2 Global Business Assignment

Have 2 assignment from Global Business class. Needs to be done by Saturday, November 24, 2012 by 6:00 pm New York time.

Please see attached files for details.

Assignment 1

http://extmedia.kaplan.edu/business/AB220_MT220_1203C/Unit_1/index.html- this is an article.

http://extmedia.kaplan.edu/business/AB220_MT220_1203C/220_u2assignment –this is assignment details ( or check pdf file attached)

Assignment 2

http://extmedia.kaplan.edu/business/AB220_MT220_1203C/Unit_1/index.html- this is an article.http://extmedia.kaplan.edu/business/AB220_MT220_1203C/220_u3assignment -this is assignment details

NO PLAGIARISM PLEASE! I WILL CHECK MY HOMEWORK FOR PLAGIARISM BEFORE I PURCHASE!

thanks,

Parvin

AssignmentDetails

Read Zip-6 Scenario

Nils, the partner of Ravi and Keith at Zip-6, approached them with an interesting possibility. A

fellow venture capitalist friend revealed to him that he and his partners were acquiring a large

family-owned group of businesses in the South American country of Colombia. Most of these

family-owned businesses are diversified manufacturing businesses in the capital of Bogota, but

there is one soft drink bottling operation in the acquisition that does not fit within their venture

business plan and thus they would like to divest (sell) this particular operation. Nils’ friend knew

that Nils, Ravi, and Keith had extensive presence in neighboring Brazil and thought that this

business in Colombia might offer Zip-6 an additional expansion opportunity in the region.

Neither Nils, Ravi, or Keith have any knowledge of this nation.

Your job in this Assignment is to conduct some basic research into the country of Colombia (a

neighboring country to Brazil) and examine the most important historical events (political, economic,

and technological) that might impact the country of Colombia’s business climate for the future of this

investment by Zip-6. Review the full Zip-6 Scenario.

After researching the historical events in Colombia, write your brief analysis in a minimum 250

words double spaced synopsis in 12 point Times New Roman font, addressing all the checklist

items and advising Ravi and Keith on a recommended course of action and your justification for

such an approach. Be sure to reference any sources used in your work.

Suggested Web Resources:

Colombia:

arch for information on Colombia

Michigan State University: globalEDGE™ website:

http://globaledge.msu.edu/Countries/Colombia

You may also use information from other sources that are from governmental or educational

sites as well. Do not use Wikipedia!

Checklist:

1. What events (political, economic and technological) are the most important in the last

30 years that might have impacted the business culture in Colombia? Unit 2 [220:

Global Business]

2. How have these events in question 1 above, impacted business in Colombia?

3. Do you feel that the Colombian economy is sufficiently robust to support the growth of

the sports drink industry within the country and why?

4. Do you feel that the Colombian political climate is likely to be supportive of Zip-6’s

entry into the Colombian beverage market and why?

5. Should Zip-6 acquire this new plant in Colombia based on what you have found out

about historical events that have impacted the business culture and the current

economic and political climate there? Why or why not?

Draft your response addressing these points in 250 words

Continueusing your Zip-6 Scenario

Following Coca-Cola’s model, Ravi and Keith want to standardize and centralize syrup production in

the U.S. for Zip-6 concentrate they will then ship to each bottling plant within each country. Zip-6

management feels that this will be the best way to ensure consistency across different markets and

better protect the firm’s formulation. Accordingly, Zip-6 notified each government’s trade authorities

and received permissions from Korea and Mexico to import the syrup concentrate. To their surprise

however, Brazil’s Department of Foreign Trade (Carteira de Comércio Exterior–Cacex) has refused

to approve the import of the concentrate, insisting that the ingredients available from Brazilian

sources be used in the product that is sold within that country. An existing permission has allowed the

importation of the herbal ingredient. There exists within Brazil a difficult and time-consuming appeal

process to the agency’s ruling (for importing ingredients), within the Brazilian legal system.

Ravi and Keith believe that centralizing this production would be in the best interests of Zip-6 but are

hesitant to go forward without one of its biggest markets (Brazil).

Based on your reading on pages 204-220, respond to the following:

Political Risk Factors according to Hill, (2011) refers to “The likelihood that political forces [or the

government] will cause drastic changes in a country’s business environment that will adversely

affect…goals of a business enterprise” (p.82)

Checklist:

-6 would be

involved in adopting each of the following options: 1) appeal the decision, 2) treat Brazil as the

central concentration site rather than the U.S., or 3) forget about adding in concentrate

production to the existing operations in Brazil altogether.

Respond to the checklist items in a 1 to 2 page APA formatted paper. Make sure that if you use

citations you limit these to maximum two very short citations and include the accompanying APA

citations and an additional References page.

Reference

Hill, C.W. (2011). Global business today. (7th ed.). New York, NY: McGraw- Hill.

L
E

A
R

IV
E

After you have read this chapter you should be able to:

1
Explain what is meant by the culture of a society.

2
Identify the forces that lead to differences in social culture.

3
Identify the business and economic implications of differences

in culture.

4
Recognize how differences in social culture influence values in the

workplace.

5
Demonstrate an appreciation for the economic and business implications

of cultural change.

part 2 Country Differences

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Business Culture in China
opening case

T
he first McDonald’s restaurant to open in China was located on the corner of Wangfujing
Street and the Avenue of Eternal Peace, just two blocks from Tiananmen Square, the very
heart of China’s capital, Beijing. The choice of location seemed auspicious, and within two

years, sales at the restaurant were surpassing all expectations. Then the Beijing city government
dropped a bombshell; officials abruptly informed McDonald’s that it would have to vacate the location
to make way for a commercial, residential, and office complex planned by Hong Kong developer Li
Ka-shing. At the time, McDonald’s still had 18 years to run on its 20-year lease. A stunned McDonald’s
did what any good Western company would do—it took the Beijing city government to court to try to
enforce the lease. The court refused and McDonald’s had to move. Chinese observers had a simple
explanation for the outcome. McDonald’s, they said, lacked the guanxi of Li Ka-shing. Given this, the
company could not expect to prevail. Company executives should have accepted the decision in
good grace and moved on, but instead, McDonald’s filed a lawsuit—a move that would only serve
to reduce what guanxi McDonald’s might have had with the city government!
This example illustrates a basic difference between doing business in the West and doing
business in China. In the advanced economies of the West, business transactions are
conducted and regulated by the centuries-old framework of contract law, which specifies the
rights and obligations of parties to a business contract and provides mechanisms for seeking
to redress grievances should one party in the exchange fail to live up to the legal agreement.
In the West, McDonald’s could have relied on the courts to enforce its legal contract with
the city government. In China, this approach didn’t work. China does not have the same
legal infrastructure. Personal power and relationships or connections, rather than the
rule of law, have always been the key to getting things done in China. The key to
understanding this process is the concept of guanxi.
Guanxi literally means relationships, although in business settings it can be
better understood as “connections.” McDonald’s lost its lease in central Beijing
because it lacked the guanxi enjoyed by the powerful Li Ka-shing. The concept
of guanxi is deeply rooted in Chinese culture, particularly the Confucian
philosophy of valuing social hierarchy and reciprocal obligations.
Confucian ideology has a 2,000-year-old history in China, and 60
years of Communist rule has done little to dent its influence on
everyday life in China. Confucianism stresses the importance

Differences in Culture

3 c h a p t e

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of relationships, both within the family and between master and servant.
Confucian ideology teaches that people are not created equal. In Confucian
thought, loyalty and obligations to one’s superiors (or to family) is regarded
as a sacred duty, but at the same time, this loyalty has its price. Social
superiors are obligated to reward the loyalty of their social inferiors by
bestowing “blessings” upon them; thus, the obligations are reciprocal.
Today, Chinese will often cultivate a guanxiwang, or “relationship
network,” for help. Reciprocal obligations are the glue that holds such
networks together. If those obligations are not met—if favors done are not
paid back or reciprocated—the reputation of the transgressor is tarnished
and he or she will be less able to draw on the guanxiwang for help in the
future. Thus, the implicit threat of social sanctions is often sufficient to ensure
that favors are repaid, that obligations are met, and that relationships are
honored. In a society that lacks a rule-based legal tradition, and thus legal
ways of redressing wrongs such as violations of business agreements,
guanxi is an important mechanism for building long-term business
relationships and getting business done in China. There is a tacit
acknowledgment that if you have the right guanxi, legal rules can be bent. Li
Ka-shing had the right guanxi; McDonald’s apparently did not.
As they have come to understand this, many Western businesses have
tried to build guanxi to grease the wheels required to do business in China.
Indeed, guanxi has become a commodity that is for sale to foreigners. Many
of the sons and daughters of high-ranking government officials have set up
“consulting” firms and offered to mobilize their guanxiwang or those of their
parents to help Western companies navigate their way through Chinese
bureaucracy. Taking advantage of such services, however, requires good
ethical judgment. There is a fine line between relationship building, which
may require doing favors to meet obligations, and bribery. Consider the case
of a lucrative business contract that was under consideration for more than a
year between a large Chinese state-owned enterprise and two competing
multinational firms. After months of negotiations, the Chinese elected to
continue discussions with just one of the competitors—the one that had
recently hired the son of the principal Chinese negotiator at a significant
salary. This occurred even though the favored firm’s equipment was less
compatible with Chinese equipment already in place than that offered by the
multinational that was rejected. The clear implication is that the son of the
negotiator had mobilized his guanxiwang to help his new employer gain an
advantage in the contract negotiations. While hiring the son of the principal
negotiator may be viewed as good business practice by some in the context
of Chinese culture, others might argue that this action was ethically suspect
and could be viewed as little more than a thinly concealed bribe. •
Sources: S. D. Seligman, “Guanxi: Grease for the Wheels of China,” China Business Review, September –
October 1999, pp. 34–38; L. Dana, “Culture Is the Essence of Asia,” Financial Times, November 27, 2000, p. 12;
L. Minder, “McDonald’s to Close Original Beijing Store,” USA Today, December 2, 1996, p. 1A; M. W. Peng,
Business Strategies in Transition Economies (Thousand Oaks, CA: Sage Publications, 2000); and Hannah
Seligson, “For American Workers in China: a Cultural Clash,” The New York Times, December 24, 2009, p. B1.

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Chapter Three Differences in Culture 93

Introduction
In Chapter 2, we saw how national differences in political, economic, and legal sys-
tems influence the benefits, costs, and risks associated with doing business in differ-
ent countries. In this chapter, we will explore how differences in culture across and
within countries can affect international business. Several themes run through this
chapter. The first is that business success in a variety of countries requires cross-
cultural literacy. By cross-cultural literacy, we mean an understanding of how cul-
tural differences across and within nations can affect the way business is practiced.
In these days of global communications, rapid transportation, and worldwide mar-
kets, when the era of the global village seems just around the corner, it is easy to
forget just how different various cultures really are. Underneath the veneer of mod-
ernism, deep cultural differences often remain. Take the Chinese. Increasingly, they
are embracing the material products of modern society. Anyone who has visited
Shanghai cannot fail to be struck by how modern the city seems, with its skyscrap-
ers, department stores, and freeways. Yet beneath the veneer of Western modern-
ism, long-standing cultural traditions rooted in a 2,000-year-old ideology continue
to have an important influence on the way business is transacted in China. As the
opening case illustrates, in China, guanxi, or a network of social relationships with
others backed by reciprocal obligations, is central to getting business done. Firms
that lack sufficient guanxi may find themselves at a disadvantage when doing busi-
ness in China. The lesson: To succeed in China you have to play by Chinese rules.
More generally, in this chapter, we shall argue that it is important for foreign busi-
nesses to understand the culture that prevails in those countries where they do
business, and that success requires a foreign enterprise to adapt to the culture of its
host country. 1
Another theme developed in this chapter is that a relationship may exist between
the culture and the cost of doing business in a country or region. Different cultures
are more or less supportive of the capitalist mode of production and may increase or
lower the costs of doing business. For example, some observers have argued that cul-
tural factors lowered the costs of doing business in Japan and helped to explain Ja-
pan’s rapid economic ascent during the 1960s, 70s, and 80s. 2 Similarly, cultural factors
can sometimes raise the costs of doing business. Historically, class divisions were an
important aspect of British culture, and for a long time, firms operating in Great
Britain found it difficult to achieve cooperation between management and labor.
Class divisions led to a high level of industrial disputes in that country during the
1960s and 1970s and raised the costs of doing business relative to the costs in coun-
tries such as Switzerland, Norway, Germany, or Japan, where class conflict was his-
torically less prevalent.
The British example, however, brings us to another theme we will explore in
this chapter. Culture is not static. It can and does evolve, although the rate at which
culture can change is the subject of some dispute. Important aspects of British cul-
ture have changed significantly over the past 30 years, and this is reflected in
weaker class distinctions and a lower level of industrial disputes. Indeed, in recent
years the number of days lost due to strikes in the United Kingdom has been sig-
nificantly less than in Australia, the United States, Ireland, and Canada. 3 Finally,
multinational enterprises can themselves be engines of cultural change, particu-
larly with regard to material culture. For example, Western fast-food companies
such as McDonald’s may help to change the dining culture in developing nations
such as India, drawing people away from traditional restaurants and toward fast-
food outlets.

Cross-Cultural
Literacy
An understanding of how
cultural differences
across and within nations
can affect the way
business is practiced.

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94 Part Two Country Difference

What Is Culture?
Scholars have never been able to agree on a simple definition of culture . In the 1870s,
the anthropologist Edward Tylor defined culture as “that complex whole which includes
knowledge, belief, art, morals, law, custom, and other capabilities acquired by man as a
member of society.” 4 Since then hundreds of other definitions have been offered. Geert
Hofstede, an expert on cross-cultural differences and management, defined culture as
“the collective programming of the mind which distinguishes the members of one hu-
man group from another. . . . Culture, in this sense, includes systems of values; and
values are among the building blocks of culture.” 5 Another definition of culture comes
from sociologists Zvi Namenwirth and Robert Weber, who see culture as a system of
ideas and argue that these ideas constitute a design for living. 6
Here we follow both Hofstede and Namenwirth and Weber by viewing culture as a
system of values and norms that are shared among a group of people and that when
taken together constitute a design for living. By values we mean abstract ideas about
what a group believes to be good, right, and desirable. Put differently, values are shared
assumptions about how things ought to be. 7 By norms we mean the social rules and
guidelines that prescribe appropriate behavior in particular situations. We shall use the
term society to refer to a group of people who share a common set of values and norms.
While a society may be equivalent to a country, some countries harbor several societies
(i.e., they support multiple cultures), and some societies embrace more than one country.

VALUES AND NORMS Values form the bedrock of a culture. They provide the
context within which a society’s norms are established and justified. They may include
a society’s attitudes toward such concepts as individual freedom, democracy, truth, jus-
tice, honesty, loyalty, social obligations, collective responsibility, the role of women,
love, sex, marriage, and so on. Values are not just abstract concepts; they are invested
with considerable emotional significance. People argue, fight, and even die over values
such as freedom. Values also often are reflected in the political and economic systems of
a society. As we saw in Chapter 2, democratic free market capitalism is a reflection of a
philosophical value system that emphasizes individual freedom.

Norms are the social rules that govern people’s actions toward one another. Norms can
be subdivided further into two major categories: folkways and mores. Folkways are the
routine conventions of everyday life. Generally, folkways are actions of little moral sig-
nificance. Rather, they are social conventions concerning things such as the appropriate
dress code in a particular situation, good social manners, eating with the correct utensils,
neighborly behavior, and the like. Although folkways define the way people are expected
to behave, violation of them is not normally a serious matter. People who violate folkways
may be thought of as eccentric or ill-mannered, but they are not usually considered to be
evil or bad. In many countries, foreigners may initially be excused for violating folkways.

A good example of folkways concerns attitudes toward time in different countries.
People are keenly aware of the passage of time in the United States and Northern Euro-
pean cultures such as Germany and Britain. Businesspeople are very conscious about
scheduling their time and are quickly irritated when their time is wasted because a busi-
ness associate is late for a meeting or if they are kept waiting. They talk about time as
though it were money, as something that can be spent, saved, wasted, and lost. 8 Alterna-
tively, in Arab, Latin, and Mediterranean cultures, time has a more elastic character.
Keeping to a schedule is viewed as less important than finishing an interaction with
people. For example, an American businesswoman might feel slighted if she is kept wait-
ing for 30 minutes outside the office of a Latin American executive before a meeting, but
the Latin American may simply be completing an interaction with an associate and view
the information gathered from this as more important than sticking to a rigid schedule.

LEARNING OBJECTIVE 1
Explain what is meant by
the culture of a society.

Culture
A system of values and
norms that are shared

among a group of people
and that when taken
together constitute a

design for living.

Norms
Social rules and

guidelines that prescribe
appropriate behavior in

particular situations.

Values
Abstract ideas about

what a group believes to
be good, right, and

desirable.

Society
A group of people who
share a common set of

values and norms.

Folkways
Routine conventions of

everyday life.

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Chapter Three Differences in Culture 95

The Latin American executive intends no disre-
spect, but due to a mutual misunderstanding about
the importance of time, the American may see
things differently. Similarly, Saudi attitudes to time
have been shaped by their nomadic Bedouin heri-
tage, in which precise time played no real role and
arriving somewhere tomorrow might mean next
week. Like Latin Americans, many Saudis are un-
likely to understand the American obsession with
precise time and schedules, and Americans need to
adjust their expectations accordingly.
Folkways include rituals and symbolic behav-
ior. Rituals and symbols are the most visible mani-
festations of a culture and constitute the outward
expression of deeper values. For example, upon
meeting a foreign business executive, a Japanese
executive will hold his business card in both hands
and bow while presenting the card to the for-
eigner. 9 This ritual behavior is loaded with deep
cultural symbolism. The card specifies the rank of
the Japanese executive, which is a very important
piece of information in a hierarchical society such
as Japan (Japanese often have business cards with Japanese printed on one side, and
English printed on the other). The bow is a sign of respect, and the deeper the angle
of the bow, the greater the reverence one person shows for the other. The person re-
ceiving the card is expected to examine it carefully, which is a way of returning respect
and acknowledging the card giver’s position in the hierarchy. The foreigner is also
expected to bow when taking the card and to return the greeting by presenting the
Japanese executive with his own card, similarly bowing in the process. To not do so,
and to fail to read the card that he has been given, instead casually placing it in his
jacket, violates this important folkway and is considered rude.
Mores are norms that are seen as central to the functioning of a society and to its
social life. They have much greater significance than folkways. Accordingly, violating
mores can bring serious retribution. Mores include such factors as indictments against
theft, adultery, incest, and cannibalism. In many societies, certain mores have been en-
acted into law. Thus, all advanced societies have laws against theft, incest, and cannibal-
ism. However, there are also many differences between cultures. In America, for
example, drinking alcohol is widely accepted, whereas in Saudi Arabia the consumption
of alcohol is viewed as violating important social mores and is punishable by imprison-
ment (as some Western citizens working in Saudi Arabia have discovered).

CULTURE, SOCIETY, AND THE NATION-STATE We have defined a soci-
ety as a group of people that share a common set of values and norms; that is, people who
are bound together by a common culture. There is not a strict one-to-one correspon-
dence between a society and a nation-state. Nation-states are political creations. They
may contain a single culture or several cultures. While the French nation can be thought
of as the political embodiment of French culture, the nation of Canada has at least three
cultures—an Anglo culture, a French-speaking “Quebecois” culture, and a Native Ameri-
can culture. Similarly, many African nations have important cultural differences between
tribal groups, as exhibited in the early 1990s when Rwanda dissolved into a bloody civil
war between two tribes, the Tutsis and Hutus. Africa is not alone in this regard. India is
composed of many distinct cultural groups. During the first Gulf War, the prevailing view

A n o t h e r P e r s p e c t i v e

Doing Business Overseas
Going overseas for business? Be aware of cultural differ-
ences. For example, not all cultures regard time as Americans
do. In Germany or Switzerland, meetings start promptly, but
not in Saudi Arabia or Mexico, where meetings often begin
with lengthy socializing to establish rapport. Be careful
how you say things: Americans and Europeans tend to
speak plainly and in a straightforward manner, but the
Chinese, Japanese, Koreans, and some Latin Americans
are indirect and rely on body language and context to
make their point. And be careful what you say. Americans
describe business in financial terms; Swedes are more
likely to speak in terms of number of employees. A good rule
of thumb: Pay attention to cues and don’t assume that your
customs are observed everywhere. (“Cultural Differences,”
Iowa State University Web site, http://www.celt.iastate.edu,
accessed March 25, 2010; and Bill Decker, “Important
Questions to Ask While Conducting Business,” Portfolio.
com, March 11, 2010, http://www.portfolio.com)

Mores
Norms that are seen as
central to the functioning
of a society and to its
social life.

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96 Part Two Country Differences

presented to Western audiences was that Iraq was a
homogenous Arab nation. However, since then we
have learned that several different societies exist
within Iraq, each with its own culture. The Kurds in
the north do not view themselves as Arabs and have
their own distinct history and traditions. There are
two Arab societies: the Shiites in the South and the
Sunnis who populate the middle of the country and
who ruled Iraq under the regime of Saddam Hussein
(the terms Shiites and Sunnis refer to different sects
within the religion of Islam). Among the southern

Sunnis is another distinct society of 500,000 Marsh Arabs who live at the confluence of
the Tigris and Euphrates rivers, pursuing a way of life that dates back 5,000 years. 10
At the other end of the scale are cultures that embrace several nations. Several
scholars argue that we can speak of an Islamic society or culture that is shared by the
citizens of many different nations in the Middle East, Asia, and Africa. As you will re-
call from the last chapter, this view of expansive cultures that embrace several nations
underpins Samuel Huntington’s view of a world that is fragmented into different civi-
lizations, including Western, Islamic, and Sinic (Chinese). 11
To complicate things further, it is also possible to talk about culture at different lev-
els. It is reasonable to talk about “American society” and “American culture,” but there
are several societies within America, each with its own culture. One can talk about
African-American culture, Cajun culture, Chinese-American culture, Hispanic culture,
Indian culture, Irish-American culture, and Southern culture. The relationship between
culture and country is often ambiguous. Even if a country can be characterized as hav-
ing a single homogenous culture, often that national culture is a mosaic of subcultures.

THE DETERMINANTS OF CULTURE The values and norms of a culture
do not emerge fully formed. They are the evolutionary product of a number of factors,
including the prevailing political and economic philosophies, the social structure of a
society, and the dominant religion, language, and education (see Figure 3.1). We

A n o t h e r P e r s p e c t i v e

Online View of Other Cultures
Visit the online versions of some English-language foreign
newspapers in major international cities to get a sense of
their cultural values, social structure, and markets. Look at
the ads and business names. Check out the classifieds. A
good list link is at www.newhopepa.com/News/Intl_News/
default.htm.

LEARNING OBJECTIVE 2
Identify the forces that

lead to differences in
social culture.

Culture
Norms and

Value
Systems

Language

Political
Philosophy

Economic
Philosophy

Education

Religion

Social
Structure

figure 3.1

The Determination of
Culture

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Chapter Three Differences in Culture 97

discussed political and economic philosophies at length in Chapter 2. Such philoso-
phies clearly influence the value systems of a society. For example, the values found in
Communist North Korea toward freedom, justice, and individual achievement are
clearly different from the values found in the United States, precisely because each
society operates according to different political and economic philosophies. Below we
will discuss the influence of social structure, religion, language, and education. The
chain of causation runs both ways. While factors such as social structure and religion
clearly influence the values and norms of a society, the values and norms of a society
can influence social structure and religion.

Social Structure
A society’s social structure refers to its basic social organization. Although social
structure consists of many different aspects, two dimensions are particularly important
when explaining differences between cultures. The first is the degree to which the
basic unit of social organization is the individual, as opposed to the group. In general,
Western societies tend to emphasize the primacy of the individual, whereas groups
tend to figure much larger in many other societies. The second dimension is the de-
gree to which a society is stratified into classes or castes. Some societies are character-
ized by a relatively high degree of social stratification and relatively low mobility
between strata (e.g., Indian); other societies are characterized by a low degree of social
stratification and high mobility between strata (e.g., American).

INDIVIDUALS AND GROUPS A group is an association of two or more
individuals who have a shared sense of identity and who interact with each other in
structured ways on the basis of a common set of expectations about each other’s be-
havior. 12 Human social life is group life. Individuals are involved in families, work
groups, social groups, recreational groups, and so on. However, while groups are
found in all societies, societies differ according to the degree to which the group is
viewed as the primary means of social organization. 13 In some societies, individual
attributes and achievements are viewed as being more important than group mem-
bership; in others the reverse is true.

The Individual In Chapter 2, we discussed individualism as a political philosophy.
However, individualism is more than just an abstract political philosophy. In many
Western societies, the individual is the basic building block of social organization.
This is reflected not just in the political and economic organization of society but
also in the way people perceive themselves and relate to each other in social and busi-
ness settings. The value systems of many Western societies, for example, emphasize
individual achievement. The social standing of individuals is not so much a function
of whom they work for as of their individual performance in whatever work setting
they choose.
The emphasis on individual performance in many Western societies has both ben-
eficial and harmful aspects. In the United States, the emphasis on individual perfor-
mance finds expression in an admiration of rugged individualism and entrepreneurship.
One benefit of this is the high level of entrepreneurial activity in the United States and
other Western societies. New products and new ways of doing business (e.g., personal
computers, photocopiers, computer software, biotechnology, supermarkets, and dis-
count retail stores) have repeatedly been created in the United States by entrepreneur-
ial individuals. One can argue that the dynamism of the U.S. economy owes much to
the philosophy of individualism.

Group
An association of two or
more individuals who
have a shared sense of
identity and who interact
with each other in
structured ways on the
basis of a common set of
expectations about each
other’s behavior.

Social Structure
The basic social
organization of a society.

LEARNING OBJECTIVE 3
Identify the business and
economic implications of

differences in culture.

