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International Business

Sixteenth Edition

Chapter 5

Globalization and Society

Learning Objectives (1 of 2)

5-1 Describe the trade-offs among different stakeholders in MNE activities

5-2 Evaluate the major economic effects of MNEs on home and host countries

5-3 Explain the broad foundations of ethical behavior

5-4 Identify the cultural foundations of ethical behavior

5-5 Illustrate how ethical behavior is affected by different legal attitudes corporate behavior

Discuss the 9 Learning Objectives for this chapter.

Learning Objectives (2 of 2)

5-6 Show how corruption and bribery affect and are affected by cultural, legal, and political forces

5-7 Summarize what the roles are of governments and companies in resolving environmental issues

5-8 Demonstrate how global labor issues need to be addressed by MNEs to their stakeholders

5-9 Restate how codes of conduct can help MNEs respond to concerns by stakeholders over responsible corporate behavior

Discuss the 9 learning objectives for this chapter.

Meeting the Needs of Stakeholders

Objective 5-1

What are stakeholders?

Why be concerned about the needs of stakeholders?

Learning Objective 1: Describe the trade-offs among different stakeholders in MNE activities.

To prosper—indeed, to survive—a company must satisfy different groups of stakeholders, including shareholders, employees, customers, suppliers, and society at large.

Stakeholders include:

Shareholders.

Employees.

Customers.

Suppliers.

Society.

Factors Affecting Ability to Operate Abroad

Objective 5-2

Figure 5.1 What MNEs Have to Offer

Learning Objective 2: Evaluate the major economic effects of MNEs on home and host countries.

This figure shows the benefits that MME’s bring to benefit society.

What MNE’s Have to Offer Society

Objective 5-2

Figure 5.1 What MNEs Have to Offer

Learning Objective 2: Evaluate the major economic effects of MNEs on home and host countries.

This figure shows the benefits that MNE’s bring to benefit society.

Balance of Payments considerations

Objective 5-2

Balance of Payments effects

FDI

Net import effect

Net capital flow

Growth and Employment effects

Learning Objective 2: Evaluate the major economic effects of MNEs on home and host countries.

Balance of payments effects: This refers to trade and capital flows that result from FDI. Under different conditions, these effects may be positive or negative, either for the host country or the home country.

FDI: is an important measure in economic effect because it looks at the amount invested in a country from companies in other countries. When a company in one country invests in a company in another, it creates negative balance of payment effects.

Net import effect: Looking at the amount of imports versus exports in a country can help determine balance of payments as well.

Net Capital flow: As a rule, MNE investments are initially favorable to the host country and unfavorable to the home country in the short run. After some time, however, the situation usually reverses.7 Why? Because nearly all foreign investors eventually plan to have their subsidiaries remit dividends back to the parent company in excess of the amount they sent abroad.

Growth and Employment effects: movement of any of these factors from home to abroad would result in an increase in foreign output abroad and a decrease in domestic output. Even if this assumption were realistic, it’s still possible that gains in the host country will be greater or less than the losses in the home country.

Foundations of Ethical Behavior

Objective 5-3

Foundations of Ethical Behavior

Preconventional level

Conventional level

Postconventional level

Individuals and ethics

Teleological approach

Utilitarianism

Deontological

Learning Objective 3: Explain the broad foundations of ethical behavior.

Foundations of ethical behavior:

Level 1, the preconventional level, where children learn what is right and wrong but don’t necessarily understand why their behavior is right or wrong.

Level 2, the conventional level, where we learn role conformity, first from our peers (including parents), then from societal laws. One could argue that company codes of conduct are also part of the conventional level of behavior in the narrow context of a company rather than a society. However, behavior espoused by companies likely reflects the values of the company’s home country.

• Level 3, the postconventional, autonomous, or principled level, where individuals internalize moral behavior, not because they are afraid of sanctions, but because they truly believe such behavior is right.

