Chapter 5: gLOBALIZATION AND SOCIETY

5.1 Evaluating the Impact of FDI

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.

FDI has come to be seen as a major contributor to economic growth and development by bringing capital, technology, management expertise, jobs, and wealth to host countries However, FDI is not without controversy. Over time the structure of FDI has shifted toward services and away from many extractive and other industries. Many countries that opened their markets have experienced economic and social disruptions as MNE investments have constrained or eliminated domestic competitors. At the same time many firms made large foreign investments that have seriously underperformed. As MNEs continue to allocate resources across a variety of countries in their quests to optimize performance, governments will, in turn, enact policies that reflect their own interpretations of the relative benefits and costs of FDI. Countries react differently to FDI. Some countries view FDI with suspicion, some oppose it, and others encourage it. The reasons for these different viewpoints can be traced to various factors.

5.2 Reasons for FDI

To get a better understanding of the relationship between MNEs and governments, three areas are of particular interest: stakeholder trade-offs, cause-and-effect relationships, and individual and aggregate effects.

5.2.1 Stakeholder Trade-offs To survive and prosper, companies must satisfy a variety of stakeholders, i.e., shareholders, employees, customers, suppliers, and society. Depending upon the objectives of different constituencies, FDI can result in win-win, win-lose, or lose-lose (positive, neutral, negative) outcomes. At any given time, it is necessary to give the various stakeholders unequal attention. The management of stakeholder relationships requires that the MNE make necessary trade-offs. 5.2.2 The Question of Cause-and-Effect RelationshipsJust because two factors (such an in increase in both FDI and unemployment) move in similar directions, it does not necessarily mean that they are causally related and interdependent. Inequitable income distribution, political corruption, environmental debasement, and social deprivation are just some of the many intervening variables that can distort the analysis of cause and effect.

5.2.3 Individual and Aggregate EffectsEvaluating MNEs and their activities on an individual basis can be both time-consuming and costly. On the other hand, applying the same policies and control mechanisms to one and all is a far from perfect approach, especially if policies are based on exceptions, and not the general rule. 5.3 The Economic Impact of the Mne

The investments and operations of MNEs may affect national balance-of-payments, economic growth, and employment objectives in ways that are positive or negative for both home and host countries.5.3.1 Balance-of-Payments EffectsAlthough foreign direct investment involves both capital and earnings inflows and outflows, many people fear (irrationally) that the net balance-of-payments effects may be negative. Effect of Individual FDI: The effect on the host country of a single foreign direct investment may be positive or negative. When FDI results in import substitution, i.e., when products that were formerly imported by a country are subsequently produced within that country, its foreign exchange reserves should increase. Generally, FDI is initially favorable to the host country and unfavorable to the home country, but this effect may reverse over time if aggregate repatriated profits exceed the value of the initial investment. Thus, governments must learn to maximize the benefits while minimizing the long-term adverse effects of FDI flows.

The formula for calculating the balance-of-payments effects is: 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 Calculating Net Import Effect: Although the equation is straightforward, determining the value of each variable I difficult because the data used must be estimated and are subject to assumptions. The net import effect (m m1) is positive for the host country if the FDI results in the substitution of local production for imported products and is negative if it results in an increase in imports to supply the new productive capacity. (The marginal propensity to import reflects the fraction of a change in imports due to a change in income, i.e., the portion of increased income spent on imports.)

Calculating the Net Export Effect: The net export effect (x x1) is particularly controversial because underlying assumptions are widely debated. That said, the effect is positive for the host country 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.)

Calculating the Net capital flows: The Net capital flows (c c1) are difficult to assess because of the time lag between an outward flow of investment funds and 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. Finally, indirect effects such as those derived from the transfer of technology and managerial skills are difficult to measure but may be critical to the development of the economic efficiency of the host country.

