please see the attached question and writing rules
Using the Six Steps of Decision-Making framework from this week’s content, please develop responding to the following questions related to the case study Student Advocacy and “Sweatshop” Labor: The Case of Russell Athletic (p. 109).
Recognize decision requirement:
What are the factors to consider in a corporation when deciding to outsource labor to developing countries? Include the following:
1- Have your recommendations been implemented in other countries?
2- Are they working?
3- What has been the outcome?
Required:
· Chapters 2 & 3 in International Management: Culture, Strategy, and Behavior
·
Chapter 2 PowerPoint slides
Chapter 2 PowerPoint slides – Alternative Formats
in International Management: Culture, Strategy, and Behavior
· “In-Depth Integrative Case Study 1.1: Student Advocacy and “Sweatshop” Labor: The Case of Russell Athletic” (p. 109), in International Management: Culture, Strategy, and Behavior.
· Lander, C. (2018).
Foreign investment adaptations to the changing political and economic environments of the agro-food sector: A case study of Cargill Russia.
Problems of Post-Communism, 65(3), 201-219.
· The Lancet. (2019).
Dealing with drug pricing: not just one solution
. Lancet (London, England), 392(10165), 2655.
Recommended:
Comanor, W., Schweitzer, S., Riddle, J. & Schoenberg, F. (2018).
Value based pricing of pharmaceuticals in the US and UK: Does centralized cost effectivenes analysis matter?
Review of Industrial Organization, 52(4), 589-602.
writing rules:
International
Management
Culture, Strategy, and Behavior
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Chapter 2
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
20
10s, 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.
45
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 Foundatio
n
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).
48 Part 1 Environmental Foundation
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
50 Part 1 Environmental Foundation
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/.
52
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.
54 Part 1 Environmental Foundation
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
56
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.
59
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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Internet Freedom Debate Heats Up,” Broadband-
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freedom-debate-heats-up/.
4. Eva Galperin, “Fake YouTube Site Targets Syrian
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6. Andrew Byme and Erika Solomon, “Refugees
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html#axzz3xjqWWaD1.
7. Brunwasser, “A 21st Century Migrant’s Essentials:
Food, Shelter, Smartphone.”
8. Ibid.
9. Zeina Karam, “Syria’s Civil War Plays Out on
Social Media,” Huffington Post, October 19, 2013,
www.huffingtonpost.com/huff-wires/20131019/
ml–syria-youtube-war/?utm_hp_ref=world&ir=world.
10. Ibid.
11. Jennifer Moire, “5 Ways Social Media Spread Word
of Syrian Chemical Attack,” Adweek Social Times,
August 27, 2013, www.adweek.com/socialtimes/5-
ways-social-media-spread-word-of-syrian-chemical-
attack/135905.
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trending-35116022.
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September 2015, www.comres.co.uk/polls/bbc-
newsnight-refugee-poll/.
ENDNOTES
70 Part 1 Environmental Foundation
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30. Paul Nadler, “Making a Mystery out of How to
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31. “International: Financial Crisis Goes Global,” New
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32. David M. Herszenhorn, “Financial Overhaul Wins
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30, 2010, p. A1.
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Manager’s Guide,” California Management Review,
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34. R. Christopher Cook and Stephanie Connor, “The
Foreign Corruption Practices Act: 2010 and
Beyond,” Jonesday.com, January 2010.
35. Katsunori Nagayasu, “How Japan Restored Its
Financial System,” The Wall Street Journal Online,
August 6, 2009.
36. Scott Cendrowski, “Why China’s SOE Reform
Would Always Disappoint,” Fortune, September 15,
2015, http://fortune.com/2015/09/15/why-chinas-soe-
reform-would-always-disappoint/.
37. Gabriel Wildau, “China Cautiously Embraces Priva-
tisation of State-Owned Enterprises,” The Financial
Times, September 25, 2015, www.ft.com/intl/cms/
s/0/69253d76-633c-11e5-97e9-7f0bf5e7177b.
