Solution Manual for International Business 14th Edition

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CHAPTER FIVE
GLOBALIZATION AND SOCIETY

OBJECTIVES
• To examine the broad foundations of ethical behavior
• To demonstrate the cultural and legal foundations of ethical behavior
• To discuss the importance of social responsibility when operating internationally, especially
in areas of sustainability
• To discuss some key issues in the social activities and consequences of globalized
business
• To examine corporate responses to globalization in the form of codes of conduct, among
other things

CHAPTER OVERVIEW
Globalization has become a major socioeconomic force and topic of debate in the twenty-first
century. While Chapter One examined 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
OPENING CASE: ECOMAGINATION AND THE GLOBAL GREENING OF GE

In 2005, CEO Jeffery Immelt of GE announced a new and ambitious strategy designed to
demonstrate that an ecologically conscious conglomerate can cultivate the bottom line while
doing its duty toward the global environment. GE surprised both investors and industrial
Copyright ©2013 Pearson Education, Inc. publishing as Prentice Hall
1
customers who had long seen GE as an ally in the struggle against environmental activists. The
initiative, called Ecomagination, consisted of three parts: 1) reducing greenhouse emissions, 2)
doubling investment in R&D in “clean” technologies, and 3) increasing revenues from those
same technologies. A new initiative added two additional commitments: 4) reduce global water
use and 5) keep public informed. With half its markets outside the United States and many
countries already enforcing limitations stipulated by the Kyoto Protocol, GE felt it was pursuing
its own best interests to develop a greener company. GE feels that markets exist for cleaner
technology and that it can not only help the environment, but also strengthen its strategic position
with such a move. The plan has been met with mixed reactions and the big question is: Can GE
bring about sufficient ecological and economic results to satisfy a worldwide constituency of
customers, shareholders, governments, and societies?

TEACHING TIPS: Have students visit the corporate Web site of GE (www.ge.com). The
site contains additional information on the firm’s ecomagination program

I. INTRODUCTION
Multinational enterprises (MNEs) have their greatest impact on countries when they engage
in foreign direct investment (FDI). 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.

II. THE FOUNDATIONS OF ETHICAL BEHAVIOR

Because ethical behavior is rooted in both cultural and legal traditions that vary from one
country to another, dilemmas often arise. There are multiple approaches to the analysis,
including: 1. Teleological approach – decisions are based upon the consequences of the
action, 2. Utilitarianism – an action is deemed right if it produces the greatest amount of
good for the greater number of people, and 3. Deontological approach – moral judgments
are made independent of consequences.
A. Why Do Companies Care about Ethical Behavior? There are cultural and legal
reasons for companies to behave ethically, and individuals have high ethical standards.
In addition, ethical behavior can help achieve a competitive advantage and avoid the
perception of being irresponsible.
B. The Cultural Foundations for Ethical Behavior
1. Relativism versus Normativism. 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. 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, normativism holds that there are universal standards of behavior that
Copyright ©2013 Pearson Education, Inc. publishing as Prentice Hall
2
 everyone should follow; thus, nonintervention in local violations of global standards
is clearly unethical.
2. Walking the Fine Line Between Relativism and Normativism. 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. In
addition, many multilateral agreements exist that can aid in ethical decision
making; they deal primarily with employment practices, consumer and
environmental protection, political activity, and human rights in the workplace.
Still, no set of workable corporate guidelines is universally accepted and observed.
C. The Legal Foundations for Ethical Behavior
Ethics teaches that people have a responsibility to do what is right and to avoid doing
what is wrong.
1. Legal Justification: Pro and Con. 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, opponents of legal justification
feel that 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. Proponents of the legal-justification standard state there are several
good reasons for complying with it: (i) the law provides a basic guide for proper
conduct, (ii) the law provides a clearly defined set of rules, and when followed they
establish a good precedent, (iii) the law contains enforceable rules that apply to
everyone, and (iv) the law reflects careful and wide-ranging discussions.
2. Extraterritoriality. 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.