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98 Part Two Country Differences

Individualism also finds expression in a high degree of managerial mobility between
companies, and this is not always a good thing. Although moving from company to
company may be good for individual managers who are trying to build impressive ré-
sumés, it is not necessarily a good thing for American companies. The lack of loyalty
and commitment to an individual company, and the tendency to move on for a better
offer, can result in managers who have good general skills but lack the knowledge,
experience, and network of interpersonal contacts that come from years of working
within the same company. An effective manager draws on company-specific experi-
ence, knowledge, and a network of contacts to find solutions to current problems, and
American companies may suffer if their managers lack these attributes. One positive
aspect of high managerial mobility is that executives are exposed to different ways of
doing business. The ability to compare business practices helps U.S. executives iden-
tify how good practices and techniques developed in one firm might be profitably ap-
plied to other firms.
The emphasis on individualism may also make it difficult to build teams within an
organization to perform collective tasks. If individuals are always competing with each
other on the basis of individual performance, it may be difficult for them to cooperate.
A study of U.S. competitiveness by the Massachusetts Institute of Technology sug-
gested that U.S. firms are being hurt in the global economy by a failure to achieve
cooperation both within a company (e.g., between functions; between management
and labor) and between companies (e.g., between a firm and its suppliers). Given the
emphasis on individualism in the American value system, this failure is not surpris-
ing. 14 The emphasis on individualism in the United States, while helping to create a
dynamic entrepreneurial economy, may raise the costs of doing business due to its
adverse impact on managerial stability and cooperation.

The Group In contrast to the Western emphasis on the individual, the group is the
primary unit of social organization in many other societies. For example, in Japan, the
social status of an individual is determined as much by the standing of the group to
which he or she belongs as by his or her individual performance. 15 In traditional Japa-
nese society, the group was the family or village to which an individual belonged. To-
day, the group has frequently come to be associated with the work team or business
organization to which an individual belongs. In a now-classic study of Japanese society,
Nakane noted how this expresses itself in everyday life:

When a Japanese faces the outside (confronts another person) and affixes some
position to himself socially he is inclined to give precedence to institution over
kind of occupation. Rather than saying, “I am a typesetter” or “I am a filing clerk,”
he is likely to say, “I am from B Publishing Group” or “I belong to S company .” 16

Nakane goes on to observe that the primacy of the group to which an individual
belongs often evolves into a deeply emotional attachment in which identification with
the group becomes all-important in one’s life. One central value of Japanese culture is
the importance attached to group membership. This may have beneficial implications
for business firms. Strong identification with the group is argued to create pressures for
mutual self-help and collective action. If the worth of an individual is closely linked to
the achievements of the group (e.g., firm), as Nakane maintains is the case in Japan, this
creates a strong incentive for individual members of the group to work together for the
common good. Some argue that the success of Japanese enterprises in the global econ-
omy has been based partly on their ability to achieve close cooperation between indi-
viduals within a company and between companies. This has found expression in the
widespread diffusion of self-managing work teams within Japanese organizations, the

LEARNING OBJECTIVE 3
Identify the business and
economic implications of

differences in culture.

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Chapter Three Differences in Culture 99

close cooperation among different functions within Japanese companies (e.g., among
manufacturing, marketing, and R&D), and the cooperation between a company and its
suppliers on issues such as design, quality control, and inventory reduction. 17 In all of
these cases, cooperation is driven by the need to improve the performance of the group
(i.e., the business firm).
The primacy of the value of group identification also discourages managers and
workers from moving from company to company. Lifetime employment in a particu-
lar company was long the norm in certain sectors of the Japanese economy (estimates
suggest that between 20 and 40 percent of all Japanese employees have formal or in-
formal lifetime employment guarantees). Over the years, managers and workers build
up knowledge, experience, and a network of interpersonal business contacts. All these
things can help managers perform their jobs more effectively and achieve cooperation
with others.
However, the primacy of the group is not always beneficial. Just as U.S. society is
characterized by a great deal of dynamism and entrepreneurship, reflecting the pri-
macy of values associated with individualism, some argue that Japanese society is char-
acterized by a corresponding lack of dynamism and entrepreneurship. Although the
long-run consequences are unclear, the United States could continue to create more
new industries than Japan and continue to be more successful at pioneering radically
new products and new ways of doing business.

SOCIAL STRATIFICATION All societies are stratified on a hierarchical basis
into social categories—that is, into social strata. These strata are typically defined on
the basis of characteristics such as family background, occupation, and income. Indi-
viduals are born into a particular stratum. They become a member of the social cate-
gory to which their parents belong. Individuals born into a stratum toward the top of
the social hierarchy tend to have better life chances than those born into a stratum
toward the bottom of the hierarchy. They are likely to have better education, health,
standard of living, and work opportunities. Although all societies are stratified to some
degree, they differ in two related ways. First, they differ from each other with regard
to the degree of mobility between social strata; second, they differ with regard to the
significance attached to social strata in business contexts.

Social Mobility The term social mobility refers to the extent to which individu-
als can move out of the strata into which they are born. Social mobility varies signifi-
cantly from society to society. The most rigid system of stratification is a caste system.
A caste system is a closed system of stratification in which social position is deter-
mined by the family into which a person is born, and change in that position is usually
not possible during an individual’s lifetime. Often a caste position carries with it a spe-
cific occupation. Members of one caste might be shoemakers, members of another
might be butchers, and so on. These occupations are embedded in the caste and passed
down through the family to succeeding generations. Although the number of societies
with caste systems diminished rapidly during the twentieth century, one partial exam-
ple still remains. India has four main castes and several thousand subcastes. Even
though the caste system was officially abolished in 1949, two years after India became
independent, it is still a force in rural Indian society where occupation and marital op-
portunities are still partly related to caste (for more details, see the Country Focus
feature on the caste system in India today). 18
A class system is a less rigid form of social stratification in which social mobility is
possible. It is a form of open stratification in which the position a person has by birth
can be changed through his or her own achievements or luck. Individuals born into a

Social Strata
Hierarchical social
categories often based
on family background,
occupation, and income.

Social Mobility
The extent to which
individuals can move out
of the strata into which
they are born.

Class System
A system of social
stratification in which the
position a person has by
birth can be changed
through his or her own
achievements or luck.

Caste System
A closed system of
stratification in which
social position is
determined by the family
into which a person is
born, and change in that
position is usually not
possible during an
individual’s lifetime.

LEARNING OBJECTIVE 2
Identify the forces that

lead to differences in
social culture.

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100 Part Two Country Differences

class at the bottom of the hierarchy can work their way up; conversely, individuals
born into a class at the top of the hierarchy can slip down.
While many societies have class systems, social mobility within a class system
varies from society to society. For example, some sociologists have argued that
Britain has a more rigid class structure than certain other Western societies, such as
the United States. 19 Historically, British society was divided into three main classes:
the upper class, which was made up of individuals whose families for generations
had wealth, prestige, and occasionally power; the middle class, whose members
were involved in professional, managerial, and clerical occupations; and the working
class, whose members earned their living from manual occupations. The middle
class was further subdivided into the upper-middle class, whose members were in-
volved in important managerial occupations and the prestigious professions (e.g.,
lawyers, accountants, doctors), and the lower-middle class, whose members were
involved in clerical work (e.g., bank tellers) and the less prestigious professions
(e.g., schoolteachers).
The British class system exhibited significant divergence between the life chances
of members of different classes. The upper and upper-middle classes typically sent

Breaking India’s Caste System

Modern India is a country of dramatic contrasts. Its infor-
mation technology sector is among the most vibrant in the
world, with companies such as Infosys and Wipro Tech-
nologies emerging as powerful global players. India’s caste
system, long an impediment to social mobility, is a fading
memory among the educated urban middle-class Indians
who make up the majority of employees in the high-tech
economy. However, the same is not true in rural India
where 70 percent of the population still resides. There,
caste remains a pervasive influence. In 1950, the national
constitution reserved 22.5 percent of jobs for people from
the lower castes, or Dalits (also known as “untouchables”),
and for tribal people. In 1990, an additional 27 percent of
jobs were set aside for what were called “other backward
castes.” Some Indian states set higher quotas, including
Tamil Nadu, which reserves 69 percent of government jobs
for lower castes and other needy groups. Despite these
long-standing policies, anecdotal and hard evidence sug-
gests that the caste system still plays an important role in
daily life.
For example, a young female engineer at Infosys who
grew up in a small rural village and is a Dalit recounts how
she never entered the house of a Brahmin , India’s elite
priestly cast, even though half of her village was Brahmins .
When a Dalit was hired to cook at the school in her native
village, Brahmins withdrew their children from the school.
The engineer herself is the beneficiary of a charitable
training system that Infosys launched in 2006. Her caste is

among the poorest in India, with some 91 percent making
less than $100 a month, compared to 65 percent of Brahmins .
To try to correct this historic inequality, politicians have
talked for years about extending the employment quota
system to private enterprises. The government has told
private companies to hire more Dalits and members of
tribal communities and has warned that strong measures
will be taken if companies do not comply. Private employ-
ers are resisting government attempts to impose quotas,
arguing with some justification that people who are guar-
anteed a job by a quota system are unlikely to work very
hard. At the same time, progressive employers realize
that they need to do something to correct the inequalities
and that, unless India taps into the lower castes, it may
not be able to find the employees required to staff rapidly
growing high-technology enterprises. Thus, the Confed-
eration of Indian Industry recently introduced a package
of Dalit -friendly measures, including scholarships for
bright lower-caste children. Building on this, Infosys is
leading the way among high-tech enterprises. The com-
pany provides special training to low-caste engineering
graduates who have failed to get a job in industry after
graduation. While the training does not promise employ-
ment, so far almost all graduates who completed the
seven-month training program have been hired by Infosys
and other enterprises.

Sources: “With Reservations: Business and Caste in India,” The Economist ,
October 6, 2007, pp. 81–83; and Eric Bellman, “Reversal of Fortune Isolates
India’s Brahmins,” The Wall Street Journal , December 24, 2007, p. 4.

3 C o u n t r y F O C U S

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Chapter Three Differences in Culture 101

their children to a select group of private schools, where they wouldn’t mix with lower-
class children, and where they picked up many of the speech accents and social norms
that marked them as being from the higher strata of society. These same private
schools also had close ties with the most prestigious universities, such as Oxford and
Cambridge. Until fairly recently, Oxford and Cambridge guaranteed a certain number
of places for the graduates of these private schools. Having been to a prestigious uni-
versity, the offspring of the upper and upper-middle classes then had an excellent
chance of being offered a prestigious job in companies, banks, brokerage firms, and
law firms run by members of the upper and upper-middle classes.
In contrast, the members of the British working and lower-middle classes typically
went to state schools. The majority left at 16, and those who went on to higher educa-
tion found it more difficult to get accepted at the best universities. When they did,
they found that their lower-class accent and lack of social skills marked them as being
from a lower social stratum, which made it more difficult for them to get access to the
most prestigious jobs.
Because of this, the class system in Britain perpetuated itself from generation to
generation, and mobility was limited. Although upward mobility was possible, it could
not normally be achieved in one generation. While an individual from a working-class
background may have established an income level that was consistent with member-
ship in the upper-middle class, he or she may not have been accepted as such by others
of that class due to accent and background. However, by sending his or her offspring
to the “right kind of school,” the individual could ensure that his or her children were
accepted.
According to many commentators, modern British society is now rapidly leaving
this class structure behind and moving toward a classless society. However, sociologists
continue to dispute this finding and present evidence that this is not the case. For ex-
ample, one study reported that state schools in the London suburb of Islington, which
has a population of 175,000, had only 79 candidates for university, while one presti-
gious private school alone, Eton, sent more than that number to Oxford and Cam-
bridge. 20 This, according to the study’s authors, implies that “money still begets
money.” They argue that a good school means a good university, a good university
means a good job, and merit has only a limited chance of elbowing its way into this
tight little circle.
The class system in the United States is less pronounced than in Britain and mobil-
ity is greater. Like Britain, the United States has its own upper, middle, and working
classes. However, class membership is determined to a much greater degree by indi-
vidual economic achievements, as opposed to background and schooling. Thus, an
individual can, by his or her own economic achievement, move smoothly from the
working class to the upper class in a lifetime. Successful individuals from humble ori-
gins are highly respected in American society.
Another society where class divisions have historically been of some importance has
been China, where there has been a long-standing difference between the life chances
of the rural peasantry and urban dwellers. Ironically, this historic division was strength-
ened during the high point of Communist rule because of a rigid system of household
registration that restricted most Chinese to the place of their birth for their lifetime.
Bound to collective farming, peasants were cut off from many urban privileges—com-
pulsory education, quality schools, health care, public housing, varieties of foodstuffs, to
name only a few—and they largely lived in poverty. Social mobility was thus very lim-
ited. This system crumbled following reforms of the late 1970s and early 1980s, and as
a consequence, migrant peasant laborers have flooded into China’s cities looking for
work. Sociologists now hypothesize that a new class system is emerging in China based
less on the rural-urban divide and more on urban occupation. 21

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102 Part Two Country Differences

Significance From a business perspective, the stratification of a society is sig-
nificant if it affects the operation of business organizations. In American society,
the high degree of social mobility and the extreme emphasis on individualism limit
the impact of class background on business operations. The same is true in Japan,
where most of the population perceives itself to be middle class. In a country such
as Great Britain, however, the relative lack of class mobility and the differences
between classes have resulted in the emergence of class consciousness. Class con-
sciousness refers to a condition where people tend to perceive themselves in terms
of their class background, and this shapes their relationships with members of other
classes.
This has been played out in British society in the traditional hostility between
upper-middle-class managers and their working-class employees. Mutual antagonism
and lack of respect historically made it difficult to achieve cooperation between man-
agement and labor in many British companies and resulted in a relatively high level of
industrial disputes. However, as noted earlier, the last two decades have seen a dra-
matic reduction in industrial disputes, which bolsters the arguments of those who
claim that the country is moving toward a classless society (the level of industrial dis-
putes in the United Kingdom is now lower than in the United States). Alternatively, as
noted above, class consciousness may be reemerging in urban China, and it may ulti-
mately prove to be significant there.
An antagonistic relationship between management and labor classes, and the result-
ing lack of cooperation and high level of industrial disruption, tends to raise the costs
of production in countries characterized by significant class divisions. In turn, this can
make it more difficult for companies based in such countries to establish a competitive
advantage in the global economy.

Until the late 1970s, social mobility in China was very limited, but now sociologists believe a new class system is emerging
in China based less on the rural-urban divide and more on urban occupation.

Class
Consciousness

A tendency for people
to perceive themselves

in terms of their class
background.

LEARNING OBJECTIVE 3
Identify the business and
economic implications of
differences in culture.

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Chapter Three Differences in Culture 103

Religious and Ethical Systems
Religion may be defined as a system of shared beliefs and rituals that are concerned
with the realm of the sacred. 22 Ethical systems refer to a set of moral principles, or
values, that are used to guide and shape behavior. Most of the world’s ethical systems
are the product of religions. Thus, we can talk about Christian ethics and Islamic ethics.
However, there is a major exception to the principle that ethical systems are grounded
in religion. Confucianism and Confucian ethics influence behavior and shape culture in
parts of Asia, yet it is incorrect to characterize Confucianism as a religion.
The relationship among religion, ethics, and society is subtle and complex. Among
the thousands of religions in the world today, four dominate in terms of numbers of
adherents: Christianity with 1.7 billion adherents, Islam with around 1 billion adher-
ents, Hinduism with 750 million adherents (primarily in India), and Buddhism with
350 million adherents (see Map 3.1). Although many other religions have an impor-
tant influence in certain parts of the modern world (for example, Judaism, which has
18 million adherents), their numbers pale in comparison with these dominant reli-
gions (however, as the precursor of both Christianity and Islam, Judaism has an indi-
rect influence that goes beyond its numbers). We will review these four religions,
along with Confucianism, focusing on their business implications. Some scholars have
argued that the most important business implications of religion center on the extent
to which different religions shape attitudes toward work and entrepreneurship and the
degree to which the religious ethics affect the costs of doing business in a country.
It is hazardous to make sweeping generalizations about the nature of the relation-
ship between religion and ethical systems and business practice. While some scholars
argue that there is a relationship between religious and ethical systems and business
practice in a society, in a world where nations with Catholic, Protestant, Muslim,
Hindu, and Buddhist majorities all show evidence of entrepreneurial activity and sus-
tainable economic growth, it is important to view such proposed relationships with a
degree of skepticism. The proposed relationships may exist, but their impact is proba-
bly small compared to the impact of economic policy. Alternatively, research by econo-
mists Robert Barro and Rachel McCleary suggests that strong religious beliefs, and
particularly beliefs in heaven, hell, and an afterlife, have a positive impact on economic
growth rates, irrespective of the particular religion in question. 23 Barro and McCleary
looked at religious beliefs and economic growth rates in 59 countries during the 1980s
and 1990s. Their conjecture was that higher religious beliefs stimulate economic
growth because they help to sustain aspects of individual behavior that lead to higher
productivity.

CHRISTIANITY Christianity is the most widely practiced religion in the world.
Approximately 20 percent of the world’s people identify themselves as Christians.
The vast majority of Christians live in Europe and the Americas, although their num-
bers are growing rapidly in Africa. Christianity grew out of Judaism. Like Judaism, it
is a monotheistic religion (monotheism is the belief in one god). A religious division
in the eleventh century led to the establishment of two major Christian organiza-
tions—the Roman Catholic Church and the Orthodox Church. Today, the Roman
Catholic Church accounts for more than half of all Christians, most of whom are
found in Southern Europe and Latin America. The Orthodox Church, while less in-
fluential, is still of major importance in several countries (e.g., Greece and Russia). In
the sixteenth century, the Reformation led to a further split with Rome; the result was
Protestantism. The nonconformist nature of Protestantism has facilitated the emer-
gence of numerous denominations under the Protestant umbrella (e.g., Baptist,
Methodist, Calvinist).

Religion
A system of shared
beliefs and rituals that
are concerned with the
realm of the sacred.

Ethical Systems
A set of moral principles,
or values, that are used
to guide and shape
behavior.

LEARNING OBJECTIVE 2
Identify the forces that
lead to differences in
social culture.

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Chapter Three Differences in Culture 105

Economic Implications of Christianity: The Protestant Work Ethic Several
sociologists have argued that of the main branches of Christianity—Catholic, Orthodox,
and Protestant—the latter has the most important economic implications. In 1904, a
German sociologist, Max Weber, made a connection between Protestant ethics and “the
spirit of capitalism” that has since become famous. 24 Weber noted that capitalism
emerged in Western Europe, where

business leaders and owners of capital, as well as the higher grades of skilled la-
bor, and even more the higher technically and commercially trained personnel of
modern enterprises, are overwhelmingly Protestant . 25

Weber theorized that there was a relationship between Protestantism and the
emergence of modern capitalism. He argued that Protestant ethics emphasize the im-
portance of hard work and wealth creation (for the glory of God) and frugality (absti-
nence from worldly pleasures). According to Weber, this kind of value system was
needed to facilitate the development of capitalism. Protestants worked hard and sys-
tematically to accumulate wealth. However, their ascetic beliefs suggested that rather
than consuming this wealth by indulging in worldly pleasures, they should invest it in
the expansion of capitalist enterprises. Thus, the combination of hard work and the
accumulation of capital, which could be used to finance investment and expansion,
paved the way for the development of capitalism in Western Europe and subsequently
in the United States. In contrast, Weber argued that the Catholic promise of salvation
in the next world, rather than this world, did not foster the same kind of work ethic.
Protestantism also may have encouraged capitalism’s development in another way.
By breaking away from the hierarchical domination of religious and social life that
characterized the Catholic Church for much of its history, Protestantism gave indi-
viduals significantly more freedom to develop their own relationship with God. The
right to freedom of form of worship was central to the nonconformist nature of early
Protestantism. This emphasis on individual religious freedom may have paved the way
for the subsequent emphasis on individual economic and political freedoms and the
development of individualism as an economic and political philosophy. As we saw in
Chapter 2, such a philosophy forms the bedrock on which entrepreneurial free market
capitalism is based. Building on this, some scholars claim there is a connection be-
tween individualism, as inspired by Protestantism, and the extent of entrepreneurial
activity in a nation. 26 Again, one must be careful not to generalize too much from this
historical sociological view. While nations with a strong Protestant tradition such as
Britain, Germany, and the United States were early leaders in the industrial revolu-
tion, nations with Catholic or Orthodox majorities show significant and sustained en-
trepreneurial activity and economic growth in the modern world.

ISLAM With about 1 billion adherents, Islam is the second largest of the world’s
major religions. Islam dates back to AD 610 when the prophet Muhammad began spread-
ing the word, although the Muslim calendar begins in AD 622 when, to escape growing
opposition, Muhammad left Mecca for the oasis settlement of Yathrib, later known as
Madina. Adherents of Islam are referred to as Muslims. Muslims constitute a majority in
more than 35 countries and inhabit a nearly contiguous stretch of land from the north-
west coast of Africa, through the Middle East, to China and Malaysia in the Far East.
Islam has roots in both Judaism and Christianity (Islam views Jesus Christ as one of
God’s prophets). Like Christianity and Judaism, Islam is a monotheistic religion. The
central principle of Islam is that there is but the one true omnipotent God. Islam re-
quires unconditional acceptance of the uniqueness, power, and authority of God and
the understanding that the objective of life is to fulfill the dictates of his will in the
hope of admission to paradise. According to Islam, worldly gain and temporal power

LEARNING OBJECTIVE 2
Identify the forces that
lead to differences in
social culture.
LEARNING OBJECTIVE 3
Identify the business and
economic implications of
differences in culture.

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106 Part Two Country Differences

are an illusion. Those who pursue riches on earth may gain them, but those who forgo
worldly ambitions to seek the favor of Allah may gain the greater treasure—entry into
paradise. Other major principles of Islam include (1) honoring and respecting parents,
(2) respecting the rights of others, (3) being generous but not a squanderer, (4) avoid-
ing killing except for justifiable causes, (5) not committing adultery, (6) dealing justly
and equitably with others, (7) being of pure heart and mind, (8) safeguarding the pos-
sessions of orphans, and (9) being humble and unpretentious. 27 Obvious parallels exist
with many of the central principles of both Judaism and Christianity.
Islam is an all-embracing way of life governing the totality of a Muslim’s being. 28 As
God’s surrogate in this world, a Muslim is not a totally free agent but is circumscribed
by religious principles—by a code of conduct for interpersonal relations—in social
and economic activities. Religion is paramount in all areas of life. The Muslim lives in
a social structure that is shaped by Islamic values and norms of moral conduct. The
ritual nature of everyday life in a Muslim country is striking to a Western visitor.
Among other things, orthodox Muslim ritual requires prayer five times a day (business
meetings may be put on hold while the Muslim participants engage in their daily
prayer ritual), requires that women should be dressed in a certain manner, and forbids
the consumption of pork and alcohol.

Islamic Fundamentalism The past three decades have witnessed the growth of
a social movement often referred to as Islamic fundamentalism. 29 In the West, Islamic
fundamentalism is associated in the media with militants, terrorists, and violent up-
heavals, such as the bloody conflict occurring in Algeria, the killing of foreign tourists
in Egypt, and the September 11, 2001, attacks on the World Trade Center and Pen-
tagon in the United States. This characterization is misleading. Just as Christian fun-
damentalists are motivated by sincere and deeply held religious values firmly rooted
in their faith, so are Islamic fundamentalists. The violence that the Western media

The rise of Islamic fundamentalism as a reaction against globalization and the prevalence of Western cultural ideas has sent
many scrambling to try to understand Muslim culture and promote greater dialogue.

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Chapter Three Differences in Culture 107

associates with Islamic fundamentalism is perpetrated by a small minority of radical
“fundamentalists” who have hijacked the religion to further their own political and
violent ends. (Some Christian “fundamentalists” have done exactly the same, includ-
ing Jim Jones and David Koresh.) The vast majority of Muslims point out that Islam
teaches peace, justice, and tolerance, not violence and intolerance, and that Islam ex-
plicitly repudiates the violence that a radical minority practices.
The rise of fundamentalism has no one cause. In part, it is a response to the social
pressures created in traditional Islamic societies by the move toward modernization
and by the influence of Western ideas, such as liberal democracy, materialism, equal
rights for women, and attitudes toward sex, marriage, and alcohol. In many Muslim
countries, modernization has been accompanied by a growing gap between a rich urban
minority and an impoverished urban and rural majority. For the impoverished majority,
modernization has offered little in the way of tangible economic progress, while threat-
ening the traditional value system. Thus, for a Muslim who cherishes his or her tradi-
tions and believes that his or her identity is jeopardized by the encroachment of alien
Western values, Islamic fundamentalism has become a cultural anchor.
Fundamentalists demand commitment to traditional religious beliefs and rituals.
The result has been a marked increase in the use of symbolic gestures that confirm
Islamic values. In areas where fundamentalism is strong, women have resumed wear-
ing floor-length, long-sleeved dresses and covering their hair; religious studies have
increased in universities; the publication of religious tracts has increased; and public
religious orations have risen. 30 Also, the sentiments of some fundamentalist groups are
often anti-Western. Rightly or wrongly, Western influence is blamed for a range of
social ills, and many fundamentalists’ actions are directed against Western govern-
ments, cultural symbols, businesses, and even individuals.
In several Muslim countries, fundamentalists have gained political power and have
used this to try to make Islamic law (as set down in the Koran, the bible of Islam) the
law of the land. There are good grounds for this in Islam. Islam makes no distinction
between church and state. It is not just a religion; Islam is also the source of law, a
guide to statecraft, and an arbiter of social behavior. Muslims believe that every human
endeavor is within the purview of the faith—and this includes political activity—
because the only purpose of any activity is to do God’s will. 31 (Some Christian funda-
mentalists also share this view.) Muslim fundamentalists have been most successful in
Iran, where a fundamentalist party has held power since 1979, but they also have had
an influence in many other countries, such as Algeria, Afghanistan (where the Taliban
established an extreme fundamentalist state until removed by the U.S.-led coalition in
2002), Egypt, Pakistan, the Sudan, and Saudi Arabia.

Economic Implications of Islam The Koran establishes some explicit eco-
nomic principles, many of which are pro-free enterprise. 32 The Koran speaks approv-
ingly of free enterprise and of earning legitimate profit through trade and commerce
(the prophet Mohammed was once a trader). The protection of the right to private
property is also embedded within Islam, although Islam asserts that all property is a
favor from Allah (God), who created and so owns everything. Those who hold prop-
erty are regarded as trustees rather than owners in the Western sense of the word. As
trustees they are entitled to receive profits from the property but are admonished to
use it in a righteous, socially beneficial, and prudent manner. This reflects Islam’s
concern with social justice. Islam is critical of those who earn profit through the ex-
ploitation of others. In the Islamic view of the world, humans are part of a collective
in which the wealthy and successful have obligations to help the disadvantaged. Put
simply, in Muslim countries, it is fine to earn a profit, so long as that profit is justly
earned and not based on the exploitation of others for one’s own advantage. It also

LEARNING OBJECTIVE 3
Identify the business and
economic implications of
differences in culture.

