Social

Corporate social responsibility (CSR) is a controversial subject when determining how the MNCs should function, especially in less developed countries (LDC). Why is it important for a MNC to consider CSR? How do they take action? The level of corporate responsibility ranges from low involvement to high, proactive involvement; explain this. What are examples of controversy related to CSR?

Your response should be at least 200 words in length. You are required to use at least your textbook as source material for your response. All sources used, including the textbook, must be referenced; paraphrased and quoted material must have accompanying citations.

Herdesky, H. (2011). International management: Managing across the borders and cultures. (7 ed., pp. 36-40). Upper Saddle River: The Pearson Education Company.

(Herdesky, 2011)

36 Part 1 ” The Global l\{anager’s Environment

0pening Profile: Primark’s Moral Maze: Embroidered T-Shirt-Price: t4.
Cost: Misery or Survival?l
For Primark, the U.K, clothing retailer owned by Associated Bri

sh Foods, there are few clear answers
to the moral maze faced by retailers in the developed world which are reliant on suppliers in less
developed economies. Primark announced in June 2008 that it had fired three suppiiers in India after it
was found that they had subcontracted work to home workers who used child labor; company execu-
tives protested that the factories had engaged in systematic deception and that regular audits had not
exposed the breaches. Primark’s executives were alerted about child labor being used by its garment
suppliers in southern India aller an expose by the BBC’s Pa norama program. One of the three factories
the documentary exposed as subcontracting to child laborers had been supplying Primark for 1 2 years.

Primark’s response to the expose increased as various stakeholders communicated their
positions. The initial reaction was to fire the offending suppliers. However. that brought criticism
that such action was insufficient and also only served to punish those workers who spoke up about
their working conditions. When consumers protested, the company withdrew the clothes from sale
and oflered refunds. The company said it would appoint an organization in southern Itidia to check
on the suppliers. Hswever, according to the Ethical Trade Initiative, an organization set up by
retailers, NGOs, and trade unions of which Primark is a member, audits are essential, but tlot
foolproof; whiie all companies have problens in supply chains, the key is what they do about them.
Later Primark said that the company is setting up a charity to improve the lives of children in its
suppliers’locations.

Consumers, too, come under fire for expecting that they can pay !4 tbr an embroidered t-shirt
without realizing that something in the supply chain has got to give. According to Richard Welford

Chairman of CSR Asia, anyone with any experience of supply chains in Asia knows that regular audits
will uncover breaches. However many suppliers are determined to keep their breaches from being
discovered. Instead, companies need to get suppliers to recognize that adhering to sound employment
practices is in their own intelests and to help suppliers develop policies and practices for a long-term
relationship. Simply to cut the confiacts of factories that indirectly employ children has the potential to

make a bad situation worse. Parents in less-developed economies carmot chose between sending their
chitdren to school or work-their choice is only whether they work or go hungry.

While little over a decade ago a company’s respoilsibility was almost exclusively profit, now
corporate social responsibility (CSR) has come to the forefront. “Transparency” has become the
watchword, and the issue of sweatshops must be carcfully evaluated and controlled by manufacturers
such as Primark or The Gap. Primark’s case is a waming to othei corporations because it reveals how
much scrutiny is being applied to all levels of an organization’s operations. The lesson is that CSR is
now a vital part of corporate culture and strategy, and in fact can become an organization’s license to
keep operating.

Global interdependence is a compelling factor in the globai business environment, creating
demands on international managers to take a positive stance on issues of social responsibility and

ethical behavior, economic development in host countries, and ecological protection around the
world.

Managers today are usually quite sensitive to issues of social responsibility and ethical
behavior because ofpressures from the public, from intercst groups, fiom legal and governmental

concerns, and from media coverage, as illustrated in the opening profile. In August 2003, for
example, the United Nations published draft guidelines for the responsibilities of transnational
corporations and called for companies to be subject to monitoring, verification, and censure.
Though many companies agree with the guidelines, they resist the notion that corporate rcspon-

sibility should be regulated and question where to draw the line between socially responsible
bshavior and the concerns ofthe corporation’s other stakeholders.2 In the domestic arena, managers

are faced with numerous ethical cornplexities. In the international arena, such concerns are
compounded by the larger numbers of stakeholders involved, including customers, communities,
allies, and ownel’s in various countries.

This chapter’s discussion focuses separately on issues ol’social responsibility and ethical

behavior, though considerable overlap can be observed, The difference between the two is a

matter of scope and degree. Whereas ethics deals with decisions and interactions on an indi-
vidual level, decisions about social responsibility are broader in scope, tend to be made at a
higher level, affect more people, and reflect ageneral stance taken by a company or a number of
decision makers.

Chapter 2 .

TFIE SCCII\L ffi€SP#NSISII-NTY OF MNCS

Multinational corporations (MNCs) and multinational enterprises (MNEs) have been, and-to a
lesser extent-continue to be, at the center of debate regarding corporate social responsibility
(CSR), particularly the benefits versus harm wrought by their operations around the world,
especially in less developed countries. The criticisms of MNCs have been lessened in recent years
by the decreasing economic differences among countries, by the emergence of less developed
countries’ (LDCs) multinationals, and by the greater emphasis on social responsibility by MNCs.

Issues ofsocial responsibility continue to center on the poverty and lack ofequal opportu-
nity around the world, the environment, consumer concerns’ and employee saf’ety and welfare.
Many argue that, since MNCs operate in a global context, they shouid use their capital, skilis,
and power to play proactive roles in handling worldwide social and economic problems and that,
at the least, they should be concerned with host-country welfare. Others argue that MNCs
already have a positive impact on developing economies by providing managerial training,
investment capital, and new technology, as well as by creating jobs and improving infrastructure.
Certainly, multinational corpolations constitute a powerful presence in the world economy
and often have a greater capacity than iocal governments to induce change. The sales, debts, and
tesources of some of the largest multinationals exceed the gross national product, the public and
private debt, and the resources, respectively, of some nations.

The concept of international social responsibility includes the expectation that MNCs
concern themselves with the social and economic effects of their decisions. The issue is how fal that
concem should go and what level of planning and control that concern should take. Such dilemmas
ale common for MNC managers. Del Monte managers, for example, realize that growing pineapples
in the rich coastal lands of Kenya brings tnixed results there. Although badly needed foreign-
exchange earnings are generated for Kenya, poor Kenyans living in the region experience adverse
effects because less land is available for subsistence agriculture to support them.

Opinions on the level of social responsibility that a domestic firrn should demonstrate
range from one extreme-the only responsibility of a business is to make a profit, within the con-
tines of the law, in order to produce goods and services and serve its shareholders’ interests3-to
another extreme-companies should anticipate and try to solve probiems in society, Between
these extremes are varying positions described as sociaily reactive, in which companies respond
to some degree of currently prevailing social expectations, to the environmental and social costs
of their actions, as illustrated in the opening profile on the Primalk Company.

The stance toward social responsibility that a firm should lake in its international operations,
however, is much more complex-ranging perhaps from assuming some responsibility for
economic development in a subsidiary’s host country to taking an active role in identifying and
solving world problems. The increased complexity regarding the social responsibility and ethical
behavior of firms across borders is brought about by the additionai stakehoiders in the firm’s
activities through operating overseas. As illustrated in Exhibit 2-1, managers are faced with not
only considering stakeholders in the host country but also with weighing their rights against the
rights of their domestic stakeholders. Most managerial decisions will have a trade-off of the rights
of these stakeholders-at least in the short term. For example, a decision to discontinue using
children in Pakistan to sew soccer balls means the company will pay more for adult employees and
wiil, therefore, reduce the profitability to its owners. That same decision-while taking a stand for
human rights according to the social and ethical expectations in the home country and bowing to
consumers’ detnands-may mean that those children and their families go hungry or are ibrced
into worse working situations. Another decision to keep jobs at home to satisfy local employees
and unions will mean higher prices fbr consumers and less profit for stakeholders. In addition, if
competitors take their jobs to cheaper overseas factories, a company may go out of business,
which will mean no jobs at all for the dornestic ernployees and a loss for the owners. In spite of
conflicting agendas, there is some consensus about rvhat CSR means at a basic ievel-that “corpo-
rate activity should be motivated in part by a concern tbr the welfare of some non-ownet’s, and by
an underiying commitment to basic principles such as integrity, fairness and respect tbr persons.”4

