Globalization & Society

Chapter Five Globalization & Society

Group Members • R.A.R.G. Ranaweera (PGIA07 – 6924) • F.R.M. Riyaldeen (PGIA07 – 6932) • S.S. Samarakoon (PGIA07 – 6884) • R.M.D.P. Rajapakse (PGIA07 – 6940)

Learning Outcomes • To identify the problems in evaluating the activities of MNEs • To evaluate the major Economic impacts of MNEs on home and host countries • Establish the foundations for responsible behavior • Discuss key issues in Globalization, Society ethics and Bribery, the environment, pharmaceuticals and labor issues • Examine the corporate response to globalization

Introduction • Criticisms of globalization • Treat to sovereignty • Treat of Economic growth • Growing Income inequality

Size of the MNEs • Sales of some MNEs are larger than few countries in the world • Since the sheer size and potential influence MNEs directly some times deals with the Head of the State Ex / Microsoft spend $750 million to build its position in China by 2005 The Toyota motor company now has a 10% share of the global car market and 11% of the American market

The Governments have power despite the fact that MNEs are larger in revenue. • Most of the time GDP of a country > Value addition done by the MNE • Pressure groups push to restrict or increase MNEs’ activities at home and abroad • Situation in both host and home country influence MNEs

Objectives Strategy Home country enhancements and restrictions Host country enhancements and restrictions Means Trade FDI Other equity and non – equity arrangements

Evaluating the impact of FDI • Many countries changed from creating obstacles to FDIs  incentives to FDI to create favorable investment environment • Major contribution to growth and development, attract capital, technology, management expertise, jobs and wealth • Economic and social disruption • Constrain existing or potential domestic companies • On the other hand some MNEs failed in countries to incur huge losses

The growing wide extent or occurrence of FDI demands a clear understanding of the policies of both host and home governments with respect to enhance national interest. • This will help to understand how a country reacts to a FDI

Trade – off among constituencies • Any organization (company) have stake holders • Ex / Share holders, Customers, Employees, Society at large • MNEs have stake holders in home as well as host country • Ex / Share holders  home, Society  home & host, Customers  host, etc. • Aims and expectations of stake holders in short run have conflicts

MNE has to satisfy all key stake holders because each group is powerful enough to demise the company • Company should make the right trade – off at right time (which unevenly satisfy the stake holders at given time) to keep the pressure groups at equilibrium • FDI may result in win – win (SLT), Win – lose (Shell, Prima) and Lose – lose (Oil hedging agreement) situation

Companies  best at serving the interest of share holders to maximize the share holders wealth • Government  best at social issues and externalities or the side effects of business transactions such as pollution

Cause – Effect relationship • To identify whether two factors which move in relationship are correlated sufficient data need to be analyzed. • One such situation Increase FDI increase unemployment *even both happens simultaneously can not say FDI cause unemployment • Current situation may effected by many factors like technological development, competitors' actions • If a different tactic adopted the result can be different even with the FDI

Individual and Aggregate Effect • Most cases were presented by analyzing individual cases • It’s dangerous for a Government to decide on Policy based on extreme and individual case • On the other hand analyzing the effects of each and every MNE to make company based policy is also difficult due to • Size, number and type of effects an MNE cause • Inability to predict the future impact

So to increase the accuracy (relatively) the Governments should go for aggregate analysis than individual analysis • But this may result in throwing some good companies along with the bad companies

Potential Contributions of MNEs • Can contribute to a range of National objectives with their assets basis • Can bring capital, since they control a larger portion of world capital which increase production • Accounts to a good portion of import and exports  can increase the foreign money inflow  better exchange rates • Will help technology transfer

Resources & possible contributions of MNEs • Trade • Export expansion • Lower – cost imports • Investment • Links to local companies • Increased productivity • Improved efficiency • Capital formation • Technology • R & D • Industrial upgrading • New capital equipment MNE • HR • Training • Employment • Managerial skills • Environment • Access to clean technology • Pollution – abatement skills • Company wide standards