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108 Part Two Country Differences

helps if those making profits undertake charitable acts to help the poor. Furthermore,
Islam stresses the importance of living up to contractual obligations, of keeping one’s
word, and of abstaining from deception. For a closer look at how Islam, capitalism,
and globalization can coexist, see the accompanying Country Focus on the region
around Kayseri in central Turkey.
Given the Islamic proclivity to favor market-based systems, Muslim countries are
likely to be receptive to international businesses as long as those businesses behave in a
manner that is consistent with Islamic ethics. Businesses that are perceived as making an
unjust profit through the exploitation of others, by deception, or by breaking contractual

Islamic Capitalism in Turkey

For years now Turkey has been lobbying the European
Union to allow it to join the free trade block as a member
state. If the EU says yes, Turkey will be the first Muslim
state in the union. Many critics worry that Islam and
Western-style capitalism do not mix well and, as a result,
allowing Turkey into the EU would be a mistake. However, a
close look at what is going on in Turkey suggests this view
may be misplaced. Consider the area around the city of
Kayseri in central Turkey. Many dismiss this poor, largely
agricultural region of Turkey as a non-European backwa-
ter, far removed from the secular bustle of Istanbul. It is a
region where traditional Islamic values hold sway. And yet,
it is also a region that has produced so many thriving Mus-
lim enterprises that it is sometimes called the Anatolian
Tiger. Businesses based here include large food manufac-
turers, textile companies, furniture manufacturers, and en-
gineering enterprises, many of which export a substantial
percentage of their production.
Local business leaders attribute the success of compa-
nies in the region to an entrepreneurial spirit that they say
is part of Islam. They point out that the Prophet Muham-
mad, who was himself a trader, preached merchant honor
and commanded that 90 percent of a Muslim’s life be de-
voted to work in order to put food on the table. Outsider
observers have argued that what is occurring around Kay-
seri is an example of Islamic Calvinism, a fusion of tradi-
tional Islamic values and the work ethic often associated
with Protestantism in general and Calvinism in particular.
Within Kayseri, the influence of Islam is plain to see.
Many companies set aside rooms and time for 15-minute
prayer breaks. Most of the older businessmen have been
to Mecca on the Hajj, the pilgrimage that all Muslims are
meant to make at least once in a lifetime. Few of the café’s
and restaurants in Kayseri serve alcohol, and most women
wear a head scarf.
At the Kayseri sugar factory, one of the most profitable in
the region, a senior manager claims that Islam has played
a large part in improving the profitability of the enterprise.

For a long time the factory bought most of its sugar beet
from a single monopoly supplier, who charged a high price.
But because Islam preaches equal opportunity in business,
managers at the sugar factory decided that the Islamic
thing to do was to diversify the supply base and encourage
small producers to sell beets to the factory. Today the fac-
tory buys sugar beets from 20,000 small growers. Competi-
tion between growers has lowered prices and boosted the
factory’s profitability. The same manager also noted, “If
you are not a good Muslim, don’t pray five times a day, and
don’t have a wife who wears a head scarf, it can be diffi-
cult to do business here.”
However, not everyone agrees that Islam is the driving
force behind the region’s success. Saffet Arslan, the man-
aging director of Ipek, the largest furniture producer in the
region (which exports to more than 30 countries), claims
another force is at work—globalization! According to
Arslan, over the past three decades, local Muslims who once
eschewed making money in favor of focusing on religion
now make business a priority. They see the Western world,
and Western capitalism, as a model, and are striving to be
successful through the opportunities associated with glo-
balization. At the same time, Arslan is a practicing Muslim
who has built a mosque in the basement of Ipec’s head-
quarters building so that people can pray while at work.
If there is a weakness in the Islamic model of business
that is emerging in places such as Kayseri, some say it can
be found in traditional attitudes toward the role of women in
the workplace and in the low level of female employment in
the region. According to a report by the European Stability
Initiative, the same group that holds up the Kayseri region
as an example of Islamic Calvinism, the low participation of
women in the local workforce is the Achilles’ heel of the
economy and may stymie the region’s attempts to catch up
with the countries of the European Union.

Sources: D. Bilefsky, “Turks Knock on Europe’s Door with Evidence that
Islam and Capitalism Can Coexist,” The New York Times , August 27, 2006,
p. 4; and European Stability Imitative, Islamic Calvinists , September 19, 2005,
archived at www.esiweb.org.

3 C o u n t r y F O C U S

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Chapter Three Differences in Culture 109

obligations are unlikely to be welcomed in an Islamic country. In addition, in Islamic
countries where fundamentalism is on the rise, hostility toward Western-owned busi-
nesses is likely to increase.
In the previous chapter, we noted that one economic principle of Islam prohibits the
payment or receipt of interest, which is considered usury. This is not just a matter of
theology; in several Islamic states, it is also a matter of law. The Koran clearly con-
demns interest, which is called riba in Arabic, as exploitative and unjust. For many years,
banks operating in Islamic countries conveniently ignored this condemnation, but
about 30 years ago, starting with the establishment of an Islamic bank in Egypt, Islamic
banks began to appear in predominantly Muslim countries. By 2008, more than 200
Islamic financial institutions worldwide managed more than $700 billion in assets. 33
Even conventional banks are entering the market—both Citigroup and HSBC, two of
the world’s largest financial institutions, now offer Islamic financial services. While only
Iran and the Sudan enforce Islamic banking conventions, in an increasing number of
countries, customers can choose between conventional banks and Islamic banks.
Conventional banks make a profit on the spread between the interest rate they have
to pay to depositors and the higher interest rate they charge borrowers. Because
Islamic banks cannot pay or charge interest, they must find a different way of making
money. Islamic banks have experimented with two different banking methods—the
mudarabah and the murabaha. 34
A mudarabah contract is similar to a profit-sharing scheme. Under mudarabah, when
an Islamic bank lends money to a business, rather than charging that business interest
on the loan, it takes a share in the profits that are derived from the investment. Simi-
larly, when a business (or individual) deposits money at an Islamic bank in a savings
account, the deposit is treated as an equity investment in whatever activity the bank
uses the capital for. Thus, the depositor receives a share in the profit from the bank’s
investment (as opposed to interest payments) according to an agreed-on ratio. Some
Muslims claim this is a more efficient system than the Western banking system, since
it encourages both long-term savings and long-term investment. However, there is no
hard evidence of this, and many believe that a mudarabah system is less efficient than a
conventional Western banking system.
The second Islamic banking method, the murabaha contract, is the most widely
used among the world’s Islamic banks, primarily because it is the easiest to implement.
In a murabaha contract, when a firm wishes to purchase something using a loan—let’s
say a piece of equipment that costs $1,000—the firm tells the bank after having nego-
tiated the price with the equipment manufacturer. The bank then buys the equipment
for $1,000, and the borrower buys it back from the bank at some later date for, say,
$1,100, a price that includes a $100 markup for the bank. A cynic might point out that
such a markup is functionally equivalent to an interest payment, and it is the similarity
between this method and conventional banking that makes it so much easier to adopt.

HINDUISM Hinduism has approximately 750 million adherents, most of them
on the Indian subcontinent. Hinduism began in the Indus Valley in India more than
4,000 years ago, making it the world’s oldest major religion. Unlike Christianity and
Islam, its founding is not linked to a particular person. Nor does it have an officially
sanctioned sacred book such as the Bible or the Koran. Hindus believe that a moral
force in society requires the acceptance of certain responsibilities, called dharma . Hin-
dus believe in reincarnation, or rebirth into a different body, after death. Hindus also
believe in karma , the spiritual progression of each person’s soul. A person’s karma is
affected by the way he or she lives. The moral state of an individual’s karma deter-
mines the challenges he or she will face in the next life. By perfecting the soul in each
new life, Hindus believe that an individual can eventually achieve nirvana , a state of

LEARNING OBJECTIVE 2
Identify the forces that
lead to differences in
social culture.

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110 Part Two Country Differences

complete spiritual perfection that renders reincarnation no longer necessary. Many
Hindus believe that the way to achieve nirvana is to lead a severe ascetic lifestyle of
material and physical self-denial, devoting life to a spiritual rather than material quest.
One of the interesting aspects of Hindu culture is the reverence for the cow, which
Hindus see as a gift of the gods to the human race. The sacred status of the cow cre-
ated some unique problems for McDonald’s when it entered India in the 1990s, since
devout Hindus do not eat beef (and many are also vegetarians.

Economic Implications of Hinduism Max Weber, famous for expounding on
the Protestant work ethic, also argued that the ascetic principles embedded in Hindu-
ism do not encourage the kind of entrepreneurial activity in pursuit of wealth creation
that we find in Protestantism. 35 According to Weber, traditional Hindu values empha-
size that individuals should be judged not by their material achievements but by their
spiritual achievements. Hindus perceive the pursuit of material well-being as making
the attainment of nirvana more difficult. Given the emphasis on an ascetic lifestyle,
Weber thought that devout Hindus would be less likely to engage in entrepreneurial
activity than devout Protestants.
Mahatma Gandhi, the famous Indian nationalist and spiritual leader, was certainly
the embodiment of Hindu asceticism. It has been argued that the values of Hindu as-
ceticism and self-reliance that Gandhi advocated had a negative impact on the eco-
nomic development of postindependence India. 36 But one must be careful not to read
too much into Weber’s arguments. Modern India is a very dynamic entrepreneurial
society, and millions of hardworking entrepreneurs form the economic backbone of
the country’s rapidly growing economy.
Historically, Hinduism also supported India’s caste system. The concept of mobility
between castes within an individual’s lifetime makes no sense to traditional Hindus.
Hindus see mobility between castes as something that is achieved through spiritual
progression and reincarnation. An individual can be reborn into a higher caste in his
or her next life if he or she achieves spiritual development in this life. Although the
caste system has been abolished in India, it still casts a long shadow over Indian life,
according to many observers. In so far as the caste system limits individuals’ opportu-
nities to adopt positions of responsibility and influence in society, the economic con-
sequences of this religious belief are somewhat negative. For example, within a
business organization, the most able individuals may find their route to the higher
levels of the organization blocked simply because they come from a lower caste. By the
same token, individuals may get promoted to higher positions within a firm as much
because of their caste background as because of their ability.

BUDDHISM Buddhism was founded in India in the sixth century BC by Siddhartha
Gautama, a Nepalese prince who renounced his wealth to pursue an ascetic lifestyle
and spiritual perfection. Siddhartha achieved nirvana but decided to remain on earth
to teach his followers how they too could achieve this state of spiritual enlightenment.
Siddhartha became known as the Buddha (which means “the awakened one”). Today,
Buddhism has 350 million followers, most of whom are found in Central and South-
east Asia, China, Korea, and Japan. According to Buddhism, suffering originates in
people’s desires for pleasure. Cessation of suffering can be achieved by following a
path for transformation. Siddhartha offered the Noble Eightfold Path as a route for
transformation. This emphasizes right seeing, thinking, speech, action, living, effort,
mindfulness, and meditation. Unlike Hinduism, Buddhism does not support the caste
system. Nor does Buddhism advocate the kind of extreme ascetic behavior that is en-
couraged by Hinduism. Nevertheless, like Hindus, Buddhists stress the afterlife and
spiritual achievement rather than involvement in this world.

LEARNING OBJECTIVE 3
Identify the business and
economic implications of
differences in culture.

LEARNING OBJECTIVE 2
Identify the forces that
lead to differences in
social culture.

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Chapter Three Differences in Culture 111

Economic Implications of Buddhism The emphasis on wealth creation that is
embedded in Protestantism is not found in Buddhism. Thus, in Buddhist societies, we do
not see the same kind of historical cultural stress on entrepreneurial behavior that Weber
claimed could be found in the Protestant West. But unlike Hinduism, the lack of support
for the caste system and extreme ascetic behavior suggests that a Buddhist society may
represent a more fertile ground for entrepreneurial activity than a Hindu culture.

CONFUCIANISM Confucianism was founded in the fifth century BC by K’ung-
Fu-tzu, more generally known as Confucius. For more than 2,000 years until the 1949
Communist revolution, Confucianism was the official ethical system of China. While
observance of Confucian ethics has been weakened in China since 1949, more than
200 million people still follow the teachings of Confucius, principally in China, Korea,
and Japan. Confucianism teaches the importance of attaining personal salvation
through right action. Although not a religion, Confucian ideology has become deeply
embedded in the culture of these countries over the centuries and, through that, has
an impact on the lives of many millions more. Confucianism is built around a compre-
hensive ethical code that sets guidelines for relationships with others. High moral and
ethical conduct and loyalty to others are central to Confucianism. Unlike religions,
Confucianism is not concerned with the supernatural and has little to say about the
concept of a supreme being or an afterlife.

Economic Implications of Confucianism Some scholars maintain that Con-
fucianism may have economic implications as profound as those Weber argued were
to be found in Protestantism, although they are of a different nature. 37 Their basic
thesis is that the influence of Confucian ethics on the culture of China, Japan, South
Korea, and Taiwan, by lowering the costs of doing business in those countries, may
help explain their economic success. In this regard, three values central to the Confu-
cian system of ethics are of particular interest: loyalty, reciprocal obligations, and hon-
esty in dealings with others.
In Confucian thought, loyalty to one’s superiors
is regarded as a sacred duty—an absolute obliga-
tion. In modern organizations based in Confucian
cultures, the loyalty that binds employees to the
heads of their organization can reduce the conflict
between management and labor that we find in
more class-conscious societies. Cooperation be-
tween management and labor can be achieved at a
lower cost in a culture where the virtue of loyalty is
emphasized in the value systems.
However, in a Confucian culture, loyalty to
one’s superiors, such as a worker’s loyalty to man-
agement, is not blind loyalty. The concept of recip-
rocal obligations is important. Confucian ethics
stress that superiors are obliged to reward the loy-
alty of their subordinates by bestowing blessings
on them. If these “blessings” are not forthcoming,
then neither will be the loyalty. This Confucian
ethic is central to the Chinese concept of guanxi,
which refers to relationship networks supported by
reciprocal obligations. 38 As discussed in the open-
ing case, guanxi means relationships, although in
business settings it can be better understood as

LEARNING OBJECTIVE 3
Identify the business and
economic implications of
differences in culture.

LEARNING OBJECTIVE 2
Identify the forces that

lead to differences
in social culture.

LEARNING OBJECTIVE 3
Identify the business and
economic implications of
differences in culture.
A n o t h e r P e r s p e c t i v e

Shamans: Staying Abreast of the Times
in South Korea
Since the 1960s, South Korea has enjoyed tremendous
economic growth. And as the nation becomes increasingly
global, even its shamans—local religious practitioners
who channel the spirits on behalf of believers—have had
to adapt to changing times. For centuries, shamans played
a significant role in traditional village life, helping house-
holds deal with family problems, illnesses, and other wor-
ries. But now, as the economy has grown and urban
development crowded out the South Korean countryside,
shamans have moved with the times. Today, they carry cell
phones and perform modern-day rituals, or kut, in commer-
cial shrines. A twenty-first-century kut is likely to focus
more on the concerns of business ownership—worries
about market downturns, cash flow, and the competition—
than on personal matters. (“South Korean Shamans Fluidly
Absorb Cultural Change,” Physord.com, February 23, 2010,
http://www.physorg.com)

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112 Part Two Country Differences

connections. Today, Chinese will often cultivate a guanxiwang, or “relationship net-
work,” for help. Reciprocal obligations are the glue that holds such networks together.
If those obligations are not met—if favors done are not paid back or reciprocated—the
reputation of the transgressor is tarnished and the person will be less able to draw on
his or her guanxiwang for help in the future. Thus, the implicit threat of social sanctions
is often sufficient to ensure that favors are repaid, obligations are met, and relationships
are honored. In a society that lacks a rule-based legal tradition, and thus legal ways of
redressing wrongs such as violations of business agreements, guanxi is an important
mechanism for building long-term business relationships and getting business done in
China. For an example of the importance of guanxi , read the Management Focus on
DMG-Shanghai.
A third concept found in Confucian ethics is the importance attached to honesty.
Confucian thinkers emphasize that, although dishonest behavior may yield short-term
benefits for the transgressor, dishonesty does not pay in the long run. The importance
attached to honesty has major economic implications. When companies can trust each
other not to break contractual obligations, the costs of doing business are lowered. Ex-
pensive lawyers are not needed to resolve contract disputes. In a Confucian society,
people may be less hesitant to commit substantial resources to cooperative ventures
than in a society where honesty is less pervasive. When companies adhere to Confucian

M a n a g e m e n t F O C U S

DMG-Shanghai

In 1993, New Yorker Dan Mintz moved to China as a free-
lance film director with no contacts, no advertising experi-
ence, and no Mandarin. By 2006, the company he had
founded in China, DMG, had emerged as one of China’s
fastest-growing advertising agencies with a client list that
included Budweiser, Unilever, Sony, Nabisco, Audi, Volk-
swagen, China Mobile, and dozens of other Chinese
brands. Mintz attributes his success in part to what the
Chinese call guanxi .
In a society that lacks a strong rule-based legal tradition,
and thus legal ways of redressing wrongs such as viola-
tions of business agreements, guanxi is an important
mechanism for building long-term business relationships
and getting business done in China. There is a tacit ac-
knowledgment that if you have the right guanxi, legal rules
can be broken, or at least bent.
Mintz, who is now fluent in Mandarin, cultivated his
guanxiwang by going into business with two young Chi-
nese who had connections, Bing Wu and Peter Xiao. Bing
Wu, who works on the production side of the business,
was a former national gymnastics champion, which trans-
lates into prestige and access to business and govern-
ment officials. Peter Xiao comes from a military family
with major political connections. Together, these three
have been able to open doors that long-established West-
ern advertising agencies have not. They have done it in

large part by leveraging the contacts of Wu and Xiao, and
by backing up their connections with what the Chinese
call Shi li , the ability to do good work.
A case in point was DMG’s campaign for Volkswagen,
which helped the German company to become ubiquitous
in China. The ads used traditional Chinese characters,
which had been banned by Chairman Mao during the cul-
tural revolution in favor of simplified versions. To get per-
mission to use the characters in film and print ads—a first
in modern China—the trio had to draw on high-level gov-
ernment contacts in Beijing. They won over officials by ar-
guing that the old characters should be thought of not as
“characters” but as art. Later, they shot TV spots for the ad
on Shanghai’s famous Bund, a congested boulevard that
runs along the waterfront of the old city. Drawing again on
government contacts, they were able to shut down the
Bund to make the shoot. Steven Spielberg had been able to
close only a portion of the street when he filmed Empire of
the Sun there in 1986. DMG has also filmed inside Beijing’s
Forbidden City, even though it is against the law to do so.
Using his contacts, Mintz persuaded the government to lift
the law for 24 hours. As Mintz has noted, “We don’t stop
when we come across regulations. There are restrictions
everywhere you go. You have to know how get around
them and get things done.”

Sources: J. Bryan, “The Mintz Dynasty,” Fast Company , April 2006, pp. 56–62;
and M. Graser, “Featured Player,” Variety , October 18, 2004, p. 6.

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Chapter Three Differences in Culture 113

ethics, they can trust each other not to violate the terms of cooperative agreements.
Thus, the costs of achieving cooperation between companies may be lower in societies
such as Japan relative to societies where trust is less pervasive.
For example, it has been argued that the close ties between the automobile compa-
nies and their component parts suppliers in Japan are facilitated by a combination of
trust and reciprocal obligations. These close ties allow the auto companies and their
suppliers to work together on a range of issues, including inventory reduction, quality
control, and design. The competitive advantage of Japanese auto companies such as
Toyota may in part be explained by such factors. 39 Similarly, the combination of trust
and reciprocal obligations is central to the workings and persistence of guanxi networks
in China. Someone seeking and receiving help through a guanxi network is then obli-
gated to return the favor and faces social sanctions if that obligation is not reciprocated
when it is called upon. If the person does not return the favor, his or her reputation will
be tarnished and he or she will be unable to draw on the resources of the network in the
future. It is claimed that these relationship-based networks can be more important in
helping to enforce agreements between businesses than the Chinese legal system. Some
claim that guanxi networks are a substitute for the legal system. 40

Language
One obvious way in which countries differ is language. By language, we mean both the
spoken and the unspoken means of communication. Language is one of the defining
characteristics of a culture.

SPOKEN LANGUAGE Language does far more than just enable people to
communicate with each other. The nature of a language also structures the way we
perceive the world. The language of a society can direct the attention of its members
to certain features of the world rather than others. The classic illustration of this
phenomenon is that whereas the English language has but one word for snow, the
language of the Inuit (Eskimos) lacks a general term for it. Instead, because distin-
guishing different forms of snow is so important in the lives of the Inuit, they have
24 words that describe different types of snow (e.g., powder snow, falling snow, wet
snow, drifting snow). 41
Because language shapes the way people perceive the world, it also helps define cul-
ture. Countries with more than one language often have more than one culture. Canada
has an English-speaking culture and a French-speaking culture. Tensions between the
two can run quite high, with a substantial proportion of the French-speaking minority
demanding independence from a Canada “dominated by English speakers.” The same
phenomenon can be observed in many other countries. Belgium is divided into Flemish
and French speakers, and tensions between the two groups exist; in Spain, a Basque-
speaking minority with its own distinctive culture has been agitating for independence
from the Spanish-speaking majority for decades; on the Mediterranean island of Cyprus,
the culturally diverse Greek- and Turkish-speaking populations of the island engaged in
open conflict in the 1970s, and the island is now partitioned into two parts. While it does
not necessarily follow that language differences create differences in culture and, there-
fore, separatist pressures (e.g., witness the harmony in Switzerland, where four languages
are spoken), there certainly seems to be a tendency in this direction. 42
Chinese is the mother tongue of the largest number of people, followed by English
and Hindi, which is spoken in India. However, the most widely spoken language in
the world is English, followed by French, Spanish, and Chinese (i.e., many people
speak English as a second language). English is increasingly becoming the language
of international business. When a Japanese and a German businessperson get together

LEARNING OBJECTIVE 3
Identify the business and
economic implications of
differences in culture.
LEARNING OBJECTIVE 2
Identify the forces that
lead to differences in
social culture.

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114 Part Two Country Differences

to do business, it is almost certain that they will
communicate in English. However, although
English is widely used, learning the local language
yields considerable advantages. Most people pre-
fer to converse in their own language, and being
able to speak the local language can build rapport,
which may be very important for a business deal.
International businesses that do not understand
the local language can make major blunders
through improper translation. For example, the
Sunbeam Corporation used the English words for
its “Mist-Stick” mist-producing hair curling iron
when it entered the German market, only to dis-
cover after an expensive advertising campaign
that mist means excrement in German. General
Motors was troubled by the lack of enthusiasm
among Puerto Rican dealers for its new Chevrolet
Nova. When literally translated into Spanish, nova
means star. However, when spoken it sounds like
“no va,” which in Spanish means “it doesn’t go.”
General Motors changed the name of the car to
Caribe. 43

UNSPOKEN LANGUAGE Unspoken language refers to nonverbal communi-
cation. We all communicate with each other by a host of nonverbal cues. The raising
of eyebrows, for example, is a sign of recognition in most cultures, while a smile is a
sign of joy. Many nonverbal cues, however, are culturally bound. A failure to under-
stand the nonverbal cues of another culture can lead to a communication failure. For
example, making a circle with the thumb and the forefinger is a friendly gesture in the
United States, but it is a vulgar sexual invitation in Greece and Turkey. Similarly, while
most Americans and Europeans use the thumbs-up gesture to indicate that “it’s all
right,” in Greece the gesture is obscene.
Another aspect of nonverbal communication is personal space, which is the com-
fortable amount of distance between you and someone you are talking with. In the
United States, the customary distance apart adopted by parties in a business discussion
is five to eight feet. In Latin America, it is three to five feet. Consequently, many
North Americans unconsciously feel that Latin Americans are invading their personal
space and can be seen backing away from them during a conversation. Indeed, the
American may feel that the Latin is being aggressive and pushy. In turn, the Latin
American may interpret such backing away as aloofness. The result can be a regretta-
ble lack of rapport between two businesspeople from different cultures.

Education
Formal education plays a key role in a society. Formal education is the medium
through which individuals learn many of the language, conceptual, and mathematical
skills that are indispensable in a modern society. Formal education also supplements
the family’s role in socializing the young into the values and norms of a society. Values
and norms are taught both directly and indirectly. Schools generally teach basic facts
about the social and political nature of a society. They also focus on the fundamental
obligations of citizenship. Cultural norms are also taught indirectly at school. Respect
for others, obedience to authority, honesty, neatness, being on time, and so on, are all

LEARNING OBJECTIVE 2
Identify the forces that
lead to differences in
social culture.

LEARNING OBJECTIVE 2
Identify the forces that
lead to differences
in social culture.

A n o t h e r P e r s p e c t i v e

Helping Teens Speak Their Parents’ Language
Minneapolis and St. Paul, Minnesota, are home to the larg-
est concentration of Hmong refugees in the United States.
Their children—some born in their native Laos but many
others born in the United States or in refugee camps in
Thailand—are increasingly embracing Western life. While
Hmong is spoken at home, high-school-age children have
discovered they lack the language skills to explain such
Western concepts as “scholarship” or “honor roll” to their
parents. Even the words Asian Club defy translation into
Hmong. Schools often assume—incorrectly—that students
of foreign descent are fluent in their parents’ language. To
help preserve their culture and create better school–family
relations, Minneapolis students recently petitioned the
school board to provide literacy classes that include read-
ing, writing, and lessons on Hmong history and culture.
(Kristal Leebrick, “Hmong Teens Make It Happen: Minne-
apolis School Offers Hmong Language Class,” Twin Cities
Daily Planet, March 16, 2010, http://www.tcdailyplanet.com)

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Chapter Three Differences in Culture 115

part of the hidden curriculum of schools. The use of a grading system also teaches
children the value of personal achievement and competition. 44
From an international business perspective, one important aspect of education is its
role as a determinant of national competitive advantage. 45 The availability of a pool of
skilled and educated workers seems to be a major determinant of the likely economic
success of a country. In analyzing the competitive success of Japan since 1945, for ex-
ample, Michael Porter notes that after the war, Japan had almost nothing except for a
pool of skilled and educated human resources.

