4-6 pages double-spaced Business Ethic Paper!!!

The Ethical Responsibilities of Businesses in Developing Areas Author(s): Frederick Bird Source: Journal of Business Ethics, Vol. 89, Supplement 2: International Business Firms, Economic Development, and Ethics (2009), pp. 85-97 Published by: Springer Stable URL: http://www.jstor.org/stable/27749760 . Accessed: 29/10/2013 23:02

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Journal of Business Ethics (2009) 89:85-97 DOI 10.1007/s 10551 -010-0368-6

? Springer 2010

The Ethical Responsibilities of Businesses in Developing Areas Frederick Bird

ABSTRACT. This article reviews the responsibilities of

businesses in relation to the ongoing debates with respect to ethical issues related to economic development. The

article addresses four questions: (1) What are the most

appropriate ways of thinking about economic develop ment and its relation to human development? (2) What

policies are most likely to foster fitting forms of devel

opment? (3) What are the best ways of managing the inevitable social disruptions that accompany economic

development? And (4) what roles should governments

play in fostering and managing development? In relation

to each question the articles considers the practical

implications for business practices in developing areas.

KEY WORDS: responsibilities of firms, economic and

human development, social disruption

Introduction

International businesses in the world's developing areas face a number of morally challenging situations

characteristic of these areas. They must determine

how they will operate when local conventions differ

Frederick Bird has recently assumed the position of Research

Professor in the Department of Political Science at the Uni

versity of Waterloo. Previously, he was Professor of Religious

Studies at Concordia University, where he held a Concordia

University Research Chair in Comparative Ethics. He is the

author or co-author of a number of books on business ethics,

including Good Management (1991), The Muted Conscience: Moral Silence and the Practice of Ethics

in Business (1996), International Businesses and the

Challenge of Poverty in the Developing World

(2004), International Business and Dilemmas of

Development (2004), and Just Business Practices in a

Diverse and Developing World (2006). Between 1999 and 2006, he directed an international team of researchers

examining the practices of international businesses in devel

oping areas in 20 countries.

markedly in ways that sometimes seem morally

questionable (Smucker, 2006; Velasquez, 2006).

They must attempt to establish fair and enforceable

guidelines with respect to diverse, often deeply

engrained, but nonetheless morally questionable

practices regarding gifts, kickbacks, facilitation fees,

donations, bribes, transfer pricing, and mispricing (Baker, 2005; Klitgaard, 1988, 1990). International

businesses must determine as well effective and just ways to manage aggravated security problems, where

they may well feel hard pressed to decide between

mutually unattractive alternatives, which either leave

them overly exposed or too closely connected with

practices that seem excessive (Fossgard-Moser and

Bird, 2004). Characteristically, they face a diverse

array of labor issues, in respect of everything from

the treatment of particular groups of employees -

minorities, women, young workers, and expats ?

to

fitting working conditions, remunerations levels, workers associations, and alternative strategies

to

encourage effective workmanship (Khan, 2004;

Sejjaaka, 2004).1 These issues with respect to international busi

nesses and development arise within a larger, more

general set of debates about the ethics of economic

development. Viewing these issues in terms of the

options available for international businesses, I will

consider four topics that have been much discussed

with respect to economic development:

1. What is economic development? What is the

relation of economic development to human

development? How in turn do different

views of economic development affect busi ness policies?

2. What policies facilitate or aggravate eco

nomic development? How should businesses

correspondingly act to facilitate genuine,

sus

tainable economic development?

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86 Frederick Bird

3. What are the best ways of managing the social

disruptions that accompany development? 4. What role should governments play with re

spect to development? And, what roles

should international businesses play with re

spect to host governments?

What is economic development? Why is it important? How is it related to human

development? And how do internationally businesses best contribute to these

developments?

From an ethical perspective, questions about eco

nomic development can be rephrased as questions about what aspects of human life do people seek to

improve - which do they really value, and why

-

when they are attempting to foster economic

development? Typically, economic development has

been measured by increases in per capita income.

For the most part, economically developed countries

have high per capita income and undeveloped countries (except a few oil-rich nations) have low

per capita income. Correspondingly, when eco

nomic development is viewed in terms of increases

in per capita income, businesses contribute to

development by the wages they pay, the royalties and taxes they generate, and the investments they

make in developing areas.

Although income level serves fairly well as an

approximate gauge of economic development, it fails

in a number of ways to focus our attention on what

really matters when we are thinking about economic

development. As Amartya Sen has so well argued,

people want money not for itself but as a means to

gain other things they want, when they are thinking about development: namely,

more education, greater

access to health care, longer lives, literacy, oppor

tunities to influence political processes, more leisure,

better security, and so forth. Sen uses the term

"human capabilities" to refer to these valued ends.

