THE GLOBAL MONETARY ENVIRONMENT
exchange instruments, such as futures and options, are
MARKETS FOR FOREIGN EXCHANGE
I. FOREIGN EXCHANGE AND THE MAJOR PLAYERS IN THE MARKET
 Foreign exchange - money denominated in the currency of another
nation or group of nations.
 Foreign exchange refers to exchanging the currency of one country
for another at prevailing exchange rates.
o Different countries have different currencies. Foreign exchange
converts the currency of one country into another.
 Foreign-exchange market - The market in which such transactions
take place.
 Foreign exchange can be in the form of cash, funds available on
credit and debit cards, traveler’s checks, bank deposits, or other
short-term claims.
 An exchange rate is the price of a currency—specifically, the
number of units of one currency that buy one unit of another
currency. The number can change daily.
 The foreign-exchange market is made up of many different players.
o The Bank for International Settlements (BIS), a financial
organization centered in Basel, Switzerland, owned and
controlled by 60-member central banks.
o BIS divides the market into three major categories: reporting
dealers, other financial institutions, and non-financial
institutions.
o Financial institutions
- smaller local and regional commercial banks, investment
banks and securities houses, hedge funds, pension funds,
money market funds, currency funds, mutual funds,
specialized foreign-exchange trading companies, and so
forth
o Reporting dealers
 Money center bank
- are large financial institutions that actively participate
in local and global foreign- exchange and derivative
markets.
- They include the largest banks and financial
institutions in terms of overall market share in
foreign-exchange trading, such as Deutsche Bank, Citi,
Barclays Capital, UBS, JP Morgan, HSBC, RBS, Credit
Suisse, and Goldman Sachs
o Nonbanking financial institution
- Nonfinancial customers comprise any counterparty
including any nonfinancial end user, such as governments
and companies.
- Western Union
II. SOME ASPECTS OF THE FOREIGN-EXCHANGE MARKET
1. HOW TO TRADE FOREIGN EXCHANGE
 Foreign exchange is traded using electronic methods
(eTrading), customer direct, interbank direct, or voice broker.
 Dealers can trade foreign exchange:
- Directly with customers
- Through voice brokers
- Through electronic brokerage systems
- Directly through interbank
 Foreign-exchange market segments:
 Over-the-counter (OTC) commercial and investment
banks – composed of commercial banks as just
described, investment banks, and other financial
institutions.
 Securities exchanges – certain types of foreign-
traded.
- CME group, NASDAQ OMX, and Intercontinental
Exchange (ICE)
GLOBAL OTC FOREIGN-EXCHANGE INSTRUMENTS
- Spot transactions
- Outright forward transactions
- FX swap
- Currency swaps
- Options
- Future contract
 Spot transactions
- Involve the exchange of currency for delivery in two business
days after the day the transaction was made.
- For example, a bank would quote an exchange rate for a
transaction on Monday, but delivery would take place on
Thursday. The rate at which the transaction is settled is the spot
rate.
 Outright forward transactions
- Involve the exchange of currency on a future date beyond two
business days. It is the single purchase or sale of a currency for
future delivery.
- The rate at which the transaction is settled is the forward rate
and is a contract rate between the two parties. The forward
transaction will be settled at the forward rate no matter what
the actual spot rate is at the time of settlement.
 FX swap
- One currency is traded for another on one date and then
swapped back later.
- Most often, the first or short leg of an FX swap is a spot
transaction and the second or long leg a forward transaction.
 Currency swaps
- Deal more with interest-bearing financial instruments (such as a
bond) and involve the exchange of principal and interest
payments.
 Options
- Are the right, but not the obligation, to trade foreign currency in
the future.
 A futures contract
- is an agreement between two parties to buy or sell a particular
currency at a particular price on a particular future date, as
specified in a currency futures exchange rather than in the over-
the-counter market.
III. SIZE, COMPOSITION, AND LOCATION OF THE FOREIGN EXCHANGE
MARKET
 Using the U.S. Dollar on the Foreign-Exchange Market
- The U.S. dollar is the most important currency on the
foreign-exchange market; in the latest BIS Survey, it was one
side (buy or sell) of 87% of all foreign currency transactions
worldwide.
