International Business Chapter Five Globalization and Society

Chapter Objectives To identify problems in evaluating the 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 environ-ment, pharmaceuticals, and labor issues To examine corporate responses to globalization

Introduction Multinational enterprises (MNEs) have their greatest impact on countries when they engage in foreign direct investment (FDI) via wholly-owned 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.

Fig. 5.1: Home and Host Country Influences on Companies’ Use of FDI

Trade-offs among Constituencies Stakeholders, i.e., the collection of constituencies that an organization must satisfy to survive in the long run, include: shareholders employees customers suppliers society In the long run, the aims of all stakeholders must be adequately met or none will be attained. [continued]

Advocates of corporate social responsibility (CSR) believe that capitalism fails to serve the 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

Fig. 5.2: Resources and Possible Contributions of MNEs

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.

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

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]

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.

Selected Economic Growth and Employment Effects of FDI 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

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.

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: employment practices consumer protection environmental protection political activity human rights in the workplace. No set of workable corporate guidelines is universally accepted and observed.

Legal Foundations of Ethical Corporate Behavior Ethics teaches that people have a 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.

The Insufficiency of the Legal Argument Everything that is legal is not necessarily ethical. The law is slow to develop in emerging areas of 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.

Other Legal Issues Extraterritoriality: the extension by a govern-ment 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.

Ethics and Bribery Bribery consists of payments, or promises to pay 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.

Multilateral Efforts to Confront Bribery Transparency International’s Business Principles for Confronting Bribery (2003) The OECD’s Convention on Combating Bribery of 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)

Fig. 5.4: Likelihood of Paying Bribes Abroad by Nationality of Companies

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 SCORE RANK/COUNTRY SCORE 1. Finland 9.7 26. Botswana 6.0 2. New Zealand 9.6 38. South Africa 4.8 5. Singapore 9.3 46. Brazil 4.0 11. United Kingdom 8.6 54. El Salvador 3.6 12. Canada 8.5 57. China 3.5 15. Germany 8.2 71. India 2.7 17. United States 7.6 79. Russia 2.3 18. Chile 7.5 84. Bolivia 2.0 21. Japan 7.1 90. Nigeria 1.0 Source: Transparency International

Ethical Behavior and Environmental Issues Sustainability: meeting the needs of the present without 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.

Ethical Dilemmas and Pharmaceutical Sales Research-based pharmaceutical firms sell products at high 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 Intel-lectual 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.

Ethical Dimensions of Labor Conditions International labor issues that firms, governments, trade unions, and NGOs must deal with include: - fair wages - 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.

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 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.

Fig. 5.6: Pressures for Ethical Behavior of Companies on Issues Related to Workers in the Global Supply Chain

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. Employment is freely chosen. 2. Freedom of association and the right to collective bargaining are respected. 3. Working conditions are safe and hygienic. 4. Child labor shall not be used. 5. Living wages are paid. 6. Working hours are not excessive. 7. No discrimination is practiced. 8. Regular employment is provided. 9. No harsh or inhuman treatment is allowed. Source: Ethical Trading Initiative, “Base Code”

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

Implications/Conclusions While FDI is a major source of capital and 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]

Whereas the legal approach to responsible 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 share-holders, but it is the role of government to deal with the externalities associated with corporate behavior.