The United Nations Human Development Index

seeks roughly to measure the extent to which

people in various nations enjoy these kinds of ends

(Sen, 1999; see also Nussbaum, 2000). Sen then

shifts the focus to the broader category of human

development as the process by which human beings

increase their capabilities ? that is, their abilities to

realize these objectives. Freedom is viewed as both

the by-product of this process - the freedoms to

realize these capabilities - as well as its cause -

namely, the overcoming of the impediments to

freedom associated with the absence of these capa bilities. Still, from his perspective, this process itself

remains a bit amorphous; it includes whatever

activities - political, economic, or cultural ? which

facilitate these developments. Correspondingly, many have argued

- including Sen

- that development can

in proximate terms be associated with the extent to

which people are able fully to enjoy basic human

rights. Promoting and protecting human rights becomes a practical way of fostering human capabilities.

From this perspective, businesses can and should be

evaluated insofar as their practices contribute, directly or indirectly, to fostering or reducing human capa bilities and rights. Businesses work against human

development, understood in these terms, to the extent

that they variously undermine or frustrate these

capabilities and rights. This perspective on human

development establishes a very broad agenda for

businesses. It calls for them to review not only their own labor practices and social programs but also

whether and to what degree they should take stands on a wide variety of public issues affecting human

capabilities in the communities in which they operate. While recognizing the appeal of thinking about

development broadly, as Sen does in terms of human

capabilities, in this article, I will focus attention in a

more restricted way on economic development.

However, I will use a gauge for economic devel

opment that is, I think, broader and more analyti

cally useful than per capita income. I argue that

economic development in particular can best be

understood in terms of those kinds of economic

arrangements (institutional patterns) that foster

greater productivity. Productivity has been measured in terms of a number of outcome standards,

including profits, income levels, and returns on

investments. In contrast, I think productivity is best

gauged in terms of the effective utilization of par ticular inputs, namely existing human and natural

resources, so that they yield more benefits (uses, values, wealth) without seriously depleting those resources. Sometimes productivity

can be increased

by finding ways of utilizing existing resources -

wind, sun, soil, animals, communication systems,

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Business in Developing Areas 87

minerals -

in ways not used before. Sometimes,

increasing productivity involves finding ways of

using existing resources more effectively and less

wastefully. Often, it involves finding ways of con

serving these resources

- human and natural

- in

ways that allow for longer-term sustainable utiliza tion. Often, it involves altering the way humans

organize themselves to utilize these resources:

changes in the social patterns of work, management, commerce, finance, and the like. Increases in pro

ductivity allow given resources to yield more ben

efits, which can in turn be utilized to raise standards of living, fund cultural programs, and support public projects. Alternately, depending upon existing pat terns of distribution, higher productivity may be

squandered or exploited for private ends. In partic ular, increases in productivity in less developed societies make it possible for resources to be invested in education and health care, in nutrition and safety, in legal systems and public agencies, in ways that allow people to enjoy both a wider range of basic

capabilities and given capabilities to a greater extent.

Failures to increase productivity - whether as the

result of natural calamities, aggravated civil conflict, underskilled labor forces, absence of legal guarantees, or lack of investment - characteristically lead to

situations where growing populations struggle over

diminishing resources (Bird, 2006).

Many factors have functioned to foster increased

productivity in developing areas, including local and foreign investments, technological innovations,

growth in educational attainment, expansion of

commerce, and government initiatives. Two factors

seem especially important. First, countries

are more

likely to develop economically to the extent that

they can guarantee minimum levels of public security. It is very difficult to foster sustainable economic growth in settings characterized by civil

war, insurrections and high crime rates. Second,

when viewed in general terms, countries are more

likely to grow in their economic development to

the extent that they have managed to develop workable infrastructures of several different kinds.

These include physical infrastructures (roads, canals, communication networks, electrical power grids,

water and sewrage systems); social infrastructures

(schools, health care, social insurance, and welfare

systems); and economic infrastructures (offices and

institutions to facilitate market exchanges, employ

merit services, property titling and transfers, and

credit facilities). These infrastructures variously function to foster the general development of

industry and commerce.

When economic development is defined in terms

of increased productivity, then the mandate for

businesses, whether local or international, shifts

slightly. First and foremost, they are to be evaluated

in terms of the degree to which they foster increased

productivity. To what degree have they found ways to utilize or augment natural, human, productive,

social, and financial resources in ways that increase

benefits? To what extent, in contrast, have they

operated in ways that have depleted natural re

sources, exploited or

denigrated human resources,

reduced or aggravated social resources, devalued or

not added to existing productive resources, or

facilitated the lopsided distribution of existing financial resources? Have businesses operated in

ways that have added to the overall productive

capacity of these developing societies? Or have they

operated in ways that produced short-term wealth

for some of those directly involved but not in ways add to overall productive capacity?

From this perspective, mining companies like

Placer Dome Canada and Freeport McMoRan, examined in other articles in this special issue, face a

serious challenge.- By their veiy operations, these

firms are using up and not replacing particular natural resources. They may in the short term add some wealth in the form of wages, royalties, and taxes. But if they are to add to the productivity of

developing societies such as (in these instances) South Africa and Indonesia, then they need to find

means so that they can in some ways augment as

well the resources of these societies -

in financial,

human, productive, and or social terms

- variously,

by fostering the skill development of their workers, the vitality of local commerce, the technological know-how of associates, and the resources of gov

ernments. They need to find ways to strengthen and augment other productive

resources because

they are by their basic nature depleting natural resources. In contrast, Hewlett Packard, discussed in

another article in this issue, clearly added to the

long-term productivity of China by overtly work

ing to develop the technological and managerial know how of their associates in Legend, their

Chinese partnering firm.