 There are five major reasons why the dollar is so widely
traded:
1. It’s an investment currency in many capital markets.
2. It’s a reserve currency held by many central banks.
3. It’s a transaction currency in many international commodity
markets.
4. It’s an invoice currency in many contractors.
5. It’s an intervention currency employed by monetary
authorities in market operations to influence their own
exchange rates
Although the dollar, euro, yen, and pound are the most widely traded
currencies, the Chinese yuan is steadily growing in importance.
 Frequently Traded Currency Pairs
- The dollar, the most traded currency in the world, is part of four
of the top seven currency pairs: the dollar/euro and the
dollar/yen are the top two.
- Example, the exchange rate between the euro and the Brazilian
real – is known as a cross rate.
 The Euro
- Also in four of the top ten currency pairs.
- The top three currency pairs involving the euro are the dollar,
the yen, and the British pound.
- However, the euro is also important for other currencies in the
EU that are not part of the monetary union as well as non-EU
countries in Europe, such as Turkey.
IV. FOREIGN-EXCHANGE TRADES AND TIME ZONES
If the U.S. dollar is the most widely traded currency in the world, why is
London so important as a trading center?
 There are two major reasons:
- (1) London, which is close to the major capital markets in
Europe, is a strong international financial center where
many domestic and foreign financial institutions operate.
Thus, its geographic location relative to significant global
economic activity is key.
- (2) London is positioned in a unique way because of its time
zone.
V. MAJOR FOREIGN-EXCHANGE MARKETS
 The Spot Market
o Rates are quoted by foreign-exchange dealers.
o The bid (buy) rate is the price at which the dealer is willing to
buy foreign currency; the offer (sell) is the price at which the
dealer is willing to sell foreign currency. The difference
between the bid and offer rates is the dealer’s profit margin.
 The Forward Market
o The forward rate is the rate quoted for transactions that call
for delivery after two business days.
 Options
o An option is the right, but not the obligation, to trade a foreign
currency at a specific exchange rate.
 Futures
o A future contract specifies an exchange rate in advance of the
actual exchange of currency, but it is not flexible as a forward
contract.
VI. THE FOREIGN-EXCHANGE TRADING PROCESS
o When a company sells goods or services to a foreign customer
and receives foreign currency, it needs to convert it into
domestic currency. When importing, the company needs to
convert domestic to foreign currency to pay the foreign
supplier. This conversion usually takes place between the
company and its bank.
VII. HOW COMPANIES USE FOREIGN EXCHANGE
o Companies enter the foreign-exchange market to facilitate
their regular business transactions and/or to speculate.
o Their treasury departments are responsible for establishing
policies for trading currency and for managing banking
relationships to make the trades.
o From a business standpoint, a company, first of all, trades
foreign exchange for exports/imports and the buying or selling
of goods and services.
 CASH FLOW ASPECTS OF IMPORTS AND EXPORTS
o When a company must move money to pay for purchases or
receives money from sales, it has options as to the documents it
can use, the currency of denomination, and the degree of
protection it can ask for.
o Although transactions can be settled with cash in advance, it is
more common to use a commercial bill of exchange or letter of
credit.
 Commercial Bill of Exchange – an individual or a company
that pays a bill in a domestic setting can pay cash, but checks
are typically used-often electronically transmitted.
 Letter of credit (L/C) – obligates the buyer’s bank to honor a
draft presented to it and assume payment; a credit
relationship exists between the importer and the importer’s
bank.
 OTHER FINANCIAL FLOWS
o Speculation – companies sometimes deal in foreign exchange for
profit.
- Speculators take positions in foreign-exchange markets and
other capital markets to earn a profit.
o Arbitrage – is the buying and selling of foreign currencies at a
profit due to price discrepancies.
FACTORS THAT INFLUENCE EXCHANGE RATES
I. THE INTERNATIONAL MONETARY FUND
o International Monetary Fund (IMF) came into official existence on
December 27, 1945, with the goal of promoting exchange-rate
stability and facilitating the international flow of currencies.
o the IMF began financial operations on March 1, 1947.
