Module 03 Discussion

Advertising or Free Speech? The Case of Nike and Human Rights

This week’s discussion is about Corporate Social Responsibility (CSR), focusing on the brief case study about Nike (p.101 in the textbook).

Nike pioneered offshore manufacturing by hiring third-party contractors in developing nations to work in its company-owned plants. Among other workers, the contractors hired minors at low pay in” sweatshops.” When the news became public in 1996, Nike faced negative public opinion, and then it established a Corporate Responsibility and Sustainability Committee to ensure that labor practices were ethical across its supply chain.

After that, Nike was sued for allegedly knowingly making false and misleading statements in denying its direct participation in the abusive labor conditions abroad in manufacturing its products. The case was dismissed for procedural issues by the U.S. Supreme Court. Thereafter, Nike has worked on building its CSR profile through relief efforts and advocating fair wages and employment practices in its outsourced operations.

Thinking about Nike’s corporate practices, if you were to start a company that outsourced labor in order to reduce manufacturing costs,

1- what decisions would you make to combine commercial objectives with social goals to improve the impact of corporate social responsibility efforts?

2- How might the two conflict?

Require:

Embed course material concepts, principles, and theories, which require supporting citations along with four scholarly peer-reviewed references supporting your answer.

Required:

Review Chapters 2 & 3 in International Management: Culture, Strategy, and Behavior

Chapter 3 PowerPoint slides Chapter 3 PowerPoint slides – Alternative Formats in International Management: Culture, Strategy, and Behavior

“Brief Integrative Case 1.1: Advertising or Free Speech? The Case of Nike and Human Rights” (p. 101), in International Management: Culture, Strategy, and Behavior.

Beumer, C., Figge, L., & Elliott, J. (2018). The sustainability of globalisation: Including the ‘social robustness criterion ’. Journal of Cleaner Production, 179, 704-715.

Christ, K., & Schaltegger, S. (2020). Multinational enterprise strategies for addressing sustainability: The need for consolidation. Journal of Business Ethics, 1-22.

Richter, U., & Arndt, F. (2018). Cognitive processes in the CSR decision-making process: A sensemaking perspective. Journal of Business Ethics, 148(3), 587-602.

Recommended:

Al-Malkawi, H. (2018). Corporate social responsibility and financial performance in Saudi Arabia. Managerial Finance, 44(6), 648-664.

Alnajdi, O., Calautit, J., & Wu, Y. (2019). Development of a multi-criteria decision making approach for sustainable seawater desalination technologies of medium and large-scale plants: a case study for Saudi Arabia’s vision 2030. Energy Procedia, 158, 4274-4279.

Das, M., Rangarajan, K., and Dutta, G. (2020). Corporate Sustainability in SME’s: Asian Culture. Journal of Asia Business Studies, 14 (1), 109-138.

Murphy, M., Macdonald, J., Antoine, G., & Smolarski, J. (2019). Exploring Muslim attitudes towards corporate social responsibility: Are Saudi business students different? Journal of Business Ethics, 154(4), 1103-1118.

Brief Integrative Case 1.1

Advertising or Free Speech? The Case of Nike and Human Rights Nike Inc., the global leader in

the production and market- in of sports and athletic merchandise including shoes, clothing, and

equipment, has enjoyed unparalleled world- wide growth for many years. Consumers around the

world recognize Nike’s brand name and logo. As a supplier to and sponsor of professional sports

figures and organiza- tions, and as a large advertiser to the general public, Nike is widely known.

Nike was a pioneer in offshore manu- facturing, establishing company-owned assembly plants

and engaging third-party contractors in developing coun- tries.

In 1996, Life magazine published a landmark article about the labor conditions of Nike’s

overseas subcontrac- tors, entitled “On the Playgrounds of America, Every Kid’s Goal Is to

Score: In Pakistan, Where Children Stitch Soccer Balls for Six Cents an Hour, Their Goal Is to

Sur- vive.” Accompanying the article was a photo of a 12-year- old Pakistani boy stitching a

Nike-embossed soccer ball. The photo caption noted that the job took a whole day, and the child

was paid US$0.60 for his effort. Up until this time, the general public was neither aware of the

wide use of foreign labor nor familiar with the working arrange- ments and treatment of laborers

in developing countries. Almost instantly, Nike became a poster child for the ques- tionable

unethical use of offshore workers in poorer regions of the world. This label continued to plague

the corporation as many global human interest and labor rights organizations have monitored and

often condemned Nike for its labor practices around the world.

In the years following, Nike executives were frequent targets at public events, especially at

universities where students pressed administrators and athletic directors to ban products that had

been made under “sweatshop” con- ditions. Indeed, at the University of Oregon, a major gift

from Phil Knight, Nike’s CEO, was held up in part because of student criticism and activism

against Nike on campus.1 Nike took immediate action to repair its damaged brand. In 2001, the

company established a Corporate Responsibility and Sustainability Committee to ensure that

labor practices were ethical across its supply chain. By 2003, the company employed 86

compliance officers (up from just three in 1996) to monitor its plant operations and working

conditions and ensure compliance with its published corporate code of conduct. In 2005, Nike

became the first among its peers to release a complete listing of all of the overseas factories that

it contracts for labor. That same year, Nike released the pay scales of the factory workers and

addressed actions it was taking to further improve conditions. Even so, the stigma of past

practices—whether perceived or real—remained embla- zoned on its image and brand name.

Nike found itself constantly defending its activities, striving to shake this reputation and

perception.

In 2002, Marc Kasky sued Nike, alleging that the com- pany knowingly made false and

misleading statements in its denial of direct participation in abusive labor condi- tions abroad.

Through corporate news releases, full-page ads in major newspapers, and letters to editors, Nike

defended its conduct and sought to show that allegations of misconduct were unwarranted. The

action by the plain- tiff, a local citizen, was predicated on a California state law prohibiting

unlawful business practices. He alleged that Nike’s public statements were motivated by market-

ing and public relations and were simply false. According to the allegation, Nike’s statements

misled the public and thus violated the California statute. Nike countered by claiming its

statements fell under and within the protec- tion of the First Amendment, which protects free

speech. The state court concluded that a firm’s public statements about its operations have the

effect of persuading consum- ers to buy its products and therefore are, in effect, adver- tising.

Therefore, the suit could be adjudicated on the basis of whether Nike’s pronouncements were

false and misleading. The court stated that promoting a company’s reputation was equivalent to

sales solicitation, a practice clearly within the purview of state law. The majority of justices

summarized their decision by declaring, “because messages in question were directed by a

commercial speaker to a commercial audience, and because they made representations of fact

about the speaker’s own business operations for the purpose of promoting sales of its prod- ucts,

we conclude that these messages are commercial speech for purposes of applying state laws

barring false and misleading commercial messages” (Kasky v. Nike Inc., 2002). The conclusion

reached by the court was that statements by a business enterprise to promote its reputa- tion

must, like advertising, be factual representations and that companies have a clear duty to speak

truthfully about such issues.2

100 Part 1 Environmental Foundation

In January 2003, the U.S. Supreme Court agreed to hear Nike’s appeal of the decision in Kasky

v. Nike Inc. from the California Supreme Court. In particular, the U.S. Supreme Court agreed to

rule on whether Nike’s previous statements about the working conditions at its subcon- tracted,

overseas plants were in fact “commercial speech” and, separately, whether a private individual

(such as Kasky) has the right to sue on those grounds. Numerous amici briefs were filed on both

sides. Supporters of Kasky included California, as well as 17 other states; Ralph Nader’s Public

Citizen Organization; California’s AFL/ CIO; and California’s attorney general. Nike’s friends

of the court included the American Civil Liberties Union, the Business Roundtable, the U.S.

Chamber of Com- merce, other MNCs including Exxon/Mobil and Micro- soft, and the Bush

administration (particularly on the grounds that it does not support private individuals acting as

public censors).3 Despite the novelty of this First Amendment debate and the potentially wide-

reaching effects for big business (particularly MNCs), the U.S. Supreme Court dismissed the

case (6 to 3) in June 2003 as “improvidently granted” due to procedural issues surrounding the

case. In their dissenting opinion, Justices Stephen G. Breyer and Sandra Day O’Connor

suggested that Nike would likely win the appeal at the U.S. Supreme Court level. In both the

con- curring and dissenting opinions, Nike’s statements were described as4a mix of

“commercial” and “noncommer- cial” speech. This suggested to Nike, as well as other MNCs,

that if the Court were to have ruled on the sub- stantive issue, Nike would have prevailed.

Although this case has set no nationwide precedent for corporate advertising about business

practices or corporate social responsibility (CSR) in general, given the sensitivity of the issue,

Nike has allowed its actions to speak louder than words in recent years. As part of its

international CSR profile, Nike has assisted relief efforts (donating $1 million to tsunami relief

in 2004) and advocated fair wages and employment practices in its outsourced operations. Nike

claims that it has not abandoned production in certain countries in favor of lower-wage labor in

others and that its factory wages abroad are actually in accordance with local regulations, once

one accounts for purchasing power and cost-of- living differences.5 The Nike Foundation, a

nonprofit organization supported by Nike, is also an active sup- porter of the Millennium

Development Goals, particu- larly those directed at improving the lives of adolescent girls in

developing countries (specifically Bangladesh, Brazil, China, Ethiopia, and Zambia) through

better health, education, and economic opportunities.6 Envi- ronmental impact is also a key

component of Nike’s CSR profile. The company has focused on preserving water in the areas

where its products are manufactured, incorporating new technology that minimizes the amount

of water needed for dyeing processes. Nike has pledged to eliminate all hazardous chemicals

from its supply chain by 2020.

As part of its domestic CSR profile, Nike is primarily concerned with keeping youth active,

presumably for health, safety, educational, and psychological/esteem rea- sons. Nike has worked

with Head Start (2005) and Special Olympics Oregon (2007), as well as created its own com-

munity program, NikeGO, to advocate physical activity among youth. Partnering with the First

Lady Michelle Obama, Nike worked to implement the “Let’s Move” campaign (2013) into

schools across the U.S. Nike also sponsors Project Play (2014), which aims to reshape the

direction of youth sports by encouraging children to stay involved and feel included.

Furthermore, Nike is commit- ted to domestic efforts such as Hurricane Katrina relief and

education, the latter through grants made by the Nike School Innovation Fund in support of the

Primary Years Literacy Initiative.7 Despite Nike’s impressive CSR profile, if the Califor- nia

State Supreme Court decision is sustained and sets a global precedent, Nike’s promotion or

“advertisement” of its global CSR initiatives could still be subjected to legal challenge. This

could create a minefield for multinational firms. It would effectively elevate statements on

human rights treatment by companies to the level of corporate marketing and advertising. Under

these conditions, it might be difficult for MNCs to defend themselves against allegations of

human rights abuses. In fact, action such as the issuance and dissemination of a written company

code of conduct could fall into the category of advertising dec- larations. Although Kasky v.

Nike was never fully resolved in court, the issues that it raised remain to be addressed by global

companies.

International Management

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Chapter 3

Ethics, Social Responsibility, and Sustainability

Insert Photo Credit Here

Learning Objectives

Examine ethics in international management and some of the major ethical issues and problems confronting MNCs

Discuss some of the pressures on and actions being taken by selected industrialized countries and companies to be more socially and environmentally responsive to world problems

Learning Objectives (continued)

Explain some of the initiatives to bring greater accountability to corporate conduct and limit the impact of corruption around the world

Sustaining Sustainable Companies

Shift in focus from traditional market-responsive strategies to broader approaches

Help incorporate business and social or environmental goals

Triple bottom line approach

Simultaneously considers social, environmental, and economic sustainability

Could help harness business and managerial skills to impact human and environmental conditions

Ethics

Study of morality and standards of conduct

Victim of subjectivity as it yields to the will of cultural relativism

Cultural relativism – Belief that:

Ethical standard of a country is based on the culture that created it

Moral concepts lack universal application

Ethical Dilemmas

Dilemmas arising from conflicts between ethical standards of a country and business ethics are most evident in:

Employment and business practices

Recognition of human rights, including women in the workplace

Corruption

Corporate Social Responsibility (CSR) versus Ethics

CSR

Actions taken by a firm to benefit society beyond the requirements of the law and the direct interests of the firm

Based more on voluntary actions

Ethics

Study of or the learning process involved in understanding morality

Area of ethics has a lawful component and implies right and wrong in a legal sense

Ethical Theories and Philosophy

Kantian philosophical traditions

Aristotelian virtue ethics

Utilitarianism

Eastern philosophy

Kantian Philosophical Traditions

Entities have responsibilities based on a core set of moral principles that go beyond those of narrow self-interest

Reject consequences as morally irrelevant when evaluating the choice of an agent

Ask one to consider choices as implying a general rule, or maxim

Must be evaluated for its consistency as a universal law

Aristotelian Virtue Ethics

Focus on core, individual behaviors and actions and how they express and form individual character

Consider social and institutional arrangements and practices in terms of their contribution to the formation of good character in individuals

For Aristotle, moral success and failure largely come down to a matter of right desire, or appetite

Aristotelian Virtue Ethics (continued)

Virtue theory

States that one’s formation is a social process

Relies heavily on existing practices to provide an account of:

What is good

What character traits contribute to pursuing and realizing the good in concrete ways

Utilitarianism

Form of consequentialism

Favors the greatest good for the greatest number of people under a given set of constraints

Acts are morally correct if they maximize utility

Attained when the ratio of benefit to harm is greater than the ratio resulting from an alternative act

Eastern Philosophy

Broadly includes various philosophies of Asia

Indian philosophy, Chinese philosophy, Iranian philosophy, Japanese philosophy, and Korean philosophy

Holds that:

People are an intrinsic and inseparable part of the universe

Attempts to discuss the universe from an objective viewpoint are inherently absurd

Human Rights Issues

Present challenges for MNCs

Absence of universally adopted standards of what constitutes acceptable behavior

Basic rights

Life, freedom from slavery or torture, freedom of opinion and expression, and a general ambiance of nondiscriminatory practices

Women’s rights and gender equity can be considered a subset of human rights

Issues Faced by Women in the Workplace

Most still experience the effects of a glass ceiling

Lack of promotions to upper management positions

Partially due to social factors and perceived levels of opportunity or lack thereof

Pervasive throughout the world

Issues Faced by Women in the Workplace – Examples

Japan

Women employees are subject to sexual harassment, two-track recruiting processes, and unequal opportunities for growth

France, Germany, and Great Britain

Witnessed an increase in the number of women in managerial positions but only in low-level managerial positions

Labor Policy Issues

Political, economic, and cultural differences interfere with the establishment of a universal foundation for employment practices

Difficulty in deciding working conditions, expected consecutive work hours, and labor regulations

Frequent offshoring due to differences in labor costs

Ensuring that all contractors along the global supply chain are compliant with company standards

Labor, Employment, and Business Practices in China

Workers are not paid well

Forced to work 12-hour days, seven days a week to meet demand

Some cases involve the usage of child labor

Example – Foxconn

2010 – Issue of low wages headlined after a number of workers committed suicide

Environmental Protection and Development

Poor countries are more focused on improving the welfare of their citizens

Environmental Kuznets Curve (EKC)

Relationship between per capita income and the use of natural resources and/or the emission of wastes has an inverted U-shape

Environmental Kuznets Curve (EKC)

Reasons behind the inverted U-shape of the EKC

Composition of production and/or consumption

Preference for environmental quality

Institutions that are needed to internalize externalities

Increasing returns to scale associated with pollution abatement

Figure 3.1 – Environmental Kuznets Curve

Environmental Protection and Development (continued)

United Nations Climate Change Conference, 2015

Tried to achieve an international consensus on environmental reform

Adopted the Paris Agreement

Phenomena in Response to Globalization

Difficulty in attempts to balance organizational and cultural roots

Offshoring low-cost labor-intensive practices

Transferring a large percentage of current employees of all types to foreign locations

Creates issues related to corporate citizenship

Reconciling Ethical Differences across Cultures

Integrative Social Contracts Theory (ISCT)

Attempts to navigate a moral position that does not force decision makers to engage exclusively in relativism versus absolutism

Offers one framework to help reconcile fundamental contradictions in international business ethics between home and host countries

Corporate Social Responsibility (CSR)

Social, economic, and environmental expectations of each company are based on the desires of the stakeholders

Pressurize MNCs to pay greater attention to CSR

Nongovernmental organizations (NGO)

Private, not-for-profit organizations

Seek to serve society’s interests by focusing on social, political, and economic issues

Nongovernmental Organizations

Urge MNCs to be more responsive to a range of social needs in developing countries

Activism has helped generate substantial changes in corporate management, strategy, and governance

Regarded as counterweights to business and global capitalism

Nongovernmental Organizations (continued)

Collaborate with MNCs on social and environmental projects

Contribute to the well-being of the community and to the reputation of the MNC

Responses to Social and Organizational Obligations

MNCs follow codes of conduct, including the U.N. Global Compact, the Global Reporting Initiative, and “SA8000” standards

Commit to maintain certain standards in their domestic and global operations

Help offset the concern that companies move jobs to avoid higher labor or environmental standards

Contribute to raising the standards in the developing world

Responses to Social and Organizational Obligations (continued)

Fair trade

Organized social movement and market-based approach

Aims to help producers in developing nations obtain better trading conditions and promote sustainability

Sustainability

Development that meets humanity’s needs without harming future generations

Helps companies recognize that dwindling resources will eventually halt productivity

World Economic Forum, Davos, Switzerland

Focused on how sustainable consumption can be used to ease problems related to the need for rapid business scaling

Corporate Governance

System by which businesses are directed and controlled

Specifies distribution of rights and responsibilities among stakeholders

Spells out rules and procedures for corporate decision-making

Provides the structure for setting company objectives and means for attaining those objectives and maintaining performance

Corporate Governance (continued)

Rules and regulations differ among countries and regions

The UK and U.S. systems are outsider systems because of dispersed ownership of equity among a large number of outside investors

Many continental European countries are insider systems in which ownership is more concentrated

Differences in legal systems affect shareholders’ and other stakeholders' rights

Corporate Governance: Crony Capitalism

Occurs in nations with:

Less well-developed legal and institutional protections

Poor property rights

Emerges where weak corporate governance and government interference can lead to:

Poor performance

Risky financing patterns

Macroeconomic crises

Foreign Corrupt Practices Act (FCPA)

Makes it illegal for U.S. companies and their managers to attempt to influence foreign officials through:

Personal payments

Political contributions

In complying with the provisions, U.S. firms must be aware of changes in the law

Makes FCPA violators subject to Federal Sentencing Guidelines

Other Anticorruption Measures

Formal agreement by many industrialized nations to outlaw the practice of bribing foreign government officials

Includes nations that belong to the Organization for Economic Cooperation and Development (OECD)

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Fails to outlaw most payments to political party leaders but does indicate growing support for antibribery initiatives

Other Anticorruption Measures (continued)

Organization of American States (OAS) Inter-American Convention Against Corruption

Established by Latin American countries

Transparent Agents Against Contracting Entities (TRACE) standard

Developed as a means of preventing the shift of corrupt practices to suppliers and intermediaries

International Assistance

Governments and corporations are collaborating to provide assistance to locales through global partnerships

Recent study identified the top priorities around the world for development assistance

Uses a cost-benefit analysis of where investments would have the greatest impact

Table 3.3 – Copenhagen Consensus Development Priorities

Source: Copenhagen Consensus 2012.

U.N. Sustainable Development Goals

Poverty – End poverty in all its forms everywhere

Food – End hunger, achieve food security and improved nutrition, and promote sustainable agriculture

Health – Ensure healthy lives and promote well-being for all at all ages

U.N. Sustainable Development Goals (continued 1)

Education – Ensure inclusive and equitable quality education and promote lifelong learning opportunities for all

Women – Achieve gender equality and empower all women and girls

Water – Ensure availability and sustainable management of water and sanitation for all

U.N. Sustainable Development Goals (continued 2)

Energy – Ensure access to affordable, reliable, sustainable, and modern energy for all

Economy – Promote sustained, inclusive, and sustainable economic growth; full and productive employment; and decent work for all

Infrastructure – Build resilient infrastructure, promote inclusive and sustainable industrialization, and foster innovation

U.N. Sustainable Development Goals (continued 3)

Inequality – Reduce inequality within and among countries

Habitation – Make cities and human settlements inclusive, safe, resilient, and sustainable

Consumption – Ensure sustainable consumption and production patterns

Climate – Take urgent action to combat climate change and its impacts

U.N. Sustainable Development Goals (continued 4)

Marine ecosystems – Conserve and sustainably use the oceans, seas, and marine resources for sustainable development

Ecosystems – Protect, restore, and promote sustainable use of terrestrial ecosystems; sustainably manage forests; combat desertification; halt and reverse land degradation; and halt biodiversity loss

U.N. Sustainable Development Goals (continued 5)

Institutions – Promote peaceful and inclusive societies for sustainable development; provide access to justice for all; and build effective, accountable, and inclusive institutions at all levels

Sustainability – Strengthen the means of implementation and revitalize the global partnership for sustainable development

In the International Spotlight – Cuba

Would you advise a company to become an early investor in Cuba?

Do you think Airbnb’s investment in Cuba will eventually see success and become a reliable profit stream?

Do you think Cuba will ultimately become an attractive long-term tourist destination for Americans?

Review and Discuss

How might different ethical philosophies influence how managers make decisions when it comes to offshoring of jobs?

What lessons can U.S. multinationals learn from the political and bribery scandals in recent years, such as those affecting contractors doing business in Iraq (Halliburton) as well as large MNCs such as Siemens, HP, and others? Discuss two

Review and Discuss (continued 1)

In recent years, rules have tightened such that those who work for the U.S. government in trade negotiations are now restricted from working for lobbyists for foreign firms

Is this a good idea? Why or why not?

Review and Discuss (continued 2)

What are some strategies for overcoming the impact of counterfeiting?

Which strategies work best for discretionary (for instance, movies) versus nondiscretionary (pharmaceutical) goods?

Review and Discuss (continued 3)

Why are MNCs getting involved in corporate social responsibility?

Are they displaying a sense of social responsibility, or is this merely a matter of good business? Defend your answer

International Management

Culture, Strategy, and Behavior

Fred Luthans | Jonathan P. Doh

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THE POLITICAL, LEGAL, AND TECHNOLOGICAL ENVIRONMENT

The World of International Management

Social Media and Political Change

T he struggle for government reform has traditionally been a long, painful process. In the past, uprisings in the Middle East were often violently and horrifically repressed by corrupt dictators. Governments censored and controlled news organizations, hiding the atrocities of war from the view of the global community. For example, the true scale of the 1982 Hama massacre, where at least 10,000 Syrian revolutionaries were killed by government forces, is still unclear. Over the last few years, however, the transparency of war and the resulting pace of change appear to be rapidly increasing. The ongoing conflict in Syria, which arose in the wake of the “Arab Spring” that spread across Egypt, Tunisia, and Libya in the early 2010s, has been particularly impacted by the use of social media. Journalism, communication, and transparency from within Syria have all been redefined by the use of social media by ordinary citizens. Unlike past conflicts, the Syrian civil war and resulting refugee crisis are unraveling in real time to a global audience in photos and videos through YouTube, Facebook, and Twitter.

Social Media as an Organizing Tool While previous uprisings lacked widespread communication tools, those engaged in the Syrian conflict are equipped with smartphones and social media. Syrian government loyalists, Syrian revolutionaries, and the terrorist organization Islamic State of Iraq and Syria (ISIS) have all utilized social media to quickly and efficiently organize their supporters. In the early years of the conflict, the pro-revolution Facebook group “The Syrian Revolution 2011” swelled to nearly half a million mem- bers, while the group supporting Syrian President Bashar al- Assad had nearly 3 million. ISIS has released propaganda videos on all forms of social media, and the terror group has maintained multiple Twitter accounts in an attempt to recruit internationally. Evidence suggests that revolutionaries in particular have mobilized successfully through social media. Inspired by videos

The broader political, legal, and technological environment faced by international managers is changing rapidly. Changes in this environment are more common and rapid, presenting challenges for managers seeking to respond and adapt to this environment. Although there are many dimensions of the external environment relevant to international management, economic considerations covered in the last chapter are among the most important, along with cultural issues covered in Part Two. However, the political, legal, regulatory, and tech- nological dimensions also bear on the international manager in highly significant ways. The objective of this chapter is to examine how the political, legal, regulatory, and technological environments have changed in recent years, and how these changes pose challenges and opportunities for international managers. In Chapter 10, we return to some of these themes, especially as they relate to political risk and managing the political environment. In this chapter, we outline some of the major trends in the political, legal, and technological environ- ment that will shape the world in which international managers will compete. The specific objectives of this chapter are

1. INTRODUCE the basic political systems that characterize regions and countries around the world and offer brief examples of each and their implications for international management.

2. PRESENT an overview of the legal and regulatory environ- ment in which MNCs operate worldwide, and highlight differ- ences in approach to legal and regulatory issues in different jurisdictions.

3. REVIEW key technological developments, including the growth of e-commerce, and discuss their impact on MNCs now and in the future.

