Professional Documents
Culture Documents
OBJECTIVES
CHAPTER OVERVIEW
Globalization has become a major socioeconomic force and topic of debate in the twenty-
first century. While Chapter One examines the forces and criticisms associated with the
globalization process, Chapter Five focuses upon the impact of foreign direct investment
on home and host countries. Following an explanation of the balance-of-payments
effects of FDI, a series of ethical issues concerning the social responsibilities of MNEs is
explored. The cultural and legal foundations of ethical behavior are examined, and the
challenges of global warming, pharmaceutical sales, and child labor are highlighted. The
chapter concludes with a brief discussion of the need for corporate codes of ethics.
CHAPTER OUTLINE
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Will Newmont’s mine at Batu Hijau on Sumbawa suffer the same fate? What can
Newmont do to effectively manage the environmental pressures it now faces in other
countries as well?
TEACHING TIPS: Carefully review the PowerPoint slides for Chapter Five, as
well as the opening case regarding Newmont Mining, which is cited throughout
the chapter. In addition, review the corresponding video clip, “Global Business
and Ethics” [12:07].
I. INTRODUCTION
Multinational enterprises (MNEs) have their greatest impact on countries when they
engage in foreign direct investment (FDI) via wholly-owned subsidiaries and/or
joint ventures. Although not all MNEs are huge, the sheer size of some troubles their
critics. Further, their global orientation causes many to believe that MNEs are
insensitive to national (local) concerns. Depending upon their particular
perspectives, pressure groups in both home and host countries continue to urge their
governments to devise policies that either encourage or restrict MNE activities. [See
Fig. 5.1.]
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related and interdependent. Technological developments, competitors’ actions,
and government policies are just three of the many intervening variables that can
distort the analysis of cause and effect.
C. Individual and Aggregate Effects
Evaluating MNEs and their activities on an individual basis can be both time-
consuming and costly. On the other hand, applying the same policies and
control mechanisms to one and all is a far from perfect approach, especially if
policies are based on exceptions, and not the general rule.
D. Potential Contributions of MNEs
The sheer scale of many MNEs means they have assets that can contribute to a
wide range of national objectives. In addition to controlling a large portion of
the world’s capital and accounting for a majority of the world’s exports, MNEs
are also important producers and organizers of technology. [See Fig. 5.2.]
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Although the equation is straightforward, determining the value of each
variable is difficult because the data used must be estimated and are subject
to assumptions. The net import effect (m – m1) is positive for the host
country if the FDI results in the substitution of local production for
imported products and is negative if it results in an increase in imports to
supply the new productive capacity. (The marginal propensity to import
reflects the fraction of a change in imports due to a change in income, i.e.,
the portion of increased income spent on imports.) The net export effect
(x – x1) is particularly controversial because underlying assumptions are
widely debated. That said, the effect is positive for the host country if the
FDI results in the generation of exports but negative if it results in a decline.
(FDI may also stimulate home country exports of complementary products
to the host country.) Net capital flows (c – c1) are difficult to assess
because of the time lag between an outward flow of investment funds and
the subsequent inward flow of remitted earnings from that investment.
Although initial capital flows to the host country are positive, they may be
negative in the long run if capital outflows eventually exceed the value of
the investment. Finally, indirect effects such as those derived from the
transfer of technology and managerial skills are difficult to measure but
may be critical to the development of the economic efficiency of the host
country.
3. Aggregate Assumptions and Responses. Generally, FDI is initially
favorable to the host country and unfavorable to the home country, but this
effect may reverse over time if aggregate repatriated profits exceed the
value of the initial investment. Thus, governments must learn to maximize
the benefits while minimizing the long-term adverse effects of FDI flows.
B. Growth and Employment Effects
In contrast to the balance-of-payments effects, the effects of FDI on economic
growth and employment should not be a zero-sum game because MNEs may use
resources that were either underemployed or unemployed. The argument that
both home and host countries can gain from FDI rests on two assumptions:
(i) resources are not fully employed and (ii) capital and technology cannot be
easily transferred from one activity to another.
1. Home Country Losses. As manufacturers seek lower-cost foreign
production sites, home countries claim that FDI outflows create jobs abroad
at the expense of jobs in the home country.
2. Host Country Gains. Host countries gain through the transfer of capital,
technology, and managerial expertise, as well as the creation of new jobs.
3. Host Country Losses. Critics argue that FDI inflows often displace
domestic investment and drive up local labor costs. They claim that MNEs
have access to lower-cost funds than local competitors do and that MNEs
can spend more on promotion activities. In addition, while it is true that
MNEs often source inputs locally, critics claim that they also destroy local
entrepreneurship. Further, as MNEs gain valuable knowledge in their
foreign operations that can be shared across their entire organizations, critics
fear that local firms subsequently suffer a competitive disadvantage.