 ORIGIN AND OBJECTIVES
o Twenty-nine countries initially signed the IMF agreement; there
were 189 member countries as of April 28,2016.
o The fundamental mission of the IMF is to:
 Foster global monetary cooperation
 Secure financial stability
 Facilitate international trade
 Promote high employment and sustainable economic
growth, and
 Reduce poverty around the world
 THE ROLE OF THE IMF IN THE GLOBAL
o An important responsibility of the IMF is:
- To monitor and assess vulnerabilities of the economic and
financial policies of member countries in relation to domestic
and global stability.
II. EXCHANGE-RATE ARRANGEMENTS
 Three choices:
o HARD PEG – Two (2) possibilities for countries that adopt a hard
peg:
(1) Dollarization – can occur when a country like Zimbabwe or
Ecuador does not have its own currency but has adopted the
U.S. dollar as its currency.
(2) Currency Board – which is separate from a country’s central
bank. It is responsible for issuing domestic currency, typically
 anchored to a foreign currency. If it does not have deposits
on hand in foreign currency, it cannot issue more domestic
currency.
o SOFT PEG
 Conventional fixed-peg arrangement, whereby a country
pegs its currency to another currency or basket of currencies
and allows the exchange rate to vary plus or minus 1 percent
from that value.
o FLOATING ARRANGEMENT
 Floating currencies are those that generally change according
to market forces but may be subject to market intervention
with no predetermined direction in which the currency
should move.
 THE EURO – resulted in countries giving up their own
currency to create a new one due to economic integration
envisaged in the Single European Act, the EU nations signed
the Treaty of Maastricht in 1992, which set steps to
accomplish two goals: political union and monetary union.
 To replace each national currency with a single European
currency, the countries first had to converge their economic
policies.
III. DETERMINING EXCHANGE RATES
 A lot of different factors cause exchange rates to adjust.
 Currencies change in different ways depending on the type of
regime:
o NONINTERVENTION: CURRENCY IN FLOATING-RATE WORLD
- Currencies that float free respond to supply and demand
conditions.
- Demand for a country’s currency is a function of the demand
for that country’s goods and services and financial assets.
- Under a market-determined exchange rate framework, the BSP
does not set the foreign exchange rate but instead allows the
value of peso to be determined by the supply of and demand
of foreign exchange.
o INTERVENTION: CURRENCY IN A FIXED-RATE OR MANAGED
FLOATING-RATE WORLD
 The Role of Central Banks
- Each country has a central bank responsible for the policies
affecting the value of its currency, although countries with
independent currency boards use them to control the
currency value.
o BLACK MARKETS
- Closely approximates a price based on supply and demand
for a currency instead of a government-controlled price.
o FOREIGN-EXCHANGE CONVERTIBILITY AND CONTROLS
- Fully convertible currencies are those that the government
allows both residents and nonresidents to purchase in
unlimited amounts.
o EXCHANGE RATES AND PURCHASING POWER PARITY
 Purchasing Power Parity (PPP)
- The PPP exchange rate is the rate at which the currency of
one country would have to be converted into that of
another country to buy same amount of goods and services
in each country.
 The “Big Mac Index”
- The British periodical The Economist has used the price of a
Big mac to estimate the exchange rate between the dollar
and another currency.
- Because the Big Mac is sold in more than 36,000
McDonald’s restaurants in more than 100 countries every
day, it is easy to use it to compare prices.
- PPP would suggest that the exchange rate should leave
hamburgers costing the same in the US as abroad.
- However, the Big Mac sometimes costs more and
sometimes less, demonstrating how far currencies are
under-or overvalued against the dollar.
o EXCHANGE RATES AND INTEREST RATES
- Short term components, exchange rates are strongly influenced
by interest rates.
- Long term components, there is a strong relationship between
inflation, interest rates, and exchange rates.
o OTHER FACTORS IN EXCHANGE-RATE DETERMINATION
 Confidence: Flight to Risk Versus Flight to Safety
- Exchange-rate movements are also influenced by investors’
appetite for risk versus their appetite for safety.
IV. FORECASTING EXCHANGE-RATE MOVEMENTS
o FUNDAMENTAL AND TECHNICAL FORECASTING
 Fundamental forecasting uses trends in economic variables to
predict future exchange rates
 Technical forecasting uses past trends in exchange-rate
movements to spot future trends.
