromising national

competitiveness or state budgets (O'Rourke, 2003). Ultimately, multistakeholder partnerships

combine the resources of all actors to create regulatory frameworks based on trust and mutual

benefits (Utting P. , 2014). Three types of regulatory multistakeholder instruments are discussed

below; (1) covenants; (2) roundtable certification schemes; and (3) Public Private Partnerships (PPPs).

Firstly, stakeholders can make voluntary guidelines on RBC (see 3.7.2) binding by including them in

formal agreements (i.e. covenants) (SER, 2014). For example, numerous Dutch textile companies, the

Dutch government and CSOs have recently signed a publicly binding agreement that stipulates that

companies must implement the UNGPs, OECD Guidelines for Multinational Enterprises and ILO labour

standards throughout their entire supply chain31. The covenant seeks to institutionalise cooperation

between business, CSOs and governments and includes agreements about due diligence, grievance

mechanisms, monitoring, reporting and remediation. A ‘Steering Group’ representing the three

contingencies has the mandate to plan new projects and welcome new members32. The covenant is

binding to the extent that disputes regarding compliance of the agreement are first taken up by an

internal and independent ‘Complaints and Disputes Committee’ that must be appointed by the

contingencies. If the committee cannot solve the case, it is taken to the Netherlands Arbitration

Institute33. In effect, the covenant holds MNCs internally accountable so that the parties can

collectively formulate a response. If parties cannot agree on a response, the possibility exists to

escalate to legal measures34. Ultimately, covenants such as the Dutch Sustainable Garment and Textile

Agreement (and more recently the Dutch Banking Agreement35) demonstrate how multiple

stakeholders can be included in the implementation of voluntary guidelines at the national level.

Secondly, another multistakeholder regulatory instrument is roundtable certification. Roundtables are

similar to covenants as they are essentially a platform where private, public and civil society actors

come together to collectively design, implement, enforce and evaluate sustainable production

standards in a specific industry (Utting P. , 2014, p. 426). Well-known roundtables are the Roundtable

on Sustainable Palm Oil (RSPO) and Roundtable on Responsible Soy (RTRS) (Schouten & Glasbergen,

2012). The difference between covenants and roundtables lies in the scope and purpose; whereas the

Dutch covenants are national agreements focused on the institutionalisation of multistakeholder

cooperation, the RSPO and RTRS are global certification schemes (ibid). These roundtables promote

the sustainable production of palm oil and soy, respectively. Members of the RSPO and RTRS are

several large palm oil and soy producing companies, global banks, retailers, government agencies and

31 See the Dutch Sustainable Garment and Textile Agreement here: https://www.ser.nl/~/media/files/internet/talen/engels/2016/agreement-sustainable-garment-textile.ashx 32 Ibid. 33 Ibid. 34 Ibid. 35 See the Dutch Banking Sector Agreement regarding Human Rights here: https://www.ser.nl/nl/publicaties/overige/2010-2019/2016/dutch-banking-sector-agreement.aspx

https://www.ser.nl/~/media/files/internet/talen/engels/2016/agreement-sustainable-garment-textile.ashx

https://www.ser.nl/nl/publicaties/overige/2010-2019/2016/dutch-banking-sector-agreement.aspx

36

NGOs such as WWF and Solidaridad36. Like covenants, these initiatives are non-hierarchical as all

contingencies are represented in the executive board (ibid). In short, the RSPO and RTRS are

multistakeholder standards that any palm oil or soy producing company, trade association, financial

organisation or CSO can become member of. All organisations cooperate on equal footing to achieve

responsible production standards and use certification to demarcate their achievements (Utting P. ,

2014; Schouten & Glasbergen, 2012).

Thirdly, Public-Private Partnerships (PPPs) are another example of multistakeholder regulation. PPPs

are defined as working arrangements between business, government and civil society (Bovaird, 2004).

Whereas covenants and roundtables aim to improve responsible business standards, PPPs are project-

orientated agreements typically geared towards the financing and implementing of: infrastructure,

capacity building, policy, service delivery and economic development (Brinkerhoff & Brinkerhoff,

2011, p. 8). As PPPs are project-orientated, they are typically based on untransparent contractual

agreements rather than collaborative trust (Bovaird, 2004). Regarding SD, governments, MNCs and

CSOs use PPPs to coordinate projects that promote sustainable business practices. For example, a PPP

between the Dutch government, Heineken and several NGOs called ‘CREATE’ aims to improve the

livelihood of Heineken-contracted smallholder farmers in Africa by helping them improve their

agricultural practices 37. Whilst Heineken gains access to local malt barley, governments and CSOs use

the PPP to improve the livelihoods of rural farmers (see 4.3.6). Ultimately, PPPs often entail

contractual and thus untransparent partnerships aimed at financing and implementing specific

development projects (Brinkerhoff & Brinkerhoff, 2011; Bovaird, 2004).

Whilst multistakeholder regulation stimulates cooperation, several shortcomings exist. Firstly, most

multistakeholder initiatives are strictly voluntary and only become publicly binding once MNCs (and

other stakeholders) have agreed to commit themselves. Whilst many of the world’s leading MNCs

appear to be willing to engage in partnerships (van Tulder & da Rosa, 2010), many companies still

refrain from committing themselves to covenants, roundtables and PPPs (Utting P. , 2014, p. 436). For

36 See RSPO and RTSS here: http://www.rspo.org/members/all & here: http://www.responsiblesoy.org/about-rtrs/members/?lang=en (accessed September 20th, 2016) 37 See information on the CREATE PPP here: http://eucord.org/1284-2/ (accessed September 20th, 2016)

Table 12. Examples of multistakeholder regulation

Name Focus Type

Forest Stewardship Council (FSC) Sustainable timber Standard/ certification

Marine Stewardship Council (MSC) Sustainable fish Standard/ certification

Roundtable on Sustainable Palm Oil (RSPO)

Sustainable palm oil Standard/ certification

Roundtable on Responsible Soy (RTRS)

Sustainable soy Standard/ certification

OECD Guidelines for Multinational Enterprises

Risk based due diligence Guidelines

ISO 26000 Guidance on social responsibility Standards/Certification

UN Global Compact 10 environment, social, human right and anti-corruption related principles

Guidelines

GRI Reporting standards Guidelines

CREATE Partnership between Heineken, Dutch government and NGOs to improve agricultural practices of African farmers.

PPP

http://www.rspo.org/members/all

http://www.responsiblesoy.org/about-rtrs/members/?lang=en

http://www.responsiblesoy.org/about-rtrs/members/?lang=en

http://eucord.org/1284-2/

37

example, only 17% of the world’s palm oil is RSPO certified38. Similarly, only a small number of

important soy producers have become member of the RTRS (Schouten & Glasbergen, 2012, p. 68).

Secondly, there is a trade-off between quality and quantity in partnerships; the smaller the group of

stakeholders the more rigorous the standards, implementation and compliance mechanisms are likely

to be (Utting P. , 2014, p. 436). However, once a partnership increases in size, coordinating efforts

between stakeholders will become increasingly difficult. Consequently, the number of free riders is

likely to increase. This, in turn, compromises the legitimacy of the partnership (ibid). Thirdly, the scope

and focus of an initiative are only agreed upon after negotiations between all stakeholders. MNCs can

dominate these negotiations and thus strongly influence the scope of the deal (Fuchs, 2005).

In summary, multistakeholder regulation focuses on creating partnerships between private, public and

civil society actors (Schouten, Vellema, & Van Wijk, 2014). Whereas, public regulation tends to focus

on top-down regulation and ‘naming and shaming’, multistakeholder regulation places emphasis on

cooperating and the ‘knowing and showing’ of best practices (SER, 2014). By cooperating, all

stakeholders gain a collaborative advantage (Schouten & Glasbergen, 2012). Companies gain better

relationships with CSOs, decrease their risk of reputational damage and get the opportunity to certify

their products. Meanwhile, NGOs gain access to finance, technology and managerial/technical

knowledge and skills (Rivera-Santos, Rufin, & Kolk, 2012). Lastly, governments manage to enhance

MNCs’ contributions to SD without compromising national competitiveness or increasing state budget

or staff (Nadvi & Waltring, 2001, p. 8). Despite the collaborative advantages, there are several

shortcomings: (1) membership remains voluntary; (2) there is a trade-off between quality and size of

the partnership; and (3) the scope and focus of partnerships require consensus and are thus subject

to power relations. Finally, despite these points of concern, a growing number of large MNCs,

governments and CSOs are collaborating to enhance the impact of business on SD (van Tulder & da

Rosa, 2010). Regarding motives, multistakeholder regulation is argued to appeal strongly to a MNCs’

social motives as engaging with stakeholders implies managers are committed to earn the approval of

others (Nielsen & Parker, 2012, p. 431).

Table 13. Classification of instruments

Type Instruments Strengths Limits Scope

Self

-re

gula

tio

n

Voluntary guidelines on RBC

Creates awareness among MNCs regarding SD

Holds MNCs publicly accountable vis-à-vis guidelines

Non-binding

Firm specific

CSV Integrates RBC into core of business strategy

Gives business ownership over its contributions to SD

Non-binding

Blurs accountability versus state

Firm specific

CSR

Holds MNCs publicly accountable


Non-binding

Greenwashing

Blurs accountability versus state

Firm or industry specific

Pu

blic

regu

lati

on

Legislation/ licencing Legally binding

Coercive

Costly & time-consuming

Not internationally applicable

Home/host country specific

38 See: http://www.rspo.org/about/impacts

http://www.rspo.org/about/impacts

38

Legislation is not necessarily stringent

Taxes/subsidies Appeals strongly to MNCs’ economic motives

Complex, costly, time consuming

Home/host country specific

Mu

ltis

take

ho

lde

r re

gula

tio

n

Covenants Collaborative advantages

Builds trust

Publicly binding

Gives MNCs ownership over SD

Voluntary

Quality vs quantity

Negotiations

Industry or country specific*

Roundtables/ certification

Collaborative advantages

Builds trust

Publicly binding


Voluntary

Negotiations

Quality vs quantity

Firm or industry specific*

PPPs Collaborative advantage

Share financial burden and risks

Voluntary

Untransparent

Firm or country specific*

* depends on nature of the agreement

3.8 Inferences

In addition to discussing SD and the role of MNCs therein (see 0), this chapter answered the following

sub question:

(1) In theory, how can beer MNCs contribute to/hinder SD in the Global South and what role do

institutions play therein?

It was shown that MNCs’ impacts relate to the following areas: employment; finance; public revenue;

technology, knowledge and skills; linkages; competitiveness; and social and environmental standards

(see 3.4.2 & 3.4.3). Furthermore, the literature states that MNCs’ behaviour consists of economic,

social and normative motives (see 3.5.2) that depend on several factors (see 3.5.3). Instruments can

be used to influence MNCs’ behaviour so that their contributions to SD are enhanced. Instruments

emerge from both national and international institutions (see 3.6). Three types of instruments can be

used to influence MNCs’ behaviour; self-regulatory, public-regulatory and multistakeholder

instruments (see 3.7).

39

Chapter 4 Case study: four international beer companies in Ethiopia

4.1 Introduction

This chapter presents a case study on four beer MNCs in Ethiopia. First, an introduction is given to

Ethiopia’s: (1) demographics and economic growth; (2) institutions; (3) beer industry; and (4) the four

companies. Secondly, using the possible impact mechanisms identified in 3.4.2 & 3.4.3, the actual

impacts of the four MNCs on SD are analysed. Lastly, the rationales behind each impact are discussed.

4.2 Context

4.2.1 Ethiopia's demographics and economic growth

The Federal Democratic Republic of Ethiopia is the second most populated country in Africa with a

population of approximately 90 million people (Ethiopia Statistical Agency, 2015). In the coming years,

the population is estimated to grow by an average of 2.5% per year (World Bank, 2016b). The country

has over 80 different ethnic groups of which the largest are the: Oromo, Amhara, Somali, Tigray and

Sidama. Together these ethnic groups cover about 77% of the population (Population and housing

commission of Ethiopia, 2015). Furthermore, most Ethiopians are Christian but Muslims also comprise

a large fraction of the population (ibid). Amharic is recognised as the working language of the national

government (ibid). However, Ethiopia is highly multi-lingual and other languages spoken include:

Oromo, Somali and Tigrinya. The most commonly spoken foreign language is English (ibid).

Figure 8 Ethiopia's growth compared with the Sub-Saharan African average

Ethiopia has one of the fastest growing economies in Sub-Saharan Africa. Therefore, some refer to the

country as the ‘African Tiger’ 39. Ethiopia’s economic growth is often attributed to its pro-poor policies

and high public spending. To illustrate, in 2014/2015, 73% of government spending was classified as

pro-poor40 (Wondifraw, Kibret, & Wakaiga, 2016, p. 12; MOFED, 2010a). To finance its pro-poor

expenditure, Ethiopia’s government floated international bonds. As a result, Ethiopia’s external-debt

stock has increased fivefold between 2009 and 2015 (Wondifraw, Kibret, & Wakaiga, 2016, p. 8).

Overall, Ethiopia’s pro-poor spending has improved income, health and education levels (ibid, p. 11).

39 Ethiopia’s ‘African tiger’ leaps towards middle income, see: http://www.theguardian.com/global-development/poverty-matters/2014/oct/22/ethiopia-african-tiger-middle-income (accessed November 7th, 2016)

-10

-5

0

5

10

15

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

GD

P p

er c

apit

a gr

ow

th (

ann

ual

%)

Years

Ethiopia's economic growth is relatively high

Sub-Saharan Africa EthiopiaSource: World Bank (2016a)

http://www.theguardian.com/global-development/poverty-matters/2014/oct/22/ethiopia-african-tiger-middle-income

http://www.theguardian.com/global-development/poverty-matters/2014/oct/22/ethiopia-african-tiger-middle-income

40

Despite the progress, Ethiopia remains one of the poorest countries in the world: it ranks 174th out of

188 countries in the Human Development Report (ibid, p. 12).

Ethiopia’s economy is primarily agricultural driven as 73% of all people are employed in the sector

(Wondifraw, Kibret, & Wakaiga, 2016, p. 3). The sector is an important source of food and provides

important raw-materials for domestic industries. However, many farmers still use traditional farming

methods and depend on rain (ibid). This makes Ethiopia extremely vulnerable to drought and climate

change. To illustrate, in 2015 El Nino ruined harvests forcing Ethiopia to import food aid for millions

of people (ibid, p.4).

Over the past years, Ethiopia’s manufacturing and services industries have become increasingly

important (Wondifraw, Kibret, & Wakaiga, 2016, pp. 3-4). This is illustrated by the fact that industries

such as food processing, textiles and beverages attract most of Ethiopia’s FDI. In 2015, FDI flows

towards Ethiopia were worth $2.2 billion (UNCTAD, 2016, p. 71).

4.2.2 Ethiopia’s institutions

Following, Acemoglu & Robinson (2012) a country’s institutions depend on its (pre-) colonial history.

The authors argue that SD cannot be achieved without a transition towards inclusive political and

economic institutions (Acemoglu & Robinson, 2012).

Despite never being colonised, Ethiopia has a history of extractive regimes. From 1930 to 1974, Haile

Selassie ruled Ethiopia as emperor. Haile Selassie’s was greatly respected but he neglected the poor

and failed to deal with widespread famine (Kapuscinski, 1983; Keller, 1992). After famine and drought

killed hundreds of thousands of Ethiopians, a group of Marxist army officers ousted Haile Selassie in a

coup d’état (Kapuscinski, 1983).

Instead of establishing a more inclusive government, the army officers established a socialist-military

junta that became known as the Derg (Keller, 1992, p. 611). Between 1974 and 1991, the Derg

nationalised almost all industries (including the beer breweries) and land (Hagmann & Abbink, 2011).

Meanwhile state farms were created for food production. During its rule, the Derg faced numerous

uprisings that it violently resisted (ibid). It is estimated that the Derg spent two-thirds of Ethiopia’s

annual budget on wars against Eritrean, Tigrayan and Somalian rebels (ibid, p.615). The Derg’s

excessive military spending, combined with frequent droughts, meant that Ethiopians had become

highly dependent on foreign aid (ibid). In 1991, after years of civil war, drought and economic

stagnation, the Ethiopian People’s Revolutionary Democratic Front (EPRDF) ousted the Derg and came

to power (Hagmann & Abbink, 2011; Keller, 1992). The EPRDF has been in power ever since.

In the 25 years that the EPRDF has been in power, it has restructured Ethiopia’s political and economic

structures. Measures that have been taken include: introducing a multi-party system, holding election,

decentralising bureaucracy, redrawing administrative boundaries and liberalising sectors of the

economy (Hagmann & Abbink, 2011, p. 582). Ethiopia’s high economic growth is often attributed to

the EPRDF’s policies (Hagmann & Abbink, 2011). Yet, despite the high economic growth, the EPRDF is

criticised for its authoritarian rule. The party is dominated by a Tigrayan consortium that – according

to observers – is undemocratic, top-down, uses violence to oppress opposing ethnic groups and

exploits public land ownership (Hagmann & Abbink, 2011, p. 582). To illustrate, during the last

elections, the party effectively removed political opposition by winning all the parliamentary seats41.

41 Ethiopia's ruling party wins by landslide in general election, see: https://www.theguardian.com/world/2015/jun/22/ethiopias-ruling-party-win-clean-sweep-general-election (accessed November 7th, 2016).

https://www.theguardian.com/world/2015/jun/22/ethiopias-ruling-party-win-clean-sweep-general-election

41

Furthermore, in 2016, tensions between the EPRDF and other ethnic groups has led to violent police

oppression and the destruction of Dutch commercial farms that were built on land allocated by the

government42,43. Ultimately, these examples suggest that Ethiopia’s political institutions remain

somewhat extractive.

4.2.3 The EPRDF’s development policies

Ethiopia’s goal is to be a middle-income country by 2020-2023 (MOFED, 2010a, p. 1; MOFED, 2015).

To achieve this, Ethiopia has medium-term action plans. Each plan has its own set of strategies,

objectives, and specific targets relating to development. Past programmes have been: The Sustainable

Development and Poverty Reduction Program (SDPRP); the Plan for Accelerated and Sustained

Development to End Poverty (PASDEP) and the Growth and Transformation Plan I (GTP I) (MOFED,

2010a; MOFED, 2010b). Currently, GTP II is Ethiopia’s development plan until 202044, 45 (MOFED, 2015).

The GTP II explicitly refers to the SDGs however much emphasis is placed on economic growth. To

elaborate, attracting FDI and accommodating MNCs is a key element of the GTP II (MOFED, 2015). To

attract FDI, the following institutional revisions have been made: (1) an upgrade of the Ethiopian

Investment Commission; (2) an amendment of the Investment Proclamation to open areas for

industrial investment; (3) simplifying and streamlining regulation; (4) removing of entry barriers; (5)

creating a legal framework to address anti-competitive behaviour; and (5) establishing a forum for

public private dialogue (Wondifraw, Kibret, & Wakaiga, 2016, p. 9). These institutional arrangements

sometimes mean that foreign MNCs are better accommodated than domestic companies. For

example, whereas foreign MNCs deal with the Ethiopian Investment Commission, local firms are

required to deal with local offices and ministries. These offices are much more bureaucratic and

difficult to deal with46.

