Ethical Issues in International Business Tuesday, September 27, 2010 Chapter 4: Ethics in International Business

What Is Ethics? Ethics refers to accepted principles of right or wrong that govern the conduct of a person the members of a profession the actions of an organization Business ethics are the accepted principles of right or wrong governing the conduct of business people Ethical strategy is a strategy, or course of action, that does not violate these accepted principles Suppose you’ve been assigned responsibility for hiring people to work in your company’s new factory in Mexico, where wages are considerably lower than they are in your country, and you don’t have to pay benefits. Is your company is taking advantage of the situation. What should you do? Perhaps you should talk to your superiors about providing a more generous compensation package that would still be much lower than what you’d pay in your home country. But, you worry that this could jeopardize your new position. So, you decide just to follow orders, even if you’re not really comfortable with them. This is an example of an ethical dilemma. People involved in business run into ethical situations daily. In international business, they are often magnified because of differences in legal systems, political systems, economic systems, culture, and so on. Ethics refers to the accepted principles of right or wrong that govern the conduct of a person, the members of a profession, or the actions of an organization. Business ethics are the accepted principles of right or wrong governing the conduct of business people. An ethical strategy then, is a course of action that doesn’t violate these principles. Keep in mind that as we discuss ethics, there may be no right or wrong response, and so in some cases, we may raise more questions that we actually answer. September 27, 2011 Ethical Issues

Which Ethical Issues Are Most Relevant To International Firms? The most common ethical issues in business involve: employment practices human rights environmental regulations corruption the moral obligation of multinational companies What are the most common ethics issues for companies? We usually think of issues that involve employment practices, human rights, environmental regulations, corruption, and the moral obligations of companies. Let’s talk about each of these, beginning with employment practices. September 27, 2011 Ethical Issues

How Are Ethics Relevant To Employment Practices? Suppose work conditions in a host nation are clearly inferior to those in the multinational’s home nation Which standards should apply? home country standards host country standards something in between Employment practices frequently present ethical dilemmas. Suppose, as we suggested earlier, work conditions in a host country are inferior to those in the home country. Which standards should you apply--the home country standards or the host country standards? Is it ok to employ minors to work a 50 hour week if it doesn’t violate local laws? Do you have to supply safety gear to employees if it’s not required by law? Nike found itself in the midst of a huge controversy in the mid-1990s when it was reported that the working conditions at some of its sub-contractors were poor. While neither the subcontractor, nor Nike was actually breaking the law, there was strong reason to suspect that workers were being exploited. For example, in one factory in Vietnam, women were paid just 20 cents an hour, well below the living wage of $3 per day, to work with toxic materials six days a week. Nike was forced by public pressure to establish a code of conduct for all of its subcontractors, and implement a monitoring system to ensure that the code was followed. You might notice the similarities in this case to the Management Focus on making Apple’s iPOD. September 27, 2011 Ethical Issues

How Are Ethics Relevant To Human Rights? Basic human rights are taken for granted in developed countries freedom of association freedom of speech freedom of assembly freedom of movement What are the responsibilities of firms in countries where basic human rights are not respected? You may not think much about your human rights—things like freedom of association, freedom of speech, freedom of assembly, and so on are often taken for granted in developed countries. But, it’s important to remember that these freedoms are not respected in many countries. Think about the apartheid system that denied basic political rights to blacks in South Africa, for example, or the ongoing situation in the Darfur region of western Sudan where the Sudanese government has been accused of genocide by the U.S. and other countries. Should companies do business in countries with repressive regimes? Some people argue that the presence of multinational companies actually helps bring change to these countries. Some people believe that change is occurring in China for example, because investments by multinationals are helping to raise living standards. Others, however, argue that some countries like Myanmar, which has one of the worst human rights records in the world, are so brutally repressive that no investment can be justified. In fact, many companies left the country in the mid-1990s because of its dismal human rights. Even so, some companies, like Unocal, ignore these issues as the Management Focus in your text outlines. September 27, 2011 Ethical Issues