 Managers need to be concerned with the timing, magnitude, and
direction of an exchange-rate movement.
o FUNDAMENTAL FACTORS TO MONITOR
 For freely fluctuating currencies, the law of supply and demand
determines market value. Your ability to forecast exchange rates
depends on your time horizon.
 In general, the best predictors of future exchange rates are:
- Interest rates for the short-term movements,
- Inflation for medium-term movements, and
- Current account balances for long-term movements (the
statement of all transactions made between one country and
another)
 Key factors to monitor:
- Institutional setting
- Fundamental
- Analysis
- Confidence factors
- Events (circumstances), and
- Technical analysis
V. BUSINESS IMPLICATIONS OF EXCHANGE-RATES CHANGES
Exchange rate changes can dramatically affect operating strategies as
well as translated overseas profits.
o MARKETING DECISIONS
 Marketing managers watch exchange rates because they can
affect demand for a company’s products at home and abroad.
 For example, in 2013, as the Indian rupee plunged in value
against the U.S. dollar, Indian small importers were in trouble
because they didn’t have the financial strength to deal with the
currency fluctuations. In most cases, they had to pay their
suppliers in U.S. dollars; when the rupee fell, they had to come
up with more rupees to convert into dollars to pay suppliers,
and they were struggling to do so.
 On the other side, U.S. exporters struggled with a strong dollar
as the prices in local currencies rose during a time when
economic growth abroad was weak in the first place.
o PRODUCTION DECISIONS
  Exchange-rate changes can also affect the location of
production, although it will be only one of many variables
companies consider.
 A manufacturer in a country where wages and operating
expenses are high might be tempted to relocate production to a
country with a currency that is rapidly losing value. The
company’s home currency would buy lots of the weak currency,
making the company’s initial investment cheap. Further, goods
manufactured in that country would be relatively low-cost in
world markets.
 Companies might locate production in a weak-currency country
because:
- Initial investment there is relatively cheap,
- Such a country is a good base for inexpensive exportation
o FINANCIAL DECISIONS
 Exchange rates can influence the:
- Sourcing of financial resources
- The cross-border remittance of funds, and
- The reporting of financial results (Ex. Percent of revenues
from different nations)
GLOBAL DEBT AND EQUITY MARKETS
I. THE FINANCE FUNCTION
 Chief Financial Officer (CFO) and the Financial Management role is
to maintain and create economic value or wealth by maximizing
shareholder wealth – the market value of existing shareholders’
common stock.
The management activities related to cash flows can be divided into
three major areas:
- Make financial decision
- Make investment decisions – typically in the context of capital
budgeting
- Manage short-term capital needs managing the MNE’s currency
assets and liabilities (cash, receivables, marketable securities,
inventory, trade receivables and payables, and short-term bank
debt)
THE ROLE OF THE CFO
 The CFO acquires financial resources – responsible for generating
funds either internally or from external sources at the lowest
possible cost – and allocates them among the company’s activities
and projects.
 Allocating resources (investing) means increasing stockholders’
wealth through the allocation of funds to different projects and
investment opportunities.
 The CFO’s Global Perspective
o More complex in a global environment than in the domestic
setting because of such forces:
- Foreign – exchange risk
- Currency flows and restrictions
- Political risk
- Different tax rates and laws determining taxable income,
and
- Regulations on access to capital in different markets
II. THE CAPITAL STRUCTURE
 Capital Structure – the company’s proper mix between long-term
debt and equity.
 Many companies start off with an initial investment and then grow
through internally generated funds.
 When those sources are inadequate to fund continued growth
into new markets, the CFO’s office must decide the proper
debt/equity mix.
a. LEVERAGING DEBT FINANCING
o The degree to which a firm funds the growth of the business by
debt.
o The degree to which companies use leverage instead of equity
capital – known as stocks or shares – varies throughout the
world.
b. FACTORS AFFECTING THE CHOICE OF CAPITAL STRUCTURE
1. Debt and Exchange Rates
- Sourcing debt in a currency with a lower interest seemed
like a good idea, but the lower foreign interest rates were
replaced by exchanged rate risk.
2. Regulatory Risk
- Regulatory reform has complicated access to debt financing
 Companies have many ways of raising capital to fund operations,
including debt and equity sources as well as domestic and
international sources.