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38. Marcin Sobczyk, “Warsaw Rows Back from Large-
Scale Asset Sales,” The Wall Street Journal Online,
July 4, 2014, www.wsj.com/articles/polish-govern-
ment-rows-back-from-large-scale-asset-
sales-1404469210.
39. Privatization Alert, Fdi.net, May 2010.
40. Thomas Friedman, The World Is Flat (Updated and
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Century (New York: Farrar, Straus and Giroux,
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41. Charles W. L. Hill, International Business (New
York: McGraw-Hill/Irwin, 2011).
42. Rebecca Buckman, “China Keeps Telecom Firms
Waiting on 3G,” The Wall Street Journal, May 13,
2004, p. B4.
43. “China Telecom Announces 2015 Plan in 4G
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http://english.cri.cn/12394/2014/12/24/1261s858097.
htm.
44. Lee Stott, “What Does DreamSpark Offer for UK
Education?” Microsoft.com, April 2, 2014, https://
www.microsoft.com/en-gb/developers/articles/
week01apr14/what-does-dreamspark-offer-for- uk-
education/.
Chapter 2 The Political, Legal, and Technological Environment 71
45. Andrew Rosenblum, “For Oakland Startup, a $9
Computer About More Than Getting Rich,” Mer-
cury News, February 9, 2016, www.mercurynews.
com/news/ci_29491760/west-oakland-startup-9-
computer-about-more-than?source=infinite-up.
46. Greg Miller, “Undersea Internet Cables Are
Surprisingly Vulnerable,” Wired.com, October 29,
2015, www.wired.com/2015/10/undersea-cable-
maps/.
47. “Vietnam Suffers Second Internet Cable Cut in
Less Than 4 Months,” Tuoi Tre News, April 23,
2015, http://tuoitrenews.vn/society/27677/vietnam-
suffers-second-internet-cable-cut-in-less-than-
4-months.
48. “Supercomputers: The Race Is On,” BusinessWeek,
June 7, 2004, p. 76.
49. Nicholas Zamiska and Eric Bellman, “Ranbaxy
Unveils Its Ambition to Be a Generics Power-
house,” The Wall Street Journal, January 10, 2007,
p. A11.
50. Congressional Budget Office,“Using Biofuel Tax
Credits to Achieve Energy and Environmental
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51. Christopher Leonard, “Monsanto, BASF Join
Forces,” BusinessWeek Online, March 21, 2007,
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52. Doris De Guzman, “Monsanto Sows More Seeds,”
ICIS Chemical Business Americas 270, no. 2
(2007), p. 26.
53. “World’s First BSE-Immune Cow,” Asia Pacific
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54. Gretchen Vogel, “E.U. Parliament Votes to Ban
Cloning of Farm Animals,” Science Magazine, Sep-
tember 8, 2015, www.sciencemag.org/news/2015/09/
eu-parliament-votes-ban-cloning-farm-animals.
55. David Mildenberg, “SDN Sees Growth in High
Speed Links,” The Business Journal, May 14, 2004,
p. 1.
56. James Ayre, “Toyota Following Tesla’s Lead,
Trying Out Direct Online Sales,” Clean Technica,
August 29, 2015, http://cleantechnica.
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direct-online-sales/.
57. “Deutsche Bank Govvie Honcho: Business as Usual
Now,” Bondweek, June 22, 2003, p. 1.
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61. David Yanofsky and Christopher Mims, “Since
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countries.
63. Morgan Winsor, “Nigeria’s Telephone Penetration
Expands in First Half of 2015 Amid Mobile Phone
Boom,” International Business Times, September
29, 2015, www.ibtimes.com/nigerias-telephone-
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phone-boom-2118947.
64. Heidi Vogt, “Making Change: Mobile Pay in
Africa,” The Wall Street Journal Online, January 2,
2015, www.wsj.com/articles/making-change-mobile-
pay-in-africa-1420156199.
65. mobiThinking,“Global Mobile Statistics 2014 Part
A: Mobile Subscribers; Handset Market Share;
Mobile Operators,” mobiForge, May 16, 2014,
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handset-market-share-mobile-operators.