In addition, it is clear that there are long-tenn competitive benet-rts deriving fi-om CSR, much
of rvhich results from the goodwill, attractiveness, and loyalty of the various stakeholders connected
with the company. These may be in the local area, such as government, suppliers, employees, brand
teputation, etc., or far-flung such as consumers. Manuela Weber suggests a CSR impact model can
be derived that reflects the main ciusters of CSR business benefits as shown inExhrbit2-2,

Managing Interdependence 37

l:.
:i

38 Part 1 The Global Manager’s Envirolment

EXFI!gtT 2-t MNC Stakeholders

Home Counlry
Owners
Cuslomers
Employees

Unions
Suppliers
Distributon
Sirolegic ollies
Community
Economy
Government

MNC Srokeholders

Hosl €ountry
Economy
Fmployees
Communify
Host government
Consumen
Strotegic ollies
Suppliers
Distributors

Sorlety in Generol
(globol interdependence/
slondord of living)
Globql environmeni ond ecology
Sustoinoble resources
Populotion’s standord o{ living

EX*’llslT ?-2 CSR lmPact Model

source..Reprinted from Manuela Weber,
,’The Business Case for corporate Social Responsibility: A company-Level

Measurement Approach for CSR,” Furopean Managernent Journal26, no- 4
(2008): 247-61 Copyright 2008′ with

permiSsion from Elsevier.

CSR: Global Consensus or fiegienal Variation?

With the growing awareness of the world’s socioeconomic interdependence,
global organiza-

tions are beginning to recognize the need to reach a consensus on
what should constitute moral

and ethical behavior. Sorne think that such a consensus is emerging because
of the development

of a global corporate culture-an integration of the business environments in
which firms

.urrJntly opera;. This integration results from the gradual dissolution of traditional
boundaries

and from the many intricaL interconnection, u*ong MNCs, internationally linked
securities

markets, and communication networks’ Nevertheless, there are comlnonly
acknowledged

regional variations in how companies respond to corporate social responsibility
(CSR)

The U.S. arul Europe adopt strikittgty dffirent po,sitiorts tltat can be traced largely to

history, gilcl cttltuie. In the {J.5., CSR is weiShted tnore tovvards “doing brtsiness

right’; byfoltowing basic business obligations; . . . inEwope, CSR is weiShted more

lmproved customer
attraction, retention
lmproved reputation
lmproved employee
recruitment,
motivation, retention

Qualitstive Qsantilative

ChaPter 2

toyvarcls seruing,*or ut least not conflicting with-brosder sociql aims, such as envi’

ro nme ntal s u s tctinab ilitY.

THe. FwaNclal Ttir,tes,
Jwrc 3,2005.s

White making good faith efforts to implement CSR, companies operating abroad face

confusion about the cross’cultural dilemmas it creates, especially how to behave in host countries,

which have their own differing expectations and agendas. Recommendations about how to deal

with such dilemmas include:

. Engaging stakeholders (and sometimes nongovernmental organizations, or NGOs) in a
dialogue.

. Establishing principles and procedures tbr addressing difficult issues such as labor
standards for suppliers, environmental reporting, and human rights.

. Adiusting reward systems to retlect the company’s commitment to CSR’6

Although it is very difficult to implement a generalized code of morality and ethics in
individual countdes, such guidelines do provide a basis ofjudgment regarding specific situations.

Bowie uses the term moral universalism to address the need for a moral standard that is accepted

by all cultures.T Although, in practice, it seems unlikely that a universal code of ethics will ever be
a reality, Bowie says that this approach to doing business across cultures is far preferable to other

approaches, such as ethnocentrism or ethical relativism. With an ethnocentric approach, a company

applies the morality used in its home country-regardless of the host countly’s system of ethics.
A company subscribing to ethical relativism, on the other hand, simply adopts the local

moral code of whatever countly in which it is operating. With this approach, companies run into
value conflicts, such as continuing to do business in China despite home-country objections to
China’s continued violation of human rights. In addition, public pressure in the home country often

forces the MNC to act in accordance with ethnocentric value systems anyway. In one instance, pub-

lic outcry in the United States and most of the world rcsulted in major companies (IBM, General
Motors, Coca-Cola, and Eastman Kodak) either selling or discontinuing their opel’ations in South

Africa during the 1980s to protest that country’s apartheid policies. More recently, the Food and

Drug Administration (FDA) has been pressuring U.S. manufacturers of silicone-filied breast
implants (prohibited in the United States for cosrnetic surgery because of health hazards) to adopt a

voluntary moratorium on exports. While Dow Corning has ceased its foreign sales–citing its
responsibility to apply the same standards intemationally as it does domestically-other major
manufacturers continue to expofi the implants, often from their factories in other countries.

The difficulty, even in adopting a stance of moral universalism, is in deciding where to
draw the line. Individual managers must at some point decide, based on their own morality, when

they feel a situation is simply not right and to withdraw their involvement.
One fact is inescapable, howevel and that is that, in a globalized market economy, CSR is

pat of modern business.

MNC Responsibility Toward Fluman Rights

With almost all tech products now rnude by contract manufacttrers in low-wage
ncttiorts yvhere sweatshops are common, . . . Hewlett Packqrd, Dell, IBM, Intel, and
twelve other tech companies decided to unite to ereate the Elechonic Industry Code
of Conduct (EICC)

Buswess Weer,
June 19,2A06.8

Whereas many situations regarding the morality of the MNC’s presence or activities in a country

are quite clear, other situations are not, especially when dealing with human rights. So loud has
been the cry about pl’oducts coming from so-called sweatshops around the world that fotmer
Plesident Bill Clinton established an Anti-Sweatshop Code of Conduct, which includes a ban on
lbrced labor, abuse, and discrimination, and it requires companies to provide a healthy and safe
work environment and to pay at least the prevailing local minimum wage, among other require-
ments. A group has been named to monitor compliance; enforcement is difficult, of course, but

. Managing InterdePendence 39

40 Part 1 ” The Global Manager’s Environnent

publicity helps. The Deparlment of Labor publishes the names of companies that comply with

ihe code, including Nike, Reebok, Liz Claiborne, Wal-Mafi, and Phillips-Van Heusen.’Nike’s
efforts to address its problems include publishing its entire list of contract rnanuf’acturers on the
Internet in order to gain transparency. The company admits that it is dif{icult to keep track of
what goes on at its 800 plus contracted factories around the world.l0 (See the case at the end of
this chapter for a review of Nike’s approach to human rights in its factories.)

What constitutes “human rights” is clouded by the perceptions and priorities of people in
different countries. While the United States often takes the lead in the charge against what it
considers human rights violations around the world, other countries point to the homeiessness
and high crime statistics in the United States. Often the discussion of human rights centers
around Asia because many of the products in the West are imported from Asia by Western
companies using manufacturing facilities located there. It is commonly held in the West that
the best chance to gain some ground on human rights issues is for large MNCs and govern-
ments around the world to take a unified stance; many global players now question the moral-
ity of trading for goods that have been produced by forced labor or child labor. Although laws
in the United States ban prison imports, shady deals between the manuf’acturers and companies
acting as intermediaries make it difficult to determine the origin of many products-and make
it easy lbr companies wanting access to cheap products or materials to ignore the law.
However, under pressure fi’om their labor unions (and perhaps their consciences), a number of
large image-conscious companies, such as Reebok and Levi Strauss, have established corpo-
rate codes of conduct for their buyers, suppliers, and contractors and have instituted strict pro-
cedures f’or auditing their imports. In addition, some companies are uniting with others in their’
industry to form their own code for responsible action. One of these is the Electronic Industry
Code of Conduct (EICC), which comprises Hewlett-Packard, Dell, IBM, Intel, and 12 other
tech companies who have agreed on the following policies:

. The EICC bans forced and child labor and excessive overtime.

. The EICC requires contract manuf-acturers to foliow some basic environmental requirements.

. The EICC requires each company to audit its overseas suppliers to ensure compliance,
following a common factory inspection system for all members.l

cosEs 0F cCIruDUcT
A considerable number oforganizations have developed their own codes ofconduct; some have
gone further to group togethel’with others around the world to establish standards to improve
the quality of life for workers around the world. Companies such as Avon, Sainsbury Plc., Toys
“R” lJs, and Otto Versand have joined with the Council on Economic Priorities (CEP) to estab-
iish SA8000 (Social Accountability 8000, on the lines of the manuf’acturing quality standard
ISO9000). Their proposed global labor standards would be monitored by outside organizations
to certify whether plants are meeting those standards, among which are the following:

. Do not use child or forced labor.