Economic impact of MNE • Balance of Payment effect • Countries require a positive BOP (Higher capital inflow & lower capital outflow) • FDI can increase both so counties are feared of a possible negative net balance due to FDIs • If a deficit occurs countries should compensate by • Reducing its capital reserves • Attracting an influx of capital in a form of unilateral transfer (aid), foreign investment, etc. Ex / China bought Treasury bills of USA and USA covered its deficit on 2005 and 2006

Effect of individual FDI • Tow extreme hypothetical scenarios high lights the importance of evaluating the effect of each investment Case 01 • Mexican MNE  FDI  bought a Haitian owned company • Organization, capital, management, etc. remained same • Dividend goes to Mexican owners creating a cash out flow to Haiti and inflow to Mexico Case 02 • Mexican MNE buys idle resources in Haiti • Rising consumer demand  reinvest profit in Haiti • Increases Haiti’s foreign exchange reserves • Most cases in FDI lies in between

If • B = Balance of payment effect • m = import displacement • m1 = import stimulus • x = export stimulus • x1 = export reduction • c = capital inflow for other than import and export payment • c1 = capital outflow for other than import export payment Then B = (m – m1) + (x – x1) + (c – c1) • It’s difficult to estimate the data to be used and have lot of assumptions

On the importers side, the balance of payment effect is positive if the FDI results in a substitution for imports and negative if it results in an increase in imports • On the exporters side, the balance of payment effect is positive if the FDI results in generating exports in the host country and negative if it produces only for the local market and stops exports • Short run  positive capital flow to the host country • Long run  negative due to remit dividends or other capital flows back to the home country

Aggregate Assumptions and responses Balance of Payment effect of FDIs

Growth and Employment effect • Underlining assumptions • Resources are not necessarily fully employed • Capital and technology can not be easily transferred from one industry to another • Hence growth and employment are not a zero – sum game • MNEs will use under employed or unemployed resources so both parties can come to a win – win situation

Counter arguments • Home country losses • Firms moving to foreign countries to exploit low cost labour • Lack of expansion, down size or close down home country plants • Home country  loss of jobs, Host country  expansion of jobs (Others say, this is inevitable with lack of protection under immense competition) • Host country gains • Transfer capital and technology • If used on firms going out on business, can save and create jobs • Optimum use of employed / unemployed resources, improve factor quality

Host country losses • Lack of protection for local entrepreneurs (opportunity loss for them) • MNEs can bit for factor (Labour) competitively than local firms due to financial strength they have • Can block the development of local R&D capabilities due to dependancy

Learning Objective- 03 To establish foundations for responsible behavior

Foundations of responsible behavior No matter where they operate, whether through trade or investment, MNEs have to act responsibly Foundations for establishing ethical behavior Cultural Legal

Cultural foundations for ethical behavior Many actions elicit almost universal agreement on what is right or wrong, but other situations are either unclear or less clear Mangers face dilemmas Opposing view points exist as one’s values differ from other’s policies or prevalent societal norms & laws Values differ from country to country & sometimes between employees& employers

Relativism Ethical truths depend on the groups holding them making intervention by outsiders unethical Normativism Universal standards of behaviors that all cultures should follow , making non intervention unethical Thus managers struggle with implementing universal set of truths Vs adapting to local conditions A company can face pressures to comply with a country’s norms. in the form of laws which require certain practices, competitive advantages for rivals or accusations of meddling. or

It can face pressures not to comply with a country’s norms, which may come from -its own ethical values, -its home-country government or -constituencies that threaten to boycott its products or to spread adverse publicity about its products Managers need to exhibit ordinary decency i.e. principles of honesty & fairness MNEs are obligated to set good examples which lead to the responsible behavior Managers need to create competitive advantages through ethical behavior & avoid being perceived as irresponsible

Responsible acts lead to trust & commitment to create strategic & financial success NGOs are active in prodding companies to comply with certain standards of ethical behaviors Eg: ICCR (Interfaith Centre on Corporate Responsibility) represents about 275 religious institutes sponsors shareholder resolutions threatens to take back its funds from the investments in companies which practice irresponsibly& causes them change their practices As it educated companies about the environmental & economic threats posed by emissions of greenhouse gases from their products or operations to increase share holder values by urging companies to proactively address the global warming challenge

NGOs are taking the place of elected government officials in determining how best to deal with externalities NGOs may perform a useful role if, they report on violations of existing laws or generally accepted standards of behavior