Social Media as a Journalistic Tool In the early stages of the war, the Syrian government banned international news media from covering the revolution. As a result, social media became the primary source of photos, videos, and news stories from inside the conflict. The Syrian civil war represented one of the first major conflicts in which citizens could instantly record video from the front lines and, using smartphones, transmit that footage to the Internet in real time. News organizations, unable to gather information from any other source, used the uploaded social media to build their reports.9

Syrians from all sides of the conflict created and shared this content on various social networking sites, attempting to build international support for their cause.10 The sheer amount of content uploaded is staggering; over a million videos from within the revolution were uploaded to YouTube, often taken by cellular phone. Another website, OnSyria, was used by pro- testors to upload nearly 200,000 videos. More importantly, smartphones and social networks ensured that any human rights violations from either revolu- tionaries or the government would be broadcast online, likely eroding any international support that the inflicting party had. In August 2013, one of the most defining moments in the early years of the war occurred when hundreds of civilians were killed in a sarin gas chemical attack in Ghouta, allegedly perpetrated by the Syrian government. Almost instantly, wit- nesses and first responders uploaded photos and video of the aftermath to social networking sites including YouTube, Reddit, and Twitter. These images marked a critical turning point in the global public opinion and international involvement in the war. The U.S. government had taken a hands-off approach prior to the attacks; however, once these human rights viola- tions were broadcast across social media, the U.S. had no choice but to take a formal stand against the Syrian government.11

Social Media as a Support-Building Tool Unlike written news releases, pictures and videos have the ability to convey information in emotional ways that transcend language. During the Syrian civil war, social media, used as a visual medium, led the global community to unite behind the plight of the Syrian refugees in an unprecedented way. Throughout early 2015, images and videos of overloaded rafts, filled with desperately fleeing Syrians, dominated social media. The emotion and suffering of the refugees were con- veyed through these images to a worldwide audience in real

uploaded to YouTube showing the Syrian government harshly cracking down on nonviolent protesters, nearly 100,000 Syrians organized via Facebook and staged a protest in Hama in June 2011. The strength in numbers afforded by social media has made the Syrian protests incredibly difficult to dissolve; the mass scale of protests organized through social networking sites far outnumbers the military and government forces sent to suppress them. Tips on how to protect oneself from tear gas and police batons are shared through Facebook groups, and Twitter has served as a communication lifeline when gov- ernment authorities have attempted to disperse the crowds.1,2

Social media has provided such a powerful tool to revolu- tionaries that the Syrian government has attempted to completely disrupt Internet service on several occasions since 2011, most notably during massive protests demanding the removal of President Bashar al-Assad. Widespread outages spread through nearly all of Syria, including Damascus, essentially shutting off all communication with the outside world.3 Cyber attacks have also been perpetrated by supporters of the Syrian government in an attempt to censor photos and videos coming from the protesters; malware programs that steal Facebook and YouTube logins have been dispatched on a massive scale.4 Smartphones have morphed into a symbol of the revolutionary forces, with Syrian government soldiers and ISIS border guards often demanding to inspect cell phones of anyone passing through their posts.5

Those fleeing the conflict have also utilized social media to plan safe escape from Syria. Refugees who successfully migrated to Europe assist those still making the journey through online activity. A Facebook group dedicated to sharing knowledge and advice with fellow refugees has over 100,000 members. Topics range from necessary supplies and route information to messages of encouragement. Smugglers, often necessary for safe passage, are recommended and discussed, and even weather conditions are relayed to those making the journey by sea.6,7 Refugees in past conflicts often separated from their family and friends with the unfortunate yet realistic possibility that they would never reunite. During the Syrian conflict, refugees have been able to send messages to their loved ones and update them on their safety throughout their journey.8 WhatsApp, the instant messaging application, is popular among refugees not only for familial communication but also for its ability to connect with transportation, smug- glers, and even Greek coast guard officials in the event of an emergency.

46 Part 1 Environmental Foundation

The role of social media as an organizing tool, a journalistic tool, and a support-building tool, all in the context of political change, underscores the interesting interactions of technological progress and political conflict and change. Social media has enabled revo- lutionaries, governments, journalists, and even terrorists to organize quickly, communi- cate globally, and build support for their cause, resulting in serious ramifications for international management. It is important for international managers to think through these complex political, legal, and technological issues that arise in a world that embraces rapid change so that they are prepared for potential challenges. MNCs must collabora- tively work with new governments as laws, policies, and regulations are introduced and altered. Managing the political and legal environment will continue to be an important challenge for international managers, as will the rapid changes in the technological envi- ronment of global business.

■ Political Environment Both domestic and international political environments have a major impact on MNCs. As government policies change, MNCs must adjust their strategies and practices to accommodate the new perspectives and actual requirements. Moreover, in a growing number of regions and countries, governments appear to be less stable; therefore, these areas carry more risk than they have in the past. The assessment of political risk and strategies to cope with it will be given specific attention in Chapter 10, but in this chap- ter we focus on general political systems with selected areas used as illustrations relevant to today’s international managers.

The political system or system of government in a country greatly influences how its people manage and conduct business. We discussed in Chapter 1 how the government regulates business practices via economic systems. Here we review the general systems currently in place throughout the world. Political systems vary greatly between nation- states across the world. The issue with understanding how to conduct international man- agement extends beyond general knowledge of the governmental practices to the specifics of the legal and regulatory frameworks in place. Underlying the actions of a government is the ideology informing the beliefs, values, behavior, and culture of the nation and its political system. We discussed ideologies and the philosophies underpin- ning them above. Effective management occurs when these different ideologies and philosophies are recognized and understood.

A political system can be evaluated along two dimensions. The first dimension focuses on the rights of citizens under governments ranging from fully democratic to totalitarian. The other dimension measures whether the focus of the political system is

200,000 times within 24 hours. In the United States, the United Kingdom, and Canada, the hashtag “#RefugeesWelcome” swelled to 1.5 million shares.12 Within four days, 78 percent of the British public had seen the photo of Al-Kurdi, and 92 per- cent had at least heard about it. The photo was directly linked to increased support: Those who had seen the photo were nearly twice as likely to say that the United Kingdom should take in more refugees.13 Support in the form of financial donations also surged. Migrant Offshore Aid Station, an NGO focused on search and rescue efforts, reported a 1,400 per- cent increase in donations in the 24 hours immediately after the pictures went viral. Donations to organizations including Oxfam and Care Canada doubled in one week what had been raised all year.14

time. Though thousands of images, stories, and videos were shared over various social networks during the crisis, the September 2015 photo of a deceased toddler, Aylan Al-Kurdi, who had drowned during his family’s attempted escape on a raft across the Mediterranean, provoked global outcry and underscores the power of social media as a support-building tool. As a direct result of this image, financial and emotional support among the global community grew almost instantly. World leaders, including French President François Hollande, British Prime Minister David Cameron, and Irish Prime Minister Enda Kenny, publically expressed support and shock after seeing the picture of the toddler. Spreading across social networks almost instantly, the hashtag “#kiyiyavuraninsanlik,” meaning “Humanity Washed Ashore,” was shared more than

Chapter 2 The Political, Legal, and Technological Environment 47

on individuals or the broader collective. The first dimension is the ideology of the system, while the second measures the degree of individualism or collectivism. No pure form of government exists in any category, so we can assume that there are many gradations along the two extremes. The observed correlation suggests that democratic societies emphasize individualism, while totalitarian societies lean toward collectivism.15

Ideologies Individualism Adopters of individualism adhere to the philosophy that people should be free to pursue economic and political endeavors without constraint. This means that government interest should not solely influence individual behavior. In a business con- text, this is synonymous with capitalism and is connected to a free-market society, as discussed in Chapter 1, which encourages diversity and competition, compounded with private ownership, to stimulate productivity. It has been argued that private property is more successful, progressive, and productive than communal property due to increased incentives for maintenance and focus on care for individually owned property. The idea is that working in a group requires less energy per person to achieve the same goal, but an individual will work as hard as he or she has to in order to survive in a competitive environment. Simply following the status quo will stunt progress, while competing will increase creativity and progress. Modern managers may witness this when dealing with those who adopt an individualist philosophy and then must work in a team situation. Research has shown that team performance is negatively influenced by those who con- sider themselves individualistic; however, competition stimulates motivation and encourages increased efforts to achieve goals.16

The groundwork for this ideology was founded long ago. Philosophers such as David Hume (1711–1776), Adam Smith (1723–1790), and even Aristotle (384–322 BC) contributed to these principles. While philosophers created the foundation for this belief system long ago, it can be witnessed playing out through modern practice. Eastern Europe, the former Soviet Union, areas of Latin America, Great Britain, and Sweden all have moved toward the idea that the betterment of society is related to the level of free- dom individuals have in pursuing economic goals, along with general individual free- doms and self-expression without governmental constraint. The well-known movement in Britain toward privatization was led by Prime Minister Margaret Thatcher during her 11 years in office (1979–1990), when she successfully transferred ownership of many companies from the state to individuals and reduced the government-owned portion of gross national product from 10 to 3.9 percent. She was truly a pioneer in the movement toward a capitalistic society, which has since spread across Europe.

International managers must remain alert as to how political changes may impact their business, as a continuous struggle for a foothold in government power often affects leaders in office. For example, Britain’s economy improved under the leadership of Tony Blair; however, his support of the Iraq War severely weakened his position. Conservative David Cameron, first elected prime minister in 2010, sought to integrate traditional con- servative principles without ignoring social development policies, something the Labour Party has traditionally focused on. More recently, however, increased concerns about immigration and the role of the EU in managing affairs in member states prompted the United Kingdom to vote to leave the EU, a process that has been termed “Brexit.” Gov- ernment policy, in its attempt to control the economic environment, waxes and wanes, something the international manager must be keenly sensitive to.

Europe has added complexity to the political environment with the unification of the EU, which celebrated its 60th “birthday” in 2017. Notwithstanding the increasing integration of the EU, MNCs still need to be responsive to the political environment of individual countries, some due to the persistence of cultural differences, which will be discussed in Chapter 5. Yet, there are also significant interdependencies. For example, the recent economic crises in Greece, Spain, Portugal, and Ireland have prompted Germany and France to mobilize public and private financial support, even though the

individualism The political philosophy that people should be free to pursue economic and political endeavors without constraint (Chapter 2); the tendency of people to look after themselves and their immediate family only (Chapter 4).

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two largest economies in the euro zone have residual distrust from earlier eras of conflict and disagreement.17 Europe is no longer a group of fragmented countries; it is a giant and expanding interwoven region in which international managers must be aware of what is happening politically, not only in the immediate area of operations but also throughout the continent. The EU consists of countries that adhere to individualistic orientations as well as those that follow collectivist ideals.

Collectivism Collectivism views the needs and goals of society at large as more im- portant than individual desires.18 The reason there is no one rigid form of collectivism is because societal goals and the decision of how to keep people focused on them differ greatly among national cultures. The Greek philosopher Plato (427–347 BC) believed that individual rights should be sacrificed and property should be commonly owned. While on the surface one may assume that this would lead to a classless society, Plato believed that classes should still exist and that the best suited should rule over the people. Many forms of collectivism do not adhere to that idea.

Collectivism emerged in Germany and Italy as “national socialism,” or fascism. Fascism is an authoritarian political ideology (generally tied to a mass movement) that considers individual and other societal interests inferior to the needs of the state and seeks to forge a type of national unity, usually based on ethnic, religious, cultural, or racial attributes. Various scholars attribute different characteristics to fascism, but the following elements are usually seen as its integral parts: nationalism, authoritarianism, militarism, corporatism, collectivism, totalitarianism, anticommunism, and opposition to economic and political liberalism.

We will explore individualism and collectivism again in Chapter 4 in the context of national cultural characteristics.

Socialism Socialism directly refers to a society in which there is government ownership of institutions but profit is not the ultimate goal. In addition to historically communist states such as China, North Korea, and Cuba, socialism has been practiced to varying degrees in recent years in a more moderate form—“democratic socialism”—by Great Britain’s Labour Party, Germany’s Social Democrats, as well as in France, Spain, and Greece.19

Modern socialism draws on the philosophies of Karl Marx (1818–1883), Friedrich Engels (1820–1895), and Vladimir Ilyich Lenin (1870–1924). Marx believed that govern- ments should own businesses because in a capitalistic society only a few would benefit, and it would probably be at the expense of others in the form of not paying wages due to laborers. He advocated a classless society where everything was essentially communal. Socialism is a broad political movement and forms of it are unstable. In modern times, it branched off into two extremes: communism and social democracy.

Communism is an extreme form of socialism that was realized through violent revolution and was committed to the idea of a worldwide communist state. During the 1970s, most of the world’s population lived in communist states. The communist party encompassed the former Soviet Union, China, and nations in Eastern Europe, Southeast Asia, Africa, and Latin America. Cuba, Nicaragua, Cambodia, Laos, and Vietnam headed a notorious list. Today much of the communist collective has disintegrated. China still exhibits communism in the form of limiting individual political freedom. China has begun to move away from communism in the economic and business realms because it has discovered the failure of communism as an economic system due to the tendency of common goals to stunt economic progress and individual creativity.

Some transition countries, such as Russia, are postcommunist but still retain aspects of an authoritarian government. Russia presents one of the most extreme examples of how the political environment affects international management. Poorly managed approaches to the economic and political transition resulted in neglect, corruption, and confusing changes in economic policy.20 Devoid of funds and experiencing regular gas pipeline leaks, toxic drinking water, pitted roads, and electricity shutoffs, Russia did not present attractive investment opportunities as it moved away from communism. Yet more

collectivism The political philosophy that views the needs or goals of society as a whole as more important than individual desires (Chapter 2); the tendency of people to belong to groups or collectives and to look after each other in exchange for loyalty (Chapter 4).

socialism A moderate form of collectivism in which there is government ownership of institutions, and profit is not the ultimate goal.

Chapter 2 The Political, Legal, and Technological Environment 49

companies are taking the risk of investing in Russia because of increasing ease of entry, the new attempt at dividing and privatizing the Unified Energy System, and the move- ment by the Kremlin to begin government funding for the good of society including education, housing, and health care.21 Actions by the Russian government over the past few years, however, continue to call into question the transparency and reliability of the Russian government. BP, Exxon Mobil, and Ikea have each encountered de facto expro- priation, corruption, and state-directed industrialization (see The World of International Management at the beginning of Chapter 10).

One of the biggest problems in Russia and in other transition economies is cor- ruption, which we will discuss in greater depth in Chapter 3. The 2014 Corruption Perception Index from Transparency International ranked Russia 136th out of 174 coun- tries, falling behind Egypt and Colombia.22 Brazil, China, and India, part of the BRIC emerging markets block, consistently score higher than Russia. In the 2015 Heritage Foundation’s Index of Economic Freedom, Russia’s overall rating in the measurement of economic openness, regulatory efficiency, the rule of law, and competitiveness remained at 52.1 this year, ranking it only 2.1 points away from being a repressive economic busi- ness environment.23 As more MNCs invest in Russia, these unethical practices will face increasing scrutiny if political forces can be contained. To date, some multinationals feel that the risk is too great, especially with corruption continuing to spread throughout the country. Despite the Kremlin’s support of citizens, Russia is in danger of becoming a unified corrupt system. Still most view Russia as they do China: Both are markets that are too large and potentially too lucrative to ignore.

Social democracy refers to a socialist movement that achieved its goals through nonviolent revolution. This system was pervasive in such Western nations as Australia, France, Germany, Great Britain, Norway, Spain, and Sweden, as well as in India and Brazil. While social democracy was a great influence on these nations at one time or another, in practice it was not as viable as anticipated. Businesses that were nationalized were quite inefficient due to the guarantee of funding and the monopolistic structure. Citizens suffered a hike in both taxes and prices, which was contrary to the public inter- est and the good of the people. The 1970s and 1980s witnessed a response to this unfair structure with the success of Britain’s Conservative Party and Germany’s Christian Dem- ocratic Party, both of which adopted free-market ideals. Margaret Thatcher, as mentioned previously, was a great leader in this movement toward privatization. Although many businesses have been privatized, Britain still has a central government that adheres to the ideal of social democracy. With Britain facing severe budget shortfalls, Prime Min- ister David Cameron, first elected in 2010, proposed a comprehensive restructuring of public services that could further alter the country’s longstanding commitment to a broad social support program. Under his administration, austerity measures, including cuts to military and social program spending, were implemented. The Conservatives and David Cameron were reelected in a landslide in 2015, however, the Brexit vote was seen as a repudiation to Cameron and he later resigned.24

It is important to note here the difference between the nationalization of businesses and nationalism. The nationalization of businesses is the transference of ownership of a business from individuals or groups of individuals to the government. This may be done for several reasons: The ideologies of the country encourage the government to extract more money from the firm, the government believes the firm is hiding money, the gov- ernment has a large investment in the company, or the government wants to secure wages and employment status because jobs would otherwise be lost. Nationalism, on the other hand, is an ideal in and of itself whereby an individual is completely loyal to his or her nation. People who are a part of this mindset gather under a common flag for such reasons as language or culture. The confusing thing for the international businessperson is that it can be associated with both individualism and collectivism. Nationalism exists in the United States, where there is a national anthem and all citizens gather under a common flag, even though individualism is practiced in the midst of a myriad of cultures and extensive diversity. Nationalism also exists in China, exemplified in the movement

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against Japan in the mid-1930s and the communist victory in 1949 when communist leader Mao Tse-tung gathered communists and peasants to fight for a common goal. This ultimately led to the People’s Republic of China. In the case of modern China, nationalism presupposes collectivism.

Political Systems There are two basic anchors to political systems, each of which represents an “ideal type” that may not exist in pure form.

Democracy Democracy, with its European roots and strong presence in Northern and Western Europe, refers to the system in which the government is controlled by the citi- zens either directly or through elections. Essentially, every citizen should be involved in decision-making processes. The representative government ensures individual freedom since anyone who is eligible may have a voice in the choices made.

A democratic society cannot exist without at least a two-party system. Once elected, the representative is held accountable to the electorate for his or her actions, and this ultimately limits governmental power. Individual freedoms, such as freedom of expression and assembly, are secured. Further protections of citizens include impartial public service, such as a police force and court systems that also serve the government and, in turn, the electorate, though they are not directly affiliated with any political party. Finally, while representatives may be reelected, the number of terms is often limited, and the elected representative may be voted out during the next election if he or she does not sufficiently adhere to the goals of the majority ruling. As mentioned above, a social democracy com- bines a socialist ideology with a democratic political system, a situation that has charac- terized many modern European states as well as some in Latin America and other regions.

Totalitarianism Totalitarianism refers to a political system in which there is only one representative party, which exhibits control over every facet of political and human life. Power is often maintained by suppression of opposition, which can be violent. Media censorship, political repression, and denial of rights and civil liberties are dominant ide- als. If there is opposition to government, the response is imprisonment or even worse tactics, often torture. This may be used as a form of rehabilitation or simply a warning to others who may question the government.

Because only one party within each entity exists, there are many forms of totalitarian government. The most common is communist totalitarianism. Most dictatorships under the communist party disintegrated by 1989, but as noted above, aspects and degrees of this form of government are still found in Cuba, North Korea, Laos, Vietnam, and China. The evolution of modern global business has substantially altered the political systems in Viet- nam, Laos, and China, each of which has moved toward a more market-based and plural- istic environment. However, each still exhibits some oppression of citizens through denial of civil liberties. The political environment in China is very complex because of the gov- ernment’s desire to balance national, immediate needs with the challenge of a free-market economy and globalization. Since joining the WTO in 2001, China has made trade liber- alization a top priority. However, MNCs still face a host of major obstacles when doing business with and in China. For example, government regulations severely hamper multi- national activity and favor domestic companies, which results in questionable treatment such as longer document processing times for foreign firms.25 This makes it increasingly difficult for MNCs to gain the proper legal footing. The biggest problem may well be that the government does not know what it wants from multinational investors, and this is what accounts for the mixed signals and changes in direction that it continually sends. All this obviously increases the importance of knowledgeable international managers.

China may be moving further away from its communist tendencies as it begins supporting a more open, democratic society, at least in the economic sphere. China continues to monitor what it considers antigovernment actions and practices, but there

democracy A political system in which the government is controlled by the citizens either directly or through elections.

totalitarianism A political system in which there is only one representative party, which exhibits control over every facet of political and human life.

Chapter 2 The Political, Legal, and Technological Environment 51

is a discernible shift toward greater tolerance of individual freedoms.26 For now, China continues to challenge the capabilities of current international business theory as it tran- sitions through a unique system favoring high governmental control yet striving to unleash a more dynamic market economy.27

Though the most common, the totalitarian form of government exhibited in China is not the only one. Other forms of totalitarianism exhibit other forms of oppression as well. Parties or governments that govern an entity based on religious principles will ultimately oppress religious and political expression of its citizens. Examples are Iran and Saudi Arabia, where the laws and government are based on Islamic principles. Con- ducting business in the Middle East is, in many ways, similar to operating a business in the Western world. The Arab countries have been a generally positive place to do busi- ness, as many of these nations are seeking modern technology and most have the finan- cial ability to pay for quality services. Worldwide fallout from the war on terrorism; the rise of ISIS; the Afghanistan, Iraq, and Syrian wars; and the ongoing Israel–Arab con- flicts, however, have raised tensions in the Middle East considerably, making the business environment there risky and potentially dangerous.

The 2011 Arab Spring uprisings have affected business dealings in the authoritar- ian and/or totalitarian countries across northern Africa and the Middle East. Reasons for the political unrest varied, but most commonly included factors were oppressive govern- ment rule, economic decline, high unemployment, and human rights violations. Protest- ers successfully overthrew four government regimes and forced reforms in almost a dozen others. The political and economic fallout from the Arab Spring, including the Syrian civil war discussed in the opening section of this chapter, has left the business environ- ment with much continued uncertainty. Production and GDP were negatively affected almost overnight, and fuel prices spiked globally. Supply chain routes were disrupted for months, increasing the shipping and logistical costs of goods passing through the region. In Egypt, a military coup overthrew democratically elected Egyptian President Morsi in 2013, and a military general was elected president in a suspect election in 2014. In Libya, the fall of Gaddafi has resulted in a power vacuum, inviting increased acts of terrorism. Unemployment in Egypt and Tunisia has not recovered since the uprisings, and inflation remains around 10 percent.28 According to a late 2011 study by Grant Thornton, 26 percent of businesses in North America, and 22 percent of businesses globally, reported negative effects from the uprisings.29 A map of the countries that were impacted by the Arab Spring can be seen in Figure 2–1. Though many countries in the region have

Morocco

Western Sahara

Algeria

Tunisia Lebanon

Libya Egypt Saudi Arabia

Iraq Syria

Kuwait Jordan

Oman

Somalia

YemenSudan

Mauritania

Civil war Government overthrown Governmental changes Protests

Figure 2–1 Summary of Arab Spring Uprisings

Source: Original graphic by Ben Littell under supervision of Professor Jonathan Doh.

somewhat stabilized, the fallout from the revolutions will continue to impact international business.

One final form of totalitarianism, sometimes referred to as “right-wing,” allows for some economic (but not political) freedoms. While it directly opposes socialist and com- munist ideas, this form may gain power and support from the military, often in the form of a military leader imposing a government “for the good of the people.” This results in military officers filling most government positions. Such military regimes ruled in Germany and Italy from the 1930s to the 1940s and persisted in Latin America and Asia until the 1980s, when the latter moved toward democratic forms. Recent examples include Myanmar, where the military ruled as a dictatorship from 1962 to 2011.

■ Legal and Regulatory Environment One reason why today’s international environment is so confusing and challenging for MNCs is that they face so many different laws and regulations in their global business operations. These factors affect the way businesses are developed and managed within host nations, so special consideration must be paid to the subtle differences in the legal codes from one country to another. Adhering to disparate legal frameworks sometimes prevents large MNCs from capitalizing on manufacturing economies of scale and scope within these regions. In addition, the sheer complexity and magnitude of bureaucracies

A Closer Look

The Economic Impacts of Global Terrorism

A New Challenge for the International Business Community As discussed in the opening section of this chapter, social media has made global communication easier, which unfortunately includes the orchestration of terror- ist attacks. Global terrorism is a relatively new challenge; no longer are terrorist attacks small, one-person events isolated to a particular region or country. Over the last decade, attacks in Madrid, London, and Paris have involved a high degree of complexity and organization. Organizations like ISIS are recruiting worldwide through social networking sites, working to organize attacks far from their home base in Syria. Living in an intercon- nected world, it would be naïve to believe that the threat of terrorism does not affect the international business community. Evidence shows that the tourism industry appears to be especially impacted by the threat of terrorism, at least in the short term. According to the Paris Conven- tion and Visitors Bureau, the November 2015 terrorist attacks in Paris, which killed 130 civilians, resulted in a sudden, yet temporary, decline in tourism activity. Res- taurants, shops, and related businesses lost revenue, and hotels reported that the number of visitors declined sharply in the weeks following the attacks. Forty per- cent of hotel bookings in Brussels were cancelled the weekend following the Paris attacks, when suspected terrorist apartments were raided in Belgium. In places like France, where seven percent of economic activity and nearly two million jobs are dependent on tourism, even a slight decrease in visitors has a high economic

impact. There is some evidence that terrorism nega- tively impacts other sectors of the economy as well. According to a report issued by financial services firm Markit, manufacturing and service providers grew at a slower rate in November 2015 than expected. Service providers specifically stated that the terrorist attacks in Paris contributed to negative performance and a decrease in consumer confidence. Some estimates suggest that the November attacks could ultimately cost the French economy tens of billions of euros. Despite these setbacks, the long-term economic impact from terrorist attacks does not appear to be sub- stantial. Past terrorist attack locations, such as New York City, quickly rebounded from short-term economic set- backs. Stock market volatility following previous terror attacks has always stabilized fairly quickly, indicating a continued confidence from investors despite living in a world with this new type of uncertainty. The global econ- omy faces a variety of challenges in the 21st century— climate change, political tensions, and demographic shifts, to name a few. Global terrorism, like these other challenges, will likely continue to cause some disruption to the international business community, but it will not stop economic progress.

Sources: Walker, Andrew, “Paris Attacks: Assessing the economic impact,” BBC, December 2, 2015. http://www.bbc.com/news/ business-34965000; “Market Flash France PMI,” Markit Economics, November 23, 2015. https://www.markiteconomics.com/; Newton- Small, Jay, “The Cost of the Paris Attacks,” Time, November 23, 2015. http://time.com/4123827/paris-attacks-tourism/.

Chapter 2 The Political, Legal, and Technological Environment 53

require special attention. This, in turn, results in slower time to market and greater costs. MNCs must take time to carefully evaluate the legal framework in each market in which they do business before launching products or services in those markets.

There are four foundations on which laws are based around the world. Briefly summarized, these are

1. Islamic law. This is law derived from interpretation of the Qur’an and the teachings of the Prophet Muhammad. It is found in most Islamic countries in the Middle East and Central Asia.

2. Socialist law. This law comes from the Marxist socialist system and contin- ues to influence regulations in former communist countries, especially those from the former Soviet Union, as well as present-day China, Vietnam, North Korea, and Cuba. Since socialist law requires most property to be owned by the state or state-owned enterprises, MNCs have traditionally shied away from these countries.

3. Common law. This comes from English law, and it is the foundation of the legal system in the United States, Canada, England, Australia, New Zealand, and other nations.

4. Civil or code law. This law is derived from Roman law and is found in the non-Islamic and nonsocialist countries such as France, some countries in Latin America, and even Louisiana in the United States.

With these broad notions serving as points of departure, the following sections discuss basic principles and examples of the international legal environment facing MNCs today.