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88 Frederick Bird

What policies facilitate or aggravate economic development? In particular, how should international businesses operate in order to foster genuine, sustainable

economic development?

There has been much debate in recent years about

those policies that do and do not foster genuine, sustainable economic development. Rieff (2002) and

Kennedy (2004) have raised a number of probing

questions about humanitarian aid programs in which

the aid deliverers have become preoccupied with

championing their particular delivery systems - their

organizations and their tactics - without pausing to

assess their practical consequences in very changing circumstances. William Easterly has written a couple of books castigating 40 years of developmental pol icies and aid programs for their failures to make

much of a difference in the developing world. Too

many planners and too many economists, Easterly argues, have fruitlessly attempted to impose their

static visions on the world. What is called for instead, he maintains, are more searchers, willing to experi ment, working from the bottom up, responding to

the market forces (Easterly, 1997, 2006). The

problem, as Stiglitz (2002) has argued, is that econ

omists have attempted to impose a particular neo

liberal model for many developing countries to

which it does not apply. They have frequently called

for poor countries to liberalize their markets, mini

mize government interventions, and reduce their

taxes in ways that have in turn rendered these gov ernments both unable to develop adequate social

infrastructures, for example, in education and justice, and unable as well to regulate adequately interna

tional businesses operating in their domains (Stiglitz,

2002). These debates about development policies reflect

the fact that since World War Two the experience of developing countries has been very mixed. While a number of previously impoverished countries, such as the Korean Republic and Malaysia (see Naguib and Smucker, 2009), have successfully developed,

many other countries, such as most sub-Saharan

African countries, have not. For many of the least

developed countries, per capita income since 1980 has

markedly declined (Milanovic, 2005; Stigletz and

Carlton, 2005). Current debates regarding economic

development thus seek to address the question

about why some countries, and some areas within

countries, have managed to foster economic

growth while others have not. What particular factors seem to have played decisive roles? To what

degree has economic development been spurred by

improvements in general education, the utilization

of modern technology, international or local trade,

democratization, the rule of law, innovation,

entrepreneurial activity, protected industries, or

political leadership? I will not here attempt to review and summarize

these debates, except to identify several common

points of reference. First, economic development,

whether gauged in terms of per capita income, human capabilities, or infrastructural institutions, has

succeeded in a number of countries and areas. The

percentage of the world's population that is

impoverished, living on the equivalent of less than two dollars per day, has declined over the past 60

years, even though, because of population growth, the numbers are not much different. A number of

newly industrialized countries, including China,

India, and Brazil, Thailand, Malaysia, and Chile, have made significant progress. At the same time, more than 60 less developed countries, and large rural regions as well as urban slum areas in countries

like India and Brazil have witnessed little progress. Overall, the economies of developing countries

grew more in the period up to about 1980 than in

the years since (Milanovic, 2005). What practices by international businesses have

best functioned to foster or impede growth in the

overall productivity of developing areas? On the

basis of existing studies, we can identify two useful

observations, each a partial answer to this question.

My first observation is that international busi nesses are more

likely to contribute to overall eco

nomic development if they adopt an asset building

approach rather than a cost minimization approach to their business strategy. Cost minimization strate

gies lead businesses to operate so that they keep their costs for labor, supplies, credit, and taxes as low as

possible; they are likely to invest as little as possible in fixed assets. Likewise, they contribute as little as

they can get away with toward public revenues,

suppliers, and workers aside from the minimum.

Many firms that mass-produce retail goods such as

clothes, shoes, and toys have adopted this kind of

business strategy, frequently moving their operations

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Business in Developing Areas 89

to other locations with lower costs for labor, like

Bangladesh, for example, when local labor costs in

successfully developed countries like Korea have risen. Asset building strategies differ in approach, in

that firms work to increase the value of their overall

assets, broadly conceived, whether these assets are

gauged in terms of fixed productive assets, connec

tions with local suppliers, the skills and loyalty of

their workforce, or the loyalty of local customers.

Firms are especially likely to adopt this approach where the initial costs of productive assets are large (as, for example, in manufacturing expensive

con

sumer items such as automobiles) and where firms

deliberately seek to cultivate local consumer markets

(Santoro, 1999). In The Fortune at the Bottom of the Pyramid (2005),

C. K. Prahalad champions an asset development

approach toward business strategy in developing countries. Prahalad does not actually

use these terms.