 Two major sources of funds external to the MNE’s normal
operations are (1) debt markets and (2) equity markets.
III. GLOBAL DEBT MARKETS
a. EUROCURRENCIES AND THE EUROCURRENCY MARKET
- An important source of debt financing to complement what
MNEs can find in their domestic markets.
- A Eurocurrency or offshore currency is any currency banked
outside its country of origin.
b. INTERNATIONAL BONDS
 Many countries have active bond markets available to domestic
and foreign investors.
- The United States is the largest market in the world for
domestic bonds.
 it allows a company to diversify its funding sources from the
local banks and the domestic bond market and borrow in
maturities that might not be available in the domestic markets.
 Tends to be less expensive than local bond markets and attracts
investors from around the world.
1. Foreign Bonds – sold outside the borrower’s country but
denominated in the currency of the country of issue.
2. Eurobonds – usually underwritten (placed in the market for the
borrower)
3. Global Bond – issued outside of the country where the currency is
denominated, such a U.S. dollar bond issued outside of the United
States in multiple locations.
IV. GLOBAL EQUITY MARKETS
a. GLOBAL EQUITY MARKETS
- Another source of financing equity security/markets, whereby
an investor takes an ownership position in return for shares of
stock in the company and the promises of capital gains and
dividends.
b. THE SIZE OF GLOBAL STOCK MARKETS
- The three largest markets in the world are in New York, Tokyo,
and London, with the U.S. markets controlling nearly half of
the world’s stock market capitalization.
V. TAXATION OF FOREIGN-SOURCE INCOME
 Tax planning is a crucial responsibility for a CFO because taxes
can profoundly affect profitability and cash flow
 Taxation has a strong impact on several choices:
o Location of operations
o Choice of operating form, such as export or import,
licensing agreement, or overseas investment
 o Legal form of the new enterprise, such as branch or
subsidiary
o Possible facilities in tax-haven countries to raise capital and
manage cash
o Method of financing, such as internal or external sourcing,
and debt or equity
o Capital budgeting decisions
o Method of setting transfer prices
a. INTERNATIONAL TAX PRACTICES
 Differences in tax practices around the world often cause
headaches for MNEs.
 Lack of familiarity with laws and customs can create
confusion.
o in some countries, tax laws are loosely enforced.
o In others, taxes may generally be negotiated between
the tax collector and the taxpayer – if they are ever
paid at all.
o In still others, they must be rigidly followed.
 Differences in tac practices:
o Differences in Types of Taxes
o Differences in Generally Accepted Accounting
Principles (GAAP)
o Differences in Tax Rates
o Approaches to Corporation Taxation
 (1) the separate entity approach (also known as the
classical approach)
 (2) the integrated system approach
b. TAXING BRANCHES AND SUBSIDIARIES
- The Foreign Branch
- The Foreign Subsidiary
- The Controlled Foreign Corporation
c. TRANSFER PRICES
 Impediment to performance evaluation is the extensive use
of transfer pricing in international operations
 Transfer Prices and Taxation – Companies establish arbitrary
transfer prices primarily because of differences in taxation
between countries.
d. DOUBLE TAXATION AND TAX CREDIT
 Every country has a sovereign right to levy taxes on all
income, which could result in double taxation if both the
home and host country tax the income.
 Tax Treaties: Eliminating Double Taxation – to prevent
international double taxation or to provide remedies when
it occurs.
e. DODGING TAXES
 Two things will always be true: governments will always try
to figure out how to collect as much in taxes as they can and
companies (and individuals) will try to avoid paying as much
in taxes as they can.
VI. OFFSHORE FINANCING AND OFFSHORE FINANCIAL CENTERS
Companies are partly able to be successful in reducing their tax
liabilities because of tax haven countries and the ability to use them
for a variety of offshore activities.
Offshore financing
 Is the provision of financial services by banks and other agents to
nonresidents.
 This involves borrowing money from and lending to the
nonresidents.
 Offshore financial centers (OFCs) – are cities or countries that
provide large amounts of funds in currencies other than their
own and are used as locations in which to raise and accumulate
cash.
ETHICS AND SOCIAL RESPONSIBILITY
I. INTRODUCTION
 Examine how globalization affects society and managers’
judgments as they interact with different laws and cultures and try
to be socially responsible.
