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Title: International Business

International Business
  • Chapter Five
  • Globalization and Society

Chapter Objectives
  • To identify problems in evaluating the activities
    of MNEs
  • To evaluate the major economic impacts of MNEs on
    home and host countries
  • To establish the foundations for responsible
  • To discuss some key issues of globalization and
    societyethics and bribery, the environ-ment,
    pharmaceuticals, and labor issues
  • To examine corporate responses to globalization

  • 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
    many troubles their critics.
  • The global orientation of MNEs causes many to
    believe that they are insensitive to national
    (local) concerns.

Fig. 5.1 Home and Host Country Influences on
Companies Use of FDI
Trade-offs among Constituencies
  • Stakeholders, i.e., the collection of
    constituencies that an organization must satisfy
    to survive in the long run, include
  • shareholders
  • employees
  • customers
  • suppliers
  • society
  • In the long run, the aims of all stakeholders
  • be adequately met or none will be attained.
  • continued

  • Advocates of corporate social responsibility
    (CSR) believe that capitalism fails to serve the
    public interest and that managers must be
    pressured to act responsibly.
  • Others argue that
  • managers are best equipped to serve the interests
    of their shareholders and
  • governments should deal with social issues and
    externalities whenever private sector benefits
    and costs differ significantly from public sector
    benefits and costs

Fig. 5.2 Resources and Possible Contributions of
Balance-of-Payments Effects of FDI
  • A country must compensate for a long-term trade
    deficit by
  • -reducing its capital reserves
  • -attracting an influx of capital via the receipt
    of foreign direct
  • -the purchase of public or private debt by
    foreign governments or individuals
  • -the receipt of unilateral transfers
    (e.g., foreign aid)
  • Ultimately, one countrys deficit is another
    countrys surplus.

Calculating the Balance-of-Payments Effects
  • B (m m1) (x x1) (c c1)
  • where B balance-of-payments effect
  • m import displacement
  • m1 import stimulus
  • x export stimulus
  • x1 export reduction
  • c capital inflow for other than import and
    export payments
  • c1 capital outflow for other than import and
    export payments

Host Country BOP Effects
  • The net import effect (m m1) is positive if the
    FDI results in the substitution of local
    production for imported products and is negative
    if it results in an increase in imports.
  • The marginal propensity to import represents
    the fraction of an increase in imports that are
    due to an increase in income.
  • The net export effect (x x1) is positive 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.
  • continued

  • Net capital flows (c c1) are difficult to
    assess because of the time lag between
  • (i) the outward flow of investment funds and
  • (ii) 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.

Selected Economic Growth and Employment Effects
of FDI
  • Home Country LossesFDI outflows may create jobs
    abroad at the expense of jobs in the home
  • Host Country GainsFDI inflows may result in the
    transfer of capital, technology, and/or
    managerial expertise, and well as the creation of
    new jobs.
  • Host Country LossesFDI inflows may
  • cream off premium resources
  • drive up local labor costs
  • displace domestic investment
  • disadvantage local competitors
  • destroy local entrepreneurship

Cultural Foundations of Ethical Corporate Behavior
  • 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.
  • 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
  • While many actions elicit universal agreement on
    what is clearly right and
    wrong, others are less clear.

The Effects of NGOs and Multilateral Agreements
on Corporate Behavior
  • Non-governmental organizations (NGOs) actively
    monitor and publicize corporate practices in
    order to
  • educate managers about the environmental and
    economic consequences of corporate operations and
  • increase shareholder value
  • Multilateral agreements aid in ethical
    decision-making by dealing with
  • employment practices
  • consumer protection
  • environmental protection
  • political activity
  • human rights in the workplace.
  • No set of workable corporate guidelines is
    universally accepted
    and observed.

Legal Foundations of Ethical Corporate 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 and legal principles.
  • Civil law countries tend to have a large body
    of law dealing with business operations common
    law countries rely more on precedent than
    statutory regulations.

The Insufficiency of the Legal Argument
  • Everything that is legal is not necessarily
  • The law is slow to develop in emerging areas of
  • The law is often based on moral concepts that
    cannot be separated from legal concepts.
  • The law may need to be tested by the courts.
  • The law is inefficient in terms of achieving
    ethical behavior at a minimum cost.

Other Legal Issues
  • Extraterritoriality the extension by a
    govern-ment of the application of its laws to the
    foreign operations of its domestic firms
  • In cases of health and safety standards,
    differences may not be insurmountable, but in
    other instances, differences in home- and
    host-country laws may pose challenging
  • Externalities the by-products of activities
    that affect the well-being of people and/or the
  • Although externalities are not reflected in
    standard cost accounting practices, they must be
    included in the determination of stakeholder

Ethics 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.
  • The U.S. Foreign Corrupt Practices Act of 1997
  • outlaws the payment of bribes by U.S. firms to
    foreign officials, political parties, party
    officials, or party candidates
  • applies to firms registered in the U.S. and to
    any foreign firms that are quoted on any U.S.
    stock exchange
  • was extended in 1998 to include bribery by
    foreign firms operating in U.S. territory
  • Bribery affects the performance of countries and
    companies alike.