Basic Principles of International Law When compared with domestic law, international law is less coherent because its sources embody not only the laws of individual countries concerned with any dispute but also treaties (universal, multilateral, or bilateral) and conventions (such as the Geneva Conven- tion on Human Rights or the Vienna Convention of Diplomatic Security). In addition, international law contains unwritten understandings that arise from repeated interactions among nations. Conforming to all the different rules and regulations can create a major problem for MNCs. Fortunately, much of what they need to know can be subsumed under several broad and related principles that govern the conduct of international law.

Sovereignty and Sovereign Immunity The principle of sovereignty holds that gov- ernments have the right to rule themselves as they see fit. In turn, this implies that one country’s court system cannot be used to rectify injustices or impose penalties in another country unless that country agrees. So while U.S. laws require equality in the workplace for all employees, U.S. citizens who take a job in Japan cannot sue their Japanese em- ployer under the provisions of U.S. law for failure to provide equal opportunity for them.

International Jurisdiction International law provides for three types of jurisdictional principles. The first is the nationality principle, which holds that every country has jurisdiction (authority or power) over its citizens no matter where they are located. There- fore, a U.S. manager who violates the American Foreign Corrupt Practices Act while traveling abroad can be found guilty in the United States. The second is the territoriality principle, which holds that every nation has the right of jurisdiction within its legal territory. Therefore, a German firm that sells a defective product in England can be sued under English law even though the company is headquartered outside England. The third is the protective principle, which holds that every country has jurisdiction over behav- ior that adversely affects its national security, even if that conduct occurred outside the country. Therefore, a French firm that sells secret U.S. government blueprints for a satellite system can be subjected to U.S. laws.

Islamic law Law that is derived from interpretation of the Qur’an and the teachings of the Prophet Muhammad and is found in most Islamic countries.

socialist law Law that comes from the Marxist socialist system and continues to influence regulations in countries formerly associated with the Soviet Union as well as China.

common law Law that derives from English law and is the foundation of legislation in the United States, Canada, and England, among other nations.

civil or code law Law that is derived from Roman law and is found in the non-Islamic and nonsocialist countries.

principle of sovereignty An international principle of law that holds that governments have the right to rule themselves as they see fit.

nationality principle A jurisdictional principle of international law that holds that every country has jurisdiction over its citizens no matter where they are located.

territoriality principle A jurisdictional principle of international law that holds that every nation has the right of jurisdiction within its legal territory.

protective principle A jurisdictional principle of international law that holds that every country has jurisdiction over behavior that adversely affects its national security, even if the conduct occurred outside that country.

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Doctrine of Comity The doctrine of comity holds that there must be mutual respect for the laws, institutions, and governments of other countries in the matter of jurisdiction over their own citizens. Although this doctrine is not part of international law, it is part of international custom and tradition.

Act of State Doctrine Under the act of state doctrine, all acts of other governments are considered to be valid by U.S. courts, even if such acts are inappropriate in the United States. As a result, for example, foreign governments have the right to set limits on the repatriation of MNC profits and to forbid companies from sending more than this amount out of the host country back to the United States.

Treatment and Rights of Aliens Countries have the legal right to refuse admission of foreign citizens and to impose special restrictions on their conduct, their right of travel, where they can stay, and what business they may conduct. Nations also can deport aliens. For example, the United States has the right to limit the travel of foreign scientists com- ing into the United States to attend a scientific convention and can insist they remain within five miles of their hotel. After the horrific events of 9/11, the U.S. government began greater enforcement of laws related to illegal aliens. As a consequence, closer scrutiny of visitors and temporary workers, including expatriate workers from India and elsewhere who have migrated to the United States for high-tech positions, may result in worker shortages.30

Forum for Hearing and Settling Disputes This is a principle of U.S. justice as it applies to international law. At their discretion, U.S. courts can dismiss cases brought before them by foreigners; however, they are bound to examine issues including where the plaintiffs are located, where the evidence must be gathered, and where the property to be used in restitution is located. One of the best examples of this principle is the Union Carbide pesticide plant disaster in Bhopal, India. Over 2,000 people were killed and thousands left permanently injured when a toxic gas enveloped 40 square kilome- ters around the plant. The New York Court of Appeals sent the case back to India for resolution.

Examples of Legal and Regulatory Issues The principles described above help form the international legal and regulatory frame- work within which MNCs must operate. In the following, we examine some examples of specific laws and situations that can have a direct impact on international business.

Financial Services Regulation The global financial crisis of 2008–2010 underscored the integrated nature of financial markets around the world and the reality that regulatory failure in one jurisdiction can have severe and immediate impacts on others.31 The global contagion that enveloped the world was exacerbated, in part, by the availability of global derivatives trading and clearing and the relatively lightly regulated private equity and hedge fund industries. The crisis and its broad economic effects have prompted regulators around the world to consider tightening aspects of financial services regulation, espe- cially those related to the risks associated with the derivatives activities of banks and their involvement in trading for their own account. In the United States, financial reform legislation was approved in July of 2010, although the degree to which that legislation would prevent another crisis remained hotly debated.32 The nearby Closer Look box provides a comparison of proposed and implemented financial reform approaches across the globe.

Foreign Corrupt Practices Act During the special prosecutor’s investigation of the Watergate scandal in the early 1970s, a number of questionable payments made by U.S. corporations to public officials abroad were uncovered. These bribes became the focal

doctrine of comity A jurisdictional principle of international law that holds that there must be mutual respect for the laws, institutions, and governments of other countries in the matter of jurisdiction over their own citizens.

act of state doctrine A jurisdictional principle of international law that holds that all acts of other governments are considered to be valid by U.S. courts, even if such acts are illegal or inappropriate under U.S. law.

Chapter 2 The Political, Legal, and Technological Environment 55

point of investigations by the U.S. Internal Revenue Service, Securities and Exchange Commission (SEC), and Justice Department. This concern over bribes in the international arena eventually culminated in the 1977 passage of the Foreign Corrupt Practices Act (FCPA), which makes it illegal to influence foreign officials through personal payment or political contributions. The objectives of the FCPA were to stop U.S. MNCs from initiating or perpetuating corruption in foreign governments and to upgrade the image of both the United States and its businesses abroad.

Critics of the FCPA feared the loss of sales to foreign competitors, especially in those countries where bribery is an accepted way of doing business. Nevertheless, the U.S. government pushed ahead and attempted to enforce the act. Some of the countries that were named in early bribery cases under the law included Algeria, Kuwait, Saudi Arabia, and Turkey. The U.S. State Department tried to convince the SEC and Justice Department not to reveal countries or foreign officials who were involved in its investi- gations for fear of creating internal political problems for U.S. allies. Although this political sensitivity was justified for the most part, several interesting developments occurred: (1) MNCs found that they could live within the guidelines set down by the FCPA and (2) many foreign governments actually applauded these investigations under the FCPA because it helped them crack down on corruption in their own country.

One analysis reported that since passage of the FCPA, U.S. exports to “bribe prone” countries actually increased.33 Investigations reveal that once bribes were removed as a key competitive tool, more MNCs were willing to do business in that country. This proved to be true even in the Middle East, where many U.S. MNCs always assumed that bribes were required to ensure contracts. Evidence shows that this is no longer true in most cases; and in cases where it is true, those companies that engage in bribery face a strengthened FCPA that now allows the courts to both fine and imprison guilty parties. In addition, stepped-up enforcement appears to be having a real impact. A report from the law firm Jones Day found that FCPA actions are increasingly targeting individual executives, not just corporations; that penalties imposed under the FCPA have skyrocketed; and that violations have spurred a number of collateral civil actions.34

Bureaucratization Very restrictive foreign bureaucracies are one of the biggest prob- lems facing MNCs. This is particularly true when bureaucratic government controls are inefficient and left uncorrected. A good example is Japan, whose political parties feel more beholden to their local interests than to those in the rest of the country. As a result, it is extremely difficult to reorganize the Japanese bureaucracy and streamline the ways things are done because so many politicians are more interested in the well-being of their own districts than in the long-term well-being of the nation as a whole. In turn, parochial actions create problems for MNCs trying to do business there. The administration of Prime Minister Junichiro Koizumi of Japan tried to reduce some of this bureaucracy, although the fact that Japan has had seven different prime ministers from 2006 to 2015 has not helped these efforts. Certainly the long-running recessionary economy of the country is inspiring reforms in the nation’s antiquated banking system, opening up the Japanese market to more competition.35

Japanese businesses are also becoming more aware of the fact that they are depen- dent on the world market for many goods and services and that when bureaucratic red tape drives up the costs of these purchases, local consumers pay the price. These busi- nesses are also beginning to realize that government bureaucracy can create a false sense of security and leave them unprepared to face the harsh competitive realities of the international marketplace.

In many developing and emerging markets, bureaucratic red tape impedes business growth and innovation. The World Bank conducts an annual survey to determine the ease of doing business in a variety of countries around the world. The survey includes indi- vidual items related to starting a business, dealing with construction permits, employing workers, registering property, getting credit, protecting investors, paying taxes, trading across borders, enforcing contracts, and closing a business. A composite ranking, as

Foreign Corrupt Practices Act (FCPA) An act that makes it illegal to influence foreign officials through personal payment or political contributions; became U.S. law in 1977 because of concerns over bribes in the international business arena.

A Closer Look

Comparing Recent Global Financial Reforms

Preventing More Tax-Funded Bailouts The G20 wants to end the belief among banks that they are “too big to fail” by requiring resolution mechanisms and “living wills” for speedy windups that don’t destabi- lize markets. As a legislative body for a unified country, the United States’ Senate was able to set up an “orderly liquidation” process fairly quickly through Title II of the Dodd-Frank Act. Japan’s Diet passed similar reforms by amending its existing Deposit Insurance Act in 2013. The EU, as a collection of 28 states with no common insolvency laws, faces a much harder task of thrashing out a pan-EU mechanism even though cross-border banks dominate the sector. To ensure that resolution funds can quickly be collected and paid even when banks cross international borders, the European Com- mission established a centralized banking union in 2012. This banking union essentially transfers the leg- islating of banking policies from individual nations to the EU as a whole. Two major initiatives have resulted from this shift: the Single Supervisory Mechanism (SSM) and the Single Resolution Mechanism (SRM). The SSM, which became operational in 2014, supervises the financial health of banking institutions across Europe. The SRM, which came into force on January 1, 2016, provides restructuring assistance to failing EU banks. The SRM is funded through contributions made by other banking institutions, thereby protecting taxpayers. Winners/Losers: Banks face an extra levy on top of higher capital and liquidity requirements. Taxpayers should be better shielded. Messy patchwork for global banks, which will come under pressure to “subsidiarize” operations in different countries.

Over-the-Counter Derivatives The G20 agreed that derivatives should be standard- ized where possible so they can be centrally cleared and traded on an exchange by the end of 2012; three- quarters of the G20 members were able to meet this deadline. Some countries have taken reforms a step further. The U.S. Senate adopted legislation (Dodd-Frank Act) requiring banks to spin off their swaps desk to iso- late risks from depositors, and, in 2014, Canada expanded the ability of banking regulators to set restric- tions over banks that trade standard derivatives. However, some disagreement has risen between the EU and the U.S. within the international derivatives mar- ket. Between 2014 and 2016, regulators in Europe and the United States were unable to agree on whether each other’s clearinghouse rules were equivalent. Without an agreement, European traders would have faced higher capital requirements, likely resulting in less transnational trading. In 2016, the EU and the United States finally reached a deal on the oversight of clearinghouses, pav- ing the way for a more unified global market. Winners/Losers: Cross-border trading within the United States and the EU will continue uninterrupted.

Corporations face costlier hedging as there will be heavier capital charges on uncleared trades, but differ- ences in exemption scope could be exploited.

Bonuses The G20 has introduced principles to curb excessive pay and bonuses, such as requiring a big chunk of a bonus to be deferred over several years with a claw- back mechanism. The United States and the EU are applying these principles and taking their own actions, such as a one-off tax in Britain. Winners/Losers: Harder to justify big bonuses in the future.

Credit Ratings Agencies The G20 agreed that ratings agencies should be required to register, report to supervisors, and show how they man- age internal conflicts of interest. In 2014 the EU adopted even stricter laws, increasing the disclosure requirements regarding fees charged by credit rating agencies. Also in 2014, the Securities and Exchange Commission in the United States adopted stricter requirements for credit rat- ing agencies, aimed at preventing conflicts of interest and increasing standards and transparency. Winners/Losers: Ratings agencies will have to justify what they do much more in the future. The “Big Three”— Fitch, S&P, and Moody’s—may face more competition in the EU. The sector faces more efforts to dilute their role in determining bank capital requirements.

Hedge Funds/Private Equity The United States and the EU are working in parallel to introduce a G20 pledge to require hedge fund manag- ers to register and report a range of data on their posi- tions. U.S. law is in line with G20 but exempts private equity and venture capital. The EU wants to go much further by including private equity and requiring third- country funds and managers to abide by strict require- ments if they want to solicit European investors, a step the United States says is discriminatory. Managers of alternative funds in the EU would also have curbs on remuneration, an element absent from U.S. reform. Winners/Losers: U.S. hedge fund managers may find it harder to do business in the EU. European investors may end up with less choice. Regulators will have better data on funds. EU managers may decamp to Switzer- land, though also for tax reasons.

Banks Trading The U.S. Senate has adopted the “Volcker Rule,” which would ban risky trading unrelated to customers’ needs at deposit-insured banks. The Volcker Rule’s associated regulations were fully implemented in the United States

Chapter 2 The Political, Legal, and Technological Environment 57

shown in Table 2–1, ranks the overall ease of doing business in these countries. Although developed countries generally rank better (higher), there are some developing countries (Georgia, Malaysia) that do well, and some developed economies (Greece) that do poorly.

In Table 2–1 economies are ranked on their ease of doing business, from 1 to 189, with first place being the best. A high ranking on the ease-of-doing-business index means the regulatory environment is conducive to the operation of business. This index averages the country’s percentile rankings on 10 topics, made up of a variety of indicators, giving equal weight to each topic. The rankings are benchmarked to June 2015.

Privatization Another example of the changing international regulatory environment is the current move toward privatization by an increasing number of countries. The German govern- ment, for example, has sped up privatization and deregulation of its telecommunications market. This has opened a host of opportunities for MNCs looking to create joint ventures with local German firms. Additionally, the French government has put some of its busi- nesses on the sale block. Meanwhile, in China the government is slowly moving forward with plans to partially privatize many of its state-owned enterprises. In late 2015, the Chinese government announced reforms allowing private investment in state-owned enterprises. These reforms are likely aimed at increasing the profitability of the

in 2014. Similar regulation in Europe has been slower to take shape. Many key EU states are against the rule as they want to preserve their universal banking model, though, in 2015, the European Commission sent a pro- posal to the European Parliament for consideration. Winners/Losers: Some trading could switch to the EU from the United States inside global banks.

Systemic Risk The G20 wants mechanisms in place to spot and tackle systemwide risks better, a core lesson from the crisis. The U.S. Senate bill sets up a council of regulators that includes the Federal Reserve, but the U.S. House wants a bigger role for the Fed. The EU has approved a reform that will make the European Central Bank the hub of a pan-EU systemic risk board. Winners/Losers: ECB is a big winner with an enhanced role that many see as a platform for a more pervasive role in the future. Banks will have yet another pair of eyes staring down at them.

Bank Capital Requirements The push to beef up bank capital and liquidity require- ments is being led by the global Basel Committee of central bankers and supervisors, which is toughening up its global accord as requested by the G20. It took at the end of 2012. The U.S. bill directs regulators to increase capital requirements on large financial firms as they grow in size or engage in riskier activities. In 2015, the Federal Reserve further increased the capital require- ments for the eight largest banks.

The EU has approved new rules to beef up capital on trading books and allow supervisors to slap extra capital requirements if remuneration is encouraging excessively risky behavior. Additional rules were imple- mented to strengthen corporate governance and increase transparency. Winners/Losers: Bank return on equity is set to be squeezed. Regulators will have many more tools to control the sector. Higher costs are likely to be passed on to consumer investors. There could be timing issues as the EU has been more willing than the United States in the past to adopt Basel rules.

Fixing Securitization The U.S. Senate bill forces securitizers to keep a base- line 5 percent of credit risk on securitized assets. The EU has already approved a law to this effect. Winners/Losers: Banks say privately the 5 percent level is low enough not to make much difference and that the key problem is restoring investor confidence into the tarnished sector.

Sources: Tracy, Ryan; McGrane, Victoria; Baer, Justin, “Fed Lifts Capi- tal Requirements for Banks,” The Wall Street Journal, July 20, 2015; “SEC Adopts Credit Rating Agency Reform Rules,” US Securities and Exchange Commission, August 27, 2014; Brush, Silla; Verlaine, Julia- Ambra, “EU, U.S. Reach Deal on Clearing Rules for Derivatives Mar- ket,” BloombergBusiness, February 10, 2016; Mayeda, Andrew, “Canada to Increase Regulation of Over-the-Counter Derivatives,” BloombergBusiness, February 11, 2014; “Factbox: Comparing EU and U.S. Financial Reform,” Reuters, May 19, 2010. Additional research by authors.

approximately 115 large state-owned conglomerates. The returns for these businesses, ranging from telecommunications to energy, have been far lower than those from related private enterprises. Despite these small reforms, some still express doubt that the Com- munist Party will allow a true market-based economy to take hold. The state still controls 80,000 small-scale businesses across the country, plans to maintain a high level of con- trol over the nationalized conglomerates, and continues to exert a level of control over the stock market.36,37

Poland, transitioning from a state-planned economy to a free-market economy, underwent extensive privatization of its state-owned enterprises in the early 2000s. The mass privatization of industries, including insurance and coal mining, boosted the Warsaw Stock Exchange into the top ten European markets by value.38 Turkey had issued various privatization tenders in the energy and electricity sectors; Nigeria finalized the privatiza- tion of three of the Power Holding Company of Nigeria successor companies in 2012;

International Management in Action

Bitcoin and other Decentralized Currencies in the Digital Age

Alternative, extra-governmental currencies have sparked the interest of many due to the global nature of online transactions. In the past, these virtual currencies were centrally controlled and often quickly shut down by gov- ernmental regulations. Virtual currencies in the early 2000s, such as “E-gold” and “Liberty Reserve,” were prone to criminal activity and illegal transactions. These virtual currencies acted more as businesses than as peer-to-peer transaction devices, and the currencies provided little flexibility in real, everyday use. In 2008, a paper published online by Satoshi Naka- moto, titled “Bitcoin: A Peer-to-Peer Electronic Cash Sys- tem,” outlined a new concept for digital currency, in which open peer-to-peer transactions replace the need for cen- tralized currency oversight and regulation. Little is known about “Satoshi Nakamoto,” with many now believing that the name is a pseudonym for a group of individuals. In 2009, Nakamoto released the first peer-to-peer Bitcoin software and issued the first round of currency. Unlike its predecessors, Bitcoin is easy to use when purchasing real, tangible goods. In recent years, Bitcoin has quickly grown into the most widely used digital currency. Like traditional paper currency, Bitcoin depends on faith of the users for the system to work. Rather than relying on a central bank, Bitcoin relies on a decentral- ized ledger system to maintain the overall value within the market. On a basic level, every registered user main- tains a copy of the ledger, which displays the individual balance of Bitcoin for every other user. Transactions in Bitcoin are, in essence, just the debiting and crediting of those balances. The open, public sharing of the value of the transactions occurring in Bitcoin is essential, as this allows for the role of the central banking institution to be completely replaced, thereby “decentralizing” the currency. As of February 2016, the market capitalization of Bitcoin was about US$6 billion. More than 1,000 retailers, both online and in brick-and-mortar locations, now accept Bitcoin. Bitcoin and other decentralized digital currencies could provide an alternative method of storing value in

times of currency uncertainty. In 2015, when Greece’s inability to meet its debt repayment schedule led to restrictions on bank withdrawals and growing uncer- tainty for the future of the European Union, Bitcoin saw a surge in activity across Europe. In July, the number of Greeks registering to buy and sell Bitcoin increased ten- fold, and trades increased by 79 percent. Bitcoin mar- kets in Germany, Poland, and China saw large increases in activity from Greek computers. Governments appear to be cautiously open to the use of Bitcoin within their borders. Almost every country allows the use of Bitcoin for private transactions. The United States and EU have issued only modest warnings regarding the use of digital currencies, and few legal regulations exist. In 2015, the United States officially recognized Bitcoin as a commodity. Bitcoin’s growth has not been completely smooth. A series of rapid increases and decreases in the value of a Bitcoin, from US$0.08 in 2010 to over US$1,200 in 2013, has led to many economists, including former U.S. Federal Reserve Chairman Alan Greenspan, to declare the currency a bubble. Though the currency has stabi- lized to a value of between US$200 and US$400 in recent years, rapid price swings are still commonplace. Illegal activity, including drug trafficking and money laundering, does occur through Bitcoin marketplaces, though the open ledger concept behind the currency makes these activities easier to trace. As a digital cur- rency, malware and computer viruses have also led to some limited instances of theft. Bitcoin’s encryption, however, is still regarded as strong. Bitcoin appears to be reaching a tipping point. While some economists insist that Bitcoin will ultimately sink to a value of zero, others predict that the currency will rise to a value of over US$40,000. Perhaps the ultimate suc- cess or failure of Bitcoin as a digital currency lies not in its own design, but in the uncertainties that led to its initial rise in popularity. If consumers continue to cast doubt over government-issued, centralized currencies, Bitcoin could continue to grow in popularity for years to come.

60 Part 1 Environmental Foundation

and Pakistan had privatized 167 state-owned enterprises since its inception, yielding US$9 billion in proceeds to the government.39 As described in the International Manage- ment in Action box “Brazilian Economic Reform” in Chapter 1, many developing coun- tries are privatizing their state-owned companies to provide greater competition and access to service.

Regulation of Trade and Investment The regulation of international trade and investment is another area in which individual countries use their legal and regulatory policies to affect the international management environment. The rapid increase in trade and investment has raised concerns among countries that others are not engaging in fair trade, based on the fundamental principles of international trade as specified in the WTO and other trade and investment agreements. Specifically, international trade rules require countries to provide “national treatment,” which means that they will not discriminate against others in their trade relations. Unfor- tunately, many countries engage in government support (subsidies) and other types of practices that distort trade. For example, many developing countries require that foreign MNCs take on local partners in order to do business. Others mandate that MNCs employ a certain percentage of local workers or produce a specific amount in their country. These practices are not limited to developing countries. Japan, the United States, and many European countries use product standards, “buy local” regulations, and other policies to protect domestic industries and restrict trade.

In addition, most trade agreements require that countries extend most-favored-nation status such that trade benefits accorded one country (such as tariff reductions under the WTO) are accorded all other countries that are parties to that agreement. The emergence of regional trade arrangements has called into question this commitment because, by definition, agreements among a few countries (NAFTA, EU) give preference to those specific members over those who are not part of these trading “blocs.” As discussed in Chapter 1, many countries engage in antidumping actions intended to offset the practice of trading partners “dumping” products at below cost or home market price, as well as countervailing duty actions intended to offset foreign government subsidization. In each case, there is evidence that many countries abuse these laws to protect domestic industries, something the WTO has been more vigilant in monitoring in recent years.

■ Technological Environment and Global Shifts in Production

Technological advancements not only connect the world at incredible speed but also aid in the increased quality of products, information gathering, and R&D. Manufacturing, infor- mation processing, and transportation are just a few examples of where technology improves organizational and personal business. The need for instant communication increases exponentially as global markets expand. MNCs need to keep their businesses connected; this is becoming increasingly easier as technology contributes to “flattening the world.” Thomas Friedman, in his book The World Is Flat, writes that such events as the introduc- tion of the Internet or the World Wide Web, along with mobile technologies, open sourc- ing, and work flow software distribution, not only enable businesses and individuals to access vast amounts of information at their fingertips in real time but are also resulting in the world flattening into a more level playing field.40

Trends in Technology, Communication, and Innovation The innovation of the microprocessor could be considered the foundation of much of the technological and computing advancements seen today.41 The creation of a digital frame- work allowed high-power computer performance at low cost. This then gave birth to such breakthroughs as the development of enhanced telecommunication systems, which will

Chapter 2 The Political, Legal, and Technological Environment 61

be explored in greater depth later in the chapter. Now, computers, telephones, televisions, and wireless forms of communication have merged to create multimedia products and allow users anywhere in the world to communicate with one another. The Internet allows one to obtain information from literally billions of sources.

Global connections do not necessarily level the playing field, however. Throughout the early 2000s, the challenge of integrating telecom standards became an issue for MNCs in China. Qualcomm Corporation had wanted to sell China narrowband CDMA (code division multiple access) technology; however, Qualcomm was initially unsuccess- ful in convincing the government that it could build enough products locally. Instead, China’s network, the world’s largest mobile network, used primarily the GSM technology that is popular in Europe.42 Following the reorganization of China’s telecommunication industry in 2009, however, CDMA gained a foothold in China. In 2015 alone, China Telecom was expected to sell an estimated 100 million CDMA handsets.43

Furthermore, concepts like the open-source model allow for free and legal sharing of software and code, which may be utilized by underdeveloped countries in an attempt to gain competitive advantage while minimizing costs. India exemplifies this practice as it continues to increase its adoption of the Linux operating system (OS) in place of the global standard Microsoft Windows. The state of Kerala shifted the software of its 2,600 high schools to the Linux system, enabling each user to configure it to his or her needs, with the goal of creating a new generation of adept programmers. Microsoft, through its DreamSpark program, has been providing students access to its latest developer and designer tools at no charge. The program aims to unlock students’ creative potential and set them on the path to academic and career success and, since its inception, has provided nearly 50 million free downloads. Originally launched in the United States and United Kingdom, the DreamSpark program is now available to students in over 165 countries.44 More broadly, a number of for-profit and nonprofit firms have been aggressively working to bring low-cost computers into the hands of the hundreds of millions of children in the developing world who have not benefited from the information and computing revolution.

