CHAPTER 4
EMPHASIZING INSTITUTIONS, CULTURES, AND ETHICS
CHAPTER OUTLINE
I. OPENING CASE: Emerging Markets: One Rock Formation, Two Countries
A. Eagle Ford shale extends beneath both south Texas and north Mexico, but shale wells
have appeared in numbers only in Texas, not in Mexico.
B. Mexican institutions favor small business, but oil is big business.
1. Most firms (95.5%) in Mexico have 10 or few employees, fewer than any other Latin
American country. Firms in Mexico prefer to stay small to avoid tax and regulatory
intrusion.
II. UNDERSTANDING INSTITUTIONS
A. Definitions
1. Institutions
(a) “Humanly devised constraints that structure human interaction” (North)
(b) “Regulatory, normative and cognitive structures and activities that provide
stability and meaning to social behavior” (Scott)
(c) Institutional framework is made up of formal and informal institutions governing
individual and firm behavior and is supported by three pillars—regulatory,
B. What Do Institutions Do?
1. Key function is to reduce uncertainty
(a) Signal what conduct is acceptable and which is not
(b) Constrain the range of acceptable actions
(c) Reduce opportunism and transaction costs
C. How Do Institutions Reduce Uncertainty?
Chapter 4 Emphasizing Institutions, Cultures, and Ethics
(b) Disadvantage—may cause firms to stick with established relationships
3. An arm’s length transaction refers to a formal, rule-based, impersonal exchange with
3rd party enforcement
4. Institutional transitions defined as fundamental and comprehensive changes to the
informal and formal rules that affect all organizations
(a) Transition economies: pervasive transitions in emerging economies (e.g., China,
Poland, Russia)
III. AN INSTITUTION-BASED VIEW OF BUSINESS STRATEGY
A. Overview
1. Historically, strategy literature has not discussed specifically the relationship between
strategic choices and institutional frameworks
2. Influence of task environment, i.e., economic variables (market demand,
technological change), has been explored in strategy literature
(a) Porter’s “diamond” model explains the competitive advantage of globally leading
industries in different countries. It is criticized for ignoring history and institutions
3. Strategic choices are selected within and constrained by institutional frameworks in
developed economies
4. Striking differences between institutions in developed and emerging economies have
pushed the institution-based view to the forefront of strategy discussions
5. Strategic choices are direct outcomes of the dynamic interaction between institutions
and firms
B. Two Core Propositions
1. Managers and firms rationally pursue their interests and make strategic choices within
institutional constraints
2. When formal institutional constraints fail, informal constraints will play a larger role
in reducing uncertainty and providing constancy to managers and firms
Chapter 4 Emphasizing Institutions, Cultures, and Ethics
IV. THE STRATEGIC ROLE OF CULTURE
A. Definition of Culture follows Hofstede’s view of “national” culture
1. “Collective programming of the mind which distinguishes the members of one group
or category of people from another” (Hofstede)
2. No strict one-to-one correspondence between cultures and nation-states
3. Many layers of culture exist—regional, ethnic, religious, and organizational cultures,
etc.
B. Five Dimensions of Culture are the starting point for understanding the strategic role of
culture
1. Power distance—degree of social inequality
2. Individualism—identity of an individual is fundamentally his or her own, not based
on the identity of his or her collective group (e.g., family, village, company, etc.)