. Provide a safe working environment.

. Respect workers’ rights to unionize.

. Do not regularly require more than 48-hour work weeks.

. Pay wages suflicient to meet workers’ basic needs.1z

In addition, four international codes of conduct provide some consistent guidelines for multi-
national enterprises (MNEs). These codes were developed by the International Chamber of
Commerce, the Organization for Economic Cooperation and Development, the International Labor

Organization, and the United Nations Comrnission on Transnational Corporations. Getz has
integrated these four codes and organized their common undedying principles, thereby estabiishing

MNE behavior roward governments, publics, and people, as shown in Exhibit 2-3 (the originating
institutions are in parentheses). Getz concludes, ‘As international organizations and institutions
(including MNEs themselves) continue to refine the codes, the underlying moral issues will be better
identified, antl applopriate MNE behavior will be more readily apparent.”l3 The examples shown in
Exhibit 2-3 are excerpted from the codes and show how companies can provide a cooperative, long-
term relationship with the local people and governments where they operate.

. MNEs should maintain the highest standards of safety and
health, and should provide adequate information about
work-tetated health hazards. (ILO)

Human rights
. MNEs should respect human rights and fundamental

freedoms in the countries in which they operate. (LIN/CTC)

. MNEs should not discriminate on the basis of race, color,
sex, reiigion, language, social, national and ethnic ot’igin,

or political or other opinion. (I-IN/CTC)
. Nl-I{Es strould respec!tbe socra\ and cu\tura\ ubier\tes,

values, and traditions of the countries in which they
operare. (uN/cTC)

M Part 1 ‘ The Clobal Manager’s Etrvironment

f;,KfllglT 2-3 lnternational Codes of Conduct for MNEs

lnternational agency sources:

OECD: The Organization for Economic Cooperation and Development Guidelines for Multinational Enterprises

kA: The lnternational Labor Office Tripartite Declarations of Principles Concerning Multinational Enterprises and Social Policy

ICC: The lnternational Chamber of Commerce Guidelines for lnternational lnvestment

UN/CTC: The United Nations Universal Declaration of Human Rights

The UN Code of Conduct on Transnational Corps.

HTHICS Iru GL&SAL MANAGEMEruT

Nation.al, as well as cotpotate, cultures need to be taken ifito accouttt if ntultinationals

arc to enforce their codes trctttss dffireilt rcgiotts.
FlNnNcral TtnlPs,
March 7, 2005.2s

Globalization has multiplie

ethics have not yet been globalized. Attitudes toward ethics are rooted in culture and business

practices. Swee Hoon Ang found, for example, that while East Asians tended to be less ethical

ihan rheir expatriate counierparts from the United States and Britain, it was because they
considered deception as amoral and acceptable if it has a positive effect on larger issues such
as rhe company, the extended family, or the state.26 Fo. an MNC, it is difficult to reconcile
consistent and acceptable behavior around the world with home-country standards’ One
question, in fact, is whether it should be reconciled. It seems that, while the United States has
been the driving force to legislate moral business conduct overseas, perhaps more scrutiny

should have been applied to those global MNCs headquartered in the United States, such as

Enron and WorldCom, that so greatly defrauded their investors, employees, and all who had

business with them.
The term international business ethics refers to the business conduct or morals of MNCs

in their relationships with individuals and entities. Such behavior is based largely on the cul-

tural value system and the generally accepted ways ofdoing business in each country or socieiy,

as we have discussed throughout this book. Those norms, in turn, are based on broadly accepted

guideiines from religion, philosophy, professional organizations, and the legal system’ The

complexity of the combination of various national and cultural factors in a particular host

environment that combine to determine ethical or unethical societal norms is illustrated in

Exhibit 2-4.The authors, Robertson and Crittenden, note,

Varyhtg legal and cultural constraittts ocross borders hat,e mnde integrating an ethical

, onrpirr,rt ittto intenntiottal sf rctegic decisions quite challengitzg.2T

Should managers of MNC subsidiaries, then, base their ethical standards on those of the

host country or those of the horne country-or can the two be reconciled? What is the moral

r.esponsibility of expatriates regarding ethical behavior, and how do these issues affect busi-

ness objectives? How do expatriates simultaneously balance their responsibility to variout

stakeholders-to owners, cleditors, consumers, employees, suppliers, governments, and soci’

eties? The often conflicting objectives of host and home governments and societies also mus

be balanced.

Chapter 2 ” Managing lnterdepettdence 45

EXHIBIT 2-4 A Moral Philosophy of Cross-cultural Societal Ethics

Moso-level

Moderolors:

Ndurol resources
GDP per copilo

Form ol gwmment
Politicol dobilily

Ecmomic lddogy: ,
Copilolism versus i
Saiqlism if \.\-J” Dminqnl

I
I

Cuhure:

We$ern versus

Eosiern
I

S€ielcl Ay’oder.dors:
Longuoge

Raligion

Hi$oric troditions

Source: C. J. Robertson and W. F. Crittenden, “Mapping Moral Philisophies: Strategic lmplications

for Multinational Firms,” Strategic Management Journat 241385-92 (2003) O .lohn Wiley & Sons,

lnc. Reproduced with permission.

The approach to these dilernmas varies among MNCs from different countries. While the

American approach is to treat everyone the same by making moral judgments based on general

rules, managers in Japan and Europe tend to make such decisions based on shared values, social

ties, and their perceptions of their obligations. According to many U-S. executives, therc is little dif-

ference in ethical practices among the United States, Canada, and Northern Europe. According to

Bruce Smar1, former U.S. Undersecretary of Commerce for International Trade, the highest ethical

standards seem to be practiced by the Canadians, British, Australians, and Germans, As he says, “a

kind of noblesse oblige still exists among the business classes in those countries”-compared with

the prevailing attitude among many U.S. managers that condones “making if’ whatever way one
can.28 Another who expedenced few problems with ethical practices in Europe is Donald Petersen,

tbmer CEO of Foril Motor Company. However, he warns us about underdeveloped countries, in
particular those under a ilictatorship where bribery is a generally accepted practice.2g

Petersen’s experience has been borne out by research by Transpzrency International, a
German nongovemmental organization (NGO) that fights coruption. It draws on data from foufteen

different polls and surveys fiom twelve independent institutions around the world to rank 180 coun-

tries, based on results from 63,199 respondents. The organization’s year 2007 Global Conuption
Barometer (selections are shown in Exhibit 2-5) shows the results of resemch into the extent that

business and other sectors of their society are affected by colruption, as perceived by businesspeople,

academics, and risk analysts in 69 countries. A primary focus of the research was the relative preva-
lence ofbribery in various spheres ofpeople’s lives, including political and business practices.

Overall, the data show that those countries in Western Europe, Canada, and Australia, were

the least corrupt, closely followed by Hong Kong and Japan; the United States scored 1.2 for
example, compared with 9.4 for Denmark. South Africa and South Korea both ranked 5.1. Brazil,
China, India, and Mexico scored 3.5; other countries such as Vietnam, and Aiiican countries
scored far lower.3o

The biggest singie problem for MNCs in their attempt to define a corporate-wide ethical
posture is the great variation of ethical standards around the world. Many practices that are con-

sidered unethical or even illegal in some countries are accepted ways ofdoing business in others.

More recently, this dilemma has taken on new fonns because of the varied understandings of the

ethical use of technology aound the world, as illustrated by the electronic data privacy laws in

Europe. The EU Directive on Data Protection guarantees European citizens absolute control over

data concerning them. A U.S. company wanting personal information must get perrnission liom
that person and explain what the information will be used fbr; the company must also guarantee
that the information won’t be used for anything else without the person’s consent.

Morol
Philosophy

Firm Specific

Moderolors:

Corpsote cullure
Policies

Prolit mciive

46 Part 1 . The Global Manager’s Environment

ExHlBlT 2-5 2007 Corruption Perceptions lndex-Selected Ranks

The score relates to perceptions of the degree of corruption a5 seen by business people and
country analysts, and ranges between 10 (highly clean) and 0 (highly corrupt).