With a long tradition of respect for education that borders on reverence, Japan
possessed a large pool of literate, educated, and increasingly skilled human
resources. . . . Japan has benefited from a large pool of trained engineers.
Japanese universities graduate many more engineers per capita than in the
United States. . . . A first-rate primary and secondary education system in
J apan operates based on high standards and emphasizes math and science.
Primary and secondary education is highly competitive. . . . Japanese educa-
tion provides most students all over Japan with a sound education for later
education and training. A Japanese high school graduate knows as much about
math as most American college graduates . 46

Porter’s point is that Japan’s excellent education system is an important factor ex-
plaining the country’s postwar economic success. Not only is a good education system
a determinant of national competitive advantage, but it is also an important factor
guiding the location choices of international businesses. The recent trend to outsource
information technology jobs to India, for example, is partly due to the presence of
significant numbers of trained engineers in India, which in turn is a result of the In-
dian education system. By the same token, it would make little sense to base produc-
tion facilities that require highly skilled labor in a country where the education system
was so poor that a skilled labor pool wasn’t available, no matter how attractive the
country might seem on other dimensions. It might make sense to base production
operations that require only unskilled labor in such a country.
The general education level of a country is also a good index of the kind of prod-
ucts that might sell in a country and of the type of promotional material that should be
used. For example, a country where more than 70 percent of the population is illiterate
is unlikely to be a good market for popular books. Promotional material containing
written descriptions of mass-marketed products is unlikely to have an effect in a coun-
try where almost three-quarters of the population cannot read. It is far better to use
pictorial promotions in such circumstances.

Culture and the Workplace
Of considerable importance for an international business with operations in different
countries is how a society’s culture affects the values found in the workplace. Man-
agement process and practices may need to vary according to culturally determined
work-related values. For example, if the cultures of the United States and France re-
sult in different work-related values, an international business with operations in
both countries should vary its management process and practices to account for these
differences.
Probably the most famous study of how culture relates to values in the workplace
was undertaken by Geert Hofstede. 47 As part of his job as a psychologist working for
IBM, Hofstede collected data on employee attitudes and values for more than
100,000 individuals from 1967 to 1973. These data enabled him to compare dimen-
sions of culture across 40 countries. Hofstede isolated four dimensions that he

LEARNING OBJECTIVE 3
Identify the business and
economic implications of
differences in culture.

LEARNING OBJECTIVE 4
Recognize how differences

in social culture influence
values in the workplace.

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116 Part Two Country Differences

claimed summarized different cultures—power distance, uncertainty avoidance, indi-
vidualism versus collectivism, and masculinity versus femininity.
Hofstede’s power distance dimension focused on how a society deals with the fact
that people are unequal in physical and intellectual capabilities. According to Hofstede,
high power distance cultures were found in countries that let inequalities grow over
time into inequalities of power and wealth. Low power distance cultures were found in
societies that tried to play down such inequalities as much as possible.
The individualism versus collectivism dimension focused on the relationship
between the individual and his or her fellows. In individualistic societies, the ties
between individuals were loose and individual achievement and freedom were
highly valued. In societies where collectivism was emphasized, the ties between in-
dividuals were tight. In such societies, people were born into collectives, such as
extended families, and everyone was supposed to look after the interests of his or
her collective.
Hofstede’s uncertainty avoidance dimension measured the extent to which differ-
ent cultures socialized their members into accepting ambiguous situations and tolerat-
ing uncertainty. Members of high uncertainty avoidance cultures placed a premium on
job security, career patterns, retirement benefits, and so on. They also had a strong
need for rules and regulations; the manager was expected to issue clear instructions,
and subordinates’ initiatives were tightly controlled. Lower uncertainty avoidance cul-
tures were characterized by a greater readiness to take risks and less emotional resis-
tance to change.
Hofstede’s masculinity versus femininity dimension looked at the relationship
between gender and work roles. In masculine cultures, sex roles were sharply differen-
tiated and traditional “masculine values,” such as achievement and the effective exer-
cise of power, determined cultural ideals. In feminine cultures, sex roles were less
sharply distinguished, and little differentiation was made between men and women in
the same job.
Hofstede created an index score for each of these four dimensions that ranged from
0 to 100 and scored high for high individualism, high power distance, high uncertainty
avoidance, and high masculinity. He averaged the score for all employees from a given
country. Table 3.1 summarizes these data for 20 selected countries. Western nations
such as the United States, Canada, and Britain score high on the individualism scale
and low on the power distance scale. At the other extreme are a group of Latin Amer-
ican and Asian countries that emphasize collectivism over individualism and score
high on the power distance scale. Table 3.1 also reveals that Japan’s culture has strong
uncertainty avoidance and high masculinity. This characterization fits the standard
stereotype of Japan as a country that is male dominant and where uncertainty avoid-
ance exhibits itself in the institution of lifetime employment. Sweden and Denmark
stand out as countries that have both low uncertainty avoidance and low masculinity
(high emphasis on “feminine” values).
Hofstede’s results are interesting for what they tell us in a very general way about
differences between cultures. Many of Hofstede’s findings are consistent with standard
Western stereotypes about cultural differences. For example, many people believe
Americans are more individualistic and egalitarian than the Japanese (they have a
lower power distance), who in turn are more individualistic and egalitarian than Mex-
icans. Similarly, many might agree that Latin countries such as Mexico place a higher
emphasis on masculine value—they are machismo cultures—than the Nordic coun-
tries of Denmark and Sweden.
However, one should be careful about reading too much into Hofstede’s research.
It has been criticized on a number of points. 48 First, Hofstede assumes there is a one-
to-one correspondence between culture and the nation-state, but as we saw earlier,

Power Distance
Theory of how a society
deals with the fact that

people are unequal in
physical and intellectual
capabilities. High power

distance cultures are
found in countries that let

inequalities grow over
time into inequalities of
power and wealth. Low

power distance cultures
are found in societies

that try to play down
such inequalities as

much as possible.

Individualism
versus Collectivism

Theory focusing on the
relationship between the
individual and his or her
fellows; in individualistic

societies, the ties between
individuals are loose and

individual achievement
and freedom are highly

valued; in societies
where collectivism is
emphasized, the ties

between individuals are
tight; people are born into

collectives, such as
extended families, and

everyone is supposed to
look after the interests of

the collective.

Masculinity versus
Femininity

Theory of the relationship
between gender and work

roles. In masculine
cultures, sex roles are

sharply differentiated and
traditional “masculine

values,” such as
achievement and the
effective exercise of

power, determine cultural
ideals; in feminine

cultures, sex roles are
less sharply distinguished,
and little differentiation is
made between men and
women in the same job.

Uncertainty
Avoidance

Extent to which different
cultures socialize their

members into accepting
ambiguous situations and

tolerating uncertainty.

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Chapter Three Differences in Culture 117

many countries have more than one culture. Hofstede’s results do not capture this
distinction. Second, the research may have been culturally bound. The research team
was composed of Europeans and Americans. The questions they asked of IBM em-
ployees and their analysis of the answers may have been shaped by their own cultural
biases and concerns. So it is not surprising that Hofstede’s results confirm Western
stereotypes, because it was Westerners who undertook the research.
Third, Hofstede’s informants worked not only within a single industry, the com-
puter industry, but also within one company, IBM. At the time, IBM was renowned for
its own strong corporate culture and employee selection procedures, making it possi-
ble that the employees’ values were different in important respects from the values of
the cultures from which those employees came. Also, certain social classes (such as
unskilled manual workers) were excluded from Hofstede’s sample. A final caution is
that Hofstede’s work is now beginning to look dated. Cultures do not stand still; they
evolve, albeit slowly. What was a reasonable characterization in the 1960s and 1970s
may not be so today.
Still, just as it should not be accepted without question, Hofstede’s work should not
be dismissed either. It represents a starting point for managers trying to figure out
how cultures differ and what that might mean for management practices. Also, several
other scholars have found strong evidence that differences in culture affect values and

3.1 table

Work-Related Values
for 20 Selected
Countries

Source: G. Hofstede, Culture’s

Publications. Cited in G. Hofstede,

“The Cultural Relativity of

Organizational Practices and

Theories,” Journal of International

Business Studies 14 (Fall 1983),

pp. 75–89. Reprinted by permission

of Geert Hofstede.

Power Uncertainty
Distance Avoidance Individualism Masculinity

Argentina 49 86 46 56

Australia 36 51 90 61

Brazil 69 76 38 49

Canada 39 48 80 52

Denmark 18 23 74 16

France 68 86 71 43

Germany (F.R.) 35 65 67 66

Great Britain 35 35 89 66

Indonesia 78 48 14 46

India 77 40 48 56

Israel 13 81 54 47

Japan 54 92 46 95

Mexico 81 82 30 69

Netherlands 38 53 80 14

Panama 95 86 11 44

Spain 57 86 51 42

Sweden 31 29 71 5

Thailand 64 64 20 34

Turkey 66 85 37 45

United Sates 40 46 91 62

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118 Part Two Country Differences

practices in the workplace, and Hofstede’s basic results have been replicated using
more diverse samples of individuals in different settings. 49 Still, managers should use
the results with caution, for they are not necessarily accurate.
Hofstede subsequently expanded his original research to include a fifth dimen-
sion that he argued captured additional cultural differences not brought out in his
earlier work. 50 He referred to this dimension as “Confucian dynamism” (sometimes
called long-term orientation ). According to Hofstede, Confucian dynamism cap-
tures attitudes toward time, persistence, ordering by status, protection of face, re-
spect for tradition, and reciprocation of gifts and favors. The label refers to these
“values” being derived from Confucian teachings. As might be expected, East Asian
countries such as Japan, Hong Kong, and Thailand scored high on Confucian dyna-
mism, while nations such as the United States and Canada scored low. Hofstede
and his associates went on to argue that their evidence suggested that nations with
higher economic growth rates scored high on Confucian dynamism and low on
individualism—the implication being Confucianism is good for growth. However,
subsequent studies have shown that this finding does not hold up under more sophis-
ticated statistical analysis. 51 During the past decade countries with high individualism
and low Confucian dynamics such as the United States have attained high growth
rates, while some Confucian cultures such as Japan have had stagnant economic
growth. In reality, while culture might influence the economic success of a nation, it is
just one of many factors, and while its importance should not be ignored, it should not
be overstated either. The factors discussed in Chapter 2—economic, political, and
legal systems—are probably more important than culture in explaining differential
economic growth rates over time.

Cultural Change
Culture is not a constant; it evolves over time. 52 Changes in value systems can be slow
and painful for a society. In the 1960s, for example, American values toward the role of
women, love, sex, and marriage underwent significant changes. Much of the social
turmoil of that time reflected these changes. Change can often be quite profound. For
example, at the beginning of the 1960s, the idea that women might hold senior man-
agement positions in major corporations was not widely accepted. Many scoffed at
the idea. Today, it is a reality, and few in the mainstream of American society question

the development or the capability of women in the
business world. American culture has changed (al-
though it is still more difficult for women to gain
senior management positions than men). Similarly,
the value systems of many ex-communist states,
such as Russia, are undergoing significant changes
as those countries move away from values that em-
phasize collectivism and toward those that empha-
size individualism. While social turmoil is an
inevitable outcome of such a shift, the shift will still
probably occur.

Similarly, some claim that a major cultural shift
has been occurring in Japan, with a move toward
greater individualism. 53 The model Japanese office
worker, or “salaryman,” is characterized as being
loyal to his boss and the organization to the point
of giving up evenings, weekends, and vacations to
serve the organization, which is the collective of

Confucian
Dynamism

Theory that Confucian
teachings affect attitudes
toward time, persistence,

ordering by status,
protection of face,

respect for tradition,
and reciprocation of gifts

and favors.

LEARNING OBJECTIVE 5
Demonstrate the economic
and business implications
of cultural change.

A n o t h e r P e r s p e c t i v e

The Chinese as Conspicuous Consumers?
By all accounts, the growth of consumerism in China
would appear to be a gold mine for marketers in the West
looking to promote “the next new thing.” In her book
Brand New China, Massachusetts Institute of Technology
Professor Jing Wang characterizes this cultural change
as “a mockery of the Communist revolution.” And although
she agrees that Chinese culture is changing, Wang says
it’s not happening as fast as Western marketers might
believe. Traditional Chinese values, she says, have not dis-
appeared altogether, and Wang advises marketers to keep
those values in mind when targeting the Chinese market.
(“Party Times: Marketing through Events,” BusinessWeek,
June 19, 2007, www.businessweek.com)

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Chapter Three Differences in Culture 119

which the employee is a member. However, a new generation of office workers does
not seem to fit this model. An individual from the new generation is likely to be more
direct than the traditional Japanese. He acts more like a Westerner, a gaijian. He does
not live for the company and will move on if he gets the offer of a better job. He is not
keen on overtime, especially if he has a date. He has his own plans for his free time,
and they may not include drinking or playing golf with the boss. 54
Several studies have suggested that economic advancement and globalization may
be important factors in societal change. 55 For example, there is evidence that eco-
nomic progress is accompanied by a shift in values away from collectivism and toward
individualism. 56 Thus, as Japan has become richer, the cultural emphasis on collectiv-
ism has declined and greater individualism is being witnessed. One reason for this shift
may be that richer societies exhibit less need for social and material support structures
built on collectives, whether the collective is the extended family or the paternalistic
company. People are better able to take care of their own needs. As a result, the impor-
tance attached to collectivism declines, while greater economic freedoms lead to an
increase in opportunities for expressing individualism.
The culture of societies may also change as they become richer because economic
progress affects a number of other factors, which in turn influence culture. For exam-
ple, increased urbanization and improvements in the quality and availability of educa-
tion are both a function of economic progress, and both can lead to declining emphasis
on the traditional values associated with poor rural societies. A 25-year study of values
in 78 countries, known as the World Values Survey, coordinated by the University of
Michigan’s Institute for Social Research, has documented how values change. The
study linked these changes in values to changes in a country’s level of economic devel-
opment. 57 According to this research, as countries get richer, a shift occurs away from
“traditional values” linked to religion, family, and country, and toward “secular ratio-
nal” values. Traditionalists say religion is important in their lives. They have a strong
sense of national pride; they also think that children should be taught to obey and that
the first duty of a child is to make his or her parents proud. They say abortion, eutha-
nasia, divorce, and suicide are never justified. At the other end of this spectrum are
secular rational values.

The 2006 MTV awards show in India demonstrates the globalization of what was originally American pop culture. Do you
think traditional Indian values are at risk from the importation of MTV?

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120 Part Two Country Differences

Another category in the World Values Survey is quality of life attributes. At one end
of this spectrum are “survival values,” the values people hold when the struggle for
survival is of paramount importance. These values tend to stress that economic and
physical security are more important than self-expression. People who cannot take
food or safety for granted tend to be xenophobic, are wary of political activity, have
authoritarian tendencies, and believe that men make better political leaders than
women. “Self-expression” or “well-being” values stress the importance of diversity,
belonging, and participation in political processes.
As countries get richer, there seems to be a shift from “traditional” to “secular ratio-
nal” values, and from “survival values” to “well-being” values. The shift, however, takes
time, primarily because individuals are socialized into a set of values when they are
young and find it difficult to change as they grow older. Substantial changes in values
are linked to generations, with younger people typically being in the vanguard of a
significant change in values.
With regard to globalization, some have argued that advances in transportation and
communication technologies, the dramatic increase in trade since World War II, and
the rise of global corporations such as Hitachi, Disney, Microsoft, and Levi Strauss,
whose products and operations can be found around the globe, are creating conditions
for the merging of cultures. 58 With McDonald’s hamburgers in China, The Gap in
India, iPods in South Africa, and MTV everywhere helping to foster a ubiquitous
youth culture, some argue that the conditions for less cultural variation have been cre-
ated. At the same time, one must not ignore important countertrends, such as the shift
toward Islamic fundamentalism in several countries; the separatist movement in Que-
bec, Canada; or the continuing ethnic strains and separatist movements in Russia.
Such countertrends in many ways are a reaction to the pressures for cultural conver-
gence. In an increasingly modern and materialistic world, some societies are trying to
reemphasize their cultural roots and uniqueness. Cultural change is not unidirectional,
with national cultures converging toward some homogenous global entity. Also, while
some elements of culture change quite rapidly—particularly the use of material
symbols—other elements change slowly if at all. Thus, just because people the world
over wear blue jeans and eat at McDonald’s, one should not assume that they have also
adopted American values—for more often than not, they have not.

Focus on Managerial Implications

International business is different from national business because countries and societ-
ies are different. In this chapter, we have seen just how different societies can be. Soci-
eties differ because their cultures vary. Their cultures vary because of profound
differences in social structure, religion, language, education, economic philosophy, and
political philosophy. Three important implications for international business flow
from these differences. The first is the need to develop cross-cultural literacy. There is
a need not only to appreciate that cultural differences exist but also to appreciate what
such differences mean for international business. A second implication centers on the
connection between culture and national competitive advantage. A third implication
looks at the connection between culture and ethics in decision making. In this section,
we will explore the first two of these issues in depth. The connection between culture
and ethics is explored in the next chapter.

LEARNING OBJECTIVE 3
Identify the business and
economic implications of
differences in culture.

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Chapter Three Differences in Culture 121

Cross-Cultural Literacy
One of the biggest dangers confronting a company that goes abroad for the first time is
the danger of being ill-informed. International businesses that are ill-informed about the
practices of another culture are likely to fail. Doing business in different cultures requires
adaptation to conform with the value systems and norms of that culture. Adaptation can
embrace all aspects of an international firm’s operations in a foreign country. The way in
which deals are negotiated, the appropriate incentive pay systems for salespeople, the
structure of the organization, the name of a product, the tenor of relations between man-
agement and labor, the manner in which the product is promoted, and so on, are all sensi-
tive to cultural differences. What works in one culture might not work in another.
To combat the danger of being ill-informed, international businesses should con-
sider employing local citizens to help them do business in a particular culture. They
must also ensure that home-country executives are cosmopolitan enough to under-
stand how differences in culture affect the practice of international business. Transfer-
ring executives overseas at regular intervals to expose them to different cultures will
help build a cadre of cosmopolitan executives. An international business must also be
constantly on guard against the dangers of ethnocentric behavior. Ethnocentrism is a
belief in the superiority of one’s own ethnic group or culture. Hand in hand with eth-
nocentrism goes a disregard or contempt for the culture of other countries. Unfortu-
nately, ethnocentrism is all too prevalent; many Americans are guilty of it, as are many
French people, Japanese people, British people, and so on. Ugly as it is, ethnocentrism
is a fact of life, one that international businesses must be on guard against.
Simple examples illustrate how important cross-cultural literacy can be. Anthro-
pologist Edward T. Hall has described how Americans, who tend to be informal in
nature, react strongly to being corrected or reprimanded in public. 59 This can cause
problems in Germany, where a cultural tendency toward correcting strangers can
shock and offend most Americans. For their part, Germans can be a bit taken aback by
the tendency of Americans to call everyone by their first name. This is uncomfortable
enough among executives of the same rank, but it can be seen as insulting when a
young and junior American executive addresses an older and more senior German
manager by his first name without having been invited to do so. Hall concludes it can
take a long time to get on a first-name basis with a German; if you rush the process
you will be perceived as overfriendly and rude, and that may not be good for business.
Hall also notes that cultural differences in attitude
to time can cause a myriad of problems. He notes
that in the United States, giving a person a deadline
is a way of increasing the urgency or relative impor-
tance of a task. However, in the Middle East, giving a
deadline can have exactly the opposite effect. The
American who insists an Arab business associate
make his mind up in a hurry is likely to be perceived
as overly demanding and exerting undue pressure.
The result may be exactly the opposite of what the
American intended, with the Arab going slow as a re-
action to the American’s arrogance and rudeness. For
his part, the American may believe that an Arab as-
sociate is being rude if he shows up late to a meeting
because he met a friend in the street and stopped to
talk. The American, of course, is very concerned
about time and scheduling. But for the Arab, who
lives in a society where social networks are a major
source of information, and maintaining relationships

Social networking and the importance of communal eating are some of
the collectivist values Arabs bring to business.

Ethnocentrism
A belief in the superiority
of one’s own ethnic
group or culture; often
results in disregard or
contempt for the culture
of other countries.

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122 Part Two Country Differences

is important, finishing the discussion with a friend is more important than adhering to
a strict schedule. Indeed, the Arab may be puzzled as to why the American attaches so
much importance to time and schedule.

Culture and Competitive Advantage
One theme that continually surfaces in this chapter is the relationship between culture
and national competitive advantage. Put simply, the value systems and norms of a coun-
try influence the costs of doing business in that country. The costs of doing business in
a country influence the ability of firms to establish a competitive advantage in the
global marketplace. We have seen how attitudes toward cooperation between manage-
ment and labor, toward work, and toward the payment of interest are influenced by
social structure and religion. It can be argued that the class-based conflict between
workers and management in class-conscious societies, when it leads to industrial dis-
ruption, raises the costs of doing business in that society. Similarly, we have seen how
some sociologists have argued that the ascetic “other-worldly” ethics of Hinduism may
not be as supportive of capitalism as the ethics embedded in Protestantism and Confu-
cianism. Also, Islamic laws banning interest payments may raise the costs of doing busi-
ness by constraining a country’s banking system.
Japan presents an interesting case study of how culture can influence competitive
advantage. Some scholars have argued that the culture of modern Japan lowers the
costs of doing business relative to the costs in most Western nations. Japan’s emphasis
on group affiliation, loyalty, reciprocal obligations, honesty, and education all boost
the competitiveness of Japanese companies. The emphasis on group affiliation and
loyalty encourages individuals to identify strongly with the companies in which they
work. This tends to foster an ethic of hard work and cooperation between manage-
ment and labor “for the good of the company.” Similarly, reciprocal obligations and
honesty help foster an atmosphere of trust between companies and their suppliers.
This encourages them to enter into long-term relationships with each other to work
on inventory reduction, quality control, and design—all of which have been shown to
improve an organization’s competitiveness. This level of cooperation has often been
lacking in the West, where the relationship between a company and its suppliers tends
to be a short-term one structured around competitive bidding rather than one based
on long-term mutual commitments. In addition, the availability of a pool of highly
skilled labor, particularly engineers, has helped Japanese enterprises develop cost-
reducing process innovations that have boosted their productivity. 60 Thus, cultural
factors may help explain the competitive advantage enjoyed by many Japanese busi-
nesses in the global marketplace. The rise of Japan as an economic power during the
second half of the twentieth century may be in part attributed to the economic conse-
quences of its culture.
It also has been argued that the Japanese culture is less supportive of entrepreneur-
ial activity than, say, American society. In many ways, entrepreneurial activity is a
product of an individualistic mind-set, not a classic characteristic of the Japanese. This
may explain why American enterprises, rather than Japanese corporations, dominate
industries where entrepreneurship and innovation are highly valued, such as computer
software and biotechnology. Of course, obvious and significant exceptions to this gen-
eralization exist. Masayoshi Son recognized the potential of software far faster than
any of Japan’s corporate giants; set up his company, Softbank, in 1981; and has since
built it into Japan’s top software distributor. Similarly, dynamic entrepreneurial indi-
viduals established major Japanese companies such as Sony and Matsushita (now know
as Panasonic). But these examples may be the exceptions that prove the rule, for as yet
there has been no surge in entrepreneurial high-technology enterprises in Japan
equivalent to what has occurred in the United States.

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Chapter Three Differences in Culture 123

For the international business, the connection between culture and competitive
advantage is important for two reasons. First, the connection suggests which countries
are likely to produce the most viable competitors. For example, one might argue that
U.S. enterprises are likely to see continued growth in aggressive, cost-efficient com-
petitors from those Pacific Rim nations where a combination of free market econom-
ics, Confucian ideology, group-oriented social structures, and advanced education
systems can all be found (e.g., South Korea, Taiwan, Japan, and, increasingly, China).
Second, the connection between culture and competitive advantage has important
implications for the choice of countries in which to locate production facilities and do
business. Consider a hypothetical case when a company has to choose between two
countries, A and B, for locating a production facility. Both countries are characterized
by low labor costs and good access to world markets. Both countries are of roughly the
same size (in terms of population) and both are at a similar stage of economic develop-
ment. In country A, the education system is undeveloped, the society is characterized
by a marked stratification between the upper and lower classes, and there are six major
linguistic groups. In country B, the education system is well developed, social stratifi-
cation is lacking, group identification is valued by the culture, and there is only one
linguistic group. Which country makes the best investment site?
Country B probably does. In country A, conflict between management and labor,
and between different language groups, can be expected to lead to social and industrial
disruption, thereby raising the costs of doing business. 61 The lack of a good education
system also can be expected to work against the attainment of business goals.
The same kind of comparison could be made for an international business trying to
decide where to push its products, country A or B. Again, country B would be the
logical choice because cultural factors suggest that in the long run, country B is the
nation most likely to achieve the greatest level of economic growth.
But as important as culture is, it is probably less important than economic, political,
and legal systems in explaining differential economic growth between nations. Cul-
tural differences are significant, but we should not overemphasize their importance in
the economic sphere. For example, earlier we noted that Max Weber argued that the
ascetic principles embedded in Hinduism do not encourage entrepreneurial activity.
While this is an interesting academic thesis, recent years have seen an increase in en-
trepreneurial activity in India, particularly in the information technology sector where
India is rapidly becoming an important global player. The ascetic principles of Hindu-
ism and caste-based social stratification have apparently not held back entrepreneurial
activity in this sector.

cross-cultural literacy, p. 93
culture, p. 94
values, p. 94
norms, p. 94
society, p. 94
folkways, p. 94
mores, p. 95
social structure, p. 97

group, p. 97
social strata, p. 99
social mobility, p. 99
caste system, p. 99
class system, p. 99
class consciousness, p. 102
religion, p. 103
ethical systems, p. 103

power distance, p. 116
individualism versus collectivism,
p. 116
uncertainty avoidance, p. 116
masculinity versus femininity, p. 116
Confucian dynamism, p. 118
ethnocentrism, p. 121

Key Terms

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124 Part Two Country Differences

Summary

We have looked at the nature of social culture and
studied some implications for business practice. The
chapter made the following points:

1. Culture is a complex whole that includes
knowledge, beliefs, art, morals, law, customs,
and other capabilities acquired by people as
members of society.

2. Values and norms are the central components
of a culture. Values are abstract ideals about
what a society believes to be good, right, and
desirable. Norms are social rules and guidelines
that prescribe appropriate behavior in
particular situations.

3. Values and norms are influenced by political
and economic philosophy, social structure,
religion, language, and education.

4. The social structure of a society refers to its
basic social organization. Two main dimensions
along which social structures differ are
the individual–group dimension and the
stratification dimension.

5. In some societies, the individual is the basic
building block of social organization. These
societies emphasize individual achievements
above all else. In other societies, the group is
the basic building block of social organization.
These societies emphasize group membership
and group achievements above all else.

6. All societies are stratified into different classes.
Class-conscious societies are characterized by
low social mobility and a high degree of
stratification. Less class-conscious societies are
characterized by high social mobility and a low
degree of stratification.

