978-0134200057 Chapter 5 Lecture Notes

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CHAPTER FIVE

GLOBALIZATION AND SOCIETY

OBJECTIVES

5-1 Describe the trade-offs among different stakeholders in MNE activities

5-2 Evaluate the major economic effects of MNEs on home and host countries

5-3 Explain the broad foundations of ethical behavior

5-4 Identify the cultural foundations of ethical behavior

5-5 Illustrate how ethical behavior is affected by different legal attitudes

5-6 Show how corruption and bribery affect and are affected by cultural, legal, and political

forces

5-7 Summarize what the roles are of governments and companies in resolving environmental

issues

5-8 Demonstrate how global labor issues need to be addressed by MNEs to their stakeholders

5-9 Restate how codes of conduct can help MNEs respond to concerns by stakeholders over

responsible corporate behavior

CHAPTER OVERVIEW

In this chapter, we’ll examine how globalization affects society and managers’ judgments as

they interact with different laws and cultures and try to be socially responsible. The impact of

MNEs on the countries where they operate is explored. The cultural and legal foundations of

ethical behavior are examined, and environmental and global labor issues are highlighted. The

chapter concludes with a brief discussion of the need for corporate codes of ethics.

CHAPTER OUTLINE

OPENING CASE: ECOMAGINATION AND THE GLOBAL GREENING OF GE

In 2005, CEO Jeffery Immelt of GE announced a new and ambitious strategy designed to

demonstrate that an ecologically conscious conglomerate could cultivate the bottom line while

doing its duty toward the global environment. GE surprised both investors and industrial

customers who had long seen GE as an ally in the struggle against environmental activists. The

initiative, called Ecomagination, consisted of three parts: 1) reducing greenhouse emissions, 2)

doubling investment in R&D in “clean” technologies, and 3) increasing revenues from those

same technologies. A new initiative added two additional commitments: 4) reduce global water

use and 5) keep public informed. With half its markets outside the United States and many

countries already enforcing limitations stipulated by the Kyoto Protocol, GE felt it was pursuing

its own best interests to develop a greener company. GE feels that markets exist for cleaner

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technology and that it can not only help the environment but also strengthen its strategic position

with such a move. The plan has been met with mixed reactions and the big question is: Can GE

bring about sufficient ecological and economic results to satisfy a worldwide constituency of

customers, shareholders, governments, and societies?

I. INTRODUCTION

Doing business abroad is not easy. The greater the “distance” from one’s home country, the

more complicated it is to do business. Distance can be described in many different ways, but

one way to identify it is the acronym CAGE: cultural (also known as psychic distance),

administrative (such as political and institutional policies), geographic, and economic.

II. STAKEHOLDER TRADE-OFFS

To prosper a company must satisfy different groups of stakeholders, including shareholders,

employees, customers, suppliers, and society at large. The basic idea of focusing on

stakeholders more broadly is that companies can consider various socially important groups

when making decisions.

III. THE ECONOMIC IMPACT OF THE MNE

MNE’s activities can also affect the operating environment, such as through

corruption and bribery, environmental impact (i.e., air and water pollution), and labor

policies. It is hard to determine whether or not the actions of MNEs affect societal

conditions. Opponents of FDI persist in trying to link MNE activities to such problems in

host countries as inequitable income distribution, political corruption, environmental

debasement, and social deprivation. In contrast, proponents of MNE activities tend to

assume a positive link between their activities and such effects in recipient countries as

higher tax revenues, increased levels of employment and exports, and greater innovation.

A. Balance-of-Payments Effects.

This refers to trade and capital flows that result from FDI. Under different conditions, these

effects may be positive or negative, either for the host country or the home country. The

formula to determine the balance-of-payments effect is simple but the data used must be

estimated and are subject to assumptions. On the import side, the balance-of-payments is

positive if the FDI results in a substitution for imports and negative if it results in an increase

in imports. The balance-of-payments effects in terms of capital flows for FDI are usually (1)

positive for the host country initially and negative for the home country and (2) negative for

the host country and positive for the home country later.

B. Growth and Employment Effects.

In contrast to balance-of-payments effects, MNE effects on growth and employment don’t

necessarily amount to zero-sum games (where gains must equal losses) between home and

host countries because MNEs may use resources that were unemployed or underemployed.

IV. THE FOUNDATIONS OF ETHICAL BEHAVIOR

Because ethical behavior is rooted in both cultural and legal traditions that vary from one

country to another, dilemmas often arise. There are multiple approaches to the analysis,

including: 1. Teleological approach – decisions are based upon the consequences of the

action, 2. Utilitarianism – an action is deemed right if it produces the greatest amount of

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good for the greater number of people, and 3. Deontological approach – moral judgments

are made independent of consequences.