For socio-environmental matters, Ethiopia has a unique green growth strategy called the Climate

Resilient Green Economy (CRGE) facility. The CRGE is closely aligned with the GTP II and is aimed at

building a climate resilient economy by 2025 (FDRE, 2011). The strategy is institutionalised within

Ethiopia’s Environmental Council, which is chaired by the Prime Minister and includes members from

the federal government, regional governments, private sector, CSOs and academia (FDRE, 2011, p.

47). The Environmental Council can approve environmental standards and directives independently

42 ‘Ethiopia's clampdown on dissent tests ethnic federal structure’, see: https://www.theguardian.com/global-development/2016/apr/08/ethiopia-clampdown-dissent-ethnic-federal-structure (accessed November 7th, 2016). 43 ‘Dutch, Israeli farms in Ethiopia attacked by protestors’, see: http://ethiodailypost.com/article/dutch-israeli-farms-ethiopia-attacked-protesters (accessed November 7th, 2016) 44 National Development Plan, see: http://www.mofed.gov.et/national-development-plan (accessed November 7th, 2016). 45 MOFED stands for Ethiopian Ministry of Finance and Economic Development. 46 Swinkels, T. (2015). Interview 15.

SDPRP

(2002-2005)

PASDEP

(2005-2010)

GTP I

(2010-2015)

GTP II

(2015-2020)

Figure 9 Ethiopia's development plans

https://www.theguardian.com/global-development/2016/apr/08/ethiopia-clampdown-dissent-ethnic-federal-structure

https://www.theguardian.com/global-development/2016/apr/08/ethiopia-clampdown-dissent-ethnic-federal-structure

http://ethiodailypost.com/article/dutch-israeli-farms-ethiopia-attacked-protesters

http://ethiodailypost.com/article/dutch-israeli-farms-ethiopia-attacked-protesters

http://www.mofed.gov.et/national-development-plan

42

(ibid). The CRGE only regards MNCs as a source of finance (Bass, Wang, Ferede, & Fikreyesus, 2013;

FDRE, 2011) 47.

Ultimately, Ethiopia’s GTP II and CRGE are Ethiopia’s overarching policies regarding SD48.

4.2.4 Ethiopia’s beer industry

Traditional home brewed alcoholic beverages such as Tej, Areki, Borde, Shamita and Tella have been

consumed in Ethiopia for centuries (Lee, Regu, & Seleshe, 2015; Yohannes, Melak, & Siraj, 2013).

However, Ethiopia’s beer industry recently caught the eyes of foreign investors. Since 2011 companies

such as Heineken, Diageo, Bavaria and BGI have invested hundreds of millions of US dollars in Ethiopia

(see 4.3.3).

Interestingly, there is a strong link between beer consumption and economic growth (Colen &

Swinnen, 2016). In 2009, average beer consumption in Ethiopia amounted to 4 litres per capita

annually, which is relatively low compared to other nations (see figure 9.). However, the high

economic growth is boosting beer consumption by 20% per year49. Ultimately, Ethiopia’s large

population, high economic growth and rapidly increasing beer consumption make the country a

lucrative market for foreign beer companies.

47 ‘Ethiopia validates private sector engagement strategy for CRGE facility, see: http://gggi.org/ai1ec_event/ethiopia-validates-private-sector-engagement-strategy-for-crge-facility/ (accessed November 5th, 2016). 48 The CRGE has been formulated in consultation with the OECD and UNDP, see: (FDRE, 2011). 49 USAID (2012). The business case for investing in a malting plant in Ethiopia. & ‘Ethiopia’s Private Sector Action Plan for Agricultural Development’: http://pdf.usaid.gov/pdf_docs/PA00JZ72.pdf (accessed November 7th, 2016).

Figure 10 Ethiopia’s low beer consumption

0 10 20 30 40 50 60 70

Kenya

South Africa

Nigeria

Ethiopia

Beer consumption in 2009

Beer consumpion (L/capita/year)Source: USAID (2012)

http://gggi.org/ai1ec_event/ethiopia-validates-private-sector-engagement-strategy-for-crge-facility/

http://pdf.usaid.gov/pdf_docs/PA00JZ72.pdf

43

4.2.5 The four companies

Heineken N.V. is one of the largest beer companies in the world. It is registered in the Netherlands,

but it owns 156 breweries across Europe, Asia, Africa and the Americas. In 2015, Heineken had a

revenue of €20,5 billion (Heineken, 2015b). Heineken first entered the Ethiopian market in 2011 when

it purchased two state-owned breweries. Since then Heineken has built a brand-new brewery in the

Kilinto area just outside Addis Ababa. Ultimately, with its three breweries and its strong “Walia” brand,

Heineken has become one of the leading beer companies in Ethiopia. Heineken N.V.’s Ethiopian

subsidiary is called Heineken Brewery Share Company (HBSC).

Diageo is one of the largest alcoholic beverage producers in the world. It is an English company with

more than 200 production sites in over thirty countries50. In 2015, Diageo had a global revenue of

almost USD15 billion (Diageo, 2015). Diageo entered the Ethiopian market in 2012 when it purchased

the “Meta Abo” brewery from the Ethiopian government. Thus, the company owns one former state-

owned brewery in Ethiopia. In Ethiopia, Diageo operates through its subsidiary: Meta Abo Brewery

Share Company (MABSC)

Bavaria is relatively small family-owned company. In 2015, the firm had a revenue of €550 million

(Bavaria, 2015). The company owns two breweries; one in the Netherlands and as of 2015 it owns

another in Ethiopia. The firm exports and sells its beers in more than 130 countries through various

licensing agreements51. Unlike the other companies, Bavaria is operating in a joint venture with 8,000

Ethiopian shareholders. The joint venture is called “Habesha”52.

In 1990, BGI became a subsidiary of the Castel Group, a French beverage company53. BGI is a major

brewer in Africa; it owns more than 21 breweries on the continent (van Beemen, 2015, p. 36). BGI has

been active in Ethiopia since the 1990s and owns three Ethiopian breweries through its subsidiary BGI

Ethiopia. Prior to the entry of the foreign MNCs, BGI Ethiopia dominated the Ethiopia beer market

with its traditional “St George Brand”. Currently, it is still a leading producer but it faces tough

competition from the other foreign brewers54.

50 See Diageo’s structure here: http://www.diageo.com/en-row/ourbusiness/ourregions/Pages/default.aspx 51 Swinkels, T. (2015). Interview 1. 52 Swinkels, T. (2015) Interview 10. 53 BGI is a subsidiary of the Castel Group, see: http://www.groupe-castel.com/groupe/ 54 Swinkels, T. (2015). Interview 21.

0

2

4

6

8

10

0

500

1000

1500

2000

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

Year

Bee

r p

rod

uct

ion

(l

iter

s/ca

pit

a/ye

ar)

GD

P/c

apit

a (P

PP

cu

rren

t in

tern

atio

nal

$)

Beer production is increasing with economic growth

GDP per capita Beer productionSource: World Bank (2016a) & FAO (2016)

Figure 11 Beer consumption is increasing with economic growth in Ethiopia

http://www.diageo.com/en-row/ourbusiness/ourregions/Pages/default.aspx

http://www.groupe-castel.com/groupe/

44

Dashen, Raya and UNIBRA are other upcoming beer companies in Ethiopia. However, due to time

constraints, the companies are not discussed in further detail.

Table 14. Breweries per company in Ethiopia

Company Breweries

Heineken/HBSC Kilinto Bedele Harar

Diageo/MABSC Meta Abo

Bavaria/Habesha Debre Birhan

Castel/BGI/BGI Ethiopia St George Hawassa Kombolcha

4.3 The impact of the four companies

4.3.1 Introduction

This section discusses the impact of the four MNCs by contrasting their performance against the

impact mechanisms identified in 3.4.2 & 3.4.3.

4.3.2 Employment

Prior to the privatisation of the Harar and Bedele, 800 and 600 people worked at the breweries,

respectively. However, after Heineken privatised the two breweries employment was cut; currently

200-250 people work at each brewery55 (van Beemen, 2015, p. 189). Meanwhile, 180-280 new jobs

were created at the new Kilinto brewery56. Heineken claims it was necessary to cut jobs at former

state-owned breweries as they were overemployed. This reduced efficiency and compromised

safety57. Consequently, all non-core jobs (e.g., security and the loading and unloading of freight) were

outsourced. Furthermore, new technologies were introduced which made some jobs obsolete58. A

senior Heineken manager stated the following:

“You can effectively say that Bedele and Harar were projects to create employment by the Ethiopian

government. This, of course, is not how we work; we are a business. So, at first 800-900 people worked

at these breweries, now about 250 people work there.”59

According to Heineken, all employees were offered generous severance packages that included an

extra year of insurance, optional vocational training and optional loans to set up their own businesses.

Moreover, the company states that many of the employees that were let go were either ready to

retire or rehired by agencies to where non-core tasks have been outsourced60. However, in the

Democratic Republic of Congo, Heineken is currently involved in an OECD remediation process with

its former employees who claim they were fired without adequate compensation61. Thus, Heineken’s

55 Swinkels, T. (2015). Interview 16 & 20. 56 ‘Heineken Inaugurates its Largest Ethiopian Plant’, see: http://addisbiz.com/ethiopian-business-news/29-heineken-inaugurates-its-largest-ethiopian-plant (accessed November 5th, 2016). 57 Swinkels, T. (2015). Interview 16. 58 Swinkels, T. (2015). Interview 20. 59 Swinkels, T. (2015). Interview 16. 60 Swinkels, T. (2015). Interview 20. 61‘Initial Assessment Bralima and Heineken, 28th June 2016’, see: https://www.oecdguidelines.nl/events/news/2016/06/28/initial-assessment-bralima-and-heineken-28th-june-2016 (November 8th, 2016)

http://addisbiz.com/ethiopian-business-news/29-heineken-inaugurates-its-largest-ethiopian-plant


https://www.oecdguidelines.nl/events/news/2016/06/28/initial-assessment-bralima-and-heineken-28th-june-2016

https://www.oecdguidelines.nl/events/news/2016/06/28/initial-assessment-bralima-and-heineken-28th-june-2016

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prior severance packages have not always satisfied former employees. Whether this is the case in

Ethiopia is unknown.

Heineken invests in the training and safety of its employees; its staff have received more than 50,000

training hours62. Furthermore, all employees – apart from three senior managers and several finance

and supply chain specialists – are local Ethiopians63. All workers and visitors at Heinekens’ breweries

are forced to wear protective clothing64. However, some sources suggest that accidents still occur (van

Beemen, 2015, p. 189).

Since 2014, Diageo has cut 336 jobs at its Meta Abo brewery reducing its number of employees to

about 457. Currently, it is in the process of cutting another 200 jobs65 . The people who were previously

let go received 19 months’ worth of salary as compensation66. Whilst Diageo has cut hundreds of jobs,

it has increased the wages by 40% since taking over. To compare, Heineken only increased the wages

by 6-7% which is comparable with the inflation rate (van Beemen, 2015, p. 191). Furthermore, Diageo

gives its employees access to training programmes that educate its employees in its African best

practices67.

Diageo employs a considerable number of Nigerian expatriates in Ethiopia. According to a former

employee, these Nigerian expatriates are unprofessional and sometimes put on regular tasks that local

Ethiopians could easily perform. Members of the Ethiopian staff have clearly been offended by their

presence68. Finally, Diageo takes safety very seriously and recorded 1,500,000 hours without a lost

time incident in Ethiopia in 2015 (Diageo, 2015, p. 44).

Bavaria’s Ethiopian venture employs about 255 permanent employees and another 75 temporary

contractors69. Most workers are recent Ethiopian university graduates and only ten employees are

expatriates70. Bavaria has flown local employees over to the Netherlands to educate them in Dutch

production techniques, safety procedures and codes of conduct71. Regarding safety, at the brewery all

employees wear shoes, bright overalls and goggles. Furthermore, various warnings remind workers of

the safety procedures. The only accident that has occurred thus far happened during the construction

phase72.

When BGI entered the Ethiopian market in the late 1990s, it too cut jobs and raised wages at its former

state-owned brewery73. However, the company still has many employees. In total, BGI employs 1848

people at three breweries. Interestingly, no expatriate employees work at BGI74. At BGI the salary of

employees is linked to the price index of tef, fuel, electricity, water and the value of the Birr. If the

62 Presentation by Heineken at Kilinto brewery on 10th of November 2015 63 Swinkels, T. (2015). Interview 20. 64 Observed during tour of brewery. 65 ‘Diageo and Union standoff over 30% proposed layoff (Ethiopia)’, see: https://asokoinsight.com/news/diageo-and-union-standoff-over-30-proposed-layoff-ethiopia (accessed November 8th, 2016) 66 Ibid. 67‘Meta Abo Brewery: building talent in new territories’, see: http://srreport2012.diageoreports.com/top-stories/meta-abo-brewery-building-talent-in-new-territories.aspx (accessed November 8th, 2016) 68 Swinkels, T. (2015). Interview 21. 69 Swinkels, T. (2015). Interview 10. 70 Field notes from brewery tour. & Swinkels, T. (2015). Interview 10. 71 Field notes from brewery tour. & Bavaria website article in 2015 (now offline) 72 Ibid. 73 Swinkels, T. (2015). Interview 21. 74 Information obtained through an email from BGI manager.

https://asokoinsight.com/news/diageo-and-union-standoff-over-30-proposed-layoff-ethiopia

http://srreport2012.diageoreports.com/top-stories/meta-abo-brewery-building-talent-in-new-territories.aspx

http://srreport2012.diageoreports.com/top-stories/meta-abo-brewery-building-talent-in-new-territories.aspx

46

price for any of the products changes, then the salaries of the employees change accordingly75.

Furthermore, the company also has a solidarity fund that is used to finance medical treatments for

employees abroad. BGI also rewards its employees’ children for good academic performances and

helps them to develop their talents through financing scholarships76.

In summary, Heineken, Diageo and BGI have cut hundreds of jobs at their former state-owned

breweries. Non-core jobs have either been outsourced or cut for efficiency reasons. Conversely,

Greenfield breweries by Heineken and Bavaria have created several hundreds of new jobs. Whereas

Heineken, Diageo and Bavaria prefer to employ around 100-200 people at their breweries, BGI

employs at least 450 workers per brewery. The MNCs also pay their employees well for Ethiopian

standards, especially Diageo maintains a high wage level77. Furthermore, most MNCs train their

Ethiopian staff by sharing their international best practices.

4.3.3 Finance

Heineken has invested hundreds of millions of dollars in Ethiopia through privatising and upgrading

the Bedele and Harar breweries as well as building the brand new Kilinto brewery. Furthermore, it has

also invested around USD 1.3 million in the CREATE PPP78. Heineken’s total investments in Ethiopia

are believed to be in excess of USD 344million79.

Diageo has invested significantly in its Meta Abo brewery. Firstly, purchasing Meta Abo from the

Ethiopian government cost Diageo USD 225 million80. In subsequent years, the company has spent

millions on upgrades and expansions bringing the total investments by Diageo in Ethiopia to USD 344

million – approximately the same amount as Heineken81.

Instead of privatising a state-owned brewery, Bavaria acquired shares in a new company called

“Habesha”. Bavaria is majority shareholder together with another Dutch investor, a local

floriculturist82. About a third of Habesha’s shares is owned by 8,000 local shareholders. It is estimated

that Bavaria has had to invest about USD 30 million to acquire its shares83.

BGI’s entered Ethiopia in 1998 when it privatised the St George brewery. It is difficult to estimate the

value of the FDI that the company has in the country. However, it is known that BGI acquired its St.

75 Swinkels, T. (2015). Interview 14. 76 Ibid. 77 Swinkels, T. (2015). Interview 21. 78 Beantwoording Kamervragen over subsidie voor ontwikkelingsprojecten van Heineken in Afrika’, see: https://www.rijksoverheid.nl/documenten/kamerstukken/2016/05/10/beantwoording-kamervragen-over-subsidie-voor-ontwikkelingsprojecten-van-heineken-in-afrika (accessed November 2nd, 2016) 79 Investments were worth 310 million euro, ‘Heineken Inaugurates its Largest Ethiopian Plant’ see: http://addisbiz.com/ethiopian-business-news/29-heineken-inaugurates-its-largest-ethiopian-plant & ‘Heineken koopt Ethiopische staatsbrouwerijen’, see: http://www.nieuwsblad.be/cnt/dmf20110505_023 (accessed November 2nd, 2016) 80‘Diageo officially gets Meta’, see: http://capitalethiopia.com/2012/01/16/diageo-officially-gets-meta/ (accessed November 2nd, 2016) 81 ‘Meta Abo Brewery completes latest phase of expansion with $119m bottling line’, see: http://www.diageo.com/FR-CA/NEWSMEDIA/Pages/resource.aspx?resourceid=2701 (accessed October 23rd, 2016) 82 Swinkels, T. (2015). Interview 10 & 12. 83 Calculated with figures obtained from Interview 10 & 12.




http://www.nieuwsblad.be/cnt/dmf20110505_023

http://capitalethiopia.com/2012/01/16/diageo-officially-gets-meta/

http://www.diageo.com/FR-CA/NEWSMEDIA/Pages/resource.aspx?resourceid=2701

47

George brewery for USD 10 million84. Since then the company has built two other breweries in

Kombolcha and Hawassa and invested in numerous expansions. Various sources suggest that the total

value of these construction, upgrades and expansions of BGI’s breweries have cost the company more

than USD 100 million85.

In summary, four beer MNCs are estimated to have invested approximately USD 850 million in

Ethiopia’s economy. A large portion of this capital was spent on the privatisation of state-owned

breweries and thus directly benefitted the national government allowing it to limit its external-debt

stock and finance its pro-poor spending (see 4.2.1). However, it must be noted that Heineken, Diageo

and BGI operate in Ethiopia through local subsidiaries (that they own entirely) meaning that future

profits will be repatriated when they are not reinvested86. This would cost the Ethiopian substantial

foreign exchange reserves and result in a net outflow of capital in the long-term. In contrast, Bavaria,

being one of Habesha’s many shareholders, receives profits in the form of dividends. Considering, that

30% of Habesha’s shareholders are local Ethiopians, relatively less profit is repatriated by Bavaria than

the other MNCs.

