International Business
Chapter Five
Globalization and Society
Chapter Objectives
• To identify problems in evaluating the
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activities of MNEs
To evaluate the major economic impacts of
MNEs on home and host countries
To establish the foundations for responsible
behavior
To discuss some key issues of globalization
and society—ethics and bribery, the environment, pharmaceuticals, and labor issues
To examine corporate responses to
globalization
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Introduction
• Multinational enterprises (MNEs) have their
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•
greatest impact on countries when they engage
in foreign direct investment (FDI) via whollyowned subsidiaries and/or joint ventures.
Although not all MNEs are huge, the sheer size
of many troubles their critics.
The global orientation of MNEs causes many
to believe that they are insensitive to national
(local) concerns.
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Fig. 5.1: Home and Host Country
Influences on Companies’ Use of FDI
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Trade-offs among Constituencies
Stakeholders, i.e., the collection of constituencies
that an organization must satisfy to survive in
the long run, include:
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shareholders
employees
customers
suppliers
society
In the long run, the aims of all stakeholders must
be adequately met or none will be attained.
[continued]
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• Advocates of corporate social responsibility
(CSR) believe that capitalism fails to serve the
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public interest and that managers must be
pressured to act responsibly.
Others argue that:
– managers are best equipped to serve the interests
of their shareholders and
– governments should deal with social issues and
externalities whenever private sector benefits and
costs differ significantly from public sector benefits
and costs
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Fig. 5.2: Resources and Possible
Contributions of MNEs
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Balance-of-Payments Effects of FDI
A country must compensate for a long-term
trade deficit by:
-reducing its capital reserves
-attracting an influx of capital via the receipt
of foreign direct investment
-the purchase of public or private debt by
foreign governments or individuals
-the receipt of unilateral transfers
(e.g., foreign aid)
Ultimately, one country’s deficit is another country’s surplus.
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Calculating the Balance-of-Payments
Effects
B = (m –m1) + (x – x1) + (c – c1)
where B = balance-of-payments effect
m = import displacement
m1 = import stimulus
x = export stimulus
x1 = export reduction
c = capital inflow for other than import
and export payments
c1 = capital outflow for other than import
and export payments
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Host Country BOP Effects
• The net import effect (m – m1) is positive if the
FDI results in the substitution of local production
for imported products and is negative if it results
in an increase in imports.
The marginal propensity to import represents the
fraction of an increase in imports that are due to
an increase in income.
• The net export effect (x – x1) is positive if the
FDI results in the generation of exports but
negative if it results in a decline.
FDI may also stimulate home country exports of
complementary products to the host country.
[continued]
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• Net capital flows (c – c1) are difficult to assess
because of the time lag between
(i) the outward flow of investment funds and
(ii) the subsequent inward flow of remitted
earnings from that investment.
Although initial capital flows to the host country
are positive, they may be negative in the long run
if capital outflows eventually exceed the value of
the investment.
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Selected Economic Growth and
Employment Effects of FDI
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Home Country Losses—FDI outflows may create jobs
abroad at the expense of jobs in the home country.
Host Country Gains—FDI inflows may result in the
transfer of capital, technology, and/or managerial
expertise, and well as the creation of new jobs.
Host Country Losses—FDI inflows may:
cream off premium resources
drive up local labor costs
displace domestic investment
disadvantage local competitors
destroy local entrepreneurship
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Cultural Foundations of Ethical
Corporate Behavior
• Cultural relativism holds that ethical truths
depend upon the groups subscribing to them;
thus, intervention in local issues and traditions
by outsiders is clearly unethical.
• Cultural normativism holds that there are
universal standards of behavior that everyone
should follow; thus, non-intervention in local
violations of global standards is clearly unethical.
While many actions elicit universal agreement on
what is clearly right and wrong, others are less clear.
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The Effects of NGOs and Multilateral
Agreements on Corporate Behavior
• Non-governmental organizations (NGOs) actively monitor
and publicize corporate practices in order to:
– educate managers about the environmental and economic
consequences of corporate operations and practices
– increase shareholder value
• Multilateral agreements aid in ethical
decision-making by dealing with:
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employment practices
consumer protection
environmental protection
political activity
human rights in the workplace.
No set of workable corporate guidelines is
universally accepted and observed.
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Legal Foundations of Ethical
Corporate Behavior
• Ethics teaches that people have a
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responsibility to do what is right
and to avoid doing what is wrong.
The appropriateness of behavior can be
measured in the sense that individuals and
organizations must seek justification for their
behavior, and that justification is a function
of both cultural values and legal principles.
Civil law countries tend to have a large body of law dealing
with business operations; common law countries rely more
on precedent than statutory regulations.
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The Insufficiency of the Legal
Argument
• Everything that is legal is not necessarily ethical.
• The law is slow to develop in emerging areas of
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concern.
The law is often based on moral concepts that
cannot be separated from legal concepts.
The law may need to be tested by the courts.
The law is inefficient in terms of achieving
ethical behavior at a minimum cost.
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Other Legal Issues
• Extraterritoriality: the extension by a government of the application of its laws to the
foreign operations of its domestic firms
In cases of health and safety standards, differences
may not be insurmountable, but in other instances,
differences in home- and host-country laws may
pose challenging conflicts.
• Externalities: the by-products of activities
that affect the well-being of people and/or
the environment
Although externalities are not reflected in standard
cost accounting practices, they must be included in
the determination of stakeholder value.