A. Why Do Companies Care about Ethical Behavior? There are cultural and

legal reasons for companies to behave ethically and individuals have high ethical

standards. In addition, ethical behavior can help achieve a competitive advantage and

avoid the perception of being irresponsible.

V. THE CULTURAL FOUNDATIONS FOR ETHICAL BEHAVIOR

A. Relativism versus Normativism.

Beliefs may vary because of different family and religious teachings, different laws and

social pressures, different observations, experiences, and perceptions, and even different

economic circumstances. Within a country, an individual’s values may differ from

his/her employer’s policies, which may differ from prevalent societal norms or laws. At

the international level, cultural complexity increases geometrically. While many actions

elicit universal agreement on what is clearly right and wrong, others are less clear.

Relativism holds that ethical truths depend upon the groups subscribing to them; thus,

intervention in local issues and traditions by outsiders is clearly unethical. On the other

hand, normativism holds that there are universal standards of behavior that everyone

should follow; thus, nonintervention in local violations of global standards is clearly

unethical.

B. Walking the Fine Line between Relativism and Normativism.

Many argue that managers the world over must exhibit ordinary decency, i.e., principles

of honesty and fairness. In addition, they argue that MNEs are obligated to set good

examples that can serve as the standards for responsible behavior. From a competitive

standpoint, it is argued that responsible acts create strategic and financial success because

they lead to trust, which in turn leads to commitment. In addition, many multilateral

agreements exist that can aid in ethical decision-making; they deal primarily with

employment practices, consumer and environmental protection, political activity, and

human rights in the workplace. Still, no set of workable corporate guidelines is

universally accepted and observed.

VI. THE LEGAL FOUNDATIONS FOR ETHICAL BEHAVIOR

Ethics teaches that people have a responsibility to do what is right and to avoid doing what

is wrong.

A. Legal Justification: Pros and Cons.

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 (many of which are universal) and legal principles. However,

opponents of legal justification feel that ethical behavior is not sufficient because: (i)

everything that is legal is not necessarily ethical, (ii) the law is slow to develop in

emerging areas of concern, (iii) the law is often based on moral concepts that cannot be

separated from legal concepts, (iv) the law may need to be tested by the courts, and (v)

the law is not efficient in terms of achieving ethical behavior at a minimum cost.

Nonetheless, the law does serve as a useful basis for examining ethical behavior because

it embodies cultural values. Proponents of the legal-justification standard state that there

are several good reasons for complying with it: (i) the law provides a basic guide for

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proper conduct, (ii) the law provides a clearly defined set of rules, and when followed

they establish a good precedent, (iii) the law contains enforceable rules that apply to

everyone, and (iv) the law reflects careful and wide-ranging discussions.

VII.CORRUPTION AND BRIBERY

Bribery is one facet of corruption. The determinants of corruption include cultural, legal, and

political forces. Bribery consists of payments, or promises to pay cash or something else of

value, to public officials and/or other people of influence. It affects the performance of countries

and companies alike. Anecdotal information indicates that in recent decades, questionable

payments by MNEs to government officials have been prevalent in both industrial and

developing countries.

A. Petrobras: Corruption in Brazil with a Global Twist.

Petrobras, the Brazilian national oil company, which has resulted in the disclosure of at

least $2 billion in bribes, kickbacks, and money laundering, involving payments to

company executives, the ruling Brazilian Worker’s Party, and more than 50 sitting

politicians and numerous companies trying to secure lucrative contracts with Petrobras.

On the international side, British Engineering group Rolls-Royce was also accused of

paying bribes to secure contracts.

B. The Consequences of Corruption.

High levels of corruption tend to correlate with lower rates of economic growth as well as

lower levels of per capita income. Corruption may also erode the legitimacy of a

government. Both the legal definition of a bribe and the likelihood of paying bribes

abroad vary by nationality.

C. What’s Being Done About Corruption?

Efforts to slow corruption in international business practices can be seen at the global,

regional, and national levels. Multilateral efforts to confront bribery include the accords

established by OECD (Organization for Economic Cooperation and Development), the

ICC (International Chamber of Commerce), and the UNCAC (United Nations

Convention Against Corruption). The problem is that none of the conventions have the

force of law behind them. The EU does not have specific anticorruption legislation, but it

encourages member nations to adopt high standards and follow them. The U.S. Foreign

Corrupt Practices Act (FCPA) is an example of the national approach. The FCPA

outlaws bribery by U.S. firms no matter where they do business. Although the rules are

not always clear, for example, some gift practices have been called into question.

Governments and industries continue to step up their anticorruption response globally.

Another major legislative effort in the United States is the Sarbanes–Oxley Act (SOX).

SOX toughened standards with regard to corporate governance, financial disclosure, and

oversight of accounting and auditing practices. With its passage, the Justice Department

began to use the FCPA more aggressively to combat bribery.