7. Religion may be defined as a system of shared
beliefs and rituals that is concerned with the
realm of the sacred. Ethical systems refer to a set

of moral principles, or values, that are used to
guide and shape behavior. The world’s major
religions are Christianity, Islam, Hinduism,
and Buddhism. Although not a religion,
Confucianism has an impact on behavior that
is as profound as that of many religions. The
value systems of different religious and ethical
systems have different implications for business
practice.

8. Language is one defining characteristic of a
culture. It has both spoken and unspoken
dimensions. In countries with more than one
spoken language, we tend to find more than
one culture.

9. Formal education is the medium through which
individuals learn skills and are socialized into
the values and norms of a society. Education
plays an important role in the determination of
national competitive advantage.

10. Geert Hofstede studied how culture relates to
values in the workplace. He isolated four
dimensions that he claimed summarized
different cultures: power distance, uncertainty
avoidance, individualism versus collectivism,
and masculinity versus femininity.

11. Culture is not a constant; it evolves. Economic
progress and globalization seem to be two
important engines of cultural change.

12. One danger confronting a company that goes
abroad for the first time is being ill-informed.
To develop cross-cultural literacy, international
businesses need to employ host-country
nationals, build a cadre of cosmopolitan
executives, and guard against the dangers of
ethnocentric behavior.

13. The value systems and norms of a country can
affect the costs of doing business in that country.

Critical Thinking and Discussion Questions

1. Outline why the culture of a country might
influence the costs of doing business in that
country. Illustrate your answer with examples.

2. Do you think that business practices in an
Islamic country are likely to differ from business
practices in the United States? If so, how?

3. What are the implications for international
business of differences in the dominant religion
or ethical system of a country?

4. Choose two countries that appear to be
culturally diverse. Compare the cultures of those
countries and then indicate how cultural

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Chapter Three Differences in Culture 125

differences influence ( a ) the costs of doing
business in each country, ( b ) the likely future
economic development of that country, and
( c ) business practices.

5. Reread the Country Focus about Islamic
capitalism in Turkey. Then answer the following
questions:

a. Can you see anything in the value of Islam
that is hostile to business?

b. What does the experience of the region
around Kayseri teach us about the
relationship between Islam and business?

c. What are the implications of Islamic values
towards business for the participation of a
country like Turkey in the global economy?

6. Reread the Management Focus on DMG-
Shanghai and answer the follow questions:

a. Why do you think that it is so important to
cultivate guanxi and guanxiwang in China?

b. What does the experience of DMG tells us
about the way things work in China? What
would likely happen to a business that obeyed
all of the rules and regulations, rather than
trying to find a way around them as Dan Mintz
apparently did?

c. What are the ethical issues that might arise
when drawing upon guanxiwang to get things
done in China? What does this suggest about
the limits of using guanxiwang for a Western
business committed to high ethical standards?

Use the globalEDGE Resource Desk (http://
globalEDGE.msu.edu/resourcedesk/) to complete
the following exercises:

1. You have been assigned to negotiate a business
deal with the representatives of a potential
distributor in South Africa. Since having
intercultural skills is critical for a successful
international experience, you consider
collecting information regarding the local
culture before your departure. Prepare a
short description of the most striking cultural

characteristics involved in communicating with
the local people that may affect business
interactions in this country.

2. Asian cultures exhibit significant differences in
business etiquette when compared to Western
cultures. For example, in China, large hand
movements are usually distracting, and it is
considered offensive to point while speaking.
Find five similar tips regarding the business
etiquette of the United Arab Emirates.

Research Task http://globalEDGE.msu.edu

Panasonic and Japan’s Changing Culture

Established in 1920, the consumer electronics giant Pana-
sonic was at the forefront of the rise of Japan to the status
of major economic power during the 1970s and 1980s (be-
fore 2009 Panasonic was known as Matsushita). Like many
other long-standing Japanese businesses, Panasonic was
regarded as a bastion of traditional Japanese values based
on strong group identification, reciprocal obligations, and
loyalty to the company. Several commentators attributed
Panasonic’s success, and that of the Japanese economy,

to the existence of Confucian values in the workplace. At
Panasonic, employees were taken care of by the company
from “cradle to the grave.” Panasonic provided them with a
wide range of benefits including cheap housing, guaran-
teed lifetime employment, seniority-based pay systems,
and generous retirement bonuses. In return, Panasonic ex-
pected, and got, loyalty and hard work from its employees.
To Japan’s postwar generation, struggling to recover from
the humiliation of defeat, it seemed like a fair bargain. The

closing case

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126 Part Two Country Differences

employees worked hard for the greater good of Panasonic,
and Panasonic reciprocated by bestowing “blessings” on
employees.
However, culture does not stay constant. According to
some observers, the generation born after 1964 lacked the
same commitment to traditional Japanese values as their
parents. They grew up in a world that was richer, where
Western ideas were beginning to make themselves felt, and
where the possibilities seemed greater. They did not want to
be tied to a company for life, to be a “salaryman.” These
trends came to the fore in the 1990s when the Japanese
economy entered a prolonged economic slump. As the de-
cade progressed, one Japanese firm after another was
forced to change its traditional ways of doing business.
Slowly at first, troubled companies started to lay off older
workers, effectively abandoning lifetime employment guaran-
tees. As younger people saw this happening, they concluded
that loyalty to a company might not be reciprocated, effec-
tively undermining one of the central bargains made in post-
war Japan.
Panasonic was one of the last companies to turn its back
on Japanese traditions, but in 1998, after years of poor perfor-
mance, it began to modify traditional practices. The principle
agents of change were a group of managers who had exten-
sive experience in Panasonic’s overseas operations, and in-
cluded Kunio Nakamura, who became the chief executive of
Panasonic in 2000.
First, Panasonic changed the pay scheme for its 11,000 man-
agers. In the past, the traditional twice-a-year bonuses had
been based almost entirely on seniority, but now Panasonic
said they would be based on performance. In 1999, Panasonic
announced this process would be made transparent; managers
would be shown what their performance rankings were and
how these fed into pay bonuses. As elementary as this might
sound in the West, for Panasonic it represented the beginning
of a revolution in human resource practices.
About the same time, Panasonic took aim at the lifetime
employment system and the associated perks. Under the
new system, recruits were given the choice of three em-
ployment options. First, they could sign on to the traditional
option. Under this, they were eligible to live in subsidized
company housing, go free to company-organized social
events, and buy subsidized services such as banking from
group companies. They also still would receive a retirement
bonus equal to two years’ salary. Under a second scheme,
employees could forgo the guaranteed retirement bonus in
exchange for higher starting salaries and keep perks such
as cheap company housing. Under a third scheme, they
would lose both the retirement bonus and the subsidized
services, but they would start at a still higher salary. In its
first two years of operation, only 3 percent of recruits chose

the third option—suggesting there is still a hankering for the
traditional paternalistic relationship—but 41 percent took
the second option.
In other ways Panasonic’s designs are grander still. As
the company has moved into new industries such as software
engineering and network communications technology, it has
begun to sing the praises of democratization of employees,
and it has sought to encourage individuality, initiative taking,
and risk seeking among its younger employees. But while
such changes may be easy to articulate, they are hard to im-
plement. For all of its talk, Panasonic has been slow to dis-
mantle its lifetime employment commitment to those hired
under the traditional system. This was underlined in early
2001 when, in response to continued poor performance,
Panasonic announced it would close 30 factories in Japan,
cut 13,000 jobs including 1,000 management jobs, and sell a
“huge amount of assets” over the next three years. While this
seemed to indicate a final break with the lifetime employment
system—it represented the first layoffs in the company’s
history—the company also said unneeded management staff
would not be fired but instead transferred to higher growth
areas such as health care.
With so many of its managers a product of the old way of
doing things, a skeptic might question the ability of the com-
pany to turn its intentions into a reality. As growth has slowed,
Panasonic has had to cut back on its hiring, but its continued
commitment to long-standing employees means that the aver-
age age of its workforce is rising. In the 1960s it was around
25; by the early 2000s it was 35, a trend that might counteract
Panasonic’s attempts to revolutionize the workplace, for
surely those who benefited from the old system will not give
way easily to the new. Still, by the mid-2000s it was clear that
Panasonic was making progress. After significant losses in
2002, the company broke even in 2003 and started to make
profits again in 2004. New growth drivers, such as sales of
DVD equipment, helped, but so did the cultural and organiza-
tional changes that enabled the company to better exploit
these new opportunities. The company continued to make
solid profits until 2009, when, like most enterprises, it was hit
by the global recession. Panasonic’s response to this showed
how much the company had changed. The company quickly
announced that it would close 27 plants and lay off 15,000 em-
ployees, half of them in Japan, signaling perhaps, the final
end of it’s lifetime employment commitments.

Sources: “Putting the Bounce Back into Matsushita,” The Economist,
May 22, 1999, pp. 67–68; “In Search of the New Japanese Dream,”
The Economist, February 19, 2000, pp. 59–60; P. Landers, “Matsushita
to Restructure in Bid to Boost Thin Profits,” The Wall Street Journal,
December 1, 2000, p. A13; M. Tanikawa, “A Pillar of Japan Inc. Finally
Turns Around; Work in Progress,” International Herald Tribune,
August 28, 2004, pp. 17–18; and “Panasonic Will Slash Jobs, Shut 27
Plants,” Los Angeles Times, February 5, 2009, p. C3.

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Chapter Three Differences in Culture 127

Case Discussion Questions
1. What were the triggers of cultural change in Japan

during the 1990s? How is cultural change starting to
affect traditional values in Japan?

2. How might Japan’s changing culture influence the way
Japanese businesses operate in the future? What are the
potential implications of such changes for the Japanese
economy?

3. How did traditional Japanese culture benefit Panasonic
during the 1950s–1980s? Did traditional values become
more of a liability during the 1990s and early 2000s?
How so?

4. What is Panasonic trying to achieve with human
resource changes it has announced? What are the
impediments to successfully implementing these
changes? What are the implications for Panasonic if
( a ) the changes are made quickly or ( b ) it takes years or
even decades to fully implement the changes?

5. What does the Panasonic case teach you about the
relationship between societal culture and business
success?

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L
E

A
R

N
IN

B
J
E

C
T

IV
E

After you have read this chapter you should be able to:

1
Understand the ethical issues faced by international businesses.

2
Recognize an ethical dilemma.

3
Identify the causes of unethical behavior by managers.

4
Describe the different philosophical approaches to ethics.

5
Explain how managers can incorporate ethical considerations into their

decision making.

part 2 Country Differences

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Working Conditions in a Chinese Factory
opening case

I
n 2008 the National Labor Committee sponsored an investigation into working conditions in
two Chinese factories that make computer equipment, including keyboards and printer cases
for Hewlett-Packard, Dell, Lenovo, and Microsoft. The report, which was published in early 2009,

described the factories’ working conditions as extremely harsh by Western standards.
According to the report, at the Metai factory in Guangdong, the workers sit at the assembly
line on wooden stools, without backrests, 12 hours a day with just two days off a month. Every
7.2 seconds a keyboard passes each worker, who has to snap six or seven keys into place—one
key every 1.1 seconds. The assembly line never stops. The workplace is frantic, monotonous,
numbing, and relentless. Each worker inserts 3,250 keys an hour; 35,750 keys during the official
11-hour shift; 250,250 a week, performing over 1 million operations a month. While working,
employees cannot talk, listen to music, or even lift their heads to look around. Workers cannot
use the bathroom until there is a break. Security guards spy on the workers, who are
prohibited from putting their hands in their pockets and are searched when they enter and
leave the factory. The factory operates 24 hours a day on two 12-hour shifts, with the
workers rotating between day and night shifts each month. The workers are at the factory
for up to 87 hours a week, and all overtime is mandatory. There are two half-hour meal
breaks per shift, during which the workers race to the cafeteria to line up to get food,
leaving them about 15 minutes to eat. The base wage is 64 cents an hour, which
drops to a take-home wage of just 41 cents an hour after deductions for primitive
room and board. Workers bathe using a small plastic bucket. Summer
temperatures routinely reach into the high 90s. Ten to 12 workers share each
dorm room, sleeping on narrow metal bunk beds that line the walls.
Comments from the workers, most of whom are young women
between 18 and 25 years old, reinforce how harsh the conditions are.

Ethics in

International Business

4 c h a p t e r

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130 Part Two Country Differences

One stated, “ Every day I enter the factory and I assemble keyboards. My hands
are moving constantly and I can’t stop for a second. Our fingers, hands, and
arms are swollen and sore. Every day I do this for 12 hours. What makes it
even worse is the constant pressure and boring monotony of the work.”
Another notes, “The factory rules are really like a private law. We are forced to
obey and endure management’s harsh treatment. Some young workers have
boyfriends and girlfriends outside the factory and if they want to go on a date,
we have to beg the boss for mercy to be able to leave the factory compound.”
Another said simply, “We feel like we are serving prison sentences.”
When informed of these findings, a spokesman for Microsoft said the fac-
tory supplied one if its contract manufacturers, but the company would still
investigate the issue. Representatives from Hewlett-Packard and Lenovo also
stated the factory was not a direct supplier, but they too stated they would
look into the issue. A spokesman for Dell, for whom the factory is a direct
supplier, said it was actively investigating the issue. The spokesman went on
to note, “I can tell you that any reports of poor working conditions in Dell’s
supply chain are investigated and appropriate action is taken.” As of early
2010, no reports could be found indicating whether any of these companies
had investigated the situation and decided upon a course of action. •
Sources: “The Dehumanization of Young Workers Producing Our Keyboards,” The National Labor Committee,
February 2009, accessed at http://www.nlcnet.org/article.php?id=613#intro; A. Butler, “29p an Hour Slaves Make
Our Cut Price Computers,” Sunday Mirror , February 22, 2009, p. 34; and R. Thompson, “Prison-like Conditions for
Workers Making IBM, Dell, HP, Microsoft and Lenovo Products,” ComputerWeekly.com , February 17, 2009.

Introduction
The opening case describes awful working conditions at the Metai factory in China,
which supplies computer keyboards and similar products to companies such as Microsoft,
Dell, Hewlett-Packard, and Lenovo. No doubt work was contracted out to this factory
because its costs were low. However, the description of the working conditions raises the
question of whether it is ethical to outsource production to such a factory, and what, if
anything, companies that rely upon it as a supplier should do about this issue. The situa-
tion presents companies that use the Metai factory as a supplier with an ethical problem.
Understanding the nature of ethical problems, and deciding what course of action to
pursue when confronted with one, is a central theme in this chapter. As we shall see re-
peatedly in this chapter, ethical problems occur frequently in international business.
The term ethics refers to accepted principles of right or wrong that govern the
conduct of a person, the members of a profession, or the actions of an organization.
Business ethics are the accepted principles of right or wrong governing the conduct
of businesspeople, and an ethical strategy is a strategy, or course of action, that does
not violate these accepted principles. This chapter looks at how ethical issues should
be incorporated into decision making in an international business. Next, we review
the reasons for poor ethical decision making. Then we discuss different philosophical

Business Ethics
The accepted principles

of right or wrong
governing the conduct of

businesspeople.

Ethical Strategy
A strategy, or course of

action, that does not
violate the accepted
principles of right or

wrong governing
the conduct of

businesspeople.

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Chapter Four Ethics in International Business 131

approaches to business ethics. We close the chapter by reviewing the different processes
that managers can adopt to make sure that ethical considerations are incorporated into
decision making in an international business firm.

Ethical Issues in International Business
Many of the ethical issues in international business are rooted in the fact that political
systems, law, economic development, and culture vary significantly from nation to na-
tion. What is considered normal practice in one nation may be considered unethical in
another. Because they work for an institution that transcends national borders and
cultures, managers in a multinational firm need to be particularly sensitive to these
differences. In the international business setting, the most common ethical issues in-
volve employment practices, human rights, environmental regulations, corruption,
and the moral obligation of multinational corporations.

EMPLOYMENT PRACTICES When work conditions in a host nation are
clearly inferior to those in a multinational’s home nation, what standards should be
applied: those of the home nation, those of the host nation, or something in between?
While few would suggest that pay and work conditions should be the same across na-
tions, how much divergence is acceptable? For example, while 12-hour workdays, ex-
tremely low pay, and a failure to protect workers against toxic chemicals may be
common in some developing nations, does this mean that it is OK for a multinational
to tolerate such working conditions in its subsidiaries there, or to condone it by using
local subcontractors (the opening case gives an example of such a situation)?
In the 1990s Nike found itself at the center of a storm of protests when news reports
revealed that working conditions at many of its subcontractors were very poor. Typical
of the allegations were those detailed in a 48 Hours program that aired on CBS-TV in
1996. The report painted a picture of young women at a Vietnamese subcontractor who
worked with toxic materials six days a week in poor conditions for only 20 cents an
hour. The report also stated that a living wage in Vietnam was at least $3 a day, an in-
come that could not be achieved at the subcontractor without working substantial over-
time. Nike and its subcontractors were not breaking any laws, but this report, and
others like it, raised questions about the ethics of using sweatshop labor to make what
were essentially fashion accessories. It may have been
legal, but was it ethical to use subcontractors who by
Western standards clearly exploited their workforce?
Nike’s critics thought not, and the company found it-
self the focus of a wave of demonstrations and con-
sumer boycotts. These exposés surrounding Nike’s
use of subcontractors forced the company to reexam-
ine its policies. Realizing that, even though it was
breaking no law, its subcontracting policies were per-
ceived as unethical, Nike’s management established a
code of conduct for Nike subcontractors and insti-
tuted annual monitoring by independent auditors of
all subcontractors. 1
As the Nike case demonstrate, a strong argument
can be made that it is not OK for a multinational
firm to tolerate poor working conditions in its for-
eign operations or those of its subcontractors. How-
ever, this still leaves unanswered the question of what
standards should be applied. We shall return to and

It may have been legal for a Vietnamese contractor to allow employees
to work with toxic materials six days a week in poor conditions for 20
cents an hour at a Nike factory. But was it ethical for Nike to use
subcontractors who by Western standards clearly exploited their
workers?

LEARNING OBJECTIVE 1
Understand the ethical

issues faced by
international businesses.

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132 Part Two Country Differences

consider this issue in more detail later in the chapter. For now, note that establishing
minimal acceptable standards that safeguard the basic rights and dignity of employees,
auditing foreign subsidiaries and subcontractors on a regular basis to make sure those
standards are met, and taking corrective action if they are not, is a good way to guard
against ethical abuses. Another Western company, Levi Strauss, has long taken such an
approach. The company terminated a long-term contract with one of its large suppli-
ers, the Tan family, after it discovered the Tans were allegedly forcing 1,200 Chinese
and Filipino women to work 74 hours per week in guarded compounds on the Mari-
ana Islands. 2 For another example of problems with working practices among suppli-
ers, see the accompanying Management Focus, which looks at working conditions in a
factory that supplied Apple with iPods.

M a n a g e m e n t F O C U S

Making Apple’s iPod

In mid-2006 news reports surfaced suggesting systematic
labor abuses at the factory in China that makes the iconic
iPod for Apple Computer. According to the reports, workers
at Hongfujin Precision Industry Co. were paid as little as $50
a month to work 15-hour shifts making the iPod. There were
also reports of forced overtime and poor living conditions for
the workers, many of whom were young women that had
migrated from the countryside to work at the plant and lived
in company-owned dormitories. The news articles were the
work of two Chinese journalists, Wang You and Weng Bao,
employed by China Business News, a state-run newspaper.
Hongfujin Precision Industry was reportedly China’s largest
export manufacturer in 2005 with overseas sales totaling
$14.5 billion. Hongfujin is owned by Foxconn, a large Taiwan-
ese conglomerate, whose customers also include Intel, Dell,
and Sony Corporation. The Hongfujin factory is a small city in
its own right, with clinics, recreational facilities, buses, and
13 restaurants that serve the 200,000 employees.
Upon hearing the news, Apple management responded
quickly, pledging to audit the operations to make sure Hon-
gfujin was complying with Apple’s code on labor standards
for subcontractors. Managers at Hongfujin took a different
tack—they filed a defamation suit against the two journal-
ists, suing them for $3.8 million in a local court, which
promptly froze the journalists’ personal assets pending a
trial. Clearly, the management of Hongfujin was trying to
send a message to the journalistic community: Criticism
would be costly. The suit sent a chill through Chinese jour-
nalists; Chinese courts have shown a tendency to favor
powerful locally based companies in legal proceedings.
Within six weeks, Apple had completed its audit. The com-
pany’s report suggested that although workers had not been
forced to work overtime and were earning at least the local
minimum wage, many had worked more than the 60 hours a

week allowed for by Apple, and their housing was substan-
dard. Under pressure from Apple, management at Hongfujin
agreed to bring practices in line with Apple’s code, commit-
ting themselves to building new housing for employees and
limiting work to 60 hours a week.
However, Hongfujin did not immediately withdraw the def-
amation suit. In an unusually bold move in a country where
censorship is still common, China Business News gave its
unconditional backing to Wang and Weng. The Shanghai-
based news organization issued a statement arguing that
what the two journalists did “was not a violation of any rules,
laws, or journalistic ethics.” The Paris-based group Report-
ers Without Borders also took up the case of Wang and
Weng, writing a letter to Apple CEO Steve Jobs stating, “We
believe that all Wang and Weng did was to report the facts
and we condemn Foxconn’s reaction. We therefore ask you
to intercede on behalf of these two journalists so that their
assets are unfrozen and the lawsuit is dropped.”
Once again, Apple moved quickly, pressuring Foxconn
behind the scenes to drop the suit. In early September,
Foxconn agreed to do so and issued a face-saving state-
ment saying the two sides had agreed to end the dispute
after apologizing to each other “for the disturbances
brought to both of them by the lawsuit.” While the dispute
is now over, the experience shed a harsh light on labor
conditions in China. At the same time, the response of the
Chinese media, and China Business News in particular,
points toward the emergence of journalistic freedoms in a
nation that has historically seen news organizations as a
mouthpiece for the state.

Sources: E. Kurtenbach, “The Foreign Factory Factor,” Seattle Times ,
August 31, 2006, pp. C1, C3; Elaine Kurtenbach, “Apple Says It’s Trying
to Resolve Dispute over Labor Conditions at Chinese iPod Factory,”
Associated Press Financial Wire , August 30, 2006; and “Chinese iPod
Supplier Pulls Suit,” Associated Press Financial Wire , September 3, 2006.

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Chapter Four Ethics in International Business 133

HUMAN RIGHTS Questions about human rights can arise in international busi-
ness. Basic human rights still are not respected in many nations. Rights that we take
for granted in developed nations, such as freedom of association, freedom of speech,
freedom of assembly, freedom of movement, freedom from political repression, and so
on, are by no means universally accepted (see Chapter 2 for details). One of the most
obvious historic examples was South Africa during the days of white rule and apart-
heid, which did not end until 1994. The apartheid system denied basic political rights
to the majority nonwhite population of South Africa, mandated segregation between
whites and nonwhites, reserved certain occupations exclusively for whites, and prohib-
ited blacks from being placed in positions where they would manage whites. Despite
the odious nature of this system, Western businesses operated in South Africa. By the
1980s, however, many questioned the ethics of doing so. They argued that inward in-
vestment by foreign multinationals, by boosting the South African economy, sup-
ported the repressive apartheid regime.
Several Western businesses started to change their policies in the late 1970s and
early 1980s. 3 General Motors, which had significant activities in South Africa, was at
the forefront of this trend. GM adopted what came to be called the Sullivan princi-
ples, named after Leon Sullivan, a black Baptist minister and a member of GM’s
board of directors. Sullivan argued that it was ethically justified for GM to operate
in South Africa so long as two conditions were fulfilled. First, the company should
not obey the apartheid laws in its own South African operations (a form of passive
resistance). Second, the company should do everything within its power to promote
the abolition of apartheid laws. Sullivan’s principles were widely adopted by U.S.
firms operating in South Africa. Their violation of the apartheid laws was ignored by
the South African government, which clearly did not want to antagonize important
foreign investors.
However, after 10 years, Leon Sullivan concluded that simply following the prin-
ciples was not sufficient to break down the apartheid regime and that any American
company, even those adhering to his principles, could not ethically justify their contin-
ued presence in South Africa. Over the next few years, numerous companies divested
their South African operations, including Exxon, General Motors, Kodak, IBM, and
Xerox. At the same time, many state pension funds signaled they would no longer hold
stock in companies that did business in South Africa, which helped to persuade several
companies to divest their South African opera-
tions. These divestments, coupled with the impo-
sition of economic sanctions from the U.S. and
other governments, contributed to the abandon-
ment of white minority rule and apartheid in
South Africa and the introduction of democratic
elections in 1994. Thus, adopting an ethical stance
was argued to have helped improve human rights
in South Africa. 4
Although change has come in South Africa,
many repressive regimes still exist in the world. Is
it ethical for multinationals to do business in them?
It is often argued that inward investment by a mul-
tinational can be a force for economic, political,
and social progress that ultimately improves the
rights of people in repressive regimes. This posi-
tion was first discussed in Chapter 2, when we
noted that economic progress in a nation could
create pressure for democratization. In general,

A n o t h e r P e r s p e c t i v e

Human Rights Violations in Honduras
In 2009, the army in Honduras overthrew President Manual
Zelaya after he attempted to gather public views about
holding a citizen assembly to rewrite the nation’s constitu-
tion. As Honduras struggles to right itself under a newly
elected government, human rights observers have learned
that Honduran citizens peacefully protesting the coup have
been tear-gassed and pepper-sprayed. Some protesters
have been imprisoned, tortured, and beaten with chains.
Also under the new government, Honduran women—who
constitute up to 70 percent of the protestors in this Central
American nation—reportedly have been sexually abused,
raped, and killed. (Joe Tiano, “Human Rights Violations
Abound during Honduras Coup, Speaker Says,” Daily Free
Press, February 11, 2010, http://www.dailyfreepress.com)

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134 Part Two Country Differences

this belief suggests it is ethical for a multinational to do business in nations that lack the
democratic structures and human rights records of developed nations. Investment in
China, for example, is frequently justified on the grounds that although China’s human
rights record is often questioned by human rights groups, and although the country is
not a democracy, continuing inward investment will help boost economic growth and
raise living standards. These developments will ultimately create pressures from the
Chinese people for more participative government, political pluralism, and freedom of
expression and speech.
However, there is a limit to this argument. As in the case of South Africa, some re-
gimes are so repressive that investment cannot be justified on ethical grounds. An-
other example would be Myanmar (formally known as Burma). Ruled by a military
dictatorship for more than 45 years, Myanmar has one of the worst human rights re-
cords in the world. Beginning in the mid-1990s, many Western companies exited
Myanmar, judging the human rights violations to be so extreme that doing business
there cannot be justified on ethical grounds. (In contrast, the accompanying Manage-
ment Focus looks at the controversy surrounding one company, Unocal, which chose
to stay in Myanmar.) However, a cynic might note that Myanmar has a small economy
and that divestment carries no great economic penalty for Western firms, unlike, for
example, divestment from China.
Nigeria is another country where serious questions have arisen over the extent to
which foreign multinationals doing business in the country have contributed to human
rights violations. Most notably, the largest foreign oil producer in the country, Royal
Dutch Shell, has been repeatedly criticized. 5 In the early 1990s, several ethnic groups in
Nigeria, which was ruled by a military dictatorship, protested against foreign oil com-
panies for causing widespread pollution and failing to invest in the communities from
which they extracted oil. Shell reportedly requested the assistance of Nigeria’s Mobile
Police Force (MPF) to quell the demonstrations. According to the human rights group
Amnesty International, the results were bloody. In 1990, the MPF put down protests
against Shell in the village of Umuechem, killing 80 people and destroying 495 homes.
In 1993, following protests in the Ogoni region of Nigeria that were designed to stop
contractors from laying a new pipeline for Shell, the MPF raided the area to quell the
unrest. In the chaos that followed, it has been alleged that 27 villages were razed, 80,000
Ogoni people displaced, and 2,000 people killed.
Critics argued that Shell shouldered some of the blame for the massacres. Shell
never acknowledged this, and the MPF probably used the demonstrations as a pre-
text for punishing an ethnic group that had been agitating against the central gov-
ernment for some time. Nevertheless, these events did prompt Shell to look at its
own ethics and to set up internal mechanisms to ensure that its subsidiaries acted in
a manner that was consistent with basic human rights. 6 More generally, the ques-
tion remains, what is the responsibility of a foreign multinational when operating
in a country where basic human rights are trampled on? Should the company be
there at all, and if it is there, what actions should it take to avoid the situation Shell
found itself in?

