Business Ethics and International Business

QUESTION :
Business and Ethical practices/Issues in International Business and the role of Multinational enterprises (MNEs) Introduction to Business and Ethics

The ethical-related issues have represented the foundation of different religions and life styles. Ethics can be found in all aspects of human activity as the individuals have been preoccupied with the quality of their behavior towards the people around. Even if they do not purposefully intend to improve their relations with the others, people always evaluate their behavior from the point of view of their correctness. Nowadays, consumers and pressure groups appear to be increasingly demanding firms to seek out more ethical and ecologically sound ways of doing business. The media also constantly seems to be keeping the spotlight on corporate abuses and malpractices. Even firms themselves appear to be increasingly recognizing that being ethical (or at the very least being seen to be ethical) may actually be good for business.

Business Ethics

Business ethics is the study of business situations, activities and decisions where issues of right and wrong are addressed (Stanwick and Stanwick, 2009, p. 5). Business ethics covers the whole spectrum of interactions between firms, individuals, society and the state. Some specialists consider that business ethics begins where the law ends. Business ethics is primarily concerned with those issues not covered by the law, or where there is no definite consensus on whether something is right or wrong. From a managerial perspective, the ethical problems manifested in the arena of international business represent real ethical dilemmas for the contemporary managers as they generate, at least on a short term, a conflict between the organizational economic performance (evaluated by measuring the turnover, the costs and the profits) and its social performance (evaluated by measuring the ethical responsibilities to the people outside or inside the organization) (Hosmer, 1987, p.3).

Competition in international business is such that ethics can appear to be a handicap, if not downright irrelevant. Many business people consider that business has only two choices: to behave unethically or fail, and they argue that the survival of the company should not be jeopardized in order to fulfill an ethical obligation when their competitors are not behaving ethically. International business ethics is a particularly complex issue as ethical standards are different depending on where you are. Corporate governance, bribery, corruption, working conditions and targeted marketing are all issues that require organizations to establish an ethical standpoint from which they can work on. There is an increasing emphasis on the corporate responsibility of large organizations from developed nations and the way they operate in third world countries. Many nations now impose their ethical standards on developing countries even though they themselves have been guilty of arguably unethical practices in the past. For example, the poor working conditions suffered in the third world were commonplace during the industrialization of many western economies.

Introduction to international Business

In the world economy today, we see a shift away from self-contained national economies with high barriers to cross-border trade and investment and a move toward a more integrated global economic system with lower barriers to trade and investment. The globalization of markets and the globalization of production has resulted to the trend towards a more integrated global economic system. The globalization of markets refers to the merging of historically distinct and separate national markets into one huge global marketplace. In many markets today, the tastes and preferences of consumers in different nations are converging upon some global norm . Examples of this trend include Coca Cola, Starbucks, Sony PlayStation, and McDonald’s hamburgers The globalization of production refers to the sourcing of goods and services from locations around the globe to take advantage of national differences in the cost and quality of factors of production (labor energy, land, and capital) . The goal for companies in this case is to lower their overall cost structure or improve the quality or functionality of their product and gain competitive advantage.

International Business Ethical Practices

As companies expand their operations across the globe, new trends and issues arise daily that could create burdens to organizations. The need for international business ethical practices within organizations has become
critical in day-to-day operations and in avoiding legal issues. With public scandals and misleading practices companies have affected the public’s views and opinions of many organizations. Implementing strategies such as codes of conduct guides multinational organization in the efforts of following ethical standards. When ethical norms are in conflict, owning different cultural practices, ethical norms guides businesses conduct in other nations and cultures.

Pointing that ethical aspect of employees’ conduct has an overall impact on the productivity of an organization. For organization to improve the ethical climate, management must communicate proper ethical awareness throughout the organization by offering training, courses codes of ethics and reward program. Also management should appoint an ethic officer and ethics committee that could supervise the implementation of ethics policies These are a few methods that an organization can employ to improve ethical behaviors.Due to increasing globalization, international business ethics has become an important issue. The number of multinational companies, which operate outside of their home country, is increasing rapidly. Many conflicts occur due to contrasting ethical values of various nations in the international community. Some ethical dilemmas arise from issues of employee rights, human rights, environmental concerns, preventing corruption and moral obligations

Employee Rights

Employment practices of some multinational companies may cause ethical dilemmas. Many times work conditions in one nation may be inferior to conditions in another country, according to Ethics in International Business, published by McGraw-Hill. Although extremely low pay, long hours, and dangerous and unhealthy work conditions may be legal in some countries, multinational companies are obliged to consider the international community’s ethical standards. There could also be economic consequences if consumers from the company’s home country object to unethical employment practices.

Human Rights

Although there is broad agreement on the existence of universal human rights, there is debate as to what exactly those rights are. A multinational company will have to weigh human rights standards of its host country with those of its home country. The international community may also have an influence over the company’s decisions. For example, many multinational companies began to divest from South Africa, due to political pressure from the international community stemming from the country’s apartheid regime, according to Ethics in International Business Environmental Concerns.