III. ETHICS AND CORPORATE BRIBERY The law is a good place to start when studying
ethical behavior. In addition, managers encounter certain externalities (byproducts of
activities) that must be solved in the public arena. Some of the key ethical issues companies
face when doing business internationally are discussed below.
A. Corruption and Bribery. Bribery consists of payments, or promises to pay cash or
something else of value, to public officials and/or other people of influence. It affects
the performance of countries and companies alike. Anecdotal information indicates
that in recent decades, questionable payments by MNEs to government officials have
been prevalent in both industrial and developing countries.
Copyright ©2013 Pearson Education, Inc. publishing as Prentice Hall
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 1. The Consequences of Corruption. High levels of corruption tend to correlate
with lower rates of economic growth as well as lower levels of per capita income.
Corruption may also erode the legitimacy of a government. Both the legal
definition of a bribe and the likelihood of paying bribes abroad vary by nationality.
[See Fig. 5.3.]
2. What’s Being Done About Corruption? Efforts to slow corruption in
international business practices can be seen at the global, regional, and national
levels. Multilateral efforts to confront bribery include the accords established by
OECD (Organization for Economic Cooperation and Development), the ICC
(International Chamber of Commerce), and the UNCAC (United Nations
Convention Against Corruption). The OECD Anti-Bribery Convention was signed
by 38 countries by mid-2009. Although many of these agreements have been
recognized, enforcement remains a significant issue. Regional initiatives like the
one in the EU are not considered very effective. The U.S. Foreign Corrupt
Practices Act (FCPA) is an example of the national approach. The FCPA outlaws
bribery by U.S. firms no matter where they do business. Although the rules are not
always clear, for example, some gift practices have been called into question.
Governments and Industries continue to step up their anticorruption response
globally.

POINT—COUNTERPOINT: Are Top Managers Responsible When Corruption is

Afoot?

POINT: The German MNE, Siemens AG had developed a culture of corruption and this culture
was imposed on lower level employees. The top managers had an approach to doing business
which can be summed up as "fix, sell, or close." With such pressure to perform, employees had
no choice other than to engage in bribery. Responsibility for the individual acts of corruption rest
with top management who were responsible for creating a culture of corruption.

COUNTERPOINT: While it is true that the corporate culture of Siemens was corrupt, it is no
excuse for individuals to act unethically. The large, diversified MNE operated in a highly
decentralized fashion, with a number of independent operating entities. It was impossible for top
managers to be aware of the actions of individual company employees all around the globe.
Individual employees who were engaging in unethical behavior were aware of their behavior and
are ultimately the ones responsible for their actions.

IV. ETHICS AND THE ENVIRONMENT

Environmental damage can occur from the extraction of resources, some of which are
renewable and some of which are not, and the contamination of the environment via
production processes and the use of pollution-causing products.
A. What Is “Sustainability”?
Sustainability means meeting the needs of the present without compromising the
ability of future generations to meet their own needs, while taking into account what is
best for society and for the environment.
B. Global Warming and the Kyoto Protocol
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 The issue of global warming, the Kyoto Protocol, and the potential impact of the
Protocol on corporate behavior all serve to illustrate the challenges associated with
responsible societal behavior. Global warming results from the release of greenhouse
gases that trap heat in the atmosphere, rather than allowing the heat to escape.
1. The Kyoto Protocol. At the heart of the international treaty known as the Kyoto
Protocol, signed in 1997, is the theory that if global warming is not controlled and
reduced, the rising temperature of the earth will result in catastrophic events. The
Protocol, which is an extension of the UN Framework Convention on Climate
Change, obligates signatory countries to reduce their greenhouse gas emissions to
5.2 percent below 1990 levels between 2008 and 2012. While the European Union
has made the decision to set a target of an 8 percent reduction below 1990 emission
levels (and countries such as Germany have established even higher goals), the
United States, China, and India are not parties to the agreement, even though they
generate a significant portion of the world’s greenhouse gases. The U.S. has taken
the position to work on a future framework that will replace the existing Kyoto
Protocol. Many U.S. companies are voluntarily implementing emissions-reduction
programs. 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.

LOOKING TO THE FUTURE

How to See the Trees in the Rain Forest

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. Rain forests may provide a key to solving
the problem of global warming. Trees absorb carbon dioxide, and so given the size of the
Amazon, Brazil is important to the reduction of greenhouse gases.