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$19.4 Million, Police Say,” The Wall Street Journal
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chinarealtime/2015/07/27/chinese-firm-made-fake-
iphones-worth-19-4-million-police-say/.
67. Jonathan P. Doh, Kraiwinee Bunyaratavej, and
Eugene E. Hahn, “Separable but Not Equal: The
Location Determinants of Discrete Offshoring
Activities,” Journal of International Business
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after the Great Recession, Are the Good Jobs Ever
Coming Back?” International Business Times,
March 6, 2015, www.ibtimes.com/unemployment-
report-six-years-after-great-recession-are-good-
jobs-ever-coming-back-1838178.
69. Jan Syfert, “Up There with the Best,” Productivity
SA, November–December 1998, p. 49.
70. Craig Trudell, “Humans Replacing Robots Herald
Toyota’s Vision of Future,” BloombergBusiness,
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toyota-s-vision-of-future.
72 Part 1 Environmental Foundation
71. Ashok Bhattacharjee, “India’s Outsourcing Tigers
Seek
, 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-
tors (2016), http://data.worldbank.org/indicator/NY.
GDP.MKTP.KD.ZG/countries/GR?display=graph.
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.
73
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
74
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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.
75
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.
79
■
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.
80 Part 1 Environmental Foundation
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
82 Part 1 Environmental Foundation
“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
84
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.
86 Part 1 Environmental Foundation
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%
40%
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.
Source: From The Ten Principles of the UN Global Compact, by The United Nations, © 2016 United Nations. Reprinted with the permission of the United Nations.
88
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.
90 Part 1 Environmental Foundation
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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ki
n
g
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ig
h
e
r
le
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ls
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e
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e
iv
e
d
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n
South Africa
Indonesia
Mexico
Russia
Somalia
China
India
Brazil
United States
United Kingdom
180
1
60
140
120
100
80
60
40
20
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 .
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 .
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
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���������������
International Management
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Chapter 2
The Political, Legal, and Technological Environment
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Learning Objectives
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
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Learning Objectives (continued)
Present an overview of the legal and regulatory environment in which MNCs operate worldwide, and highlight differences in approach to legal and regulatory issues in different jurisdictions
Review key technological developments, including the growth of e-commerce, and discuss their impact on MNCs now and in the future
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Social Media and Political Change
Role of social media as an organizing tool, a journalistic tool, and a support-building tool in the context of political change underscores:
Technological progress
Political conflict and change
Managing the political and legal environment will be a challenge for international managers
Need to keep track of the rapid changes in the technological environment of global business
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Political Environment
Ideology underlies the actions of government
Reflects beliefs and values and behavior and culture of nations and their political systems
Dimensions in evaluating political systems
Rights of citizens based on a system of government, ranging from democratic to totalitarian
Focus of political system on individualism or collectivism
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Political Environment (continued)
Democratic nations emphasize individualism
Totalitarian nations lean toward collectivism
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Individualism
People should be free to pursue economic and political endeavors without constraint
Similar to capitalism and connected to free-market society
Private property is more successful, productive, and progressive than communal property
Encourages betterment of society, which is related to level of freedom individuals have to pursue economic goals
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Individualism (continued 1)
Research has shown that team performance is negatively influenced by individualists
Competition stimulates motivation and encourages increased efforts to achieve goals