4.3.4 Public revenue

MNCs are not paying much income tax87. Partially, this is the result of lucrative tax exemptions in

Ethiopia. Ethiopia’s Regulation No. 270/2012 states the following:

“Any investor who invests to establish a new enterprise shall be entitled to income tax exemption as

provided for in the Schedule hereto88”

“Any investor expanding or upgrading his existing enterprise pursuant to Article 2(8) of the

Proclamation shall, with respect to the additional income generated by the expansion or upgrading,

be entitled to income tax exemption as provided in the schedule attached hereto”

“Any investor who has incurred loss within the period of income tax exemption shall be allowed to

carry forward such loss for half of the income tax exemption period (6 month) after the expiring of such

period”

Ethiopia’s tax incentives give foreign beer companies an income tax exemption of three years for new

investments and provides further three-year income tax exemptions for relevant expansions or

upgrades. Furthermore, losses incurred during investments may be carried forward.

Bavaria has confirmed it is enjoying tax exemptions89. Heineken is also known to be paying very little

taxes because its large investment expenses have reduced its profit90. In theory, Diageo and BGI are

also entitled to tax benefits however whether they are benefitting from these incentives is not

84 ‘The Malt Effect: How the Growing Beer Industry Creates Opportunities for Barley Farmers’, see: http://ethiopianbusinessreview.net/index.php/topic/item/274-the-malt-effect-how-the-growing-beer-industry-creates-opportunities-for-barley-farmers (accessed October 23rd, 2016) 85‘BGI Ethiopia to build beer factory in Awassa’, see: http://nazret.com/blog/index.php/2010/02/16/bgi_ethiopia_to_build_beer_factory_in_aw & ‘ BGI’s Hawassa Plant to Boost Beer Capital Production to 1.44m hl’, see: http://addisfortune.net/articles/bgis-hawassa-plant-to-boost-beer-capital-production-to-1-44m-hl/ (accessed October 23rd, 2016) 86 Swinkels, T. (2015). Interview 10, 11, 21 87 Income tax means tax levied from business profits 88 The schedule states that beer companies are entitled to three years of income tax exemption 89 Swinkels, T. (2015). Interview 12. 90 ‘Effect van hulp via handel onduidelijk’, see: http://zembla.vara.nl/dossier/uitzending/effect-van-hulp-via-handel-onduidelijk (accessed November 2nd, 2016)

http://ethiopianbusinessreview.net/index.php/topic/item/274-the-malt-effect-how-the-growing-beer-industry-creates-opportunities-for-barley-farmers

http://ethiopianbusinessreview.net/index.php/topic/item/274-the-malt-effect-how-the-growing-beer-industry-creates-opportunities-for-barley-farmers

http://nazret.com/blog/index.php/2010/02/16/bgi_ethiopia_to_build_beer_factory_in_aw

http://addisfortune.net/articles/bgis-hawassa-plant-to-boost-beer-capital-production-to-1-44m-hl/




48

confirmed. Ultimately, MNCs are not paying the local income tax (of 30%) due to long-term tax

exemptions and large investments.

Aside from income tax, MNCs do pay Value Added Tax/Turnover Tax, Excise Tax, Import Duties,

Income Tax on Employment and Withholding Tax91. Although tax payments by MNCs are treated

confidentially, one public source suggests that BGI paid approximately USD 70 million in taxes in

2014/201592. This suggests that beer MNCs have the potential to be significant taxpayers93.

Lastly, Heineken, Bavaria and BGI all source their inputs through fixed suppliers which are often

subsidiaries. To illustrate, in Ethiopia, Heineken sources inputs from IBECORP94, Bavaria from Holland

Malt95 and BGI from a “sister company that gives advantages in terms of priority, price and time”96. As

such it is feasible to assume that Diageo too has an internal supplier. These internal suppliers generate

substantial profit for parent companies and reduce tax income in host countries through transfer

pricing97. Heineken insists it is not illegally transfer pricing because its inputs are purchased only

slightly above the market rate98. The IFC office in Addis Ababa concurs and states that beer MNCs are

significant tax payers. Yet the office suggests that Ethiopia does not have a regime in place to regulate

transfer pricing. Ultimately, transparency beer MNCs tax payments is very low99.

4.3.5 Technology, knowledge and skill transfers

Heineken has introduced several new technologies to Ethiopia. Since 2011, Heineken’s breweries have

been subject to numerous upgrades100. For example, after the company acquired the Harar brewery

it was quick to upgrade the old wastewater plant101. Aside from brewing technology, Heineken has

also introduced ‘genetic technology’ in the form of high-yielding malt barley varieties for its outgrower

schemes102. The seeds of the high-yielding varieties are being multiplied by local commercial farms yet

91 ‘Tax Imposed on Business Companies Operating in Ethiopia’, see: https://www.hg.org/article.asp?id=18800 (accessed November 1st, 2016) 92 Calculated using exchange rate data and information obtained from: ‘BGI’s Hawassa Plant to Boost Beer Capital Production to 1.44m hl’, see: http://addisfortune.net/articles/bgis-hawassa-plant-to-boost-beer-capital-production-to-1-44m-hl/ (accessed November 1st, 2016) 93 Swinkels, T. (2015). Interview 15. This is further demonstrated by the fact that Nile Breweries is one of the biggest taxpayers in Uganda,’ Top 100 Taxpayers: Nile Breweries Ltd’ see: http://ugbusiness.com/273/companies/top-100-taxpayers-nile-breweries-ltd, see also: ‘From lumps to lager’ at: http://www.economist.com/node/21551092 (accessed November 1st, 2016) 94 IBECORP is a Heineken subsidiary that provides Heineken’s global breweries with inputs Swinkels, T. (2015). Interview 16 & (van Beemen, 2015) 95 Holland Malt is a subsidiary of Bavaria that supplies its malt barley in Ethiopia- Swinkels, T. (2015). Interview 1, 12 & Document 4. 96 Swinkels, T. (2015). Interview 17. 97 Transfer pricing is the setting of the price for goods and services sold between controlled (or related) legal entities within an enterprise. The practice involves suppliers charging a price that exceeds the market rate for its goods thus decreasing the operational profit of the purchasing firm allowing it to pay less income tax in the countries where they operate. 98 Swinkels, T. (2015). Interview 16. 99 Swinkels, T. (2015). Interview 15. 100 ‘Bedele Brewery almost halves water consumption’, see: http://www.theheinekencompany.com/sustainability/case-studies/bedele-brewery-almost-halves-water-consumption & https://issuu.com/fdfworld/docs/heineken_ethiopia_-_july_2014 (accessed October 23rd, 2016) 101 ‘Cleaner waste water with additional benefits’, see: http://sustainabilityreport.heineken.com/Protecting-water-resources/Case-studies/Cleaner-waste-water-with-additional-benefits/index.htm (accessed October 23rd, 2016) 102 Swinkels, T. (2015). Interview 7.

https://www.hg.org/article.asp?id=18800



http://ugbusiness.com/273/companies/top-100-taxpayers-nile-breweries-ltd

http://www.economist.com/node/21551092

http://www.theheinekencompany.com/sustainability/case-studies/bedele-brewery-almost-halves-water-consumption


https://issuu.com/fdfworld/docs/heineken_ethiopia_-_july_2014

http://sustainabilityreport.heineken.com/Protecting-water-resources/Case-studies/Cleaner-waste-water-with-additional-benefits/index.htm


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Heineken has exclusive rights which disallow other MNCs to use its varieties103. Additionally, Heineken

trains its employees and farmers. For example, Heineken’s local staff have received extensive training

and it has partnered with EUCORD and other NGOs to give farmers agronomic training104.

Like Heineken, Diageo has invested significantly in upgrading its former state-owned brewery. In fact,

the company spent USD 119 million on an expansion which included more efficient production

technology and a new wastewater treatment plant105. Diageo’s also trains employees through sharing

its global best practices and has partnered with Technoserve to train smallholder farmers. It has also

introduced new seeds to Ethiopia, which are being multiplied locally by smallholder farmers (see

4.3.6).

Like Heineken and Diageo, Bavaria has equipped its brewery with modern technology106. Through its

partnership with Agriterra, the company is also involved in the training of smallholder farmers (see

4.3.6). Bavaria is the only MNCs that has given every distributor an Ipad that allows the company to

use GPS data to track and record sales. Considering there is a large black market in Ethiopia, this

approach could prove to be very valuable to other manufacturing companies in the country107.

BGI has also equipped its breweries with modern technology. For example, reverse osmosis filters are

used to clean water prior to the brewing process108. Moreover, a new wastewater treatment plant

was built at St George brewery in 2012 (Bula, 2014). BGI Ethiopia operates independently from BGI

International. The absence of expatriate employees is arguably evidence of this109. Prior to 2011, BGI

dominated the Ethiopian market for almost 20 years. During this period, it lacked considerable

competition resulting in relatively few incentives to introduce new technology, knowledge or skills110.

As a result, BGI Ethiopia is more inward looking and less inclined to induce new knowledge and skills

transfers from abroad like the other MNCs.

In summary, all MNCs have equipped their Ethiopian breweries with modern industrial technology.

However, the technology is expensive and arguably not very applicable to other local industries.

Technologies that are more likely to ‘spill over’ are the improved seed varieties that Heineken and

Diageo have introduced. Various farmers are already multiplying these seeds locally.

Heineken, Diageo and Bavaria actively use their international networks to educate their Ethiopian

employees and train malt barley farmers111. In contrast, BGI’s employees are less likely to acquire

international knowledge and skills because the company is more inward looking and does not exploit

its international linkages as much as the other companies do.

Ultimately, considering the above, one can conclude that beer MNCs are not extractive. Instead, the

MNCs use their international networks to introduce new technology, knowledge and skills that

103 Document 6. 104‘ CREATE-ing local sourcing opportunities’, see: http://sustainabilityreport.heineken.com/Sourcing-sustainably/Case-studies/CREATE-ing-local-sourcing-opportunities/index.htm (accessed October 23rd, 2016) 105 ‘Meta Abo Brewery completes latest phase of expansion with $119m bottling line’, see: http://www.diageo.com/FR-CA/NEWSMEDIA/Pages/resource.aspx?resourceid=2701 (accessed October 23rd, 2016) 106 Field notes from brewery tour. 107 Swinkels, T. (2015). Interview 9. 108 Swinkels, T. (2015). Interview 10. 109 Swinkels, T. (2015). Interview 21. 110 Swinkels, T. (2015). Interview 12 & 21. 111 Swinkels, T. (2015). Interview 7,10 & 21.

http://sustainabilityreport.heineken.com/Sourcing-sustainably/Case-studies/CREATE-ing-local-sourcing-opportunities/index.htm


http://www.diageo.com/FR-CA/NEWSMEDIA/Pages/resource.aspx?resourceid=2701

50

optimise the performance of their breweries and employees. The extent to which MNCs induce these

transfers depends largely on their relations with the parent company.

4.3.6 Linkages112

By 2017, Heineken aims to source 100% of the malt barley that it needs for production in Ethiopia

locally. The company sees Ethiopia as a potentially sourcing location for its other African breweries113

(Heineken, 2015, p.7). Mostly, this relates to Ethiopia’s competitive advantage for growing malt barley

(see appendix 8.3).

Heineken works together with large-scale commercial farms, model farmers114 and malt barley

cooperatives (Persoon, 2014, p. 31). Heineken’s managers are pragmatic and would prefer to work

with commercial farms and model farmers because they provide the highest yields115. However, the

company also realises that commercial farms can marginalise rural communities and lead to

controversy116. Therefore, Heineken has setup the Community Revenue Enhancement Through

Agricultural Technology Extension (CREATE) programme. CREATE is an PPP that aims to reduce poverty

and increase agricultural capacity in rural households by integrating rural farmers into Heineken’s

supply chain and training these farmers in good agricultural practices. The PPP includes the Dutch

Ministry of Foreign Affairs, EUCORD117 and several other NGOs118. CREATE lasts from 2013 until 2017

and addresses smallholder farmers in Ethiopia, Rwanda and Sierra Leone119.

In Ethiopia, CREATE aims to integrate 20,000 smallholder farmers in Heineken’s supply chain120.

However, these farmers need to achieve higher yields to produce sufficient malt barley for Heineken’s

production (see appendix 8.4). To realise this, Heineken gives its farmers access to special malt barley

seeds of the “Traveler” and “Grace” varieties. Heineken has paid to license these improved European

varieties in Ethiopia121. These seed varieties are currently being multiplied by commercial farms and

several cooperatives122. Heineken distributes these seeds to farmers through local microfinance

institutions (MFIs). These MFIs provide farmer groups with a loan that allows them to purchase the

improved seed varieties. The farmers repay the loans to the MFIs with interest after which the MFIs

repay Heineken123. Furthermore, Heineken also directly pre-finances inputs (seeds, pesticides and

112 This thesis only focuses on the upstream value chain linkages (i.e. the linkages before the brewing process) 113 In 2015 Heineken was already sourcing 49% of raw materials in locally in Africa (Heineken, 2015) 114 Model farmers are relatively wealthy farmers who are asked to assist neighbouring smallholder farmers 115 Swinkels, T. (2015). Interview 7. 116Previously, international commercial farming companies such as Karaturi and Saudi Star faced difficulties after being accused of land grabbing in Ethiopia. Heineken is wary of facing the same controversy. (Swinkels, T. (2015). Interview 4). See also ‘Karaturi challenges Ethiopian decision to cancel farming project’ at: http://www.bloomberg.com/news/articles/2016-01-11/karuturi-challenges-ethiopian-decision-to-cancel-farming-project & ‘Local Ethiopians miss out as big agriculture farms struggle in Gambella’ at: http://www.farmlandgrab.org/post/view/24377-local-ethiopians-miss-out-as-big-agriculture-firms-struggle-in-gambella (accessed November 5th, 2016) 117 European Cooperative for Rural Development (EUCORD) 118 These NGOs include: Fair and Sustainable, ICCO, Hundee. 119 See: http://eucord.org/ethiopia/ethiopia-current-projects/ & http://eucord.org/wp-content/uploads/2014/01/Press-Release-HEINEKEN-barley-program-Ethiopia.pdf and 120 Swinkels, T. (2015). Interview 7. ‘Heineken launches 4 year barley program in Ethiopia together with Dutch and Ethiopian Government’, see: http://eucord.org/wp-content/uploads/2014/01/Press-Release-HEINEKEN-barley-program-Ethiopia.pdf (accessed November 8th, 2016) 121 Swinkels, T. (2015). Interview 7. 122 Document 6. 123 Ibid.

http://www.bloomberg.com/news/articles/2016-01-11/karuturi-challenges-ethiopian-decision-to-cancel-farming-project

http://www.bloomberg.com/news/articles/2016-01-11/karuturi-challenges-ethiopian-decision-to-cancel-farming-project

http://www.farmlandgrab.org/post/view/24377-local-ethiopians-miss-out-as-big-agriculture-firms-struggle-in-gambella

http://www.farmlandgrab.org/post/view/24377-local-ethiopians-miss-out-as-big-agriculture-firms-struggle-in-gambella

http://eucord.org/ethiopia/ethiopia-current-projects/

http://eucord.org/wp-content/uploads/2014/01/Press-Release-HEINEKEN-barley-program-Ethiopia.pdf




51

herbicides) and outputs (the collection of the malt barley) to farmer cooperatives (see appendix 8.6).

EUCORD is responsible for supporting the cooperatives and training farmers124. Two contracts are

used to implement the cooperation. The first contract is signed between Heineken and a specific

farmer cooperative. The second contract is signed between the farmer cooperative and its members

(i.e. the farmers who grow the malt barley) (see sample contract in appendix 8.8). In Ethiopia alone,

the PPP is financed by USD 1.3 million in Dutch subsidies and USD 2 million in both cash and in-kind

contributions by Heineken125.

Significant progress has been booked since CREATE started in 2013. To elaborate, in the 2014/2015

season, Heineken-contracted farmers realised an average yield of 4.5 tonnes/ha – significantly higher

than the national average of 1.78 tonnes/ha from 2010 to 2014 (see appendix 8.4). In the same season,

Heineken worked together with a total of 6,000 farmers and in 2015/2016 the number of contracted

farmers is expected to increase to 10,200. By the end of 2016, this number is again expected to

increase to 15,200. However, Heineken may be forced to delay this expansion due to limited malting

capacity126 (see 8.8). Despite this bottleneck, Heineken is well on track to contract 20,000 farmers and

achieve its 100% Ethiopian local sourcing target by 2017.

Despite the progress, the CREATE project has been heavily scrutinised. Firstly, critics argue that

multibillion dollar MNCs like Heineken do not need subsidies to stimulate local sourcing127. Secondly,

it is criticised because farmers are paying interest over their seeds128. Thirdly, a local NGO argues that

the project is unsustainable because the farmer cooperatives are not being strengthened. Instead,

Heineken is only using the cooperatives as a distribution mechanism for inputs and output129. As such,

they are entirely dependent on Heineken to pre-finance inputs prior to harvest and purchase the malt

barley post-harvest. If Heineken were to abandon the project, the cooperative would lose functionality

and its farmers would be out of business130. Therefore, the NGO argues that the inputs should be sold

to the cooperative (rather than distributed through it). This would allow cooperatives to freely sell the

inputs to individual farmers and make a small profit131. These margins would capitalise a cooperative

allowing it to invest in storage facilities, processing facilities, new seeds, fertiliser and the cultivation

of other crops. Ultimately, it would allow a cooperative to become self-sufficient132.

Like Heineken, Diageo’s aims to source 100% of the malt barley that it needs in Ethiopia locally by

2017133. To become self-sufficient in Ethiopia, Diageo has formed partnerships with Technoserve and

124 ‘CREATE-ing local sourcing opportunities’, see: http://sustainabilityreport.heineken.com/Sourcing-sustainably/Case-studies/CREATE-ing-local-sourcing-opportunities/index.htm (accessed November 2nd, 2016) 125 Document 5 & ‘Beantwoording Kamervragen over subsidie voor ontwikkelingsprojecten van Heineken in Afrika’, see: https://www.rijksoverheid.nl/documenten/kamerstukken/2016/05/10/beantwoording-kamervragen-over-subsidie-voor-ontwikkelingsprojecten-van-heineken-in-afrika (accessed November 2nd, 2016) 126 Document 6. 127 ‘Effect van hulp via handel onduidelijk’, see: http://zembla.vara.nl/dossier/uitzending/effect-van-hulp-via-handel-onduidelijk (accessed November 2nd, 2016) 128 Swinkels, T. (2015). Interview 4. & Document 6. 129 Ibid. 130 Ibid. 131 Ibid. 132 Ibid. 133Currently, it sourcing 60% locally, see (Swinkels, 2015, Interview 11).







52

Gorta-Self Help Africa (two NGOs). Together, the partners aim to improve the income of smallholder

farmers by integrating them in Diageo’s supply chain134.

Diageo works with: (1) commercial farms; and (2) farmer cooperatives. About 10% of the malt barley

is sourced from commercial farms; the remaining 90% is sourced through farmer cooperatives135.