When individuals confronted with ethical decisions enter the realm of moral reasoning, they examine their moral values, especially as related to Levels 2 and 3 above, and decide what to do. One method of doing so, the teleological approach, holds to the idea that decisions are based on the consequences of the action. Utilitarianism, a consequences-based theory of moral reasoning, means that “an action is right if it produces, or if it tends to produce, the greatest amount of good for the greatest number of people affected by the action. Otherwise, the action is wrong.”10 A second method, the deontological approach, asserts that we make moral judgments or engage in moral reasoning independent of consequences. It implies that actions are right or wrong per se.

Why Do Companies Care About Ethical Behavior?

Objective 5-3

Why do companies care about ethical behavior?

Competitive advantage

Perception

Learning Objective 3: Explain the broad foundations of ethical behavior.

Two main reasons why companies care about ethics:

To develop competitive advantage.

To avoid being perceived as irresponsible.

First, some argue that responsible behavior contributes to strategic and financial success because it fosters trust, which in turn encourages commitment.

Second, companies are aware that more and more NGOs and other groups and individuals are becoming active in monitoring—and publicizing—international corporate practices. Governments also want to ensure that individual and corporate behavior is consistent with the best interests of the broader community and that laws are being duly followed.

Cultural Foundations of Ethical Behavior

Objective 5-4

Relativism

Normativism

Learning Objective 4: Identify the cultural foundations of ethical behavior,

Relativism holds that ethical truths depend on the values of a particular society and may vary from one society or country to another.

In contrast, normativism holds that there are indeed universal standards of behavior that, although influenced by different cultural values, should be accepted by people everywhere.

Companies and their employees struggle with the problem of how to implement their own ethical principles in foreign business environments: Do those principles reflect universally valid “truths” (the normative approach)? Or must they adapt to local conditions on the assumption that every place has its own “truths” and needs to be treated differently (the relative approach)? Many individuals and organizations have laid out minimum levels of business practices that they say a company (domestic or foreign) must follow regardless of the legal requirements or ethical norms prevalent where it operates.

Legal Foundations of Ethical Behavior

Objective 5-5

Illegal vs. Unethical

Going above and beyond the law to ethics

Using the law to justify ethical behavior

Learning Objective 5: Illustrate how ethical behavior is affected by different legal attitudes corporate behavior.

According to the legal argument, an individual or company can do anything that isn’t illegal. However, there are five good reasons why this is inadequate:

Some things that are unethical are not illegal. Some forms of interpersonal behavior, for example, can clearly be wrong even if they’re not against the law.

The law is slow to develop in emerging areas, and it takes time to pass and test laws in the courts.

Because laws essentially respond to issues that have already surfaced, they can’t always anticipate dilemmas that will arise in the future.

The law is often based on imprecisely defined moral concepts that can’t be separated from the legal concepts they underpin.

The law often needs to undergo scrutiny by the courts. This is especially true of case law, in which the courts create law by establishing precedent.

The law simply isn’t very efficient. “Efficiency” in this case implies achieving ethical behavior at a very low cost, and it would be impossible to solve every ethical behavioral problem with an applicable law.

In contrast, there are also several good reasons for using the law to justify ethical behavior:

The law embodies many of a country’s moral principles, making it an adequate guide for proper conduct.

The law provides a clearly defined set of rules, and following it at least establishes a good precedent for acceptable behavior.

The law contains enforceable rules that apply to everyone.

Because the law represents a consensus derived from widely shared experience and deliberation, it reflects careful and wide-ranging discussions.

Activity Minute:

Ask students to come up with a list of examples on things that may be legal, but may not be ethical.

Corruption and Bribery

Objective 5-6

What is Corruption?

What is bribery?

Efforts to minimize corruption

Figure 5-2 Where Bribes Are (and Are Not) Business as Usual

Source: Based on Transparency International, “TI Corruption Perceptions Index” (2015), transparency.org/cpi2015 (accessed February 15, 2016).

Learning Objective 6: Show how corruption and bribery affect and are affected by cultural, legal, and political forces.

Corruption. The determinants of corruption include cultural, legal, and political forces. As defined by NGO Transparency International, corruption is “the abuse of entrusted power for private gain. When government officials are involved, bribes can be paid to obtain government contracts, or they can be as minor as trying to get government officials to do what they should be doing anyway.

