International Business

1
International Business

• Chapter Five
• Globalization and Society

2
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
  societyethics and bribery, the environ-ment,
  pharmaceuticals, and labor issues
• To examine corporate responses to globalization

3
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.

4
Fig. 5.1 Home and Host Country Influences on
Companies Use of FDI
5
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

6

• 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

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Fig. 5.2 Resources and Possible Contributions of
MNEs
8
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 countrys deficit is another
  countrys surplus.

9
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

10
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

11

• 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.

12
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, and well as the creation of
  new jobs.
• Host Country LossesFDI inflows may
• cream off premium resources
• drive up local labor costs
• displace domestic investment
• disadvantage local competitors
• destroy local entrepreneurship

13
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.

14
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.

15
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.

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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
  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.

18
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.

19
Multilateral Efforts to Confront Bribery

• Transparency Internationals Business Principles
  for Confronting Bribery (2003)
• The OECDs Convention on Combating Bribery of
  Foreign Public Officials in International
  Business Transactions (1997)
• The revised OECD Guidelines for Multinationals
• The ICCs Rules of Combat to Combat Extortion and
  Bribery (1999)
• The UN Convention Against Corruption (2003)

20
Fig. 5.4 Likelihood of Paying Bribes Abroad by
Nationality of Companies
21
International CorruptionA 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

22
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.

23
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.

24
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.

25
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.

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Fig. 5.6 Pressures for Ethical Behavior of
Companies on Issues Related to Workers in the
Global Supply Chain
27
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

28
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
  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
  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.