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Ethics and Bribery
• Bribery consists of payments, or promises to pay
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cash or something else of value, to public
officials and/or other people of influence.
The U.S. Foreign Corrupt Practices Act of 1997:
– outlaws the payment of bribes by U.S. firms to foreign
officials, political parties, party officials, or party candidates
– applies to firms registered in the U.S. and to any foreign
firms that are quoted on any U.S. stock exchange
– was extended in 1998 to include bribery by foreign firms
operating in U.S. territory
Bribery affects the performance of countries and companies alike.
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Multilateral Efforts to Confront
Bribery
• Transparency International’s Business Principles
for Confronting Bribery (2003)
• The OECD’s Convention on Combating Bribery of
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Foreign Public Officials in International Business
Transactions (1997)
The revised OECD Guidelines for Multinationals
The ICC’s Rules of Combat to Combat Extortion
and Bribery (1999)
The UN Convention Against Corruption (2003)
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Fig. 5.4: Likelihood of Paying Bribes
Abroad by Nationality
of Companies
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International Corruption:
A Survey of Business Perceptions
2004 CPI Score:
-relates to perceptions of the degree of corruption as seen by
businesspeople, risk analysts, journalists, and the general public
-ranges between 10 (highly clean) and 0 (highly corrupt)
RANK/COUNTRY
1.
2.
5.
11.
12.
15.
17.
18.
21.
Finland
New Zealand
Singapore
United Kingdom
Canada
Germany
United States
Chile
Japan
SCORE
9.7
9.6
9.3
8.6
8.5
8.2
7.6
7.5
7.1
RANK/COUNTRY
26.
38.
46.
54.
57.
71.
79.
84.
90.
Botswana
South Africa
Brazil
El Salvador
China
India
Russia
Bolivia
Nigeria
SCORE
6.0
4.8
4.0
3.6
3.5
2.7
2.3
2.0
1.0
Source: Transparency International
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Ethical Behavior and Environmental
Issues
• Sustainability: meeting the needs of the present without
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compromising the ability of future generations to meet
their own needs, while taking into account what is best
for people and for the environment
The Kyoto Protocol: signed in 1997, the Protocol is an
extension of the UN Framework Convention on Climate
Change that obligates signatory countries to reduce their
greenhouse gas emissions to 5.2 percent below 1990
levels between 2008 and 2012
Global warming results from the release of greenhouse gases that trap
heat in the atmosphere, rather than allowing the heat to escape.
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Ethical Dilemmas and
Pharmaceutical Sales
• Research-based pharmaceutical firms sell products at high
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prices so long as their products are covered by patents.
Legal generic products comply with patents while allowing
for the purchase of drugs at lower costs; unauthorized
(illegal) generic products may or may not be reliable.
The WTO Agreement on Trade-Related Aspects of Intellectual Property (TRIPs) provides a mechanism for poor
countries facing health crises to either produce or import
generic products.
Governments and private foundations enable countries to
issue bonds to generate funds needed to purchase vaccines
via the International Finance Facility for Immunization.
Tiered pricing: consumers in industrial countries pay market prices
for products, while consumers in developing countries pay lower
(subsidized) prices.
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Ethical Dimensions of Labor
Conditions
International labor issues that firms, governments,
trade unions, and NGOs must deal with include:
- fair wages
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child labor
working conditions
working hours
freedom of association
The Ethical Trading Initiative Base Code focuses upon the
employment practices of MNEs by getting them to first
adopt ethical employment policies and then monitor
compliance with their foreign suppliers.
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Child Labor Issues
• According to the International Labor Organization:
– more than 250 million children between 5 and 17 are working
worldwide
– nearly three-quarters of those children who work are very young
or are working in ways that endanger their health or well-being
because of hazards, sexual exploitation, trafficking, and/or debt
bondage
• Those who argue in favor of child labor claim that in
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many instances, children are better suited to perform
certain tasks than adults, and that if the children were
not employed, they would in fact be worse off.
While some firms simply avoid operating in countries
where child labor is used, other firms work to establish
responsible operating policies in those locales.
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Fig. 5.6: Pressures for Ethical Behavior
of Companies on Issues Related to
Workers in the Global Supply Chain
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Ethical Trading Initiative Base Code
ETI is a British-based organization that focuses on the ethical
employment practices of MNEs. Members include representatives
from companies and trade union organizations.
1.
2.
3.
4.
5.
6.
7.
8.
9.
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 inhuman treatment is allowed.
Source: Ethical Trading Initiative, “Base Code”
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Corporate Codes of Ethics
In creating its code of corporate conduct a firm
should:
• set global policies that must be complied with
wherever the firm operates
• communicate the code to all employees
within the organization, and to all suppliers,
subcontractors, and customers
• ensure that its policies are carried out in all
instances
• report results to its stakeholders
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Implications/Conclusions
• While FDI is a major source of capital and
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expertise, it is also a center of controversy
regarding its costs and benefits to home
and host countries and other stakeholders.
Major challenges facing MNEs include the
globalization of the supply chain, human rights,
employment practices, environmental protection,
and consistent standards of ethical conduct.
[continued]
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• Whereas the legal approach to responsible
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behavior says that firms can operate according
to local laws, the ethical approach says that
firms should do whatever is necessary and
economically feasible to maximize stakeholder
value.
Management is charged with maximizing the
long-term value of the assets of the shareholders, but it is the role of government to deal
with the externalities associated with corporate
behavior.
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