 Doing business abroad is not easy.
 The greater the “distance’ from one’s home country, the more
complicated it is to do business.
 Distance can be described with acronym – CAGE:
- Cultural (also known as psychic distance)
- Administrative (political and institutional policies)
- Geographic
- Economic
 Given the criticisms of globalization and the challenge of
companies and individuals of companies and individuals doing
business in areas of the world that are quite distant
 How can companies and individuals be successful, or at least not
create serious mistakes?
II. STAKEHOLDER TRADE-OFFS
 To prosper—indeed, to survive—a company must satisfy different
groups of stakeholders, including shareholders, employees,
customers, suppliers, and society at large.
 This juggling act can be quite tricky.
o The shareholder (or stockholder)-versus-stakeholder
dilemma pits the demands of one stakeholder against all the
others.
o There is a debate on the idea of shared value, which implies
that companies can increase profits while at the same time
addressing critical social problems.
 It is tricky to do both successfully, but many MNEs feel it is worth
the effort.
 The basic idea of focusing on stakeholders more broadly is that
companies can consider various socially important groups when
making decisions.
 In the short term, for example, group aims often conflict.
 Shareholders want additional sales and increased productivity
(which result in higher profits and returns).
 Employees want safer workplaces and higher compensation.
 Customers want higher-quality products at lower prices.
 Society would like to see more jobs, increased corporate taxes,
more corporate support for social services, and more trustworthy
behavior on the part of corporate executives.
 In the long term, all of these aims must be adequately met.
 If they aren’t, there’s a good chance that none of them will be,
especially if each stakeholder group is powerful enough to bring
operations to a standstill.
 In addition, pressure groups—which may reflect the interests of
any stakeholder group—lobby governments to regulate MNE
activities both at home and abroad.
III. THE ECONOMIC IMPACT OF THE MNE
 a. BALANCE-OF-PAYMENTS EFFECTS
 The effect of an individual MNE may be positive or negative.
 The balance-of-payments effects in terms of capital flows for
FDI are usually
- positive for the host country initially and negative for
the home country
- negative for host country and positive for the home
country later.
b. GROWTH AND EMPLOYMENT EFFECTS
 Growth and employment effects are not a zero – sum game
because MNEs may use resources that were unemployed or
underemployed.
IV. THE FOUNDATIONS OF ETHICAL BEHAVIOR
There are three levels of moral development:
 Level 1, the preconventional level, where children learn what is
right and wrong but don’t necessarily understand why their
behavior is right or wrong.
 Level 2, the conventional level, where we learn role conformity,
first from our peers (including parents), then from societal laws.
- One could argue that company codes of conduct are also part
of the conventional level of behavior in the narrow context of
a company rather than a society.
- However, behavior espoused by companies likely reflects the
values of the company’s home country.
 Level 3, the postconventional, autonomous, or principled level,
where individuals internalize moral behavior, not because they are
afraid of sanctions, but because they truly believe such behavior is
right.
WHY DO COMPANIES CARE ABOUT ETHICAL BEHAVIOR?
- ethical behavior can be instrumental in achieving one or both of
two possible objectives:
1. To develop competitive advantage
2. To avoid being perceived as irresponsible
V. THE CULTURAL FOUNDATIONS OF ETHICAL BEHAVIOR
a. RELATIVISM VERSUS NORMATIVISM
 Relativism holds that ethical truths depend on the values of a
particular society and may vary from one society or country to
another.
 Normativism In contrast, normativism holds that there are
indeed universal standards of behavior that, although
influenced by different cultural values, should be accepted by
people everywhere.
 Even a pluralistic society such as the United States has a large
core of commonly held values and norms.
b. WALKING THE FINE LINE BETWEEN RELATIVE AND NORMATIVE
 Companies and their employees struggle with the problem of
how to implement their own ethical principles in foreign
business environments:
o Do those principles reflect universally valid “truths” (the
normative approach)?
o Or must they adapt to local conditions on the assumption
that every place has its own “truths” and needs to be
treated differently (the relative approach)?
 Many individuals and organizations have laid out minimum
levels of business practices that they say a company (domestic
or foreign) must follow regardless of the legal requirements or
ethical norms prevalent where it operates.