ENVIRONMENTAL POLLUTION Ethical issues arise when environmental
regulations in host nations are inferior to those in the home nation. Many developed
nations have substantial regulations governing the emission of pollutants, the dump-
ing of toxic chemicals, the use of toxic materials in the workplace, and so on. Those
regulations are often lacking in developing nations, and according to critics, the result
can be higher levels of pollution from the operations of multinationals than would be
allowed at home. For example, consider again the case of foreign oil companies in

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Chapter Four Ethics in International Business 135

Nigeria. According to a 1992 report prepared by environmental activists in Nigeria, in
the Niger Delta region:

Apart from air pollution from the oil industry’s emissions and flares day and
night, producing poisonous gases that are silently and systematically wiping out
vulnerable airborne biota and endangering the life of plants, game, and man
himself, we have widespread water pollution and soil/land pollution that results
in the death of most aquatic eggs and juvenile stages of the life of fin fish and
shell fish on the one hand, whilst, on the other hand, agricultural land contami-
nated with oil spills becomes dangerous for farming, even where they continue
to produce significant yields.” 7

The implication inherent in this description is that pollution controls applied by foreign
companies in Nigeria were much laxer than those in developed nations.
Should a multinational feel free to pollute in a developing nation? (To do so hardly
seems ethical.) Is there a danger that amoral management might move production to
a developing nation precisely because costly pollution controls are not required, and
the company is therefore free to despoil the environment and perhaps endanger local
people in its quest to lower production costs and gain a competitive advantage? What

M a n a g e m e n t F O C U S

Unocal in Myanmar

In 1995, Unocal, an oil and gas enterprise based in Califor-
nia, took a 29 percent stake in a partnership with the
French oil company Total and state-owned companies from
both Myanmar and Thailand to build a gas pipeline from
Myanmar to Thailand. At the time, the $1 billion project was
expected to bring Myanmar about $200 million in annual
export earnings, a quarter of the country’s total. The gas
used domestically would increase Myanmar’s generating
capacity by 30 percent. This investment was made when a
number of other American companies were exiting Myan-
mar. Myanmar’s government, a military dictatorship, had a
reputation for brutally suppressing internal dissent. Citing
the political climate, the apparel companies Levi Strauss
and Eddie Bauer had both withdrawn from the country.
However, as far as Unocal’s management was concerned,
the giant infrastructure project would generate healthy re-
turns for the company and, by boosting economic growth,
a better life for Myanmar’s 43 million people. Moreover,
while Levi Strauss and Eddie Bauer could easily shift pro-
duction of clothes to another low-cost location, Unocal ar-
gued it had to go where the oil and gas were located.
However, Unocal’s investment quickly became highly con-
troversial. Under the terms of the contract, the government
of Myanmar was contractually obliged to clear a corridor for
the pipeline through Myanmar’s tropical forests and to pro-
tect the pipeline from attacks by the government’s enemies.
According to human rights groups, the Myanmar army forc-
ibly moved villages and ordered hundreds of local peasants

to work on the pipeline in conditions that were no better
than slave labor. Those who refused suffered retaliation.
News reports cite the case of one woman who was thrown
into a fire, along with her baby, after her husband tried to
escape from troops forcing him to work on the project. The
baby died and she suffered burns. Other villagers report be-
ing beaten, tortured, raped, and otherwise mistreated when
the alleged slave labor conditions were occurring.
In 1996, human rights activists brought a lawsuit against
Unocal in the United States on behalf of 15 Myanmar villag-
ers who had fled to refugee camps in Thailand. The suit
claimed that Unocal was aware of what was going on,
even if it did not participate or condone it, and that aware-
ness was enough to make Unocal in part responsible for
the alleged crimes. The presiding judge dismissed the
case, arguing that Unocal could not be held liable for the
actions of a foreign government against its own people—
although the judge did note that Unocal was indeed aware
of what was going on in Myanmar. The plaintiffs appealed,
and in late 2003 the case wound up at a superior court. In
2005 the case was settled out of court for an undisclosed
amount. Unocal itself was acquired by Chevron in 2005.

Sources: Jim Carlton, “Unocal Trial for Slave Labor Claims Is Set to Start
Today,” The Wall Street Journal, December 9, 2003, p. A19; Seth Stern,
“Big Business Targeted for Rights Abuse,” Christian Science Monitor,
September 4, 2003, p. 2; “Trouble in the Pipeline,” The Economist, January 18,
1997, p. 39; Irtani Evelyn, “Feeling the Heat: Unocal Defends Myanmar Gas
Pipeline Deal,” Los Angeles Times, February 20, 1995, p. D1; and “Unocal
Settles Myanmar Human Rights Cases,” Business and Environment ,
February 2005, pp. 14–16.

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136 Part Two Country Differences

is the right and moral thing to do in such circumstances—pollute to gain an economic
advantage, or make sure that foreign subsidiaries adhere to common standards regard-
ing pollution controls?
These questions take on added importance because some parts of the environment
are a public good that no one owns, but anyone can despoil. No one owns the atmo-
sphere or the oceans, but polluting both, no matter where the pollution originates,
harms all. 8 The atmosphere and oceans can be viewed as a global commons from
which everyone benefits but for which no one is specifically responsible. In such cases,
a phenomenon known as the tragedy of the commons becomes applicable. The tragedy of
the commons occurs when a resource held in common by all, but owned by no one, is
overused by individuals, resulting in its degradation. The phenomenon was first named
by Garrett Hardin when describing a particular problem in sixteenth century England.
Large open areas, called commons, were free for all to use as pasture. The poor put
out livestock on these commons and supplemented their meager incomes. It was ad-
vantageous for each to put out more and more livestock, but the social consequence
was far more livestock than the commons could handle. The result was overgrazing,
degradation of the commons, and the loss of this much-needed supplement. 9
In the modern world, corporations can contribute to the global tragedy of the com-
mons by moving production to locations where they are free to pump pollutants into
the atmosphere or dump them in oceans or rivers, thereby harming these valuable
global commons. While such action may be legal, is it ethical? Again, such actions
seem to violate basic societal notions of ethics and social responsibility. This issue
is taking on greater importance as concerns about human-induced global warming

move to center stage. Most climate scientists argue
that (a) human industrial and commercial activity is
increasing the amount of carbon dioxide in the atmo-
sphere; (b) carbon dioxide is a greenhouse gas, which
reflects heat back to the earth’s surface, warming the
globe; and (c) as a result, the average temperature of
the earth is increasing. The accumulated scientific
evidence supports this argument. 10 Given this, soci-
eties around the world are starting to restrict the
amount of carbon dioxide that can be emitted into
the atmosphere as a by-product of industrial and
commercial activity. However, regulations differ
from nation to nation. Given this, is it ethical for a
company to try to escape tight emission limits by
moving production to a country with lax regulations,
given that doing so will contribute to global warm-
ing? Again, many would argue that doing so violates
basic ethical principles.

CORRUPTION As noted in Chapter 2, corrup-
tion has been a problem in almost every society in his-
tory, and it continues to be one today. 11 There always
have been and always will be corrupt government of-
ficials. International businesses can and have gained
economic advantages by making payments to those
officials. A classic example concerns a well-publicized
incident in the 1970s. Carl Kotchian, the president of
Lockheed, made a $12.5 million payment to Japanese
agents and government officials to secure a large order

A marketplace in Myanmar/Burma. Many activists question Unocal’s
continued involvement in Myanmar/Burma because the state’s
dictatorship harshly punishes proponents of democracy.

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Chapter Four Ethics in International Business 137

for Lockheed’s TriStar jet from Nippon Air. When the payments were discovered, U.S.
officials charged Lockheed with falsification of its records and tax violations. Although
such payments were supposed to be an accepted business practice in Japan (they might
be viewed as an exceptionally lavish form of gift giving), the revelations created a scandal
there too. The government ministers in question were criminally charged, one commit-
ted suicide, the government fell in disgrace, and the Japanese people were outraged.
Apparently, such a payment was not an accepted way of doing business in Japan! The
payment was nothing more than a bribe, paid to corrupt officials, to secure a large order
that might otherwise have gone to another manufacturer, such as Boeing. Kotchian
clearly engaged in unethical behavior, and to argue that the payment was an “acceptable
form of doing business in Japan” was self-serving and incorrect.
The Lockheed case was the impetus for the 1977 passage of the Foreign Corrupt
Practices Act in the United States, which we first discussed in Chapter 2. The act out-
lawed the paying of bribes to foreign government officials to gain business. Some U.S.
businesses immediately objected that the act would put U.S. firms at a competitive dis-
advantage (there is no evidence that subsequently occurred). 12 The act was subse-
quently amended to allow for “facilitating payments.” Sometimes known as speed
money or grease payments, facilitating payments are not payments to secure contracts
that would not otherwise be secured and nor are they payments to obtain exclusive
preferential treatment. Rather they are payments to ensure receiving the standard
treatment that a business ought to receive from a foreign government, but might not
due to the obstruction of a foreign official.
In 1997, the trade and finance ministers from the member states of the Organization
for Economic Cooperation and Development (OECD) followed the U.S. lead and ad-
opted the Convention on Combating Bribery of Foreign Public Officials in Inter-
national Business Transactions. 13 The convention, which went into force in 1999,
obliges member states and other signatories to make the bribery of foreign public offi-
cials a criminal offense. The convention excludes facilitating payments made to expe-
dite routine government action from the convention.
While facilitating payments, or speed money, are excluded from both the Foreign
Corrupt Practices Act and the OECD convention on bribery, the ethical implications
of making such payments are unclear. In many countries, payoffs to government offi-
cials in the form of speed money are a part of life. One can argue that not investing
because government officials demand speed money ignores the fact that such invest-
ment can bring substantial benefits to the local populace in terms of income and jobs.
From a pragmatic standpoint, giving bribes, although a little evil might be the price
that must be paid to do a greater good (assuming the investment creates jobs where
none existed and assuming the practice is not illegal). Several economists advocate this
reasoning, suggesting that in the context of pervasive and cumbersome regulations in
developing countries, corruption may improve efficiency and help growth! These econ-
omists theorize that in a country where preexisting political structures distort or limit
the workings of the market mechanism, corruption in the form of black marketeering,
smuggling, and side payments to government bureaucrats to “speed up” approval for
business investments may enhance welfare. 14 Arguments such as this persuaded the
U.S. Congress to exempt facilitating payments from the Foreign Corrupt Practices Act.
In contrast, other economists have argued that corruption reduces the returns on
business investment and leads to low economic growth. 15 In a country where corruption
is common, unproductive bureaucrats who demand side payments for granting the en-
terprise permission to operate may siphon off the profits from a business activity. This
reduces businesses’ incentive to invest and may retard a country’s economic growth rate.
One study of the connection between corruption and economic growth in 70 countries
found that corruption had a significant negative impact on a country’s growth rate. 16

Foreign Corrupt
Practices Act
A U.S. law regulating
behavior regarding the
conduct of international
business in the taking of
bribes and other
unethical actions.

Convention on
Combating Bribery
of Foreign Public
Officials in
International
Business
Transactions
OECD convention that
obliges member states
to make the bribery of
foreign public officials a
criminal offense.

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138 Part Two Country Differences

Given the debate and the complexity of this issue,
one again might conclude that generalization is dif-
ficult and the demand for speed money creates a
genuine ethical dilemma. Yes, corruption is bad, and
yes, it may harm a country’s economic development,
but yes, there are also cases where side payments to
government officials can remove the bureaucratic
barriers to investments that create jobs. However,
this pragmatic stance ignores the fact that corruption
tends to corrupt both the bribe giver and the bribe
taker. Corruption feeds on itself, and once an indi-
vidual starts down the road of corruption, pulling
back may be difficult if not impossible. This argu-
ment strengthens the ethical case for never engaging
in corruption, no matter how compelling the benefits
might seem.

Many multinationals have accepted this argument.
The large oil multinational, BP, for example, has a
zero-tolerance approach toward facilitating pay-
ments. Other corporations have a more nuanced ap-
proach. For example, consider the following from
the code of ethics at Dow Corning:

Dow Corning employees will not authorize or
give payments or gifts to government employ-
ees or their beneficiaries or anyone else in
order to obtain or retain business. Facilitating

payments to expedite the performance of routine services are strongly discour-
aged. In countries where local business practice dictates such payments and there
is no alternative, facilitating payments are to be for the minimum amount neces-
sary and must be accurately documented and recorded. 17

This statement allows for facilitating payments when “there is no alternative,” al-
though they are strongly discouraged.

MORAL OBLIGATIONS Multinational corporations have power that comes
from their control over resources and their ability to move production from country
to country. Although that power is constrained not only by laws and regulations, but
also by the discipline of the market and the competitive process, it is nevertheless
substantial. Some moral philosophers argue that with power comes the social respon-
sibility for multinationals to give something back to the societies that enable them to
prosper and grow. The concept of social responsibility refers to the idea that busi-
nesspeople should consider the social consequences of economic actions when mak-
ing business decisions, and that there should be a presumption in favor of decisions
that have both good economic and social consequences. 18 In its purest form, social
responsibility can be supported for its own sake simply because it is the right way for
a business to behave. Advocates of this approach argue that businesses, particularly
large successful businesses, need to recognize their noblesse oblige and give something
back to the societies that have made their success possible. Noblesse oblige is a French
term that refers to honorable and benevolent behavior considered the responsibility
of people of high (noble) birth. In a business setting, it is taken to mean benevolent
behavior that is the responsibility of successful enterprises. This has long been recog-
nized by many businesspeople, resulting in a substantial and venerable history of

Social
Responsibility

The idea that
businesspeople should

consider the social
consequences of

economic actions when
making business

decisions.

In addition to a commitment to introduce cleaner fuels and renewable
energy, BP also supports urban renewal programs, art sponsorships,
literacy drives, and conservation programs.

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Chapter Four Ethics in International Business 139

corporate giving to society and in businesses making social investments designed to
enhance the welfare of the communities in which they operate.
However, there are examples of multinationals that have abused their power for pri-
vate gain. The most famous historic example relates to one of the earliest multinationals,
the British East India Company. Established in 1600, the East India Company grew
to dominate the entire Indian subcontinent in the nineteenth century. At the height
of its power, the company deployed over 40 warships, possessed the largest standing
army in the world, was the de facto ruler of India’s 240 million people, and even
hired its own church bishops, extending its dominance into the spiritual realm. 19
Power itself is morally neutral; how power is used is what matters. It can be used in
a positive way to increase social welfare, which is ethical, or it can be used in a manner
that is ethically and morally suspect. Consider the case of News Corporation, one of
the largest media conglomerates in the world, which is profiled in the accompanying
Management Focus. The power of media companies derives from their ability to

Management FOCUS

News Corporation in China

Rupert Murdoch built News Corporation into one of the
largest media conglomerates in the world with interests
that include newspapers, publishing, and television broad-
casting. According to critics, however, Murdoch abused
his power to gain preferential access to the Chinese media
market by systematically suppressing media content that
was critical of China and by publishing material designed
to ingratiate the company with the Chinese leadership.
In 1994, News Corporation excluded BBC news broad-
casts from Star TV coverage in the region after it had be-
come clear that Chinese politicians were unhappy with the
BBC’s continual reference to repression in China, and most
notably, the 1989 massacre of student protesters for de-
mocracy in Beijing’s Tiananmen Square. In 1995, News
Corporation’s book publishing subsidiary, HarperCollins,
published a flattering biography of Deng Xiaoping, the for-
mer leader of China, written by his daughter. Then in 1998,
HarperCollins dropped plans to publish the memoirs of
Chris Patten, the last governor of Hong Kong before its
transfer to the Chinese. Patten, a critic of Chinese leaders,
had aroused their wrath by attempting to introduce a de-
gree of democracy into the administration of the old British
territory before its transfer back to China in 1997.
In a 1998 interview in Vanity Fair, Murdoch took another
opportunity to ingratiate himself with the Chinese leader-
ship when he described the Dalai Lama, the exiled leader of
Chinese-occupied Tibet, as “a very political old monk shuf-
fling around in Gucci shoes.” On the heels of this, in 2001
Murdoch’s son James, who was in charge of running Star
TV, made disparaging remarks about Falun Gong, a spiritual
movement involving breathing exercises and meditation
that had become so popular in China that the Communist

regime regarded it as a political threat and suppressed its
activities. According to James Murdoch, Falun Gong was a
“dangerous,” “apocalyptic cult” that “clearly does not have
the success of China at heart.”
Critics argued that these events were all part of a deliber-
ate effort on the part of News Corporation to curry favor with
the Chinese. The company received its reward in 2001 when
Star TV struck an agreement with the Chinese government
to launch a Mandarin-language entertainment channel for
the affluent southern coastal province of Guangdong. Earlier
that year, China’s leader, Jiang Zemin, had publicly praised
Murdoch and Star TV for their efforts “to present China ob-
jectively and to cooperate with the Chinese press.”
Once in China, News Corporation was soon tugging at the
constraints imposed on it by the Chinese government. Start-
ing in 2002, News Corp set up shell companies, owned by
News Corp employees, which resold News Corp program-
ming to local cable TV networks throughout China, in direct
violation of Chinese regulations. Payments, sometimes in the
form of briefcases stuffed with cash, were channeled to
News Corp through the shell companies. One such deal in-
volved selling News Corp programming through a shell com-
pany known as Runde Investments to a nationwide satellite
TV channel, Qinghai Satellite, based in the remote Qinghai
province of China. Runde was partly owned by the son of for-
mer hard-line Communist Party propaganda minister Ding
Guangen. If News Corp was hoping that its political connec-
tions would help it to get away with these actions, it was
badly disappointed. In 2005, Chinese authorities raided News
Corp headquarters and seized documents and equipment.
They also quickly terminated the deal with Qinghai Satellite.

Sources: Daniel Litvin, Empires of Profit (New York: Texere, 2003); and M.
Forney, “Testing Beijing’s Limits,” Time , September 5, 2005, p. 50.

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140 Part Two Country Differences

shape public perceptions by the material they choose to publish. News Corporation
founder and CEO Rupert Murdoch has long considered China to be one of the most
promising media markets in the world and has sought permission to expand News
Corporation’s operations in China, particularly the satellite broadcasting operations of
Star TV. Some critics believe that Murdoch used the power of News Corporation in
an unethical way to attain this objective.
Some multinationals have acknowledged a moral obligation to use their power to
enhance social welfare in the communities where they do business. BP, one of the
world’s largest oil companies, has made it part of the company policy to undertake
“social investments” in the countries where it does business. 20 In Algeria, BP has been
investing in a major project to develop gas fields near the desert town of Salah. When
the company noticed the lack of clean water in Salah, it built two desalination plants to
provide drinking water for the local community and distributed containers to resi-
dents so they could take water from the plants to their homes. There was no economic
reason for BP to make this social investment, but the company believes it is morally
obligated to use its power in constructive ways. The action, while a small thing for BP,
is a very important thing for the local community.

Ethical Dilemmas
The ethical obligations of a multinational corporation toward employment condi-
tions, human rights, corruption, environmental pollution, and the use of power are not
always clear-cut. There may be no agreement about accepted ethical principles. From
an international business viewpoint, some argue that what is ethical depends upon
one’s cultural perspective. 21 In the United States, it is considered acceptable to execute
murderers, but in many cultures this is not acceptable; execution is viewed as an af-
front to human dignity and the death penalty is outlawed. Many Americans find this
attitude very strange, but many Europeans find the American approach barbaric. For a
more business-oriented example, consider the practice of “gift giving” between the
parties to a business negotiation. While this is considered right and proper behavior in
many Asian cultures, some Westerners view the practice as a form of bribery, and
therefore unethical, particularly if the gifts are substantial.
Managers often confront very real ethical dilemmas where the appropriate course
of action is not clear. For example, imagine that a visiting American executive finds
that a foreign subsidiary in a poor nation has hired a 12-year-old girl to work on a
factory floor. Appalled to find that the subsidiary is using child labor in direct viola-
tion of the company’s own ethical code, the American instructs the local manager to
replace the child with an adult. The local manager dutifully complies. The girl, an
orphan, who is the only breadwinner for herself and her 6-year-old brother, is unable
to find another job, so in desperation she turns to prostitution. Two years later she
dies of AIDS. Meanwhile, her brother takes up begging. He encounters the American
while begging outside the local McDonald’s. Oblivious that this was the man responsi-
ble for his fate, the boy begs him for money. The American quickens his pace and walks
rapidly past the outstretched hand into the restaurant, where he orders a quarter-pound
cheeseburger with fries and a cold milk shake. A year later, the boy contracts tubercu-
losis and dies.
Had the visiting American understood the gravity of the girl’s situation, would he
still have requested her replacement? Perhaps not! Would it have been better, there-
fore, to stick with the status quo and allow the girl to continue working? Probably not,
because that would have violated the reasonable prohibition against child labor found
in the company’s own ethical code. What then would have been the right thing to do?
What was the obligation of the executive given this ethical dilemma?

LEARNING OBJECTIVE 2
Recognize an ethical
dilemma.

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Chapter Four Ethics in International Business 141

There is no easy answer to these questions. That is the nature of ethical dilemmas —
they are situations in which none of the available alternatives seems ethically accept-
able. 22 In this case, employing child labor was not acceptable, but given that she was
employed, neither was denying the child her only source of income. What the American
executive needed, what all managers need, was a moral compass, or perhaps an ethical
algorithm, that would guide him through such an ethical dilemma to find an acceptable
solution. Later we will outline what such a moral compass, or ethical algorithm, might
look like. For now, it is enough to note that ethical dilemmas exist because many real-
world decisions are complex; difficult to frame; and involve first-, second-, and third-
order consequences that are hard to quantify. Doing the right thing, or even knowing
what the right thing might be, is often far from easy. 23

The Roots of Unethical Behavior
As we have seen, examples abound of managers behaving in a manner that might be
judged unethical in an international business setting. Why do managers behave in an
unethical manner? There is no simple answer to this question, for the causes are com-
plex, but some generalizations can be made (see Figure 4.1). 24

PERSONAL ETHICS Business ethics are not divorced from personal ethics,
which are the generally accepted principles of right and wrong governing the conduct
of individuals. As individuals, we are typically taught that it is wrong to lie and cheat—
it is unethical—and that it is right to behave with integrity and honor, and to stand up
for what we believe to be right and true. This is generally true across societies. The
personal ethical code that guides our behavior comes from a number of sources, in-
cluding our parents, our schools, our religion, and the media. Our personal ethical
code exerts a profound influence on the way we behave as businesspeople. An indi-
vidual with a strong sense of personal ethics is less likely to behave in an unethical
manner in a business setting. It follows that the first step to establishing a strong sense
of business ethics is for a society to emphasize strong personal ethics.
Home-country managers working abroad in multinational firms (expatriate manag-
ers) may experience more than the usual degree of pressure to violate their personal

LEARNING OBJECTIVE 3
Identify the causes of
unethical behavior by

managers.

Ethical Dilemma
A situation in which none
of the available
alternatives seems
ethically acceptable.

4.1 figure

Determinants of Ethical
Behavior

Decision-
making

processes

Ethical
behavior

Personal
ethics

Organization
culture

Leadership

Unrealistic
performance
expectations

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142 Part Two Country Differences

ethics. They are away from their ordinary social context and supporting culture, and
they are psychologically and geographically distant from the parent company. They
may be based in a culture that does not place the same value on ethical norms impor-
tant in the manager’s home country, and they may be surrounded by local employees
who have less rigorous ethical standards. The parent company may pressure expatriate
managers to meet unrealistic goals that can only be fulfilled by cutting corners or act-
ing unethically. For example, to meet centrally mandated performance goals, expatri-
ate managers might give bribes to win contracts or might implement working
conditions and environmental controls that are below minimal acceptable standards.
Local managers might encourage the expatriate to adopt such behavior. Due to its
geographical distance, the parent company may be unable to see how expatriate man-
agers are meeting goals, or may choose not to see how they are doing so, allowing such
behavior to flourish and persist.

DECISION-MAKING PROCESSES Several studies of unethical behavior in
a business setting have concluded that businesspeople sometimes do not realize they
are behaving unethically, primarily because they simply fail to ask, “Is this decision or
action ethical?” 25 Instead, they apply a straightforward business calculus to what they
perceive to be a business decision, forgetting that the decision may also have an im-
portant ethical dimension. The fault lies in processes that do not incorporate ethical
considerations into business decision making. This may have been the case at Nike
when managers originally made subcontracting decisions (see the earlier discussion).
Those decisions were probably made based on good economic logic. Subcontractors
were probably chosen based on business variables such as cost, delivery, and product
quality, and the key managers simply failed to ask, “How does this subcontractor treat
its workforce?” If they thought about the question at all, they probably reasoned that
it was the subcontractor’s concern, not theirs.

