Business Finance – Management Individual assignments

Chapter 7. Ethical Issues in the Global Arena

Introduction

The growth of global business as a critical element in the world economy is one of the most important developments of the past half century, but it also has been an increasingly fertile ground for corruption and ethical challenges. Epstein and Hanson refer to the global level as potentially part of the “Bad Orchard” level. At this competitive, global level, ethical behavior is much more challenging and misconduct is more likely. In the United States and elsewhere, domestic issues have been made immensely more complex by the escalating international growth of commerce. At the same time, the internationalization of business has created unique challenges of its own. With the rise of global business, international markets have been seen as natural extensions of an ever-expanding global marketplace that must be pursued if firms are to remain competitive.

This expanded global marketplace has been referred to also as the transnational economy. A useful definition of the transnational or global economy is as follows: trade in goods, a much smaller trade in services, the international movement of labor, and international flows of capital and information.

Most observers have assumed that international business would continue its rapid growth of the past two decades and that, increasingly, companies and countries would become more integrated with the rest of the world. Global trade statistics, however, suggest that after a burst of globalization about a decade ago, world business has been more in a period of consolidation, possibly even retrenchment. Beginning with the global financial crisis of 2009, growth in international trade has become sluggish. With the global pandemic serving as a significant overlay beginning in 2020, the challenges have been even greater. French President Emmanuel Macron has said that the coronavirus “will change the nature of globalization, with which we have lived for 40 years.”

This is why some business experts have begun to think that the globalization moment is over. Why, for example, would one want to offshore jobs to China when Chinese workers are demanding and getting large pay raises? Why would a company want to expand its supply chain when it might be interrupted by terrorists? These and other important questions are being asked.

Not only has world economic growth slowed, but global instability in the form of geopolitics has become more intense than in any recent period. Geopolitical issues that have now intertwined governments with business include global migration patterns, tariffs, trade wars, terrorism, and corruption. In spite of this, the most recent survey of CEOs says that they expect global economic growth to improve beginning in 2021. McKinsey & Company has observed that “the resilience that businesses have developed in the face of disruption (the pandemic) can provide a new foundation for growth.”

Some companies are beginning to question the breadth of their operations and are worried about their vulnerability to regional instabilities. Not only has business growth slowed in the global economy, but it has also been getting more complex and subject to increasing disruptive changes. Researchers at the McKinsey Global Institute have observed that there are four trends or forces that are transforming the nature of the global economy and, hence, global business: the rise of emerging markets, the accelerating rate of technological change on market competition, an aging world population, and greater connectedness in movements of trade, capital, people, and data. These trends have been ushering in a dynamic, new phase of globalization.

The complexity and intricacies of the transnational economy and the globalization of business are seen visibly when social or ethical issues arise. At best, business ethics is difficult when we are dealing with one culture. Once two or more cultures intersect, along with the rapid changes in each of them, it gets extremely complex. Managers must deal not only with differing customs, protocols, and ways of operating but also with differing concepts of law and standards of acceptable business practices. All of this is then exacerbated by the fact that world political issues become intertwined. What might be intended as an isolated corporate attempt to bribe a foreign government official, in keeping with local custom, could readily explode into major international political tensions between two or more countries.

7.1. Challenges in the Global Environment

There are five major challenges that virtually all businesses face in doing business internationally. These include language barriers, cultural differences, managing global teams, currency exchange and inflation rates, and nuances of foreign politics, policy, and relations. Underlying these challenges as they operate in a multinational, business environment, companies also have to deal with several complex issues. One is that of achieving corporate legitimacy as the multinational corporation (MNC), or multinational enterprise (MNE), seeks to be recognized and accepted in an unfamiliar society. A second and related problem is the fundamentally differing philosophies that may exist between the firm’s home country and the host country in which it seeks to operate. For firms to be perceived as legitimate in the eyes of a host country, they must fulfill their social responsibilities and be good corporate citizens abroad just as they were expected to do so at home. Sometimes being socially responsible has different meanings in different countries.

Closely related to the legitimacy issue is the dilemma of MNCs that have quite different cultural or philosophical perspectives from those of their host countries. The philosophy of Western industrialized nations, and thus their MNCs, has focused on economic growth, efficiency, specialization, free trade, and comparative advantage. By contrast, many developing countries or emerging economies have different priorities. Other important objectives for them might include a more equitable income distribution or increased economic self-determination. In this context, the economically advanced nations may appear to be inherently exploitative in that their presence may perpetuate the dependency of the poorer nation. Very large MNCs have budgets that exceed those of many small countries. Thus, critics of MNCs say they have too much power and undue political influence over governments and can exploit developing nations. These basic challenges set the stage for examining how ethical problems arise in the global environment.