Ranfr’ :’ ,…: :eoudtrlr”, Score

I
1

,’1
”4 “” ‘
4 . ..,,’
9
1l ,
t2
14

16, ,i ., . ..’,
17 ,.
‘t9

.2Q ,,,
2tl
22

30′
::’34 ”, ‘, ,’
.34

4ll
41 ::
43′ ‘,,
43:
JS, , ..,,:, .
61 ,:: -:
64
,72: ‘
72″ ‘
72 ‘,
12 .,,.79 ,..’ ,,
79′., ,,

’84,” ‘,
105 ..
r05 :l
I23 ‘ .:’
X31 ,.,, :
I43, . .
147 ,

: ‘Finland
:New,Zealand

.: :.:$uig$g[, :
‘Singapore.

,Canada
:: . ,’ Austfalia. :

United Kingdom :
, Hong Kong
Genn4ny , ,’ ,Japan

USA
‘Belgium:

Chile ‘
Israel , ,

: lil14rgn :
Urited,Arab,Emirates

‘ ‘ ‘Czech Republic :
ttaly ,, : ‘r
South:A&ica

: r-,South Korea
,,.,6re9ce’ . ‘ .
: Poland, ” I’,’
I Turkey ,

., ‘,Brazil ‘ , ,.
. .China,’ ,-,’ ,,

India
– . ]t’devig6: ,:. ‘

Saudi Arabia
,Serbia, .’ l

: Thailand
I Argenti.na ,,

, , Bolivia
Vietnam

. PhilipBides. r:

,r., ,Indonesia t.’t,t” ,

.,.,. , ,9.4
. 9.4
, :, .,9.3.

.9.3′
. ,8.7”

. ,. 8.6
‘ 8,4

, : ,8.3,
‘,: 7,8

: ..’
‘l

.3
, :,, 7,2
, 7.0

6,1:.: , ,.5,7.
,, 5.7

5,2
.”: 5.2

: 5.1
5;1

‘::’ ,4,2,
4,L,,

. ..:,3.5
: : 3.5.

., ‘ 3J
. ‘,

‘ 3.4: ‘J.J
,

2.9

‘ ‘: ‘:, 2t5’
, : .2,3

: ,. ,,2.2, :Nigqria,’

Source’. Selected data from the Tl Coruption perceptions lndex, 2007, wwwtransparencyinternational.org,

January 10, 2009.

Bribery

There are few other areas where a single employee’cdn, with one instance of mis’
judgment, create huge embarrassment ffor the company].

Ftt{ANcnl- TItotg’s3l

The conxputer is otx the dock, it’s raining, a.nd you have to pay $100 fbribe] to ?et it
Picked uP’

wnuav c. NoRRrs,
C ont ro I D ata C o rPo ration

ChaPter 2

MNCs are often caught between being placed at a disadvantage by ref’using to go along

rvith a country’s accepted practices, such as bribery, or being subject to criticism at home for

using “unethical” tactics to get the job clone. Large companies that have refused to participate

have led the way in taking a moral stand because of their visibility, their potential impact on the

local economy, and, afier all, their ability to affbrd such a stance. Whereas the upper iirnits of

ethical stanclards for international activities are set by the individual standards ofcertain leading

companies-or, more realistically, by the moral values of their top managers-it is rnore difficult

to set the lower’ lirnits of those standards; that limit gets set by whether the laws are actuaily

enforced in that iocation.
The bribery of officials is prohibited by law in all countries, but it still goes on as an

accepted practice; often, it is the only way to get anything done. In such cases, the MNC man-
og”ri huo” to decicle which stanclard of behavior they will follow. What about the $ I 00 bribe to
get tire computer off the rainy dock? William Norris says he told his managers to pay the $i00
because to refuse would be taking things too far. Generally, Controi Data did not yield to such

pressure, though it said sales were lost as a result’32
A specific ethical issue lbr managers in the international arena is that of questionable

payments. These are business payments that raise significant questions of appropriate moral

behavior either in the host nation or in other nations. Such questions arise out of differences in

laws, customs, and ethics in various counlries, rvhether the payments in question are political

paylnents, extortion, bribes, sales commissions, or “grease money”-payments to expedite

routine transactions. Other common types of payrnents are made to speed the clearance of

goods at ports of entry and to obtain required certifications. They are called different natnes in

clil’ferentcountries: tokensof appreciation, lamorclida (thebite,inlr{exico), bastarella (“iittle

enveiope” in Itaiy), pot-de-ttitt (fug of wine in France). For the sake of simplicity, all these

cliiibrent types of questionable payments are categorized rn this text as some form of bribery.

In Mexico, for example, companies make monthly payments to the mail carriers or their mail

gets “lost.”
Most managers perceive bribery as “en

Africa and south and east Asia. Corruption and bribcly are consideted to be part of the culture

anti environment of certain markets, and will not simply go away.”J’] In some parts of Latin
Arnerica, lor example, customs officers are paid poorly and so are encouraged to take bribes to

supplement their incomes. However, developed countries are not immune to bribery-as
ciemonstrated in 2002 when several members of the International Olympic Committee were

expelled fbr accepting bribes during Salt Lake City’s campaign to host the 2002 Winter
Olympics.

The clilemma for Americans operating abroad is how much to adhere to their own ethical

standards in the face of foreign customs or how much to follow local ways to be competitive.

Cer.tainly, in some societies, gift giving is common to bind social and familial ties, and such gifts

incur obiigation. Nevertheless, a bribe is different from a gift or other reciprocation, and those
involr’ed know that by whether it has a covefi nature. According to Noonan:

Briberf is urtiverscrlly slzanreful. T’here is ftot a countrj’ in the worlcl that does not
treat briberl,cts crinrinql on its books.,..In fio cot4ntr,v do bribe.takers speak
publicll, of their bribes, uor do bribegivers annotlnce the bribes they pay. No
newspaper lists them. llo one qdvertises that he cafl arrctnge a bribe. No one is
honorcd precise!\’ becattse he is a big briber or bribee. No one writes an auto-
biogrupltf in which he recalls tlte bribes he has taken or paid . . . . Not nterely the
critninal lq’*-for the transaction could hc:e happened long ago and prosecution
be barretl b1, tinre-but ctn innote fear of being considered disgusting restraitts
briber ctnd bribee.from pa.ratling their exchange. Signi.ficantll’, it is often the
Westerner r;ith ethnocetttric prejudice who supposes that a modern Asittn or
Africctn societt does not regard the act of bribery as shameful in the way
Vle s te rn e r s re g cr rcl i t.34

However, Antericans must be able to distinguish between harmless practices and actual

bribery, between genuine relationships and those used as a cover-up. To heip them distinguish,

” l,lanaging InterdePendence 47

48 Part 1 . The Global Manager’s Environment

the Foreign Corrupt Practices Act {FCPAt of 1977 was estabiisired, which prohibits U’S.
companie! fiom making illegal pa1’ments. other gifls, or political contributions to foreign

government officials fbr the purposes of inlluencing rhem in business transactions. The goal was

io ,top MNCs tiom contributing to corruption in foreign government and to upgrade the image

of the United States and its companies operating overseas. The penalties include severe fines and

sometimes imprisonment. Many managels feel the 1aw has given them a more even playing field,

and so they have been more willing to do business in certain countries where it seemed impossi-

ble to clo business without bribery and kickbacks.

Since then, in 1997 the Organisation for Economic Co-operation and Development
Conventlon on Bribery was signed by 36 countries in an attempt to combat cotruption.3s

However, evidential problems continue to hinder prosecution. Unless there is a complaint or

whistle-blowing, there are few avenues for regulators to ferret out incidents in bribery in cor-

porations. Unfortunately, bribery continues, mostly on a small scale, where it often goes unde-

iected, In any event, it is prudent (and hopefully honorable) for companies to set in place
processes to minimize the risk of prosecution’ including:

. Having a global compliance system which shows that employees have understood, and
signeJoff on, the lega1 obligations regarding bribery and corruption in the countries where

they do business.
. Making employees aware of the penalties and ramifications for lone actions, such as

criminal sanctions.
. Having a system in place to investigate any foreign agents and overseas partners who will

bc negotiat ing con{racts.
. Keeping an eifective whistle-blowing system in place.36

As far as the actions rhat individual managers take when doing business overseas, if we
agree that accepting or giving a bribe is always wrong, then ouf decisions as managers’ salesper-

sons, and so on are always clear, no matter where we are.