Diageo offers smallholder farmers a large support package. Just like Heineken, Diageo pre-finances

various inputs, namely: certified seeds, chemical fertilisers, pesticides and herbicides136. This is done

through farmer unions and the multipurpose cooperatives. In addition, Technoserve provides

agronomic training to the contracted farmers137. Furthermore, Diageo is carrying out pilots with

mechanisation services (i.e. threshers and row planters) and crop insurance. The insurance package

consists of input insurance as well as output insurance. The former insures farmers for the value of

their pre-financed inputs whilst the latter insures farmers for the value of their harvests138. This

reduces the exposure of smallholder farmers to the extreme climate conditions such as the El Niño,

which has hit Ethiopia in 2016139.

Diageo has not yet given its contracted farmers access to improved seed varieties. Instead it pre-

financed the local “Holker” variety which is produced by the Ethiopian Seed Enterprise (a state-owned

company)140. However, the Holker variety is old and it and has lost its purity over the years. Moreover,

due to the high demand in malt barley, there is a shortage of local seeds. Therefore, Diageo is

importing and testing the Kenyan “Fanaka” variety next season141. Together with Gorta-Self Help

Africa, Diageo is also looking to start seed multiplication by specific cooperatives142. Ultimately, out of

all the beer companies in Ethiopia, Diageo pre-finances the most inputs, only it has not yet given its

farmers access to sufficient high quality seeds143. Diageo is independently funding its outgrower

scheme meaning there are no subsidies.

Diageo’s local malt barley investments have yielded some promising results. Firstly, in the 2014/2015

season, Diageo’s contracted farmers realised an average yield of 2.5-2.7 tonnes of malt barley per

hectare – higher than Ethiopia’s average yield of 1.78 tonnes/ha, yet still substantially lower than

Heineken’s144. Secondly, in the 2014/2015 season Diageo contracted 6,000 farmers. For the

2015/2016 seasons, Diageo had hoped to contract a total of 10,000 farmers, however, the company

had to hold off expansion due the shortage of local seeds145.

134 ‘Diageo’s business boost for Ethiopian farmers’, see: https://selfhelpafrica.org/ie/diageoboost/ & ‘Working with the private sector to achieve sustainable development, see http://www.technoserve.org/blog/working-with-the-private-sector-to-achieve-sustainable-development (accessed October 31st, 2016) 135 Swinkels, T. (2015). Interview 11. 136 Swinkels, T. (2015). Interview 6 &11. 137 Ibid. 138 Swinkels, T. (2015). Interview 11. 139 Ibid. 140 Swinkels, T. (2015). Interview 6 &11. 141 Swinkels, T. (2015). Interview 11. 142 Swinkels, T. (2015). Interview 11. & ‘Diageo’s business boost for Ethiopian farmers’ see: https://selfhelpafrica.org/ie/diageoboost/ (accessed October 31st, 2016) 143 Swinkels, T. (2015). Interview 6 & 11. 144 Ibid 145 Swinkels, T. (2015). Interview 11.

https://selfhelpafrica.org/ie/diageoboost/

http://www.technoserve.org/blog/working-with-the-private-sector-to-achieve-sustainable-development

http://www.technoserve.org/blog/working-with-the-private-sector-to-achieve-sustainable-development

https://selfhelpafrica.org/ie/diageoboost/

53

Diageo faces substantially less scrutiny for its outgrower scheme because it is not being subsidised

with public money. Nor is it using MFIs to distribute the seeds146. However, like Heineken, Diageo’s

pre-financing farmers and thus not strengthening farmer cooperatives147

Bavaria has partnered with Agriterra and Holland Malt to investigate local sourcing possibilities.

Initially Bavaria approached smallholder farmers without any support from NGOs 148. However, the

cooperation with local farmers was more troublesome than Bavaria had expected. Farmers only

supplied 5% of the agreed quantity of malt barley149. Consequently, Bavaria partnered with Agriterra

to start a new pilot. Agriterra is a Dutch organisation specialised in agronomical practices and

strengthening cooperatives150.

In the Bavaria-Agriterra pilot, five cooperatives have been given access to improved seeds as well as

technical training151. The malt barley pilot was still in a start-up phase during fieldwork, the harvest of

December 2015 will have shed further light on the success of the pilot and Bavaria’s future strategy.

BGI gives preference to all locally sourced materials but has not initiated any local malt barley sourcing

schemes. The company sources all its malt barley from Assela Malt Factory152 (AMF) and imports its

own malt barley if AMF cannot provide153. Yet AMF itself frequently imports malt barley from

abroad154 (see 8.5). Ultimately, BGI has faith in the capacity of the market to meet its demand for malt

barley. The management trusts that if the need for malt barely arises, large commercial farms will step

up to meet demand155. A senior BGI manager stated the following about outgrower schemes:

“… we don’t go directly to the farmers. I don’t think contract farming is socially responsible. You give

something to the farmers and then they have to sell everything back to you. They do not have freedom.

For me contract farming is bad business and I believe it is a new form of colonisation.”156

In summary, Heineken and Diageo have created strong linkages with local malt barley farmers. In fact,

these companies are actively supporting these farmers to enhance their yields. Currently, Bavaria is

investigating whether it will commence a similar scheme. Whilst BGI prioritises local linkages, it does

not want to interfere in the value chain.

146 Ibid. 147 Swinkels, T. (2015). Interview 6. 148 Field notes from meeting with former Bavaria manager. 149 Ibid. 150 Agriterra Fact Sheet Malt Barley Pilot. 151 Swinkels, T. (2015). Interview 5. 152 AMF is an Ethiopian state-owned malting factory 153 Swinkels, T. (2015). Interview 14&17. 154 Ethiopia: Shortage of Barley Taunts Malts Makers, Brewers’ see: http://allafrica.com/stories/201510280978.html (accessed October 31st, 2016) 155 Swinkels, T. (2015). Interview 17. 156 Ibid.

Table 15. Summary of malt barley outgrower schemes

Company Ethiopian sourcing target

Modality Programme status

Partners (Indirect) Subsidies

Heineken 100% by 2017 1. Commercial farms

2. Model Farmers 3. Microfinance

groups

- 10,200 farmers - Average yield

of 4.5 tonnes/ha*

1. Dutch government

2. EUCORD 3. ICCO/Terrafina 4. Hundee

USD 1.3 million from Dutch Government

http://allafrica.com/stories/201510280978.html

54

4.3.7 Competitiveness

Heineken, Diageo and Bavaria have drastically increased the competitiveness of Ethiopia’s beer value

chain. AMF is a state-owned malt barley processing factory that has become renowned for its low

efficiency, poor quality service and collusion with traders157. For a long time, AMF was the only malt

barley processing factory in Ethiopia giving it monopsony power158 over farmers 159. In effect, AMF set

the national malt barley prices and determined the income of farmers (Rashid, et al., 2015). In 2014,

AMF initially offered malt barley farmers 600-700Birr/quintal (about USD33-39)160. However, when

Heineken and Diageo began to buy up local malt barley, AMF had to increase its offer to 900-1035 Birr

(USD 45-57) to stay in business161. Ultimately, the foreign MNCs enhanced the competitiveness of the

Ethiopian malt barley business boosting the price of malt barley and the income of farmers.

Currently, AMF is malting the barley that is being produced at Heineken and Diageo’s outgrower

scheme. For this service the MNCs pay AMF a fee of more than 250 euro per tonne – which is

extremely high162. Again, this relates to the fact that AMF barely has competition. Consequently,

Heineken and Bavaria have even invited specialised European malting companies to privatise AMF or

build new malting factories163. The MNCs have also put pressure on AMF to expand its capacity to

accommodate the growing supply of local malt barley that their outgrower schemes are producing.

Heineken has already had to delay the expansion of its outgrower scheme because of the limited

national processing capacity164. AMF’s management has been replaced with more progressive

managers that have begun to support farmers with their own outgrower schemes165. Furthermore,

AMF also plans to double its capacity within the next five years and has allowed Heineken to install

157 Swinkels, T. (2015). Interview 5. 158 A monopsony is a market with one buyer and many sellers. 159 Ibid. 160 A quintal is equal to 100kg. 161 Swinkels, T. (2015). Interview 5. & (Rashid, et al., 2015). 162 Document 4. 163 Document 4, 5 & Swinkels, T. (2015). Interview 1,2&7. 164 Document 5. 165 Swinkels, T. (2015). Interview 5.

4. Farmer cooperatives

5. Malteurop 6. ATA

Diageo 100% by 2017 1. Commercial farms

2. Farmer cooperatives

- 6,000 farmers - Average yield

2.7 tonnes/ha*

1. Technoserve 2. Gorta-Self Help

Africa 3. ATA

n.a.

Bavaria No target 1. Commercial farm

2. Farmers cooperatives

Assessing pilot 1. Agriterra 2. Holland Malt 3. ATA

n.a.

BGI No target n.a. – all local malt barley is purchased from AMF or imported

n.a. Ethiopian Institute of Agricultural Research

n.a.

Sources: Swinkels, T. (2015). Interviews 2-7, 11, 13; documents 2, 3; (Persoon, 2014; Rashid, et al., 2015) *Average malt barley yield in Ethiopia is approximately 1.7 tonnes/ha

55

private silos at its factory166 167. Ultimately, under pressure from foreign MNCs, AMF has upgraded its

services and begun outgrower schemes of its own168.

4.3.8 Social and Environmental standards

Heineken, Diageo and Bavaria have raised social and environmental standards by improving their

water use efficiency and wastewater treatment plants (see table 16.).

Ethiopia’s breweries are located in both rural and urban areas where they compete with irrigation and

household water use, respectively (UNEP/ARSCP, 2006, p. iv). In a brewery, water is used as an

ingredient for beer and cleaning, washing and distillation purposes (Olajire, 2012, p. 1). According to

a UNEP study, Ethiopian breweries were responsible for approximately 1.5% of national water

consumption in 2006. Severe impacts on water services were observed in “areas” although it is not

known which areas are referred to (UNEP/ARSCP, 2006, p. 9).

All MNCs acknowledge the importance of water to local communities and the environment. Both

Heineken and Diageo have made water efficiency a key pillar in their global sustainability strategy169

(Heineken, 2015a; Diageo, 2015). To illustrate, in Ethiopia Heineken seeks to reduce its average water

efficiency to less than 3.5 litres of water per litre of beer produced (L/L) (Heineken, 2015a, p. 6).

Meanwhile, Diageo has set itself a local water use efficiency target of 4.35L/L (Diageo, 2015).

In Ethiopia, the Bedele and Harar breweries are in regions identified by Heineken as water scarce170.

Accordingly, Heineken has drafted a plan to make these breweries water neutral171. The plan consists

of: (1) minimizing the amount of wastewater; (2) treating wastewater so it is reusable downstream;

and (3) compensating for water that is irrecoverable (e.g. evaporated water or the water in beer)

through public-private partnerships172. In Ethiopia, Heineken is involved in a PPP with the Dutch

Ministry of Foreign Affairs and Vitens (a Dutch water company) in Harar. It also has a partnership with

the United Nations Industrial Development Organisations (UNIDO) in Bedele173. These partnerships

provide water access to 25,000 households174. Since 2011, Heineken has improved the water use at

efficiency at Bedele by 42% while water use at Harar brewery has been reduced to 5.11 hl/hl (see table

16)175. Similarly, Diageo has partnered with WaterAid and the African Medical and Research

Foundation (AMREF) to provide communities with access to clean drinking water and sanitation. These

166‘Ethiopia: Shortage of Barley Taunts Malts Makers, Brewers’, see: http://allafrica.com/stories/201510280978.html (accessed November 3rd, 2016) 167 Swinkels, T. (2015). Interview 2 168 Swinkels, T. (2015). Interview 2,5&16 & (Rashid, et al., 2015) 169 Diageo’s water blueprint: our strategic approach to water stewardship, see: http://www.diageo.com/Lists/Resources/Attachments/2730/Diageo_Water_Blueprint_April_2015.pdf (accessed October 23rd, 2016) 170 ‘Water balancing’, see: http://sustainabilityreport.heineken.com/Protecting-water-resources/Actions-and-results/Water-balancing/index.htm & ‘ Bedele brewery almost halves water consumption’, see: http://www.theheinekencompany.com/sustainability/case-studies/bedele-brewery-almost-halves-water-consumption (accessed on October 29th, 2016) 171 Swinkels, T. (2015). Interview 16. 172 Swinkels, T. (2015). Interview 16. 173 ‘Heineken-UNIDO partnership supports sustainability in developing markets’, see: http://www.unido.org/news/press/heineken-unido-partnership-supports-sustainability-in-developing-markets.html (accessed on October 29th, 2016) 174 Swinkels, T. (2015). Interview 16. 175 See also: http://www.theheinekencompany.com/sustainability/case-studies/bedele-brewery-almost-halves-water-consumption


http://www.diageo.com/Lists/Resources/Attachments/2730/Diageo_Water_Blueprint_April_2015.pdf

http://sustainabilityreport.heineken.com/Protecting-water-resources/Actions-and-results/Water-balancing/index.htm

http://sustainabilityreport.heineken.com/Protecting-water-resources/Actions-and-results/Water-balancing/index.htm



http://www.unido.org/news/press/heineken-unido-partnership-supports-sustainability-in-developing-markets.html

http://www.unido.org/news/press/heineken-unido-partnership-supports-sustainability-in-developing-markets.html



56

programmes allegedly have 118,000 beneficiaries176. Table 16 shows that Diageo’s local brewery has

become significantly more water efficient. The table also suggests that Heineken and Diageo have

significantly improved the water use efficiency of their former state-owned breweries.

Bavaria does not have formal targets to reduce water consumption, instead the firm seeks to make its

Ethiopian brewery just as efficient as its brewery in the Netherlands177.

According to a senior BGI manager, water use efficiency is only an issue in areas where water is scarce.

Consequently, it is not a priority for BGI’s breweries178. Exact water use efficiency rates are not known

for BGI’s breweries but the manager estimated they were between 8-12L/L179.

Regarding the water use efficiency of new breweries, both Heineken’s Kilinto and Bavaria’s Debre

Birhan breweries are relatively inefficient because they are built to accommodate future

expansions180. Once expansions are implemented the water efficiency is expected to improve181.

The Ethiopian Ministry of Environment and Forestry identifies the textile and leather industries as the

country’s worst polluters. However, ministry officials state that breweries also contribute to water

pollution182 . For example, BGI’s St George Brewery deposited its untreated wastewater into the Akaki

river that runs through Addis Ababa for almost two decades. During this period BGI never paid for the

dumping of its effluent because Ethiopia did not enforce a ‘polluter pays’ principle (Bula, 2014, p. 5).

Small incidents regarding wastewater also occurred at Kilinto and in Debre Birhan when yeast entered

the wastewater treatment plants killing the bacteria that break down pollutants183. The MNCs were

forced to temporarily dump their untreated water in the natural environment because a catchment

area wasn’t built. Neither company was fined for the incidents184.

Despite the incidents, the MNCs have taken measures to reduce pollution. After public complaints

were made, BGI installed a new wastewater treatment plant at St George in 2012 (Bula, 2014).

Heineken replaced the wastewater plants at Harar and Bedele immediately after it purchased the

breweries. Furthermore, it also ensured an adequate wastewater treatment plant was built at

Kilinto185. Diageo has also invested (four million pounds) in a new effluent treatment plant which

reduces both the chemical and biological waste content of the water that it dumps by 85%. Bavaria’s

new brewery also has a wastewater treatment plant. Farmers were initially sceptical about the

brewery as they feared for pollution. However, once operations started farmers changed their

opinion. In fact, they expressed interest in using the treated waste water for irrigation during the dry

season. The water still consists of a low concentration of minerals such a phosphate and could thus

fertilise as well as irrigate the land. Bavaria currently supplies 60 households with treated water from

its waste water plant. Heineken is also testing whether its wastewater can be used as a fertiliser for

farmers in Harar186.

176 Swinkels, T. (2015). Interview 11. See also: http://www.diageo.com/en-row/csr/casestudies/Pages/safe-water-through-partnerships-ethiopia.aspx 177 Bavaria website article (link no longer valid) 187 Most recent publicly available figure prior to privatisation of breweries in 2010/2011 188 Most recent figure found.

Table 16. Water efficiency in Ethiopian breweries

Company Brewery Year of inauguration

Water consumption (pre-2011) in hl/hl187

Water consumption (post-2011) in hl/hl188

Source of water

http://www.diageo.com/en-row/csr/casestudies/Pages/safe-water-through-partnerships-ethiopia.aspx

http://www.diageo.com/en-row/csr/casestudies/Pages/safe-water-through-partnerships-ethiopia.aspx

57

4.3.9 Summary of impact

The impact of the four MNCs on SD in Ethiopia is summarised in table 17. below. The table

demonstrates that impact differs greatly per firm. Despite the complexity, several inferences are

drawn.

It must be noted that the case study took place shortly after most MNCs’ initial investments.

Therefore, potential long-term impacts such as profit repatriation, tax evasion, transfer pricing and

knowledge and skills spill overs could not be adequately assessed.

Considering the above, the following inferences can be drawn regarding the impacts of beer MNCs

on SD in Ethiopia:

(1) MNCs that acquired state-owned breweries reduced employment but have increased wages.

(2) MNCs have injected capital into the Ethiopian economy but are likely to repatriate profits in

the long-term.

(3) There is no transparency regarding actual tax payments. Transfer pricing occurs.

(4) MNCs have introduced new and more efficient technology. International knowledge & skills

are transferred to employees.

(5) MNCs have created a large and robust demand for cereals that they are attempting to source

locally through outgrower schemes. However, MNCs are pre-financing inputs and have thus

made farmers dependant on their support.

180 Heineken already started expanding Kilinto brewery in 2015. 181 Information obtained during tours of Habesha’s Debre Birhan and Heineken’s Kilinto breweries. 182 Swinkels, T. (2015). Interview 18 &19. 183 Fieldnotes from brewery tour at Kilinto and Debre Birhan. 184Ibid. 185 See: http://sustainabilityreport.heineken.com/Protecting-water-resources/Case-studies/Cleaner-waste-water-with-additional-benefits/index.htm 186 See: http://sustainabilityreport.heineken.com/Protecting-water-resources/Case-studies/Cleaner-waste-water-with-additional-benefits/index.htm 187 Most recent publicly available figure prior to privatisation of breweries in 2010/2011 188 Most recent figure found.

Heineken/HBSC Bedele* 1993 7.2-15.1 5.1 Dabena River

Harar* 1984 7.8 5.11 Boreholes & Spring

Kilinto 2015 n.a. 6.51 Boreholes Diageo/MABSC Meta Abo* 1967 22 (2007)

7.7 Borehole &

spring BGI/BGI Ethiopia St George* 1922 - 8-12L Borehole &

municipal Kombolcha ~1998 - 8-12L - Hawassa 2011 - 8-12L Hawassa

Lake Bavaria/Habesha Debre Birhan 2015 n.a. 7-8 hl Boreholes *Former state-owned enterprises Sources include: (UNEP, 2012; UNEP/ARSCP, 2006; UNEP/ARSCP, n.d.), an Ethiopia-Dutch business council presentation by Heineken on 10th of November 2015 and a visit by the author to the Habesha brewery, Heineken’s quarterly newsletter, and interview 17. According to a 2012 study, an efficient brewery uses about 4L of water to produce a litre of beer (Olajire, 2012, p. 4)





58

(6) MNC have made the output market for malt barley more competitive resulting in higher

incomes for farmers.