Principles were evolved by David Hume, Adam Smith, and Aristotle
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Individualism (continued 2)
International managers must remain alert as to how political changes may impact their business
Continuous struggle for a foothold in government power affects leaders in office
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Collectivism
Views the needs or goals of society as a whole as more important than individual desires
Plato believed individual rights should be sacrificed and property should be commonly owned
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Collectivism (continued)
Has no rigid form as societal goals differ greatly among cultures
Reflects some attributes of fascism
Nationalism and authoritarianism
Militarism and corporatism
Collectivism
Totalitarianism
Anticommunism
Opposition to economic and political liberalism
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Socialism
Society in which there is government ownership of institutions but profit is not the ultimate goal
Has been practiced in China, North Korea, Cuba
Democratic socialism
More moderate form of socialism
Practiced by Great Britain’s Labour Party, Germany’s Social Democrats, and in France, Spain, and Greece
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Socialism (continued)
Modern socialism draws on philosophies of Karl Marx, Friedrich Engels, and Vladimir Ilyich Lenin
Marx believed that governments should own businesses because in a capitalistic society only a few would benefit
Communism – Extreme form of socialism
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Social Democracy
Socialist movement that achieved its goals through nonviolent revolution
Reasons for not being viable
Businesses that were nationalized were 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 interest and the good of the people
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Social Democracy (continued)
Reasons for nationalization of businesses
Ideologies of the country encourage the government to extract more money from the firm
Government believes the firm is hiding money
Government has a large investment in the company
Government wants to secure wages and employment status because jobs would otherwise be lost
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Political Systems: Democracy
Government is controlled by citizens either directly or through elections
Democratic society cannot exist without at least a two-party system
Once elected, representative is held accountable to the electorate for his or her actions
Apart from getting reelected, the number of terms is limited
Winner can get voted out if he or she does not adhere to the goals of the majority ruling
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Political System: Totalitarianism
Only one representative party, which exhibits control over every facet of political and human life
Power maintained by suppression of opposition
Dominant ideals – Media censorship, political repression, and denial of rights and civil liberties
Common form – Communist totalitarianism
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Political Environment in China
Making trade liberalization a top priority since joining WTO in 2001
Supporting a more open and democratic society
Shifting toward greater tolerance of individual freedoms
Seeking to unleash a more dynamic market economy
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Political Environment in the Middle East
In Iran and Saudi Arabia, laws and government are based on Islamic principles
Arab countries operate business that is in many ways similar to the West
Seeking modern technology and having the financial ability to pay for quality services
Worldwide fallout from war on terrorism has made business environment risky and potentially dangerous
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Legal and Regulatory Environment
Many different laws and regulations in global business operations create confusion and pose challenges to MNCs
Adhering to disparate legal frameworks can prevent MNCs from capitalizing on manufacturing economies
MNCs must carefully evaluate legal framework in each market before doing business
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Global Foundations of Law
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22
Islamic law
Socialist law
Common law
Civil or code law
Islamic Law
Derived from interpretation of the Qur’an and teachings of Prophet Muhammad
Found in most Islamic countries in the Middle East and Central Asia
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Socialist Law
Originates from Marxist socialist system
Continues to influence regulations in former and current communist countries
Soviet Union
China and Vietnam
North Korea and Cuba
Forces MNCs to shy away from countries that follow this law
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Common Law
Derives from English law
Foundation of legal system in:
United States
Canada
England
Australia
New Zealand
Several other nations
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Civil or Code Law
Derived from Roman law
Found in non-Islamic and nonsocialist countries
France
Some Latin American countries
Louisiana in U.S.