C. Cultures and Strategic Choices
1. Solicitation of subordinate feedback and participation is a sign of weak leadership and
low integrity in high power distance countries (e.g., Egypt, India, Mexico, Russia)
2. Individualistic cultures foster greater differentiation and entrepreneurship and prefer
more formal contractual safeguards in alliances than collectivistic cultures
3. Masculinity and femininity also have strategic implications
(a) Masculine cultures—stereotypical manager is assertive, decisive, and aggressive
4. Uncertainty avoidance—strategic implications
(a) Managers in low uncertainty avoidance countries (e.g., Great Britain) rely more
on experience and training
(b) Managers in high uncertainty avoidance countries (e.g., China) rely more on rules
and procedures
5. Long-term orientation—strategic implications
Chapter 4 Emphasizing Institutions, Cultures, and Ethics
V. THE STRATEGIC ROLE OF ETHICS
A. The Definition and Impact of Ethics
1. Ethics—the norms, principles, and standards of conduct that govern individual and
firm behavior
(a) Important part of informal (organizational culture) and formal institutions (laws
and regulations, organizational codes of ethical conduct)
2. Motivation to become ethical
(a) Negative view—firms jump on the ethics bandwagon to appear more legitimate
without becoming more ethical
3. Appreciating the strategic value of ethics
(a) Examine what happens after a crisis
(i) Value of an ethical reputation is magnified during crisis (e.g., terrorist attacks
on the Taj Mahal Palace Hotel in Mumbai and the response of the hotel staff)
(ii) Catastrophes may allow ethical firms to shine
B. Managing Ethics Overseas
1. What is ethical in one country may be unethical or illegal in other countries
(a) Dealing with an under-performing employee who is the primary breadwinner
2. Two perspectives on dealing with ethical dilemmas overseas (Donaldson)
(a) Ethical relativism—“when in Rome, do as the Romans do”
(b) Ethical imperialism—the absolute belief that “there is only one set of ethics, and
(iii)Respect for institutional contexts—understand local institutions
C. Ethics and Corruption
1. Ethics help combat corruption—the abuse of public power for private benefit
2. Corruption distorts the basis for competition—causes misallocation of resources and
slows economic development
Chapter 4 Emphasizing Institutions, Cultures, and Ethics
corruption abroad
5. U.S. firms complain about unfair restrictions by the Foreign Corrupt Practices Act
(FCPA)—passed in 1977—which bans bribery to foreign officials
(a) The FCPA had regulatory “teeth,” but was not supported by a normative or
cognitive pillar until 1997
(b) OECD Convention on Bribery of Foreign Public Officials (1997) required
criminalization of bribery and removed tax deductibility of bribes to public
officials
VI. A STRATEGIC RESPONSE FRAMEWORK FOR ETHICAL CHALLENGES
A. The way firms strategically respond to ethical challenges leads to a strategic response
framework. It features four strategic choices: (1) reactive, (2) defensive, (3)
accommodative, and (4) proactive
B. Reactive Strategy
1. Passive—firms do not feel compelled to act unless faced with a disaster or public
outcry
2. Example: Ford Pinto and the exploding gas tank, Ford’s failure to recall vehicle
without pressure from government, court cases, and the media
C. Defensive Strategy
1. Focus on regulatory compliance, firm fights demand for changes unless they are
regulatory
2. Example: Nike (early 1990s) running sweatshops in Indonesia and Vietnam
E. Proactive Strategy
1. Firms constantly anticipate institutional changes and do more than is required to act
ethically and responsibly
2. Top management champions proactive action and sees behaving ethically as a
potential source of competitive advantage
3. Examples: BMW’s compliance with the take-back policy of the German government
F. The four strategies are not mutually exclusive
VII. DEBATES AND EXTENSIONS
A. Cultures Versus Institutions
Chapter 4 Emphasizing Institutions, Cultures, and Ethics
1. Instead of asking which is most important—culture or institutions—we are interested
in how cultures, institutions, and/or ethics affect strategic choices and performance
B. Opportunism Versus Individualism/Collectivism
1. Transaction cost theorists argue that institutions emerge to combat opportunism
2. One cultural dimension—individualism/collectivism—sheds light on opportunism
(a) Collectivists are more collaborative when dealing with in-group members
3. Implications
(a) Individualists may view social interactions/activities as unrelated to the business,
and build trust through repeated social interactions
C. Cultural Distance Versus Institutional Distance
1. Liability of foreignness—doing business with foreigners may incur significantly
higher transaction costs than doing business with domestic firms
2. Firms usually prefer to enter culturally close countries first
(a) Sequence of entry into foreign markets is often based on the cultural distance
between the home and host countries
D. Bad Apples Versus Bad Barrels
1. Identify the root cause of unethical business behavior
(a) Unethical person (bad apple)—predisposed to behave unethically
(b) Ethical person who behaves unethically because of the organization’s influence—
“been spoiled by bad barrel”