Next Thing Company, a start-up based in California, has developed an extremely low-cost computer with the goal of providing word processing and Internet access to people in low-income areas. Called C.H.I.P., the computers retail for US$9. The comput- ers are roughly the size of a postcard, allowing for cheap and easy shipment to any part of the world. Despite the low price, C.H.I.P. computers have about as much functional- ity as a smartphone; every unit has Wi-Fi capability, a 4-gigabyte hard drive, and 512 megabytes of RAM. Accessories can be connected through USB ports, and most televi- sions can serve as the computer’s screen, saving additional costs by negating the need for more expensive monitors. Because of the low cost and small size, the computers are suited to be adapted, or “hacked,” to best fit the needs of the user. Next Thing Company plans to actively partner with schools and nonprofits to ensure that the computers ulti- mately meet the needs of the end users in the developing world. The first 30,000 units were shipped in January 2016.45

There also exists a great potential for disruptions as the world relies more and more on digital communication and imaging. The world is connected by a vast network of fiber-optic cables that we do not see because they are buried either underground or under- water. Roughly the width of a garden hose, 200 sets of these cables carry 99 percent of all transoceanic communication, leading to a great deal of system vulnerability.46 In 2015, a series of accidental disruptions to one cable led to weeks of slower Internet and com- munication problems throughout Vietnam. The fact that so many were reliant on a mere 4-inch-thick cable shows the potential risks associated with greater global connectivity.47

We have reviewed general influences of technology here, but what are some of the specific dimensions of technology and what other ways does technology affect interna- tional management? Here, we explore some of the dimensions of the technological envi- ronment currently facing international management, with a closer look at biotechnology, e-business, telecommunications, and the connection between technology, outsourcing, and offshoring.

62 Part 1 Environmental Foundation

In addition to the trends discussed above, other specific ways in which technology will affect international management in the next decade include

1. Rapid advances in biotechnology that are built on the precise manipulation of organisms, which will revolutionize the fields of agriculture, medicine, and industry.

2. The emergence of nanotechnology, in which nanomachines will possess the ability to remake the whole physical universe.

3. Satellites that will play a role in learning. For example, communication firms will place tiny satellites into low orbit, making it possible for millions of peo- ple, even in remote or sparsely populated regions such as Siberia, the Chinese desert, and the African interior, to send and receive voice, data, and digitized images through handheld telephones.

4. Automatic translation telephones, which will allow people to communicate naturally in their own language with anyone in the world who has access to a telephone.

5. Artificial intelligence and embedded learning technology, which will allow think- ing that formerly was felt to be only the domain of humans to occur in machines.

6. Silicon chips containing up to 100 million transistors, allowing computing power that now rests only in the hands of supercomputer users to be available on every desktop.

7. Supercomputers that are capable of 1 trillion calculations per second, which will allow advances such as simulations of the human body for testing new drugs and computers that respond easily to spoken commands.48

The development and subsequent use of these technologies have greatly benefited the most developed countries in which they were first deployed. However, the most positive effects should be seen in developing countries where inefficiencies in labor and production impede growth. Although all these technological innovations will affect international man- agement, specific technologies will have especially pronounced effects in transforming economies and business practices. The following discussion highlights some specific dimensions of the technological environment currently facing international management.

Biotechnology The digital age has given rise to such innovations as computers, cellular phones, and wireless technology. Advancements within this realm allow for more efficient commu- nication and productivity to the point where the digital world has extended its effect from information systems to biology. Biotechnology is the integration of science and technol- ogy, but more specifically it is the creation of agricultural or medical products through industrial use and manipulation of living organisms. At first glance, it appears that the fusion of these two disciplines could breed a modern bionic man immune to disease, especially with movements toward technologically advanced prosthetics, cell regeneration through stem cell research, or laboratory-engineered drugs to help prevent or cure diseases such as HIV or cancer.

Pharmaceutical competition is also prevalent on the global scale with China’s raw material reserve and the emergence of biotech companies such as Genentech and Merck, after its acquisition of Swiss biotech company Serono. India is emerging as a major player, with its largest, mostly generic, pharmaceutical company Ranbaxy’s ability to produce effective and affordable drugs (for further discussion on drug affordability inter- nationally and the ethics of drug pricing, see In-Depth Integrative Case 1.2 at the end of Part One).49 While pharmaceutical companies mainly manufacture drugs through a process similar to that of organic chemistry, biotech companies attempt to discover genetic abnormalities or medicinal solutions through exploring organisms at the molecu- lar level or by formulating compounds from inorganic materials that mirror organic

Chapter 2 The Political, Legal, and Technological Environment 63

substances. DNA manipulation in the laboratory extends beyond human research. As mentioned above, another aspect of biotech research is geared toward agriculture. In the United States and Brazil, ethanol production is expected to increase for the foreseeable future, with corn and sugarcane serving as feedstock. Automobile gasoline in Brazil is now mandated to consist of nearly 25 percent ethanol, and blended gasoline was initially encouraged in the United States through tax subsidies.50 However, some have raised concerns regarding increased food prices caused by using sugarcane and corn as a fuel alternatives. For this and many other reasons, global companies like Monsanto are col- laborating with others such as BASF AG to work toward creating genetically modified seeds such as drought-tolerant corn and herbicide-tolerant soybeans.51 (See the supple- mental online simulation related to the U.S.-EU dispute over trade in genetically modified organisms.) Advancements in this industry include nutritionally advanced crops that may help alleviate world hunger.52

Aside from crops, the meat industry can also benefit from this process. The out- break of mad cow disease in Great Britain sparked concern when evidence of the disease spread throughout Western Europe; however, the collaborative work of researchers in the United States and Japan may have engineered a solution to the problem by eliminat- ing the gene that is the predecessor to making the animal susceptible to this ailment.53 Furthermore, animal cloning, which simply makes a copy of preexisting DNA, could boost food production by producing more meat or dairy-producing animals. The first evidence of a successful animal clone was Dolly, born in Scotland in 1996. Complica- tions arose, and Dolly aged at an accelerated rate, indicating that while she provided hope, there still existed many flaws in the process. While the EU has banned the clon- ing of livestock, the United States allows cloned animal products to be incorporated in the food supply.54 Other countries actively cloning animals include Australia, China, Japan, New Zealand, and South Korea. The world is certainly changing, and the trend toward technological integration is far from over. Whether one desires laser surgery to correct eyesight, a vaccine for emerging viruses, or more nutritious food, there is a biotechnology firm competing to be the first to achieve these goals. Hunger and poor health care are worldwide issues, and advancement in global biotechnology is working to raise the standards.

E-Business As the Internet becomes increasingly widespread, it is having a dramatic effect on inter- national commerce. Table 2–2 shows Internet penetration rates for major world regions,

Table 2–2 World Internet Usage and Population Statistics

Internet Internet World Population Users Users Penetration Growth Users % Regions (2015 Est.) 2000 2015 (% Population) 2000–2015 of Total

Africa 1,158,355,663 4,514,400 327,145,889 28.2% 7,146.7% 9.8% Asia 4,032,466,882 114,304,000 1,611,048,215 40.0 1,309.4 48.1 Europe 821,555,904 105,096,093 604,147,280 73.5 474.9 18.1 Middle East 236,137,235 3,284,800 123,172,132 52.2 3,649.8 3.7 North America 357,178,284 108,096,800 313,867,363 87.9 190.4 9.4 Latin America/ Caribbean 617,049,712 18,068,919 339,251,363 55.5 1,777.5 10.1 Oceania/Australia 37,158,563 7,620,480 27,200,530 73.2 256.9 0.8

WORLD TOTAL 7,259,902,243 360,985,492 3,345,832,772 46.1 826.9 100.0

Source: “Usage and Population Statistice,” Internet World Stats, www.internetworldstats.com/stats.htm. Estimated Internet users are 3,345,832,772 for November 15, 2015.

64 Part 1 Environmental Foundation

illustrating the dramatic increase from 2000 to 2015 and the accompanying growth rates, with Africa exhibiting the highest rate at more than 7,000 percent.

Tens of millions of people around the world have now purchased books from Ama- zon.com, and the company has now expanded its operations around the world (see The World of International Management at the beginning of Chapter 11). So have a host of other electronic retailers (e-tailers), which are discovering that their home-grown retailing expertise can be easily transferred and adapted for the international market.55 Dell Com- puter has been offering B2C (electronic business-to-consumer) goods and services in Europe for a number of years, and the automakers are now beginning to move in this direction. Tesla sells most of its cars directly to customers through the Internet, and Toyota is testing a similar model.56 Other firms are looking to use e-business to improve their current operations. For example, Deutsche Bank has overhauled its entire retail net- work with the goal of winning affluent customers across the continent.57 Yet the most popular form of e-business is for business-to-business (B2B) dealings, such as placing orders and interacting with suppliers worldwide. Business-to-consumer (B2C) transactions will not be as large, but this is an area where many MNCs are trying to improve their operations.

The area of e-business that will most affect global customers is e-retailing and financial services. For example, customers can now use their keyboard to pay by credit card, although security remains a problem. However, the day is fast approaching when electronic cash (e-cash) will become common. This scenario already occurs in a number of forms. A good example is prepaid smart cards, which are being used mostly for tele- phone calls and public transportation. An individual can purchase one of these cards and use it in lieu of cash. This idea is blending with the Internet, allowing individuals to buy and sell merchandise and transfer funds electronically. The result will be global digital cash, which will take advantage of existing worldwide markets that allow buying and selling on a 24-hour basis.

Some companies, such as Capital One 360, the U.S.’s largest direct bank, are completely “disintermediating” banking by eliminating the branches and other “bricks- and-mortar” facilities altogether. Through Capital One 360, all banking transactions occur online, with higher interest rates often offered to those who agree to “paperless” state- ments and communication. To align with its Internet-savvy clientele, Capital One 360 has developed a comprehensive social media “Savers Community,” including Twitter, Facebook, Pinterest, and its YouTube “Challenge Your Savings” video series. And so far, not one of the 275-plus bank failures in the U.S., since the financial crisis began in 2008, has been online banks.58 HSBC and other global banks are learning from Capital One 360’s success and growing their Internet banking globally(see In-Depth Integrative Case 4.1 after Part Four).

Telecommunications One of the most important dimensions of the technological environment facing interna- tional management today is telecommunications. To begin with, global access to afford- able cell phone services is resulting in a form of technological leapfrogging, in which regions of the world are moving from a situation where phones were completely unavail- able to one where cell phones are available everywhere, including rural areas, due to the quick and relatively inexpensive installation of cellular infrastructure. This is especially true in sub-Saharan Africa. According to a 2015 Pew Research study, the number of land-line phone users is nearly zero percent in the countries of Ghana, Kenya, Nigeria, Senegal, South Africa, Tanzania, and Uganda, while cellular phone access in those same countries averages over 80 percent.59 In addition, technology has merged two previously discrete methods of communication: the telephone and the Internet. Internet access through cellular phones has, in many ways, replaced access via computers. By 2016, nearly half of all e-mails were opened on mobile phones. Social networking sites have seen an even larger shift to mobile; over 900 million people were checking Facebook

Chapter 2 The Political, Legal, and Technological Environment 65

daily via their smartphones, and 90 percent of all video views on Twitter were occurring on mobile devices.60 Wireless technology is proving to be a boon for less developed countries, such as in South America, Africa, and Eastern Europe where customers once waited years to get a telephone installed.

One reason for this rapid increase in telecommunications services is many countries believe that without an efficient communications system, their economic growth may stall. Additionally, governments are accepting the belief that the only way to attract foreign investment and know-how in telecommunications is to cede control to private industry. As a result, while most telecommunications operations in the Asia-Pacific region were state-run a few decades ago, a growing number are now in private hands. Singapore Telecommunications, Pakistan Telecom, Thailand’s Telecom Asia, Korea Tele- com, and Globe Telecom in the Philippines all have been privatized, and MNCs have helped in this process by providing investment funds. Today, First Pacific holds a 25 per- cent stake in the Philippine Long Distance Telephone Company, and the Japanese gov- ernment has privatized nearly two-thirds of Nippon Telegraph & Telephone (NTT). At the same time, Australia’s Telestra is moving into the Philippines; Thailand is loosening regulations on foreign investment in telecom; and Korea Telecom has operations in Brunei, Mongolia, and Uzbekistan.

Many governments are reluctant to allow so much private and foreign ownership of such a vital industry; however, they also are aware that foreign investors will go elsewhere if the deal is not satisfactory. The Hong Kong office of Salomon Brothers, a U.S. invest- ment bank, estimates that to meet the expanding demand for telecommunication service in Asia, companies will need to considerably increase the investment, most of which will have to come from overseas. MNCs are unwilling to put up this much money unless they are assured of operating control and a sufficiently high return on their investment.

Developing countries are eager to attract telecommunication firms and offer liberal terms. This liberalization has resulted in rapid increases in wireless penetration, with more than 1.2 billion wireless devices in circulation in China and about a billion in India. Between 2000 and 2012, the total number of mobile subscribers in developing countries grew dramatically—from 250 million to nearly 4.5 billion.61 According to the International Telecommunications Union, nearly 80 percent of people in developing nations have mobile phones.62 Growth was rapid in all regions, but fastest in sub-Saharan Africa. It is estimated that mobile phone penetration in Africa stands at over 60 percent, and, in Nigeria alone, there are nearly 150 million mobile phones. This represents a nearly one-to-one ratio of people to mobile devices.63 In Africa, mobile users are increasingly relying on their devices for commerce and payment. Transactions are conducted via text message, and users aren’t even required to hold a bank account.64 Apple and Samsung, two of the larg- est mobile phone producers globally, have been aggressively penetrating emerging markets with smartphone technology (see The World of International Management at the beginning of Chapter 5). Since 2012, China has held the largest share of smartphone sales world- wide.65 Although the counterfeiting of smartphones remains an issue in many emerging markets, there are signs that some effort is being taken to protect authentic products; in 2015, police in Beijing busted a large-scale counterfeiting operation that included hun- dreds of employees and six production lines. According to the Wall Street Journal, this particular counterfeiter manufactured over 40,000 fake iPhones in 2015 alone.66

Technological Advancements, Outsourcing, and Offshoring As MNCs use advanced technology to help them communicate, produce, and deliver their goods and services internationally, they face a new challenge: how technology will affect the nature and number of their employees. Some informed observers note that technology already has eliminated much and in the future will eliminate even more of the work being done by middle management and white-collar staff. Mounting cost pressures resulting from increased globalization of competition and profit expectations exerted by investors have placed pressure on MNCs to outsource or offshore production to take advantage of

66 Part 1 Environmental Foundation

lower labor and other costs.67 In the past century, machines replaced millions of manual laborers, but those who worked with their minds were able to thrive and survive. During the past three decades in particular, employees in blue-collar, smokestack industries such as steel and autos have been downsized by technology, and the result has been a perma- nent restructuring of the number of employees needed to run factories efficiently. In the 1990s, a similar trend unfolded in the white-collar service industries (insurance, banks, and even government). Most recently, this trend has affected high-tech companies in the late 1990s and early 2000s, when after the dot-com bubble burst, hundreds of thousands of jobs were lost, and again in 2008–2010, when many jobs were lost in finance and related industries as a result of the financial crisis and global recession. Furthermore, the job recovery in the wake of the financial crisis has been largely dependent on lower-wage jobs. According to the National Employment Law Project, 78 percent of jobs lost during the global recession were in finance, manufacturing, and construction, but only 57 percent of the jobs created from 2009 to 2015 were in those fields.68

Some experts predict that in the future, technology has the potential to displace employees in all industries, from those doing low-skilled jobs to those holding positions traditionally associated with knowledge work. For example, voice recognition is helping to replace telephone operators; the demand for postal workers has been reduced substan- tially by address-reading devices; and cash-dispensing machines can do 10 times more transactions in a day than bank tellers, so tellers can be reduced in number or even eliminated entirely in the future. Also, expert (sometimes called “smart”) systems can eliminate human thinking completely. For example, American Express has an expert system that performs the credit analysis formerly done by college-graduate financial analysts. In the medical field, expert systems can diagnose some illnesses as well as doctors can, and robots capable of performing certain operations are starting to be used.

Emerging information technology also makes work more portable. As a result, MNCs have been able to move certain production activities overseas to capitalize on cheap labor resources. This is especially true for work that can be easily contracted with overseas locations. For example, low-paid workers in India and Asian countries now are being given subcontracted work such as labor-intensive software development and code- writing jobs. A restructuring of the nature of work and of employment is a result of such information technology; Table 2–3 identifies some winners and losers in the workforce in recent years.

The new technological environment has both positives and negatives for MNCs and societies as a whole. On the positive side, the cost of doing business worldwide should decline thanks to the opportunities that technology offers in substituting lower-cost machines for higher-priced labor. Over time, productivity should go up, and prices should go down. On the negative side, many employees will find either their jobs eliminated or their wages and salaries reduced because they have been replaced by machines and their skills are no longer in high demand. This job loss from technology can be especially devastating in developing countries. However, it doesn’t have to be this way. A case in point is South Africa’s showcase for automotive productivity as represented by the Delta Motor Corporation’s Opel Corsa plant in Port Elizabeth. To provide as many jobs as pos- sible, this world-class operation automated only 23 percent, compared to more than 85 percent auto assembly in Europe and North America.69 Even some manufacturing processes in developed countries have traded robots for humans; in 2014, Toyota replaced automated manufacturing machines with manual jobs in an effort to increase quality.70 Some industries can also add jobs. For example, the positive has outweighed the negative in the computer and information technology industry, despite its ups and downs. Specifi- cally, employment in the U.S. computer software industry has increased over the last decade. In less developed countries such as India, a high-tech boom in recent years has created jobs and opportunities for a growing number of people.71 Even though developed countries such as Japan and the United States are most affected by technological displace- ment of workers, both nations still lead the world in creating new jobs and shifting their traditional industrial structure toward a high-tech, knowledge-based economy.

Chapter 2 The Political, Legal, and Technological Environment 67

The precise impact that the advanced technological environment will have on inter- national management over the next decade is difficult to forecast. One thing is certain, however; there is no turning back the technological clock. MNCs and nations alike must evaluate the impact of these changes carefully and realize that their economic perfor- mance is closely tied to keeping up with, or ahead of, rapidly advancing technology.

The World of International Management—Revisited Political, legal, and technological environments can alter the landscape for global com- panies. The chapter opening The World of International Management described how social media can be used a tool for political change—both positive and negative. It has

Table 2–3 Winners and Losers in Selected Occupations: Percentage Change Forecasts for 2014–2024

The 10 occupations with the largest projected employment growth 2014–2024

Occupation

Employment in millions

Difference Percent change2014 2024

Personal care aides Registered nurses Home health aides Combined food preparation and serving workers, including fast food Retail salespersons Nursing assistants Customer service representatives Cooks, restaurant General and operations managers Construction laborers

1768.4 2751.0

931.5

3159.7 4624.9 1492.1 2581.8 1109.7 2124.1 1159.1

2226.5 3190.3 1261.9

3503.2 4939.1 1754.1 2834.8 1268.7 2275.2 1306.5

458.1 439.3 348.4

343.5 314.2 262.0 252.9 158.9 151.1 147.4

25.9% 16.0 38.1

10.9 6.8

17.6 9.8

14.3 7.1

12.7

The 10 occupations with the largest projected employment declines, 2014–2024

Occupation

Employment in millions

Difference Percent change2014 2024

Bookkeeping, accounting, and auditing clerks Cooks, fast food Postal service mail carriers Executive secretaries and executive administrative assistants Farmworkers and laborers, crop, nursery, and greenhouse Sewing machine operators Tellers Postal service mail sorters, processors, and processing machine operators Cutting, punching, and press machine setters, operators, and tenders, metal and plastic Switchboard operators, including answering service

1760.3 524.4 297.4

776.6

470.2 153.9 520.5

117.6

192.2 112.4

1611.5 444.0 219.4

732.0

427.3 112.2 480.5

78.0

152.7 75.4

−148.7 −80.4 −78.1

−44.6

−42.9 −41.7 −40.0

−39.7

−39.5 −37.0

−8.4% −15.3 −26.2

−5.7

−9.1 −27.1

−7.7

−33.7

−20.6 −32.9

Source: Bureau of Labor Statistics, “Tables 4 & 6,” Employment Projections. December 15, 2015. http://www.bls.gov/emp/tables.htm.

68 Part 1 Environmental Foundation

allowed political groups to organize, journalists to communicate and report on political developments, and citizens to mobilize and build support for political movements. This situation underscores the increasing uncertainty in the global business environment and the rapidity and extent of political and legal change. It also highlights how technology is contributing to accelerating change and how traditional legal systems have difficulty keeping pace with these changes. International managers need to be aware of how dif- fering political, legal, and technological environments are affecting their business and how globalization, security concerns, and other developments influence these environ- ments. Changes in political, legal, and environmental conditions also open up new busi- ness opportunities but close some old ones.

In light of the information you have learned from reading this chapter, you should have a good understanding of these environments and some of the ways in which they will affect companies doing business abroad. Drawing on this knowledge, answer the following questions: (1) How will changes in the political and legal environment in the Middle East and North Africa, including the potential economic impacts of terrorism, affect U.S. MNCs conducting business there? (2) How might evolving political interests and legal systems affect future investment in the region? (3) How does technology result in greater integration and dependencies among economies, political systems, and financial markets, but also greater fragility?

1. The global political environment can be understood via an appreciation of ideologies and political sys- tems. Ideologies, including individualism and col- lectivism, reflect underlying tendencies in society. Political systems, including democracy and totali- tarianism, incorporate ideologies into political struc- tures. There are fewer and fewer purely collectivist or socialist societies, although totalitarianism still exists in several countries and regions. Many coun- tries are experiencing transitions from more social- ist to democratic systems, reflecting related trends discussed in Chapter 1 toward more market-oriented economic systems.

2. The current legal and regulatory environment is both complex and confusing. There are many differ- ent laws and regulations to which MNCs doing business internationally must conform, and each nation is unique. Also, MNCs must abide by the laws of their own country. For example, U.S. MNCs

must obey the rules set down by the Foreign Cor- rupt Practices Act. Privatization and regulation of trade also affect the legal and regulatory environ- ment in specific countries.

3. The technological environment is changing quickly and is having a major impact on international busi- ness. This will continue in the future with, for example, digitization, higher-speed telecommunica- tion, and advancements in biotechnology as they offer developing countries new opportunities to leapfrog into the 21st century. New markets are being created for high-tech MNCs that are eager to provide telecommunications service. Technological developments also impact both the nature and the structure of employment, shifting the industrial structure toward a more high-tech, knowledge-based economy. MNCs that understand and take advantage of this high-tech environment should prosper, but they also must keep up, or go ahead, to survive.

SUMMARY OF KEY POINTS

KEY TERMS

act of state doctrine, 54 civil or code law, 53 collectivism, 48 common law, 53 democracy, 50 doctrine of comity, 54

Foreign Corrupt Practices Act (FCPA), 55 individualism, 47 Islamic law, 53 nationality principle, 53 principle of sovereignty, 53

protective principle, 53 socialism, 48 socialist law, 53 territoriality principle, 53 totalitarianism, 50

Chapter 2 The Political, Legal, and Technological Environment 69

REVIEW AND DISCUSSION QUESTIONS

1. In what ways do different ideologies and political systems influence the environment in which MNCs operate? Would these challenges be less for those operating in the EU than for those in Russia or China? Why or why not?

2. How do the following legal principles impact MNC operations: the principle of sovereignty, the national- ity principle, the territoriality principle, the protective principle, and principle of comity?

3. How will advances in technology and telecommuni- cations affect developing countries? Give some specific examples.

4. Why are developing countries interested in privatiz- ing their state-owned industries? What opportunities does privatization have for MNCs?

Hitachi products are well known in the United States, as well as in Europe and Asia. However, in an effort to maintain its international momentum, the Japanese MNC is continuing to push forward into new markets, especially emerging markets, while also developing new products. Visit the MNC at its website www.hitachi.com and examine some of the latest developments that are taking place. Begin by reviewing the firm’s current activities in Asia, specifically Hong Kong and Singapore. Then look at how it is doing business in

North America. Finally, read about its European opera- tions. Then answer these three questions: (1) What kinds of products and systems does the firm offer? What are its primary areas of emphasis? (2) In what types of environments does it operate? Is Hitachi pri- marily interested in developed markets, or is it also pushing into newly emerging markets? (3) Based on what it has been doing over the last two to three years, what do you think Hitachi’s future strategy will be in competing in the environment of international business?

INTERNET EXERCISE: HITACHI GOES WORLDWIDE

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7. Brunwasser, “A 21st Century Migrant’s Essentials: Food, Shelter, Smartphone.”

8. Ibid. 9. Zeina Karam, “Syria’s Civil War Plays Out on

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10. Ibid. 11. Jennifer Moire, “5 Ways Social Media Spread Word

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13. “BBC Newsnight Refugee Poll,” ComRes, September 2015, www.comres.co.uk/polls/bbc- newsnight-refugee-poll/.

ENDNOTES

70 Part 1 Environmental Foundation

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Chapter 2 The Political, Legal, and Technological Environment 71

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72 Part 1 Environmental Foundation

71. Ashok Bhattacharjee, “India’s Outsourcing Tigers Seek Cover, Markets, in Europe’s East,” The Wall Street Journal, December 18, 2003, p. A16.

72. CIA, “Greece,” The World Factbook (2016), https:// www.cia.gov/library/publications/the-world-factbook/ geos/gr.html.

73. Ibid. 74. World Bank, “Greece,” World Development Indica-

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75. CIA, “Greece.” 76. Liz Alderman, James Kanter, Jim Yardley, and Jack

Ewing, “Greece’s Debt Crisis Explained,” New York Times, November 9, 2015, www.nytimes.com/inter- active/2015/business/international/greece-debt-crisis- euro.html?_r=0.

77. Ibid.

The country has started to show some limited signs of progress and has recently agreed to further economic reforms in return for liquidity from its lenders. Greece is not out of the woods, however. The bailout money has largely gone to the country’s lenders and has not yet been able to support the restructuring of the economy.76

You Be the International Management Consultant In 2015, Greece received its third bailout in five years. Relations between Greece and its creditors remain strained and contentious. On several occasions, Greece has threat- ened to default on its loans and has even contemplated exiting the European Union. The 2015 bailout allowed creditors to demand harsh austerity programs and require deep economic and structural reforms. These measures included raising the retirement age, cutting pensions, lib- eralizing the energy market, opening up protected profes- sions, enlarging a property tax that Greeks already despise, and moving ahead with a program to sell state-owned enterprises and other assets.77

Questions 1. If you are a consultant for a business looking to

expand in Europe, is Greece even an option? 2. Do the facts that its population is comprised largely

of government workers, that the citizens were largely in favor of defaulting on its national debt, and that the country nearly left the European Union constitute a deal breaker?

3. If the government does, in fact, implement the agreed-upon austerity measures, would that be a sign that the country is on the right track?