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International Law
Sources
Laws of individual countries
Treaties – Universal, multilateral, and bilateral
Conventions – Geneva Convention on Human Rights or the Vienna Convention of Diplomatic Security
Contains unwritten understandings that arise from repeated interactions among nations
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Principle of Sovereignty
Holds that governments have the right to rule themselves as they see fit
One country’s court system cannot be used to rectify injustices or impose penalties in another country unless that country agrees
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Jurisdictional Principles of International Law
Nationality principle: Every country has jurisdiction over its citizens no matter where they are located
Territoriality principle: Every nation has the right of jurisdiction within its legal territory
Protective principle: Every country has jurisdiction over the behavior that adversely affects its national security
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Jurisdictional Principles of International Law (continued 1)
Doctrine of comity
Mutual respect for laws, institutions, and governments of other countries in the matter of jurisdiction over their own citizens
Part of international custom and tradition and not part of international law
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Jurisdictional Principles of International Law (continued 2)
Act of state doctrine
All acts of other governments are considered to be valid by U.S. courts
Even if such acts are inappropriate under U.S. law
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Treatment and Rights of Aliens
Countries have the legal right to:
Refuse admission of foreign citizens
Impose special restrictions on a foreign citizen’s conduct, their right of travel, where they can stay, and what business they may conduct
Nations can deport aliens, which may result in worker shortages
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Forum for Hearing and Settling Disputes
U.S. courts:
Can dismiss cases brought before them by foreigners
Are bound to examine issues such as:
Where the plaintiffs are located
Where the evidence must be gathered
Where the property to be used in restitution is located
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Financial Services Regulation
Global financial crisis of 2008–2010 underscored:
Integrated nature of financial markets around the world
Reality that regulatory failure in one jurisdiction had severe and immediate impacts on others
Crisis and its broad economic effects have prompted regulators to tighten the financial services regulation
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Foreign Corrupt Practices Act (FCPA)
Makes it illegal to influence foreign officials through personal payment or political contributions
Objectives of the FCPA
Stop U.S. MNCs from initiating or perpetuating corruption in foreign governments
Upgrade the image of both the United States and its businesses abroad
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Foreign Corrupt Practices Act (FCPA) (continued)
Implementation allowed the U.S. Justice Department to uncover several developments
MNCs found that they could live within the guidelines set down by the FCPA
Many foreign governments applauded the investigations under the FCPA
Helped them crack down on corruption in their own country
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Bureaucratization
Restrictive foreign bureaucracies are one of the biggest problems facing MNCs
Particularly true when bureaucratic government controls are inefficient and left uncorrected
In many developing and emerging markets, bureaucratic red tape impedes business growth and innovation
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Regulation of Trade and Investment
Individual countries use legal and regulatory policies to affect the international management environment
Trade practices that distort trade
Countries engage in government support
MNCs are required to accept local partners
MNCs are mandated to employ a certain percentage of local workers or produce a specific amount in their country
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Regulation of Trade and Investment (continued)
Trade agreements require that countries extend most-favored-nation status
Questioned by regional trade agreements
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Trends in Technology, Communication, and Innovation
Computers, telephones, televisions, and wireless forms of communication have merged to create multimedia products
Allow users anywhere in the world to communicate with one another
Internet allows people to obtain information from several sources
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Trends in Technology, Communication, and Innovation (continued 1)
Open-source model allows for free and legal sharing of software and code
Can be utilized by underdeveloped countries in an attempt to gain competitive advantage while minimizing costs
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Trends in Technology, Communication, and Innovation (continued 2)
For-profit and nonprofit firms have created low-cost computers
Provided them to several children in the developing world
Great potential exists for disruptions as the world relies more and more on digital communication and imaging
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Areas of International Management Affected by Technology
Biotechnology and nanotechnology
Satellites
Automatic translation telephones
Artificial intelligence and embedded learning technology
Silicon chips
Advancements in computer chip technology
Supercomputers
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Biotechnology
Creation of agricultural or medical products through industrial use and manipulation of living organisms
Advancement has led to pharmaceutical competition and cloning of animals
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Types of E-Business
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45
Business to business (B2B)
Business to consumer (B2C)
E-retailing
Financial services (e-cash)
Telecommunications
Technological leapfrogging is allowing the entire world to have global access to affordable cell phone services
Merging of telephone and the Internet has replaced access via computers
Wireless technology has been beneficial to less developed countries
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Telecommunications (continued)
Reason for the rapid increase in telecommunications services
Many countries believe that without an efficient communications system, their economic growth may stall
Governments cede control to private industry to attract foreign investments
Developing countries are eager to attract telecommunication firms and offer liberal terms
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Technological Advancements, Outsourcing, and Offshoring
Technology has reduced and eliminated middle management and white-collar jobs
Global competition has forced MNCs to outsource or offshore production
Emerging technology has made work more portable
Advantage – Reduction in cost of doing business
Disadvantage – Loss of jobs or reduction in salaries
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Be the International Management Consultant
If you are a consultant for a business looking to expand in Europe, is Greece even an option?