(c) Extends the broader nature vs. nurture debate
VIII. THE SAVVY STRATEGIST
A. Underlying context of institutional structures, resources and capabilities impacts strategic
choices
B. Institutions, culture, and ethics implications
C. Institution-based answers to the four fundamental questions:
1. Why do firms differ?
2. How do firms behave?
(a) Institutional differences influence behavior
3. What determines the scope of the firm?
4. What determines the international success and failure of firms?
(a) Institutional frameworks that govern strategic choices
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CHAPTER FOUR – LECTURE NOTES AND TEACHING TIPS
SUMMARY OF THE OPENING CASE: Emerging Markets: One Rock Formation, Two
Countries
This opening case discusses why fracking is big business in south Texas but not north Mexico
even though the same shale deposit lies beneath both areas.
Teaching Tip: Ask students to respond to the following case discussion questions (Possible
answers are included in italics):
How does “smallness” in business hinder oil and gas development in Mexico?
Businesses in Mexico tend to be small, with most businesses employing fewer than 10 people. Oil
How do oil and gas rights affect incentives, particularly in Mexico?
In the United States, the right to oil and gas deposits, as well as other mineral rights, are largely
unlikely to benefit if oil or gas is found on his land.
UNDERSTANDING INSTITUTIONS
Building on the “rules of the game” metaphor, Nobel laureate economist Douglas North formally
defines institutions as “the humanly devised constraints that structure human interaction.” More
behavior.”
Teaching Tip: Students might not connect with the implications of institutional theory. To avoid
this problem, bring in examples of institutions and why they matter. Examples would include the
way family business is understood and conducted in Overseas Chinese communities (informal
institution covering commercial activities), the giving and reciprocation rituals of many cultures,
such as the Chinese red packet money given at Chinese New Year and other occasions (informal
institution), or the laws and enforcement governing counterfeiting activities (mostly formal
institutions, but some informal regarding norms of enforcement).
Institutional Framework
The institutional framework is made up of formal and informal institutions governing individual
Chapter 4 Emphasizing Institutions, Cultures, and Ethics
Formal Institutions
Formal institutions include laws, regulations, and rules (such as competition and regulation
important example of a formal institution that impact firms and economies.
Informal Institutions
Informal institutions include norms, cultures, and ethics. The two main supportive pillars for
informal institutions are normative and cognitive. Because norms define how things should be
Cognitive Pillar
The cognitive pillar refers to the internalized, taken-for-granted values and beliefs that guide
individual and firm behavior. Several “whistle blowers” reported Enron’s wrongdoing because of
What Do Institutions Do?
Teaching Tip: Give some examples of institutions in action. A good applied example is firm
legitimacy. For example, in some societies, for-profit health care is frowned upon. In the U.S.,
many people, including key opinion leaders, believe that if health care is for-profit, it will be
substandard, as the doctor and hospital cuts costs to the detriment of the poor patient. In East
Asia, however, for-profit hospitals are seen as expensive, but as providing very high-quality care
that everyone would like to receive if they could afford to go outside of the public health system.
The U.S. health care industry has a lot of work to do to influence the normative and cognitive
aspects of the institutional environment there to be more accepting of for-profit health care
organizations.
The primary function of an institution is to reduce uncertainty. Specifically, institutions
influence individuals’ decision-making by signaling to individuals and groups which conduct is
acceptable and which is not. Apart from defining legitimacy, institutions reduce uncertainty.
Chapter 4 Emphasizing Institutions, Cultures, and Ethics
One important source of transaction costs is opportunism, defined as “self-interest seeking with
guile.” In an effort to reduce these nontrivial transaction costs, institutional frameworks facilitate
certainty-enhancing strategies by spelling out the rules of the game.