Rather, citing numerous examples, especially of

businesses in countries like India, Brazil, and Mex

ico, he indicates ways in which retail businesses can

make profits while effectively serving low- and

moderate-income customers. He demonstrates that

how successful "bottom of the pyramid" (BOP)

companies make transactions convenient for cus

tomers by selling items in small packages they can

afford. They also often facilitate consumer purchases

by arranging low-cost credit for customers through various micro-credit schemes. Much in the way that

Avon used part-time women sales representatives to

market its products, many BOP firms have suc

ceeded in greatly expanding their operations by contracting with

women in low-income areas to sell

and distribute their goods. These BOP businesses, like Unilever in India and Cemex in Mexico, do find ways of minimizing their expenses. But these

savings are the by-product of efforts to develop their

practical working assets in terms of expanding the

numbers of their customers and cultivating a

mutually beneficial relationship with them. The

Body Shop's community trade program provides another kind of example of an asset development strategy. The Body Shop decided to purchase some

of the ingredients for its products, as well as some

craft items, directly from comparatively small pro ducer groups in developing areas. Many of these

producer groups had already been selling goods to

Fair Trade groups in Europe and North America.

The Body Shop not only offered these producer groups fair prices for their goods, but also helped them enhance their own business capabilities

through better ways to standardize products, manage

production, review and balance budgets, and

supervise and train personnel. In part, it undertook to assist these groups out of a sense of social

responsibility; but it also undertook this assistance in

order to make sure that it was more likely to receive a reliable flow of goods from these sources (Bird, 2004b).

In ethical terms, the differences between asset

development and cost minimization lie in how those

who develop and evaluate practical business strate

gies conceive of and assess the economic value that

their firms produce. Does value primarily consist in returns on equity or rather in the net amount of

money generated by sales? Or does the company's true value consist in the value of the overall assets -

productive, financial, human, social, and natural -

which businesses develop and draw upon to conduct their operations? Clearly, all of these questions are

relevant. I would argue for the especial importance of the latter question because as they review changes in the character of overall assets, managers are directly called upon by this approach to attend to how well

actual operations are functioning. This approach directly requires those who manage businesses to assume fiduciary responsibility over these operations. They assume this responsibility for all those who

have made investments in the firms they manage and who have thus undertaken corresponding risks, whether by purchasing securities, contracting to

work, offering credit, selling supplies, or acting as

regular customers. As managers, they have a fiduciary

responsibility to manage these overall resources

effectively and, in the process, to understand, respect, and know how to foster the particular virtues and

manage the particular risks of the diverse types of assets with which their firms are working.3

My second observation is that companies are more

likely to foster economic development in their host areas of operation to the degree that they interconnect their businesses, with other local businesses rather

remaining isolated enclaves. Many international

businesses have in fact subsisted as economic islands

separated from other local commerce and local

enterprises. Many firms involved in extracting min

erals, gas, or petroleum, like Freeport-McMoran,

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90 Frederick Bird

have set up their operations in order to export raw

materials, which are often refined and upgraded elsewhere (see article by Rifai-Hasan, 2009). Many international businesses have set up assembly plants in developing areas in order to utilize low cost local

labor for products which are sold externally. Other

international businesses, like the firms involved in

harvesting sugar cane in

Fiji, discussed in a sub

sequent article, have either established local planta tions or arranged to purchase agricultural products

-

coffee, tea, cocoa, cotton, rice, sugar -

to be sold and

often refined as finished products in developed countries. What characterizes all of these businesses

is the fact that, even though they generate local

wages, taxes, and royalties, they are not very inter

connected with local commerce. Typically, they

acquire most of their needed supplies in the form of

technologically advanced equipment, financial ser

vices, management expertise, partially manufactured

parts, and even sometimes raw materials, from sup

pliers external to their areas of operation. To cite an

example from our own research, in the 1990s, a

pulp and paper mill in Mexico began to import lumber for its operations from Finland instead of

the nearby forests because, it claimed, the Finnish source of supply of wood was less expensive

(Raufflet, 2004). All of these enclave-like international operations

occasion flows of considerable wealth, but only to

the small numbers of local people directly involved as managers, landholders, and government officials

-

aggravating inequalities as these local elites directly acquire wealth and spend their incomes on housing or other commodities in ways that distort prices for

the local population, whose incomes have not been

improved.

The "resource curse" theory focuses attention on

these kinds of enclave-like investments and on the

critical role played by local political and economic

elites. This theory begins with an observation: many

developing countries that have specialized in

exploiting and exporting a

particular natural resource

such as oil or minerals, or a crop such as sugar cane,

bananas, or coffee, have not thereby become gen

erally wealthier and more

productive societies. In

these countries, local elites have tended to focus their

energies on gaining access to the wealth created by these resources, whether by private

means (owner

ship and corporate controls) or by public means

(royalties, ownership, and taxes). According to the resource curse theory, these elites have tended to

adopt various rent-seeking strategies designed to

channel this wealth into their private accounts. In

the meantime, efforts to develop the economy more

generally and to develop other sources for public revenues have been ignored. Because gaining wealth seems to be both certain and accessible by finding

ways to exploit these particular resources (oil, min

erals, cash crops, assembly plants), attention and

efforts are diverted away from developing sources of

wealth, less immediately profitable to the elites,

including infrastructures, competing enterprises, and

other sources of public revenues (Ascher, 1999;

Auty, 1993, 2001).