An important topic that has come up in recent years has to do with the diverse views about corporate social responsibility (CSR) relative to business–government relationships that occur in different regions of the world. For example, Scherer and Palazzo have noted that under conditions of globalization, the strict division of responsibilities between private businesses and nation-state governments do not hold as much everywhere. They observe that many business firms have begun to assume social and political responsibilities that extend beyond legal requirements and fill some vacuums in global governance. Thus, there is an emerging, politicized concept of CSR that is occurring in some parts of the world. We discussed this notion of political CSR in Chapter 2, and we continue the conversation in Chapter 18 when we discuss business’s influence on government. Though this changing relationship between business and government is not occurring everywhere, it is a factor that needs to be considered in some regions of the world. It is in the global business environment where it has become most applicable.

Social, cultural, and ethical tensions are built into global business. MNCs attempt to bridge the cultural gaps between two or more cultures; yet, as they attempt to adapt to local customs and business practices, they are assailed at home for not adhering to the standards, practices, laws, or ethics of their home country.

Figure 7-1 graphically depicts the dilemma of MNCs caught between the characteristics and expectations of their home country and those of one or more host countries. They often find themselves in an almost unmanageable situation but cannot be deterred from finding sustainable solutions if they desire to expand to markets abroad.

Figure 7-1 The Dilemma of the Multinational Corporation

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Spotlight on Sustainability A Global Sustainability Movement: Earth Hour

The celebration known as Earth Hour was started in Australia in 2007 by the World Wide Fund for Nature (WWF). The organization’s mission is to stop degrading Earth’s natural environment and to create a low-carbon future for planet Earth.

Earth Hour is a global sustainability movement that was initiated with the hope that each year will bring about a continued celebration. The first Earth Hour was held in Australia, and after national acclaim, it gained high international interest, with more and more cities beginning to sign up for the next Earth Hour campaign.

Held each year on the last Saturday of March, Earth Hour engages millions of concerned citizens in 180 countries and territories to turn off their lights and show support for the planet. Beyond the switching-off event, Earth Hour has become a catalyst for positive sustainability impact. You can learn more about Earth Hour’s mission and events in your country by going to https://www.earthhour.org/take-part/events.

Sources: Earth Hour, https://www.earthhour.org/our-mission, accessed March 26, 2021; “Earth Hour 2021,” https://www.worldwildlife.org/pages/earth-hour, accessed March 26, 2021; Earth Hour, Facebook, @earthhour, https://www.facebook.com/earthhour/, accessed March 26, 2021.

7.2. Ethical Issues in the Global Business Environment

The challenges for companies operating in the global business environment include issues of corporate social responsibility, generally, and business ethics, specifically. Our primary focus in this chapter will be on business ethics, but the issues related to the global dimension of CSR should not be forgotten. For many companies, most of the ethical problems that arise in the global environment are in the same categories as those that arise in their domestic environments. These ethical issues reside in all of the functional areas of business: operations, marketing, finance, accounting, and management. These issues embrace the fair treatment of stakeholders—employees, customers, the community, and competitors—and involve product safety, plant safety, advertising practices, human resource management, human rights, environmental problems, business practices, and so on.

These ethical issues may seem to be somewhat fewer in developed countries, but they exist there as well. The ethical challenges seem to be more acute in less-developed countries (LDCs) or emerging economies because these countries are at earlier stages of economic development and often do not have a legal or ethical infrastructure in place to help protect their citizenry. This situation creates an environment in which there is temptation to operate with lower standards, or perhaps no standards, because fewer government regulations or activist groups exist to protect the stakeholders’ interests. In the LDCs, the opportunities for business exploitation and the engagement in questionable practices (by developed countries’ standards) are abundant.

7.3. Improving Global Business Ethics

It is clear from the discussion up to this point that business ethics is much more complex at the global level than at the domestic level. The complexity arises from the fact that a wide variety of value systems, stakeholders, cultures, forms of government, socioeconomic conditions, and standards of ethical behavior exist throughout the world. Recognition of diverse standards of ethical behavior is important, but if we assume that firms from developed countries should operate in closer accordance with developed countries’ ethical standards than with those of developing countries, the strategy of ethical leadership in the world will indeed be a challenging one.

Because the United States and European multinationals have played such a leadership role in world affairs—usually espousing fairness and human rights—these firms have a heavy responsibility, particularly in underdeveloped countries and developing nations. The power–responsibility equation and the Iron Law of Responsibility (see Chapter 1) suggest that these firms have a serious ethical responsibility in global markets. That is, the larger sense of ethical behavior and social responsibility derives from the enormous amount of power these countries have.

In the following section, we will first discuss the challenge of honoring and balancing the ethical traditions of a business’s home country with those of its host country. Next, we will discuss four recommended strategies for conducting business in foreign environments. We will conclude by taking a look at some other steps companies are taking to improve their global ethics.