(7) MNCs have introduced cleaner and more efficient technologies that have raised

environmental standards.

Table 17. Evaluation of beer MNCs’ impact

Impact area Heineken/HBSC Diageo/MABSC Bavaria/Habesha BGI/BGI

Ethiopia

Inferences

Employment

+ Created jobs at

new brewery

+ Employs mainly

Ethiopians

- Cut jobs at state-

owned breweries

+ High wages

- Employs many Nigerian

expatriates - Cut jobs at state-owned

brewery

+ Created new

jobs at new

brewery

+ Employs mainly

Ethiopians

+ High

employment

+ Only

Ethiopians

+ Good facilities

for employees

MNCs that acquired state-

owned breweries cut employment

but have increased wages.

Financial capital

+ Large source FDI

- Profit repatriation: all

equity owned by Heineken N.V.

+ Large source of

FDI

- Profit repatriation: all

equity owned by Diageo plc

+ Average source

of FDI

+ Limited profit

repatriation due

to local

shareholders

+ Large source

of FDI

+ Profit

repatriation: all

equity owned

by Castel Group

MNCs have injected capital but

are structured to repatriate profits in

the long-term.

Public revenue

+ Privatisation of

state-owned

brewery

- Entitled to

income tax

exemption

- Transfer pricing

+ Privatisation of

state-owned

brewery

- Transfer pricing

- Temporarily

exempt from

income tax

- Transfer pricing

+ Large tax

payer

- Transfer

pricing

No transparency regarding actual tax payments.

Transfer pricing occurs.

Technology,

knowledge and

skills

+ Upgraded

brewery

technology

+ International knowledge & skills

transfers

+ Upgraded

brewery

technology

+ International

knowledge &

skills transfers

+Upgraded

brewery

technology

+ International

knowledge &

skills transfers

+ Digital

distribution

system

+Upgraded

brewery

technology

+ International

knowledge &

skills transfers

New technology is introduced.

International knowledge & skills are transferred to

employees.

Linkages

+ Elaborate

outgrower scheme

+ Improved seed

varieties

- Pre-financing

- Imports most

inputs

+ Elaborate

outgrower

scheme

+ Improved seed

varieties

- Pre-financing

- Imports most

inputs

+ Outgrower

scheme pilot

- Imports most

inputs

-No outgrower

scheme

- Imports most

inputs

A select amount of MNCs have invested in elaborate

outgrower schemes to import

substitute malt barley. Farmers risk

becoming dependent through

pre-financing.

Competitiveness

+Pressure on AMF

+ Better price for

farmers

+ Pressure on

AMF

+ Better price for

farmers

+ Pressure on

AMF

+ Better price for

farmers

n.a.

MNCs have made the output market

for malt barley more competitive resulting in higher

incomes for farmers

59

4.4 Rationales behind impact

This section attempts to shed light on the rationales that drive the impacts discussed in 4.3.

4.4.1 Employment

MNCs’ rationale for reducing employment in Ethiopia efficiency. To elaborate, Ethiopia’s beer industry

is highly competitive; it is the only African country where Heineken, Diageo and BGI – three out of

Africa’s four largest beer companies – are competing (van Beemen, 2015). To strengthen their long-

term position vis-à-vis their competitors, MNCs strive for size (i.e. production capacity) and efficiency.

However, the breweries were nationalised under the Derg regime and thus employed a significant

number of people189. When asked about the employment cuts, a senior Heineken manager

emphasised his company was a business and not an “employment project”190. Furthermore, he

pointed out that jobs were not necessarily cut, only outsourced to more specialised agencies. This

suggests that MNCs only employ the workers they need and have removed all redundant jobs for

efficiency purposes.

4.4.2 Finance

Long term profit is the raison d'être for beer MNCs in Ethiopia as the demand for beer in Ethiopia is

estimated to grow significantly in the coming years (see 4.2.4). Heineken, Diageo, Bavaria and BGI

have recognised Ethiopia’s growing demand for beer and have invested early to establish a strong

market position. Many managers readily admit that profit repatriation will occur once investments are

completed and Ethiopia’s thirst for beer has been saturated191.

4.4.3 Public revenue

MNCs’ rationales regarding their impact on public revenue relate to profit and competitiveness. In

effect, the companies are taking advantage of the tax incentives to which they are entitled and are

transferring prices towards subsidiaries with the aim of reducing income tax payments and thus

maximising profit. Transparency regarding tax payments is argued to be relatively low due to the high

level of competition between MNCs that aim to withhold valuable information from competitors.

4.4.4 Technology, knowledge and skills

MNCs have invested in new technologies for efficiency (i.e. production capacity) purposes192. As was

described above, MNCs are actively upgrading and building new production lines because the demand

for beer currently exceeds the supply193. As such, there are incentives to introduce production

technologies that produce beer faster using less resources than current technologies. Similarly, MNCs

189 Swinkels, T. (2015). Interview 20. 190 Swinkels, T. (2015). Interview 2,3,4, 6 &16. 191 Swinkels, T. (2015). Interview 10,11, 16 & 21. 192 Swinkels, T. (2015). Interview 10 & 21. 193 Swinkels, T. (2015). Interview 13.

Social

Environmental

Standards

+ New waste

treatment plant

+ Enhanced water

and energy

efficiency

+ New waste

treatment plant

+ Enhanced water

and energy

efficiency

+ New waste

treatment plant

- Slow upgrade

of waste

treatment plant

MNCs have introduced cleaner and more resource

efficient technologies

60

transfer international knowledge and skills to their local employees because they need to outperform

the other companies194.

4.4.5 Linkages

Heineken, Diageo and Bavaria have all admitted that they are sourcing locally because it: (1) allows

them to hedge the risk associated with Ethiopia’s foreign exchange (forex) regulations; (2) they must

comply with inclusive corporate strategies that earn them a social license to operate (SLO); and (3) it

is likely to be highly competitive in the long-term195.

Firstly, imported malt barley is cheaper than locally sourced malt barley making the former an

attractive sourcing strategy. This is illustrated by the fact that beer companies in Ethiopia still import

more than half of their raw materials; collectively they spend USD 30-40 million per year on malt barley

imports196 (see Figure 12 Malt barley imports). Naturally, the companies earn their income in the local

currency; Birr. Yet, to pay for their imports, MNCs must exchange their Birr for a more internationally

relied upon currency such as the US dollar or Euro – depending on the preference of the supplier. This

exchange must be approved by the National Bank of Ethiopia that oversees forex reserves197.

However, Ethiopia only has an estimated 1.8 months’ worth of forex reserves198. This shortage

threatens to hinder the government’s forex expenditure on infrastructure projects and development

programmes. The government considers malt barley imports an unnecessary forex expense due to

the potential to source it locally (see appendix 8.3). Therefore, the government is (deliberately)

delaying forex transactions199 and threatening to ban malt barley imports entirely by 2020. However,

in anticipation of this import ban, Heineken has used its political connections to acquire an exclusive

government guarantee that will allow it to continue importing ‘high quality’ malt barley to brew its

premium brand200. Nevertheless, the possible import ban still holds for all other brands and, as such,

risk-management is one of the main rationales that underlie Heineken, Diageo and Bavaria’s

outgrower schemes201.

Secondly, Heineken and Diageo have previous experience with local sourcing strategies. For example,

Heineken started its locally sourcing strategy in Nigeria and Sierra Leone where it was challenged by

the governments to source ingredients locally202. To illustrate, in the late 1980s, the Nigerian

government – at the bequest of General Babangida – banned malt barley imports forcing beer

companies to source locally (Van Wijk & Kwakkenbos, 2011). Heineken had anticipated this ban and

managed to quickly substitute imported malt barley for locally available sorghum. It is argued that

Heineken managed to increase its market share because it was more prepared to make the transition

than its competitors – i.e. the company benefitted from the import ban203. Ultimately, Heineken’s

director for Africa – Tom de Man – was pleasantly surprised about how locally sourcing ingredients

could generate a comparative advantage whilst providing local farmers with a reliable source of

194 Ibid. 195 Swinkels, T. (2015). Interview 3,4,5, 11 &16, 196 Swinkels, T. (2015). Interview & Document 6, (Persoon, 2014; Rashid, et al., 2015) 197 Swinkels, T. (2015). Interview 4. 198 Ethiopia currently has a current account deficit of 12.8% of its GDP, see: https://www.imf.org/external/pubs/ft/scr/2015/cr15300.pdf 199 In 2015 Heineken had to wait 6-12 months for a forex transaction to be approved. Therefore, Heineken has stocked up on “emergency resources” in warehouses (Interview 16). 200 Swinkels, T. (2015. Interview 7. 201 Swinkels, T. (2015). Interview 4, 11, 12 & 16. 202 Swinkels, T. (2015). Interview 12 & 16. 203 Swinkels, T. (2015). Interview 12.

https://www.imf.org/external/pubs/ft/scr/2015/cr15300.pdf

61

income. Locally sourcing had essentially given Heineken an edge over it competitors whilst earning it

a SLO204. Ultimately, MNCs have learned from their experiences in other African countries and have

integrated local sourcing targets into the core of their business strategies.

Lastly, MNCs also argue that competitiveness is one of their motives for local sourcing. Many MNCs

believe that once the outgrower schemes grow and farmers become more efficient, malt barley supply

will surpass demand allowing prices to drop below international market prices205.


Heineken, Diageo and Bavaria have enhanced the competitiveness of Ethiopia’s malting factories for

efficiency purposes. AMF was not meeting expectation in terms of quantity or quality and was

hindering the progress of outgrower schemes206.

4.4.7 Social and Environmental standards

Lastly, MNCs’ impact regarding their social and environmental standards are driven by efficiency,

compliance and earning a SLO. To elaborate, when Heineken and Diageo managers were asked why

they were improving water use efficiency, they stated it was a key element of their corporate

strategy207. They claimed they were meeting targets that had been prescribed by their global

offices.208. In contrast, Bavaria and BGI are driven more by the moral compasses of their managers.

The companies do not have corporate strategies based on enhancing social and environmental

impacts. Instead Bavaria’s decision to build a decent wastewater treatment plant and work with

smallholder farmers rather than commercial farms was made because managers believe it is the

responsibility they have towards their surrounding community209. In effect, they were determined to

earn their license to operate and maintain a good relationship with their surrounding community.

4.5 Inferences

Two sub-questions were answered in this chapter;

(2) How are beer MNCs contributing to/hindering SD in the Global South?

(3) What are the driving forces behind beer MNCs’ impact on SD in the Global South?

204 Swinkels, T. (2015). Interview 16. 205 Swinkels, T. (2015). Interview 6&7. 206 Swinkels, T. (2015). Interview 5. 207 Swinkels, T. (2015). Interview 7,11 & 16 208 Swinkels, T. (2015). Interview 16. 209 Swinkels, T. (2015). Interview 12.

0

20

40

60

80

0

10

20

30

40

50

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Net

wei

ght

(to

nn

es)

Tho

usa

nd

s

CIF

val

ue

(USD

)

Mill

ion

s

Year

Malt barley imports

Cost Insurance and Freight (CIF) value (USD) Net weight (tonnes)

Source: (ERCA, 2015)

Figure 12 Malt barley imports

62

Regarding sub question two, we can infer that beer MNCs are contributing to SD in Ethiopia by: (1)

injecting capital into the local economy; (2) introducing new technology and transferring international,

knowledge and skills to their local employees; (3) sourcing the malt barley they need locally from

smallholder farmers; (4) introducing cleaner and more efficient technologies that raise environmental

standards (see 4.3).

However, the beer MNCs are simultaneously hindering SD by: (1) significantly reducing employment

at existing enterprises; (2) (potentially) repatriating profits in the long-term; (3) paying less tax due to

transfer pricing; and (4) making farmers dependent on malt barley prices and inputs through pre-

financing (see also 4.3).

Regarding, sub question three, the impact of MNCs appears to be driven by: long term profit,

efficiency, competitiveness, risk management, earning a SLO and internal compliance (see 4.4).

Table 18. Rationale per impact

Impact area Net impact Rationale(s)

Employment MNCs that acquired state-owned breweries cut employment but have increased wages.

Efficiency

Finance MNCs have injected capital but are structured to repatriate profits in the long-term.

Profit

Public revenue No transparency regarding actual tax payments. Transfer pricing occurs.

Profit

Technology, knowledge and skills New technology is introduced. International knowledge & skills are transferred to employees.

Efficiency

Linkages A select amount of MNCs have invested in elaborate outgrower schemes to import substitute malt barley. Farmers risk becoming dependent through pre-financing.

Risk management, SLO, internal compliance, competitiveness

Competitiveness MNCs have made the output market for malt barley more competitive resulting in higher incomes for farmers

Efficiency

Social Environmental Standards MNCs have introduced cleaner and more resource efficient technologies

Efficiency, SLO, internal compliance

63

Chapter 5 Discussion: contributions to the SDGs

5.1 Introduction

This chapter first discusses the findings vis-à-vis the SDGs. Subsequently several recommendations are

given with respect to how instruments can be used to improve MNCs’ contributions to the global

goals.

5.2 Beer MNCs contributions to the SDGs

In chapter four, seven different types of impacts by beer MNCs were discussed. Below these impacts

are discussed in relation to the SDGs.

Firstly, beer MNCs hinder SD because they destroy existing jobs. Bedele, Harar, Meta Abo and St

George are all former state-owned breweries that previously employed approximately 600-900

people each. After Heineken, Diageo and BGI privatised these breweries, at least 400 jobs were lost

at each brewery whilst the wages of the remaining employees increased (see 4.3.2). This supports the

proposition that M&A’s by foreign MNCs result in a net reduction of jobs (Ernst, 2005; Jude & Silaghi,

2016) and means that beer MNCs hinder poverty alleviation (SDG#1), dismiss decent work (SDG#8)

and worsen inequalities within Ethiopia (SDG#10).

Secondly, inject financial capital into emerging economies. Heineken, Diageo, Bavaria and BGI are

estimated to have invested more than USD 850 million in Ethiopia since 2011. However, Heineken,

Diageo and BGI operate through subsidiaries that they own entirely whilst Bavaria owns majority share

in Habesha. Therefore, it is estimated that once the demand for beer has been saturated, the foreign

ownership structure of the beer MNCs is likely to instigate a capital flight (see 4.4.2). Furthermore,

beer MNCs hinder SD by engaging in transfer pricing with foreign sister companies. This reduces the

income tax MNCs pay in Ethiopia (see 4.3.4). As such, beer MNCs perpetuate global inequalities

(SDG#10) and weaken domestic resource mobilisation and financial resources (SDG#17)210.

Fourthly, beer MNCs transfer technology, knowledge and skills. Examples of technologies that have

been transferred are more efficient production lines, high-yielding seed varieties and digital

distribution systems. Furthermore, MNCs transfer valuable technical, vocational and business-related

skills that can spill over once employees change jobs. However, MNCs’ high-tech production lines are

not likely to spill over whilst the high-yielding seed varieties have exclusive rights (see 4.3.5). Due to

data constraints and the short-term scope of the research, spill over effects could not be measured.

Therefore, this thesis cannot associate this area of impact with specific SDGs.

Fifthly, beer MNCs contribute to SD by sourcing their cereals from local smallholder farmers. In

Ethiopia, about 50,000 tonnes (worth USD 30-40 million) of malt barley was imported from Europe in

2014. However, Heineken and Diageo aim to import substitute all their malt barley and have set up

outgrower schemes with NGOs to improve farmers’ yields. In 2014, these outgrower schemes

collectively: (1) supported more than 15,000 farmers; (2) increased yields from 1.7 tonnes/ha to

between 2.7-4.5 tonnes/ha; and (3) increased the malt barley prices that farmers earn from USD33-

39 per quintal of malt barley to USD 45-57 per quintal (see 4.3.6). However, beer MNCs hinder SD in

the long term because these outgrower schemes give farmers a poor bargaining position and prevent

farmer cooperatives from saving up capital income. This makes malt barley farmers entirely

210 Sustainable Development Goal 17 entails targets such as: (1) strengthening domestic resource mobilization, including through international support to developing countries, to improve domestic capacity for tax and other revenue collection & (2) mobilizing additional financial resources for developing countries from multiple sources see also: https://sustainabledevelopment.un.org/sdg17

https://sustainabledevelopment.un.org/sdg17

64

dependent on the individual beer MNCs (see 4.3.6 & 4.3.7). Considering this, beer MNCs can – under

pressure from the right instruments – contribute to: ending rural poverty (SDG#1), food security

(SDG#2), inclusive economic growth (SDG#8).

Lastly, beer MNCs contribute to SD by introducing more efficient technologies that enhance resource

efficiency and reduce pollution. In doing so, beer MNCs raise environmental standards. To illustrate,

prior to 2011, Ethiopia’s beer industry consisted of state-owned breweries that (1) used up 22L of

water to produce one 1L of beer and were responsible for 1.5% of the national water consumption;

and (2) did not have wastewater treatment plants. After 2011, Heineken and Diageo (1) increased

water efficiency to below 8L/L; and (2) upgraded or replaced wastewater treatment plants. However,

despite these improvements, preventable incidents stilled occurred without repercussion (see 4.3.8).

Therefore, one might conclude that – under pressure from instruments – beer MNCs have the

potential to contribute to: cleaner and more sustainable water management (SDG#6); sustainable

industrialisation (SDG#9) and cleaner production patterns (SDG#12).

Table 19 Contributions of beer MNCs to the SDGs.