Maquiladoras are a noticeable example of enclave

like businesses. From the perspective of developing areas, these operations have been established in order to utilize local low-cost labor and thereby develop

job opportunities for otherwise unemployed work ers. These operations bring in most of their basic raw

materials, parts, technologies, and managerial ser

vices from elsewhere. AH in all, they help developing areas most by providing low-income wages, which

nonetheless are often higher than what local workers

could otherwise earn. They may also generate some

rudimentary retail businesses to help supply workers

with basic household necessities. These added

earnings are not insignificant; but they do not have

much of a multiplier effect in fostering other forms

of economic development. Maquiladora firms gen erate little tax revenue.

Alternatively, rather than operating as distinct

export-oriented enclaves, a number of international

businesses have sought ways to become more fully

integrated into local economies. They have done so, as Santoro (1999) argues in his study of international

businesses in China, to the degree that these firms

have also attempted to cultivate markets for their

products in local economies. This kind of market reorientation especially makes sense in countries like

China where consumer demands for manufactured

goods are potentially huge. This orientation is, of

course, intrinsic to the kinds of retail firms examined

by Prahalad, and to businesses that offer important services, like the two firms operating in China (see article by Krueger and Ding, 2009).

This kind of market reorientation represents a

less significant alternative for firms in extractive

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Business in Developing Areas 91

industries and in natural produce industries (sugar, cotton, coffee, etc.). These latter firms must explore

other ways of becoming more economically inte

grated in developing areas. One significant factor that

directly affects such local interaction concerns the

ways these firms provide for the basic infrastructures

their operations require: adequate supplies of water

and electrical power, provision for sewage and gar

bage disposal, serviceable roads, reliable systems of

security, accessible and proficient health care facili

ties, effective systems of schooling (both to educate

the children of expats and to train locals for positions

requiring advanced skills), usable means of commu

nication, and a minimal degree of public order. In

industrialized countries, these infrastructures are lar

gely provided by governments or government mandated firms, and funded both by reliable sources

of public revenues and by user fees. In most of the

least developed countries, these infrastructures are

largely absent; even in more economically developed societies, they are often not well established. Rather

than waiting for governments or local businesses,

international businesses operating in developing countries often have sought to provide these infra structures and services for themselves. They have

constructed roads, built ports, generated power,

provided water, and established schools and clinics to

facilitate their own operations and address the needs

of their employees and sometimes the immediate communities

abutting their operations. They have

developed, or hired on contract, their own security services and systems of communication. Many

"company towns" have been established in currently

developing areas, just as they were established in the

past in Western industrialized societies. However,

by providing for their infrastructural needs primarily

by means of their own efforts, these firms have

remained largely disconnected from the larger economies of these developing

areas.

There are other ways of addressing these infra

structural needs that interconnect firms more fully into local economies. That is, international busi

nesses can explore ways of investing

in or partnering

with local firms or public agencies established pre

cisely to provide particular infrastructural services.

For example, instead of building generators for

their own operations, international businesses can

work with local entrepreneurs and governments to

develop power grids capable of servicing a larger

region, from which they can then contract to pur

chase energy. Originally, this was the idea that led

Alcan to work with the government of Ghana in the

late 1950s to develop the Volta dam, as an inde

pendent source of energy both for the aluminum

company's operations and the neighboring region. This arrangement was fairly well designed in general terms, even though it allowed Alcan to purchase

energy at prices that were excessively low and not

initially adjusted for inflation. Subsequently, the

government re-negotiated this arrangement to the

public's advantage (Puplampu, 2004). The way Rio Tinto has proceeded with its

mining operations in Madagascar provides another

instructive example. Initially, Rio Tmto's subsidiary, MNZ, had planned to develop facilities exclusively for its own use. Subsequently, it altered its plans with

the idea of investing in a much larger independently

incorporated, privately owned and managed public

port, which would be used by a number of other

firms. Rio Tinto's preliminary experiences in

Madagascar provide a number of other examples of

the ways it recognized it could best meet its own

infrastructural needs by establishing and strengthen

ing infrastructures that helped others as well. As it

thought about the impact of its mining operations on

the social relations and economy of Madagascar, MNZ began to see numerous ways in which it had

to rethink and modify the initial plans for its oper ations. Realizing that its operations would likely attract much larger numbers of people looking for

work than the company could ever hire, MNZ saw

that it might well be in its interests to encourage other developments in the area, where some of these

job-seekers could then find work. In fact, MNZ saw

that the proposed development of the port facilities

and the business start-ups taking advantage of the

new port would also help to address this problem. Likewise, in order to provide adequate water sup

plies for its own operations without adversely

affecting the local water supply for current and

future residents, MNZ changed its initial plans and

decided to build a weir, which would partially dam a

nearby river and thereby increase the volume of

fresh water for industrial and local use. As it surveyed the practices of indigenous groups with respect to

the forest within and near the proposed mining sites, MNZ foresaw that the extent of the forest would

be steadily reduced as villagers cut trees for wood

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92 Frederick Bird

supplies and charcoal. In order to preserve the forest on these sites, MNZ had initially planned to replant

quickly on sites it had cleared for surface mining. MNZ realized that this plan was inadequate, even

though it allowed for eventual reforestation. The

problem was that its activities would be seen as

aggravating what was soon to become a major

problem ?

namely, the growing destruction of the

littoral forest. Consequently, even before beginning to mine, MNZ established conservation areas to

preserve tracts of forest that could not be lumbered, even by indigenous groups. In other areas, the

company began tree planting, and worked with

villagers to allow their traditional wood-harvesting

practices to continue in a more closely supervised manner (Bird, 2004c).