Teaching Tip: The case of the oil industry in Argentina and the high transaction costs caused by
a weak institutional framework is instructive. In 1955, the government canceled international
contracts signed by a previous president, Peron, in 1952. The next president signed new contracts
in 1958, which were nullified in 1963 by a different president. Foreign oil companies were
invited to return in 1966, expelled in 1973, and again encouraged to enter after 1976. Not the
best conditions for an industry requiring heavy investment. Ask students to research the details
of this case and comment on it based on what they have learned.
How Do Institutions Reduce Uncertainty?
As noted, the two primary kinds of institutions—informal and formal—reduce uncertainty in
economic transactions. Often called relational contracting, the first kind of economic transaction
is an informal, relationship-based, personalized exchange. In many parts of the world, there is no
need to write an IOU note when you borrow money from your friends. Insisting on such a note,
Often termed arm’s-length transactions, the second institutional mode to govern relationships is a
formal, rule-based, impersonal exchange with third-party enforcement. As the economy expands,
the scale and scope of transactions rise (many entrepreneurs want to borrow more money to start
up firms), calling for the emergence of third-party enforcement through formal market-
supporting institutions. As shown in Figure 4.2, the initial costs per transaction are high, because
of the high costs of formal institutions. Services provided by the court system, police forces, and
law firms are expensive. Small villages usually cannot afford and do not need them. Over time,
however, third-party enforcement is likely to facilitate the widening of markets, because
Chapter 4 Emphasizing Institutions, Cultures, and Ethics
Teaching Tip: Ask the students how often they have ordered a product over the phone. Ask them
how often they have bought products over the Internet, from sites like Amazon. Ask them how
they know Amazon exists, or how they know they will get the product they ordered. Is it because
of the formal or informal institutional mode of transaction governance? Then ask them how
common they think it is for people in China to order products over the phone or computer. In
China’s big cities, where many people have a reasonable amount of disposable income and often
a credit or debit card, they actually order products increasingly over the phone, but usually only
Both the formal and informal forms of contracting can complement each other. Relational
contracting has an advantage when the size of the economy is limited—imagine a small village
economy where everyone knows each other. But as transaction complexity rises, informal
dealings within the group may become difficult—imagine a city or national economy in which it
would be too difficult to impose informal sanctions against negative opportunistic behavior.
Arm’s-length transactions, on the other hand, help overcome these barriers, by bringing together
formerly distant groups (firms, communities, and even countries) to enjoy the gains from
complicated long-distance trade. These rule-based transactions thus become increasingly
attractive as more new players enter the game.
AN INSTITUTION-BASED VIEW OF STRATEGY
Much of the past focus in strategy was on the “task environment” (sometimes called “technical
environment” by institutional theorists). For example, consider Porter’s influential “diamond”
model, which argues that the competitive advantage of different industries in different nations
depends on four factors which form a “diamond”: (1) firm, strategy, structure, and rivalry within
one country are essentially the same as the industry-based view, (2)factor endowments refer to
the natural and human resource repertoires, (3) related and supporting industries provide the
foundation upon which key industries excel, and (4) domestic demand propels firms to scale new
heights to satisfy such demand.
Chapter 4 Emphasizing Institutions, Cultures, and Ethics
choices are not only driven by industry structure and firm capabilities emphasized by traditional
strategic thinking, but also reflect the formal and informal constraints of a particular institutional
framework.
Two Core Propositions
The institution-based view suggests two core propositions.
First, managers and firms rationally pursue their interests and make strategic choices within
institutional constraints. One of the main institution-based reasons for emerging multinationals
from BRIC to invest overseas is to avoid the bureaucratic, unfriendly, and in some cases
predatory policies of their domestic governments.
For example, counterfeiters (as in the closing case) have made a rational decision (from their
standpoint at least), given an institutional environment of weak intellectual protection and
availability of certain manufacturing and distribution capabilities. Although firms and
Just as firms compete in product markets, firms also fiercely compete in the political marketplace
that is characterized by informal relationships. The best-connected firms are able to reap
significant benefits. Basically, if a firm cannot be a cost, differentiation, or focus leader, it may
still beat the competition on another ground, namely, the nonmarket, political environment that
features informal relationships.