4. What other concerns would you have about entering the Greek market?

Greece is located in southern Europe, positioned geograph- ically between the Aegean and Mediterranean Seas, Albania, and Turkey. The country’s land mass is slightly smaller than that of Alabama. Major natural resources include lignite, petroleum, iron ore, bauxite, lead, zinc, nickel, magnesite, marble, salt, and hydro-power potential.72 Greece has a population of 10.78 million people, with Athens, the capital, home to 3 million people. Population growth has stabilized at zero in recent years. Greece is a fairly homogeneous country, with close to 95 percent of the population with Greek ethnicity. Nearly all in the country practice the Greek Orthodox religion. With a median age of 44 years, Greece has an older population than most countries in the world. Approximately 34 per- cent of the population is 55 years or older. In recent years, the country has struggled economically, leading to the third highest unemployment rate in the world.73 Greece’s GDP is estimated at US$238 billion. After years of negative growth, and declines of 9.1 percent in 2011 and 7.3 percent in 2012, the country’s GDP finally grew in 2014 by 0.7 percent. GDP per capita in Greece is estimated at $26,000. Greece has a capitalist economy, but the public sector accounts for approximately 40 per- cent of GDP.74 Greece was significantly impacted by the financial cri- sis of 2008. Greece’s poor financial management of the country’s budget and its failure to report massive deficits in a timely fashion to its borrowers amplified the impact of the crisis, causing the economy to spiral downward. As a consequence, Greece was no longer able to borrow in global markets. Ultimately, Greece was required to take a US$316 billion bailout from the European Union. In return for the bailout, the Greek government was required to implement dramatic spending cuts and tax increases to reduce its budget deficits. In total, aid from the European Union has amounted to approximately 3 percent of the country’s GDP.75

Greece In the International Spotlight

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R Chapter 3

ETHICS, SOCIAL RESPONSIBILITY, AND SUSTAINABILITY

The World of International Management

Sustaining Sustainable Companies

W ith a more environmentally aware public, becoming a “sustainable” business has become an important part of the business model for many MNCs. Three of these companies—Patagonia, Nestlé, and Tesla—have in different ways transformed their corporate strategy to emphasize “doing good” socially and environmentally while “doing well” economically.

Sustainability in the Supply Chain—Patagonia Founded by Yvon Chouinard in 1972, Patagonia is a private, outdoor-clothing company. Patagonia’s transition to a sustainability-focused company started in 1988 after several employees in one of their Boston retail stores suddenly fell ill. After a thorough investigation, it was discovered that formaldehyde, emitted from Patagonia’s cotton-based mer- chandise, was cycling into the air. In response, Patagonia committed in 1994 to use only formaldehyde-free, 100 per- cent organic cotton in the manufacture of its clothing; within just 18 months, they achieved that goal.1 Since then, Pata- gonia has examined and modified its entire supply chain from both a corporate social responsibility and environmen- tal viewpoint. Its revised mission statement reflects that ideal: “Build the best product, cause no unnecessary harm, and use business to inspire and implement solutions to the environmental crisis.”2

Internally, recycled products constitute a large percentage of the material used in Patagonia’s products. Recycled polyes- ter and nylon, made of postconsumer soda bottles and waste fabric, are used in the production of fleece and linings.3 This reuse cuts down on oil usage and CO2 emissions. All of Patagonia’s wool products are now chlorine-free, preventing the contamination of wastewater in the developing countries where the products are manufactured. Furthermore, Patagonia’s finished products are fully recyclable, and the company has encouraged its customers to properly dispose of their prod- ucts. Any Patagonia product can be dropped off at a retail store for guaranteed recycling.4

Recent concerns about ethics, social responsibility, and sus- tainability transcend national borders. In this era of globaliza- tion, MNCs must be concerned with how they carry out their business and their social role in foreign countries. This chapter examines business ethics and social responsibility in the inter- national arena, and it looks at some of the critical social issues that will be confronting MNCs in the years ahead. The discus- sion includes ethical decision making in various countries, reg- ulation of foreign investment, the growing trends toward environmental sustainability, and current responses to social responsibility by today’s multinationals. The specific objectives of this chapter are

1. EXAMINE ethics in international management and some of the major ethical issues and problems confronting MNCs.

2. DISCUSS some of the pressures on and actions being taken by selected industrialized countries and companies to be more socially and environmentally responsive to world problems.

3. EXPLAIN some of the initiatives to bring greater account- ability to corporate conduct and limit the impact of corrup- tion around the world.

Nestlé sets environmental objectives, resulting in trackable and measurable progress. From 2005 to 2015, Nestlé cut overall energy consumption by a quarter and greenhouse gas emissions by 40 percent. The use of industrial refriger- ants has been cut by 92 percent, and Nestlé’s chest freezers now consume 50 percent less energy. In 2015, Nestlé was able to achieve zero waste in 15 percent of its global facto- ries. By 2017, Nestlé plans to eliminate 100,000 tons of packaging material.11

Environmental efforts extend down Nestlé’s supply chain, from raw material sourcing to final distribution. Environmen- tal standards are set for all farmers conducting business with Nestlé, and Nestlé supports those farmers through training and informational support. Whenever possible, local farmers are utilized to decrease the environmental impacts from ship- ping raw materials long distances. During the manufacturing process, the Nestlé Environmental Management System tracks energy performance and improves efficiency and qual- ity. Areas for improvement are identified, leading to new manufacturing processes that lead to less waste. Final distri- bution, though handled by third parties, is subject to Nestlé’s environmental performance standards. Mileage and fuel con- sumption are tracked, distribution networks are altered to decrease congestion and noise, and greenhouse gas emis- sions are monitored.12

Continual environmental-friendly innovation is a priority for Nestlé. Nestlé developed an eco-design tool, called the Eco- dEX, to assist with sustainability in its research and develop- ment efforts. Since 2013, over 5,000 products have been tested and assessed using this tool. All new products now undergo an environmental assessment.13 As with Patagonia, customers seem eager to purchase products that are sustain- able, giving Nestlé a competitive advantage over the competi- tion. Nestlé reached number 18 on Fortune magazine’s 2014 “Best Global Green Brands” list.14

Sustainability as a Competitive Advantage—Tesla Motors Tesla Motors, an independent Silicon Valley–based auto manufacturer, focuses on creating and mass-producing reliable electric automobiles. Using technology descended from 19th- century physicist Nikola Tesla, Tesla Motors has developed the longest-range electric car battery on the market. Visionary billionaire Elon Musk, who is also behind SpaceX, cofounded the company in 2003.15

Social sustainability, with an emphasis on employee welfare, has also become a key tenet of Patagonia’s strat- egy. Beginning in 1990, Patagonia instituted a policy of vis- iting every factory that manufactured its goods to evaluate and score working conditions.5 Patagonia refuses to do busi- ness with any factory that does not allow full access or breaks local labor laws. Additionally, third-party audits of factories were established to provide nonbiased assess- ments of the factories. Every factory along its supply chain is listed on its website. In 1999, Patagonia became one of the founding members of the Fair Labor Association.6 Since 1985, Patagonia has donated one percent of its sales to environmental nonprofits.7 In 2002, Chouinard expanded on his vision for corporate sustainability by cofounding “One Percent for the Planet,” an international nonprofit dedicated to philanthropy for environmental organizations. The pro- gram encourages companies to follow Patagonia’s lead and donate one percent of sales to worthwhile, environmentally focused causes. As of 2015, over 1,200 companies across 48 countries have joined the organization. Over 3,300 dif- ferent nonprofits have received funding from the over US$100 million donated by the member companies.8

The decision to invest in sustainable products has not been without repercussions. Chlorine-free wool has been more costly to manufacture, cutting down on profits. Follow- ing the shift to 10 percent organic cotton, Patagonia’s prof- its dropped.9 Furthermore, the high priority that Patagonia puts on only using factories that follow its strict standards means higher labor costs than the competition. However, Patagonia has gained a competitive advantage by doing good. The company has developed a loyal customer base that is willing to pay a premium for the sustainability that Patagonia provides.

Sustainability in Operations and Products—Nestlé Founded over 150 years ago, Nestlé S.A., a Swiss MNC, is best known for its chocolate and other snack products. With sales of over US$1.1 billion in 2015, the company employs over 339,000 people across 447 factories. Nestlé maintains operations in 197 countries and boasts over 2,000 brands. For Nestlé, sustainability means improving its environmental impact along the entire value chain.10

Nestlé’s sustainable efforts are centered on six core cat- egories: resource efficiency, packaging, products, climate change, natural capital, and information. In each category,

76 Part 1 Environmental Foundation

Unlike previously developed electric cars, which were clunky and unattractive, Tesla aimed to design automobiles that were attractive and high-quality. Tesla’s first vehicle, the Roadster, was designed to be a high-performance sports car. Released in 2008, the Roadster can accelerate from zero to 60 in less than four seconds, reaching top speeds of over 125 miles per hour.16 The Model S, released in 2012, was designed to be a luxury sedan for the masses. Starting at US$57,400, the Model S was introduced for less than half of the cost of the Roadster. The car won multiple awards upon its release, including Motor Trend’s “Car of the Year” award for 2013, and sold over 100,000 units within its first four years.17 In late 2015, Tesla introduced a full- size SUV, named the Model X, as the latest addition to its fleet and in early 2016, the company started taking pre-orders for its forthcoming US$35,000 Model 3. More than a quarter of a mil- lion people pre-ordered the car within the first 72 hours, shat- tering expectations.18

Inspiring sustainability across the entire automobile industry is a secondary goal for the company. To achieve that goal, Tesla has collaborated with several other researchers and car manufacturers to produce greener automobiles. Panasonic joined Tesla’s US$5 billion “Gigafactory” battery production project in 2014, and from 2009 to 2015, Tesla partnered with Mercedes to provide powertrain components for its electric models.19,20,21 In its partnerships with Smart and Toyota, Tesla produced batteries and chargers.22,23

As an innovator, Tesla has faced some major obstacles. Tesla’s first automobile, the Roadster, faced two high-profile recalls, one of which dealt with the potential loss of control of the car.24,25 In a highly publicized February 2013 article, a New York Times reporter took the Model S on an infamous test drive along the East Coast. Not only did the car fall short of the estimated 200-mile range per charge, but the battery actually ran completely out of power and the car ended up having to be towed.26 Musk estimated that the negative New York Times review resulted in several hundred vehicle can- cellations and cost Tesla US$100 million in valuation.27 Financially, Tesla has invested hundreds of millions of dollars into its operations. Since its founding in 2003, Tesla has only earned a quarterly profit once; Tesla posted a US$300 million loss in 2014.28

Tesla, despite its setbacks, still maintains a competitive advantage from its dedicated investor and customer bases. Customers seem willing to deal with minor issues and recalls for the sake of the overall sustainability goal of the company. By targeting high-income customers with the Roadster, Tesla was able to spend the funds necessary to develop and fine-tune its technology. Investors have also been willing to bet on the idea of Tesla Motors. The IPO on June 29, 2010, raised US$226 million for the company, and in the years since, Tesla’s share price has increased nearly tenfold.29,30

Our opening discussion of Patagonia, Nestlé, and Tesla demonstrates how corporations are shifting their focus from traditional market-responsive strategies to broader approaches that incorporate both business and social or environmental goals. Patagonia has radically transformed its business to focus on what it expects to be increasing demand for “green” products as well as those that contribute to improved working conditions in developing countries. Focusing on six core categories for creating and tracking sustainable goals allowed Nestlé to achieve measurable progress in emissions reductions. Tesla Motors’s Model S is focused on developing and deploying a reason- ably priced all-electric car to the masses. By combining their commitment to social and environmental sustainability, aligned with their business and commercial objec- tives, these three companies appear to be setting an example for a new approach to integrating social and business goals among global corporations, tapping into consum- ers’ desire for products and services that are consistent with their values. This “triple bottom line” approach, which simultaneously considers social, environmental, and economic sustainability (“people, planet, profits”) could make a real and lasting impact on the world’s human and environmental conditions by harnessing business and managerial skills and techniques.

More broadly, recent scandals have called attention to the perceived lack of ethical values and corporate governance standards in business. In addition, assisting impover- ished countries by helping them gain a new level of independence is both responsible and potentially profitable. Indeed, corporate social responsibility is becoming more than just good moral behavior. It can assist in avoiding future economic and environmental setbacks and may be the key to keeping companies afloat.

Chapter 3 Ethics, Social Responsibility, and Sustainability 77

■ Ethics and Social Responsibility The ethical behavior of business and the broader social responsibilities of corporations have become major issues in the United States and all countries around the world. Eth- ical scandals and questionable business practices have received considerable media atten- tion, aroused the public’s concern about ethics in international business, and brought attention to the social impact of business operations.

Ethics and Social Responsibility in International Management Unbiased ethical decision-making processes are imperative to modern international business practices. It is difficult to determine a universal ethical standard when the views and norms in one country can vary substantially from those in others. Ethics, the study of morality and standards of conduct, is often the victim of subjectivity as it yields to the will of cultural relativism, or the belief that the ethical standard of a country is based on the culture that created it and that moral concepts lack universal application.31

The adage “When in Rome, do as the Romans do” is derived from the idea of cultural relativism and suggests that businesses and their managers should behave in accordance with the ethical standards of the country they are active in, regardless of MNC headquarters location. It is necessary, to some extent, to rely on local teams to execute under local rule; however, this can be taken to extremes. While a business whose only objective is to make a profit may opt to take advantage of these differ- ences in norms and standards in order to legally gain leverage over the competition, it may find that negative consumer opinion about unethical business practices, not to mention potential legal action, could affect the bottom line. Dilemmas that arise from conflicts between ethical standards of a country and business ethics, or the moral code guiding business behavior, are most evident in employment and business practices; recognition of human rights, including women in the workplace; and corruption. The newer area of corporate social responsibility (CSR) is closely related to ethics. However, we discuss CSR issues separately. Ethics is the study of or the learning process involved in understanding morality, while CSR involves taking action. Fur- thermore, the area of ethics has a lawful component and implies right and wrong in a legal sense, while CSR is based more on voluntary actions. Business ethics and CSR therefore may be viewed as two complementary dimensions of a company’s overall social profile and position.

Ethics Theories and Philosophy There are a range of ethical theories and approaches around the world, many emanat- ing from religious and cultural traditions. We focus on the cultural factors in Part Two of the book. Here we review three tenets from Western philosophy and briefly describe Eastern philosophy, which can be used to evaluate and inform international manage- ment decisions. The International Management in Action feature explores how these perspectives might be used to inform the ethics of a specific international business decision.

Kantian philosophical traditions argue that individuals (and organizations) have responsibilities based on a core set of moral principles that go beyond those of narrow self-interest. In fact, a Kantian moral analysis rejects consequences (either conceivable or likely) as morally irrelevant when evaluating the choice of an agent: “The moral worth of an action does not lie in the effect expected from it, nor in any principle of action which requires to borrow its motive from this expected effect.”32 Rather, a Kantian approach asks us to consider our choices as implying a general rule, or maxim, that must

ethics The study of morality and standards of conduct.

corporate social responsibility (CSR) The actions of a firm to benefit society beyond the requirements of the law and the direct interests of the firm.

78 Part 1 Environmental Foundation

be evaluated for its consistency as a universal law. For Kant, what is distinctive about rational behavior is not that it is self-interested or even purpose driven, though all actions do include some purpose as part of their explanation. Instead, rational beings, in addition to having purposes and being able to reason practically in their pursuit, are also capable of evaluating their choices through the lens of a universal law, what Kant calls the moral law, or the “categorical imperative.”33 From this perspective, we ought always to act under a maxim that we can will consistently as a universal law for all rational beings similarly situated.

Aristotelian virtue ethics focus on core, individual behaviors and actions and how they express and form individual character. They also consider social and institutional arrangements and practices in terms of their contribution to the formation of good character in individuals. A good, or virtuous, individual does what is right for the right reasons and derives satisfaction from such actions because his or her character is rightly formed. For Aristotle, moral success and failure largely come down to a matter of right desire, or appetite: “In matters of action, the principles of initiating motives are the ends at which our actions are aimed. But as soon as people become corrupted by pleasure or pain, the goal no longer appears as a motivating principle: he no longer sees that he should choose and act in every case for the sake of and because of this end. For vice tends to destroy the principle or initiating motive of action.”34 It is important to have an understanding of what is truly good and practical wisdom to enable one to form an effective plan of action toward realizing what is good; however, absent a fixed and habitual desire for the good, there is little incentive for good actions. There is also an important social component to virtue theory insofar as one’s formation is a social process. The exemplars and practices one finds in one’s cultural context guide one’s moral development. Virtue theory relies heavily on existing practices to provide an account of what is good and what character traits contribute to pursuing and realizing the good in concrete ways.

Utilitarianism—a form of consequentialism—favors the greatest good for the great- est number of people under a given set of constraints.35 A given act is morally correct if it maximizes utility, that is, if the ratio of benefit to harm (calculated by taking every- one affected by the act into consideration) is greater than the ratio resulting from an alternative act. This theory was given its most famous modern expression in the works of Jeremy Bentham (1988) and John Stuart Mill (1957), two English utilitarians writing in the 18th and 19th centuries, both of whom emphasized the greatest happiness prin- ciple as their moral standard.36,37 Utilitarianism is an attractive perspective for business decision making, especially in Western countries, because its logic is similar to an eco- nomic calculation of utility or cost-benefit, something many Western managers are accus- tomed to doing.

Eastern philosophy—which broadly can include various philosophies of Asia, including Indian philosophy, Chinese philosophy, Iranian philosophy, Japanese philoso- phy, and Korean philosophy—tends to view the individual as part of, rather than separate from, nature. Many Western philosophers generally assume as a given that the individual is something distinct from the entire universe, and many Western philosophers attempt to describe and categorize the universe from a detached, objective viewpoint. Eastern perspectives, on the other hand, typically hold that people are an intrinsic and insepa- rable part of the universe and that attempts to discuss the universe from an objective viewpoint, as though the individual speaking were something separate and detached from the whole, are inherently absurd.

In international management, executives may rely upon one or more of these perspectives when confronted with decisions that involve ethics or morality. While they may not invoke the specific philosophical tradition by name, they likely are drawing from these fundamental moral and ethical beliefs when advancing a specific agenda or decision. The International Management in Action box regarding an offshoring decision shows how a given action could be informed by each of these perspectives.

■ Human Rights Human rights issues present challenges for MNCs as there is currently no universally adopted standard of what constitutes acceptable behavior. It is difficult to list all rights inherent to humanity because there is considerable subjectivity involved, and cultural dif- ferences exist among societies. Some basic rights include life, freedom from slavery or torture, freedom of opinion and expression, and a general ambiance of nondiscriminatory practices.38 One violation of human rights that resonated with MNCs and made them question whether to move operations into China was the violent June 1989 crackdown on student protesters in Beijing’s Tiananmen Square. Despite this horrific event, most MNCs continued their involvement in China, although friction still exists between countries with high and low human rights standards. Even South Africa is beginning to experience the healing process of transitioning to higher human rights standards after the 1994 disman- tling of apartheid, the former white government’s policy of racial segregation. Unfortu- nately, human rights violations are still rampant worldwide. For several decades, for example, Russia has experienced widespread human trafficking, but this practice has accelerated in recent years.39 Here, we take a closer look at women in the workplace.

Women’s rights and gender equity can be considered a subset of human rights. While the number of women in the workforce has increased substantially worldwide, most are still experiencing the effects of a “glass ceiling,” meaning that it is difficult, if

International Management in Action

The Ethics of an Offshoring Decision

The financial services industry has been especially active in offshoring. Western investment banks including Citi- group, Deutsche Bank, Goldman Sachs, Credit Suisse, and UBS have established back-office functions in India. JP Morgan was the first to offshore staff to the country in 2001 and has more than 8,000 staff in Mumbai, nearly 5 percent of its 170,000 employees worldwide. In Octo- ber 2007, Credit Suisse announced the expansion of its center of excellence in Pune, India, with 300 new jobs, bringing staff numbers to 1,000 by December. Deutsche Bank has 3,500 staff in Bangalore and Mumbai. UBS began outsourcing work to third-party information tech- nology vendors in 2003 and has 1,220 employees in Hyderabad and Mumbai. Goldman Sachs started offshor- ing to India three years ago and has about 2,500 employees there. On October 17, 2007, JP Morgan announced plans to build a back-office workforce of 5,000 in the Philippines over the next two years. Its tra- ditional offshoring center of Mumbai in India has become overcrowded by investment banks that have set up similar operations. The bank will develop credit card and treasury services in the Philippines. A source close to the bank said the move was to diversify its back-office loca- tions and because JP Morgan has strong links with a human resources network in the country. Mark Kobayashi- Hillary, an outsourcing specialist, said: “Because India’s finance center is almost wholly based in Mumbai, the resources are finite and there is a supply and demand problem. It’s no surprise people are looking elsewhere. But banks are not just after keeping costs down; these moves are also strategic.” He said he was surprised that banks had not opened more offices in the Philippines,

considering its strong links with the U.S., cheap rent, and wealth of resources. “In Manila there is a high density of people who have worked in the financial sector with the skills that investment banks look for. We should see more banks setting up shop there soon.” Ethical philosophy and reasoning could be used to inform offshoring decisions such as these. A Kantian approach to offshoring would require us to consider a set of principles in accord with which offshoring choices were made such that decisions were measured against these core tenets, such as a corporate code of conduct. A virtue theory perspective would suggest that the deci- sion should consider the impact on communities and a goal of humans flourishing more generally; such an analysis could include economic as well as social impacts. A utilitarian perspective would urge that ben- efits and costs be measured; e.g., who is losing jobs, who is gaining, and do the gains (measured in either jobs, income, utility, or quality of life) outweigh the losses. An Eastern philosophical approach would sug- gest a broader, more integrative and longer-term view, considering impacts not just on humans but also on the broader natural environment in which they operate. Taken together, an understanding of these ethical perspectives could help managers to decide how to make their own ethical decisions in the international business environment.

Source: Jonathan Doh and Bret Wilmot, “The Ethics of Offshoring,” Working Paper, Villanova University, 2010; David Smith, “Offshoring: Political Myths and Economic Reality,” World Economy, March 2006, pp. 249–256.

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not impossible, to reach the upper management positions. Japan is a good example because both harassment and a glass ceiling have existed in the workplace. Sexual harass- ment also remains a major social issue in Japan. Many women college graduates in Japan are still offered only secretarial or low-level jobs. Japanese management still believes that women will quit and get married within a few years of employment, leading to a two-track recruiting process: one for men and one for women.40,41 Japan ranked 101st in the “gender gap index” study by the World Economic Forum, an international nonprofit organization that measured the economic opportunities and political empowerment of women by nation in 2015. Iceland ranked no. 1, and the U.S. was no. 28. Japanese women make up only 8 percent of senior executives and managers, a tiny share compared with 21 percent in the U.S., 38 percent in China, and 26 percent in France, according to Grant Thornton’s 2015 Women in Business report. Two-thirds of Japanese businesses still have no female members on their senior leadership teams.42

Equal employment opportunities may be more troubled in Japan than other coun- tries, but the glass ceiling is pervasive throughout the world. Today, women earn less than men for the same job in the United States, although progress has been made in this regard. France, Germany, and Great Britain have seen an increase in the number of women not only in the workforce but also in management positions. Unfortunately, women in management tend to represent only the lower level and do not seem to have the resources to move up in the company. This is partially due to social factors and perceived levels of opportunity or lack thereof. The United States, France, Germany, and Great Britain all have equal opportunity initiatives, whether they are guaranteed by law or are represented by growing social groups. Despite the existence of equal opportunity in French and German law, the National Organization for Women in the United States, and British legislation, there is no guarantee that initiatives will be implemented. It is a difficult journey as women attempt to make their mark in the workplace, but soon it may be possible for them to break through the glass ceiling.

Labor, Employment, and Business Practices Labor policies vary widely among countries around the world. Issues of freedom to work, freedom to organize and engage in collective action, and policies regarding notification and compensation for layoffs are treated differently in different countries. Political, eco- nomic, and cultural differences make it difficult to agree on a universal foundation of employment practices. It does not make much sense to standardize compensation pack- ages within an MNC that spans both developed and underdeveloped nations. Elements such as working conditions, expected consecutive work hours, and labor regulations also create challenges in deciding which employment practice is the most appropriate. For example, the low cost of labor entices businesses to look to China; however, workers in China are not well paid, and to meet the demand for output, they often are forced to work 12-hour days, seven days a week. In some cases, children are used for this work. Child labor initially invokes negative associations and is considered an unethical employ- ment practice. The reality is that of the 168 million children age 5–17 working globally in 2016, most are engaged in work to help support their families.43 In certain countries it is necessary for children to work due to low wages. UNICEF and the World Bank recognize that in some instances, family survival depends on all members working, and that intervention is necessary only when the child’s developmental welfare is compro- mised. There has been some progress in the reduction of child labor. It continues to decline, especially among girls, but only modestly, with the International Labour Orga- nization reporting a 25 percent reduction between 2000 and 2015.44 There has also been considerable progress in the ratification of ILO standards concerning child labor. Conven- tion 182 (on the worst forms of child labor) has been ratified by 180 countries, with only India and a few Pacific island nations yet to endorse. Convention 138 (on minimum age), however, has found less acceptance and remains yet to be ratified by nearly two dozen countries, including the United States, India, and Australia. Roughly one-quarter of the children in the world live in countries that have not ratified Convention 138.45

Chapter 3 Ethics, Social Responsibility, and Sustainability 81

In early 2010, the issue of relatively low wages paid by Chinese subcontractors made the headlines after a number of suicides by workers at factories run by Foxconn, one of the largest contractors for electronics firms such as Apple, and a strike by work- ers at a Honda plant. A year later, in May 2011, an explosion at a Foxconn iPad factory killed two employees. In a survey of Foxconn employees, over 43 percent of workers stated that they have seen or been part of a workplace accident.46 As a result of these controversies, Foxconn, which employs more than 800,000 workers in China making products for companies such as Dell, Hewlett-Packard, and Apple, agreed to raise its base wage by more than 30 percent. Earlier, Honda had raised wages at some of its factories by 24 percent.47 Additional pressure from Apple in 2012 further improved employee safety and reduced working hours at Foxconn. By July 2013, weekly work hours were limited to just 49 per employee; this reduced overtime hours from 80 per month to just 36. Apple also partnered with the Fair Labor Association to independently audit the safety of the Foxconn plants.48 Some analysts believe these higher wages, com- bined with the longstanding shortage and high turnover of factory workers in China, will eventually result in the lowest wage manufacturing moving to other countries, such as Vietnam, while higher value-added production will remain in China.