V. ETHICAL DILEMMAS AND OTHER BUSINESS PRACTICES Sometimes ethical

dilemmas are industry specific, such as the pharmaceutical industry. Other times the dilemmas
are not exactly industry specific but deal with issues that cross industries, such as with labor
conditions in developing countries.
A. Ethical Dilemmas in the Pharmaceutical Industry. How can pharmaceutical
MNEs such as GlaxoSmithKline generate sufficient revenues to create new products,
their major source of competitive advantage, while being responsive to the very real
health problems of developing countries? Most research-based pharmaceutical firms
sell products at high prices so long as those products are covered by patents.
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 1. Tiered Pricing and Other Price-Related Issues. Many firms also used tiered
pricing schemes whereby consumers in industrial countries pay market prices for
products, but consumers in developing countries pay lower (subsidized) prices.
Legal generic products comply with patents while allowing for the purchase of
drugs at lower costs; unauthorized (illegal) generic drugs may or may not be
reliable.
2. Taking TRIPS for What It’s Worth. The WTO Agreement on Trade-Related
Aspects of Intellectual Property (TRIPS) provides a mechanism for poor countries
facing health crises (such as AIDS in Africa) to either produce or import generic
products.
3. R&D and the Bottom Line. Governments and private foundations enable
countries to issue bonds to generate the funds needed to purchase vaccines via the
International Finance Facility for Immunization. In addition, governments are
pressured to reduce tariffs and other barriers that disadvantage their own people.
B. 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. [See Fig. 5.4.]
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 the retail, clothing, footwear, and agricultural industries, where so
many MNEs outsource production to independent firms in foreign countries 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.
1. The Problem of Child Labor. 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
180 million 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.
C. Corporate Codes of Ethics: How Should A Company Behave? Companies
face real pressures to act responsibly, yet they don't always act consistently. A corporate
code of ethics can aid in the consistency of behavior. The United Nations Global
Compact offers ten broad principles that MNEs can adopt.
1. Motivations for Corporate Responsibility. Firms need to act responsibly for
at least four reasons. First, unethical and/or irresponsible behavior could result in
legal headaches, especially in the areas of financial mismanagement and product
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 safety. Second, such behavior could also result in consumer action (e.g., boycotts),
even though the effectiveness of such actions is unclear. Third, unethical behavior
can lower employee morale. Fourth, the cost to firms of bad publicity can be
enormous.
2. Developing a Code of Conduct. A major component of a company’s strategy
to realize ethical and socially responsible behavior across the entirety of its
organization is a corporate code of conduct. External codes provide guidelines,
recommendations, and rules that are issued by entities within society in order to
enhance corporate responsibility, but they are somewhat inconsistent across
organizations.
In creating its own code of corporate ethics a firm should: set global policies that
must be complied with wherever the company operates; communicate the code to
all employees within the organization and to all suppliers, subcontractors, and
customers; ensure that its policies are carried out in all instances; and report results
to its stakeholders. Generally, codes of conduct address such areas as employment
practices, human rights, standards of ethical conduct, and care of the environment.
In addition to the efforts made by firms themselves to ensure compliance, they may
also choose to use NGOs such as the Fair Labor Association or global audit firms,
such as KPMG, to help monitor their practices.

CLOSING CASE: Anglo American PLC in South Africa: What Do You Do When
Costs Reach Epidemic Proportions?

Anglo American PLC is a mining conglomerate that operates in 45 countries. 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 105,000 permanent employees, 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 2002 that it would be providing
free antiretroviral therapy to HIV-infected employees at its South African operation. Previously
the company had developed AIDS prevention education and awareness training to employees
because the disease was so widespread among its workforce and was having financial
consequence for the company. Anglo American now spends an estimated $4,000 per year per
employee on the drug treatments, and estimates that it will cost the company $1 billion or more
over 10 years. There are many challenges facing the company such as getting the drug
manufacturer to provide lower costs, employee compliance with the program, and criticism from
various constituencies that the company isn't doing enough to help solve the problem. Given
these problems, some have suggested that the company would be better off stopping the program
rather than pouring more resources into it.