5.3.2 Growth and Employment Effects

In contrast to the balance-of-payments effects, the effects of FDI on economic growth and employment should not be a zero-sum game because MNEs may use resources that were either underemployed or unemployed. The argument that both home and host countries can gain from FDI rests on two assumptions: (i) resources are not necessarily fully employed and (ii) capital and technology cannot be easily transferred from one industry to another.

Home-Country Losses: As manufacturers seek lower-cost foreign production sites, home countries claim that FDI outflows create jobs abroad at the expense of jobs in the home country.

Host-Country Gains: Host countries gain through the transfer of capital and technology; through the import of technology and managerial ability, new jobs may also be created.

Host-Country Losses: Critics argue that FDI inflows often displace domestic investment and drive up local labor costs. They claim that MNEs have access to lower-cost funds than local competitors do and that MNEs can spend more on promotion activities. In addition, while it is true that MNEs often source inputs locally, critics claim that they also destroy local entrepreneurship. Further, as MNEs gain valuable knowledge in their foreign operations that can be shared across their entire organizations, critics fear that local firms subsequently suffer a competitive disadvantage. Pro-NME analysts claim that the presence of MNEs may actually increase the number of local companies operating in host-country markets by serving as role models for local talent to emulate.

5.4 The Foundations of Ethical Behavior

Whether they engage in trade, licensing, or foreign direct investment, MNEs must act responsibly. However, because ethical behavior is rooted in both cultural and legal traditions that vary from one country to another, dilemmas often arise.

5.4.1 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.

5.4.1.1 The Cultural Foundations for Ethical Behavior

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 individuals values may differ from his/her employers 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 everyone should follow; thus, nonintervention in local violations of global standards is clearly unethical. 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.

5.4.1.2 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. 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 the 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.

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.

5.5 Ethics And Corporate BriberyThe 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.

5.5.1 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.

5.5.2 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 brides abroad vary by nationality.

5.5.3Whats Being Done About Corruption?

The U.S. Foreign Corrupt Practices Act 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 United States and to any foreign firms that are quoted on any U.S. stock exchange; and was extended to include bribery by foreign firms operating in U.S. territory in 1998. (While the law seems to be a useful deterrent, an apparent inconsistency permits payments to foreign officials to expedite otherwise legitimate transactions, but not to other officials.) Federal government guidelines for establishing an effective antibribery compliance program involve setting high standards, communicating those standards to relevant employees, educating employees regarding their expected behavior, and monitoring compliance.

Multilateral efforts to confront bribery are numerous. They include: Transparency Internationals Business Principles for Countering Bribery (2003); the OECD Convention on Combating Bribery of Foreign Public Officials in International Business Transactions (1997); the antibribery provisions of the revised OECD Guidelines for Multinationals; and the International Chamber of Commerce (ICC) Rules of Combat to Combat Extortion and Bribery (1999).

In addition, Transparency International assists citizens in setting up national chapters to fight local corruption. It also regularly compiles an international Corruption Perceptions Index (CPI) based on surveys of business people, risk analysts, journalists, and the general public. Further, the Partnering Against Corruption Initiative brought together nearly fifty construction- and natural resource-based multinational enterprises at the 2005 World Economic Forum to sign a zero-tolerance pact against corruption.

5.6 Ethical Behaviour And Environmental Issues

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. 5.6.1 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. 5.6.2 Global Warming and the Kyoto Protocol

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.

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 worlds greenhouse gases.

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.

5.7 Ethical Dilemmas And Business Practices

Sometimes ethical 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.

5.7.1 Ethical Dilemmas and the Pharmaceutical IndustryHow 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.

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.

Taking TRIPS for What Its 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.

R&D and the Bottom Line. Governments and private foundations enable countries to issues 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. 5.7.2 Ethical Dimensions of Labour ConditionsA 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. 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.

The use of child labor is a particularly sensitive issue. According to the UNs 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.

5.8 How a company should behave?

A corporate code of ethics can aid in the consistency of behavior.

Motivations for Corporate ResponsibilityFirms 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 safety. Second, such behavior could also result in consumer action (eg, 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.

Developing a Code of ConductA major component of a companys 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