ORGANIZATION CULTURE The climate in some businesses does not en-
courage people to think through the ethical consequences of business decisions. This
brings us to the third cause of unethical behavior in businesses—an organizational
culture that deemphasizes business ethics, reducing all decisions to the purely eco-
nomic. The term organization culture refers to the values and norms that are shared
among employees of an organization. You will recall from Chapter 3 that values are
abstract ideas about what a group believes to be good, right, and desirable, while norms
are the social rules and guidelines that prescribe appropriate behavior in particular
situations. Just as societies have cultures, so do business organizations. Together, values
and norms shape the culture of a business organization, and that culture has an impor-
tant influence on the ethics of business decision making.
Author Robert Bryce has explained how the organization culture at now-bankrupt
multinational energy company Enron was built on values that emphasized greed and
deception. 26 According to Bryce, the tone was set by top managers who engaged in
self-dealing to enrich themselves and their own families. Bryce tells how former Enron
CEO Kenneth Lay made sure his own family benefited handsomely from Enron.
Much of Enron’s corporate travel business was handled by a travel agency part owned
by Lay’s sister. When an internal auditor recommended that the company could do
better by using another travel agency, the auditor soon found himself out of a job. In
1997, Enron acquired a company owned by Kenneth Lay’s son, Mark Lay, which was
trying to establish a business trading paper and pulp products. At the time, Mark Lay
and another company he controlled were targets of a federal criminal investigation of
bankruptcy fraud and embezzlement. As part of the deal, Enron hired Mark Lay as an
executive with a three-year contract that guaranteed him at least $1 million in pay

Organization
Culture

The values and norms
shared among an

organization’s employees.

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Chapter Four Ethics in International Business 143

over that period, plus options to purchase about
20,000 shares of Enron. Bryce also details how Lay’s
grown daughter used an Enron jet to transport her
king-sized bed to France. With Kenneth Lay as an
example, it is perhaps not surprising that self-dealing
soon became endemic at Enron. The most notable
example was Chief Financial Officer Andrew Fastow,
who set up “off balance sheet” partnerships that not
only hid Enron’s true financial condition from inves-
tors, but also paid tens of millions of dollars directly
to Fastow. (Fastow was subsequently indicted by the
government for criminal fraud and went to jail.)

UNREALISTIC PERFORMANCE EXPEC-
TATIONS A fourth cause of unethical behavior
has already been hinted at—it is pressure from the
parent company to meet unrealistic performance goals that can be attained only by
cutting corners or acting in an unethical manner. Again, Bryce discusses how this may
have occurred at Enron. Lay’s successor as CEO, Jeff Skilling, put a performance eval-
uation system in place that weeded out 15 percent of underperformers every six
months. This created a pressure-cooker culture with a myopic focus on short-run per-
formance, and some executives and energy traders responded to that pressure by falsi-
fying their performance—inflating the value of trades, for example—to make it look as
if they were performing better than was actually the case.
The lesson from the Enron debacle is that an organizational culture can legitimize
behavior that society would judge as unethical, particularly when this is mixed with a
focus on unrealistic performance goals, such as maximizing short-term economic per-
formance, no matter what the costs. In such circumstances, there is a greater than av-
erage probability that managers will violate their own personal ethics and engage in
unethical behavior. Conversely, an organization culture can do just the opposite and
reinforce the need for ethical behavior. At Hewlett-Packard, for example, Bill Hewlett
and David Packard, the company’s founders, propagated a set of values known as The
HP Way. These values, which shape the way business is conducted both within and by
the corporation, have an important ethical component. Among other things, they
stress the need for confidence in and respect for people, open communication, and
concern for the individual employee.

LEADERSHIP The Enron and Hewlett-Packard examples suggest a fifth root
cause of unethical behavior—leadership. Leaders help to establish the culture of an
organization, and they set the example that others follow. Other employees in a busi-
ness often take their cue from business leaders, and if those leaders do not behave in
an ethical manner, they might not either. It is not what leaders say that matters, but
what they do. Enron, for example, had a code of ethics that Kenneth Lay himself of-
ten referred to, but Lay’s own actions to enrich family members spoke louder than
any words.

Philosophical Approaches to Ethics
We shall look at several different approaches to business ethics here, beginning with
some that can best be described as straw men, which either deny the value of business
ethics or apply the concept in a very unsatisfactory way. After discussing, and dismiss-
ing, the straw men, we then move on to consider approaches that are favored by most

Enron executive Jeff Skilling has become a well-known example of
corporate greed and deception.

LEARNING OBJECTIVE 4
Describe the different

philosophical approaches
to ethics.

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144 Part Two Country Differences

moral philosophers and form the basis for current models of ethical behavior in inter-
national businesses.

STRAW MEN Straw men approaches to business ethics are raised by business eth-
ics scholars primarily to demonstrate that they offer inappropriate guidelines for ethical
decision making in a multinational enterprise. Four such approaches to business ethics
are commonly discussed in the literature. These approaches can be characterized as the
Friedman doctrine, cultural relativism, the righteous moralist, and the naive immoral-
ist. All of these approaches have some inherent value, but all are unsatisfactory in im-
portant ways. Nevertheless, sometimes companies adopt these approaches.

The Friedman Doctrine The Nobel Prize-winning economist Milton Friedman
wrote an article in 1970 that has since become a classic straw man that business ethics
scholars outline only to then tear down. 27 Friedman’s basic position is that the only
social responsibility of business is to increase profits, so long as the company stays
within the rules of law. He explicitly rejects the idea that businesses should undertake
social expenditures beyond those mandated by the law and required for the efficient
running of a business. For example, his arguments suggest that improving working
conditions beyond the level required by the law and necessary to maximize employee
productivity will reduce profits and are therefore not appropriate. His belief is that a
firm should maximize its profits because that is the way to maximize the returns that
accrue to the owners of the firm, its stockholders. If stockholders then wish to use the
proceeds to make social investments, that is their right, according to Friedman, but
managers of the firm should not make that decision for them.
Although Friedman is talking about social responsibility, rather than business ethics
per se, many business ethics scholars equate social responsibility with ethical behavior
and thus believe Friedman is also arguing against business ethics. However, the assump-
tion that Friedman is arguing against ethics is not quite true, for Friedman does state,

There is one and only one social responsibility of business—to use its resources
and engage in activities designed to increase its profits so long as it stays within
the rules of the game, which is to say that it engages in open and free competi-
tion without deception or fraud. 28

In other words, Friedman states that businesses should behave in an ethical manner
and not engage in deception and fraud.
Nevertheless, Friedman’s arguments do break down under examination. This is par-
ticularly true in international business where the “rules of the game” are not well estab-
lished and differ from country to county. Consider again the case of sweatshop labor.
Child labor may not be against the law in a developing nation, and maximizing productiv-
ity may not require that a multinational firm stop using child labor in that country, but it
is still immoral to use child labor because the practice conflicts with widely held views
about what is the right and proper thing to do. Similarly, there may be no rules against
pollution in a developed nation and spending money on pollution control may reduce the
profit rate of the firm, but generalized notions of morality would hold that it is still un-
ethical to dump toxic pollutants into rivers or foul the air with gas releases. In addition to
the local consequences of such pollution, which may have serious health effects for the
surrounding population, there is also a global consequence as pollutants degrade those
two global commons so important to us all—the atmosphere and the oceans.

Cultural Relativism Another straw man often raised by business ethics scholars is
cultural relativism, which is the belief that ethics are nothing more than the reflec-
tion of a culture—all ethics are culturally determined—and that accordingly, a firm

Cultural Relativism
The belief that ethics are

culturally determined and
that firms should adopt

the ethics of the cultures
in which they operate.

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Chapter Four Ethics in International Business 145

should adopt the ethics of the culture in which it
is operating. 29 This approach is often summarized
by the maxim when in Rome do as the Romans. As
with Friedman’s approach, cultural relativism does
not stand up to a closer look. At its extreme, cul-
tural relativism suggests that if a culture supports
slavery, it is OK to use slave labor in a country.
Clearly, it is not! Cultural relativism implicitly re-
jects the idea that universal notions of morality
transcend different cultures, but, as we shall argue
later in the chapter, some universal notions of mo-
rality are found across cultures.
While dismissing cultural relativism in its most
sweeping form, some ethicists argue there is re-
sidual value in this approach. 30 As we noted in
Chapter 3, societal values and norms do vary from
culture to culture, customs do differ, so it might
follow that certain business practices are ethical in
one country, but not another. Indeed, the facilitat-
ing payments allowed in the Foreign Corrupt
Practices Act can be seen as an acknowledgment
that in some countries, the payment of speed money to government officials is neces-
sary to get business done, and if not ethically desirable, it is at least ethically acceptable.
However, not all ethicists or companies agree with this pragmatic view. As noted
earlier, oil company BP explicitly states it will not make facilitating payments, no mat-
ter what the prevailing cultural norms are. BP has enacted a zero-tolerance policy for
facilitation payments, primarily on the basis that such payments are a low-level form
of corruption, and thus cannot be justified because corruption corrupts both the bribe
giver and the bribe taker, and perpetuates the corrupt system. As BP notes on its Web
site, because of its zero-tolerance policy:

Some oil product sales in Vietnam involved inappropriate commission payments
to the managers of customers in return for placing orders with BP. These were
stopped during 2002 with the result that BP failed to win certain tenders with
potential profit totaling $300k. In addition, two sales managers resigned over
the issue. The business, however, has recovered using more traditional sales
methods and has exceeded its targets at year-end. 31

BP’s experience suggests that companies should not use cultural relativism as an argu-
ment for justifying behavior that is clearly based upon suspect ethical grounds, even if
that behavior is both legal and routinely accepted in the country where the company
is doing business.

The Righteous Moralist Righteous moralism contends that a multinational’s
home-country standards of ethics are the appropriate ones for companies to follow in
foreign countries. This approach is typically associated with managers from developed
nations. While this seems reasonable at first blush, the approach can create problems.
Consider the following example: An American bank manager was sent to Italy and was
appalled to learn that the local branch’s accounting department recommended grossly
underreporting the bank’s profits for income tax purposes. 32 The manager insisted
that the bank report its earnings accurately, American style. When he was called by the
Italian tax department to the firm’s tax hearing, he was told the firm owed three times
as much tax as it had paid, reflecting the department’s standard assumption that each

A n o t h e r P e r s p e c t i v e

Child Labor: India’s Ethical Dilemma
As India strives to become an industrialized nation, it faces
an ethical dilemma: tens of millions of its workers are chil-
dren. While most countries regard child labor as unaccept-
able, the practice is legal in India, and families depend on
their child’s earnings for survival.
After the government banned children under 14 from hold-
ing certain hazardous jobs, the changes in the law forced
many children “underground”—into jobs where monitoring
is more difficult and where they may suffer abuse and ne-
glect. The prospect of children on the production floor rep-
resents a huge concern for U.S. manufacturers with plants
in India.
Believing it will take time to eliminate child labor, advo-
cacy groups in India argue that the government should
instead support and protect child workers. (Laurie Goering,
“Ending Child Labor Tricky Job for India,” Chicago Tribune,
April 17, 2008, www.chicagotribune.com)

Righteous
Moralism
The belief that a
multinational’s home-
country standards
of ethics are the
appropriate ones for
companies to follow in
foreign countries.

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146 Part Two Country Differences

firm underreports its earnings by two-thirds. Despite his protests, the new assessment
stood. In this case, the righteous moralist has run into a problem caused by the prevail-
ing cultural norms in the country where he is doing business. How should he respond?
The righteous moralist would argue for maintaining the position, while a more prag-
matic view might be that in this case, the right thing to do is to follow the prevailing
cultural norms, since there is a big penalty for not doing so.
The main criticism of the righteous moralist approach is that its proponents go
too far. While there are some universal moral principles that should not be violated,
it does not always follow that the appropriate thing to do is adopt home-country
standards. For example, U.S. laws set strict guidelines with regard to minimum wage
and working conditions. Does this mean it is ethical to apply the same guidelines in
a foreign country, paying people the same as they are paid in the United States, pro-
viding the same benefits and working conditions? Probably not, because doing so
might nullify the reason for investing in that country and therefore deny locals the
benefits of inward investment by the multinational. Clearly, a more nuanced ap-
proach is needed.

The Naive Immoralist Naive immoralism asserts that if a manager of a multina-
tional sees that firms from other nations are not following ethical norms in a host na-
tion, that manager should not either. The classic example to illustrate the approach is
known as the drug lord problem. In one variant of this problem, an American manager
in Colombia routinely pays off the local drug lord to guarantee that his plant will not
be bombed and that none of his employees will be kidnapped. The manager argues
that such payments are ethically defensible because everyone is doing it.
The objection is twofold. First, to say that an action is ethically justified if everyone
is doing it is not sufficient. If firms in a country routinely employ 12-year-olds and
make them work 10-hour days, is it therefore ethically defensible to do the same? Ob-
viously not, and the company does have a clear choice. It does not have to abide by
local practices, and it can decide not to invest in a country where the practices are
particularly odious. Second, the multinational must recognize that it does have the
ability to change the prevailing practice in a country. It can use its power for a positive
moral purpose. This is what BP is doing by adopting a zero-tolerance policy with re-
gard to facilitating payments. BP is stating that the prevailing practice of making fa-
cilitating payments is ethically wrong, and it is incumbent upon the company to use its
power to try to change the standard. While some might argue that such an approach
smells of moral imperialism and a lack of cultural sensitivity, if it is consistent with
widely accepted moral standards in the global community, it may be ethically justified.
To return to the drug lord problem, an argument can be made that it is ethically
defensible to make such payments, not because everyone else is doing so but because
not doing so would cause greater harm (i.e., the drug lord might seek retribution and
engage in killings and kidnappings). Another solution to the problem is to refuse to
invest in a country where the rule of law is so weak that drug lords can demand protec-
tion money. This solution, however, is also imperfect, for it might mean denying the
law-abiding citizens of that country the benefits associated with inward investment by
the multinational (i.e., jobs, income, greater economic growth and welfare). Clearly,
the drug lord problem constitutes one of those intractable ethical dilemmas where
there is no obvious right solution, and managers need a moral compass to help them
find an acceptable solution to the dilemma.

UTILITARIAN AND KANTIAN ETHICS In contrast to the straw men just
discussed, most moral philosophers see value in utilitarian and Kantian approaches to
business ethics. These approaches were developed in the eighteenth and nineteenth

Naïve Immoralism
The belief that if a

manager of a
multinational sees that

firms from other nations
are not following ethical

norms in a host nation,
that manager should

not either.

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Chapter Four Ethics in International Business 147

centuries and although they have been largely superseded by more modern ap-
proaches, they form part of the tradition upon which newer approaches have been
constructed.
The utilitarian approach to business ethics dates to philosophers such as David
Hume (1771–1776), Jeremy Bentham (1784–1832), and John Stuart Mill (1806–1873).
Utilitarian approaches to ethics hold that the moral worth of actions or practices is
determined by their consequences. 33 An action is judged desirable if it leads to the best
possible balance of good consequences over bad consequences. Utilitarianism is com-
mitted to the maximization of good and the minimization of harm. Utilitarianism rec-
ognizes that actions have multiple consequences, some of which are good in a social
sense and some of which are harmful. As a philosophy for business ethics, it focuses
attention on the need to weigh carefully all of the social benefits and costs of a busi-
ness action and to pursue only those actions where the benefits outweigh the costs.
The best decisions, from a utilitarian perspective, are those that produce the greatest
good for the greatest number of people.
Many businesses have adopted specific tools such as cost-benefit analysis and risk
assessment that are firmly rooted in a utilitarian philosophy. Managers often weigh the
benefits and costs of an action before deciding whether to pursue it. An oil company
considering drilling in the Alaskan wildlife preserve must weigh the economic benefits
of increased oil production and the creation of jobs against the costs of environmental
degradation in a fragile ecosystem. An agricultural biotechnology company such as
Monsanto must decide whether the benefits of genetically modified crops that pro-
duce natural pesticides outweigh the risks. The benefits include increased crop yields
and reduced need for chemical fertilizers. The risks include the possibility that Mon-
santo’s insect-resistant crops might make matters worse over time if insects evolve a
resistance to the natural pesticides engineered into Monsanto’s plants, rendering the
plants vulnerable to a new generation of super bugs.
For all of its appeal, utilitarian philosophy does have some serious drawbacks as
an approach to business ethics. One problem is measuring the benefits, costs, and
risks of a course of action. In the case of an oil company considering drilling in
Alaska, how does one measure the potential harm done to the region’s ecosystem? In
the Monsanto example, how can one quantify the risk that genetically engineered
crops might ultimately result in the evolution of super bugs that are resistant to the
natural pesticide engineered into the crops? In general, utilitarian philosophers rec-
ognize that the measurement of benefits, costs, and risks is often not possible due to
limited knowledge.
The second problem with utilitarianism is that the philosophy omits the consid-
eration of justice. The action that produces the greatest good for the greatest num-
ber of people may result in the unjustified treatment of a minority. Such action
cannot be ethical, precisely because it is unjust. For example, suppose that in the
interests of keeping down health insurance costs, the government decides to screen
people for the HIV virus and deny insurance coverage to those who are HIV posi-
tive. By reducing health costs, such action might produce significant benefits for a
large number of people, but the action is unjust because it discriminates unfairly
against a minority.
Kantian ethics are based on the philosophy of Immanuel Kant (1724–1804).
Kantian ethics hold that people should be treated as ends and never purely as means
to the ends of others. People are not instruments, like a machine. People have dig-
nity and need to be respected as such. Employing people in sweatshops, making
them work long hours for low pay in poor work conditions, is a violation of ethics,
according to Kantian philosophy, because it treats people as mere cogs in a machine
and not as conscious moral beings that have dignity. Although contemporary moral

Utilitarian
Approaches
These approaches to
ethics hold that the moral
worth of actions or
practices is determined
by their consequences.

Kantian ethics
The belief that people
should be treated as
ends and never as means
to the ends of others.

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148 Part Two Country Differences

philosophers tend to view Kant’s ethical philosophy as incomplete—for example, his
system has no place for moral emotions or sentiments such as sympathy or caring—
the notion that people should be respected and treated with dignity still resonates in
the modern world.

RIGHTS THEORIES Developed in the twentieth century, rights theories rec-
ognize that human beings have fundamental rights and privileges that transcend na-
tional boundaries and cultures. Rights establish a minimum level of morally acceptable
behavior. One well-known definition of a fundamental right construes it as something
that takes precedence over or “trumps” a collective good. Thus, we might say that the
right to free speech is a fundamental right that takes precedence over all but the most
compelling collective goals and overrides, for example, the interest of the state in civil
harmony or moral consensus. 34 Moral theorists argue that fundamental human rights
form the basis for the moral compass that managers should navigate by when making
decisions that have an ethical component. More precisely, they should not pursue ac-
tions that violate these rights.
The notion that there are fundamental rights that transcend national borders and
cultures was the underlying motivation for the United Nations Universal Declara-
tion of Human Rights, which has been ratified by almost every country on the planet
and lays down basic principles that should always be adhered to irrespective of the
culture in which one is doing business. 35 Echoing Kantian ethics, Article 1 of this dec-
laration states:

Article 1: All human beings are born free and equal in dignity and rights. They
are endowed with reason and conscience and should act towards one another in
a spirit of brotherhood.

Article 23 of this declaration, which relates directly to employment, states:

Everyone has the right to work, to free choice of employment, to just and favor-
able conditions of work, and to protection against unemployment.
Everyone, without any discrimination, has the right to equal pay for equal work.
Everyone who works has the right to just and favorable remuneration ensur-
ing for himself and his family an existence worthy of human dignity, and supple-
mented, if necessary, by other means of social protection.
Everyone has the right to form and to join trade unions for the protection of
his interests.

Clearly, the rights to “just and favorable work conditions,” “equal pay for equal
work,” and remuneration that ensures an “existence worthy of human dignity” em-
bodied in Article 23 imply that it is unethical to employ child labor in sweatshop
settings and pay less than subsistence wages, even if that happens to be common
practice in some countries. These are fundamental human rights that transcend na-
tional borders.
It is important to note that along with rights come obligations. Because we have the
right to free speech, we are also obligated to make sure that we respect the free speech
of others. The notion that people have obligations is stated in Article 29 of the Uni-
versal Declaration of Human Rights:

Article 29: Everyone has duties to the community in which alone the free and
full development of his personality is possible.

Within the framework of a theory of rights, certain people or institutions are
obligated to provide benefits or services that secure the rights of others. Such obli-
gations also fall upon more than one class of moral agent (a moral agent is any

Rights Theories
Twentieth century

theories that recognize
human beings have

fundamental rights and
privileges that transcend

national boundaries
and cultures.

Universal
Declaration of
Human Rights

A United Nations
document that lays down

the basic principles of
human rights that should

always be adhered to.

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Chapter Four Ethics in International Business 149

person or institution that is capable of moral
action such as a government or corporation).
For example, to escape the high costs of toxic
waste disposal in the West, in the late 1980s sev-
eral firms shipped their waste in bulk to African
nations, where it was disposed of at a much lower
cost. In 1987, five European ships unloaded toxic
waste containing dangerous poisons in Nigeria.
Workers wearing sandals and shorts unloaded the
barrels for $2.50 a day and placed them in a dirt
lot in a residential area. They were not told about
the contents of the barrels. 36 Who bears the obli-
gation for protecting the rights of workers and
residents to safety in a case like this? According to
rights theorists, the obligation rests not on the
shoulders of one moral agent, but on the shoul-
ders of all moral agents whose actions might harm
or contribute to the harm of the workers and resi-
dents. Thus, it was the obligation not just of the
Nigerian government but also of the multinational firms that shipped the toxic waste
to make sure it did no harm to residents and workers. In this case, both the govern-
ment and the multinationals apparently failed to recognize their basic obligation to
protect the fundamental human rights of others.

JUSTICE THEORIES Justice theories focus on the attainment of a just distribu-
tion of economic goods and services. A just distribution is one that is considered fair
and equitable. There is no one theory of justice, and several theories of justice conflict
with each other in important ways. 37 Here we shall focus on one particular theory of
justice that is both very influential and has important ethical implications. The theory
is attributed to philosopher John Rawls. 38 Rawls argues that all economic goods and
services should be distributed equally except when an unequal distribution would work
to everyone’s advantage.
According to Rawls, valid principles of justice are those with which all persons
would agree if they could freely and impartially consider the situation. Impartiality is
guaranteed by a conceptual device that Rawls calls the veil of ignorance. Under the veil
of ignorance, everyone is imagined to be ignorant of all of his or her particular char-
acteristics, for example, race, sex, intelligence, nationality, family background, and
special talents. Rawls then asks what system people would design under a veil of igno-
rance. Under these conditions, people would unanimously agree on two fundamental
principles of justice.
The first principle is that each person be permitted the maximum amount of basic
liberty compatible with a similar liberty for others. Rawls takes these to be political
liberty (e.g., the right to vote), freedom of speech and assembly, liberty of conscience
and freedom of thought, the freedom and right to hold personal property, and free-
dom from arbitrary arrest and seizure.
The second principle is that once equal basic liberty is assured, inequality in basic
social goods—such as income and wealth distribution, and opportunities—is to be
allowed only if such inequalities benefit everyone. Rawls accepts that inequalities can
be just if the system that produces inequalities is to the advantage of everyone. More
precisely, he formulates what he calls the difference principle, which is that inequalities
are justified if they benefit the position of the least-advantaged person. So, for exam-
ple, wide variations in income and wealth can be considered just if the market-based

A n o t h e r P e r s p e c t i v e

Cyber-Freedom in China
Nearly 400 million surf the Web in China, and the number
continues to grow. That’s a market too huge for Google to
ignore. However, the Chinese government censors Internet
use—a practice Google refused to tolerate, so it closed its
Beijing headquarters and rerouted search traffic through
Hong Kong, where censorship is not practiced. Secretary of
State Hillary Clinton has characterized Internet freedom as a
universal right, but is it? Such freedom is a widely held value
in North America, South America, and Europe. In China, reac-
tion to Google’s departure has been mixed, perhaps because
Chinese search engine Baidu is more popular. (Bruce
Nussbaum, “Internet Freedom Is Not a Universal Value, Sec-
retary of State Hillary Clinton,” BusinessWeek, January 22,
2010, http://www.businessweek.com)

Just Distribution
A distribution of
economic goods and
services that is
considered fair and
equitable.

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150 Part Two Country Differences

system that produces this unequal distribution also
benefits the least-advantaged members of society.
One can argue that a well-regulated, market-based
economy and free trade, by promoting economic
growth, benefit the least-advantaged members of
society. In principle at least, the inequalities inher-
ent in such systems are therefore just (in other
words, the rising tide of wealth created by a market-
based economy and free trade lifts all boats, even
those of the most disadvantaged).

In the context of international business ethics,
Rawls’s theory creates an interesting perspective.
Managers could ask themselves whether the poli-
cies they adopt in foreign operations would be con-
sidered just under Rawls’s veil of ignorance. Is it
just, for example, to pay foreign workers less than

workers in the firm’s home country? Rawls’s theory would suggest it is, so long as the
inequality benefits the least-advantaged members of the global society (which is what
economic theory suggests). Alternatively, it is difficult to imagine that managers oper-
ating under a veil of ignorance would design a system where foreign employees were
paid subsistence wages to work long hours in sweatshop conditions and where they
were exposed to toxic materials. Such working conditions are clearly unjust in Rawls’s
framework, and therefore, it is unethical to adopt them. Similarly, operating under a
veil of ignorance, most people would probably design a system that imparts some pro-
tection from environmental degradation to important global commons, such as the
oceans, atmosphere, and tropical rain forests. To the extent that this is the case, it fol-
lows that it is unjust, and by extension unethical, for companies to pursue actions that
contribute toward extensive degradation of these commons. Thus, Rawls’s veil of igno-
rance is a conceptual tool that contributes to the moral compass that managers can use
to help them navigate through difficult ethical dilemmas.

Focus on Managerial Implications

What then is the best way for managers in a multinational firm to make sure that
ethical considerations figure into international business decisions? How do manag-
ers decide upon an ethical course of action when confronted with decisions pertain-
ing to working conditions, human rights, corruption, and environmental pollution?
From an ethical perspective, how do managers determine the moral obligations that
flow from the power of a multinational? In many cases, there are no easy answers to
these questions, for many of the most vexing ethical problems arise because there
are very real dilemmas inherent in them and no obvious correct action. Neverthe-
less, managers can and should do many things to make sure that basic ethical prin-
ciples are adhered to and that ethical issues are routinely inserted into international
business decisions.