Bribes are payments or promises to pay cash or anything of value.

International efforts to combat bribery include those established by the OECD (Organization for Economic Cooperation and Development), the ICC (International Chamber of Commerce), and the United Nations through UNCAC (United Nations Convention against Corruption). The problem is that none of the conventions have the force of law behind them.

The Foreign Corrupt Practices Act (FCPA) outlaws bribery payments by U.S. firms to foreign officials, political parties, party officials, and political candidates. The coverage of the FCPA was extended in 1998 to include bribery by foreign firms operating in any U.S. territory. The FCPA applies not only to companies registered in the United States but also to any foreign company quoted on any U.S.

This figure shows the perception of countries and their levels of bribery.

Ethics and the Environment

Objective 5-7

What is sustainability?

Global efforts for the environment

Learning Objective 7: Summarize what the roles are of governments and companies in resolving environmental issues.

Sustainability means meeting the needs of the present without compromising the ability of future generations to meet their own needs.

The Paris Climate Agreement involving 187 countries targeted policies to reduce GHG emissions in order to keep the global average temperature to 2°C above pre-industrial levels.

The ethical approach urges companies to go beyond the law to do whatever is necessary and economically feasible to reduce GHG emissions, given that they still have multiple stakeholders to satisfy.

Ethics and Labor Conditions

Objective 5-8

Labor conditions as a challenge to MNEs

ETI’s (Ethical Trading Initiative) code on labor conditions

Figure 5.3 Sources of Worker-Related Pressures in the Global Supply Chain

Learning Objective 8: Demonstrate how global labor issues need to be addressed by MNEs to their stakeholders.

A major challenge facing MNEs today is the labor conditions of foreign workers, whether in their own offshore operations or their outsourced supply chains. They’re especially critical in retail, clothing, footwear, electronics, and agriculture—industries in which MNEs typically outsource huge portions of production to independent companies abroad.

A more specific listing of worker issues was developed by the Ethical Trading Initiative (ETI), a British-based organization that focuses on MNEs’ employment practices and whose standards are consistent with those adopted by the UN-based International Labor Organization. The objective of ETI is to get companies to adopt ethical employment policies and then monitor compliance with their overseas suppliers. ETI’s trading initiative base code identifies the following issues:

Employment is freely chosen.

Freedom of association and the right to collective bargaining are respected.

Working conditions are safe and hygienic.

Child labor shall not be used.

Living wages are paid.

Working hours are not excessive.

No discrimination is practiced.

Regular employment is provided.

No harsh or inhumane treatment is allowed.

This figure addresses some of the pressures assisting the awareness and change of labor condition issues in global markets.

Corporate Codes of Ethics

Objective 5-9

Strategy for ethical behavior

Codes of conduct

Learning Objective 9: Restate how codes of conduct can help MNEs respond to concerns by stakeholders over responsible corporate behavior.

A major component in a company’s strategy for ethical and socially responsible behavior is a code of conduct.

A useful code of conduct:

It sets global policies with which everyone working anywhere for the company must comply. A good example is the code promulgated by the Finnish cell-phone company Nokia, which discusses how its code was set, who approved it, how it is communicated to its employees, and what its foundation values are.

It communicates company policies not only to all employees but to all suppliers and subcontractors as well.

It ensures that the policies laid out in the code are carried out. This usually occurs through training programs where employees sign off on their compliance and sometimes through internal audits.

It reports the results to external stakeholders. This usually occurs in a company’s annual report to shareholders, but GE uses social media to communicate with external stakeholders, a common practice of most MNEs. In addition, a major contributor to enhanced transparency is the Global Reporting Initiative (or GRI) which has issued G4 sustainability reporting guidelines that identify several different areas related to the environment, society, and the economy. GRI is an independent international organization that links the interests of governments, companies, and various stakeholders to encourage responsible behavior by companies. The reports are broad and comprehensive and pull together many of the issues discussed in the chapter.