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?
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Be the International Management Consultant (continued)
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?
What other concerns would you have about entering the Greek market?
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Review and Discuss
In what ways do different ideologies and political systems influence the environment in which MNC’s operate?
Would these challenges be less for those operating in the EU than for those in Russia or China?
Why or why not?
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Review and Discuss (continued 1)
How do the following legal principles impact MNC operations: the principle of sovereignty, the nationality principle, the territoriality principle, the protective principle, and principle of comity?
How will advances in technology and telecommunications affect developing countries? Give some specific examples
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Review and Discuss (continued 2)
Why are developing countries interested in privatizing their state-owned industries?
What opportunities does privatization have for MNCs?
© 2018 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
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Page number
Paper title
Bolded
Capital Case
Author(s)
Affiliation line
Course info
Instructor
Due date
Title page
Inset page break
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Paper title No “introduction”
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Title of your paper
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Parenthetical citation,
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Narrative citation,
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Parenthetical citation,
multiple authors
Parenthetical citation,
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Parenthetical citation,
two authors
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First page/
in-text citations
Main section heading
Subsection of Level 1
Subsection of Level 2
Centered
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Title Case
Flush left
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Title Case
Flush left
Bolded italic
Title Case
Indented
Bolded
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End with period
Indented
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Title Case
End with period
Subsection of Level 3
Subsection of Level 4
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Section headings
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Question and writing rules
1. Diagnosis and analysis of causes: If labor outsourcing to developing countries is a legitimate business strategy, how can it be handled without risk of running into a sweatshop scandal?
2. Development of alternatives: What are other countries doing to avoid, reduce or eliminate sweatshops?
Selection of desired alternative: Decide on alternatives for outsourcing for companies in developed countries, including whether or not to maintain or implement the same high labor standards and regulations as in the home countries.
3. Implementation of alternatives: Which alternatives would be best for outsourcing for companies in the United States?
4. Evaluation and feedback:
1)-Have your recommendations been implemented in other countries?
2)- Are they working?
3)-What has been the outcome?
Required:
· Chapters 2 & 3 in International Management: Culture, Strategy, and Behavior
· Chapter 2 PowerPoint slides Chapter 2 PowerPoint slides – Alternative Formats in International Management: Culture, Strategy, and Behavior
· “In-Depth Integrative Case Study 1.1: Student Advocacy and “Sweatshop” Labor: The Case of Russell Athletic” (p. 109), in International Management: Culture, Strategy, and Behavior.
· Lander, C. (2018). Foreign investment adaptations to the changing political and economic environments of the agro-food sector: A case study of Cargill Russia. Problems of Post-Communism, 65(3), 201-219.
· The Lancet. (2019). Dealing with drug pricing: not just one solution. Lancet (London, England), 392(10165), 2655.
Recommended:
Comanor, W., Schweitzer, S., Riddle, J. & Schoenberg, F. (2018). Value based pricing of pharmaceuticals in the US and UK: Does centralized cost effectiveness analysis matter? Review of Industrial Organization, 52(4), 589-602.
Essay should meet the following requirements:
· Be 5 pages in length, which does not include the title page, abstract, or required reference page, which is never a part of the content minimum requirements.
· Use APA (7th ed) style guidelines.
· Support your submission with course material concepts, principles, and theories from the textbook and at least five scholarly, peer-reviewed journal articles.
Writing rules
· Use a standard essay format for responses to all questions (i.e., an introduction, middle paragraphs, headline (and conclusion).
· Make sure to include all the key points within conclusion section, which is discussed in the assignment. Your way of conclusion should be logical, flows from the body of the paper, and reviews the major points.
· I would like to see more depth for the question
· Responses must be submitted as a MS Word Document only, typed double-spaced, using a standard font (i.e. Times New Roman) and 12 point type size.
· Plagiarism All work must be free of any form of plagiarism.
· Written answers into your own words. Do not simply cut and paste your answers from the Internet and do not copy your answers from the textbook