Both societies & companies often must choose between the two bad choices Eg banning of DDT in high income countries & selling it in lower – income countries Social responsibility requires human judgment which is subjective & ambiguous Multi lateral agreements exist which can help companies make ethical decisions& deal primarily with employment practices consumer protection environmental protection Political activity human rights in the work place In international business practices may not clash with foreign values directly but may undermine host-country’s long term cultural identity

Legal foundations for ethical behavior Ethical dilemmas entail balancing means& ends Means- actions we take& may be right or wrong Ends- results of actions. May also be right or wrong Some argue: Cultural relativism implies no method exists to decide whether any behavior is appropriate Individuals must seek justification for their behavior Justification= f( cultural values, legal principles) Some argue: Legal justification for ethical behavior is the only important one& any person/ company can do anything that is not illegal

Reasons for legal argument be insufficient are Law is not appropriate for regulating all business activities as every thing unethical is not illegal Law is slow to develop in emerging areas of concern Law often is based on moral concepts that are not precisely defined & cant be separated from legal concepts Law needs testing by courts Law is not very efficient efficiency implies achieving ethical behavior at a low cost

Good reasons for complying with law Law embodies many of a country’s moral beliefs& is an adequate guide for proper conduct Law provides a clearly defined set of rules Law contains enforceable rules that all must follow Law represents a consensus derived from a significant experience& deliberation Problems faced by companies that use a legal basis Law varies among countries Not all moral values are common to every culture Extraterritoriality: strong home country governments try to extend this legal& ethical practices to foreign subsidiaries of domestically head quarted companies . E.ga u.s. company operating in China might be forced to follow some us laws. In some cause problem extra tertitoriaties cause problems.

E.g. in trade with enemies of us this may cause tension between foreign subsidiary and the lost country government. • Potential liability and legal of actions varies between countries with civil law system and common law system. • Civil law countries tend to have a large body of laws they specify the legality of various behaviors. • Common law countries tend to rely more on cases and precedents than on statutory regulations • A company must to ensure the minimum level of compliance of laws. In each country in which it operates, • Nevertheless , all countries tackle similar ethical issues , laws .

Will become more similar . Also they tackle externalities – are by- product of activities that affect the well – being of people or damage the environment . Imports are not reflected in market prices .

Objective 4 To discuss some key issues in globalization and society ethics and bribery, the environment, pharmaceuticals, and labor issues

ETHICS AND BRIBERY • Bribery is a form of unethical behavior and it influence the performance of countries and companies • Higher level of corruption are strongly associate with lower growth and lower level of per capita income • Bribery inflate the cost of an MNE’s operations and the price of its products • A common motives for bribery are - to secure or obtain government contract - to get officials to do the work without delay Eg: product registration, construction permits, Import clearances • Bribes are payments or promises to pay cash or anything of value

The foreign corrupt practices act (FCPA) is U.S. legislation that makes bribery illegal. It applies to domestic or foreign operations and to company employees as well as their agents overseas. • Under FCPA, facilitation payments are legal, but payments to officials who are not directly responsible to carrying out law are illegal • Critics of FCPA - U.S companies lose businesses - U.S anticorruption laws seen as attempt to meddle in other countries domestic affairs • The FCPA appears to be a deterrent to bribery Eg: IBM had to paid civil penalty, as it paid bribes to government officials to win a contract • International multilateral approaches to combating bribery include the OECD, International Chamber of Commerce, and United Nations

Multilateral efforts to stop bribery are - Transparency international issued “Business Principles for Countering Bribery” in 2003 - ICC rules were issued on demand side bribery - UN convention against corruption and held international anti-corruption day December 9,2003 • A “zero tolerance” pact against bribery was signed by companies at the 2005 World Economic Forum. • “Zero tolerance” pact against bribery in an effort to clean up the notorious corruption within their rank

General guidelines issued by US government to established effective antibribery compliance programme are; -Gain full support of upper management -Establish and adhere to a written corporate code of conduct -establish an organizational compliance structure -Provide anticorruption training and educational seminar -Establish auditing and internal controls -Set up compliance mechanisms -Put into place disciplinary actions for corporate offenders • Even though managers cannot avoid paying bribery ,when generating business they should concerned and aware of the pressure they face, company policies related to bribery and the aftermaths of breaking the law domestically and in foreign environment