The experiences of Royal Dutch Shell in Nigeria

provide a number of examples of missed opportu nities. In order to provide an adequate basis for its

overall operations, Shell had to establish reliable sources of electrical energy and water, local road and

communication systems, adequate health clinics, and

schools. In keeping and perhaps exceeding what were then the standard expectations regarding these

matters, Shell basically established these services for

its own operations. On a selective basis, it also

provided clinics, wells for water, and schools for some neighboring groups. At the same time, Shell

"flared" (burned up) the associated natural gas that came to the surface with the petroleum it was

extracting, as it had no immediate profitable use for

the gas. Over almost 40 years until 1998, when it

finally built a liquefied natural gas plant, Shell flared

85% of the associated natural gas. Often community

groups protested the air pollution which this practice occasioned. They also protested against the way Shell's operations polluted their streams and air; the

disproportionate earnings of those fortunate enough to gain jobs with Shell; and the lack of fresh water in

local communities.

If it had explored ways to become integrated with

the local Nigerian economy, then Shell might have

looked into other possibilities. It might have ex

plored ways of investing in and helping to establish a

regional electrical power system, to which it could

have sold its unused natural gas, and from which it

could have purchased electrical power. This kind of

locally owned and managed energy firm would have

been able not only to provide reliable sources of

electricity for pumps to pump up fresh water ? a very

high priority concern of Nigerians - but also more

generally to meet other household needs and facili tate the development of local industry. This kind of

investment would also have served as an effective means for Shell to disperse the benefits of its opera tions more generally among the local populations.5

As we ethically consider the practices of interna

tional businesses in developing countries, it is useful to recognize that the forms of commerce that ini

tially have the greatest sustained impact on overall

economic development are local rather than inter

national. Overall, national or regional economies

grow as they find ways of encouraging trade be tween - and, therefore, the development of

? varied

enterprises, which are both rural and urban; agri cultural, artisan, and retail; manufacturing and

service-oriented. Economic development in most

currently industrialized areas began as local com

merce expanded, as villages became interconnected

by trade, new workshops and businesses were

established, and the flow of goods and services grew in size and diversity (Braudel, 1984; Weber, 1927/

1961). International businesses are more likely to

foster local commerce and thereby genuine eco

nomic development to the degree that they have in

various ways become integrated in local economies. To the degree that these businesses act as self-sufficient

enclaves, they may create the appearance of devel

opment by generating increases in per capita income, without significantly affecting overall growth in

productivity. In the process, these enterprises have

often aggravated inequalities and social tensions.

Viewed from this perspective, enclave businesses

promise, but do not deliver, genuine economic

development.

What are the best ways of managing the social disruptions that typically accompany economic development?

What responsibilities do international

businesses have with respect to this question?

Industrialization and marked economic development have frequently occasioned dramatic social changes and various expressions of social conflict. Whether

we review the history of industrialization in Europe or

Japan, or examine contemporary instances of

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Business in Developing Areas 93

economic development in newly industrializing areas, we can see many different ways in which these

economic changes have given rise to diverse forms of

social disruption and social conflict.

What responsibilities do international businesses

have with respect to the social disturbances that

accompany the economic development their oper ations help to foster? To what extent do the

responsibilities for responding to, and managing, these disturbances - typically embodied in labor

disputes, ethnic rivalries, and social class conflicts -

remain within the exclusive charge of governments?

Clearly, international businesses are responsible to

the degree that their own operations occasion social

disturbances and tensions. We can cite a number of

examples which we have learned about as a result of

the research our group has undertaken. By its policy of paying its expat executives exceedingly higher salaries, the cell phone company, Mobile Telecom

munications Network, aggravated tensions within its

workforce in Uganda (Mutoigo and Sejjaaka, 2004). As Rio Tinto moved to establish a new mining

operation along the southeast coast of Madagascar, it

recognized that this initiative would likely give rise

to a disturbing speculative migration, with many more people arriving to seek work than the com

pany could employ (Bird, 2004c). When The Body

Shop contracted with certain groups among the

Kayapo people of the Amazon to produce Brazil nut

oil, it exacerbated resentments among those who did not benefit and indirectly encouraged consumer

behaviors which other locals found disruptive (Bird,

2004b). By calling upon distrusted regional police to

help address its security needs, Shell in Nigeria

aggravated ethnic tensions when the police overre

acted to particular public protests (Bird, 2004a).