However, many businesspeople believe that it is just part of the cost of doing business in

many countries to pay small bribes to get people simply to do their jobs and they are willing to

.ngug” in bribery as an everyday part ofmeeting their business objectives. Frequently corporate

omciutr, in fact, avoid any moral issue by simply “turning a blind eye” to what goes on in sub-

sidiaries. Some companies avoid these issues by hiling a local agent who takes care of the paper-

work and pays all thi so-called fees in return for a salary or consultant’s t’ee. However, while the

FCpA doei allow “grease” paymenrs to facilitate business in a foreign country, if those payments

are lawful there, other puyir”ntr prohibited by the FCPA remain subject to prosecution even if
the company says it did not know that its agents or subsidiaries were making such payments-

the so-called “reason to know” provision.

Critics of the FCPA contend that the law represents an ethnocentric attempt to impose

U.S. standards on the resi of the world and puts U.S. firms at a competitive disadvantage. In

any event, many feel that business activities that cannot stand scrutiny are clearly unethical,

corrupt, and, in the long run, corrupting. Bribery fails three impoftant tests of ethical

“n.poiut”
actions: (1) Is it legal? (2) Does it work (in the long run)? (3) Can it be talked

about?37
Many MNCs have decided to confront concerns about ethical behavior and social respon-

sibility by developing worldwide practices that represent the company’s posture’ Among those

policies are the following:

. Develop worldwide codes of ethics.

. Build ethical policies into strategy development.

. Plan regular assessment of the company’s ethical posture’

. If ethical problems cannot be resolved, withdraw from that market.

As an exampie, Ceneral Electric (GE) decided to take a hard iine on corruption, electing to
.,level up, not down,” and withdrawing from Nigeria and Russia when conuption was especially

rife.38 In fact, according to GE’s Mr. Rice:

The firm’s hatd line on corruption is actuolll helping it tvin business irt many
detteloping cowttries. Increasingll, thel’ wderstand that corruptiott is a barrier to

ChaPter l-

intptoving the standard of liting of the poorest people and they want to do business

ntore and more with an ethical firm.3g
THE Ecouonast,

SePtember 20, 2008′

tuIaking the Right Decision

How is a manager operating abroad to know what is the “right” decision when faced with

questionable or unfamiliar circumstances of doing business? The first line of defense is to

consult the laws of both the home and the host countries-such as the FCPA. If any of those laws

would be violated, then you, the manager, must look to some other way to complete the business

transaction, or withdraw altogether.
Second, you could consult the International Codes of Conduct for MNEs (seeExhibit2-2).

These are broad and cover various areas of social responsibility and ethical behavior; even so,

many issues are sub-iect to interpretation.
If legal consultation does not provide you with a clear answer about what to do, you should

consult the company’s code of ethics (if there is one). You, as the manager, should realize that
you are not alone in making these kinds of decisions. It is also the responsibility of the company

to provide guidelines for the actions and decisions made by its employees. In addition, you are

not the first, and certainly not the last, to be faced with this kind of situation-which also sets up

a collective experience in the company about what kinds of decisions your colleagues typically

make in various circumstances. Those norms or €xpectations (assuming they are honorable) can

supplement the cocle of ethics or substitute for the lack of a fbrmal code. If your intended action

runs conirary to the norms or the formal code, discontinue that plan’

If you are still unsure of what to do, you have the right and the obligation to consult your

superiors. Unfortunately, often the situation is not thatclear-cut, oryoul boss will tell you to “use

your own judgment.” Sometimes your superiors in the home office just want you to complete the

transaction to the benefit of the company and don’t want to be involved in what you have to do to

consummate the dea1.
If your dilemma continues, you must fall back upon your own moral code of ethics. One

way to consider the dilemma is to ask yourself what the rights of the various stakeholders
involved are (see Exhibit 2-1), and how you should weigh those rights. First, does the pro-

posed action (rigged contract bid, bribe, etc.) harm anyone? What are the likely consequences

of yout decision in both the short run and long run? Who would benefit from your contemplat-

ed action? What are the benefits to some versus potential harm to others? In the case of a
rigged contract bid through bribery, tor example, people are put at a disadvantage, especially

over the long term, with a pattern of this behavior. This is because, if competition is unfair, not
only are your competitors harmed by losing the bid, but also the consumers of the products ot’

services are harmed because they will pay more to attain them than they would under an effi-
cient market system.

In the end, you have to follow your own conscience and decide where to draw the line in

the sand in order to operate with integrity-otherwise the line moves further and further away

with each transgression. In addition, what can stan with a small bribe or cover-up here-a mat-
ter of personal ethics-can, over time, and in the aggregate of many people covering up, result in
a situation of a truly negligent, and perhaps criminal, stance toward social responsibility to
society, like that revealed by investigations of the tobacco industry in the United States. Indeed,
executives are increasingly being held personally and criminally accountable for their decisions;
this is true even for people operating on the board of directors of a company. Criminai charges
were brought against 15 executives of WorldCom in 2003, for example, and the noose was
thrown around the world after the Enron convictions in 2006 as international banks such as
Citigroup and JP Morgan Chase were charged with taking part in sham deals to disguise Enron’s
linancial probieins.

Richard Rhodes, CEO of Rhodes Architectural Stone, Inc., is one executive who has
drawn a line in the sand fbr himself and his company, and who holds himself and his ernpioy-

ees accountable to a high moral standard when it comes to issues of bribery and human
rights. He explains how they deal with difficult situations abroad in the accompanying
Management Focus, “CEO Speaks Out: Ethics Abroad-Business Fundamentals, Value
Judgments.”

, Managing InterdePendence 49

50 Part 1 . The Global Manager’s Environment

MANAGEMENT FOCUS

CEO Speaks Out: Ethics Abroad-Business Fundamentals, Value Judgments

You’ve just finished negotiating the deal, and itl time for a celebration. drinks and dinner all
around, and you go to bed only to wake up the next morning to learn that the other side wants
to start all over again.

06 you try to buy something-say a collection of antique vessels for resale for decorative
uses-and you’re told that the artifacts are yours but only for a price. You wonder, should I agree
to pay a bribe just this once?

5o it goes sometimes when rt comes to the business of doing business abroad, which has been
the case for my company, Rhodes Architectural Stone, lnc.. ever since its launch (under another name)
in 1998. Ours isthe business of buying artifacts slated for demolition in areas of the world, such as
Africa, China, lndia, and lndonesia, and. in turn, selling to discriminating clients in the United States.

lf there is one thing we’ve learned, it is that the ethical landscape is different in the third
world. ln the United States-notwithstanding the recent spate of corporate scandals that have set
a woefully new low for ethical business behavior-the fact remains that standards do exist against
which improprieties can be measured.

Not so in some other countries. The tenets that underlie our U.S. business language-that your
word is your bond. that transparency is expected in joint ventures and contractual engagements. that
each party walks away from the table getting as well as giving something-are not always under-
stood [n ail pafis of the worid.

This inherent conflict between first- and third-world business standards has meant that our
journey as a design-driven firm has been at times extremely difficult. A core value of the company,
which we call “value in the round, ” meaning that value must be created for all parties in the deal,
has invoived famifiarizing ourselves with an alien environment in order to establish business fun-
damentals. Needing to respect cultural differences must be carefully investigated and evaluated
while all the time taking care not to cross the iine to engage in practices we abhor.

Eusiness Etack and White
ln short, in the world of grays that characterizes business dealings in countries in which ethics are
at best rudimentary by U.5. standards, and at worst nonexistent, we’ve taken the position that we
must establish a black and white.

Let me explain. Take the word “transparency,” for example, which in the United States
involves a baseline understanding of capitafism, allowing that each party is able to get something in
a negotiation without necessarily having cheated another. With that common understanding, nego-
tiators don’t need to resort to taking money out of the game-bribing, to be precise**because all of
the money is in the game.

Nor is there a need to have to renegotiate a deal that has already been agreed upon because of
a belief that the deal that was struck couldn’t be good-*or why would the parties have agreed to it?

ln countries whose business laws are nascent. if they exist at all, and whose thinking has been
shaped by philosophies vastly different from our own, our first challenge is to take what I call the
“entryJevel” business players, who disproportionately populate the developing countries in which
we do business, and bring them up to speed in the business {undamentals of the United States.

ln the all-too-common instance of being asked that a deal be renegotiated, we see it as our
duty to teach the fundamentals that underlie the business practices of the West, such as your
word is your bond, and that, while its all right to take as much time as you need to negotiate a
deal, once you’ve agreed. you stand by it.

ln the wake of a request to go back to the table after the celebratory dinner. for example,
I begin by outlining what it’s going to take for them to do business with us. We put it down in writing,
even though l’ve learned that such documents are unenforceable. And, if they ask again to renegoti-
ate, we walk.

ln short, in a world in which business fundamentals are shades of gray, we’ve determined a
black-and-white process that is our blueprint for doing business.