LEARNING OBJECTIVE 5
Explain how managers
can incorporate ethical
considerations into their
decision making.

A n o t h e r P e r s p e c t i v e

Ethical Analysis: In a Different Voice
In addition to utilitarian, Kantian, rights, and justice ap-
proaches to business ethics, Carol Gilligan offers another
way to think about our moral actions: as a series of caring
relationships that evolve over time, focused first on the
self, then on dependent others, and finally, on establishing
equality of needs between self and others so that dynamic
relationships can replace dependent ones. Such an ap-
proach (self, dependent other, dynamic equality) may be a
helpful way of thinking about a multinational’s evolving cor-
porate involvement in a developing country. (Carol Gilligan,
In a Different Voice, 1982)

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Chapter Four Ethics in International Business 151

Here we focus on five things that an international business and its managers can do
to make sure ethical issues are considered in business decisions. These are (1) favor
hiring and promoting people with a well-grounded sense of personal ethics; (2) build
an organizational culture that places a high value on ethical behavior; (3) make sure
that leaders within the business not only articulate the rhetoric of ethical behavior, but
also act in a manner that is consistent with that rhetoric; (4) put decision-making pro-
cesses in place that require people to consider the ethical dimension of business deci-
sions; and (5) develop moral courage.

Hiring and Promotion
It seems obvious that businesses should strive to hire people who have a strong
sense of personal ethics and would not engage in unethical or illegal behavior. Sim-
ilarly, you would not expect a business to promote people, and perhaps to fire peo-
ple, whose behavior does not match generally accepted ethical standards. However,
actually doing so is very difficult. How do you know that someone has a poor sense
of personal ethics? In our society, we have an incentive to hide a lack of personal
ethics from public view. Once people realize that you are unethical, they will no
longer trust you.
Is there anything that businesses can do to make sure they do not hire people who
subsequently turn out to have poor personal ethics, particularly given that people have
an incentive to hide this from public view (indeed, the unethical person may lie about
his or her nature)? Businesses can give potential employees psychological tests to try
to discern their ethical predisposition, and they can check with prior employees
regarding someone’s reputation (e.g., by asking for letters of reference and talking to
people who have worked with the prospective employee). The latter is common and
does influence the hiring process. Promoting people who have displayed poor ethics
should not occur in a company where the organization culture values the need for
ethical behavior and where leaders act accordingly.
Not only should businesses strive to identify and hire people with a strong sense of
personal ethics, but it also is in the interests of prospective employees to find out as
much as they can about the ethical climate in an organization. Who wants to work at
a multinational such as Enron, which ultimately entered bankruptcy because unethical
executives had established risky partnerships that were hidden from public view and
that existed in part to enrich those same executives? Table 4.1 lists questions job seek-
ers might want to ask a prospective employer.

Some probing questions to ask about a prospective employer:

1. Is there a formal code of ethics? How widely is it distributed? Is it reinforced in other
formal ways such as through decision-making systems?

2. Are workers at all levels trained in ethical decision making? Are they also encouraged to
take responsibility for their behavior or to question authority when asked to do something
they consider wrong?

3. Do employees have formal channels available to make their concerns known confidentially?
Is there a formal committee high in the organization that considers ethical issues?

4. Is misconduct disciplined swiftly and justly within the organization?
5. Is integrity emphasized to new employees?
6. How are senior managers perceived by subordinates in terms of their integrity? How do

such leaders model ethical behavior?

4.1 table

A Job Seeker’s
Ethics Audit

Source: Linda K. Trevino, chair of

the Department of Management

and Organization, Smeal College of

Business, Pennsylvania State

University. Reported in K. Maher,

“Career Journal. Wanted: Ethical

Employer,” The Wall Street Journal,

July 9, 2002, p. B1.

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152 Part Two Country Differences

Organization Culture and Leadership
To foster ethical behavior, businesses need to build an organization culture that values
ethical behavior. Three things are particularly important in building an organization
culture that emphasizes ethical behavior. First, the businesses must explicitly articulate
values that emphasize ethical behavior. Many companies now do this by drafting a
code of ethics, which is a formal statement of the ethical priorities a business adheres to.
Often, the code of ethics draws heavily upon documents such as the UN Universal Dec-
laration of Human Rights, which itself is grounded in Kantian and rights-based theories
of moral philosophy. Others have incorporated ethical statements into documents that
articulate the values or mission of the business. For example, the food and consumer
products multinational Unilever has a code of ethics that includes the following points: 39

Employees: Unilever is committed to diversity in a working environment where
there is mutual trust and respect and where everyone feels responsible for the per-
formance and reputation of our company. We will recruit, employ, and promote
employees on the sole basis of the qualifications and abilities needed for the work
to be performed. We are committed to safe and healthy working conditions for all
employees. We will not use any form of forced, compulsory, or child labor. We are
committed to working with employees to develop and enhance each individual’s
skills and capabilities. We respect the dignity of the individual and the right of
employees to freedom of association. We will maintain good communications with
employees through company-based information and consultation procedures.

Business Integrity: Unilever does not give or receive, whether directly or indi-
rectly, bribes or other improper advantages for business or financial gain. No
employee may offer, give, or receive any gift or payment which is, or may be
construed as being, a bribe. Any demand for, or offer of, a bribe must be rejected
immediately and reported to management. Unilever accounting records and
supporting documents must accurately describe and reflect the nature of the
underlying transactions. No undisclosed or un-recorded account, fund, or asset
will be established or maintained.

It is clear from these principles, that among other things, Unilever will not tolerate
substandard working conditions, use child labor, or give bribes under any circum-

stances. Note also the reference to respecting the
dignity of employees, a statement that is grounded
in Kantian ethics. Unilever’s principles send a very
clear message about appropriate ethics to managers
and employees.

Having articulated values in a code of ethics or
some other document, leaders in the business must
give life and meaning to those words by repeatedly
emphasizing their importance and then acting on
them. This means using every relevant opportunity
to stress the importance of business ethics and
making sure that key business decisions not only
make good economic sense but also are ethical.
Many companies have gone a step further, hiring
independent auditors to make sure they are behav-
ing in a manner consistent with their ethical codes.
Nike, for example, has hired independent auditors
to make sure subcontractors used by the company
are living up to Nike’s code of conduct.

A n o t h e r P e r s p e c t i v e

How “Fair Trade” Makes Business “Fair”
Like many breakfast eaters, you probably enjoy bananas
on your morning cereal. But do you ever think about who
grew those bananas? Increasingly, consumers are paying
attention to the sources of their food. Massachusetts-
based Oké USA imports “fair trade” organic bananas and
sells them to grocers such as Whole Foods Market and
Stop & Shop. Oké buys produce from grower cooperatives
in Ecuador, paying the farmers a fair, internationally
predetermined price that affords them a living wage. The
price of Oké bananas is structured to ensure that the bulk
of the profits stays in the country of origin and helps
develop the nation’s economy. (Robert Knox, “Fair Trade
Importer Says It’s Ripe for Success,” Boston.com, January 4,
2010, http://www.boston.com)

Code of Ethics
A business’s formal
statement of ethical

priorities.

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Chapter Four Ethics in International Business 153

Finally, building an organization culture that places a high value on ethical behavior
requires incentive and reward systems, including promotions that reward people who
engage in ethical behavior and sanction those who do not. At General Electric, for ex-
ample, the former CEO Jack Welch has described how he reviewed the performance of
managers, dividing them into several groups. These included over-performers who dis-
played the right values and were singled out for advancement and bonuses and over-
performers who displayed the wrong values and were let go. Welch was not willing to
tolerate leaders within the company who did not act in accordance with the central
values of the company, even if they were in all other respects skilled managers. 40

Decision-Making Processes
In addition to establishing the right kind of ethical culture in an organization, business-
people must be able to think through the ethical implications of decisions in a systematic
way. To do this, they need a moral compass, and both rights theories and Rawls’s theory
of justice help to provide such a compass. Beyond these theories, some experts on ethics
have proposed a straightforward practical guide—or ethical algorithm—to determine
whether a decision is ethical. 41 According to these experts, a decision is acceptable on
ethical grounds if a businessperson can answer yes to each of these questions:

• Does my decision fall within the accepted values or standards that typically apply
in the organizational environment (as articulated in a code of ethics or some other
corporate statement)?

• Am I willing to see the decision communicated to all stakeholders affected by it—for
example, by having it reported in newspapers or on television?

• Would the people with whom I have a significant personal relationship, such as
family members, friends, or even managers in other businesses, approve of the
decision?

Others have recommended a five-step process to think through ethical problems (this
is another example of an ethical algorithm). 42 In step one, businesspeople should identify
which stakeholders a decision would affect and in what ways. A firm’s stakeholders are
individuals or groups that have an interest, claim, or stake in the company, in what it
does, and in how well it performs. 43 They can be divided into internal stakeholders and
external stakeholders. Internal stakeholders are individuals or groups who work for or
own the business. They include all employees, the board of directors, and stockholders.
External stakeholders are all other individuals and groups that have some claim on the
firm. Typically, this group comprises customers, suppliers, lenders, governments, unions,
local communities, and the general public.
All stakeholders are in an exchange relationship with the company. Each stake-
holder group supplies the organization with important resources (or contributions),
and in exchange each expects its interests to be satisfied (by inducements). 44 For
example, employees provide labor, skills, knowledge, and time and in exchange ex-
pect commensurate income, job satisfaction, job security, and good working condi-
tions. Customers provide a company with its revenues and in exchange they want
quality products that represent value for money. Communities provide businesses
with local infrastructure and in exchange they want businesses that are responsible
citizens and seek some assurance that the quality of life will be improved as a result
of the business firm’s existence.
Stakeholder analysis involves a certain amount of what has been called moral imagi-
nation. 45 This means standing in the shoes of a stakeholder and asking how a proposed
decision might impact that stakeholder. For example, when considering outsourcing to
subcontractors, managers might need to ask themselves how it might feel to be work-
ing under substandard health conditions for long hours.

Stakeholders
The individuals or groups
that have an interest,
stake, or claim in the
actions and overall
performance of a
company.

Internal
Stakeholders
People who work for or
own the business, such
as employees, directors,
and stockholders.

External
Stakeholders
The individuals and
groups that have some
claim on the firm, such
as customers, suppliers,
and unions.

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154 Part Two Country Differences

Step two involves judging the ethics of the pro-
posed strategic decision, given the information
gained in step one. Managers need to determine
whether a proposed decision would violate the
fundamental rights of any stakeholders. For exam-
ple, we might argue that the right to information
about health risks in the workplace is a fundamen-
tal entitlement of employees. Similarly, the right
to know about potentially dangerous features of a
product is a fundamental entitlement of custom-
ers (something tobacco companies violated when
they did not reveal to their customers what they
knew about the health risks of smoking). Manag-
ers might also want to ask themselves whether
they would allow the proposed strategic decision
if they were designing a system under Rawls’s veil
of ignorance. For example, if the issue under con-
sideration was whether to outsource work to a
subcontractor with low pay and poor working
conditions, managers might want to ask them-
selves whether they would allow such action if
they were considering it under a veil of ignorance,
where they themselves might ultimately be the
ones to work for the subcontractor.

The judgment at this stage should be guided by various moral principles that should
not be violated. The principles might be those articulated in a corporate code of ethics
or other company documents. In addition, certain moral principles that we have ad-
opted as members of society—for instance, the prohibition on stealing—should not be
violated. The judgment at this stage will also be guided by the decision rule that is
chosen to assess the proposed strategic decision. Although maximizing long-run prof-
itability is the decision rule that most businesses stress, it should be applied subject to
the constraint that no moral principles are violated—that the business behaves in an
ethical manner.

Step three requires managers to establish moral intent. This means the business
must resolve to place moral concerns ahead of other concerns in cases where either
the fundamental rights of stakeholders or key moral principles have been violated. At
this stage, input from top management might be particularly valuable. Without the
proactive encouragement of top managers, middle-level managers might tend to place
the narrow economic interests of the company before the interests of stakeholders.
They might do so in the (usually erroneous) belief that top managers favor such an
approach.
Step four requires the company to engage in ethical behavior. Step five requires the
business to audit its decisions, reviewing them to make sure they were consistent with
ethical principles, such as those stated in the company’s code of ethics. This final step
is critical and often overlooked. Without auditing past decisions, businesspeople may
not know if their decision process is working and if changes should be made to ensure
greater compliance with a code of ethics.

Ethics Officers
To make sure that a business behaves in an ethical manner, a number of firms now
have ethics officers. These individuals are responsible for making sure that all
employees are trained to be ethically aware, that ethical considerations enter the

A n o t h e r P e r s p e c t i v e

How Do You Know What Is Really Happening?
Giving Meaning across Cultures
One of the difficulties in making ethical decisions across
cultural borders is that expatriate managers may tend to
interpret a local cultural practice in the ways such behav-
ior would be understood in their home culture. If the man-
ager’s process of meaning-giving stops there, rather than
continue in an attempt to understand the practice’s mean-
ing in the local culture , the manager may miss a huge step
in ethical analysis. For example, if women’s covering their
heads and faces in conservative Muslim cultures is given
meaning in a Western context, it would lead to different
conclusions than were it given meaning with knowledge of
the specific, local, Muslim context. Remember to consider
context when conducting an ethical analysis. In such a
process, a local informant can be helpful. At the same
time, be aware of the ethical trap of cultural relativism.
(Example from H. Lane, M. Maznevski, M. Mendenhall, and
J. McNett, The Blackwell Handbook of Global Manage-
ment: A Guide to Managing Complexity [New York: John
Wiley & Sons, Inc., 2004])

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Chapter Four Ethics in International Business 155

business decision-making process, and that the
company’s code of ethics is followed. Ethics officers
may also be responsible for auditing decisions to
make sure they are consistent with this code. In
many businesses, ethics officers act as an internal
ombudsperson with responsibility for handling con-
fidential inquiries from employees, investigating
complaints from employees or others, reporting
findings, and making recommendations for change.
For example, United Technologies, a multina-
tional aerospace company with worldwide revenues
of more than $30 billion, has had a formal code of
ethics since 1990. 46 United Technologies has some
160 business practice officers (this is the company’s
name for ethics officers). They are responsible for
making sure the code is followed. United Technolo-
gies also established an ombudsperson program in
1986 that lets employees inquire anonymously about ethics issues. The program has
received some 60,000 inquiries since 1986, and over 10,000 cases have been handled
by an ombudsperson.

Moral Courage
Finally, it is important to recognize that employees in an international business may
need significant moral courage. Moral courage enables managers to walk away from a
decision that is profitable, but unethical. Moral courage gives an employee the strength
to say no to a superior who instructs her to pursue actions that are unethical. Moral
courage gives employees the integrity to go public to the media and blow the whistle
on persistent unethical behavior in a company. Moral courage does not come easily;
there are well-known cases where individuals have lost their jobs because they blew
the whistle on corporate behaviors they thought unethical, telling the media about
what was occurring. 47
However, companies can strengthen the moral courage of employees by commit-
ting themselves to not retaliate against employees who exercise moral courage, say no
to superiors, or otherwise complain about unethical actions. For example, consider the
following extract from Unilever’s code of ethics:

Any breaches of the Code must be reported in accordance with the procedures
specified by the Joint Secretaries. The Board of Unilever will not criticize man-
agement for any loss of business resulting from adherence to these principles
and other mandatory policies and instructions. The Board of Unilever expects
employees to bring to their attention, or to that of senior management, any
breach or suspected breach of these principles. Provision has been made for em-
ployees to be able to report in confidence and no employee will suffer as a con-
sequence of doing so. 48

This statement gives permission to employees to exercise moral courage. Compa-
nies can also set up ethics hotlines, which allow employees to anonymously register a
complaint with a corporate ethics officer.

Summary of Decision-Making Steps
All of the steps discussed here—hiring and promoting people based upon ethical
considerations as well as more traditional metrics of performance, establishing an ethical
culture in the organization, instituting ethical decision-making processes, appointing

United Technologies, the maker of Sikorsky helicopters, demonstrates its
commitment to ethical behavior by employing over 160 business
practices officers.

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156 Part Two Country Differences

business ethics, p. 130
ethical strategy, p. 130
Foreign Corrupt Practices Act,
p. 137
Convention on Combating Bribery
of Foreign Public Officials in
International Business Transactions,
p. 137
social responsibility, p. 138

ethical dilemma, p. 141
organization culture, p. 142
cultural relativism, p. 144
righteous moralism, p. 145
naïve immoralism, p. 146
utilitarian approaches, p. 147
Kantian ethics, p. 147
rights theories, p. 148

Universal Declaration of Human
Rights, p. 148
just distribution, p. 149
code of ethics, p. 152
stakeholders, p. 153
internal stakeholders, p. 153
external stakeholders, p. 153

Key Terms

Summary

This chapter has discussed the source and nature of
ethical issues in international businesses, the differ-
ent philosophical approaches to business ethics, and
the steps managers can take to ensure that ethical
issues are respected in international business deci-
sions. The chapter made the following points:

1. The term ethics refers to accepted principles of
right or wrong that govern the conduct of a
person, the members of a profession, or the
actions of an organization. Business ethics are
the accepted principles of right or wrong
governing the conduct of businesspeople, and
an ethical strategy is one that does not violate
these accepted principles.

2. Ethical issues and dilemmas in international
business are rooted in the variations among
political systems, law, economic development,
and culture from nation to nation.

3. The most common ethical issues in
international business involve employment
practices, human rights, environmental

regulations, corruption, and the moral
obligation of multinational corporations.

4. Ethical dilemmas are situations in which none
of the available alternatives seems ethically
acceptable.

5. Unethical behavior is rooted in poor personal
ethics, the psychological and geographical
distances of a foreign subsidiary from the home
office, a failure to incorporate ethical issues
into strategic and operational decision making,
a dysfunctional culture, and failure of leaders to
act in an ethical manner.

6. Moral philosophers contend that approaches to
business ethics such as the Friedman doctrine,
cultural relativism, the righteous moralist, and
the naive immoralist are unsatisfactory in
important ways.

7. The Friedman doctrine states that the only
social responsibility of business is to increase
profits, as long as the company stays within the
rules of law. Cultural relativism contends that

ethics officers, and creating an environment that facilitates moral courage—can help
to make sure that when making business decisions, managers are cognizant of the
ethical implications and do not violate basic ethical prescripts. At the same time, it
must be recognized that not all ethical dilemmas have a clean and obvious solution—
that is why they are dilemmas. There are clearly things that international businesses
should not do and there are things that they should do but there are also actions that
present managers with true dilemmas. In these cases, a premium is placed on manag-
ers’ ability to make sense out of complex situations and make balanced decisions that
are as just as possible.

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Chapter Four Ethics in International Business 157

one should adopt the ethics of the culture in
which one is doing business. The righteous
moralist monolithically applies home-country
ethics to a foreign situation, while the naive
immoralist believes that if a manager of a
multinational sees that firms from other
nations are not following ethical norms in a
host nation, that manager should not either.

8. Utilitarian approaches to ethics hold that
the moral worth of actions or practices is
determined by their consequences, and the best
decisions are those that produce the greatest
good for the greatest number of people.

9. Kantian ethics state that people should be
treated as ends and never purely as means to the
ends of others. People are not instruments, like
a machine. People have dignity and need to be
respected as such.

10. Rights theories recognize that human beings
have fundamental rights and privileges that
transcend national boundaries and cultures.

These rights establish a minimum level of
morally acceptable behavior.

11. The concept of justice developed by John
Rawls suggests that a decision is just and ethical
if people would allow for it when designing a
social system under a veil of ignorance.

12. To make sure that ethical issues are considered
in international business decisions, managers
should ( a ) favor hiring and promoting people
with a well-grounded sense of personal ethics;
( b ) build an organization culture that places a
high value on ethical behavior; ( c ) make sure
that leaders within the business not only
articulate the rhetoric of ethical behavior, but
also act in a manner that is consistent with that
rhetoric; ( d ) put decision-making processes in
place that require people to consider the ethical
dimension of business decisions; and ( e ) be
morally courageous and encourage others to do
the same.

Critical Thinking and Discussion Questions

1. A visiting American executive finds that a foreign
subsidiary in a poor nation has hired a 12-year-
old girl to work on a factory floor, in violation of
the company’s prohibition on child labor. He tells
the local manager to replace the child and tell her
to go back to school. The local manager tells the
American executive that the child is an orphan
with no other means of support, and she will
probably become a street child if she is denied
work. What should the American executive do?

2. Drawing upon John Rawls’s concept of the veil
of ignorance, develop an ethical code that will
( a ) guide the decisions of a large oil multinational
toward environmental protection, and
( b ) influence the policies of a clothing company
to outsourcing of the manufacturing process.

3. Under what conditions is it ethically defensible
to outsource production to the developing world
where labor costs are lower when such actions
also involve laying off long-term employees in
the firm’s home country?

4. Are facilitating payments ethical?
5. A manager from a developing country is

overseeing a multinational’s operations in a

country where drug trafficking and lawlessness
are rife. One day, a representative of a local “big
man” approaches the manager and asks for a
“donation” to help the “big man” provide
housing for the poor. The representative tells the
manager that in return for the donation, the “big
man” will make sure that the manager has a
productive stay in his country. No threats are
made, but the manager is well aware that the
“big man” heads a criminal organization that is
engaged in drug trafficking. He also knows that
the big man does indeed help the poor in the
run-down neighborhood of the city where he
was born. What should the manager do?

6. Reread the Management Focus feature on
Unocal and answer the following questions:

a. Was it ethical for Unocal to enter into a
partnership with a brutal military dictatorship
for financial gain?

b. What actions could Unocal have taken, short
of not investing, to safeguard the human
rights of people impacted by the gas pipeline
project?

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158 Part Two Country Differences

Siemens Bribery Scandal

In December 2008 Siemens, the large German electronics
firm, agreed to pay $1.6 billion in fines to settle legal suits
bought by the American and German governments. The gov-
ernments asserted that Siemens had used bribes to win busi-
ness in countries around the world. These were the largest
fines ever levied against a company for bribes, reflecting the
scale of the problem at Siemens. Since 1999, the company
had apparently paid some $1.4 billion in bribes. In Bangla-
desh, Siemens paid $5 million to the son of the prime minister
to win a mobile phone contract. In Nigeria, it paid $12.7 million
to various officials to win government telecommunications
contracts. In Argentina, Siemens paid at least $40 million in
bribes to win a $1 billion contract to produce national identity
cards. In Israel, the company “provided” $20 million to senior
government officials in order to win a contract to build power
plants. In China, it paid $14 million to government officials to
win a contract to supply medical equipment. And so on.
Corruption at Siemens was apparently deeply embedded in
the business culture. Before 1999, bribery of foreign officials
was not illegal in Germany; bribes could be deducted as a
business expense under the German tax code. In this permis-
sive environment, Siemens subscribed to the straightforward
rule of adhering to local practices. If bribery was common in a
country, Siemens would routinely use bribes to win business.
Inside Siemens, bribes were referred to as “useful money.”
When the German law changed in 1999, Siemens carried on
as before, but put in place elaborate mechanisms to hide what
it was doing. Money was transferred into hard-to-trace bank

accounts in Switzerland. These funds were then used to hire
an outside “consultant” to help win a contract. The consultant
would deliver the cash to the ultimate recipient, typically a
government official. Siemens apparently had more than 2,700
such consultants worldwide. Bribes, which were viewed as a
cost of doing business, typically ranged between 5 and 6 per-
cent of a contract’s value, although in corrupt countries bribes
could be as much as 40 percent of the value of a contract. In
justifying this behavior, one former Siemens employee stated,
“It was about keeping the business alive and not jeopardizing
thousands of jobs overnight.” But the practice left behind
angry competitors who were shut out of contracts and local
residents in poor countries who paid too much for government
services because of rigged deals. Moreover, by engaging in
bribery, Siemens helped to foster a culture of corruption in
those countries where it made illegal payouts.
During this period, Siemens put in place a formal process
for monitoring payments to make sure no illegal payments
were made. Senior executives even made some of the indi-
viduals responsible for managing the bribery funds sign com-
pliance forms stating they had not engaged in any such
activity, while knowing this was not the case.
This scheme began to collapse at Siemens when investi-
gators in several countries started to examine suspicious
transactions. Prosecutors in Italy, Liechtenstein, and Switzer-
land sent requests for help to counterparts in Germany, pro-
viding a list of Siemens employees who were implicated in
making illegal payments. In late 2006 the German police

closing case

Use the globalEDGE Resource Desk (http://
globalEDGE.msu.edu/resourcedesk/) to complete
the following exercises:

1. The Organization for Economic Cooperation
and Development (OECD) Guidelines for
Multinational Enterprises is a set of voluntary
principles and standards for responsible business
conduct addressed by governments for
multinational enterprises. The guidelines
provide recommendations in a number of areas
including labor relations, the environment,

bribery, competition, and taxation. Find the text
of the guidelines and prepare an outline of the
guidelines in the area of employment and
industrial relations.

2. The Corruption Perceptions Index (CPI) is a
comparative assessment of integrity performance
in a variety of countries. Provide a description of
this index and its ranking. Identify the five
countries with the lowest and the highest CPI
scores. Do you notice any trends or similarities
among the countries listed?

Research Task http://globalEDGE.msu.edu

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Chapter Four Ethics in International Business 159

raided the company, seizing data and arresting several ex-
ecutives. Soon afterward, the United States started to look
into these charges. Since Siemens had a listing on the New
York Stock Exchange, the company had to adhere to the For-
eign Corrupt Practices Act, which outlaws payments to gov-
ernment officials to win contracts. In total, Siemens had to
pay not only $1.6 billion in fines, but also commit to spending
another $1 billion to improve its internal compliance process,
while several executives went to jail.

Sources: S. Schubert and C. Miller, “Where Bribery Was Just a Line
Item,” The New York Times , December 21, 2008, p. B1; J. Ewing,
“Siemens Braces for a Slap from Uncle Sam,” BusinessWeek ,
November 11, 2007, pp. 78–79; and J. Ewing, “Siemens Settlement:
Relief, but Is It Over?” BusinessWeek , December 12, 2008, p. 8.

Case Discussion Questions
1. What explains the high level of corruption at Siemens?

How did managers engaged in corruption rationalize it?

2. What do you think would have happened to a manager at
Siemens if he or she had taken a stand against corrupt
practices?

3. How does the kind of corruption Siemens engaged in
distort competition?

4. What is the impact of corrupt behavior by Siemens on the
countries where it does business?

5. If you were a manager at Siemens, and you became
aware of these activities, what would you have done?

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