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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.