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IV. FOUNDATIONS OF ETHICAL BEHAVIOR
Whether they engage in trade, licensing, or foreign direct investment, MNEs must
act responsibly. However, because ethical behavior is rooted in both cultural and
legal traditions that vary from one country to another, dilemmas often arise.
A. Cultural Foundations for Ethical Behavior
Beliefs may vary because of different family and religious teachings, different
laws and social pressures, different observations, experiences, and perceptions,
and even different economic circumstances. Within a country an individual’s
values may differ from his/her employer’s policies, which may differ from
prevalent societal norms or laws. At the international level, cultural complexity
increases geometrically. While many actions elicit universal agreement on what
is clearly right and wrong, others are less clear. Cultural relativism holds that
ethical truths depend upon the groups subscribing to them; thus, intervention in
local issues and traditions by outsiders is clearly unethical. On the other hand,
cultural normativism holds that there are universal standards of behavior that
everyone should follow; thus, non-intervention in local violations of global
standards is clearly unethical.
Many argue that managers the world over must exhibit ordinary decency,
i.e., principles of honesty and fairness. In addition, they argue that MNEs are
obligated to set good examples that can serve as the standards for responsible
behavior. From a competitive standpoint, it is argued that responsible acts
create strategic and financial success because they lead to trust, which in turn
leads to commitment. The Interfaith Center on Corporate Responsibility (ICCR)
is but one of many nongovernmental organizations (NGOs) that actively
monitor and publicize corporate practices. Such efforts are designed to educate
firms about the environmental and economic consequences of their operations
and practices, on the one hand, and to increase shareholder value on the other.
In addition, many multilateral agreements exist that can aid in ethical decision-
making; they deal primarily with employment practices, consumer and environ-
mental protection, political activity, and human rights in the workplace. Still, no
set of workable corporate guidelines is universally accepted and observed.
B. Legal Foundations for Ethical Behavior
Ethics teaches that people have a responsibility to do what is right and to avoid
doing what is wrong. The appropriateness of behavior can be measured in the
sense that individuals and organizations must seek justification for their
behavior, and that justification is a function of both cultural values (many of
which are universal) and legal principles. However, legal justification for
ethical behavior is not sufficient because: (i) everything that is legal is not
necessarily ethical, (ii) the law is slow to develop in emerging areas of concern,
(iii) the law is often based on moral concepts that cannot be separated from legal
concepts, (iv) the law may need to be tested by the courts, and (v) the law is not
efficient in terms of achieving ethical behavior at a minimum cost. Nonetheless,
the law does serve as a useful basis for examining ethical behavior because it
embodies cultural values. The law provides a basic guide for proper conduct,
which when followed, establishes a good precedent. Further, the law puts
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everyone on an equal footing and should reflect careful and wide-ranging
deliberations.
In addition to the fact that laws vary among countries, strong home-country
governments may attempt to extend their legal influence to foreign countries.
Extraterritoriality refers to the extension by a government of the application of
its laws to the foreign operations of its domestic firms. In cases of health and
safety regulations, differences may not be insurmountable, but in other
instances, home- and host-country laws clearly conflict. Civil law nations tend
to have a large body of law dealing with business operations, but common law
nations rely more on precedent than statutory regulations. Externalities refer to
the by-products of activities that affect the well-being of people and/or the
environment. Although externalities are not reflected in standard cost ac-
counting practices, they must be included in the calculation of stakeholder value.
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construction- and natural resource-based multinational enterprises at the 2005 World
Economic Forum to sign a zero-tolerance pact against corruption.
POINT: Many argue in favor of paying bribes in countries where bribes are legally and
culturally acceptable and even expected. Firms that must adhere to antibribery laws, such
as those of the United States, often find themselves at such a serious competitive
disadvantage they are effectively excluded from operating in certain countries at all. If
such exclusions then result in the acquisition of inferior products, technology, and
operations by clients in those countries, all parties lose. Finally, when governments offer
foreign aid to countries in exchange for political concessions, they exhibit a double
standard if they forbid their own firms to do likewise.
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generate a significant portion of the world’s greenhouse gases. Foreign firms
operating in countries that have adopted the Kyoto Protocol are required to meet
or exceed the same standards as local companies, regardless of the standards of
their home countries. (Firms that are not in compliance with local standards
may be able to buy credits from companies whose emissions are actually below
the target levels.) While the legal approach to responsible behavior says that
firms can operate according to local laws, the ethical approach says that firms
should do whatever is necessary and economically feasible to reduce greenhouse
gas emissions to the lowest possible levels.
