Managing Interdependence: Social Responsibility and Ethics

1. Prentice Hall 2003 Chapter 2 1 Managing Interdependence: Social Responsibility and Ethics

2. Prentice Hall 2003 Chapter 2 2 Chapter 2 - Overview The Social Responsibility of MNCs Ethics in Global Management Managing Interdependence

3. Prentice Hall 2003 Chapter 2 3

4. Prentice Hall 2003 Chapter 2 4 SA 8000’s Proposed Global Standards 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 sufficient to meet worker’s basic needs

5. Prentice Hall 2003 Chapter 2 5 What is international business ethics? The term international business ethics refers to the business conduct or morals of MNCs in their relationships with individuals and entities.

6. Prentice Hall 2003 Chapter 2 6 The 2001 Corruption Perceptions Index( top 24 countries from Exhibit 2-4)

7. Prentice Hall 2003 Chapter 2 7 The 2001 Corruption Perceptions Index (contd.)

8. Prentice Hall 2003 Chapter 2 8 Limits of Ethical Standards for International Activities “The laws of economically developed countries generally define the lowest common denominator of acceptable behavior for operations in those domestic markets. In an underdeveloped country or a developing country, it would be the actual degree of enforcement of the law that would, in practice, determine the lower limits of permissible behavior.” Laczniak and Naor

9. Prentice Hall 2003 Chapter 2 9 Questionable Payments Questionable payments 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 countries, whether the payments in question are political payments, extortion, bribes, sales commissions, or “grease money” – payments to expedite routine transactions.

10. Prentice Hall 2003 Chapter 2 10 The Foreign Corrupt Practices Act The Foreign Corrupt Practices Act (FCPA), enacted in 1977, prohibits U.S. companies from making illegal payments or other gifts or political contributions to foreign government officials for the purposes of influencing them in business transactions.

11. Prentice Hall 2003 Chapter 2 11 Three Tests of Ethical Corporate Actions Is it legal? Does it work (in the long run)? Can it be talked about?

12. Prentice Hall 2003 Chapter 2 12 Ethical Behavior and Social Responsibility Guidelines Developed by MNCs Develop worldwide codes of ethics Consider ethical issues in strategy development Given major, unsolvable, ethical problems, consider withdrawal from the problem market Develop periodic “ethical impact” statements

13. Prentice Hall 2003 Chapter 2 13 Making 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? Here is a suggested sequence: Consult the laws of both the home and the host countries Consult the International Codes of Conduct for MNEs (as shown in text Exhibit 2-2) Consult the company’s code of ethics Consult your superiors Use your own moral code of ethics Follow your own conscience

14. Prentice Hall 2003 Chapter 2 14 Managing Subsidiary-Host Country Interdependence When managing interdependence, international managers must go beyond general issues of social responsibility and deal with the specific concerns of the MNC subsidiary-host country relationship. “Interdependence rather than independence, and cooperation rather than confrontation are at the heart of that accommodation … the journey from independence to interdependence managed badly leads to dependence, and that is an unacceptable destination.”

15. Prentice Hall 2003 Chapter 2 15 Criticisms of MNC Subsidiary Activities MNCs raise their needed capital locally, contributing to a rise in interest rates in host countries. 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.

16. Prentice Hall 2003 Chapter 2 16 Criticisms of MNC Subsidiary Activities (contd.) 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. MNCs do not adapt their technology to the conditions that exist in host countries. MNCs concentrate their R&D activities at home, restricting the transfer of modern technology and know-how to host countries.

17. Prentice Hall 2003 Chapter 2 17 Criticisms of MNC Subsidiary Activities (contd.) MNCs give rise to the demand for luxury goods in host countries at the expense of essential consumer goods. MNCs start their foreign operations by purchasing existing firms rather than developing new productive facilities in host countries. MNCs dominate major industrial sectors, thus contributing to inflation by stimulating demand for scarce resources and earning excessively high profits and fees. 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.

18. Prentice Hall 2003 Chapter 2 18 MNC Benefits and Costs to Host Countries(Exhibit 2-6)Capital Market Effects Benefits Broader access to outside capital Foreign-exchange earnings Import substitution effects allow governments to save foreign exchange for priority projects Risk sharing Costs Increased competition for local scarce capital Increased interest rates as supply of local capital decreases Capital service effects of balance of payments

19. Prentice Hall 2003 Chapter 2 19 MNC Benefits and Costs to Host Countries(contd.)Technology and Production Effects Benefits Access to new technology and R&D developments Infrastructure development and support Export diversification Costs Technology is not always appropriate Plants are often for assembly and can be dismantled Government infrastructure investment is higher than expected benefits

20. Prentice Hall 2003 Chapter 2 20 MNC Benefits and Costs to Host Countries(contd.)Employment Effects Benefits Direct creation of new jobs Opportunities for indigenous management development Income multiplier effects on local community business Costs Limited skill development and creation Competition for scarce skills Low percentage of managerial jobs for local people Employment instability because of ability to move production operations freely to other countries

21. Prentice Hall 2003 Chapter 2 21 Recommendations for MNCs Operating in Developing Countries(Suggested by De George) Do no international harm. This includes respect for the integrity of the ecosystem and consumer safety. Produce more good than harm for the host country. Contribute by their activity to the host country’s development. Respect the human rights of their employees. To the extent that local culture does not violate ethical norms, MNCs should respect the local culture and work with and not against it. Pay their fair share of taxes. Cooperate with the local government in developing and enforcing just background (infrastructure) institutions (i.e. laws, governmental regulations, unions, consumer groups) which serve as a means of social control.