Copyright ©2013 Pearson Education, Inc. publishing as Prentice Hall

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Questions
1. Who are the various stakeholders that Anglo American needs to consider as it adopts an
effective HIV/AIDs strategy?
The National Union of Mineworkers still criticizes the company for their working conditions
and lack of support for correcting the underlying causes of HIV/AIDs. Anglo American
does not believe that the South African government and politicians are doing their part in
combating the overall problem. The pharmaceutical companies themselves are not without
controversy. Issues over pricing and intellectual property right protection are common
concerns. (LO: 3, Learning Outcome: To discuss the importance of social responsibility
when operating internationally, especially in the area of sustainability, AACSB: Analytical
Skills)

2. What are the pros and cons of Anglo American’s adoption of an aggressive strategy in
combating HIV/AIDS among its South African workforce? What recommendations would
you give the company concerning its HIV/AIDS policy?
The pros of adopting an aggressive strategy to combat HIV/AIDS in their workforce include
the high costs associated with the disease as it relates to worker productivity, turnover, and
other costs. It is cost-effective to have a program in place that increases the wellness of the
workforce. There is also an ethical argument that can be made for the program. Anglo
American has the resources to combat the problem and the disease has a devastating effect on
the lives of its workers and their families. Furthermore, Anglo American has been a leader in
the South African business community and their actions may influence other responsible
companies to help combat an illness that has the potential to ruin the country’s economy. On
the other side, the cons of the program include the negative reactions the company received
from the union and the government, the difficulties of successfully implementing the program,
and the unforeseen consequences of additional unsafe sexual practices. In addition, the
treatment program is not inexpensive. Student opinions will vary on recommendations;
however, it seems reasonable to argue that given the ethical and cost factors, the ART program
should continue in place. Better implementation of the program is needed. (LO: 5, Learning
Outcome: To examine corporate responses to globalization in the form of codes of conduct,
among other things, AACSB: Dynamics of the Global Economy)

3. Because such a large percentage of its workforce consists of migrant workers who are more
likely to acquire and spread HIV/AIDS, should Anglo American adopt the policy of not
hiring migrant workers? Should the South African government close the doors to migrant
workers?
Migrant workers pose a special problem, not only in terms of infection rates, but also because
of the widespread prevalence of the disease. This situation poses a moral dilemma for
discussion. The migrant workers need employment, perhaps even more than the non-migrant
workers. Discriminating against them will not solve the problems faced by Anglo American or
South Africa. The problem may be lessened a bit; however, a better solution is to seek the
cooperation of the South African government in increasing its budget for HIV/AIDS education,
prevention, and wellness. (LO: 4, Learning Outcome: To discuss some key issues in the social
activities and consequences of globalized business, AACSB: Dynamics of the Global
Economy)
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4. What role do the pharmaceutical companies play in responding to the HIV/AIDS epidemic
in South Africa? What policies or courses of action would you recommend to a company
that produces 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
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. (LO: 5, Learning Outcome: To examine corporate responses to
globalization in the form of codes of conduct, among other things, AACSB: Ethical
Understanding and Reasoning Ability)

ADDITIONAL EXERCISES: Global and Societal Challenges

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 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. (LO: 4, Learning
Outcome: To discuss some key issues in social activities and consequences of globalized
business, AACSB: Analytical Skills)

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. (LO: 4, Learning Outcome: To discuss some key
issues in social activities and consequences of globalized business, AACSB: Dynamics of
the Global Economy)

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
Copyright ©2013 Pearson Education, Inc. publishing as Prentice Hall
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the students to debate this phenomenon from an ethical perspective. Do they believe that
China is a special case, and if so, why? (LO: 2, Learning Outcome: To demonstrate the
cultural and legal foundations of ethical behavior, AACSB: Ethical Understanding and
Reasoning Ability)

Exercise 5.4. Multinational enterprises are increasingly subject to demands from both
national and local governments to implement comprehensive social programs, engage in
improved labor relations, and meet increasingly rigorous environmental regulations. Ask
the students to explore the strategic options they feel are available to a firm such as
Newmont Mining in Indonesia that has extensive property and capital assets at risk. Suggest
they consider both proactive and reactive alternatives. (LO: 3, Learning Outcome: To
discuss the importance of social responsibility when operating internationally, especially in
the area of sustainability, AACSB: Dynamics of the Global Environment)

Copyright ©2013 Pearson Education, Inc. publishing as Prentice Hall

10
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