Moral Black and White
Back to the bribes: Simpty put. we don’t do them. ln the case of our wanting to buy the collection of
antique vessels, for example, we walked when told we would have to make such a payment. The good
news in that case was that we were actually invited back a year later to make the purchase on our terms.

Chapter 2′ Managing Interdependence

The matter of bribes, howevet is more than just shall we or shall we not. lt goes io the hearl of

the other issue underlying doing business in ihe third world, and thai is the need for a way to respect

cullural differences without croising the line to engage in practices that are inappropriate or immorai

by Western standards.
Looked at this way, Rhodes Architectural Stone not only draws the line at paying bribes, but

also at child labor and the mistreatment of women. The matter of chitd labor will serve to illustrate

the dilemma. lmagine an American entrepreneur, traveling in the bitter cold in the remote country-

side dressed in a Gore-Tex@ parka, Thinsulate socks, arrd the most comfortable and technologically

advanced clothing money can buy We arrrve and state that we will not buy anything fabricated or

procured with child laboi. Now contrast that with the local reality o{ the labor of the entire family

required to put bread on the table and a roof over ones head.
lf my children were starving, I suppose i would do the same. ln fact, our own forbearers in

the United States did employ children in factories well into the twentieth century and because of

that, we don’t have to do it any more.
into this moral gray area, we’ve established another black and white: namely, that we can-

not and will not do business with entities that engage in the practice of child labor, but we will not

go the next step and preach. ln other words, we will not tell them they are wrong.
Surely, we bring a powerful lever when it comes to backing up this moral stance. Unlike foreign

companies it’,at go inio native countries to sell products to people who can’t afford to buy them, we

are there to buy what they have to sell. We bring the twin carrots of hard currency and jobs.

That advantage notwithstanding, the decision to establish a moral black and white wasn’t

easy. lt’s one thing to co*e to that imperative in the matter of formulating business standards
where none exist,lor that involves the neutral task of teaching. lt5 quite another to tread into ter-

ritory in which the actions are criminal or immoral by Western standards and, yet, understandab{e

within the context of the foreign culture.
The decision to do so, therefore, is actually a process. one of thought and reflection and, in

the final analysis, leadership.

Putting it all Together

ln coming io the imperatives that Rhodes Architectural Stone has determined for its business deal-

ings overieas, I was fortunate to have the counsel of a member of our board, a former Whirlpool

executive, who had extensive business experience throughout the world.
This individual taught me that when dealing with the grays that characterize the business

landscape in the third world, it is necessary to establish a black and white, both for the way you

will conduct business and account for your moral imperatives. And, if the reality differs consider-

ably when you are actually at the table, it is necessary to be strong enough to walk away.
ln sum, you must aik yourself questions such as: Who am l? How do I feel about thls or that

action? Can I sleep at night if I so engage in lhis or that behavior?
ln the milieu of grJys that characterizes the world beyond our oceans, be strong enough to

formulate your black and whites. which, in turn. will become your guiding principles.

5″-.”.1*h, Mr*n

This article is the opinion of the author, and does not necessarily represent the opinion of EntreWorld or the

Ewrng Marion Kauffman Foundation.

MANA6 IIUG IhIYEKNEPETDEruCF

Because multinational firms (or othel organizations, such as the Red Cross) represent global in-

terdependency, their managers at all levels must recognize thal what they do, in the aggregate’

has long-tenn implications for the socioeconomic interdependence of nations. Simply to de-

scribe ethical issues as part of the general environment does not address the fact that managers

must control their activities at all levels-from simple, daily business transactions involving
local workers, intermediaries, or consumers, to global concerns of ecological responsibiliiy-
fbr the f’uture benefit of all concerned. Whatever the sifuation, the powerlul long-term el’fects of

MNC and MNE action (or inaction) should be plannecl for and contlolled-not haphazardiy
considered parr of the side effects of business. The profitability ol individual companies de-
pends on a cooperative and constructive attitude toward giobal interdependence.

52 Part 1 ‘ The Global Manager’s Environment

Foreign Subsidiaries in tf+e U*it*d 5i*te:

MuChoftheprecedingdiscusS:t-r;:hri:e:;:eilif 51::’i.*.lj*.:::i.;:’j:Xericrld’However’tO
globally highlight the grou’ing inrerdepen,senJt .1l, – :.:::. :.; – . :: – .-

– : : *.;:e .-‘ pill1 ef. foreign

iubsidiariei in the United Staies shoulcl also be;r:risirirreil. Sir;t nu;5 Jrilicisnl about a lack of

responsibiiity has been directed torvard MNCs u”ith headquarters in the United States’
we musl

thi;k of thes; criticisms from an ouisider’s perspective, The number of foreign subsidiaries in the

United States has grown and continues to grow dramatically; foreign direct investment
(FDI) in

the United States by other countries is, in many cases, far mole than U.S. investment outward.

Americans are thus becoming more sensitive to what they perceive as a lack of controi over their

own country’s business.
Things look very different tiom the perspective of Americans employed at a subsidiary

oi an overseas MNC. Interdependence takes on a new meaning when people “over there” are

calling the shots regarding stiategy, expectations, products’ and pelsonnel. Often, Americans’

resentment about differeni *uyr of doing business by “tbreigri” companies in the United States

inhibits cooperation, which gave rise to the companies’ presence in the first place’

Today, managers from all countries must learn new ways’ and most MNCs are trying to

adapt. In Japan, corporate social responsibility has traditionally meant that companies lake
care

of t’heir
“r,rploy””r,

whereas in the United States the public and private sectors are expected to

shae the responsibility for the community. Part of the explanation fbr this difference is that
U’S’

corporations get tax deductions for corporate philanthropy, whereas Japanese firms do
not; nor

are Japanese managers f’amiliar with community needs. For these and other reasons’ Japanese

subsidliaries in the United States have not been active in U.S’ philanthropy’

flJlana g ing Subsidiary-Host-eountry lnterdependen{e

when managing interdependence, international lnanagefs must go beyond general issues of

social responiibility and deal with the specific concerns of the MNC subsidiary-host-country

relationship. outdated MNC attiturtes that tbcus only on profitability and autonomy
are short-

sighted anb usually result in only short-term realization of those goals’ MNCs must
learn to

aciommodate ihe needs of other organizations and countries:

Intertlependettce rather than independence, attd cooperation rather thon confioilta-

tion ctre at the hear-t of that accommodatiort . . . the journel’ fiam independerrce to

itrtetdependence managed batlly leuds to clependence, and that is an unacceptable
.dn

destuntrcil.'”

Most of the pasr criticism levied at MNCs has focused on their activities in LDCs.
Their

real or perceived lack of responsibility centers on the transfer in of inappropriate technology’

causingunemployment, and itre transfer out of scarce financial and other resources’
reducing tire

capitaiavailable for internal development. In their defense, MNCs help LDCs by contributing

new technology and managerial skills, improving the infiastructure, creating
jobs, and bringing

in investment capitat fiom other countries by exporting products. The infusion of outside
capital

provides tbreign-exchange earnings that can be used for further development’ The host
govern-

ment,s attitude is often rJf-ened to as a love-hate relationship: It wants the economic
growth that

MNCs can provide, but it does not want the incursions on national sovereignty or the techno-

logical dependence that may result. Most criticisms of MNC subsidiary activities,
w’hether in less

dweloped or more developed countries, are along the following lines:

1. MNCs locally raise their needed capital, contributing to a rise in interest rates in
host

countries.
2. Themajority (sometimes even 100 pelcent) of the stock of most subsidiaries is

owned by

the par.ent company. consequently, host-country people do not have much
control over the

operations of corporations within their borders’

s. IraNcs usualiy t..r”ru” the key managerial and technical positions for expatfiates’
As a

result,theydonotcontributetothedevelopmentofhost.countrypersonnel.
4. MNCs do not adapt their technology to the conditions that exist in host countries’

5. MNCs concentrate their research and development activities at home, restricting
the

transfer of modern technology and know-how to host countries,

6. MNCs give rise to the clemand lbr luxury goods in host countries at the expense of essen-

tial consumer goods.