Ensuring that all contractors along the global supply chain are compliant with company standards is an ongoing issue and one that is not without challenges. This issue came to a head once again when a Bangladesh factory that produced products for Walmart caught fire in November 2012, killing 112 workers. Walmart immediately responded by severing all ties with suppliers who use subcontractors without Walmart’s knowledge and began requiring all overseas factories to pass audits before they could be used to produce Walmart products.49 Yet, a subsequent collapse of a garment factory in Bangladesh in April of 2013 that killed more than 1,000 and a fire not two weeks later, also in Bangladesh, killing eight, underscored the challenges companies face in trying to develop and implement policies for production that is largely outsourced. After a number of NGOs pressed companies to take responsibility for the conditions that allowed for these tragedies, several global apparel firms, including Swedish-based retailer H&M; Inditex, owner of the Zara chain; the Dutch retailer C&A; and British companies Primark and Tesco, agreed to a plan to help pay for fire safety and building improvements in Bangladesh. The Bangladesh government announced that it would improve its labor laws, raise wages, and ease restrictions on forming trade unions.50 Walmart and Gap chose not to sign on to the European-led agreement out of concerns that they could be subject to litigation. Instead, they initiated a separate agreement with U.S. retail trade groups and a bipartisan think tank. These challenges, and the reforms they bring, should contribute to improved workers’ conditions and help prevent similar tragedies.

Environmental Protection and Development Conservation of natural resources is another area of ethics and social responsibility in which countries around the world differ widely in their values and approach. Many poor, developing countries are more concerned with improving the basic quality of life for their citizens than worrying about endangered species or the quality of air or water. There are several hypotheses regarding the relationship between economic development, as measured by per capita income, and the quality of the natural environment. The most widely accepted thesis is represented in the Environmental Kuznets Curve (EKC), which hypothesizes that the relationship between per capita income and the use of natural resources and/or the emission of wastes has an inverted U-shape. (See Figure 3–1.) According to this specification, at relatively low levels of income, the use of natural resources and/or the emission of wastes increase with income. Beyond some turning point, the use of the natural resources and/or the emission of wastes decline with income. Reasons for this inverted U-shaped relationship are hypothesized to include income- driven changes in (1) the composition of production and/or consumption, (2) the prefer- ence for environmental quality, (3) institutions that are needed to internalize externalities, and/or (4) increasing returns to scale associated with pollution abatement. The term

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“EKC” is based on its similarity to the time-series pattern of income inequality described by Simon Kuznets in 1955. A 1992 World Bank Development Report made the notion of an EKC popular by suggesting that environmental degradation can be slowed by policies that protect the environment and promote economic development. Subsequent statistical analysis, however, showed that while the relationship might hold in a few cases, it could not be generalized across a wide range of resources and pollutants.51

Despite difficulty in achieving international consensus on environmental reform, recent progress holds promise. For two weeks in December 2015, representatives from over 185 countries converged in the suburbs of Paris at the 21st annual United Nations Climate Change Conference. Throughout the conference, representatives debated and drafted a wide-ranging greenhouse gas agreement that aims to drastically reduce global emissions beginning in 2020. On December 12, 2015, the text of the “Paris Agreement” was adopted by all 196 parties at the convention. A summary of some of the agreement’s 27 articles is included in Table 3-1.

Figure 3–1 The Environmental Kuznets Curve

P o

llu ti

o n

Income per capita

Table 3–1 Highlights of the Paris Agreement on Climate Policy

Article 2 • Outlines the objectives of the agreement, which includes limiting the increase in the average temperature globally to under

2 degrees Celsius and aiming for just a 1.5 degrees Celsius increase. Also states goals of developing lower greenhouse gas emissions technology and structuring financing to nations so that adaption to the impacts of climate change and lower greenhouse gas emissions technology is implemented.

Article 4 • Affirms that the global peaking of greenhouse gas emissions should be reached as soon as possible to ensure that goals

can be reached. The long-term goal is to achieve net zero global emissions by 2070. Each individual country is tasked with determining its own contributions, with developed countries tasked with taking the lead. Smaller, less developed nations are to be assisted by developed nations.

Article 7 • Requires countries to submit reports indicating their strategies for adapting to the effects of climate change. Article 8 • Provides a method for smaller, more vulnerable countries to mitigate potential financial losses due to climate change. Article 9 • Requires more developed countries to provide financing to developing countries to meet emissions goals and adapt to the

effects of climate change. Article 13 • Requires all countries to be transparent with their progress towards emissions reduction goals. Article 14 • Requires that every five years, countries are to update, evaluate, and set new targets based on their progress.

Source: Summarized from the Paris Agreement, https://unfccc.int/.

Chapter 3 Ethics, Social Responsibility, and Sustainability 83

For the Paris Agreement to officially take effect, ratification of the deal must now take place by at least 55 countries representing at least 55 percent of global emissions. As the two largest emitters of greenhouse gas, China and the United States are critical in reaching the 55 percent emission threshold. The signing of the agreement officially commenced on April 22, 2016, in New York City. If fully ratified, the Paris Agreement will be the largest international agreement on environmental reform since the Kyoto Protocol of 1997.

Despite improvements in environmental protection and ethical business practices, many companies continue to violate laws and/or jeopardize safety and environmental concerns in their operations. This is particularly true in emerging and developing coun- tries, where environmental laws may be reasonably strong but are not as vigorously enforced as in higher income countries. As one example, in April 2016, China’s govern- ment announced it would investigate a report that nearly 500 students became sick with various ailments, including cancer, at a school built near a recently closed chemical plant in Changzhou.52 As citizens become more demanding that governments and businesses take action to address environmental pollution, and the media report on these controver- sies, officials are likely to feel pressure to respond.

■ Globalization and Ethical Obligations of MNCs All this prompts the question, how much responsibility do MNCs have in changing these practices? Should they adopt the regulations in the country of origin or yield to those in the country of operation? One remedy could be to instill a business code of ethics that extends to all countries, or to create contracts for situations that may arise. The nearby International Management in Action box regarding Volkswagen underscores how, despite a strong code of conduct, VW found itself the subject of numerous ethical problems, which resulted in lawsuits and severely tarnished its reputation.

“Doing the right thing” is not always as simple as it appears. Some years back, Levi Strauss experienced this issue with its suppliers from Bangladesh. Children under the age of 14 were working at two locations, which did not violate the law in Bangladesh but did go against the policy of Levi Strauss. Ultimately, Levi Strauss decided to con- tinue paying the wages of the children and secured a position for them once they reached the age of 14, after their return from schooling.53 While the level of involvement is hard to standardize, having a basic set of business ethics and appropriately applying it to the culture in which one is managing is a step in the right direction. Managers need to be cautious not to blur the lines of culture in these situations. The Prince of Wales was once quoted as saying, “Business can only succeed in a sustainable environment. Illiter- ate, poorly trained, poorly housed, resentful communities, deprived of a sense of belong- ing or of roots, provide a poor workforce and an uncertain market.”54 Businesses face much difficulty in attempting to balance organizational and cultural roots with the advancement of globalization.

One recent phenomenon in response to globalization has been not just to off- shore low-cost labor-intensive practices, as described in Chapter 1, but to transfer a large percentage of current employees of all types to foreign locations. The inexpen- sive labor available through offshore outsourcing in India has aided many institutions, but also has put a strain on some industries, particularly home-based technology ser- vices. More than a third of the global IT workforce is now located in India. It is estimated that IBM now bases more than 30 percent of its employees in India and Accenture, a company specializing in management consulting, technology services, and outsourcing, now has more than double the number of employees in India than it has in the United States. With labor costs in India at less than half of those in the United States, companies like Accenture gain a competitive advantage by offering similar low-cost services, but with consulting expertise that is not yet matched by Indian cohorts.55

The transfer of the labor force overseas creates an interesting dynamic in the scope of ethics and corporate responsibility. While most international managers concern them- selves with understanding the social culture in which the corporation is enveloped and how that can mesh with the corporate culture, this recent wave involves the extension of an established corporate culture into a new social environment. The difference here is that the individuals being moved offshore are part of a corporate citizenship, meaning that they will identify with the corporation and not necessarily the outside environment; the opposite occurs when the firm moves to another country and seeks to employ local citizens. Accenture proves that it is possible to succeed with such an effort, but as more and more companies follow suit, other questions and concerns may arise. How will the two cultures work together? Will employees adhere to the work schedule of the home or the host country? Will the host country be open or reluctant to an influx of new citizens?

International Management in Action

Volkswagen’s Challenges with Ethical Business Practices

In the fiercely competitive global automotive industry, the Volkswagen Group (VW) has pursued an ongoing global strategy that emphasizes both centralization and regional adaptation and leverages the range of capa- bilities from its various brands and their production. VW operates manufacturing facilities in nearly 30 countries, including two joint ventures in China, and sells its cars in over 150 countries. After two decades of sales lead- ership in Europe, VW reached a significant milestone in its 78-year history when, for the first half of 2015, it surpassed Toyota to become the top automobile pro- ducer by sales worldwide. However, celebrations would be short-lived. In late 2015, VW found itself in a major ethical crisis after numerous independent investigations confirmed that VW’s engine software was intentionally bugged to alter a car’s performance when the vehicle was under- going emissions testing. The VW-manufactured diesel engines were programmed to function in such a way that good gas mileage could be achieved during road tests (when emissions were not being tested) and acceptable nitrogen oxide readings were emitted dur- ing lab tests (when gas mileage was not being tested). In reality, however, the amount of nitrogen oxide emit- ted during regular road driving was nearly 40 times greater than what was emitted during testing, far exceeding permissible emissions levels regulated in the United States and Europe. In September 2015, the U.S. Environmental Protection Agency (EPA) formally issued a Notice of Violation to VW. The software modification was installed on nearly 11 million vehicles across the globe, affecting all VW diesel engines manufactured between 2009 and 2015. It has been speculated that over 30 management-level employees participated in or had knowledge of the intentional attempt to cheat on these emissions tests. Within hours of the issuance of the EPA Notice of Vio- lation, the scandal was receiving worldwide news cover- age. Perhaps learning from the experience of other companies entangled in ethical scandals over the last

several years, VW was quick to assume full responsibility. A number of key figureheads, including global CEO Mar- tin Winterkorn and American President Michael Horn, resigned. Maintaining transparency, including open testi- mony before the U.S. Congress, was a key element of VW’s approach to rebuilding public trust. “We’ve totally screwed up,” stated former American VW President Horn. The financial fallout from the scandal has been dev- astating to VW. After starting the year as the top global automaker, VW slumped in the final few months of 2015, and annual sales declined for the first time in 13 years. The company’s stock price dropped by a third over the last several months of 2015. In the third quarter of 2015, VW posted its first quarterly loss in 15 years. VW has set aside over $7 billion to cover costs incurred due to the recall and repair of the vehicles. However, as of mid 2016, Volkswagen still did not have an economical approach to lowering emissions in the affected cars. In November 2015, the company offered vouchers worth $1,000 to all U.S. affected customers, and in April 2016, Volkswagen gave U.S. customers the option to return their vehicle for a full refund. No compensation package, however, has been extended to those custom- ers outside of the U.S. Fines and associated lawsuits are likely to cost VW even more in the coming years. The EPA has the ability to fine VW $37,500 per car sold in the United States—or about $18 billion. Over 500 law- suits have already been filed in the United States against VW, with additional pressure due to a pending $46 bil- lion suit filed by the U.S. Department of Justice. In its 15-page code of conduct, published in the years prior to the emissions scandal, VW emphasizes its com- mitment to its strong reputation. The trust that the public placed in the VW brand aided in its growth from a small German automaker to a global giant. Now, that reputation appears to be in jeopardy. Will VW be able to recover?

Sources: Volkswagen website, www.vw.com/; Russell Hotten, “Volkswa- gen: The Scandal Explained,” BBC, December 10, 2015, www.bbc. com/news/business-34324772.

Chapter 3 Ethics, Social Responsibility, and Sustainability 85

The latter may not be a current concern due to the infrequency of offshoring, but MNCs may face a time when they have to consider more than just survival of the company. One must also bear in mind the effects these choices will have on both cultures.

Reconciling Ethical Differences across Cultures As noted in the introduction to this section, ethical dilemmas arise from conflicts between ethical standards of a country and business ethics, or the moral code guiding business behavior. Most MNCs seek to adhere to a code of ethical conduct while doing business around the world, yet must make some adjustments to respond to local norms and values. Navigating this natural tension can be challenging. One approach advocated by two prominent business ethicists suggests that there exist implied social contracts that gener- ally govern behavior around the world, some of which are universal or near universal. These “hyper” norms include fundamental principles like respect for human life or abstention from cheating, lying, and violence. Local community norms are respected within the context of such hyper norms when they deviate from one society to another.

This approach, called “Integrative Social Contracts Theory” (ISCT), attempts to navigate a moral position that does not force decision makers to engage exclusively in relativism versus absolutism. It allows substantial latitude for nations and economic com- munities to develop their unique concepts of fairness but draws the line at flagrant neglect of core human values. It is designed to provide international managers with a framework when confronted with a substantial gap between the apparent moral and ethical values in the country in which the MNC is headquartered and the many countries in which it does business. Although ISCT has been criticized for its inability to provide precise guidance for managers under specific conditions, it nonetheless offers one approach to helping reconcile a fundamental contradiction in international business ethics.56

Corporate Social Responsibility and Sustainability In addition to expectations that they adhere to specific ethical codes and principles, corporations are under increasing pressure to contribute to the societies and communities in which they operate and to adopt more socially responsible business practices through- out their entire range of operations. Corporate social responsibility (CSR) can be defined as the actions of a firm to benefit society beyond the requirements of the law and the direct interests of the firm.57 It is difficult to provide a list of obligations since the social, economic, and environmental expectations of each company will be based on the desires of the stakeholders. Pressure for greater attention to CSR has emanated from a range of stakeholders, including civil society (the broad societal interests in a given region or country) and from nongovernmental organizations (NGOs). These groups have urged MNCs to be more responsive to the range of social needs in developing countries, includ- ing concerns about working conditions in factories or service centers and the environ- mental impacts of their activities.58 The increased CSR efforts by businesses appear to be effective in increasing public opinion; more than 50 percent of global respondents to a recent Edelman survey expressed trust in business and government in 2016, reaching a record high (see Figure 3–2).59

Many MNCs such as Intel, HSBC, Lenovo, TOMS, and others take their CSR commitment seriously (see Brief Integrative Case 1.2 at the end of Part One). These firms have integrated their response to CSR pressures into their core business strategies and operating principles around the world (see the section “Response to Social and Organizational Obligations”.

Civil Society, NGOs, MNCs, and Ethical Balance The emergence of organized civil society and NGOs has dramatically altered the business environment globally and the role of MNCs within it. Although social movements have been part of the political and economic landscape for centuries, the emergence of NGO activism in the United States

nongovernmental organizations (NGOs) Private, not-for-profit organizations that seek to serve society’s interests by focusing on social, political, and economic issues such as poverty, social justice, education, health, and the environment.

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during the modern era can be traced to mid-1984, when a range of NGOs, including church and community groups, human rights organizations, and other antiapartheid activ- ists, built strong networks and pressed U.S. cities and states to divest their public pension funds of companies doing business in South Africa. This effort, combined with domes- tic unrest, international governmental pressures, and capital flight, posed a direct, sus- tained, and ultimately successful challenge to the white minority rule, resulting in the collapse of apartheid.

Since then, NGOs generally have grown in number, power, and influence. Large global NGOs such as Save the Children, Oxfam, CARE, Amnesty International, World Wildlife Fund, and Conservation International are active in all parts of the world. Their force has been felt in a range of major public policy debates, and NGO activism has been responsible for major changes in corporate behavior and governance. Some observ- ers now regard NGOs as a counterweight to business and global capitalism. NGO criti- cisms have been especially sharp in relation to the activities of MNCs, such as Nike, Levi’s, Chiquita, and others whose sourcing practices in developing countries have been alleged to exploit low-wage workers, take advantage of lax environmental and workplace standards, and otherwise contribute to social and economic problems. Three recent exam- ples illustrate the complex and increasingly important impact of NGOs on MNCs.

In November 2015, on the opening day of the United Nations climate summit in Paris, Morgan Stanley and Wells Fargo announced that they would no longer provide financing to coal-mining companies in both the developed and developing world. Morgan Stanley also stated that it, as a financier, has a responsibility to guide the global com- munity towards a low-carbon economy. This announcement came after several months of aggressive pressure and lobbying by environmental protection groups, including the Rainforest Action Network (RAN). An online petition initiated by RAN drew thousands of signatures.60 After heavy lobbying from NGOs, in August 2003, the U.S. pharmaceu- tical industry dropped its opposition to relaxation of intellectual property provisions under the WTO to make generic, low-cost antiviral drugs available to developing coun- tries facing epidemics or other health emergencies.61 In November 2009, after nearly two years of student campaigning in coordination with the apparel workers, a Honduran workers’ union concluded an agreement with Russell Athletics, the apparel manufacturer owned by Fruit of the Loom, that puts all of the workers back to work, provides com- pensation for lost wages, recognizes the union and agrees to collective bargaining, and provides access for the union to all other Russell apparel plants in Honduras for union organizing drives in which the company will remain neutral. According to a November 18,

Figure 3–2 Public Trust Reaches Record Highs in 2016

Source: Original graphic by Ben Littell under supervision of Professor Jonathan Doh based on data from 2016 Edelman Trust Barometer, www.edelman.com/insights/intellectual-property/2016-edelman-trust-barometer/.

50%

47%

46%

38%

55%

53%

49%

43%

35%

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45%

50%

55%

60%

2012 2013 2014 2015 2016

NGOs MediaBusinesses Government

Chapter 3 Ethics, Social Responsibility, and Sustainability 87

2009, press release of United Students Against Sweatshops, this has been an “unprece- dented victory for labor rights.”62

Many NGOs recognize that MNCs can have positive impacts on the countries in which they do business, often adhering to higher standards of social and environmental responsibility than local firms. In fact, MNCs may be in a position to transfer “best practices” in social or environmental actions from their home to host countries’ markets. In some instances, MNCs and NGOs collaborate on social and environmental projects and in so doing contribute both to the well-being of communities and to the reputation of the MNC. The emergence of NGOs that seek to promote ethical and socially respon- sible business practices is beginning to generate substantial changes in corporate management, strategy, and governance.

Response to Social and Organizational Obligations MNCs are increasingly en- gaged in a range of responses to growing pressures to contribute positively to the social and environmental progress of the communities in which they do business. One response is the agreements and codes of conduct in which MNCs commit to maintain certain standards in their domestic and global operations. These agreements, which include the U.N. Global Compact (see Table 3–2), the Global Reporting Initiative, the social accountability “SA8000” standards, and the ISO 14000 environmental qual- ity standards, provide some assurances that when MNCs do business around the world, they will maintain a minimum level of social and environmental standards in the workplaces and communities in which they operate.63,64 These codes help offset the real or perceived concern that companies move jobs to avoid higher labor or environ- mental standards in their home markets. They may also contribute to the raising of standards in the developing world by “exporting” higher standards to local firms in those countries.

Another interesting trend among businesses and NGOs is the movement toward increasing the availability of “fairly traded” products. Beginning with coffee and moving to chocolate, fruits, and other agricultural products, fair trade is an organized social movement and market-based approach that aims to help producers in developing coun- tries obtain better trading conditions and promote sustainability. See the A Closer Look box for a discussion of fair trade systems and products.

fair trade An organized social movement and market- based approach that aims to help producers in developing countries obtain better trading conditions and promote sustainability.

Table 3–2 Principles of the Global Compact

Human Rights

Principle 1: Support and respect the protection of international human rights within their sphere of influence. Principle 2: Make sure their own corporations are not complicit in human rights abuses. Labor

Principle 3: Freedom of association and the effective recognition of the right to collective bargaining. Principle 4: The elimination of all forms of forced and compulsory labor. Principle 5: The effective abolition of child labor. Principle 6: The elimination of discrimination with respect to employment and occupation. Environment

Principle 7: Support a precautionary approach to environmental challenges. Principle 8: Undertake initiatives to promote greater environmental responsibility. Principle 9: Encourage the development and diffusion of environmentally friendly technologies. Anticorruption

Principle 10: Business should work against all forms of corruption, including extortion and bribery.

Sustainability In the boardroom, the term sustainability may first be associated with financial investments or the hope of steadily increasing profits, but for a growing number of companies, this term means the same to them as it does to an environmental conser- vationist. Partially this is due to corporations recognizing that dwindling resources will eventually halt productivity, but the World Economic Forum in Davos, Switzerland, has also played a part in bringing awareness to this timely subject. In a report published in 2012, the World Economic Forum discussed the challenges created by the speed of busi- ness growth. With half as many people living in poverty as just 30 years ago, the con- sumer class is growing rapidly in emerging markets. The report focused on how sustainable consumption of energy and resources can be used to ease the problems brought about from this need for rapid business scaling.65

While the United States has the Environmental Protection Agency to provide infor- mation about and enforce environmental laws,66 the United Nations also has a division dedicated to the education, promotion, facilitation, and advocacy of sustainable practices and environmentally sound concerns called the United Nations Environment Programme (UNEP).67 The degree to which global awareness and concern are rising extends beyond laws and regulations, as corporations are now taking strides to be leaders in this “green” movement.

Walmart, one of the most well-known and pervasive global retailers, has begun to recognize the numerous benefits of the adage, “Think globally, act locally.” Walmart has set three broad corporate goals in regards to sustainability: to use 100 percent renewable energy, to achieve zero-waste, and to sell products that are sustainable for the environ- ment and people.68 Working with environmentalists, it discovered that many changes in production and supply chain practices could reduce waste and pollution and therefore reduce costs. By cutting back on packaging, Walmart saves an estimated $2.4 million a

sustainability Development that meets humanity’s needs without harming future generations.

A Closer Look

Fair Trade in the U.S.: Fair trade USA http://www.fairtradeusa.org/

Fair Trade helps farming families across Latin America, Africa, and Asia to improve the quality of life in their communities. Fair Trade certification empowers farm- ers and farm workers to lift themselves out of poverty by investing in their farms and communities, protect- ing the environment, and developing the business skills necessary to compete in the global marketplace. Fair Trade is much more than a fair price. Fair Trade principles include

• Fair price: Democratically organized farmer groups receive a guaranteed minimum floor price and an additional premium for certified organic products. Farmer organizations are also eligible for preharvest credit.

• Fair labor conditions: Workers on Fair Trade farms enjoy freedom of association, safe working condi- tions, and living wages. Forced child labor is strictly prohibited.

• Direct trade: With Fair Trade, importers purchase from Fair Trade producer groups as directly as possible, eliminating unnecessary middlemen and empowering farmers to develop the business capacity necessary to compete in the global marketplace.

• Democratic and transparent organizations: Fair Trade farmers and farm workers decide democrati- cally how to invest Fair Trade revenues.

• Community development: Fair Trade farmers and farm workers invest Fair Trade premiums in social and business development projects like scholar- ship programs, quality improvement training, and organic certification.

• Environmental sustainability: Harmful agrochemi- cals and GMOs are strictly prohibited in favor of environmentally sustainable farming methods that protect farmers’ health and preserve valuable eco- systems for future generations.

Fair Trade USA, a nonprofit organization, is the only inde- pendent, third-party certifier of Fair Trade products in the U.S. and one of 20 members of Fairtrade Labeling Orga- nizations International (FLO). Fair Trade USA’s rigorous audit system, which tracks products from farm to finished product, verifies industry compliance with Fair Trade cri- teria. Fair Trade USA allows U.S. companies to display the Fair Trade Certified label on products that meet strict Fair Trade standards. Fair Trade certification is currently available in the U.S. for coffee, tea and herbs, cocoa and chocolate, fresh fruit, sugar, rice, and vanilla.

Chapter 3 Ethics, Social Responsibility, and Sustainability 89

year, 3,800 trees, and 1 million barrels of oil. Over 80,000 suppliers compete to put their products on Walmart shelves, which means that this company has a strong influence on how manufacturers do business.69,70 To encourage sustainability from these suppliers, Walmart created a “Sustainability Hub” website to share standards and encourage inno- vation.71 And Walmart’s efforts are truly global. In line with the three corporate goals, the company is buying solar and wind power in Mexico, sourcing local food in China and India, and analyzing the life-cycle impact of consumer products in Brazil. Alleviat- ing hunger has become a goal of Walmart’s charitable efforts, and so with CARE it is backing education, job-training, and entrepreneurial programs for women in Peru, Ban- gladesh, and India. Walmart is attempting to change global standards as it offers higher prices to coffee growers in Brazil and increases pressures on the factory owners in China to reduce energy and fuel costs.72 Although Walmart has faced some setbacks in its global CSR efforts, it continues to respond to pressures for social responsibility and sustain- ability (see In-Depth Integrated Case 2.2 at the end of Part Two).

GE has pursued an aggressive initiative to integrate environmental sustainability with its business goals through the “ecomagination” program. Management styles again are changing as agendas are refocused on not only seeing the present but also looking to the future of human needs and the environment. Ecomagination is a GE strategic initiative to use innovation to improve energy efficiency across the globe. By meeting the demand for “green” products and services, GE is generating value for shareholders as well as promoting environmental sustainability. At a GE Hitachi Nuclear Energy power plant in North Carolina, a new wastewater system “has reduced water usage by 25 mil- lion gallons annually, avoiding nearly 80 tons per year of CO2 emissions and realizing annual savings of $160,000 in water and energy costs.” GE’s ecomagination ZeeWeed® membrane bioreactor (MBR) technology transforms up to 65,000 gallons per day of wastewater into treated water that can be used in the facility’s cooling towers. GE Jen- bacher engines capture gas from various fuel sources, even garbage, to create power. Jenbacher engines are at the core of a Mexican landfill gas-to-energy project, which President Felipe Calderón called “a model renewable energy project” for Latin America. This project’s power supports “Monterrey’s light-rail system during the day and city street lights at night.”