SDG Contributions of beer MNCs in Ethiopia Section

SDG#1 End poverty in all its forms everywhere + Incomes of rural farmers have increased through outgrower schemes - Loss of jobs after M&As

4.3.6 & 4.3.7

SDG#2 End hunger, achieve food security and improved nutrition and promote sustainable agriculture

+ Rural farmers can afford to buy to food

SDG #2 Ensure healthy lives and promote well-being for all at all ages

? Possible negative impacts relating to alcohol assumption (further research needed)

6.3.2

SDG#4 Ensure inclusive and equitable quality education and promote lifelong learning opportunities for all

+ Employees are exposed to international technologies, knowledge and skills

4.3.5

SDG#5 Achieve gender equality and empower all women and girls

? Possible negative impacts relating to loss of livelihoods of rural women who produce traditional beverages (further research needed)

6.3.2

SDG#6 Ensure availability and sustainable management of water and sanitation for all

+ Use technology to contribute to cleaner water

4.3.8

SDG#7 Ensure access to affordable, reliable, sustainable and modern energy for all

? (further research needed)

SDG#8 Promote sustained, inclusive and sustainable economic growth, full and productive employment and decent work for all

+ Smallholder farmers are integrated in value chains - Loss of jobs after M&As - Dependency of smallholder farmers on MNCs

4.3.6 & 4.3.2

SDG#9 Build resilient infrastructure, promote inclusive and sustainable industrialization and foster innovation

+ Introduce technology that introduces resource-use efficiency

4.3.5 & 4.3.8

SDG#10 Reduce inequality within and among countries

- Profit repatriation and transfer pricing worsens inequalities among countries - Wage increases and jobs losses worsen inequalities within countries

4.3.3, 4.3.4 & 4.3.2

SDG#11 Make cities and human settlements inclusive, safe, resilient and sustainable

? Possible negative impacts through alcohol abuse (for e.g. crime and drinking and driving) (further research needed)

6.3.2

SDG#12 Ensure sustainable consumption and production patterns

+ Cleaner and more resource efficient production technology

4.3.8

SDG#13 Take urgent action to combat climate change and its impacts


65

SDG#14 Conserve and sustainably use the oceans, seas and marine resources for sustainable development


SDG#15 Protect, restore and promote sustainable use of terrestrial ecosystems, sustainably manage forests, combat desertification, and halt and reverse land degradation and halt biodiversity loss


SDG#16 Promote peaceful and inclusive societies for sustainable development, provide access to justice for all and build effective, accountable and inclusive institutions at all levels


SDG#17 Strengthen the means of implementation and revitalize the global partnership for sustainable development

- Profit repatriation and transfer pricing

4.3.3 & 4.3.4

5.3 Enhancing the contributions of beer MNCs to SD in Ethiopia

5.3.1 Employment

The findings show that beer MNCs have reduced employment for efficiency reasons after they

privatised state-owned enterprises (see 4.3.2 & 4.4.1). Several instruments can be used to address

this negative impact.

Firstly, the loss of jobs at Ethiopia’s breweries was legal per Articles 28 and 29 in Ethiopia’s Labour

Proclamation (377/2003)211. The proclamation further states employees are entitled to 4-17 weeks’

severance payments depending on the duration of their employment (World Bank, 2015). Considering

this, Ethiopia’s labour regulations give MNCs ample room to dismiss employees due to redundancy.

Ultimately, to avoid large scale dismissals such as those that occurred at the former state-owned,

Article 28 can be made more conditional. For example, by disentitling the companies who reduce their

workforce to tax benefits or giving them less access to forex.

Secondly, labour unions were central figures in the negotiations between Heineken, Diageo and the

employees they dismissed. The companies claim that their respective labour unions were comparing

the different severance packages they were offered and collectively putting pressure on Heineken and

Diageo to provide better deals. As a result, Heineken and Diageo aligned their severance packages to

“ensure that the sector was not destabilised by excessive [labour union] demands”212. Eventually, the

negotiations resulted in severance packages that exceeded legal requirements213. However, the

severance packages might have been higher if Heineken and Diageo hadn’t colluded. Whilst BGI and

Diageo support their labour unions with (in kind) donations214, Heineken appears determined to

reduce the influence of the labour unions. A Heineken manager stated the following:

“At Heineken we want to separate the labour union from the company. The old task of the labour

unions was to actively take care of the employees. However, at Heineken we want to do this ourselves.

As a multinational we want to take care of our own people. We want more direct access to our

211 National Labour Law Profile: Federal Democratic Republic of Ethiopia, see: http://www.ilo.org/ifpdial/information-resources/national-labour-law-profiles/WCMS_158894/lang--en/index.htm (accessed November 8th, 2016) 212 Swinkels, T. (2015). Interview 20. 213 Diageo’s former employees received a minimum of 19 months’ worth of salary in their severance package whereas the law only requires a minimum of thirty days see: ‘Diageo, Union Standoff Over 30pc Proposed Layoff’ at: http://addisfortune.net/articles/diageo-union-standoff-over-30pc-proposed-layoff/ (accessed November 8th, 2016) 214 Swinkels, T. (2015). Interview 11 & 17.

http://www.ilo.org/ifpdial/information-resources/national-labour-law-profiles/WCMS_158894/lang--en/index.htm

http://www.ilo.org/ifpdial/information-resources/national-labour-law-profiles/WCMS_158894/lang--en/index.htm

http://addisfortune.net/articles/diageo-union-standoff-over-30pc-proposed-layoff/

66

employees. This is not the task of our labour unions anymore. The old mandate is a legacy of the past.”

(Interview 20)

Considering their influential role in previous negotiations, it is imperative that labour unions continue

to have direct access to MNCs’ employees. Furthermore, it is worth investigating whether Heineken

and Diageo breached Ethiopia’s competition law by aligning their severances packages.

Thirdly, another possibility for employees to challenge their dismissal is take their case to the National

Contact Point (NCP) of the OECD in the home countries of the MNC. Currently, former employees from

Heineken’s brewery in the Democratic Republic of Congo are involved in a remediation case regarding

their unlawful dismissal215. For the case to be accepted, further evidence would have to arise regarding

Heineken/HBSC’s or Diageo’s violation of the OECD Guidelines. The collusion between Heineken and

Diageo regarding severance packages could be such a violation if it was indeed a breach of Ethiopian

competition law.

5.3.2 Finance

Regarding profit repatriation, the findings show that MNCs have injected a significant amount of

capital into Ethiopia’s economy. Whilst this is positive, the foreign ownership makes profit repatriation

and capital flight a risk (see 4.3.3). Considering that long-term profit repatriation is the raison d'être

for beer MNCs in Ethiopia, stringent regulatory instruments are needed to prevent capital flight (see

4.4.2.

Firstly, foreign exchange regulations on profit repatriation is a possible instrument to limit capital

flight. However, this would be in violation of Ethiopia’s Investment Proclamation216. In effect, the

Proclamation states that foreign investors can repatriate their profits and dividends in foreign

currency (see Article 26). In addition to being unlawful, limiting MNCs’ ability to repatriate profits

would have severe repercussions for Ethiopia’s investment climate and thus limit future FDI inflow.

Instead of limiting profit repatriation, a tax on profit repatriation and dividends would be more

appropriate as it would create incentives for MNCs to reinvest their profits. Ethiopia already has a

dividend tax in place (of 10%) for foreign investors that want to take their profits abroad (KPMG, 2014).

Since beer MNCs are currently not repatriating profits, it is unknown how effective this tax is.

Lastly, encouraging joint ventures with local shareholders is another measure the Ethiopia

government can apply to prevent capital flight. Ethiopian shareholders are entirely prohibited from

remitting dividend earnings abroad meaning that their share of a joint venture is likely to remain in

the country217. As such, joint ventures with local investors (as Bavaria has done) per definition limit

capital flight (see 4.3.3).

5.3.3 Public Revenue

The findings suggest that MNCs are using transfer pricing policies. By pursuing these strategies MNCs

limit their tax payments to the Ethiopian government (see 4.3.4). It is argued that MNCs engage in

transfer pricing purely to maximise profits (see 4.4.3).

215 ‘Initial Assessment Bralima and Heineken, 28th June 2016’, see: http://www.oecdguidelines.nl/notifications/documents/publication/2016/6/28/initial-assessment-bralima-and-heineken-28th-june-2016 (accessed November 8th, 2016). 216 The proclamation can be found here: http://www.investethiopia.gov.et/information-center/publications 217 Stated by the investment proclamation

http://www.oecdguidelines.nl/notifications/documents/publication/2016/6/28/initial-assessment-bralima-and-heineken-28th-june-2016

http://www.oecdguidelines.nl/notifications/documents/publication/2016/6/28/initial-assessment-bralima-and-heineken-28th-june-2016

http://www.investethiopia.gov.et/information-center/publications

67

Two instruments can be used to prevent transfer pricing; (1) adopting transfer pricing guidelines; and

(2) encouraging local sourcing.

Firstly, according to the IFC, Ethiopia does not have a regime that adequately addresses transfer

pricing218. However, since last year the IFC, OECD and Ethiopian government have implemented a

national transfer pricing framework. This framework was largely based on the UN Practical Manual on

Transfer Pricing for Developing Countries219, OECD Transfer Pricing Guidelines for Multinational

Enterprises and Tax administration220 and World Bank publication on ‘International Transfer Pricing

and Developing Economies’ - from implementation to application’. These publications provide

guidance on legislative instruments such as: maintaining an ‘arm’s length’ principle221 on transactions,

allocating minimum capital requirements, introducing reporting requirements and undertaking

audits222. However, enforcing these guidelines requires governments to undertake comparability

analyses. In effect, analyses that compare the transactions conducted by the dependent enterprises

(in this the case beer companies and their sister companies) and transactions between independent

enterprises. These analyses are difficult to conduct since comparable cases are difficult to find223.

Furthermore, they require that significant resources are made available to develop the capacity of tax

authorities. This is not something that all governments can immediately afford224.

Secondly, instead of using direct regulatory instruments, stimulating local linkages to limit

international transactions may be a more appropriate strategy for developing countries to address

transfer pricing (see 5.6).

5.3.4 Technology, knowledge and skills

The technology and potential knowledge and skills transfers that were discussed (see 4.3.5) were the

result of MNCs’ determination to expand production and become more efficient (see 4.4.4). Ethiopia

has several regulatory instruments that cover this area of impact.

Firstly, Ethiopia has several instruments in place that affect the transfer of technology, knowledge and

skills. To elaborate, Article 37 of Ethiopia’s Investment Proclamations states that (1) foreign investors

are only allowed employ expatriates at managerial position; and (2) ‘duly qualified expatriate experts’

must be replaced within ‘a limited period’ by Ethiopian personal by arranging the necessary training

thereof225. As such, Ethiopia’s legislation puts pressure on MNCs to transfer knowledge from

international experts to local Ethiopians. MNCs’ are required to disclose this information in the

investment permits that they apply for every year.

Secondly, Article 21 of Ethiopia’s Investment Proclamation states that any investor must register

technology transfer agreements at the Investment Commission226. Encouraging companies to register

218 Swinkels, T. (2015). Interview 15. 219 The manual can be found here: http://www.un.org/esa/ffd/documents/UN_Manual_TransferPricing.pdf 220 The guidelines can be found here: http://www.keepeek.com/Digital-Asset-Management/oecd/taxation/oecd-transfer-pricing-guidelines-for-multinational-enterprises-and-tax-administrations-2010_tpg-2010-en#page7 221 The "arm's-length principle" of transfer pricing states that the amount charged by one related party to another for a given product must be the same as if the parties were not related. An arm's-length price for a transaction is therefore what the price of that transaction would be on the open market. 222 See: International Transfer Pricing and Developing Economies: From Implementation to Application (DRAFT) 223 See UN Manual on Transfer Pricing for Developing Countries, Chapter 5. 224 See: International Transfer Pricing and Developing Economies: From Implementation to Application (DRAFT) 225See the Investment Proclamation here: http://www.investethiopia.gov.et/information-center/publications 226 See the application form for a technology transfer agreement registration here: http://www.investethiopia.gov.et/images/pdf/form-Technology_Transfer_Agree.pdf

http://www.un.org/esa/ffd/documents/UN_Manual_TransferPricing.pdf

http://www.keepeek.com/Digital-Asset-Management/oecd/taxation/oecd-transfer-pricing-guidelines-for-multinational-enterprises-and-tax-administrations-2010_tpg-2010-en#page7



http://www.investethiopia.gov.et/information-center/publications

http://www.investethiopia.gov.et/images/pdf/form-Technology_Transfer_Agree.pdf

68

technologies, creates transparency regarding the distribution of foreign technology. Although it is

unclear how the government is using this information, the instrument could potentially be used to

disseminate technologies of which the license or patent (that limit their use) has expired. Such an

approach could for example be used to distribute the enhanced seed varieties (that Heineken and

Diageo registered) to Ethiopian farmers outside the outgrower schemes after the MNCs’ exclusive

rights expire (see 4.3.6).

Lastly, several scholars argue that technology, knowledge and skill transfers do not spill over to

developing countries unless local institutions are geared towards adopting these technologies (Narula

R. , 2014, p. 57). Considering this, Ethiopia’s government can encourage vocational education and

ensure its citizens are adequately educated by so that they can ‘absorb’ the spill overs (ibid).

5.3.5 Linkages

Considering the low price of imported malt barley vis-à-vis the Ethiopian equivalent, sourcing malt

barley locally was not immediately an attractive option for the beer MNCs (see 4.4.5). Both risk

management, earning a SLO and compliance were argued to underlie MNCs’ decision to source malt

barley locally (see 4.4.5). Below, the use of (1) forex transactions; (2) civil society partnerships; and (3)

the CREATE PPP are discussed in further detail.

Firstly, Ethiopian regulations on forex transactions were one of the rationales for MNCs to source

locally. Long delays on forex transactions at the National Bank of Ethiopia and the threat of banning

malt barley imports altogether, convinced companies it was in their interest to source malt barley

locally (see 4.4.5). Considering this, forex regulations appear to be a highly effective instrument to

stimulate beer MNCs to create local linkages. It appears that companies who previously faced import

regulations in other African countries (e.g. Heineken and Diageo) have integrated local sourcing

targets in their African strategies because it hedges the risk of suddenly losing access to imports (see

4.4.5). Since then, these companies have integrated local sourcing targets into their corporate

strategies. Consequently, for other African subsidiaries local sourcing has become a matter of

complying with internal targets227.

Secondly, Heineken, Diageo and Bavaria have partnered with CSOs to implement their malt barley

sourcing schemes. Although MNCs are willing to earn their SLO by sourcing from smallholder farmers,

they typically prefer to source their malt barley from commercial farms because these tend to be more

productive, reliable and are easier to work with228. Furthermore, beer MNCs do not consider working

with smallholder farmers to be their core-business and prefer not to get involved in elaborate

outgrower schemes229. However, Ethiopia’s commercial farms do not produce enough malt barley and

the MNCs want to avoid the ‘land grabbing controversy’ that new commercial farms might generate.

Consequently, MNCs have partnered with NGOs like EUCORD, ICCO, Agriterra and Technoserve to

include smallholder farmers in their value chains. In Ethiopia, more than 15,000 smallholder farmers

have increased their yields by partaking in outgrower schemes (see 4.3.6). Considering this,

partnerships are an effective instrument to motivate MNCs’ to work with smallholder farmers in

addition to commercial farms.

However, the partnerships are arguably not as effective as they should be. To elaborate, there are

several concerns regarding the charging of interest rates of inputs (through MFIs) and the use of pre-

financing to contractually bind farmers to an individual company (see 4.3.6). The NGO’s themselves

227 Swinkels, T. (2015). Interview 11 & 16 228 Ibid. 229 Ibid.

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appear to be well-aware that this strategy reduces the bargaining power of farmers and makes them

dependent on individual MNCs. In fact, the NGO themselves suggest that it would be more sustainable

if the MNC sold its inputs to farmer cooperatives and allowed the cooperatives to take a margin when

selling the inputs to individual farmers230. This would allow the cooperative to save up capital (that

farmers are otherwise reluctant to do) allowing farmers to collectively invest in storage facilities, crop

diversification and processing facilities (e.g. a new malting factory to compete with AMF). This would

(1) significantly increase the bargaining power of smallholder farmers vis-à-vis the beer MNCs; (2)

make farmers more resilient against a decrease in malt barley prices that is likely to occur once the

demand for beer saturates; and (3) allow farmers to create further added value on their malt barley.

However, despite these advantages for farmers, MNCs are reluctant to take this approach as the

cooperatives’ margin on inputs and the enhanced bargaining power of farmers would increase the

output price of the malt barley231. Ultimately, the NGOs involved in the project have not yet convinced

MNCs to reconsider their pre-financing. If MNCs do not reconsider, the benefits that smallholder

farmers are now experiencing may be short-lived.

Thirdly, regarding CREATE, Heineken was shown to be the only MNC profiting from subsidies through

its PPP. However, the size, conditions and scope of CREATE are largely unknown. Recently, this has

raised questions about whether ODA funds were spent appropriately232. Furthermore, it was

previously shown that forex regulations and partnerships provided sufficient incentives for Diageo and

Bavaria to resort to local sourcing (see 4.4.5). Therefore, a subsidy was arguably not necessary to

motivate Heineken to begin local sourcing in Ethiopia. Heineken itself however beg to differ; one

manager claims that the added value of the subsidy is relates more to political protection than the

monetary value. To elaborate, by committing USD 1.3 million in ODA the Dutch government gave

CREATE a political label thus protecting the PPP (and thus also Heineken’s investments) from

interventions by the Ethiopian government233. Moreover, CREATE is arguably not fair from a state aid

perspective. To elaborate, Diageo and Bavaria have also demonstrated their commitment to local

sourcing but are not being subsidised in a similar manner (see 4.3.6). This arguably distorts

competition as Heineken is at a relative advantage in terms of securing its malt barley supply

compared to Diageo and Bavaria. Whilst CREATE has been scrutinised, it was not necessarily

ineffective. In comparison to Diageo and Bavaria, CREATE has achieved much higher yields and it

currently supports almost twice the number of farmers234. In other words, whilst the subsidy was (1)

untransparent, (2) not a precondition to source locally and (3) controversial in terms of state aid, it

has enhanced the size and effectiveness of Heineken’s outgrower scheme.

Ultimately, the usage of forex regulations, partnerships and subsidies as instruments to enhance

MNCs contributions to SD in Ethiopia appear effective in terms of alleviating poverty. Yet, several

caveats remain regarding transparency, pre-financing and state aid. These caveats can be addressed

by (1) using the subsidies to cover the extra costs that MNCs incur from refraining from pre-financing;

and (2) allowing multiple companies to benefit from a subsidy. For example, by bundling the efforts

of CSOs, governments and beer MNCs in covenants or roundtables and using these platforms to

support cooperatives (see 3.7.4).

230 Document 6 & Swinkels, T. (2015). Interview 4 231 Document 6 & Swinkels, T. (2015). Interview 4 & 11 232 ‘Effect van hulp via handel onduidelijk’, see: http://zembla.vara.nl/dossier/uitzending/effect-van-hulp-via-handel-onduidelijk (accessed October 5th, 2016), see also: (van Beemen, 2015, p. 303). 233 Swinkels, T. (2015). Interview 16. 234 i.e. Heineken’s farmers achieve yields of 4.5tonnes/ha compared to Diageo’s 2.7tonnes/ha) and support 10,200 farmers compared to Diageo’s 6,000. Bavaria is currently only involved in a pilot.



70


In terms of competitiveness, the findings suggest that MNCs have put pressure on malting factories to

enhance their efficiency. However, the increase in competitiveness is not directly attributable to

instruments. Instead it is an outcome of MNCs’ local sourcing schemes. Consequently, forex

regulations can best attributed to this impact (see 5.3.5).

5.3.7 Social and environmental standards

The findings show that MNCs have introduced cleaner and more efficient technologies that have

reduced water consumption and decreased pollution levels (see 4.3.8. The rationales behind this

impact were argued to be internal compliance and earning a SLO. These rationales differed somewhat

per firm (see 4.4.7). Below, the use of environmental regulation and self-regulation are discussed.