:i
,,

Chapter I’ Managing Interdependence

7. MNCs start their foreign operations by purchasing existing
firms father than by developing

new productive f’acilities in host countries’

8. MNCs dominate major industrial sectors, tltus contributing
to inflation, by stimulating

demand fbr scarce r.rour.., and earning excessively high profits and fees’

9. MNCs are not accountable to their host nations but only respond
to home-country govern-

ments; they are not concsrned with host-country plans ior development’al

Specific MIr{Cs have been charyed with tax evasion, union busting, and
interference in

host-country poiitics. of course, MNCs have both positive and negative effects on different

economies. For every complaint about MNC activities (whether about capital
tnarkets’ techn-o-

logy transfer, or employment practices), we can identity potential benefits
(see Exhibit 2-6)’

Numerous conllicts a.ise between MNC companies or subsidiaries and host
countries’

including cont’licting goals (both economic and noneconomic) and
conflicting concerns’ such as

the security of proprietary technology, patents, or information. Overall,
the resulting trade-ofls

create an interdependent lelationshif brt*””n the subsidiary and the host
government’ based.on

relative bargaining power. The power of MNCs is based on their large-scale,
worldwide

economies, their strategic tlexibiliiy, and their control over technology
and production location’

The bargaining chips of the host gou”rn*”nr, include their control of raw
materials and market

access and their ability to set thelules regarding the role of private
entelprise, the operation of

state-owned firms, and the specif-rc regulations regarding taxes,
permissions, and so fbrth’

MNCs run the risk of their assets becorning hostage to host control, which
may take the

form of nationalism, protectionism, oI. gou”rn,rrentalism. Under nationalism,
for example’

pubiic opinion is railied in favor of national goals and against-foreign influences’
under

protectionism, the host institutes a partial or complete closing of borders to withstand
com-

petitive foreign products, using tariff and nontaritY barriels, such as those used
by Japan’ Under

governmentalism, the governlent uses its poiicy-setting role to favor national interests’
rather

EXH1EIT Z-G Potential Benefits and Costs to Host Countries of MNC Operations
Therea2

Benefrts Costs

Capital Market Effects

. Broader access to outside capital

. Economic glowth

. Foreign-exchange earnings

. knpofi substitulion effects allow
govemments to save foreign exchange

for priority Projects

Technology and Production Effects

. Risk sharing

. Increased competition for local scarce capital

. Increased interest rates as supply of local

capital decreases
. Capital service effects of balance

of payments

. Access t0 new technologY and R&D
developments

. Employee training in new technology

. Infrastructure development and support

. Export diversifi cation

. Introduction of new management techniques

Employment Effects

. Technology is not always appropriate

. Plants are often for assembly only and

can be dismantled
. Government infrastructure investment

is higher than exPected benefits
. Increased pollution

. Direct creation of new jobs

. Introduction of more humane employmenl
standards

. Opportunities for indigenous management
development

. Income multiplier effects on iocal

community business

. Limited skill development and creation

. Competition for scarce skills

‘ Low percentage of n-ranagerial jobs for
local people

. Employment instability because of ability

to move production operations freely

to other countries

source:Adapted from R. H. Mason and R. 5. lpich, Management: An tnternational Perspective’
(202)

(Homewood, lL: lrwin, 1987).

54 Part 1 . The Global Manager’s Environment

than relying on market forces, as illustrated by th-e actions of govemments around the world to

support their banking systems in 2008 and 2009,43
The intricacies of the relationship and the relative power of an MNC subsidiary and a host-

country government are situation specific, Clearly, such a relationship should be managed for

mutual benefit; a long-term, constructive relaticnship based on the MNC’s socially responsive
stance shouid result in progressive strategic success for the MNC and economic progress for the
host country. The effective management of subsidiary-host-country interdependence must have
a long-tem perspective. Although temporary strategies to reduce interdependetrce via controls on

the transnational flows by firms (for example, transfer-pricing tactics) or by governments (such as

new residency requirements for skiiled workers) are often successfui in the short run, they result

in inefficiencies that must be absorbed by one or both panies, with negative long-tem results. In

setting up and maintaining subsidiaries, managers are wise to consider the long-term trade-offs

between strategic plans and operational management. By finding out for themselves the pressing

local concerns and understanding the sources of past conflicts, they can learn from mistakes and

recognize the consequences of the failure to manage problems. Furthermore, managers should
implernent policies that reflect corporate social responsibility regarding local economic issues,

employee welfare, or natural resources. At the least, the f’ailure to elfectively manage interdepen-
dence results in constraints on strategy. In the worst case, it results in disastrous consequences for
the local area, for the subsidiary and for the global reputation ofthe company.

The interdependent nature of developing economies and the MNCs operating there is of
particular concern when discussing social responsibility because of the tentative and fragile

nature of the economic progression in those countries. MNCs must set a high moral standard and

lay the groundwork for future economic development. At the minimum, they should ensure that

their actions will do no harm. Some recommendations for MNCs operating in and doing business
with developing countries are as follows:

1. Do no intentional harm. This includes respect for the integrity of the ecosystem and
consumer safety.

2. Produce more good than harm for the host country.

3. Contribute by their activity to the host country’s development’

4. Respect the human rights of their employees’
5. To the extent that local culture does not violate ethical norrns, respect the local culture and

work with and not against it.
6. Pay their fair share of taxes.
7. Cooperate with the local government in developing and enforcing just background (infra-

structure) institutions (i.e., laws, governmental regulations, unions, and consumer groups’

which serve as a means of social control).aa

Managing Environmental lnterdependence and Sustainab’ility

International managers can no longer afford to ignore the impact of their activities on the

environment. The demand for corporations to consider sustainability in their CSR plans comes

from various stakeholders around the world. A generally accepted definition of sustainable
development for business enterpdses is that of . . ‘

aclopting business strategies and activities that ftteet the needs of the enterprise and

its stakeholtlers toclay, **hile protecting, sustaining-and enhancing the httnwn and

natural resources that witl be neetled in the fitture’as
JounNe.l or Socto-EcoNoMICS,

June 2008.

Existing literature generally agrees on three dimensions of sustainability: (1) economtc’

(2) sociai, unO 1:; environmental, A sustainable business has to take into account
“the interests of

fuiure generations, biodiversity, animal protection, human rights, lif’e cycle impacts, and principles

like eqJity, accountability, transparency, openness, education and ieaming, and local action and scale.’*”

The dilemma for corporations is that they are faced with trying to meet two often contradic-

tory r-equircments: (1) selling at low pr.ices and (2) being environmentally and socially conscious’

However, competitive pressures limit the company’s ability to raise prices in order to cover the cost

of socially responsiblepolicies. This is obviously contradictory to the well-being of societies-47

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PowerPoint by:

Mohamad Sepehri, Ph.D.

Jacksonville University

2-1

Prentice Hall

Chapter Learning Goals

1. Appreciate the complexities involved in the

corporation’s obligations toward its various

constituencies

around the world.

2. Understand the changing perceptions and demands

of corporations doing business in other countries, in

particular the responsibilities toward human rights.

3. Acknowledge the strategic role that CSR and codes

of ethics must play in global management.

4. Provide guidance to managers to maintain ethical

behavior amid the varying standards and practices

around the world.

2-2

Prentice Hall

Chapter Learning Goals

5. Recognize that companies must provide benefits to

the host country in which they operate in order to

maintain cooperation.

6. Discuss the need for cooperation to consider

sustainability in their long-term plans in order to

manage environmental impacts on host locations.

7. Identify the challenges involved in human rights

issues when operating in China.

2-3
Copyright ©2011 Pearson Education, Inc. publishing as

Prentice Hall

Opening Profile: Primark’s Moral Maze

 Primark announced in June 2008 that it had fired three

suppliers in India after it was found that they had

subtracted work to home workers who used child labor.

 Although many suppliers are determined to keep their

breaches from being discovered, the companies need to

get suppliers to recognize that adhering to sound

employment practices is in their own interests.

 Whereas in the past, a company’s responsibility was

almost exclusively profit, now corporate social

responsibility (CSR) has come to the forefront.

 “Transparency” has become the watchword and the

lesson is that CSR is now a vital part of corporate culture

and strategy.