In addition, GE’s Flight Management System (FMS) for Boeing 737 planes has enabled airlines to lower fuel costs and reduce emissions. According to a GE Ecomagi- nation Annual Report, “The FMS enables pilots to determine, while maintaining a highly efficient cruise altitude, the exact point where the throttle can be reduced to flight idle while allowing the aircraft to arrive precisely at the required runway approach point without the need for throttle increases.”73 SAS Scandinavian Airlines estimates that FMS will save the airline $10 million annually. According to CEO Jeffrey R. Immelt and vice president of Ecomagination Steven M. Fludder, “Ecomagination is playing a role in boosting economic recovery, supporting the jobs of the future, improving the environ- mental impact of our customers’ (and our own) operations, furthering energy indepen- dence, and fostering innovation and growth in profitable environmental solutions.”74

Corporate Governance The recent global, ethical, and governance scandals have placed corporations under intense scrutiny regarding their oversight and accountability. Adelphia, Arthur Andersen, Enron, Olympus, HSBC, Tyco, and Barclays are just a few of the dozens of companies that have been found to engage in inappropriate and often illegal activities related to governance. In addition, a number of financial services firms, including Credit Suisse, Deutsche Bank, Lehman Brothers, Citigroup, and many others, have been found to have engaged in inap- propriate trading or other activities. Corporate governance is increasingly high on the agenda for directors, investors, and governments alike in the wake of financial collapses and corporate scandals in recent years. The collapses and scandals have not been limited to a single country, or even a single continent, but have been a global phenomenon.

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Corporate governance can be defined as the system by which business corpora- tions are directed and controlled.75 The corporate governance structure specifies the dis- tribution of rights and responsibilities among different participants in the corporation—such as the board, managers, shareholders, and other stakeholders—and spells out the rules and procedures for making decisions on corporate affairs. By doing this, it also provides the structure through which the company objectives are set and the means of attaining those objectives and monitoring performance.

Governance rules and regulations differ among countries and regions around the world. For example, the UK and U.S. systems have been termed “outsider” systems because of dispersed ownership of corporate equity among a large number of outside investors. Historically, although institutional investor ownership was predominant, institutions generally did not hold large shares in any given company; hence, they had limited direct control.76 In contrast, in an insider system, such as that in many conti- nental European countries, ownership tends to be much more concentrated, with shares often being owned by holding companies, families, or banks. In addition, differences in legal systems, as described in Chapter 2, also affect shareholders’ and other stake- holders’ rights and, in turn, the responsiveness and accountability of corporate manag- ers to these constituencies. Notwithstanding recent scandals, in general, North American and European systems are considered comparatively responsive to sharehold- ers and other stakeholders. In regions with less well-developed legal and institutional protections and poor property rights, such as some countries in Asia, Latin America, and Africa, forms of “crony capitalism” may emerge in which weak corporate gover- nance and government interference can lead to poor performance, risky financing pat- terns, and macroeconomic crises.

Corporate governance will undoubtedly remain high on the agenda of governments, investors, NGOs, and corporations in the coming years, as pressure for accountability and responsiveness continues to increase.

Corruption As noted in Chapter 2, government corruption is a pervasive element in the international business environment. Recently publicized scandals in Brazil, China, Costa Rica, Egypt, Pakistan, Russia, South Africa, and elsewhere underscore the extent of corruption glob- ally, especially in the developing world. However, a number of initiatives have been taken by governments and companies to begin to stem the tide of corruption.77,78

The Foreign Corrupt Practices Act (FCPA) makes it illegal for U.S. companies and their managers to attempt to influence foreign officials through personal payments or political contributions. Prior to passage of the FCPA, some American multinationals had engaged in this practice, but realizing that their stockholders were unlikely to approve of these tactics, the firms typically disguised the payments as entertainment expenses, consulting fees, and so on. Not only does the FCPA prohibit these activities, but the U.S. Internal Revenue Service also continually audits the books of MNCs. Those firms that take deductions for such illegal activities are subject to high financial penal- ties, and individuals who are involved can even end up going to prison. Strict enforce- ment of the FCPA has been applauded by many people, but some critics wonder if such a strong stance has hurt the competitive ability of American MNCs. On the positive side, many U.S. multinationals have now increased the amount of business in countries where they used to pay bribes. Additionally, many institutional investors in the United States have made it clear that they will not buy stock in companies that engage in unethical practices and will sell their holdings in such firms. Given that these institu- tions have hundreds of billions of dollars invested, senior-level management must be responsive to their needs.

Looking at the effect of the FCPA on U.S. multinationals, it appears that the law has had far more of a positive effect than a negative one. Given the growth of American MNCs in recent years, it seems fair to conclude that bribes are not a basic part of business

corporate governance The system by which business corporations are directed and controlled.

Chapter 3 Ethics, Social Responsibility, and Sustainability 91

in many countries, for when multinationals stopped this activity, they were still able to sell in that particular market. On the other hand, this does not mean that bribery and corruption are a thing of the past.

Indeed bribery continues to be a problem for MNCs around the world. In fact, recent scandals at ALSTOM, BAE, Daimler, Halliburton, Siemens, Walmart, and many other multinationals underscore the reality that executives continue to partici- pate in bribery and corruption. Although Siemens paid a record fine, U.S. authorities are still concerned about enforcement of corruption laws in other countries.79 Figure 3–3 gives the latest corruption index of countries around the world. Notice that the United States ranks 16th in this independent analysis. These rankings fluctuate somewhat from year to year. Factors that appear to contribute to these fluctuations include changes in government or political party in power, economic crises, and crackdowns in individual countries.

In complying with the provisions of the FCPA, U.S. firms must be aware of changes in the law that make FCPA violators subject to Federal Sentencing Guide- lines. The origin of this law and the guidelines that followed can be traced to two Lockheed Corporation executives who were found guilty of paying a $1 million bribe to a member of the Egyptian parliament in order to secure the sale of aircraft to the Egyptian military. One of the executives was sentenced to probation and fined $20,000 and the other, who initially fled prosecution, was fined $125,000 and sentenced to 18 months in prison.80

Another development that promises to give teeth to “antibribing” legislation is the recent formal agreement by a host of industrialized nations to outlaw the practice of bribing foreign government officials. The treaty, which initially included 29 nations that belong to the Organization for Economic Cooperation and Development (OECD), marked a victory for the United States, which outlawed foreign bribery two decades previously but had not been able to persuade other countries to follow its lead. As a result, American firms had long complained that they lost billions of dollars in contracts each year to rivals that bribed their way to success.81

This treaty does not outlaw most payments to political party leaders. In fact, the treaty provisions are much narrower than U.S. negotiators wanted, and there undoubtedly will be ongoing pressure from the American government to expand the scope and cover- age of the agreement. For the moment, however, it is a step in the direction of a more ethical and level playing field in global business. Additionally, in summing up the impact and value of the treaty, one observer noted: “For their part, business executives say the treaty . . . reflects growing support for antibribery initiatives among corporations in Europe and Japan that have openly opposed the idea. Some of Europe’s leading industrial corporations, including a few that have been embroiled in recent allegations of bribery, have spoken out in favor of tougher measures and on the increasingly corrosive effect of corruption.”82

In addition to the 34 members of the OECD, a number of developing countries, including Argentina, Brazil, Bulgaria, and South Africa, have signed on to the OECD agreement. Latin American countries have established the Organization of American States (OAS) Inter-American Convention Against Corruption, which entered into force in March 1997, and more than 25 Western Hemisphere countries are signatories to the convention, including Argentina, Brazil, Chile, Mexico, and the United States. As a way to prevent the shifting of corrupt practices to suppliers and intermediaries, the Transpar- ent Agents Against Contracting Entities (TRACE) standard was developed after a review of the practices of 34 companies. It applies to business intermediaries, including sales agents, consultants, suppliers, distributors, resellers, subcontractors, franchisees, and joint-venture partners, so that final producers, distributors, and customers can be confident that no party within a supply chain has participated in corruption.

Both governments and companies have made important steps in their efforts to stem the spread of corruption, but much more needs to be done in order to reduce the impact of corruption on companies and the broader societies in which they operate.83

Figure 3–3 Transparency International Corruption Perceptions Index Ratings, Selected Countries, 2016

Source: Original graphic by Ben Littell under supervision of Jonathan Doh based on data from Transparency International Corruption Perceptions Index Ratings 2016.

0 Denmark

Hong Kong

South Korea

R a

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South Africa

Indonesia

Mexico

Russia

Somalia

China India Brazil

United States United Kingdom

180

160

140

120

100

92 Part 1 Environmental Foundation

International Assistance In addition to government- and corporate-sponsored ethics and social responsibility prac- tices, governments and corporations are increasingly collaborating to provide assistance to communities around the world through global partnerships. This assistance is particu- larly important for those parts of the world that have not fully benefited from globaliza- tion and economic integration. Using a cost-benefit analysis of where investments would have the greatest impact, a recent study identified the top priorities around the world for development assistance. The results of this analysis are presented in Table 3–3. Fighting malnutrition, controlling malaria, and immunizing children are shown to be the best investments. Governments, international institutions, and corporations are involved in several ongoing efforts to address some of these problems.

At a United Nations summit in September 2015, world leaders placed development at the heart of the global agenda by adopting the Sustainable Development Goals (see Table 3–4). The seventeen Sustainable Development Goals constitute an ambitious agenda to significantly improve the human condition by 2030. The goals set clear targets for reducing poverty, hunger, disease, and inequalities, while protecting the environment and climate. For each goal, targets and indicators have been defined and are used to track the progress in meeting the goals.84

A more specific initiative is the Global Fund to Fight AIDS, Tuberculosis and Malaria, which was established in 2001. Through the end of 2015, the Global Fund had committed over US$33 billion in grants to over 151 countries.85

Through these and other efforts, MNCs, governments, and international organiza- tions are providing a range of resources to communities around the world to assist them as they respond to the challenges of globalization and development. International manag- ers will increasingly be called upon to support and contribute to these initiatives.

Table 3–3 Copenhagen Consensus Investment Priorities

Ranking Investment

1 Bundled micronutrient interventions to fight hunger and improve education 2 Expanding the subsidy for malaria combination treatment 3 Expanded childhood immunization coverage 4 Deworming of schoolchildren, to improve educational and health outcomes 5 Expanding tuberculosis treatment 6 R&D to increase yield enhancements, to decrease hunger, fight biodiversity

destruction, and lessen the effects of climate change 7 Investing in effective early warning systems to protect populations against natural

disaster 8 Strengthening surgical capacity 9 Hepatitis B immunization 10 Using low-cost drugs in the case of acute heart attacks in poorer nations (these

are already available in developed countries) 11 Salt reduction campaign to reduce chronic disease 12 Geo-engineering R&D into the feasibility of solar radiation management 13 Conditional cash transfers for school attendance 14 Accelerated HIV vaccine R&D 15 Extended field trial of information campaigns on the benefits from schooling 16 Borehole and public hand pump intervention

Source: Copenhagen Consensus 2012.

Chapter 3 Ethics, Social Responsibility, and Sustainability 93

The World of International Management—Revisited The World of International Management feature that opened this chapter outlines how three companies have sought to incorporate social responsibility and sustainability into their busi- ness strategy and operations. In each case, the companies have responded to changes in the external environment and sought to capitalize on increasing interest in and support of sustain- ability in business. This interest has spread around the globe such that both developed and developing countries and their companies are increasingly committed to a sustainable future.

In this chapter we focused on ethics and social responsibility in global business activities, including the role of governments, MNCs, and NGOs in advancing greater ethical and socially responsible behavior. MNCs’ new focus on environmental sustain- ability and “doing well by doing good” is an important dimension of this broad trend.

Global ethical and governance scandals have rocked the financial markets and implicated dozens of individual companies. New corporate ethics guidelines passed in the United States have forced many MNCs to take a look at their own internal ethical practices and make changes accordingly. Lawmakers in Europe and Asia have also made adjustments in rules over corporate financial disclosure. The continuing trend toward globalization and free trade appears to be encouraging development of a set of global ethical, social responsibility, and anticorruption standards. This may actually help firms cut compliance costs as they realize that economies have common global frameworks.

Having read the chapter, answer the following questions: (1) Do governments and companies in developed countries have an ethical responsibility to contribute to economic growth and social development in developing countries? (2) Are governments, companies, or NGOs best equipped to provide this assistance? How might collaboration among these sectors provide a comprehensive approach? (3) Do corporations have a responsibility to use their “best” ethics and social responsibility practices when they do business in other countries, even if those countries’ practices are different? (4) How can companies leverage their ethical reputation and social and environmental responsibility to improve business performance?

Table 3–4 The U.N. Sustainable Development Goals

Goal 1: Poverty—End poverty in all its forms everywhere. Goal 2: Food—End hunger, achieve food security and improved nutrition, and promote sustainable agriculture. Goal 3: Health—Ensure healthy lives and promote well-being for all at all ages. Goal 4: Education—Ensure inclusive and equitable quality education and promote lifelong learning opportunities for all. Goal 5: Women—Achieve gender equality and empower all women and girls. Goal 6: Water—Ensure availability and sustainable management of water and sanitation for all. Goal 7: Energy—Ensure access to affordable, reliable, sustainable, and modern energy for all. Goal 8: Economy—Promote sustained, inclusive, and sustainable economic growth; full and productive employment; and decent

work for all. Goal 9: Infrastructure—Build resilient infrastructure, promote inclusive and sustainable industrialization, and foster innovation. Goal 10: Inequality—Reduce inequality within and among countries. Goal 11: Habitation—Make cities and human settlements inclusive, safe, resilient, and sustainable. Goal 12: Consumption—Ensure sustainable consumption and production patterns. Goal 13: Climate—Take urgent action to combat climate change and its impacts. Goal 14: Marine ecosystems—Conserve and sustainably use the oceans, seas, and marine resources for sustainable development. Goal 15: Ecosystems—Protect, restore, and promote sustainable use of terrestrial ecosystems; sustainably manage forests; com-

bat desertification; halt and reverse land degradation; and halt biodiversity loss. Goal 16: Institutions—Promote peaceful and inclusive societies for sustainable development; provide access to justice for all;

and build effective, accountable, and inclusive institutions at all levels. Goal 17: Sustainability—Strengthen the means of implementation and revitalize the global partnership for sustainable development

Source: www.un.org/sustainabledevelopment/sustainable-development-goals/.

94 Part 1 Environmental Foundation

1. Ethics is the study of morality and standards of conduct. It is important in the study of international management because ethical behavior often varies from one country to another. Ethics manifests itself in the ways societies and companies address issues such as employment conditions, human rights, and corruption. A danger in international management is the ethical relativism trap—“When in Rome, do as the Romans do.”

2. During the years ahead, multinationals likely will become more concerned about being socially responsible. NGOs are forcing the issue. Countries are passing laws to regulate ethical practices and

governance rules for MNCs. MNCs are being more proactive (often because they realize it makes good business sense) in making social contributions in the regions in which they operate and in developing codes of conduct to govern ethics and social responsibility. One area in which companies have been especially active is in pursuing strategies that blend environmental sustainability and business objectives.

3. MNCs—in conjunction with governments and NGOs—are also contributing to international devel- opment assistance and working to ensure that cor- porate governance practices are sound and effective.

SUMMARY OF KEY POINTS

KEY TERMS

corporate governance, 90 corporate social responsibility (CSR), 77

ethics, 77 fair trade, 87

nongovernmental organizations (NGOs), 85 sustainability, 88

REVIEW AND DISCUSSION QUESTIONS

1. How might different ethical philosophies influence how managers make decisions when it comes to offshoring of jobs?

2. What lessons can U.S. multinationals learn from the bribery and corruption scandals in recent years, such as those affecting contractors doing business in Iraq (Halliburton), as well as large MNCs such as Siemens, HP, and others? Discuss two.

3. In recent years, rules have tightened such that those who work for the U.S. government in trade negotia- tions are now restricted from working for lobbyists

for foreign firms. Is this a good idea? Why or why not?

4. What are some strategies for overcoming the impact of counterfeiting? Which strategies work best for discretionary (for instance, movies) versus nondis- cretionary (pharmaceutical) goods?

5. Why are MNCs getting involved in corporate social responsibility and sustainable business practice? Are they displaying a sense of social responsibility, or is this merely a matter of good business, or both? Defend your answer.

1. “Becoming a Responsible Company,” Patagonia. com, www.patagonia.com/responsible-company.html.

2. “Patagonia Mission Statement: Our Reason for Being,” Patagonia.com. www.patagonia.com/ company-info.html.

3. “Becoming a Responsible Company.” 4. Ibid.

5. “Corporate Responsibility: Promoting Fair Labor Practices and Safe Working Conditions throughout Patagonia’s Supply Chain,” Patagonia.com, www. patagonia.com/corporate-responsibility.html.

6. Ibid. 7. “Becoming a Responsible Company.” 8. “About us,” 1% for the Planet, http://onepercentfor-

theplanet.org/about/.

ENDNOTES

Chapter 3 Ethics, Social Responsibility, and Sustainability 95

26. John M. Broder, “Stalled Out on Tesla’s Electric Highway,” The New York Times, February 8, 2013, www.nytimes.com/2013/02/10/automobiles/stalled- on-the-ev-highway.html.

27. Paul Chesser, “Tesla CEO Elon Musk Fights Per- ceptions as Stock Drops,” NLPC.org, February 26, 2013, http://nlpc.org/stories/2013/02/25/tesla-ceo- elon-musk-fights-perceptions-stock-drops.

28. John Lippert, “Will Tesla Ever Make Money?” Bloomberg Markets, March 4, 2015, www.bloomberg.com/news/articles/2015-03-04/ as-tesla-gears-up-for-suv-investors-ask-where-the- profits-are.

29. Ibid. 30. Kristen Scholer and Lee Spears, “Tesla Posts

Second-Biggest Rally for 2010 U.S. IPO,” Bloomberg Businessweek, June 29, 2010.

31. Thomas Donaldson, The Ethics of International Busi- ness (New York: Oxford University Press, 1989).

32. I. Kant, Fundamental Principles of the Metaphysics of Morals, trans. Thomas K. Abbott (New York: Macmillan, 1949 [1785]), p. 18.

33. Ibid. 34. Aristotle, Nicomachean Ethics, trans. Martin Ost-

wald New York: Macmillan, 1962, p. 153. 35. W. Frankena, Ethics, 2nd ed. (Engelwood Cliffs,

NJ: Prentice Hall, 1973). 36. J. Bentham, The Principles of Morals and Legisla-

tion (Amherst, NY: Prometheus Books, 1988 [1789]),

37. J. S. Mill, Utilitarianism (Indianapolis: Bobbs-Merrill, 1957 [1861]).

38. R. J. Vincent, Human Rights and International Relations (New York: Cambridge University Press, 1986).

39. Vladimir Kovalev, “EU Presses Russia on Human Trafficking,”BusinessWeek, February 23, 2007, www.bloomberg.com/news/articles/2007-02-23/ eu-presses-russia-on-human-traffickingbusinessweek- business-news-stock-market-and-financial-advice.

40. Andrew Pollack, “In Japan, It’s See No Evil; Have No Harassment,” The New York Times, May 7, 1996, p. C5.

41. Howard W. French, “Diploma at Hand, Japanese Women Find Glass Ceiling Reinforced with Iron,” The New York Times, January 1, 2001, p. A4.

42. Grant Thornton, “Women in Business: The Path to Leadership,” Grant Thornton International Business Report 2015, www.grantthornton.global/ globalassets/1.-member-firms/global/insights/ibr- charts/ibr2015_wib_report_final.pdf.

9. “Supply Chain: The Footprint Chronicles: 20 Years of Organic Cotton,” Patagonia.com, www.patagonia. com/20-years-of-organic-cotton.html.

10. “About Us,” Nestlé, www.nestle.com/aboutus (last visited January 30, 2016).

11. “Environmental Sustainability,” Nestlé, www.nestle. com/csv/environmental-sustainability (last visited January 30, 2016).

12. Ibid. 13. Ibid. 14. Brian Dumaine, “Is Apple ‘Greener’ Than Star-

bucks?” Fortune, June 24, 2014, http://fortune. com/2014/06/24/50-best-global-green-brands-2014/.

15. “About Tesla,” Tesla Motors, www.teslamotors.com/ about.

16. “Features and Specs,” Tesla Motors, http://maben. homeip.net/static/auto../tesla/Tesla%20roadster%20 specifications%201.pdf.

17. “Model S: Features and Specs,” Tesla Motors, www.teslamotors.com/models/features#/ performance.

18. Joe Romm, “Tesla’s Model 3 Is Already Shattering Expectations,” Climate Progress, April 6, 2016, http://thinkprogress.org/climate/2016/04/ 06/3766982/next-apple-tesla-model-3-presales/.

19. “Panasonic, Tesla Agree to Partnership for US Car Battery Plant,” Nikkei Asian Review, July 29, 2014, http://asia.nikkei.com/Business/Deals/Pana- sonic-Tesla-agree-to-partnership-for-US-car-battery- plant.

20. “Mercedes Electric Car by Tesla Test Drive–Video Tesla Mercedes A Class,” The Daily Green, Sep- tember 3, 2010.

21. Steve Hanley, “Mercedes Is Saying Goodbye to Tesla,” GAS2, August 21, 2015, http://gas2. org/2015/08/21/mercedes-is-saying-goodbye-to- tesla/.

22. Chuck Squatriglia, “Tesla Motors Joins Daimler on a Smart EV | Autopia,” Wired.com, January 13, 2009, www.wired.com/autopia/2009/01/tesla- motors-jo/.

23. Tori Tellem, “2012 Toyota RAV4-EV: Take Two,” The New York Times, November 17, 2011.

24. Tesla Motors, “Tesla Initiates Voluntary Recall after Single Customer Incident,” press release, October 1, 2010, www.teslamotors.com/about/press/releases/ tesla-initiates-voluntary-recall-after-single-customer- incident.

25. Suzanne Ashe, “Tesla Motors Recalls Electric Roadster,” CNET, May 28, 2009, http://reviews.cnet. com/8301-13746_7-10251758-48.html.

96 Part 1 Environmental Foundation

57. Abagail McWilliams and Donald Siegel, “Corporate Social Responsibility: A Theory of the Firm Per- spective,” Academy of Management Review 26, no. 1 (2001), pp. 117–127.

58. “Non-governmental Organizations and Business: Living with the Enemy,” The Economist, August 9, 2002, pp. 49–50.

59. “2016 Edelman Trust Barometer: Annual Global Study,” Edelman (2016), www.edelman.com/ insights/intellectual-property/2016-edelman-trust- barometer/.

60. Blair FitzGibbon, “Morgan Stanley and Wells Fargo Cut Coal Financing, Join Growing Movement by Banks in U.S. and Europe,” RAN press release, November 30, 2015, www.ran.org/morgan_ stanley_and_wells_fargo_cut_coal_financing.

61. “WTO to Allow Access to Cheap Drug Treatments,” Los Angeles Times, August 31, 2003, p. A4.

62. “USAS Press Release on Jerzees de Honduras Victory,” USAS, November 18, 2009, http://usas. org/2009/11/18/usas-press-release-on-jerzees-de- honduras-victory/.

63. Jonathan P. Doh and Terrence R. Guay, “Globalization and Corporate Social Responsibility: How Nongovernmental Organizations Influence Labor and Environmental Codes of Conduct,” Management International Review 44, no. 3 (2004), pp. 7–30.

64. Petra Christmann and Glen Taylor, “Globalization and the Environment: Strategies for International Voluntary Environmental Initiatives,” Academy of Management Executive 16, no. 30 (2002), pp. 121–135.

65. More with Less: Scaling Sustainable Consumption and Resource Efficiency (Geneva: World Economic Forum, 2012).

66. For more information, visit www.epa.gov. 67. For more information regarding the role of the

UNEP, visit www.unep.org. 68. “Sustainability,” Walmart, http://corporate.walmart.

com/global-responsibility/sustainability/. 69. Marc Gunther, “The Green Machine,” Fortune,

August 7, 2006, pp. 42–57. 70. Marc Gunther, “Wal-Mart: Still the Green Giant,”

May 19, 2010, www.marcgunther.com/2010/05/19/ walmart-still-the-green-giant/.

71. “SustainabilityHUB,” Walmart, www. walmartsustainabilityhub.com/.

72. Gunther, “The Green Machine.” 73. GE Ecomagination, 2008 Ecomagination Annual

Report, p. 29, www.ge.com/about-us/ecomagination.

43. “Child Labour,” International Labour Organiza- tion (2015), http://www.ilo.org/global/topics/child- labour/lang–en/index.htm.

44. Ibid. 45. “C138—Minimum Age Convention, 1973 (No.

138): Countries That Have Not Ratified This Con- vention,” International Labour Organization (2015), www.ilo.org/dyn/normlex/en/f?p=NORMLEXPUB: 11310:0::NO:11310:P11310_INSTRUMENT_ ID:312283:NO.

46. Mikey Campbell, “Foxconn Promises to Fix a Mul- titude of Violations Found by FLA Audit,” Apple Insider, March 29, 2012, http://appleinsider.com/ articles/12/03/29/foxconn_promises_to_fix_ violations_found_by_fla_audit.html.

47. David Barboza, “After Spate of Suicides, Technol- ogy Firm in China Raises Workers’ Salaries,” The New York Times, June 3, 2010, p. B3.

48. Campbell, “Foxconn Promises to Fix a Multitude of Violations Found by FLA Audit.”

49. Shelly Banjo, “Wal-Mart Toughens Supplier Poli- cies,” The Wall Street Journal, January 21, 2013. http://online.wsj.com/article/SB10001424127887323 301104578256183164905720.html.

50. Steven Greenhouse and Jim Yardley, “Global Retail- ers Join Safety Plan for Bangladesh,” The New York Times, May 14, 2013, p. A1.

51. David Stern, “The Rise and Fall of the Environ- mental Kuznets Curve,” World Development 32, no. 8 (2004), pp. 1419–1439.

52. Gerry Shih, “School in China Near Closed Plants Has 500 Sick Kids,” U.S. News and World Report, April 18, 2016, www.usnews.com/news/articles/ 2016-04-18/changzhou-china-school-has-500-sick- kids-due-to-toxins-report-says.

53. Ron Duska and Nicholas M. Rongione, Ethics and Corporate Responsibility: Theory, Cases and Dilemmas (New York: Thomas Custom Publishing, 2003).

54. Paul M. Minus, The Ethics of Business in a Global Economy (Boston: Kluwer Academic Publishers, 1993).

55. Shilpa Phadnis and Sujit John, “Top Global IT Firms Have More Staff in India Than Home Nations,” The Times of India, November 6, 2013, http://timesofindia.indiatimes.com/tech/jobs/ Top-global-IT-firms-have-more-staff-in-India-than- home-nations/articleshow/25280494.cms.