THE STRATEGIC ROLE OF CULTURES
Definition of Culture
Geert Hofstede, a well-known Dutch professor, defines culture as “the collective programming
of the mind which distinguishes the members of one group or category of people from another.”
This textbook is one of the only strategy books to acknowledge culture’s impact on strategy (and
Five Dimensions of Culture
Hofstede and several colleagues, including Professor Michael Bond (a Hong Kong professor
well-known in Chinese and cross-cultural psychology), have proposed five dimensions:
1. Power Distance
5. Long-term Orientation
First, power distance. In India, power distance is quite high; there is a gulf between bosses and
most subordinates. They are usually quite formal with the boss. In contrast, in the United States,
Teaching Tip: Ask the students to think about the difference in Power Distance between Asian
countries with which they are familiar and Scandinavia. You could use the following story to
illustrate this point. When the King of Sweden went to do some Christmas shopping for his
family (an act which would be highly unusual elsewhere), the salesperson demanded to see his
“government issued picture identification (ID)” in order to allow him to use his credit card. The
king could not produce any ID, and the (lowly) salesperson was not persuaded by other
shoppers’ argument that “this is our king, I can recognize him from TV” until the king searched
the bottom of his pockets and discovered a coin with his face on it, truly a most authentic piece
of government-issued picture identification.
Third, the masculinity versus femininity dimension refers to sex role differentiation. In every
traditional society, men tend to have occupations that reward assertiveness, such as politicians,
soldiers, and executives. Women, on the other hand, usually work in nurturing professions such
as teachers and nurses in addition to being homemakers. High masculinity societies (led by
Japan) continue to maintain a sharp differentiation in which men do “men’s jobs,” and women do
“women’s work.” They also emphasize production over the relational aspect of business.
Fourth, uncertainty avoidance refers to the extent to which members in different cultures accept
ambiguous situations and tolerate uncertainty. Members of high uncertainty avoidance cultures
(led by Greece) place a premium on job security, career patterns, and retirement benefits. They
also tend to resist change, which, by definition, is uncertain. Low uncertainty avoidance cultures
Cultures and Strategic Choices
Solicitation of subordinate feedback and participation, widely practiced in low power distance
Western countries, is regarded as a sign of weak leadership and low integrity in high power
distance countries.
Chapter 4 Emphasizing Institutions, Cultures, and Ethics
Individualism and collectivism also affect strategic choices. Individualist U.S. firms often try to
differentiate themselves, whereas collectivist Japanese firms tend to converge on some
defensible positions.
Likewise, masculinity and femininity may have strategic implications. At the individual level,
the stereotypical manager in masculine societies is “assertive, decisive, and aggressive.” The
stylized manager in feminine societies is “less visible, intuitive rather than decisive, and
accustomed to seeking consensus.”
Teaching Tip: Ask students how feasible they think a 250-year plan is. Ask if they think anyone
can conceive of what the world will be like in 250 years. How about 100 years later? Tell them
about the predictions for the world made in the year 1900 for 2001. People were predicting travel
from New York to London taking only two days (!), the end of warfare, and no more animals
except in menageries. More recently, in 1980, a McKinsey Inc. study done for AT&T predicted
that there would be 3 million mobile phones in the world by the year 2000. The number of
mobile phone subscribers in the Asia-Pacific region actually reached 230 million by the end of
2000 and more than double that worldwide; McKinsey’s forecast was less than 1% of the actual
number. Forecasting, particularly in a technology-related market, is very difficult business.
THE STRATEGIC ROLE OF ETHICS
Definition and Impact of Ethics
Ethics refers to the norms, principles, and standards of conduct governing individual and firm
Managing Ethics Overseas
Managing ethics overseas is challenging because what is ethical in one country may be unethical
elsewhere. As illustrated in the opening case, it is difficult to figure out what the correct ethical
action would be.
