daniels ib11 ch05

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International Business

Chapter Five

Globalization and Society


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Chapter Objectives

To identify problems in evaluating the activities ofMNEs

To evaluate the major economic impacts of MNEson home and host countries

To establish the foundations for responsiblebehavior

To discuss some key issues of globalization and

societyethics and bribery, the environ-ment,pharmaceuticals, and labor issues

To examine corporate responses to globalization

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Introduction

Multinational enterprises (MNEs) have their greatest

impact on countries when they engage inforeign

direct investment (FDI) via wholly-owned subsidiaries

and/orjoint 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 thatan organization must satisfy to survive in the longrun,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]

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Advocates ofcorporate social responsibility (CSR)believe that capitalism fails to serve the publicinterest and that managers must be pressured to act

responsibly. Others argue that:

managers are best equipped to serve the interests oftheir shareholders and

governments should deal with social issues andexternalities whenever private sector benefits and costsdiffer 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 tradedeficitby:

-reducing its capital reserves-attracting an influx of capital via the receiptof foreign direct investment

-the purchase of public or private debt by foreigngovernments or individuals

-the receipt of unilateral transfers (e.g.,foreign aid)

Ultimately, one countrys deficit is another countrys surplus.

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Calculating the Balance-of-Payments

EffectsB = (m m1) + (xx1) + (c c1)

where B = balance-of-payments effect

m = import displacementm1= import stimulus

x = export stimulus

x1 = export reduction

c = capital inflow for other than importand export payments

c1 = capital outflow for other than importand export payments

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Host Country BOP Effects

The net import effect (m m1) is positive if the FDIresults in the substitution of local production forimported products and is negative if it results in anincrease in imports.

The marginal propensity to import represents thefraction of an increase in imports that are due to an

increase in income.

The net export effect (xx1) is positive if the FDI

results in the generation of exports but negative if itresults in a decline.FDI may also stimulate home country exports ofcomplementary products to the host country.

[continued]

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Net capital flows (c c1) are difficult to assessbecause of the time lag between

(i) the outward flow of investment funds and

(ii) the subsequent inward flow of remittedearnings from that investment.

Although initial capital flows to the host country arepositive, they may be negative in the long run if capitaloutflows eventually exceed the value of the investment.


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Selected Economic Growth and

Employment Effects of FDI Home Country LossesFDI outflows may create jobs

abroad at the expense of jobs in the home country.

Host Country GainsFDI inflows may result in the transfer

of capital, technology, and/or managerial expertise, andwell as the creation of new jobs.

Host Country LossesFDI inflows may:

cream off premium resources

drive up local labor costsdisplace domestic investment

disadvantage local competitors

destroy local entrepreneurship

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Cultural Foundations of Ethical

Corporate Behavior

Cultural relativism holds that ethical truths dependupon the groups subscribing to them; thus,intervention in local issues and traditions byoutsiders is clearly unethical.

Cultural normativism holds that there are universalstandards of behavior that everyone should follow;thus, non-intervention in local violations of globalstandards 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 andpublicize corporate practices in order to:

educate managers about the environmental and economicconsequences 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 universallyaccepted and observed.

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Legal Foundations of Ethical Corporate

Behavior

Ethics teaches that people have a responsibilityto do what is right and to avoid doingwhat is wrong.

The appropriateness of behavior can bemeasured in the sense that individuals andorganizations must seek justification for theirbehavior, 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 precedentthan 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

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 govern-ment of the application of its laws to the foreignoperations of its domestic firms

In cases of health and safety standards, differences may

not be insurmountable, but in other instances, differencesin home- and host-country laws may pose challengingconflicts.

Externalities: the by-products of activities thataffect the well-being of people and/or theenvironment

Although externalities are not reflected in standard costaccounting practices, they must be included in thedetermination of stakeholder value.

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Ethics and Bribery

Briberyconsists of payments, or promises to pay cashor something else of value, to public officials and/orother 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 firmsthat are quoted on any U.S. stock exchange

was extended in 1998 to include bribery by foreign firmsoperating in U.S. territory

Bribery affects the performance of countries and companies alike.

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Multilateral Efforts to Confront Bribery

Transparency Internationals Business Principles forConfronting Bribery(2003)

The OECDs Convention on Combating Bribery of

Foreign Public Officials in International BusinessTransactions (1997)

The revised OECD Guidelines for Multinationals

The ICCs 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 Nationalityof 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 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 3.515. 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 5-21


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Ethical Behavior and Environmental

Issues Sustainability: meeting the needs of the present without

compromising the ability of future generations to meet theirown needs, while taking into account what is best for peopleand for the environment

The Kyoto Protocol: signed in 1997, the Protocol is anextension of the UN Framework Convention on ClimateChange that obligates signatory countries to reduce their

greenhouse gas emissions to 5.2 percent below 1990 levelsbetween 2008 and 2012

Global warming results from the release of greenhouse gases that trap heat in theatmosphere, rather than allowing the heat to escape.

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Ethical Dilemmas and Pharmaceutical

Sales

Research-based pharmaceutical firms sell products at high prices solong as their products are covered by patents.

Legal generic products comply with patents while allowing for thepurchase 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 facinghealth crises to either produce or import generic products.

Governments and private foundations enable countries to issuebonds to generate funds needed to purchase vaccines via the

International Finance Facility for Immunization.

Tiered pricing: consumers in industrial countries pay market prices forproducts, 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

- child labor- working conditions

- working hours

- freedom of association

The Ethical Trading Initiative Base Code focuses upon the employmentpractices 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 becauseof hazards, sexual exploitation, trafficking, and/or debt bondage

Those who argue in favor of child labor claim that in manyinstances, children are better suited to perform certain tasksthan adults, and that if the children were not employed, theywould in fact be worse off.

While some firms simply avoid operating in countries wherechild labor is used, other firms work to establish responsibleoperating 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 CodeETI is a British-based organization that focuses on the ethical employment

practices of MNEs. Members include representativesfrom 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

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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 withwherever the firm operates

communicate the code to all employees within theorganization, 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 expertise,

it is also a center of controversy regarding its costs

and benefits to home and host countries andother 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 behaviorsays that firms can operate according to local laws,the ethical approach says that firms should dowhatever 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 isthe role of government to deal with the externalities

associated with corporate behavior.

daniels ib11 ch05

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