Many other examples like these might be cited. The

point is that often, as a result of their ordinary business practices, international firms

occasion con

flicts and aggravate social tensions, which they should seek to manage and ameliorate, often by

simply learning from their experiences and modify

ing their operations. Sometimes firms aggravate social tensions as a

result of directly illegal or questionable practices. For

example, many international firms operating in

developing areas have engaged in bribery, extortion, or mispricing. By means of these practices, consid

erable wealth that might benefit the people in

developing countries is redirected to the advan

tage of particular officials, executives, and traders.

Raymond Baker has estimated that developing countries altogether lose almost half a trillion dollars

yearly as a result of these practices. It may be that

Baker overstates the amounts involved. In any case,

these practices remain wide-spread, especially in the

form of abusive transfer pricing, by which businesses overstate the cost of international transfers within

their firms and thereby greatly reduce the taxes they pay, and in the form of overstating or understating, the invoiced cost of imported and exported goods in

order to pocket the difference. These practices aggravate inequalities and deprive governments of

taxes that might fund public projects (Baker, 2005). Businesses may not be called upon to rectify social

problems they do not directly occasion; they can,

however, be expected to address social problems

they exacerbate of the sort we have just reviewed.

They can also be expected to engage on issues such as aggravated tensions between social groups, about

which they can make a difference, positively or

negatively, by what they do or fail to do. For

example, international businesses in both Malaysia and South Africa can actively support or seek to

evade affirmative-action laws in these countries. By

actively supporting these laws, firms work to reduce

inequalities which continue to occasion social ten

sions. International businesses in Fiji might explore ways to take the initiative along these lines in this

country where ethnic relations have become aggra vated between indigenous Fijians and the Fijian descendents of immigrants from South Asia.

What are the fundamental responsibilities of national governments with respect to economic development? What

responsibilities do international businesses

have with respect to these governments?

Whether and how well low-income countries

develop their economies depends in large part on the

performance of their governments. For example, the

economies of a number of East Asian countries grew

steadily over the past generation in part because the

national governments actively guided their econo

mies. As the subsequent article on Malaysia argues, and as J. Smucker demonstrated in a previous article

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94 Frederick Bird

based on related research on businesses in South

Korea, these governments were strong, bureau

cratically-administered, and effectively financed

(Smucker, 2004). In contrast, the economies of a

number of Sub-Saharan African countries languished during the same period in part because their gov ernments were weak, administered often by auto

cratic leaders and cronies, and underfinanced

(Easterly, 2006; Klitgaard, 1990; Wade, 1990). What specific responsibilities do international

businesses have with respect to how well the host

governments in developing countries govern? The

standard answer is that these businesses should

comply with local laws, pay their fair share of taxes, neither attempt bribing nor yield to extortion, and

avoid directly attempting to shape political processes. Likewise, businesses should not seek to overthrow

governments, as the United Fruit Company did in

Guatemala in the 1950s. Furthermore, businesses

should not bribe public officials, as Lockheed did in

Japan in the 1970s. While this answer is adequate, it is still overly simple. It fails to call attention to

exceptional cases, where businesses might actively seek to oppose governments operating outside their own mandates, like the Indonesia government in the

late 1990s as it became increasingly corrupt. This

standard answer also fails to take account of the

multiple ways in which international firms are often

engaged with host governments as contractual

partners and suppliers and may, therefore, be obliged to question or oppose government practices that

undermine their basic business interests. For exam

ple, as a contractual partner with the government of

Sudan, the Talisman Oil Company could legiti

mately oppose the government's conduct of the war

against its southern regions because public revela

tions of its attacks on civilians adversely affected

price of Talisman shares.

In addition to following the standard answer,

international businesses in developing countries are

directly called upon to support efforts that have the

effect of strengthening the rule of law7 and rule

ordered civic administrations. These are indeed public

goods, which work to provide a number of services,

including public order and security, as well as the

regulations and institutions that allow markets to

operate, contracts and property rights to be recog

nized and enforced, and physical and social infra structures to be developed and protected. These

public goods establish the social and economic spaces in which businesses can trade, invest, borrow, and

produce with a reasonable degree of security and

predictability.6 What responsibilities do international businesses

have where developing countries are governed by corrupt, autocratic, or oppressive regimes? This

question has been raised at various times with respect to international businesses in nations such as Sudan,

apartheid-ruled South Africa, Zimbabwe, Myanmar, and Haiti, where governments have overtly violated the human rights of their own citizens. These are, to

be sure, difficult situations. It is important, never

theless, to recognize that international businesses in

these settings have a number of options lying bet ween extremes of silently and perhaps complicitly acquiescing and completely divesting. The range of viable alternatives may well be limited. Still, like the firms that signed the Sullivan Principles during the

Apartheid era in South Africa, they can civilly not

comply with, and voice public opposition to, tar

geted oppressive laws (Sethi and Williams, 2001). Like John Kamm, an executive with long experience doing business in China, they can personally and, in

Kamm's case with regard to political prisoners, successfully, voice their concern regarding human

rights abuses (Schoenberger, 2000, pp. 192-197).