When environmental regulations in a host nation are inferior to the company’s home nation, ethical dilemmas may arise. Developed nations generally have stricter regulations on pollution, toxic waste management and use of toxic materials. The multinational company may legally be allowed to operate in the host country with more emissions of pollution and toxic material. However, there could be backlash from the international community and consumers in the home country. Environmental concerns are important because pollution of the atmosphere and oceans affect the entire international community, according to Ethics in International Business.

Preventing Corruption

In 1977 the United States passed the Foreign Corrupt Practices Act, which outlawed bribes to foreign government officials for business purposes, according to Ethics in International Business. In 1997, the Organization for Economic Cooperation and Development (OECD) created the Convention on Combating Bribery of Foreign Officials in International Business Transactions. The convention went into effect in 1997 and required OECD member nations to criminalize bribery of foreign officials. However, not every member state has translated the convention into domestic law.

Morality

Social responsibility is the idea that businesses should consider social consequences of their actions. This theory favors decisions that have positive economic and social effects, according to Ethics in International Business. Many multinational companies have taken on a moral obligation to use their influence to enhance communities in which they do business. This may be done by funding community projects, such as clean water plants or providing educational opportunities for impoverished communities.

Issues in International Business
Other ethical issues or practices related to international business that companies face include;
Prevention of forced and compulsory labor,
Avoidance of child labor,
Respect to occupational safety and remove of discrimination in employment opportunities,
Taking necessary measures to prevent environment pollution,
Adopting environmentally friendly policies,
Stimulating the design and distribution of environmentally friendly technologies and Equipments
Taking all legal and individual action against any for of corruption. Protecting and reinforcing universally accepted human rights, Not to involve in human rights violations,
Upholding the right to collective bargaining

Effects of culture in doing business

With the tremendous increase in global trade, learning more about doing international business has become especially significant. It is vital to learn about the different cultures around the world before doing business in other countries, in order to reduce the risk of failure. Becoming knowledgeable about different countries’ communication styles, body language, meeting and negotiation tactics, dress, greetings, and social events are all keys to having good business relationships with individuals in other countries.

It is important for business men and women to study the way business is conducted in other countries as there are very different norms for behavior across borders. This not only includes the way meetings and negotiations are run, but how greetings are done, whether gifts are appropriate, what types of verbal and non-verbal communication are used, as well as cultural attitudes. It is also imperative to learn how to behave in a social setting, because in many countries a personal relationship precedes that of a business relationship.

Effects of innovation in doing business

Business innovation involves a wide spectrum of original concepts, including development of new ways of doing business, new business models, business application of technology and communications, new management techniques, environmental efficiency, new forms of stakeholder participation, telecommunication, transport and finance. Innovation is the act of introducing something new or doing something in a different way. Because of growing international competition, innovation became even more vital for companies toward the end of the 20th century.

Introduction to Multinational Enterprises

A multinational corporation (MNC) or multinational enterprise (MNE) is a corporation that is registered in more than one country or that has operations in more than one country. It is a large corporation which both produces and sells goods or services in various countries. It can also be referred to as an international corporation. Multinational corporations (MNCs) are huge industrial organizations having a wide network of branches and subsidiaries spread over a number of countries. The two main characteristics of MNCs are their large size and the fact that their worldwide activities are centrally controlled by the parent companies.They play an important role in globalization. Arguably, the first multinational business organization was the Knights Templar, founded in 1120. After that came the British East India Company in 1600 and then the Dutch East India Company, founded March 20, 1602, which would become the largest company in the world for nearly 200 years. A multinational enterprise is a firm that has productive capacity in a number of countries.

The profit and income flows that they generate are part of the foreign capital flows moving between countries. As countries adopt more open outward oriented approaches to economic growth and development the role of multinational enterprises (MNE) or transnational corporations become more important. As local markets throughout the world are being deregulated and liberalized foreign firms are looking to locate part of the production process in other countries where there are cost advantages. These might be cheaper sources of labor, raw
materials and components or have preferential government regulation. Although LDCs may present high levels of risk they also present the potential for higher levels of profit. Many LDCs with growing economies and increasing incomes may provide future growth markets. Many development economists are concerned with role of the MNEs in low income countries and identify a number of problems associated with foreign direct investment. Equally other economists and politicians argue that MNE activity can drive growth and development.

The Benefits of Multinational Corporations to the Host Country A MNE investing in an area may result in a significant injection into the local economy. This may provide jobs directly or through the growth of local ancillary businesses such as banks and insurance. It might initiate a multiplier process generating more income as newly employed workers spend their wages on consumption. MNEs may provide training and education for employees thus creating a higher skilled labour force. These skills may be transferred to other areas of the host country. Often management and entrepreneurial skills learned from MNEs are an important source of human capital. MNEs will contribute tax revenue to the government and other revenues if they purchase existing national assets as in the case in Zambia through the privatization process. Creating new jobs opportunities and the domestic labour may benefit in the form of higher real wages. Improving living standards for people – The consumers benefits by way of lower prices and better quality products. Creating competition for domestic businesses and causing them to improve efficiency Bringing new technology.