ETHICAL BEHAVIOUR AND ENVIRONMENTAL ISSUES • Environment damage occurs due to extracting resources and from production process • Companies that extract natural , generate air or water waste, or manufacture products, such as automobile and electricity, that are polluters need to be concerned with their environmental impact. • Sustainability involves meeting the needs of the present without compromising the ability of future generation to meet their own needs, while taking into account what is best for the people and the environment. • It is important to companies that affect the environment to establish policies for responsible behavior

GLOBAL WARMING • Global warming is a result of the increase of carbon dioxide and other gases that act like the roof of the greenhouse ,trapping heat that would normally be radiated back into the space, Thus warming the planet. • Global worming results from the release of greenhouse gases that trap heat in the atmosphere rather than allowing it to escape. • Results of global warming would be - melting of the polar ice cap and subsequent flooding of costal region -Ocean disruptions -Shifting storm patterns -plant and animal extinctions • The Kyoto Protocol was signed in 1997 to require countries to cut their greenhouse gas emissions to 5.2% below 1990 level between 2008 and 2012. Some countries have adopted stricter requirements, and others, such as the U.S. China, and India, are not part of the compliance.

Countries adopting Kyoto protocol must reduced the gas emissions, by investing in a new technologies or change the way of doing business or pay someone else to clean up their act • U.S.-based MNEs must comply with the Kyoto Protocol in Compliance countries where they may have operations. • US developing low-carbon technologies to solve problem as they have not sign the Kyoto protocol due to fear of reduction of economic growth and employment problem • The legal approach to responsible behavior says it can operate according to the local laws, but the ethical approach is to go beyond the law and do whatever is necessary and economically feasible to reduced the greenhouse gas emissions.

ETHICAL DILEMMAS & PHARMACEUTICAL SALES • Tiered pricing for pharmaceuticals means that companies charge a market price for product sold in industrial countries and a discounted price for products sold in developing countries. • Legal generic products allow countries to purchase drugs at lower cost and comply with drug patents, whereas illegal generic product are fakes that may or may not be of high quality. • Countries with health crises, such as African countries suffering from AIDS, are allowed by TRIPS to manufacture or import generic drugs. • India is a major manufacture of generic drugs and is now moving to R&D of new drugs • Governments private foundations are attempting to solve the problem of developing country access to drugs and vaccines through an international finance facility for immunization and/or advance purchase contracts.

ETHICAL DIMENSIONS OF LABOUR CONDITIONS • Globalization of supply chain and working conditions major challenge of MNEs • Major labor issues that MNEs get involved in through FDI or purchasing from independent manufactures in developing countries are fair wages, child labor, working conditions, working hours, and freedom of association. • Companies face pressure from multiple external stake holders to adopt responsible employment practices. such as from consumers, government, NGOs, trade union ,ect. • One of the main issue is child labour

An estimated 250 million children between 5 and 17 years old are working, but only about 5% of child labor is involved in export industries and most of underage children work in informal sector, i.e agriculture • Why children have to work - parents are not earning enough money to support family - to pay off debt-(to fulfill the debt obligation) If children lose jobs they move to informal economy under worst conditions • Some companies avoid operating in countries where child labor is employed, whereas others try to establish responsible policies in those same countries. • MNEs may not be willing to hire local workers who want to work long hours due to concerns about exploitation.

ETHICAL TRADING INITIATIVE BASE CODE ON WORKERS 1.Employment is freely chosen • There is no forced, bonded or involuntary prison labour • Workers are free to leave their employer after reasonable notice. 2.Freedom of Association and the right to collective bargaining are respective • Workers have the right to join or form trade unions of their own choosing and to bargain collectively. • The employer adopts an open attitude towards the activities of trade unions and their organizational activities • Worker’s representatives are not discriminated and have access to carry out their representative functions in the workplace • Where the right to freedom of association and collective bargaining restricted under law, the employer facilitate ,and does not hinder, the development of parallel means for independent and free association and bargaining

Globalization & Society