Multilateral Efforts to Confront Bribery
  • Transparency Internationals Business Principles
    for Confronting Bribery (2003)
  • The OECDs Convention on Combating Bribery of
    Foreign Public Officials in International
    Business Transactions (1997)
  • The revised OECD Guidelines for Multinationals
  • The ICCs Rules of Combat to Combat Extortion and
    Bribery (1999)
  • The UN Convention Against Corruption (2003)

Fig. 5.4 Likelihood of Paying Bribes Abroad by
Nationality of Companies
International CorruptionA Survey of Business
  • 2004 CPI Score
  • -relates to perceptions of the degree of
    corruption as seen by businesspeople, risk
    analysts, journalists, and the general public
  • -ranges between 10 (highly clean) and 0 (highly
  • 1. Finland 9.7 26. Botswana 6.0
  • 2. New Zealand 9.6 38. South Africa
  • 5. Singapore 9.3 46. Brazil 4.0
  • 11. United Kingdom 8.6 54. El Salvador
  • 12. Canada 8.5 57. China 3.5
  • 15. Germany 8.2 71. India 2.7
  • 17. United States 7.6 79. Russia 2.3
  • 18. Chile 7.5 84. Bolivia 2.0
  • 21. Japan 7.1 90. Nigeria 1.0
  • Source Transparency International

Ethical Behavior and Environmental Issues
  • Sustainability 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 people and for the
  • The Kyoto Protocol signed in 1997, the Protocol
    is an extension of the UN Framework Convention on
    Climate Change that obligates signatory countries
    to reduce their greenhouse gas emissions to 5.2
    percent below 1990 levels between 2008 and 2012
  • Global warming results from the release of
    greenhouse gases that trap heat in the
    atmosphere, rather than allowing the heat to

Ethical Dilemmas and Pharmaceutical Sales
  • Research-based pharmaceutical firms sell products
    at high prices so long as their products are
    covered by patents.
  • Legal generic products comply with patents while
    allowing for the purchase of drugs at lower
    costs unauthorized (illegal) generic products
    may or may not be reliable.
  • The WTO Agreement on Trade-Related Aspects of
    Intel-lectual Property (TRIPs) provides a
    mechanism for poor countries facing health crises
    to either produce or import generic products.
  • Governments and private foundations enable
    countries to issue bonds to generate funds needed
    to purchase vaccines via the International
    Finance Facility for Immunization.
  • Tiered pricing consumers in industrial
    countries pay market prices for products,
    while consumers in developing countries pay lower
    (subsidized) prices.

Ethical Dimensions of Labor Conditions
  • International labor issues that firms,
    governments, trade unions, and NGOs must deal
    with include
  • - fair wages
  • - child labor
  • - working conditions
  • - working hours
  • - freedom of association
  • 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.

Child Labor Issues
  • According to the International Labor
  • more than 250 million children between 5 and 17
    are working worldwide
  • nearly three-quarters of those children who work
    are very young 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, other firms
    work to establish responsible operating policies
    in those locales.

Fig. 5.6 Pressures for Ethical Behavior of
Companies on Issues Related to Workers in the
Global Supply Chain
Ethical Trading Initiative Base CodeETI is a
British-based organization that focuses on the
ethical employment practices of MNEs. Members
include representativesfrom companies and trade
union organizations.
  • 1. Employment is freely chosen.
  • 2. Freedom of association and the right to
    collective bargaining are respected.
  • 3. Working conditions are safe and hygienic.
  • 4. Child labor shall not be used.
  • 5. Living wages are paid.
  • 6. Working hours are not excessive.
  • 7. No discrimination is practiced.
  • 8. Regular employment is provided.
  • 9. No harsh or inhuman treatment is allowed.
  • Source Ethical Trading Initiative, Base Code

Corporate Codes of Ethics
  • In creating its code of corporate conduct a firm
  • set global policies that must be complied with
    wherever the firm 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
  • report results to its stakeholders

  • While FDI is a major source of capital and
    expertise, it is also a center of controversy
    regarding its costs and benefits to home and host
    countries and other stakeholders.
  • Major challenges facing MNEs include the
    globalization of the supply chain, human rights,
    employment practices, environmental protection,
    and consistent standards of ethical conduct.
  • continued

  • Whereas 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 maximize stakeholder value.
  • Management is charged with maximizing the
    long-term value of the assets of the
    share-holders, but it is the role of government
    to deal with the externalities associated with
    corporate behavior.