Business Studies
HSC Course
Topic 5:
Section 5.5:
Global Business
Management Responsibility in a Global Environment
Section Overview:
5.5.1
Ethical practice
– tax havens and transfer pricing
– minimum standards of labour
– dumping illegal products
– ecological sustainability
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Section 5.5
Management Responsibility in a Global Environment
5.5.1 Ethical Practice
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Tax Havens and Transfer Pricing
Minimum Standards of Labour
Dumping Illegal Products
Ecological Sustainability
As business becomes increasingly globalised, ethical issues that affect business in the
international arena have also become increasingly important. But the question of ethics is
not clear cut. Cultural differences often lead to ethical problems, and often there are no
right or wrong answers. Acceptable behaviour in one culture may be seen as unethical in
another. This creates dilemmas for managers in foreign markets, as they need to consider
the ethics of the host nation and those of their home country.
A)
Tax Havens and Transfer Pricing
Most, if not all, businesses want to maximise their after-tax profit. Two common
methods used by international businesses to reduce their overall tax payments are
tax havens and transfer pricing.
TAX HAVENS are countries that have very low corporate tax rates, or tax
exemptions on certain types of business activities. For a relatively small fee, a
transnational corporation can set up a wholly owned subsidiary in a tax haven. By
manipulating payments such as dividends, interest, royalties and capital gains
between its various subsidiaries, the business diverts income from subsidiaries in
high-tax countries to the subsidiary operating in the tax haven. For Example:
Hoyts takes advantage of a minimum tax rate of 2.5% compared with a corporate tax
rate of 36% in Australia.
TRANSFER PRICING is a method of selling a good from a business to one of its
subsidiaries in such a way so as to lower their tax burden. There has been increasing
regulation of transfer pricing practices by governments, and many now regulate
internal company pricing practices by giving products approximate transfer prices
based on their free-market price. This is called arm’s length pricing.
The utilisation of tax havens and transfer pricing is legal, but is it ethical? A
transnational corporation’s failure to pay its fair share of tax in countries in which it
operates, while getting the benefits of government provided infrastructure such as
power supplies and transport networks, is considered to be unethical.
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Section 5.5
B)
Management Responsibility in a Global Environment
Minimum Standards of Labour
A transnational corporation can set workplace standards in its foreign subsidiaries
according to a few basic rules.
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Firstly, it may decide to adopt local standards, following the practices
established in each country. This would result in compliance with local laws,
but no effort to establish consistency among countries.
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Secondly, it may set a single global standard, offering the same working
conditions, safety standards, wages and benefits everywhere in the world.
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Finally, a business could combine elements of both; that is, establish a global
minimum set of standards, and adapt to local standards only if they are set
above the global minimum.
Transnational corporations recognise that by exploiting low workplace standards in
one country, they can ruin a reputation and risk entry to new markets.
C)
Dumping Illegal Products
Dumping occurs when a business sells its goods or services overseas at artificially
low prices, hoping to put competitors out of business. Transnational corporations,
with greater financial resources than domestic businesses, can often afford to make
the short-term losses associated with dumping, to gain a long-term market.
Another form of dumping is when businesses take advantage of differences in
regulations between countries to sell unsafe products that would be illegal elsewhere.
Developing nations in particular, would be more likely to accept hazardous goods
like toxic waste in order to earn foreign exchange.
D)
Ecological Sustainability
ECOLOGICAL SUSTAINABILITY is the idea that natural resources should be
used to meet the needs of the present generation without compromising the needs of
future generations. In the past, very little consideration was given by businesses to
the ecological sustainability of their practices. However, as public interest in
environmental issues has grown, an increasing number of global businesses are
starting to clean up their act. Many businesses now use an image of being
‘environmentally friendly’ as a marketing tool to attract more customers.
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Section 5.5
Management Responsibility in a Global Environment
DEFINITIONS:
Ecological Sustainability
The idea that natural resources should be used to meet the
needs of the present generation without compromising the
needs of future generations.
Tax Havens
Countries that have very low corporate tax rates, or tax
exemptions on certain types of business activities.
HOMEWORK ACTIVITIES:
Activity 1:
Complete the Activities Questions 1 – 3 on P.510 of the text.
Activity 2:
Read and complete the Case Study “Levi Strauss” on P.511/512 of the
text.
Activity 3:
Read and complete the Case Study “Nike:
P.514/515 of the text.
Activity 4:
What are TWO ethical dilemmas faced by businesses in foreign countries?
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Best foot forward?” on
June 2004