Firstly, Ethiopia’s legal and economic instruments are not effective at enhancing efficiency or reducing

pollution. To elaborate, national tariffs are very low and companies have access to private boreholes

that allow them to extract water very cheaply meaning there is very little incentive to spare water

(MoWE, 2013). Furthermore, Ethiopia’s Environmental Assessment Proclamation – which upholds a

polluter pays principle – is ineffective since the enforcement of Proclamations is the responsibility of

autonomous regional authorities. These regional authorities are underfunded, do not coordinate with

central offices and lack legitimacy as many government officials and state-owned enterprises do not

recognise their authority (Damtie & Bayou, 2008). Ultimately, regulatory instruments are not

adequately enforced.

Despite the shortcomings of Ethiopia’s regulatory instruments, all breweries have improved their

water use efficiency and built wastewater treatment plants (see 4.3.8). Managers at Heineken and

Diageo state that they have improved water use efficiency at their breweries because they have

internal water targets that they must achieve as part of their corporate sustainability strategy (see

4.4.7). In effect, social and environmental targets are devised at the global level and translated into

water use efficiency and pollution targets that managers at their subsidiaries are responsible for

achieving. In other words, Heineken and Diageo positive impact regarding water use efficiency and

pollution treatment can be attributed to hierarchical self-regulatory instruments.

In contrast, Bavaria and BGI do not have internal targets regarding water use efficiency or wastewater

treatment nor are they driven to comply with environmental legislation (see 4.4.7). These companies

are not publicly listed (like Heineken and Diageo) and consequently do not have a similar corporate

hierarchy235. As such, their self-regulation is more informal and aimed at earning a SLO. Ultimately,

there is less accountability regarding environmental standards.

Thus, far, MNCs have not been held accountable for incidents regarding the dumping of untreated

wastewater due yeast leakages in treatment plants (i.e. Heineken and Bavaria) and the dumping of

untreated wastewater in the Akaki river (i.e. BGI) (see 4.3.8). Considering that there is no aquatic life

in the Akaki river anymore BGI should have faced more severe repercussions for its dumping236.

Consequently, to hold MNCs accountable for environmental standards, Ethiopian government could

significantly improve the enforcement of its Environmental Proclamation. For example, by creating

institutional linkages between the regional Environmental Protection Agencies and the central

Investment Commission (Damtie & Bayou, 2008). To punish adverse impacts, the Investment

Commission could make tax incentives, forex transactions or even investment permits conditional on

environmental impact assessments. Furthermore, NGOs could play a bigger role in supporting and

235 Swinkels, T. (2015) Interview 12. 236 Swinkels, T. (2015). Interview 18.

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raising awareness about environmental impact assessments. This would raise global awareness about

beer MNCs’ environmental performance in developing countries – an issue that hereto has not been

adequately addressed by civil society.

Table 20. Recommendations to enhance MNCs contribution to SD

Impact Evaluation of impact by beer

MNCs in Ethiopia

Rationale Instrument Recommendations to enhance impact

Employment MNCs that acquired state-owned breweries cut

employment but have increased

wages.

Efficiency Labour Proclamation: a) Articles 28 & 29

Labour unions

OECD remediation

Make Articles regarding workforce redundancy more stringent

Strengthen/unite labour unions

Raise awareness about NCP remediation

Finance MNCs have injected capital but are structured to

repatriate profits in the long-term.

Long term profit Forex regulation

Profit repatriation/dividend tax

Joint ventures

Apply a dividend tax on repatriations

Encourage joint ventures

Public Revenue

No transparency regarding actual tax payments. Transfer

pricing occurs.

Profit Enhance transparency using OECD transfer pricing guidelines

Forex regulation

Adopt guidelines on transfer pricing and increase transparency on tax payments

Encourage local sourcing

Technology, knowledge & skills

New technology is introduced.

International knowledge & skills are transferred to

employees.

Efficiency Investment Proclamation:

a) Article 37 b) Article 21

Education

Encourage training programmes by limiting expatriate employees’ contracts

Disseminate technology once executive rights expire

Invest in education

Linkages A select amount of MNCs have invested in elaborate

outgrower schemes to import substitute

malt barley. Farmers risk

becoming dependent through

pre-financing.

Risk management

SLO

Internal Compliance

Competitiveness

Forex regulation

Self-regulation (CSV)

Partnerships

PPPs/subsidies

Regulate forex transactions to encourage local sourcing

Use partnerships to make sourcing inclusive

Refrain from pre-financing and allow cooperatives to make a margin

Only use ODA to subsidise multiple MNCs. For example, through broader industry covenants or roundtables.

Competitiveness

MNCs have made the output market

for malt barley more competitive resulting in higher

incomes for farmers

Efficiency Forex Encourage local sourcing

Social & Environmental standards

MNCs have introduced cleaner and more resource

efficient technologies

Efficiency

SLO

Internal compliance

Self-regulation (CSV)

Tariffs

Environmental Proclamation

Encourage self-regulation but ensure that laws hold MNCs accountable for incidents

Make tax incentives, forex transactions or investment permits conditional on EIA

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Chapter 6 Conclusions

6.1 Introduction

To recap, the main research question that this thesis aims to answer is: how are beer MNCs

contributing to SD and how can their contributions to the SDGs be enhanced? First four conclusions

are drawn regarding the role of MNCs in achieving the SDGs. Subsequently, to answer the research

question, several recommendations are provided regarding how MNCs’ contributions to SD can be

enhanced.

6.2 Conclusions and recommendations

6.2.1 Conclusions

Firstly, MNCs remain tools and not agents for SD. Whilst the SDGs portray MNCs as agents for SD

(Blowfield, 2012; UN Global Compact, 2013; Scheyvens, Banks, & Hughes, 2016), this thesis argues

that MNCs require external incentives to contribute to SD (see 5.2). To illustrate: (1) in Ethiopia, the

main contribution of beer MNCs to SD occur through linkages with smallholder farmers. These linkages

have so far increased smallholder farmers’ productivity and income (see 4.3.6 & 4.3.7), thus

contributing to rural poverty alleviation (SDG #1), the reduction of hunger (SDG#2) (see 8.10) and

inclusive economic growth (SDG#8). However, MNCs have needed external incentives in the form of

forex regulations and partnerships with NGOs in order to convince them to work with local smallholder

farmers and create these positive impacts (see 4.4.5). Furthermore, despite these instruments, MNCs

are still inclined to compromise on SD by finding political loopholes237 (see 4.4.5) and treating

smallholder farmers’ cooperatives as distribution mechanisms rather than equal business partners

(see 4.3.6); (2) another key contribution of Ethiopia’s beer MNCs to SD is the improvement of

environmental standards. Since 2011, water use efficiency and wastewater treatment plants have

significantly improved, allowing farmers to reuse treated wastewater as fertilised irrigation water (see

4.3.8). In doing so, MNCs have used their technology to contribute to cleaner water and sanitation

(SDG#6) and responsible production (SDG#12). However, preventable incidents such as wastewater

plant failure still occur without repercussions. These incidents expose the lack of accountability that

is associated with self-regulation (Kolk & van Tulder, 2005; Gunningham, Kagan, & Thornton, 2004;

Campbell, 2012) (see also 4.3.8). Ultimately, considering the above, this thesis argues that beer MNCs

can contribute to SD but only as a tool that constantly needs to be pointed in the right direction by

both governments and civil society (see 6.2.2 for recommendations on how this can be done).

Secondly, in addition to the previous argument, this thesis argues that MNCs have three inherent

pitfalls that pose a threat to the achievement of the SDGs, namely: capital flight, transfer pricing and

the loss of jobs through M&A’s. To elaborate, (1) the foreign ownership structure of MNCs implies

that, in the long-term, capital will ‘crawl uphill’ out of developing countries to the parent companies

that are often situated in the Industrial North (Latorre, Bajo-Rubio, & Gomez-Plana, 2009; UNCTAD,

2007; UNCTAD, 2006, p. 186). In Ethiopia, all beer companies are owned by foreign parent companies

that are looking to repatriate the long-term profits that Ethiopia’s burgeoning beer market promises

(see 4.3.3 & 4.4.2). Furthermore, (2) transfer pricing is a growing concern for developing countries as

it allows MNCs to evade tax payments that governments need to finance infrastructure and

development programmes that are imperative for a country to achieve the SDGs (Stiglitz, 2007, p. 150;

Alfaro, Kalemli-Ozcan, & Volosovych, 2006; Hollingshead, 2010; World Bank, 2013). In Ethiopia, beer

MNCs, purchase their imported goods from sister companies. This suggests transfer pricing activities

do occur (see 4.3.4). Additionally, (3) MNCs tend to be more capital intensive than firms in developing

237 Heineken has been given an exclusive guarantee that will allow it to import high quality malt barley for its premium brand despite a possible national ban on malt barley imports.

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countries, meaning that M&A’s frequently result in a loss of jobs (Jude & Silaghi, 2016, p. 43; Jenkins,

2006, p. 132; Ernst, 2005; UNCTAD, 2007, p. 12). In Ethiopia, beer MNCs’ M&As have resulted in the

excessive destruction of jobs and wage increases for the remaining employees. Moreover, MNCs

aligning their severance packages suggesting that higher compensation would have been fair and

feasible (see 4.3.2, 4.4.1 & 5.3.1). Considering these three limitations, MNCs can indeed be perceived

as neo-colonialists that through, foreign ownership, not only perpetuate North-South inequalities but

also worsen inequalities within a country. Regarding the SDGs, I conclude that MNCs are

fundamentally incapable of reducing global inequalities (SDG #10), jeopardise the creation of decent

work (SDG #8) and thus weaken financial resources in the Global South (SDG#17).

Thirdly, this thesis concludes that subsidising MNCs through PPPs is questionable: they are

untransparent, unnecessary and unfair towards other companies (see 5.3.5). To elaborate, CREATE –

a PPP with Heineken and the Dutch Government – has received more than USD 7 million in subsidies

to support Heineken source its ingredients locally across Africa. Of this USD 7 million, USD 1.3 million

has been spent on an outgrower scheme in Ethiopia (see 4.3.6). The subsidiary is questionable for

three reasons: (1) Firstly, CREATE was untransparent because the size and exact conditions of the

subsidy were unknown to the general public. This makes it difficult to confirm whether ODA-related

subsidies are being spent appropriately. (2) Secondly, the CREATE subsidy was not a precondition for

Heineken to source locally from smallholder farmers. The fact that other companies have set up similar

outgrower schemes without subsidies is testimony to this. Beer MNCs acknowledge that forex

regulations are the most important reason to source locally (see 4.3.6 & 4.4.5). (3) Finally, CREATE was

unfair because it put Diageo, Bavaria and the farmers they work with at an (illegal) disadvantage (see

5.3.5). (4) Nevertheless, it must be noted that these subsidies can be effective. CREATE has helped

Heineken improve the yields and incomes of tens of thousands of smallholder farmers. This is based

on the finding that CREATE engages with twice as many farmers who have on average achieved much

higher yields than the farmers involved in Diageo and Bavaria’s unsubsidised outgrower schemes (see

4.4.5). Ultimately, PPPs can enhance MNCs contributions to SD but are questionable in terms

transparency, purpose and fairness and thus need to be redesigned.

Fourthly, forex regulations are an effective instrument to: encourage MNCs to source locally; reduce

profit repatriation; and address transfer pricing. Therefore, they are paramount in determining

whether beer MNCs contribute to the achievement of the SDGs. To elaborate, (1) whilst Heineken and

Diageo give the impression that they are primarily sourcing locally in Ethiopia due to their sense of

CSR and dedication to CSV (Heineken, 2015a; Diageo, 2016), evidence suggests that their African local

sourcing was initiated due to forex shortages and regulations in other African countries (see 4.4.5).

Only when sourcing locally coincidently proved to be economically feasible and socially responsible,

did the MNCs apply self-regulatory instruments and work with NGOs (see 4.4.5). Furthermore, forex

regulations are conceivably effective at limiting profit repatriation and addressing transfer pricing as:

(2) forex transactions to repatriate profits need to be approved by the National Bank of Ethiopia (see

4.4.5); and (3) by encouraging local sourcing through forex regulations international transactions are

cancelled out, reducing transfer pricing possibilities (see 5.3.3). As such, this thesis argues that public

regulation in the form of forex controls is more effective in stimulating MNCs to contribute to SD than

self-regulatory or multistakeholder instruments.

74

To conclude, in September 2015, the Dutch prime minister (Mr Rutte) praised Heineken for its

contributions to SD in Africa238. This thesis has shown that Heineken and other beer MNCs can

contribute to SD. However, Mr Rutte failed to address in his speech that instruments (e.g. forex

regulations and partnerships with NGOs) played an imperative role in convincing companies like

Heineken, Diageo and Bavaria to source locally. What the prime-minster also failed to address was the

fact Heineken’s exemplary outgrower schemes are indeed relatively exemplary vis-à-vis other (beer)

companies because Heineken is benefitting from subsidies whilst other companies are not. Not to

mention the inherent hindering of SD by beer MNCs through profit repatriation, transfer pricing and

the destruction of jobs. Ultimately, under pressure from the right instruments, beer MNCs can

contribute to specific SDGs. However, without pressure from these instruments, beer MNCs can

hinder the achievement of the very same goals. Considering the need for MNCs to contribute equally

to the achievement of all seventeen global goals by 2030, Mr Rutte’s speech to the UN General

Assembly in September 2015 remains wishful thinking.

6.2.2 Recommendations

This thesis concludes that MNCs need external incentives to create positive impacts and regulations

to mitigate negative impacts. Therefore, instruments are paramount in determining whether MNCs

contribute to SD. Below several theoretically generalizable recommendations are made about how

MNCs’ contributions to SD can be enhanced.

Firstly, countries whose financial system are strictly regulated can use forex regulations to stimulate

MNCs to: (1) encourage local sourcing; (2) discourage profit repatriation; and (3) limit transfer pricing.

In doing so, negative impacts by MNCs can be contained (see 5.3.2,5.3.3 & 5.3.5).

Secondly, when privatising multiple state-owned enterprises (or permitting M&As with local firms),

governments should grant concessions to different MNCs. The competition between MNCs drives up

the prices of the products they source locally and thus increases the income of local producers (see

4.3.7).

Thirdly, PPPs must be (1) made more transparent; (2) fair towards other companies; and (3) aimed at

creating social benefits (see 5.3.5). This could be done by using multistakeholder agreements such as

roundtables and sector covenants as a platform from where to launch projects such as the CREATE

PPP (see 3.7.4). This creates more transparency vis-à-vis civil society and allows for multiple

companies to join projects and benefit from possible subsidies thus preventing state aid. Furthermore,

if ODA funds are used to subsidise projects wherein MNCs are involved, there must be utter

transparency. In effect, the sum, conditions upon which the ODA subsidy are granted and the specific

points of expenditure must be publicly assessable so that civil society and academics can evaluate

whether subsidies are indeed aimed at creating social and environmental benefits.

Fourthly, to mitigate large scale dismissals by foreign MNCs after M&As, host countries could

strengthen their legislation on the dismissal of workforces due to redundancies. This does not mean

MNCs should be barred from dismissing employees as that would negatively affect the investment

climate. However, it does mean redundancies should not be unconditional. Possible alterations could

238‘Toespraak Rutte bij de United Nations Sustainable Development Summit’, see here: https://www.rijksoverheid.nl/regering/inhoud/bewindspersonen/mark-rutte/documenten/toespraken/2015/09/26/toespraak-van-minister-president-rutte-bij-de-united-nations-sustainable-development-summit , see also: ‘ Rutte op VN-top: betrek bedrijven bij ontwikkelingsdoelen’, see here https://www.nrc.nl/nieuws/2015/09/26/rutte-op-vn-top-betrek-bedrijven-bij-ontwikkelingsdoelen-a1412853 (accessed October 6th, 2016)




https://www.nrc.nl/nieuws/2015/09/26/rutte-op-vn-top-betrek-bedrijven-bij-ontwikkelingsdoelen-a1412853

https://www.nrc.nl/nieuws/2015/09/26/rutte-op-vn-top-betrek-bedrijven-bij-ontwikkelingsdoelen-a1412853

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include rewarding MNCs that refrain from job cuts with tax incentives or priority access to forex.

Furthermore, labour unions remain an invaluable asset for employees when it comes to negotiating

severance packages that exceed legal requirements (see 5.3.1).

Fifthly, if MNCs breach the OECD Guidelines by unlawfully dismissing employees or offering poor

severance packages, employees and labour unions can hold parent companies accountable by

presenting a case to the NCP in the MNC’s home country (see 5.3.1).

Lastly, developing countries can stimulate technology, knowledge and skill transfers by limiting the

duration of expatriate ‘experts’ work permits to a few years and encouraging MNCs to provide

internships and traineeships. This puts pressure on foreign experts to prioritise the training of local

employees and stimulates spill over effects once employees/interns/trainees switch job. Furthermore,

governments can play an important role in the dissemination of MNCs’ technologies by creating

transparency around the duration of exclusive rights that are attached to technology licenses. Once

exclusive licenses expire, the government can communicate this to interested parties (see 5.3.4).

6.3 Reflection

6.3.1 On the methods

Both a literature review and case study where undertaken to answer the research question. For the

case study, interviews were conducted and documents analysed. In retrospect, these methods

allowed me to gather a vast amount of qualitative and quantitative data about local sourcing, malting

factories and the breweries.

Whilst managers from all four companies were interviewed, some were more reluctant to disclose

information than others. For example, Heineken and Bavaria were more transparent about their

business than Diageo and BGI. I believe this partially related to my Dutch nationality. I had hoped to

obtain a more complete view of the latter two companies. Furthermore, a vast amount of data was

obtained from local NGO’s who are involved in the outgrower schemes. This is also the reason why

my finding on linkages are more elaborate than my findings in other areas. Lastly, valuable information

was collected from a former employee that had worked at numerous beer MNCs. In retrospect, I

believe interviews with other former employees, labour unions and communities surrounding the

breweries would have enriched my data. Nevertheless, by narrowing down my focus on local sourcing,

malting and breweries I was still able to triangulate interview data with documents and news articles

and generate meaningful findings.

It is also worth reflecting upon my analytical framework, which was changed shortly before the

completion of this thesis. Whereas previously the focus was on the effectiveness of specific

instruments, the emphasis is now on enhancing impact. The reason for this last-minute change was

because my data is more suitable for using impacts to explore instruments than vice versa. This mainly

relates to the fact that I have studied four different companies who each engage with different

instruments. This creates a complex myriad of instruments that cannot be linked with certainty to

impacts.

In my opinion, this research contributes to the literature because it demonstrates that beer MNCs,

despite what their rhetoric suggests, still need external incentives to create meaningful contributions

to SD. Furthermore, it confirms that practices such as capital flight and transfer pricing also occur in

the beer industry. This thesis does not entirely dismiss beer MNCs ability to contribute to SD as there

is genuine potential for the companies to alleviate poverty through their outgrower schemes with

smallholder farmers. However, for these impacts to be sustainable, improvements need to be made.