2-4
Copyright ©2011 Pearson Education, Inc. publishing as

Prentice Hall

The Social Responsibility of MNC’s

Profit is
MNC’s only

goal

MNCs should
anticipate and

solve social
needs

2-5
Copyright ©2011 Pearson Education, Inc. publishing as

Prentice Hall

CSR Dilemma

MNC Stakeholders

Home Country

Host

Society in General

Prentice Hall

Owners

Customers

Employees

Unions

Suppliers

Distributors

Strategic Allies

Community

Economy

Government

MNC

Economy
Employees
Community
Host
Government

Consumers

Strategic Allies
Suppliers
Distributors

Global interdependence/standard of living

Global environment and ecology

Sustainable resources

Population’s standard of living

Global Consensus or

Regional Variation?

 Global Corporate Culture:

An integration of the business environments in

which firms currently operate

 The United States and Europe adopt strikingly

different positions that can be traced largely to

history and culture.

Prentice Hall

Dealing with Confusion About

Cross-Cultural Dilemmas

 Engaging stakeholders (and sometimes NGOs)

in a dialog

 Establishing principles and procedures for

addressing difficult issues such as labor

standards for suppliers, environmental

reporting, and human rights

 Adjusting reward systems to reflect the

company’s commitment to CSR

Prentice Hall

General Guidelines for Code of Morality

and Ethics in Individual Countries

Moral
Universalism

• Addressing the need for a moral
standard that is accepted by all cultures

Ethnocentric
Approach

• Applying the morality used in home
country—regardless of the host
country’s system of ethics

Ethical
Relativism

• Adopting the local moral code of
whatever country in which a firm is
operating

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International Codes of Conduct

 The Sweatshop Code of Conduct

 The Electronic Industry Code of Conduct

(EICC)

 Social Accountability 8000 (SA 8000)

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Comparative Management in Focus:

Doing Business in China

 The attraction of doing business in China:

 Cheap labor cost

 A larger market

 An expanding market

 A growing economy

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Comparative Management in Focus:
Doing Business in China

Human Rights and Freedom

of Information Challenges

Human Rights and Freedom

of Information Issues in China

2-12

 Potentially rampant violation
of worker’s rights

 Repression of free speech

 Difficulty monitoring and
correcting human rights
violations

 Nike

 Government crackdown on

“propaganda”

 Google

 Microsoft

 Yahoo

http://www.bizrate.com/rd2?t=http://www.roadrunnersports.com/rrs/product-detail/product.jsp?id=NIK1194&sc=CX190197&cm_mmc=portal-_-shopzilla-_-na-_-rrs201-NIK1194&mid=32645&catId=10150000&prodId=730177936&pos=9&tokenId=8B&lg=0&bAmt=7c63f56cee14ab9a&ppr=9f4640ac401dc055&oid=730177936&atom=100000874&bidType=0&bId=17&cobrand=1&keyword=nike+shoes

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http://www.google.com/imgres?imgurl=http://4.bp.blogspot.com/_zmoEeqomXD4/SjKtHaNqitI/AAAAAAAACWI/d4idS_VLiZI/s400/yahoo-logo &imgrefurl=http://freevectorlogo.blogspot.com/2009/06/yahoo-logo.html&h=300&w=300&sz=23&tbnid=cW9v2tkD-9o9bM:&tbnh=116&tbnw=116&prev=/images?q=Yahoologo&usg=__nuQWk6pJcB-vXcnle7Z7TQjZBWs=&ei=vE0IS9uLJc-UtgfjqM3HCg&sa=X&oi=image_result&resnum=1&ct=image&ved=0CAkQ9QEwAA

Ethics in Global Management

Prentice Hall

International Business Ethics

The business conduct or

morals of MNCs in their

relationship with

individuals and entities

Ethics vary based on the

cultural value system in each

country or society

A Moral Philosophy of Cross-Cultural

Societal Ethics

Prentice Hall

EXHIBIT 2-4 A Moral Philosophy of Cross-Cultural Societal Ethics

Global Corruption Barometer:
2009 Corruption Perception Index (CPI)—Selected Ranks

Source: Selected data from the TI Corruption Perception index, 2009

Top 20—Least Corrupt Bottom 20—Most Corrupt

2-15

1. New Zealand

2. Denmark

3. Singapore

3. Sweden

5. Switzerland

6. Finland

6. Netherlands

8. Australia

8. Canada

8. Iceland

11. Norway

12. Honk Kong

12. Luxembourg

14. Germany

14. Ireland

16. Austria

17. Japan

17. United Kingdom

19. United States

20. Barbados

158. Tajikistan

162. Angola

162. Congo Brazzaville

162. Dem Rep Congo

162. Guinea-Bissau

162. Kyrgyzstan

162. Venezuela

168. Burundi

168. Equatorial Guinea

168. Guinea

168. Haiti

168. Iran

168. Turkmenistan

174. Uzbekistan

175. Chad

176. Iraq

176. Sudan

178. Myanmar

179. Afghanistan

180. Somalia

To Bribe or NOT to Bribe?

 Paying mail carriers in Mexico to prevent them from

“losing” mail

 Paying $100 to get a computer picked up from a

rainy dock

 Gift-giving to bond social ties

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Questionable Payments

Managing the Corruption

 Foreign Corrupt Practices Act (FCPA)

 Organization for Economic Cooperation and

Development convention on bribery

Prentice Hall

Three Tests of Ethical Corporate Actions

Is it legal?

Does it work in
the long run?

Can it be talked
about?

Prentice Hall

The Process for Companies to Combat Corruption

and to Minimize the Risk of Prosecution

 Having a global compliance system which shows that

employees have understood, and signed off on, the legal

obligations regarding bribery and corruption in the

countries where they do business

 Making employees aware of the penalties and

ramifications for lone actions, such as criminal sanctions

 Having a system in place to investigate any foreign agents

and overseas partners who will be negotiating contracts

 Keeping an effective whistle-blowing system in place

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Policies to Help MNCs to Confront Concerns About

Ethical Behavior and Social Responsibility

 Develop worldwide code of ethics.

 Build ethical policies into strategy development.

 Plan regular assessment of the company’s ethical posture.

 If ethical problems cannot be resolved, withdraw from

that market.

Prentice Hall

Managing Subsidiary—Host-Country

Interdependence

1. MNCs locally raise their needed capital, contributing to a rise in

interest rates in host countries.

2. The majority (sometimes even 100 percent) of the stock of most

subsidiaries is owned by the parent company. Consequently, host-

country people do not have much control over the operations of

corporations within their borders.

3. MNCs usually reserve the key managerial and technical positions for

expatriates. As a result, they do not contribute to the development of

host-country personnel.

Prentice Hall

Common Criticism of MNC Subsidiary Activities

Common Criticism of MNC Subsidiary Activities Cont.

4. MNCs do not adapt their technology to the conditions that exist in host
countries.

5. MNCs concentrate their research and development activities at home,
restricting the transfer of modern technology and know-how to host
countries.

6. MNCs give rise to the demand for luxury goods in host countries at the
expense of essential consumer goods.

7. MNCs start their foreign operations by purchasing existing firms rather
than by developing new productive facilities in host countries.

8. MNCs dominate major industrial sectors, thus contributing to
inflation, by stimulating demand for scarce resources and earning
excessively high profits and fees.

9. MNCs are not accountable to their host nations but only respond to
home-country governments; they are not concerned with host-country
plans for development.

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Managing Subsidiary—Host-Country
Interdependence

Prentice Hall

Require managers to go beyond issues of CSR to deal
with specific concerns of MNC and host-country
relationship.

MNCs must learn to accommodate the needs of other
organizations and countries.

MNCs Benefits and Costs to Host Countries

Benefits Costs

Access to outside capital Competition for capital

Foreign-exchange earnings Increased interest rates

Access to technology Inappropriate technology

Infrastructure development Development investment

exceeds benefits

Creation of new jobs Limited skills

development

Local management

development

Few managerial jobs for

locals

Prentice Hall

Managing the Interdependence

The Risks of Interdependence
Issues in Managing

Environmental Interdependence

2-25

 Nationalism

 Protectionism

 Governmentalism

 Dumping of 8000 drums of
toxic waste in Koko, Nigeria

 The export of U.S. pesticides

 Industrial ecology

Recommendations for MNCs Operating in and

Doing Business with Developing Countries

1. Do no intentional harm. This includes respect for the
integrity of the ecosystem and consumer safety.

2. Produce more good than harm for the host country.

3. Contribute by their activity to the host country’s
development.

4. Respect the human rights of their employees.

5. To the extent that local culture does not violate ethical
norms, respect the local culture and work with and not
against it.

6. Pay their fare share of taxes.

7. Cooperate with the local government in developing and
enforcing just background institutions.

Prentice Hall

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