The Amazon rain forest, most of which lies in Brazil, covers an area the size of Western
Europe. It comprises one-third of the world’s remaining tropical forests and is home to
30 percent of the world’s plant and animal species. The Brazilian rain forest is seriously
threatened because of both legal and illegal logging and burning operations. Environ-
mentalists from within and outside of Brazil argue that the rain forest is a global resource,
but many Brazilians claim that it is theirs to control and use. Historically, the Brazilian
government has been hesitant to take any action that might curtail economic growth.
However, following the 2005 killing of an elderly nun who was trying to protect the rain
forest, the government has agreed to crack down on clearly illegal activities and to try to
slow the destruction on other fronts as well.
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VIII.ETHICAL DIMENSIONS OF LABOR CONDITIONS
A major challenge facing MNEs is the globalization of the supply chain and the
working conditions of laborers. Pressures from external stakeholders to adopt
responsible employment practices in overseas operations are extensive. Some of
the many international labor issues that companies, governments, trade unions, and
nongovernmental organizations must deal with include: fair wages, child labor,
working conditions, working hours, and freedom of association. These issues are
especially critical in retail, clothing, footwear, and agricultural industries, where so
many MNEs outsource production to independent firms in foreign countries. [See
Fig. 5.6.] The Ethical Trading Initiative Base Code focuses upon the employment
practices of MNEs by getting them to first adopt ethical employment policies and
then monitor compliance with their foreign suppliers. [See Table 5.2.]
The use of child labor is a particularly sensitive issue. According to the UN’s
International Labor Organization (ILO), more than 250 million children between the
ages of 5 and 17 are working worldwide; nearly three-quarters of those are young
children or are working in ways that endanger their health or well-being because of
hazards, sexual exploitation, trafficking, and/or debt bondage. Those who argue in
favor of child labor claim that in many instances, children are better suited to
perform certain tasks than adults, and that if the children were not employed, they
would in fact be worse off. While some firms simply avoid operating in countries
where child labor is used, others try to establish responsible operating policies in
those locales. Often, however, it is difficult for MNEs to hire and/or retain local
workers; even though the working conditions and wages that MNEs offer may be
higher, the number of hours they allow their employees to work may be lower.
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maximizing the long-term value of the assets of the shareholders, it is the role of
government to deal with the externalities associated with corporate behavior.
In all likelihood, governments will continue to compete for larger shares of the benefits
from the activities of MNEs. In the short term, most will probably work to create more
favorable business environments for foreign investors because investment inflows can aid
with trade deficit problems as well as foster economic development and growth. In the
longer term, however, FDI may be less welcome because attitudes tend to vary according
to economic conditions. If, in the future, people perceive themselves to be economically
disadvantaged, even if only in a relative sense, they may, at least to some degree, blame
FDI for their socio-economic distress and thus lean toward the restriction of foreign
investment activities.
Anglo American PLC is a mining conglomerate that operates in 61 countries via eight
key businesses. Founded in 1917 as the Anglo American Corp. of South Africa and now
headquartered in London, Anglo American is the largest producer of gold in the world.
With a South African workforce of more than 90,000 employees in its primary operations
and another 44,000 spread across its subsidiaries, the firm is one of the largest in the
region. Heavily affected by the HIV/AIDS epidemic, Anglo American was one of the
first companies to establish a proactive, comprehensive strategy to combat the raging
effects of the disease on its workforce and production systems. Along with many other
MNEs, Anglo American also joined the Global Business Council on HIV/AIDS, an
organization that focuses on (a) alleviating the effects of AIDS throughout the world and
(b) protecting the rights of infected workers. In response to the failure of its AIDS
prevention policy, the company announced in 2001 that it would be running a feasibility
study to determine whether it would make antiretroviral treatments available to its
workforce. (The prevalence of HIV-positive workers had risen to an average of 21
percent across all of its operations and was increasing by nearly 2 percent annually.)
However, just a year after the announcement, Anglo American decided to abandon the
study, citing the risk and the expenses involved as being too great and numerous other
factors as being too difficult to manage. However, the company insisted that it had not
completely abandoned the idea of a pilot study and expressed hopes that a more
reasonable arrangement could be made involving the entire industry and the South
African government.
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Questions
1. What choices does the government of South Africa have in the face of the HIV/AIDS
epidemic? What do you think it should do?
South Africa suffers one of the highest rates of HIV infection in the world—
approximately 5.3 million cases in a population of 45 million people. Each day
another 1,500 South African people are infected with the virus. Despite the dire
threat posed by the epidemic, the South African government has proved to be one of
the least committed to effective intervention. It has diverted little of its budget to
dealing with the crisis and has been very resistant to the widespread distribution of
antiretroviral drugs on the grounds that such action would be far too expensive and
difficult to do effectively. However, the government needs to confront the crisis! It
should begin with the development of a health care system and infrastructure adequate
to deal with the sheer number of people in need of care. The government should also
seek to partner with international aid agencies, other international organizations, and the
private sector, including pharmaceutical firms, to develop a feasible, comprehensive
strategy. [Note: student responses to the latter part of the question will vary, given
their individual beliefs regarding the role of government in society.]