56. Thomas Donaldson and Thomas W. Dunfee, Ties That Bind: A Social Contracts Approach to Busi- ness Ethics (Cambridge, MA: Harvard Business Press, 1999).

Chapter 3 Ethics, Social Responsibility, and Sustainability 97

82. Edmund L. Andrews, “29 Nations Agree to Outlaw Bribing Foreign Officials,” The New York Times, November 21, 1997, p. C2.

83. “Special Report: The Short Arm of the Law— Bribery and Business,” The Economist, March 2, 2002, p. 85.

84. “Sustainable Development Goals,” United Nations, www.un.org/sustainabledevelopment/sus- tainable-development-goals/.

85. “Financials,” The Global Fund, www.theglobalfund. org/en/financials/ (last visited February 14, 2016).

86. CIA, “Cuba,” The World Factbook (2016), https:// www.cia.gov/library/publications/the-world-factbook/ geos/cu.html.

87. Ibid. 88. Ibid. 89. Ibid. 90. Heritage Foundation, “Cuba,” Index of Economic

Freedom (2016), http://www.heritage.org/index/ country/cuba.

91. Miguel Heft, “Why Airbnb Thinks Cuba Can Become a Case Study,” Forbes, September 6, 2015, www.forbes.com/sites/miguelhelft/2015/09/06/inside- airbnbs-cuba/#42de19b7c3ec.

74. Ibid., p. 3. 75. Organization for Economic Cooperation and Devel-

opment, Corporate Governance: A Survey of OECD Countries (Paris: OECD, 2003).

76. Stijn Claessens and Joseph P. H. Fan, “Corporate Governance in Asia: A Survey,” International Review of Finance 3, no. 2 (2002), pp. 71–103.

77. Bob Davis, “The Economy: U.S. Nears Pact on Corruption Treaty,” The Wall Street Journal, August 13, 2003, p. A2.

78. See also Jonathan P. Doh, Peter Rodriguez, Klaus Uhlenbruck, Jamie Collins, and Lorraine Eden, “Coping with Corruption in Foreign Markets,” Academy of Management Executive 17, no. 3 (2003), pp. 114–127.

79. Ken Stier, “Too Big to Be Nailed,” Fortune, April 19, 2001, http://archive.fortune.com/2010/04/19/ news/companies/hewlett_packard_bribery.fortune/ index.htm.

80. Tipton F. McCubbins, “Somebody Kicked the Sleeping Dog—New Bite in the Foreign Corrupt Practices Act,” Business Horizons, January–February 2001, p. 27.

81. Greg Steinmetz, “U.S. Firms Are among Least Likely to Pay Bribes Abroad, Survey Finds,” The Wall Street Journal, August 25, 1997, p. 5.

107

conditions, such as long hours, unhealthy conditions, and/ or an oppressive environment. Some observers see these work environments as essentially acceptable if the labor- ers freely contract to work in such conditions. For others, to call a workplace a sweatshop implies that the working conditions are illegitimate and immoral. The U.S. Govern- ment Accountability Office (the name since July 7, 2004) would hone this definition for U.S. workplaces to include those environments where an employer violates more than one federal or state labor, industrial homework, occupa- tional safety and health, workers’ compensation, or indus- try registration laws. The AFL-CIO Union of Needletrades, Industrial and Textile Employees would expand on that to include workplaces with systematic violations of global fundamental workers’ rights. The Interfaith Center on Corporate Responsibility (ICCR) defines sweatshops much more broadly than either of these; even where a factory is clean, well organized, and harassment free, the ICCR considers it a sweatshop if its workers are not paid a sustainable living wage. The purpose of reviewing these varied definitions is to acknowledge that, by definition, sweatshops are oppressive, unethical, and patently unfair to workers.12

History of Sweatshops Sweatshop labor systems were most often associated with garment and cigar manufacturing of the period 1880– 1920. Sweated labor can also be seen in laundry work, green grocers, and most recently in the “day laborers,” often legal or illegal immigrants, who landscape suburban lawns.13 Now, sweatshops are often found in the clothing industry because it is easy to separate higher- and lower- skilled jobs and contract out the lower-skilled ones. Cloth- ing companies can do their own designing, marketing, and cutting and contract out sewing and finishing work. New contractors can start up easily; all they need are a few sewing machines in a rented apartment or factory loft located in a neighborhood where workers can be recruited.14 Sweatshops make the most fashion-oriented clothing—women’s and girls’—because production has to be flexible, change quickly, and be done in small batches. In less style-sensitive sectors—men’s and boys’ wear, hosiery, and knit products—there is less change and lon- ger production runs, and clothing can be made competi- tively in large factories using advanced technology.15

Introduction In November 2009, after nearly two years of student cam- paigning in coordination with the apparel workers, the Hon- duran workers’ union concluded an agreement with Russell Athletic, a major supplier of clothing and sportswear to col- lege campuses around the country. The agreement included a commitment by Russell to put all of the workers back to work, to provide compensation for lost wages, to recognize the union and agree to collective bargaining, and to allow access for the union to all other Russell apparel plants in Honduras for union organizing drives in which the company will remain neutral. According to a November 18, 2009, press release of United Students Against Sweatshops (USAS), this has been an “unprecedented victory for labor rights.”1 Outsourcing of production facilities and labor to devel- oping countries has been one of the important business strategies of large U.S. corporations. While in the United States, a typical corporation is subject to various regula- tions and laws such as minimum wage law, labor laws, safety and sanitation requirements, and trade union organiz- ing provisions, in some developing countries these laws are soft and rudimentary, allowing a large corporation to derive significant cost benefits from outsourcing. Moreover, many developing countries like Bangladesh, China, Honduras, India, Pakistan, and Vietnam encourage the outsourcing of work from the developed world to factories within their borders as a source of employment for their citizens, who otherwise would suffer from lack of jobs in their country. However, in spite of the obvious positive fact of creating new jobs in the hosting country, large multinational corpo- rations very often have been criticized for violating the rights of the workers, creating unbearable working condi- tions, and increasing workloads while cutting compensa- tion. They have been attacked for creating a so-called sweatshop environment for their employees. A few of the recent targets of the criticism have been Walmart,2 Disney,3 JCPenney, Target, Sears,4 ToysRUs,5 Nike,6 Reebok,7 adidas,8 Gap,9 IBM, Dell, HP,10 Apple, and Microsoft,11 etc. This case addresses advocacy by students and other stakeholders toward one of these companies and docu- ments the evolution and outcome of the dispute.

What Is a Sweatshop? By common agreement, a sweatshop is a workplace that provides low or subsistence wages under harsh working

In-Depth Integrative Case 1.1

Student Advocacy and “Sweatshop” Labor: The Case of Russell Athletic

108 Part 1 Environmental Foundation

sweatshops were difficult to locate and could easily close and move to avoid union organizers and government inspec- tors. In the 1960s, sweatshops began to reappear in large numbers among the growing labor force of immigrants, and by the 1980s sweatshops were again “business as usual.” In the 1990s, atrocious conditions at a sweatshop once again shocked the public.20 A 1994 U.S. Department of Labor spot check of garment operations in California found that 93 per- cent had health and safety violations, 73 percent of the gar- ment makers had improper payroll records, 68 percent did not pay appropriate overtime wages, and 51 percent paid less than the minimum wage.21

Sweatshop Dilemma The fight against sweatshops is never a simple matter; there are mixed motives and unexpected outcomes. For example, unions object to sweatshops because they are genuinely concerned about the welfare of sweated labor, but they also want to protect their own members’ jobs from low-wage competition even if this means ending the jobs of the working poor in other countries.22 Also, sweat- shops can be evaluated from moral and economic perspec- tives. Morally, it is easy to declare sweatshops unacceptable because they exploit and endanger workers. But from an economic perspective, many now argue that, without sweatshops, developing countries might not be able to compete with industrialized countries and achieve export growth. Working in a sweatshop may be the only alternative to subsistence farming, casual labor, prostitu- tion, and unemployment. At least most sweatshops in other countries, it is argued, pay their workers above the poverty level and provide jobs for women who are other- wise shut out of manufacturing. And American consumers have greater purchasing power and a higher standard of living because of the availability of inexpensive imports.23

NGOs’ Anti-Sweatshop Initiatives International nongovernmental organizations (NGOs) have attempted to step into the sweatshop conflict to suggest voluntary standards to which possible signatory countries or organizations could commit. For instance, the Interna- tional Labour Office has promulgated its Tripartite Decla- ration of Principles Concerning Multinational Enterprises and Social Policy, which offers guidelines for employment, training, conditions of work and life, and industrial rela- tions. The “Tripartite” nature refers to the critical coopera- tion necessary from governments, employers’ and workers’ organizations, and the multinational enterprises involved.24 On December 10, 1948, the General Assembly of the United Nations adopted its Universal Declaration of Human Rights, calling on all member countries to pub- licize the text of the Declaration and to cause it to be disseminated, displayed, and read. The Declaration rec- ognizes that all humans have an inherent dignity and specific equal and inalienable rights. These rights are

Since their earliest days, sweatshops have relied on immi- grant labor, usually women, who were desperate for work under any pay and conditions. Sweatshops in New York City, for example, opened in Chinatown, the mostly Jewish Lower East Side, and Hispanic neighborhoods in the bor- oughs. Sweatshops in Seattle are near neighborhoods of Asian immigrants. The evolution of sweatshops in London and Paris—two early and major centers of the garment industry—followed the pattern in New York City. First, gar- ment manufacturing was localized in a few districts: the Sentier of Paris and the Hackney, Haringey, Islington, Tower Hamlets, and Westminster boroughs of London. Second, the sweatshops employed mostly immigrants, at first men but then primarily women, who had few job alternatives.16 In developing countries, clothing sweatshops tend to be widely dispersed geographically rather than concentrated in a few districts of major cities, and they often operate alongside sweatshops, some of which are very large, that produce toys, shoes (primarily athletic shoes), carpets, and athletic equipment (particularly baseballs and soccer balls), among other goods. Sweatshops of all types tend to have child labor, forced unpaid overtime, and widespread viola- tions of workers’ freedom of association (i.e., the right to unionize). The underlying cause of sweatshops in develop- ing nations—whether in China, Southeast Asia, the Carib- bean, or India and Bangladesh—is intense cost-cutting done by contractors who compete among themselves for orders from larger contractors, major manufacturers, and retailers.17 Sweatshops became visible through the public exposure given to them by reformers in the late 19th and early 20th centuries in both England and the United States. In 1889–1890, an investigation by the House of Lords Select Committee on the Sweating System brought atten- tion in Britain. In the United States, the first public inves- tigations came as a result of efforts to curb tobacco homework, which led to the outlawing of the production of cigars in living quarters in New York State in 1884.18 The spread of sweatshops was reversed in the United States in the years following a horrific fire in 1911 that destroyed the Triangle Shirtwaist Company, a women’s blouse manufacturer near Washington Square in New York City. The company employed 500 workers in notoriously poor conditions. One hundred forty-six workers perished in the fire; many jumped out windows to their deaths because the building’s emergency exits were locked. The Triangle fire made the public acutely aware of conditions in the clothing industry and led to pressure for closer regulation. The number of sweatshops gradually declined as unions organized and negotiated improved wages and conditions and as government regulations were stiffened (particularly under the 1938 Fair Labor Standards Act, which imposed a minimum wage and required overtime pay for work of more than 40 hours per week).19 Unionization and government regulation never completely eliminated clothing sweatshops, and many continued on the edges of the industry; small

In-Depth Integrative Case 1.1 Student Advocacy and “Sweatshop” Labor: The Case of Russell Athletic 109

company. USAS pressure tactics persuaded one of the nation’s leading sportswear companies, Russell Athletic, to agree to rehire 1,200 workers in Honduras who lost their jobs when Russell closed their factory soon after the workers had unionized.29 Russell Corporation, founded by Benjamin Russell in 1902, is a manufacturer of athletic shoes, apparel, and sports equipment. Russell products are marketed under many brands, including Russell Athletic, Spalding, Brooks, Jerzees, Dudley Sports, and others. This company with more than 100 years of history has been a leading supplier of team uniforms at the high school, college, and professional level. Russell Athletic™ active wear and col- lege-licensed products are broadly distributed and mar- keted through department stores, sports specialty stores, retail chains, and college bookstores.30 After an acquisi- tion in August 2006, Russell’s brands joined Fruit of the Loom in the Berkshire-Hathaway family of products. Russell/Fruit of the Loom is the largest private em- ployer in Honduras. Unlike other major apparel brands, Russell/Fruit of the Loom owns all eight of its factories in Honduras rather than subcontracting to outside manu- facturers.31 The incident related to Russell Athletic’s busi- ness in Honduras that led to a major scandal in 2009 was the company’s decision to fire 145 workers in 2007 for supporting a union. This ignited the anti-sweatshop cam- paign against the company. Russell later admitted its wrongdoing and was forced to reverse its decision. How- ever, the company continued violating worker rights in 2008 by constantly harassing the union activists and mak- ing threats to close the Jerzees de Honduras factory. It finally closed the factory on January 30, 2009, after months of battling with a factory union.32

NGOs’ Anti-Sweatshop Pressure The Worker Rights Consortium (WRC) has conducted a thorough investigation of Russell’s activities, and ultimately released a 36-page report on November 7, 2008, document- ing the facts of worker rights violations by Russell in its factory Jerzees de Honduras, including the instances of death threats received by the union leaders.33 The union’s vice president, Norma Mejia, publicly confessed at a Berk- shire-Hathaway shareholders’ meeting in May 2009 that she had received death threats for helping lead the union.34 The Worker Rights Consortium continued monitoring the flow of the Russell Athletic scandal and issued new reports and updates on this matter throughout 2009, including its recommendation for Russell’s management on how to mediate the situation and resolve the conflict. As stated in its mission statement, the Worker Rights Consortium is an independent labor rights monitoring organization, whose purpose is to combat sweatshops and protect the rights of workers who sew apparel and make other products sold in the United States. The WRC con- ducts independent, in-depth investigations, issues public

based on the foundation of freedom, justice, and peace. The UN stated that the rights should be guaranteed with- out distinction of any kind, such as race, color, sex, lan- guage, religion, political or other opinion, national or social origin, property, birth, or other status. Further- more, no distinction shall be made on the basis of the political, jurisdictional, or international status of the country or territory to which a person belongs. The foun- dational rights also include the right to life, liberty, and security of person and protection from slavery or servi- tude, torture, or cruel, inhuman, or degrading treatment or punishment.25 Articles 23, 24, and 25 discuss issues with immediate implications for sweatshops. By extrapo- lation, they provide recognition of the fundamental human right to nondiscrimination, personal autonomy or liberty, equal pay, reasonable working hours and the abil- ity to attain an appropriate standard of living, and other humane working conditions. All these rights were rein- forced by the United Nations in its 1966 International Covenant on Economic, Social, and Cultural Rights.26 These are but two examples of standards promulgated by the international labor community, though the enforce- ment of these and other norms is spotty. In the apparel industry in particular, the process of internal and external monitoring has matured such that it has become the norm at least to self-monitor, if not to allow external third- party monitors to assess compliance of a supplier factory with the code of conduct of a multinational corporation or with that of NGOs. Though a number of factors affected this evolution, one such factor involved pressure by American universities on their apparel suppliers, which resulted in two multistakeholder efforts—the Fair Labor Association, primarily comprising and funded by the multinational retailers, and the Worker Rights Con- sortium, originally perceived as university driven. Through a cooperative effort of these two organizations, large retailers such as Nike and Adidas not only have allowed external monitoring, but Nike has now published a complete list of each of its suppliers.27

The Case of Russell Athletic While some argue that sweatshop scandals cause little or no impact on the corporate giants because people care more for the ability to buy cheap and affordable products rather than for working conditions of those who make these products,28 the recent scandal around the Russell Athletic brand has proved that it may no longer be as easy for a corporation to avoid the social responsibility for its outsourcing activities as it has been for a long time. November 2009 became a tipping point in the many years of struggle between the student anti-sweatshop movement and the corporate world. An unprecedented victory was won by the United Students Against Sweatshops (USAS) coalition against Russell Athletic, a corporate giant owned by Fruit of the Loom, a Berkshire-Hathaway portfolio

110 Part 1 Environmental Foundation

products. The students even sent activists to knock on Warren Buffett’s door in Omaha because his company, Berkshire-Hathaway, owns Fruit of the Loom, Russell’s parent company.39 United Students Against Sweatshops involved students from more than 100 campuses where it did not have chap- ters in the anti-Russell campaign. It also contacted students at Western Kentucky University in Bowling Green, where Fruit of the Loom has its headquarters.40 The USAS activ- ists even reached Congress, trying to gain more support and inflict more political and public pressure on Russell Athletic. On May 13, 2009, 65 congressmen signed the letter addressed to Russell CEO John Holland expressing their grave concern over the labor violations. In addition, the Fair Labor Association (FLA), a non- profit organization dedicated to ending sweatshop condi- tions in factories worldwide, issued a statement on June 25, 2009, putting Russell Athletic on probation for noncompli- ance with FLA standards.41 The Fair Labor Association, one of the powerful authorities that oversees the labor prac- tices in the industry, represents a powerful coalition of industry and nonprofit sectors. The FLA brings together colleges and universities, civil society organizations, and socially responsible companies in a unique multistake- holder initiative to end sweatshop labor and improve work- ing conditions in factories worldwide. The FLA holds its participants, those involved in the manufacturing and mar- keting processes, accountable to the FLA Workplace Code of Conduct.42 The 19-member Board of Directors, the FLA’s policy-making body, comprises equal representation from each of its three constituent groups: companies, col- leges and universities, and civil society organizations.43

Victory for USAS and WRC As mentioned at the start of this case, on November 2009, after nearly two years of student campaigning in coordina- tion with the apparel workers, the Honduran workers’ union concluded an agreement with Russell that put all of the workers back to work, provided compensation for lost wages, recognized the union and agreed to collective bar- gaining, and provided access for the union to all other Russell apparel plants in Honduras for union-organizing drives in which the company will remain neutral. Accord- ing to the November 18, 2009, press release of USAS, this has been an “unprecedented victory for labor rights.”44 Rod Palmquist, USAS International Campaign Coordinator and University of Washington alumnus, noted that there were no precedents for a factory apparently being shut down to dislodge a union and “later reopened after a worker-activist campaign.”45 This was not an overnight victory for the student move- ment and the coalition of NGOs such as USAS, WCR, and FLA. It took over 10 years of building a movement that persuaded scores of universities to adopt detailed

reports on factories producing for major U.S. brands, and aids workers at these factories in their efforts to end labor abuses and defend their workplace rights. The WRC is supported by over 175 college and university affiliates and is primarily focused on the labor practices of factories that make apparel and other goods bearing university logos.35 Worker Rights Consortium assessed that Russell’s decision to close the plant represented one of the most serious challenges yet faced to the enforcement of univer- sity codes of conduct. If allowed to stand, the closure would not only unlawfully deprive workers of their liveli- hoods, it would also send an unmistakable message to workers in Honduras and elsewhere in Central America that there is no practical point in standing up for their rights under domestic or international law and university codes of conduct and that any effort to do so will result in the loss of one’s job. This would have a substantial chilling effect on the exercise of worker rights throughout the region.36 The results of the WRC investigation of Russell Ath- letic unfair labor practices in Honduras spurred the nation- wide student campaign led by United Students Against Sweatshops (USAS), who persuaded the administrations of Boston College, Columbia, Harvard, NYU, Stanford, Michigan, North Carolina, and 89 other colleges and uni- versities to sever or suspend their licensing agreements with Russell. The agreements—some yielding more than $1 million in sales—allowed Russell to put university logos on T-shirts, sweatshirts, and fleeces.37 As written in its mission statement, USAS is a grass- roots organization run entirely by youth and students. USAS strives to develop youth leadership and run strategic student-labor solidarity campaigns with the goal of build- ing sustainable power for working people. It defines “sweatshop” broadly and considers all struggles against the daily abuses of the global economic system to be a struggle against sweatshops. The core of its vision is a world in which society and human relationships are organized coop- eratively, not competitively. USAS struggles toward a world in which all people live in freedom from oppression, in which people are valued as whole human beings rather than exploited in a quest for productivity and profits.38 The role of USAS in advocating for the rights of the Honduran workers in the Russell Athletic scandal is hard to overestimate. One can only envy the enthusiasm and effort contributed by students fighting the problem that did not seem to have any direct relationship to their own lives. They did not just passively sit on campus, but went out to the public with creative tactical actions such as picketing the NBA finals in Orlando and Los Angeles to protest the league’s licensing agreement with Russell, dis- tributing fliers inside Sports Authority sporting goods stores, and sending Twitter messages to customers of Dick’s Sporting Goods urging them to boycott Russell

In-Depth Integrative Case 1.1 Student Advocacy and “Sweatshop” Labor: The Case of Russell Athletic 111

Questions for Review

1. Assume that you are an executive of a large U.S. multinational corporation planning to open new manufacturing plants in China and India to save on labor costs. What factors should you consider when making your decision? Is labor outsourcing to developing countries a legitimate business strategy that can be handled without risk of running into a sweatshop scandal?

2. Do you think that sweatshops can be completely eliminated throughout the world in the near future? Provide an argument as to why you think this can or cannot be achieved.

3. Would you agree that in order to eliminate sweat- shop conflicts, large corporations such as Russell Athletic should retain the same high labor standards and regulations that they have in the home country (for example, in the U.S.) when they conduct busi- ness in developing countries? How hard or easy can this be to implement?

4. Do you think that the public and NGOs like USAS should care about labor practices in other countries? Isn’t this a responsibility of the government of each particular country to regulate the labor practices within the borders of its country? Who do you think provides a better mechanism of regulating and improving the labor practices: NGOs or country governments?

5. Would you agree that Russell Athletic made the right decision by conceding to USAS and union demands? Isn’t a less expensive way to handle this sort of situation simply to ignore the scandal? Please state your pros and cons regarding Russell’s decision to compromise with the workers’ union and NGOs as opposed to ignoring this scandal.

Source: This case was prepared by Professor Jonathan Doh and Tety- ana Azarova of Villanova University as the basis for class discussion. Additional research assistance was provided by Ben Littell. It is not intended to illustrate either effective or ineffective managerial capabil- ity or administrative responsibility.

codes of conduct for the factories used by licensees like Russell.46 It is another important lesson for the corporate world in the era of globalization, which can no longer expect to conduct business activities in isolation from the rest of the world. The global corporations such as Russell Athletic, Nike, Gap, Walmart, and others will have to assess the impact of their business decisions on all the variety of stakeholders and take higher social responsibil- ity for what they do in any part of the world. More recently, a fire at a Bangalore textile factory in late 2012, and two horrific accidents at garment factories in Bangladesh in 2013, have placed renewed pressure on U.S. and European clothing brands to take greater respon- sibility for the working conditions of the factories from which they source products. On April 24, 2013, more than 1,000 workers were killed when an eight-story building collapsed while thousands of people were work- ing inside. Less then two weeks later, eight people were killed in a fire at a factory in Dhaka that was producing clothes for Western retailers. After a number of investor, religious, labor, and human rights groups voiced con- cerns about the lack of oversight and accountability by the major companies, several of the world’s largest apparel firms agreed to a plan to help pay for fire safety and building improvements. Companies agreeing to the plan included the Swedish-based retailer H&M; Inditex, owner of the Zara chain; the Dutch retailer C&A; and British companies Primark and Tesco. At the same time, the Bangladesh government announced that it would improve its labor laws and raise wages, and ease restric- tions on forming trade unions. U.S. retailers Walmart and Gap did not commit to the agreement, expressing con- cerns about legal liability in U.S. courts. Instead, with the help of a U.S.-based think tank, they announced they would pursue a separate accord to improve factory condi- tions in Bangladesh.47 Despite these promises by various companies and gov- ernmental organizations, and a commitment of over a quarter of a billion dollars, much work remains to be done. According to December 2015 report by NYU Stern Center for Business and Human Rights, only eight out of over 3,000 factories in Bangladesh had cleared violations in the years since the garment fires and building collapse.48

1. USAS Press Release on “Jerzees de Honduras Victory,” USAS, November 18, 2009, usas. org/2009/11/18/usas-press-release-on-jerzees-de- honduras-victory/.

2. David Barboza, “In Chinese Factories, Lost Fingers and Low Pay,” New York Times, January 5, 2008, www.nytimes.com/2008/01/05/business/ worldbusiness/05sweatshop.html.

3. Ibid. 4. “Tearing Down a Sweatshop,” Duke University News,

June 15, 2001, https://today.duke.edu/2001/06/ peterle615.html.

5. Dexter Roberts and Aaron Bernstein, “Inside a Chinese Sweatshop: A Life of Fines and Beating,” BusinessWeek, October 2, 2000, www.bloomberg.

ENDNOTES

Cover
Part One Environmental Foundation��

2 The Political, Legal, and Technological Environment��

The World of International Management: Social Media and Political Change��
Political Environment��

Ideologies��
Political Systems��

Legal and Regulatory Environment��

Basic Principles of International Law��
Examples of Legal and Regulatory Issues��
Privatization��
Regulation of Trade and Investment��

Technological Environment and Global Shifts in Production��

Trends in Technology, Communication, and Innovation��
Biotechnology��
E-Business��
Telecommunications��
Technological Advancements, Outsourcing, and Offshoring��

The World of International Management-Revisited��
Summary of Key Points��
Key Terms��
Review and Discussion Questions��
Internet Exercise: Hitachi Goes Worldwide��
Endnotes��
In the International Spotlight: Greece��

3 Ethics, Social Responsibility, and Sustainability��

The World of International Management: Sustaining Sustainable Companies��
Ethics and Social Responsibility��

Ethics and Social Responsibility in International Management��
Ethics Theories and Philosophy��

Human Rights��

Labor, Employment, and Business Practices��
Environmental Protection and Development��

Globalization and Ethical Obligations of MNCs��

Reconciling Ethical Differences across Cultures��
Corporate Social Responsibility and Sustainability��
Corporate Governance��
Corruption��
International Assistance��

The World of International Management-Revisited��
Summary of Key points��
Key Terms��
Review and Discussion Questions��
Endnotes��
In-Depth Integrative Case 1.1: Student Advocacy and "Sweatshop" Labor: The Case of Russell Athletic��
Endnotes��

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