Hence the recommendations.

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This thesis has attempted to provide several recommendations about how impacts can be made

sustainable. However, the case study does have limitation regarding generalisability. Firstly, each

company is different. MNCs’ contributions to SD vary greatly depending on their size, ownership

structure, country of origin and preferences of the managers. The differences between Heineken,

Diageo, Bavaria and BGI are testimony to this. Therefore, generalisability towards other beer

companies must be made with caution. Secondly, Ethiopia is a highly unique in the sense that it has

protectionist institutions that are a legacy of its socialist history (see 4.2.2). Thirdly, Ethiopia is also

unique because its beer industry is highly competitive compared to other African countries, which

tend to be highly monopolistic (van Beemen, 2015). I believe the competitive nature of Ethiopia’s beer

industry greatly affects the decision-making of MNCs. Nevertheless, by studying four different beer

companies in one case study, I believe I have presented findings that are more theoretically

generalizable than case studies of individual MNCs. Considering this I hope to have contributed to the

literature on how MNCs’ contributions to the achievement of the SDGs can be enhanced in the Global

South.

6.3.2 On the findings

Due to time constraints and the unwillingness of beer MNCs to disclose information about their

distribution networks and marketing, all effects downstream from the brewery were not covered

during this study. Dropping this segment of my analysis meant I had to drop a significant impact of

beer MNCs, namely: health related risks due to increases in alcohol consumption. This impact would

have addressed beer MNCs impact on achieving good health and well-being (SDG#3) and responsible

consumption (a part of SDG#12). Various sources suggest that beer MNCs are accelerating the demand

for beer through their advertising. In effect, drinking commercial beers is currently regarded as

modern and a way to displays one’s wealth239. Ethiopia does not have the institutions in place to deal

with increasing alcohol consumption. For example, there is no binding regulation on alcohol

advertising and labels warning of the negative health consequences240. A visit to Addis Ababa reveals

that beer MNCs’ advertising has flooded the city and dominates almost all streetscapes (see appendix

8.9). Furthermore, cultural taboos regarding issues such as drinking and driving are essentially non-

existent241. Additionally, commercial beers that are produced by the foreign MNCs are quickly

replacing local alcoholic beverages like Tella and Araque, which are mainly produced and sold by rural

women242. Ultimately, in addition to the mainly socio-economic impacts that were studied in this

thesis, there are also health (SDG#3) and gender implications (SDG#5) that, if adequately studied,

would have affected the conclusions of this thesis.

Lastly, a point that has not been covered thus far is the performance of BGI versus the other three

newer companies. BGI abstains from sourcing malt barley from smallholder farmers thus arguably

does not contribute to poverty alleviations like the other MNCs do. Furthermore, BGI has a history of

dumping wastewater in the Akaki river (see 4.3.8). This relates to the fact that Heineken, Diageo and

Bavaria self-regulate their impact on SD by focussing on opportunities to CSV whilst BGI focusses on

CSR. To elaborate, BGI is focussed on undertaking CSR initiatives outside its core business (e.g.

financing medical treatment for children, nutritional programmes, schools and even Ethiopia’s new

hydroelectric ‘Great Renaissance Dam’) whilst the other MNCs tend to focus on their core business243.

239 Swinkels, T. (2015). Interview 21. 240 WHO factsheet on alcohol consumption in Ethiopia, see here: http://www.who.int/substance_abuse/publications/global_alcohol_report/profiles/eth.pdf (accessed October 5th, 2016 241 Swinkels, T. (2015). Interview 11. 242 ‘Alcohol Consumption in Ethiopia’ (literature review), see a cache version of the report here 243 Swinkels, T. (2015). Interview 17

http://www.who.int/substance_abuse/publications/global_alcohol_report/profiles/eth.pdf

https://www.google.nl/url?sa=t&rct=j&q=&esrc=s&source=web&cd=3&cad=rja&uact=8&ved=0ahUKEwj2xIff3qHQAhWCBsAKHWEFCG8QFgguMAI&url=https%3A%2F%2Fwww.k4health.org%2Fsites%2Fdefault%2Ffiles%2Falcohol_consumption_in_ethiopia_lit_review.doc&usg=AFQjCNEnXpCWf3_Rm-Vto1cChl45FNCC-g&sig2=jUPDSQN5ubgcXXzuSAtw4Q

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This different approach is interesting because it shows that local companies or MNCs like BGI, which

has been active in Ethiopia for almost 20 years, think differently about how MNCs should contribute

to SD than the MNCs that have just entered the Ethiopian market. Ultimately, regarding the SDGs, the

above also puts BGI’s contributions to SD in line with different SDGs such as quality education (SDG#4)

and affordable and clean energy (SDG#7).

6.3.3 Further research

Considering my omitting of health and gender impacts, I recommend further research to evaluate the

effect of (beer) MNCs across all seventeen global goals (see Table 19.). Furthermore, considering that

long-term impacts such as profit-repatriation, spill over were not measurable at the time of fieldwork

(i.e. shortly after MNCs’ first investments), I recommend future research to look at the impact of MNCs

in the long-term so that practices such as profit repatriation, transfer pricing and spill over effects can

be confirmed.

Also, further research is needed on how size, ownership structure, resources, corporate cultures,

countries of origin and manager preferences (see 3.5) relate to MNCs’ contributions to SD. Scholars

like Van Tulder and Kolk have already shed light on this but the case study reveals that MNCs’ approach

to SD varies greatly along these dimensions. As such, further studies that shed light on how different

instruments can be used to incentivise MNCs based on their profiles vis-à-vis these dimensions are

needed.

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Chapter 8 Appendix

8.1 Short history of international development

After World War II, American president Truman implemented the ‘Marshall Plan’ to re-develop war-

torn Europe. The plan consisted of billions of dollars in aid as well as policies to stimulate international

trade (Hogan, 1989). The Marshall Plan proved to be effective as Western Europe quickly showed signs

of economic recovery. Due to its scale and success, the Marshall Plan is widely considered the first

manifestation of international development assistance (ibid, p.430).

Coinciding with the Marshall Plan, many former European colonies in the Global South declared

independence. Once independent, these countries hoped to finally end their exploitation and develop

their own prosperous nations (Thorbecke, 2007). However, in many cases, the new postcolonial

governments simply took over and perpetuated the extractive (colonial) institutions for personal

enrichment (Acemoglu & Robinson, 2012). Consequently, rather than achieving socio-economic

growth, many countries in the global south fell into a vicious circle of civil war – as opposing parties

fought for control over these extractive institutions – and poverty (ibid).

In the 1960s, scholars and policymakers began to study international development to devise

appropriate strategies to improve welfare (Thorbecke, 2007). As interest in international development

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grew, development organisations such as the United Nations Development Programme (UNDP),

Organisation for Economic Cooperation and Development (OECD) and International Development

Association (IDA) were created (Gupta, Pouw, & Ros-Tonen, 2015, p. 543; Thorbecke, 2007). From the

1940s to the 1960s, development cooperation focussed first on: peace and reconstruction and

subsequently on GDP growth; balance-of-payment equilibrium; employment; human rights;

macroeconomic stability and fiscal discipline (ibid). Some notable development theories that emerged

during this time were the ‘big push theory’ (Rosenstein-Rodan, 1943), ‘stages of growth’ (Rostow,

1956) and the ‘two-sector model’ (Lewis, 1954). Most of these theories drew parallels between

savings and investments and argued that foreign aid could be used to overcome savings constraints

(Thorbecke, 2007, p. 9). Ultimately, during this period, development strategies focussed mostly on

how governments could create economic growth (Easterly, 2007).

8.2 Map of Ethiopia

Figure 13 Map of Ethiopia

Source: www.ezilon.com

8.3 Ethiopia’s comparative malt barley advantage

Ethiopia has tremendous potential to grow barley (food and malt barley combined). Barley thrives in

cool and moderately dry conditions and thus grows well in the Amhara and Oromo highlands where

the climate is temperate. In fact, after Morocco, Ethiopia is the second largest barley (food and malt

barley combined) producer in Africa (Mulatu & Grando, 2011, p. 65; Rashid, et al., 2015, p. 8).

Moreover, barley has grown in Ethiopia for at least the past 5000 years giving the country a high

genetic barley diversity which in turn makes local barley farming more resilient against abiotic (i.e.

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droughts/excessive rainfall) and biotic threats (i.e. diseases and pests). Interestingly, unique Ethiopian

barley germplasms have been used internationally to create disease resistant barley varieties (Mulatu

& Grando, 2011, p. 19; Rashid, et al., 2015, p. 1). In light of the favourable climate and high genetic

diversity, Ethiopia is argued to have the potential to meet the growing demand for malt barley locally.

8.4 Obstacles faced in Ethiopia’s malt barley sector

Beer companies face three significant obstacles when it comes to sourcing malt barley in Ethiopia; (1)

malt barley yields are too low; (2) most of the barley produced is food rather than malt barley – i.e.

the quality is does not meet the requirements for beer; and (3) the farmers lack the resources to

overcome these two issues in the short-term.

With regard to point one, in the 2013/2014 main meher harvesting season (i.e. from June to October)

2 million tonnes of barley were grown on 1 million hectares of land (Rashid, et al., 2015). In terms of

yields, this comes down to 2 tonnes of barley per hectares which – despite being an increase with

regard to previous years – is still relatively low. To compare, South Africa and Kenya achieved yields

twice as high while European countries such as the Netherlands and France obtained yields almost

four times as high (FAO, 2016).

Secondly, of the barley that is produced only 10-20% is malt barley while the remaining 90-80% is food

barley (Rashid, et al., 2015, p. 1). Malt barley is more difficult to grow than food barley. Firstly, it

requires significantly more effort. To grow malt barley, farmers have to be careful with fertilizer as

applying too much of it results in a too high protein content making the barley unsuitable for

malting244. Consequently, due to these fertilization restrictions, yields for malt barley are typically

lower than yields for food barley; in Ethiopia the former averages approximately 1.5 tonnes/ha while

the yield for food barley averages about 2 tonnes/ha (ibid). In addition, in the past, rural Ethiopian

villages there was no price differentiation between food and malt barley – i.e. farmers earned less

with malt barley than they did with food barley245. Lastly, malt barley requires high purity seeds (at

least 99% should be malt barley variety) and needs to be maintained carefully to avoid impurity 246. In

short, compared to food barley, growing malt barley requires more knowledge, skills and effort to

cultivate and it provides lower yields. Ultimately, malt barley has not been an attractive crop to grow

244 Swinkels, T. 2015. Interview 13. See also: pdf.usaid.gov/pdf_docs/pa00jz72.pdf 245 Swinkels. T. 2015. Interview 13 & Internal document 3 246Swinkels, T. 2015. Interview 13. See also: USAID (2012). The business case for investing in a malting plant in Ethiopia

Source: FAO (2016)

6.656.35

3.36 3.35

1.78

0

1

2

3

4

5

6

7

Netherlands France Kenya South Africa Ethiopia

Yiel

d (

ton

nes

/ha)

Average barley yields (2010-2014)

Figure 14 A comparison of international barley yields

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for Ethiopian farmers and therefore the Ethiopian malt barley sector has remained small and

inefficient.

Thirdly, one of the main reasons Ethiopian malt barley yields are low and its quality poor is because

the agricultural sector still mainly consists of unorganised subsistence smallholder. To illustrate, in the

2013/2014 season the 1 million hectares of land used to grow barley belonged to approximately 4.5

million smallholder farmers. In other words, the malt barley that is being grown in Ethiopia is

cultivated on millions of different small plots of land each on average smaller than 1 hectare (Rashid,

et al., 2015, p. 1). Moreover, most farmers are badly organised meaning that: (1) their cooperative is

not functioning well; or (2) they are not a member of a farmer cooperative at all. As a result, it is

difficult for farmers to save up for yield enhancing investments such as fertilisers, pesticides, improved

seed varieties or mechanisation practices. Also, the lack of organisation, means it is difficult for the

government, NGOs and companies to reach out to the farmers and support them in this. Ultimately,

farmers lack the resources and organisation capacity to invest in higher malt barley yields.

In summary, due to these three constraints, beer companies are currently incapable of sourcing all

their malt barley from local Ethiopian farmers. There is simply not enough malt barley available locally

and the malt barley that is available is often of poor quality. Furthermore, the barley farmers do not

have the financial or human capital to increase their yields and meet the beer companies’ short-term

demand for high quality malt barley. To conclude, sourcing malt barley in Ethiopia is currently

unattractive and thus all local beer companies import a significant portion of their needs.

8.5 Imported malt barley

Most malt barley in Ethiopia is imported from Europe through specialised malt barley companies such

as Malteurop247 or Holland Malt248. Buying malt barley from these specialised companies has several

advantages. Firstly, European malt barley companies take responsibility for supply and quality; they

work together with farmers and there is enough high quality supply to meet international demands.

Secondly, these companies process the raw malt barley. In other words, by sourcing malt barley from

European suppliers, beer companies do not have to engage with Ethiopian farmers or malting factories

– something most companies would rather avoid249,250. Ultimately, the European malt barley

companies conveniently bridge the gap between brewery and farmer. All a beer company must do is

order a shipment of roasted malt barley at its brewing location and pay for it.

Despite the shipping, trucking and import duty costs, imported malt barley is cheaper than local

Ethiopian malt barley. There are several reasons for this. Firstly, because of low malt barley yields the

demand for malt barley is higher than the supply. Consequently, farmers can ask a high price for their

malt barley (Rashid, et al., 2015).

Secondly, unorganised Ethiopian farmers often sell their produce through traders rather than direct

markets or cooperatives. Traders are local businessmen who own modes of transport such as donkeys,

cars or trucks and use them to transport products from farm to markets251. Traders are well aware of

the arbitrage opportunities that exist between rural farmers and the urban markets, often more so

than rural farmers and urban breweries. Thus, traders have significant bargaining power. Some use

247 Swinkels, T. 2015. Interview 4. 248 Swinkels, T. 2015. Interview 12 249 Swinkels. T. 2015. Interview 16. 250 Swinkels, T. 2015. Interview 12. 251 Swinkels, T. 2015. Interview 5.

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this knowledge to their advantage by exploiting both farmers and breweries252. In Ethiopia, traders

are known to have paid farmers low prices for their produce while later asking breweries and malting

factories excessively high prices for the same malt barley. In doing so, traders distortedly inflated local

prices253.

In summary, the Ethiopian malt barley market is distorted. Firstly, there is a significant shortage of

malt barley in the country. Allowing farmers and traders to raise their prices. Secondly, traders take

advantage of the lack of transparency between rural farms and urban markets by: (1) paying farmers

unfair prices; and (2) adding excessive value when selling to malting factories or breweries. Thirdly,

as. the Ethiopian malt barley roasting sector is highly monopolistic (see 8.6). Due to these three

constraints, the price of Ethiopian malt barley is currently slightly higher than imported malt barley254.

8.6 Malting factories

Assela Malting Factory (AMF) is Ethiopia’s largest malting house having the capacity to process 36,000

tonnes of malt barley per year255. AMF is a state enterprise and has been the only player in Ethiopia’s

malting industry for almost 30 years256. As a result, the company has become monopolistic and

inefficient. This is illustrated most notably by the high malting fee of almost €300 per tonne and the

poor-quality product that AMF delivers257. Regarding quality, AMF has bought 96% of its locally

sourced barley from traders (instead of farmer cooperatives) who have mixed high grade malt barley

with lower grade malt barley batches to fetch a higher price. Rather than identifying and refusing

these ‘watered down’ batches, AMF has accepted, processed and sold the same batches to the beer

companies258. As such, AMF has earned a reputation for charging a high price for poor quality malt

barley.

Aside from the poor price-quality ratio AMF has also struggled to meet the growing demand. In fact,

in late 2015 the company had to temporarily shut down because it was unable to procure enough raw

malt barley259. To meet the rising demand for beer, Assela has resorted to imports rather than long-

term investments in local outgrower schemes like the beer companies have done. Moreover, in the

cases that AMF has purchased from farmers it was quick to downgrade batches and pay farmers an

unfair price260. In summary, as a monopolistic state-owned enterprise, AMF has reacted conservatively

to the entry of the beer MNCs choosing to exploit its dominant supply-chain position261.

Ultimately, Ethiopia’s malt barley industry is deadlocked. On the one hand the Ethiopian government

is reluctant to private AMF and foreign investors are waiting for a more consistent supply of malt

barley before they decide to build a new malting factory. On the other hand, the beer companies are

waiting for a higher malting capacity to expand their outgrower schemes

252 Ibid. 253 Ibid. 254 Source: Document 4 255 See: http://allafrica.com/stories/201510280978.html 256 See: http://www.asmalt.gov.et/ 257 Document 4. 258 Swinkels, T. (2015). Interview 5. 259 See: http://www.icarda.org/update/two-new-malt-barley-varieties-released-game-changing-development-ethiopia 260 Swinkels, T. (2015). Interview 5. 261 Swinkels, T. (2015). Interview 5.


http://www.asmalt.gov.et/

http://www.icarda.org/update/two-new-malt-barley-varieties-released-game-changing-development-ethiopia

http://www.icarda.org/update/two-new-malt-barley-varieties-released-game-changing-development-ethiopia

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8.7 Pre-financing

To clarify, input financing involves Heineken giving farmers a conditional interest-free loan prior to

sowing season. This allows farmers to invest in improved seeds, pesticides and herbicides262. Farmers

receive this loan on the condition that they give Heineken the right to purchase their harvest first. The

interest-free loan farmers receive from Heineken must be repaid when the farmers sell their produce

to their cooperative, who in turn sell it to Heineken (see 8.8). However, as mentioned in 8.4, Ethiopian

farmer cooperatives are weak and often do not have the capital to purchase malt barley from their

members. Therefore, Heineken also provides cooperatives with output pre-financing; in December

Heineken gives cooperatives another interest-free loan that enables them to purchase the contracted

malt barley from their members. When Heineken picks up the malt barley at the cooperatives the

value of the loans are deducted from the payment Heineken makes for the contracted malt barley

(see contract sample below).

8.8 Excerpt from pre-financing contract

262 Swinkels, T. (2015). Interview 13.

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8.9 Marketing by beer MNCs in Ethiopia

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8.10 Food security

The production of malt barley is not considered to compromise food security. According to the

Ethiopian ATA and local NGOs, the malt barley outgrower schemes are significantly increasing

productivity allowing farmers to generate surpluses. It is argued that as long as productivity increases,

no extra farmers are needed to meet the demand263. In effect, malt barley production is not occurring

at the cost of other food crops264 (see also Rashid et al. 2015). Furthermore, farmers’ incomes have

increased as there are receiving a higher price for their malt barley allowing them to purchase food

(ibid).

263 Swinkels, T. (2015). 2 & 13 264 Ibid.

Documents

the role of beer multinationals IN ACHIEVING the