Bringing new management ideas and styles

Improving the balance of international payments if exporting. Investments by MNCs will also induce more domestic investment. For example, ancillary units can be set up to ‘feed’ the main industries of the MNCs MNCs expenditures on research and development(R&D), although limited is bound to benefit the host country.

Problems of Multinational Corporations to the Host Country
MNCs may result in some local firms to close plants or cut down employees
Affecting the balance of payments if the multinational company imports huge amount of components from other countries Causing difficulties in government control because of the strong power of the business Causing environmental problems to the local country

Role of Multinational Enterprises

Arguments for MNCs(The positive role): The MNCs play an important role in the economic development of underdeveloped countries.

1. Filling Savings Gap: The first important contribution of MNCs is its role in filling the resource gap between targeted or desired investment and domestically mobilized savings. For example, to achieve a 7% growth rate of national output if the required rate of saving is 21% but if the savings that can be domestically mobilised is only 16% then there is a ‘saving gap’ of 5%. If the country can fill this gap with foreign direct investments from the MNCs, it will be in a better position to achieve its target rate of economic growth.

2. Filling Trade Gap: The second contribution relates to filling the foreign exchange or trade gap. An inflow of foreign capital can reduce or even remove the deficit in the balance of payments if the MNCs can generate a net positive flow of export earnings.

3. Filling Revenue Gap: The third important role of MNCs is filling the gap between targeted governmental tax revenues and locally raised taxes. By taxing MNC profits, governments are able to mobilize public financial resources for development projects.

4. Filling Management/Technological Gap: Fourthly, Multinationals not only provide financial resources but they also supply a “package” of needed resources including management experience, entrepreneurial abilities, and technological skills. These can be transferred to their local counterparts by means of training programs and the process of ‘learning by doing’. Moreover, MNCs bring with them the most sophisticated technological knowledge about production processes while transferring modern machinery and equipment to capital poor LDCs. Such transfers of knowledge, skills, and technology are assumed to be both desirable and productive for the recipient country.

Arguments Against MNCs(The negative role): There are several arguments against MNCs which are discuss below.

1. Although MNCs provide capital, they may lower domestic savings and investment rates by stifling competition through exclusive production agreements with the host governments. MNCs often fail to reinvest much of their profits and also they may inhibit the expansion of indigenous firms.

2. Although the initial impact of MNC investment is to improve the foreign exchange position of the recipient nation, its long-run impact may reduce foreign exchange earnings on both current and capital accounts. The current account may deteriorate as a result of substantial importation of intermediate and capital goods while the capital account may worsen because of the overseas repatriation of profits, interest, royalties, etc.

3. While MNCs do contribute to public revenue in the form of corporate taxes, their contribution is considerably less than it should be as a result of liberal tax concessions, excessive investment allowances, subsidies and tariff protection provided by the host government.

4. The management, entrepreneurial skills, technology, and overseas contacts provided by the MNCs may have little impact on developing local skills and resources. In fact, the development of these local skills may be inhibited by the MNCs by stifling the growth of indigenous entrepreneurship as a result of the MNCs dominance of local markets.

5. MNCs’ impact on development is very uneven. In many situations MNC activities reinforce dualistic economic structures and widens income inequalities. They tend to promote the interests of some few modern-sector workers only. They also divert resources away from the production of consumer goods by producing luxurious goods demanded by the local elites.

6. MNCs typically produce inappropriate products and stimulate inappropriate consumption patterns through advertising and their monopolistic market power. Production is done with capital-intensive technique which is not useful for labour surplus economies. This would aggravate the unemployment problem in the host country.

7. The behaviour pattern of MNCs reveals that they do not engage in R & D activities in underdeveloped countries. However, these LDCs have to bear the bulk of their costs.

8. MNCs often use their economic power to influence government policies in directions unfavorable to development. The host government has to provide them special economic and political concessions in the form of excessive protection, lower tax, subsidized inputs, cheap provision of factory sites. As a result, the private profits of MNCs may exceed social benefits.

9. Multinationals may damage the host countries by suppressing domestic entrepreneurship through their superior knowledge, worldwide contacts, and advertising skills. They drive out local competitors and inhibit the emergence of small-scale enterprises.

REFERENCE

http://toolkit.smallbiz.nsw.gov.au/part/21/104/483
http://www.sciedu.ca/journal/index.php/ijba/article/view/1738/856 http://www.seap.usv.ro/annals/ojs/index.php/annals/article/viewFile/335/345 http://www.referenceforbusiness.com/encyclopedia/Inc-Int/Innovation.html#ixzz2hrYcIC7i http://www.trcollege.net/study-material/24-economics/47-role-of-multinational-corporations