Chapter Six

1. Chapter Six Stakeholders: Their Concerns and Actions

2. Chapter Objectives • To comprehend the concept of stakeholders and their importance to companies’ operations • To understand the stakeholder interests for restricting or enhancing companies’ abilities to trade internationally • To learn about the different means countries use to restrict companies’ international trade • To conceive why countries encourage, prohibit, and regulate foreign direct investment • To recognize how conflicting stakeholders improve their positions to affect companies’ international operations

3. Introduction • Stakeholders: individuals and groups that benefit from or are harmed by organizational actions • Stakeholders in business organizations include stockholders, employees, customers, suppliers, and society at large • The international company must be aware of the various interests of stakeholders and serve them unevenly at any given period • Companies are stakeholders in society and act as pressure groups to governmental and international organizations whose actions can benefit or harm them • In a sense, countries are stakeholders representing the combined interests of their national stakeholders within international forums

4. Introduction

5. Trade Restrictions • In general, governments influence trade to satisfy economic, social, or political objectives

6. Trade Restrictions • Every country has full employment as one of its primary economic and social objectives • A country may retaliate against another’s import restrictions by imposing import restrictions of its own • Even without retaliation, import restrictions may limit employment in related industries • Import restrictions also cause consumers to pay higher prices and to have less choice, which may also reduce employment because they buy less • Because the trade account is a major component of the balance of payments for most countries, governments restrict trade to bring imports and exports into balance • Trade restrictions differ from other means of balance-of-payments adjustments (deflation of the economy or currency devaluation) because of their greater selectivity

7. Trade Restrictions • Certain economic theories promote import restrictions to gain economic growth by developing new industries with growth potential and by diversifying the economy through a broader industrial base • Import substitution policy: entices companies to initiate production within the protected economy • Infant industry argument: government should guarantee an emerging industry a large share of its domestic market until the industry becomes sufficient enough to compete against imports • Most emerging economies depend on commodities such as agricultural products and raw materials • Many emerging economies want to broaden their industrial bases so that they are more dependent on manufactured products and less dependent on commodities • Terms of trade: the quantity of imports that a given quantity of exports can buy • The terms of trade have been deteriorating for many emerging economies

8. Trade Restrictions • Some companies and industries argue for the same access to foreign markets that their foreign competitors have to their own markets • Arguments against the fairness doctrine include: • Countries gain advantages from freer trade and thus restrictions may deny their own consumers lower prices • Implementation of restrictions based on fairness requires government negotiate and enforce separate agreements for each of the products and services they might import and with each country that might export them • Restriction of imports from countries with lax environmental and labor standards may make those countries poorer

9. Trade Restrictions • Much governmental trade protection is based not on economics, but rather on political or cultural imperatives • Governments sometimes restrict exports, even to friendly countries, so that strategic goods will not fall into the hands of potential enemies • To protect their common identity, countries sometimes limit the availability of foreign products and services that might undermine this identity • There is a near consensus that governments should prohibit sales of products that are hazardous to people’s health or the environment • Governments use trade restrictions to coerce other governments to follow certain actions • Sanctions • They have the most impact when large or multiple countries impose them because they more deeply affect a sanctioned country • Sanctions seldom work successfully • Companies from countries imposing sanctions can lose business

10. Forms of Trade Restrictions • Trade restrictions are of four types: tariffs, quotas, bureaucratic practices, and subsidies • Tariff: a tax on goods moving internationally; also known as duty • Ad valorem tariff: tariff on the percentage of the value of the goods moving internationally • Specific tariff: per-unit basis • Compound tariff: combination of ad valorem and specific tariffs • Optimum tariff: revenues shift from the exporting to the importing country through income loss in the exporting country and tax collection gain in the importing country

11. Forms of Trade Restrictions • Import tariffs are protectionist because governments assess the tax only on foreign-made products or services • Export tariffs are rare because governments fear the tax will raise export prices and limit their companies’ ability to sell abroad • Tariffs also serve as a source of governmental revenue • Quotas: quantitative limits on the maximum amount of product a country will trade in a given year • Governments place quotas most commonly on imports • Governments usually use export quotas to increase foreign prices or decrease domestic prices • Embargo: a specific type of quota that prohibits all trade

12. Forms of Trade Restrictions • Governments establish bureaucratic practices ostensibly for reasons other than protection, however the practices often restrict imports from foreign countries • Testing standards: to protect the safety or health of residents • Governmental permission • Governmental regulations • Standards for licensing • Government subsidies may be direct or indirect • Governments may reduce its imports by enabling its domestic companies to survive competition • Governments may increase its exports by making its companies competitive in foreign markets

13. Influence on Foreign Direct Investment • Given the costs and benefits of receiving FDI, most countries allow FDI entry and even promote it • Emerging economies are depending more on MNEs (multinational enterprises) to bring resources they need from abroad when they make foreign direct investments • Countries can offer a variety of incentives to companies so they will invest there • Tax postponement • Generally, companies prefer to establish investments in highly developed countries because of the large markets and a high degree of stability • Countries largely want FDI because of the potential positive effects on economic objectives of growth, employment, and balance of payments • Governments worry, however, that foreign investors merely displace what domestic companies would have otherwise done and are concerned that the long-term effects of FDI will be negative

14. Influence on Foreign Direct Investment • In countries in which investors are headquartered, stakeholders have raised concerns about the possible loss of domestic jobs when companies invest abroad and the possible loss of future domestic competitiveness when companies transfer technologies abroad that might make foreign production more competitive in the future • Closely related to the question of job loss is the question of whether foreign investors’ outsourcing of production puts downward pressure on wages in their home countries • The sheer size of many foreign investors concerns stakeholders in the countries in which they do business • Extraterritoriality: the extension of a country’s laws beyond its borders • Host-country stakeholders worry that MNEs will meddle in local politics so that they get regulations favorable to their interests • Key industries: those industries that might affect a very large segment of the economy or population by virtue of their size or influence

15. Improving Stakeholder Positions • One method of improving stakeholder positions is to build allies: • The most likely allies are other stakeholders whose positions are affected the same way • Enlist the support of other groups that have different but complimentary stakes in the outcome • Companies may lobby governmental decision makers, particularly those within their home countries • Companies may survey stakeholders to determine opinions that might lead to pressure on managerial decisions • Companies may foster local participation in their operations to reduce the image of foreignness and to develop local proponents whose personal objectives may be fulfilled by their continued success