VIII. ETHICS AND THE ENVIRONMENT

Companies that extract natural resources, generate air or water waste, or manufacture

products such as autos that generate pollution need to be concerned with their environmental

impact. Environmental damage can occur from the extraction of resources, some of which

are renewable and some of which are not, and the contamination of the environment via

production processes and the use of pollution-causing products.

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A. What Is “Sustainability”?

Sustainability means 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

society and for the environment.

B. Global Warming and the Paris Agreement on Climate Change.

At the core of the United Nations Climate talks held in Paris in December 2015 is Global

Warming, which results from the release of greenhouse gases that trap heat in the

atmosphere, rather than allowing the heat to escape. The Kyoto Protocol, which was

signed in 1997, committed signatory countries to reducing the emissions to 5.2 percent

below 1990 levels between 2008 and 2012. However, the Protocol did not include rapidly

growing emerging economies like India and China who were two of the biggest polluters,

the United States withdrew its support in 2001, and Canada withdrew from the Protocol

in 2011. However, the Paris Agreement changed everything. The Paris Climate

Agreement involving 187 countries targeted policies to reduce GHG emissions in order to

keep the global average temperature to 2°C above pre-industrial levels.

POINT—COUNTERPOINT: Should MNEs Accept Full Responsibility for the

Unethical Behavior of Their Employees?

POINT: The German auto company, Volkswagen AG, should accept full responsibility for the

unethical behavior of their employees. With such pressure to increase its market share in the

United States, especially in diesel cars, and meet the stringent antipollution requirements set by

the State of California, someone decided to cheat by introducing the ‘defeat” software.

Interestingly, VW also claimed that even though it was violating U.S. regulatory guidelines, it

was not violating European regulatory guidelines.

COUNTERPOINT: While VW obviously must take responsibility for installing the defeat”

software into some of the diesel models it is selling worldwide, it is no excuse for individuals to

act unethically. Individual employees who were engaging in unethical behavior were aware of

their behavior and are ultimately the ones responsible for their actions.

IX. ETHICAL DILEMMAS OF LABOR CONDITIONS

A major challenge facing MNEs today is the labor conditions of foreign workers, whether in

their own offshore operations or their outsourced supply chains. They’re especially critical in

retail, clothing, footwear, electronics, and agriculture—industries in which MNEs typically

outsource huge portions of production to independent companies abroad [see Figure 5.3]. Major

labor issues that MNEs get involved in through FDI or purchasing from independent

manufacturers in developing countries are fair wages, child labor, working conditions, working

hours, and freedom of association.

A. The Problem of Child Labor.

According to the International Labor Organization (ILO), a UN institution, 168 million

children between the ages of 5 and 17 are not legally working worldwide. ILO

guidelines state that children who are at least 12–14 years old may be employed in

“light” work that’s not harmful to their health, is less than 14 hours a week, and doesn’t

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interfere with school. All children under the age of 18 should be protected against the

most abusive labor conditions. For MNEs, the basic challenge is negotiating a global

labyrinth of business environments with different cultural, legal, and political rules than

those they’re used to at home. In addition, they typically rely on local suppliers who are

subject to specifically local pressures. Despite these difficulties, MNEs are not

powerless when it comes to labor-related matters in overseas facilities. Frequently,

MNEs operating in countries with very different labor policies succumb to the pressure

to simply leave the market.

X. CORPORATE CODES OF ETHICS: HOW SHOULD A COMPANY BEHAVE?

Companies face real pressures to act responsibly, yet they don’t always act consistently. A

corporate code of ethics can aid in the consistency of behavior. The United Nations Global

Compact offers ten broad principles that MNEs can adopt.

A. Motivations for Corporate Responsibility. Firms need to act responsibly for at least

four reasons. First, unethical and/or irresponsible behavior could result in legal

headaches, especially in the areas of financial mismanagement and product safety.

Second, such behavior could also result in consumer action (e.g., boycotts), even though

the effectiveness of such actions is unclear. Third, unethical behavior can lower

employee morale. Fourth, the cost to firms of bad publicity can be enormous.

B. Developing a Code of Conduct. A major component of a company’s strategy to realize

ethical and socially responsible behavior across the entirety of its organization is a

corporate code of conduct. External codes provide guidelines, recommendations, and

rules that are issued by entities within society in order to enhance corporate

responsibility, but they are somewhat inconsistent across organizations.

In creating its own code of corporate ethics a firm should: set global policies that must

be complied with wherever the company 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; and report results to its

stakeholders. Generally, codes of conduct address such areas as employment practices,

human rights, standards of ethical conduct, and care of the environment. In addition to

the efforts made by firms themselves to ensure compliance, they may also choose to use

NGOs such as the Fair Labor Association or global audit firms, such as KPMG, to help

monitor their practices.

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