Two schools of thought exist. Ethical relativism refers to an extension of the cliché, “When in
Rome, do as the Romans do.” The other ethical imperialism refers to the absolute belief that
“there is only one set of Ethics (with the big E), and we have it.”
Chapter 4 Emphasizing Institutions, Cultures, and Ethics
Ethics and Corruption
There is evidence that richer, developed economies tend to be less corrupt than poorer,
developing countries. The correlation between a high level of corruption and a low level of
economic development is strong. Some evidence supports the idea that corruption discourages
foreign direct investment (FDI). For example, there is more investment in Singapore than in
A STRATEGIC RESPONSE FRAMEWORK
How individual firms respond to ethical challenges leads to a strategic response framework that
features four strategic choices: (1) reactive, (2) defensive, (3) accommodative, and (4) proactive.
Defensive Strategy
A defensive strategy focuses on regulatory compliance. Admit responsibility, but fight it, do the
least that is required—for example, Nike and the East Asian sweat shops (the early 1990s).
Proactive Strategy
Proactive firms constantly anticipate institutional changes and endeavor to do more than is
required. Anticipate responsibility, do more than is required—for example, BMW and the
German government’s “take–back” policy.
DEBATES AND EXTENSIONS
Cultures versus Institutions
Is culture or institution “bigger” or more fundamental? How does it matter to organizational
strategy (probably not much)?
Opportunism versus Individualism/Collectivism
Chapter 4 Emphasizing Institutions, Cultures, and Ethics
Teaching Tip: One cultural dimension, individualism versus collectivism, may hold the key to
improving our understanding of opportunism. A stereotype is that people from collectivist
societies (such as China and Japan) are more collaborative and trustworthy, and that those from
individualist societies (such as America and Australia) are more competitive and opportunistic.
However, recent research suggests that this is not necessarily the case. Collectivists are more
collaborative only when dealing with in-group members, that is, individuals and firms regarded
as a part of a collective. They find it very hard to trust people from an out-group and do business
Cultural Distance versus Institutional Distance
An identifiable sequence of foreign market entries may be based on the cultural distance between
the home country and the host country. This view becomes known as the cultural distance
hypothesis.
The cultural distance hypothesis of firms wanting to partner with and buy from firms from a
similar culture has not stood up well to empirical scrutiny. In general, researchers note that while
cultural distance is important initially, its importance declines as players get to know each other.
Finally, some researchers argue that perhaps the cultural distance concept can be complemented
(but not replaced) by the institutional distance concept.
“Bad Apples” versus “Bad Barrels”
The debate on “bad apples” versus “bad barrels” is an extension of the broader debate on “nature
versus nurture.” Are we who we are because of our genes (nature) or our environments
(nurture)? Most studies report that human behavior is the result of both nature and nurture.
THE SAVVY STRATEGIST
We conclude this chapter by revisiting the four fundamental questions. First, why do firms
differ? The institution-based view points out the institutional frameworks that shape firm
Chapter 4 Emphasizing Institutions, Cultures, and Ethics
POSSIBLE ANSWERS TO CRITICAL DISCUSSION QUESTIONS
1. How does the institution-based view complement and differ from the industry-based and
resource-based views? Why has the institution-based view become a third leg in the “strategy
tripod?”
The institution-based view is a leading perspective of strategy that argues that in addition to
industry-and firm-level conditions, firms also need to take into account wider influences from
sources such as the state and society when crafting strategy. The industry-based view
2. Find one example of institutional transitions from developed economies and one example
from emerging economies. What are their similarities and differences?
Though countries make different political choices—communism or capitalism—their
economic policies have been quite similar. All governments are interested in market
development and economic growth. Initially, in all emerging economies, competition was
virtually nonexistent. Markets were closed and industries were protected. Institutional
3. ON ETHICS: Assume you work for a New Zealand company exporting a container of kiwis
to Haiti. The customs official informs you that there is a delay in clearing your container
through customs and it may last a month. However, if you are willing to pay an “expediting
fee” of US$200, he will try to make it happen in one week. What would you do?