They can lobby these governments. They can ally themselves with civil society groups and like-minded businesses to publicize specific government prac tices. Whether these alternative actions are viewed as

politically viable compromises, or cases of firms

allowing themselves to become indefensibly com

promised, depends both on larger strategic assess ments of their role as businesses in developing areas, and their own judgments regarding the possibilities for historical change. Many international firms

stayed the course in developing areas like South Africa during the Apartheid era because they be lieved that their continued roles both as employers and as dissenters were especially important. A

number of firms have elected to continue their

operations in China, despite human rights abuses and

censorship, not only because of the economic

opportunities there but also because they believe that over the long haul they might help to transform the

country's business culture in constructive ways

(Santoro, 1999). Although Yahoo, Google, and Microsoft over the short term have recently agreed

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Business iu Developing Areas 95

to comply with China's oppressive censorship laws with respect to their services available inside China,

they have not yielded to these laws in their external

operations, which are still accessible, although not

easily, by millions of Chinese. Over the long term,

they assume that the Internet itself will introduce an

ethos that is eventually inimical to censorship. Correspondingly, these businesses have defended their agreements with the Chinese government as a

tactical move and only a temporary compromise (Le Menestrel et ah, 2002).

Conclusion

International businesses operating in developing countries face a number of ethical challenges that arise especially from working in these areas. They are

in position to contribute toward the overall eco

nomic development of these areas, depending on

how they conduct their operations; but these com

panies can also aggravate development, and deplete natural and human resources. The history of inter

national businesses in developing areas has been uneven.

Many such firms have exploited these areas,

enriching their local partners while leaving the

country as a whole poorer. They have evaded taxes, exacerbated ethnic tensions, despoiled environ

ments, and worked to corrupt local governments.

However, many international businesses in devel

oping countries have acted in constructive ways:

they have helped to upgrade the skills of their

workers, transferred relevant technologies, utilized local suppliers, and paid fair taxes.

In this article, I have considered the strategic options feeing international businesses in economi

cally developing areas by looking at four broad

questions related to the ethics of development. I

have correspondingly argued that these firms are

especially called upon to foster sustainable economic

development for the areas in which they find themselves. This is the primary ethical good which these firms are challenged to pursue. They should

pursue this good by working to augment the pro ductive capabilities of developing areas

- that is, their

capacity insofar as possible to make more effective, sustainable use of natural, productive, human, social,

and financial assets. I have argued as well that these firms might best foster economic development by

working to encourage and develop local and re

gional trade (as opposed to international trade). Hence, insofar as possible, these firms are challenged not to act as isolated enclaves but as nodes within

growing webs of local commerce. I have also argued that these firms are ethically challenged to find useful

ways of responding to the social tensions and con

flicts that typically accompany processes of economic

development. Finally, these businesses were chal

lenged as well to find fitting ways to manage their

often morally ambiguous relationships with weak,

corrupt, or autocratic local governments.

As they operate in economically developing areas, international businesses are still called upon to

comply with those ethical standards that define

basic moral obligations. These are the kinds of

standards spelled out in industrial and company codes, as well as in the Global Compact. They are, for example, expected to respect the human rights of their workers, not offer bribes, protect the

environment, and act in keeping with relevant

laws. However, in addition to these standards of

conduct, they are also ethically called upon to work so as to realize relevant moral ends. In particular,

they are called upon to operate in ways that

enhance the possibilities for economically under

developed areas

- areas with high poverty rates

- to

grow economically as well.

Notes

1 In this article I use the term "international business"

to refer to all internationally engaged firms, whether

they be large multinational enterprises, partners of these

organizations, suppliers to businesses located external to

the developing areas in question, or local firms selling

internationally (as well as domestically). Other firms involved in extractive industries, such as

Shell in Nigeria and Rio Tinto in Madagascar, examined

in previously published case studies, laced the equivalent

challenge: given that their operations have functioned so

as to deplete the natural wealth of these countries, in

what ways can they, and have they, operated so as to

add wealth in other forms to compensate for this loss?

To the extent that firms primarily orient their strate

gies to develop their assets rather minimize their costs,

they need to review their practical accounting processes so that they can roughly monitor and assess the extent

and changes in their overall assets, gauged in terms of

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96 Frederick Bird

the productive, financial, human, social, and natural

resources with which they are working. 4 As illustrated by practices of businesses like Grand

Minier in the Congo and the United Fruit Company in Central America, large international firms have often in

vested considerable amounts developing infrastructures for

their own enclaves, including the company towns, like

Elizabethville in the Congo (Drohan, 2003, ch. 4 and 7). Shell's failure to take advantage of these possibilities

may be explained in part by the fact that Shell did not

really consider this possibility because it had already found ways of meeting its

own electrical energy by

diverting some associated natural gas to its own genera

tors (Bird, 2004a). 6

The development of these institutions and their

importance for economic development in late medieval

Europe is effectively examined in a recent book by

Avner Grief (2006).

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Department of Political Science,

University of Waterloo, 200 University Avenue West, Waterloo,

ON N2L 3 Gl, Canada

E-mail: fbird@uwaterloo. ca

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