2. Why did Anglo American halt its pilot study on the feasibility of providing
antiretroviral therapy to its employees? Do you agree with the decision? What
recommendation would you give the company concerning its HIV/AIDS policy?
Anglo American claimed that the risk and the expenses associated with the study were
too great. In contrast, however, by 1991 Coca-Cola was providing free anti-retroviral
drug therapy to 1,500 AIDS-infected employees in Africa, and De Beers (in which
Anglo American has a 45 percent stake) was paying 90 percent of the costs of the
treatment for its AIDS-infected employees and their spouses. Given that the company
expressed hopes that a more reasonable arrangement could be made involving the entire
industry and the government, it appears that Anglo American is attempting to shift at
least part of the responsibility for solving the crisis to the government and to other
stakeholders. [Again, student responses will vary, given their individual beliefs
regarding the role of the private sector in society.]
3. What role do the pharmaceutical companies play in the HIV/AIDS epidemic in South
Africa? What would you recommend to a pharmaceutical company that produced
HIV/AIDS drugs?
The pharmaceutical companies have a unique role to play in the HIV/AIDS epidemic in
South Africa and throughout the world because they are the source of the drugs with
which to combat this plague. However, the enormity of the epidemic is truly daunting.
Given the sheer number of people in need, on the one hand, and the utter lack of
resources, on the other, one could easily conclude that there is relatively little that can
be done to alleviate the suffering and stop the spread of the disease. Still in all, the
pharmaceutical companies can seek to partner with aid agencies, international
organizations, governments, and the private sector in their search for acceptable and
effective solutions. Pharmaceutical firms will most surely be concerned about the issue
of patent protection and generic drugs, as well as the prospect of tiered pricing and
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significantly lower profit margins. Governments, other members of the private sector,
and other stakeholders will all need to be mindful of the tremendous costs and risks that
are borne by pharmaceutical firms. Further, given the extent and the seriousness of the
problem, a lack of commitment on the part of any stakeholder will be a serious setback
in the march toward a community solution.
WEB CONNECTION
CHAPTER TERMINOLOGY:
globalization, p.164 extraterritoriality, p.174
multinational enterprise (MNE), externalities, p.174
p.164 bribery, p.175
foreign direct investment (FDI), Business Principles for Countering,
p.164 Bribery, p.176
wholly-owned subsidiary, p. 164 in Int’l Bus. Transactions,
joint venture, p.164 p.176
stakeholders, p.166 International Chamber of
corporate social responsibility Commerce (ICC), p.176
(CSR), p.166 Rules of Combat to Combat
balance of payments (BOP), p.167 Extortion and Bribery, p.176
trade deficit, p.168 Corruption Perceptions Index CPI),
trade surplus, p.168 p.177
import substitution, p.168 Partnering Against Corruption
net import effect, p.168 Initiative, p.178
marginal propensity to import, sustainability, p.180
p.169 global warming, p.180
net export effect, p.169 Kyoto Protocol, p.180
net capital flows, p.169 UN Framework Convention on
relativism, p.172 Climate Change, p.181
normativism, p.172 tiered pricing, p.183
ordinary decency, p.172 generic products, p.184
nongovernmental organizations International Finance Facility for
(NGOs), p.172 Immunization, p.184
_________________________
Exercise 5.1. Ask students if they believe that it is better for a country to
encourage (a) international trade activities or (b) inward foreign direct investment.
Then have them discuss the impact of foreign direct investment upon the
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international trade activities of the triad nations (West Europe, Japan, Canada, and
the United States) as compared to the impact upon the BRICs (Brazil, Russia, India,
and China). Finally, repeat the first question regarding their general beliefs. If
positions have changed, explore why.
Exercise 5.2. Choose two to five countries that are economically diverse. Then
lead the class in a comparative discussion of the impact of foreign direct investment
upon those countries. What MNEs are headquartered in or have subsidiaries based
in those countries? Conclude by asking the students to discuss the societal effects of
foreign direct investment upon those and possibly other countries.
Exercise 5.3. During the late 1980s and throughout the 1990s, China was
routinely cited by various governments and NGOs for human rights violations that
included torture, beatings, imprisonment, and even the executions of political
dissidents. At the same time, inflows of foreign direct investment into China from
firms headquartered in democratic societies in West Europe, North America, and
Japan were increasing at record rates. Ask the students to debate this phenomenon
from an ethical perspective. Do they believe that China is a special case, and if so,
why?
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