At present, the U.S. Foreign Corrupt Practices Act (FCPA), which is a U.S. law enacted in
1977 that bans bribing corrupt foreign officials, makes exceptions for small “grease”
Chapter 4 Emphasizing Institutions, Cultures, and Ethics
4. ON ETHICS: One of the selling points of social media firms such as YouTube is that
anybody is free to post anything. They have now become dissemination outlets and recruiting
tools for some terrorist organizations that otherwise would not find low-cost ways to
disseminate their hatred and recruit new members on a worldwide basis. Should social media
firms do something about it? If so, how?
Answers will vary. Students will probably note that most social media sites already have
TOPICS FOR EXPANDED PROJECTS
1. Some argue that guanxi (relationships and connections) is a unique, Chinese-only
phenomenon embedded in the Chinese culture. As evidence, they point out that this word,
guanxi, has now entered the English language and is often used in mainstream media (such as
the Wall Street Journal) without explanations provided in brackets. Others disagree, arguing
that every culture has a word or two describing what the Chinese call guanxi, such as blat in
Russia, guan he in Vietnam, and “old boys’ network” in the English-speaking world. They
suggest that the intensive use of guanxi in China (and elsewhere) is a reflection of the lack of
formal institutional frameworks. Write a short paper to explain which side of the debate you
would join and why.
That dictionary-evidence is not particularly strong. It is easier to argue the latter, that is, that
guanxi and related concepts in other countries will decline in importance as institutional
frameworks formalize and laws are followed and enforced. Indeed, the concept of guanxi
probably exists in all countries. The main question to ask is not if guanxi or connections exists
Chapter 4 Emphasizing Institutions, Cultures, and Ethics
2. ON ETHICS: Why has the FCPA not ended corruption in global business? Working in
groups of three or four, research the FCPA, its implementation, and enforcement. Present your
findings in a short paper or visual presentation.
The Foreign Corrupt Practices Act (FCPA) of 1977 bans bribery of foreign officials. By this
3. ON ETHICS: As CEO of Chiquita, you are eager to promote CSR efforts, such as
complying with the Social Accountability 8000 (SA8000) labor rights standard and Rain
Forest environmental standard. However, you are frustrated that retailors and consumers
have not rewarded such behavior. Should Chiquita scale back some of these CSR-driven
activities?
Answers will vary. Students might argue that Chiquita should hold fast regardless of how the
CLOSING CASE: Ethical Dilemma: Facebook Violates Privacy
OVERVIEW
On November 29, 2011, the US Federal Trade Commission (FTC) announced that it had reached
a draft settlement with Facebook over allegations that it had misled people about its use of their
personal data. The details of the settlement reveal that Facebook, which boasts over 800 million
users, betrayed its users’ trust and privacy. Reacting to this situation, the FTC proposes to
formulate a new privacy framework to deal with the phenomenal rise of social networks in the
world. Facebook needed to quickly resolve this issue as it was preparing for an initial public
offering that could value it at around $100 billion.
Chapter 4 Emphasizing Institutions, Cultures, and Ethics
POSSIBLE ANSWERS TO CASE DISCUSSION QUESTIONS
1. Supporters of Facebook argue that Facebook’s contributions to mankind—think of its
positive role in the Arab Spring of 2011—outweigh its ethical imperfections. Overly harsh
regulations will suffocate its capacity to innovate. Do you agree or disagree?
Answers might vary. The Arab Spring in Egypt and in the Mid-East relied on the Internet and
2. Critics of Facebook argue that its business model is built on violating user privacy. Without
selling sensitive personal information to advertisers, how can it make money? Therefore,
Facebook must be on a tight regulatory leash. Do you agree or disagree?
Student answers will vary. Facebook is like any other business firm. In order to survive, it
has to make a profit. Most of its revenue comes from advertising—85% in 2011; and the
remaining 15% is generated through payments and other fees. The membership is free and
yet each user when he or she signs up provides quite a lot of data and personal information,
3. Are some Facebook employees “bad apples” or is Facebook a “bad barrel”?