Unocal Was it ethical for Unocal to enter into a partnership with a brutal military dictatorship for financial gain? What actions could Unocal have taken, short of not investing at all, to safeguard the human rights of people impacted by the gas pipeline project? California oil and gas enterprise 29% stake in partnership with French company, and two state-owned enterprise from Myanmar and Thailand to build a gas pipeline from Myanmar to Thailand $1 billion project, bring $200 million to Myanmar or 25% of country’s total export earnings Also gas used domestically would increase Myanmar’s generating capacity by 30% Time when a lot of companies were moving out of Myanmar due to dictatorship Project would generate healthy returns for company AND boost economic growth and a better life for Myanmar citizens Unocal also had to go where the gas was, Couldn’t just move facilities Controversy ensued. Under the contract, gov’t had to clear a corridor for the pipeline through rainforest and protect pipeline from govt enemies. Govt forcibly moved villagers, ordered local peasants to work on the pipeline in slave like conditions, refuse suffered retaliation Unocal sued. Judge decided that Unocal could not be held responsible for the actions of a foreign govt against it’s own people. September 27, 2011 Ethical Issues

How Are Ethics Relevant To Environmental Regulations? Some parts of the environment are a public good that no one owns, but anyone can damage The tragedy of the commons occurs when a resource held in common by all, but owned by no one, is overused by individuals, resulting in its degradation What happens when environmental regulations in host nations are far inferior to those in the home nation? Is it permissible for multinationals to pollute in developing countries simply because there are no regulations against it? The state of the environment is currently a hot topic, especially the irreversible damage that manmade pollution is causing. Because many countries are establishing strong environmental regulations to try to limit further damage, companies are having to adopt costly, new measures to abide by the laws. So, new regulations are forcing your company to take costly steps to stay within the law. You know that these regulations haven’t been imposed in some other countries, particularly those that are lesser developed. Should you shift your production to another country where the laws don’t exist, or are only loosely enforced? Your first response might be that the moral and ethical thing to do is to stay home and adopt the costly compliance measures. But, you might worry that competitors that don’t take the high road will have an advantage. This brings up a phenomenon called the tragedy of the commons. It occurs when a resource held in common by everyone, like the ocean or the atmosphere, is overused by individuals, and degraded. What are the social consequences of this? If everyone else is pumping pollutants into the ocean, should you do otherwise? September 27, 2011 Ethical Issues

How Are Ethics Relevant To Corruption? What is corruption? Bribery Gifts Employment Scholarships But, is it permissible for multinationals to pay government officials facilitating payments if doing so creates local income and jobs? What impact does corruption have on an economy? Is it necessary to be ethical when dealing with corrupt government? This is something firms have to consider. Corrupt governments have always been around, and it’s important for international companies to consider their effect on company strategies. At what point does “gift giving” become bribery for example? Well, from a government perspective, bribery shouldn’t be allowed. The CFPOA was passed in 1999, more than 20 years after the U.S. passed the FCPA in 1977. In the U.S., the Foreign Corrupt Practices Act, which was passed in 1977, outlaws the paying of bribes to foreign government officials in order to gain business. The act does allow for facilitating or grease payments which are basically payments that are made to speed up standard procedures. The Organization for Cooperation and Development, or OECD, passed a similar measure in 1997, which obligates member states to make bribery of foreign public officials a criminal offense. Despite laws like these, bribery continues to be a common practice for some firms as the Opening Case on Siemens illustrates. In fact, some economists believe that in certain cases speed payments, or payments made to speed up approval for business investments, can be justified if they enhance public welfare by creating jobs, and so on. Others argue however, that corruption is a little like gambling—it’s hard to stop! If you do it once, you’re likely to do it again. September 27, 2011 Ethical Issues

How Are Ethics Relevant To Moral Obligations? Social responsibility Noblesse oblige But, are multinationals morally required to use their power to enhance local welfare? What are the moral obligations of companies? Do companies have a responsibility to take into account the social consequences of their actions when they make business decisions? Should companies always choose the path that has both good economic and good social consequences? You might answer yes,--firms have a social responsibility simply because it’s the right way to operate. Social responsibility refers to the idea that managers should consider the social consequences of economic actions when making business decisions, and that there should be a presumption in favor of decisions that have both good economic and good social consequences. It is the right way for a business to behave Many people believe that companies need to recognize their noblesse oblige and give something back to the societies that have made their success possible. Advocates argue that businesses need to recognize their noblesse oblige - honorable and benevolent behavior that is the responsibility of successful companies. Give something back to the societies that have made their success possible Noblesse oblige" is generally used to imply that with wealth, power and prestige come responsibilities.  it is sometimes used to summarize a moral economy wherein privilege must be balanced by duty towards those who lack such privilege or who cannot perform such duty. Other companies, however, don’t share this view. September 27, 2011 Ethical Issues