 One could consider this as behavior based on principles of
honesty and fairness, or “ordinary decency.
VI. THE LEGAL FOUNDATIONS OF ETHICAL BEHAVIOR
 There are good reasons to consider the law as a foundation of
ethical behavior, just as there are limitations to using the law.
a. LEGAL JUSTIFICATION: PRO AND CON
 According to the legal argument, an individual or company can do
anything that isn’t illegal.
 However, there are five good reasons why this is inadequate:
1. Some things that are unethical are not illegal.
2. The law is slow to develop in emerging areas, and it takes
time to pass and test laws in the courts. Moreover, because
laws essentially respond to issues that have already surfaced,
they can’t always anticipate dilemmas that will arise in the
future.
3. The law is often based on imprecisely defined moral concepts
that can’t be separated from the legal concepts they
underpin.
4. The law often needs to undergo scrutiny by the courts. This is
especially true of case law, in which the courts create law by
establishing precedent.
5. The law simply isn’t very efficient. “Efficiency” in this case
implies achieving ethical behavior at a very low cost, and it
would be impossible to solve every ethical behavioral
problem with an applicable law.
 In contrast, there are also several good reasons for using the law
to justify ethical behavior:
1. The law embodies many of a country’s moral principles,
making it an adequate guide for proper conduct.
2. The law provides a clearly defined set of rules, and following
it at least establishes a good precedent for acceptable
behavior.
3. The law contains enforceable rules that apply to everyone.
4. Because the law represents a consensus derived from widely
shared experience and deliberation, it reflects careful and
wide-ranging discussions.
VII. CORRUPTION AND BRIBERY
 Bribery is one facet of corruption. The determinants of corruption
include cultural, legal, and political forces.
 Bribes are payments or promises to pay cash or anything of value.
 As defined by NGO Transparency International, corruption is:
 “the abuse of entrusted power for private gain. When government
officials are involved, bribes can be paid to obtain government
contracts, or they can be as minor as trying to get government
officials to do what they should be doing anyway. It can be grand,
petty, and political depending on the amounts of money and the
sector where it operates.”
THE CONSEQUENCES OF CORRUPTION
- Corruption affects company performance and local economies.
Higher levels of corruption, for instance, correlate strongly with
lower national growth rates and lower levels of per capita income.
VIII. ETHICS AND THE ENVIRONMENT
 we refer to the environment more narrowly in the context of
pollution, both air and water, and global warming.
 Companies that extract natural resources, generate air or water
waste, or manufacture products such as autos that generate
pollution need to be concerned with their environmental impact.
  Sustainability - meeting the needs of the present without
compromising the ability of future generations to meet their own
needs.

IX. ETHICS DILEMMAS OF LABOR CONDITIONS

 Major labor issues that MNEs get involved in through FDI or
purchasing from independent manufacturers in developing
countries are fair wages, child labor, working conditions,
working hours, and freedom of association.
 Some companies avoid operating in countries where child labor
is employed, whereas others try to establish responsible
policies in those same countries.

X. CORPORATE CODES OF ETHICS: HOW SHOULD A COMPANY

BEHAVE
a. MOTIVATIONS FOR CORPORATE RESPONSIBILITY
 Companies generally experience four strong motivations for
acting responsibly:
1. Unethical and irresponsible behavior can result in legal
headaches, especially in such areas as financial
mismanagement, bribery, and product safety.
2. Such behavior could also result in consumer action
such as a boycott.
3. Unethical behavior can affect employee morale.
Conversely, responsible behavior can have a positive
influence on a workforce, both at corporate
headquarters and in overseas facilities.
4. You never know when bad publicity is going to cost you
sales.

b. DEVELOPING A CODE OF CONDUCT

 A code of conduct is a major component of most companies’
strategies for ethical and socially responsible behavior.
 Codes of conduct are useful as they give companies some
general guidance on how to operate.
 for international operations, it can take the form of two
perspectives: external and internal.

What makes a good internal code of conduct?

Here are four criteria:

1. It sets global policies with which everyone working anywhere for

the company must comply.
2. It communicates company policies not only to all employees but
to all suppliers and subcontractors as well.
3. It ensures that the policies laid out in the code are carried out.
4. It reports the results to external stakeholders.