Chapter 6 Ibat

Slide 6.
Chapter 6
International ethical and

ecological environment
Wall, Minocha and Rees, International Business, 3rd Edition, © Pearson Education Limited 2010
Slide 6.2
Ethical standards
• Those ways of acting or being that are regarded

as acceptable by some reference group at a
particular time and place
• The set of organising principles by which people
live together.
Slide 6.3
Corporate agency and responsibility
• ‘Organising principles’ by which people live

together can apply globally, nationally or at the
level of individual organisations
• Milton Friedman stated ‘There is only one social
responsibility of business – to use its resources
and engage in activities designed to increase its
profits so long as it stays within the rules of the
game, which is to say, engages in open and free
competition without deception or fraud’
(Friedman 1970: 126).
Slide 6.4
Principal–agent problem
• Refers to a potential conflict over the ‘organising

principles’ for the business or institution
• Principals: those who own the business (e.g.
shareholders)
• Agents: those who run the business (e.g. senior
management)
• Sometimes ‘principals’ (shareholders) may seek
to maximise profits, whereas ‘agents’ (managers)
may seek some other objectives.
Slide 6.5
Social contract theory (1)
• Thomas Hobbes suggested that human beings

tacitly agree to laws and regulations on their
behaviour so that they can both live in harmony
and achieve their own ends.
Slide 6.6
Social contract theory (2)
• Donaldson and Dunfee (1999) take this approach

further in their ‘Integrated Social Contract Theory’
• Basic moral minima (‘hypernorms’) include:
– Not causing gratuitous harm
– Honouring contracts
– Respecting human rights
– Treating people and organisations fairly.
Slide 6.7
Integrated Social Contract Theory

(ISCT)
• Hypernorms – moral minima
• Consistent norms – whilst consistent with
hypernorms and legitimate norms, reflect
culturally specific values
• Moral-free space – consistent with hypernorms
but clash with one or more legitimate norms
• Illegitimate norms – inconsistent with
hypernorms.
Slide 6.8
Global norms in the Integrated Social

Contract Theory (ISCT)
Figure 6.1 Global norms in the Integrated Social Contract Theory (ISCT)
Slide 6.9
International business ethics
Enderle (1995) identified four approaches:

• Foreign country type – conforms to host country
norm
• Empire type – applies domestic norms to host
country
• Interconnection type – hybrid approach where
norms applied are based on pragmatism (what
works for the MNE)
• Global type – reflects norms deemed appropriate
for ‘global citizenry’; not related to MNE interests.
Slide 6.10
Bribery and corruption
• ISCT can be used to evaluate acts of bribery and

corruption.
• Bribery and corruption can be said to be
illegitimate norms for various reasons.
– Aggravate the principal–agent problem, with agents
even less likely to pursue the interests of principals
– Violate the hypernorms of political participation and
market efficiency, with elected politicians serving
special interests not the public good. All countries
have laws against bribery and corruption.
Slide 6.11
TI Corruption Perception Index (1)
• Comprehensive databases on corruption which it

defines as an abuse of public office for private
gain.
• The ‘TI Corruption Perception Index’ correlates a
number of surveys, polls and country studies
involving the number of bribe requests.
• A score of 10 indicates a perception that bribe
requests are never made in that country, while a
score of 0 indicates a perception that bribe
requests are always made. A score of 5.0
indicates a perception that there is an equal
chance of a bribe being made as not being made.
Slide 6.12
TI Corruption Perception Index (2)
• Of the 180 countries included in the 2008 index,

129 scored 5.0 or below; in other words,
businessmen perceive that in well-over two-thirds
of the 180 countries in the index it is more likely
than not that a bribe request will be made in any
given transaction.
• In 2008 Denmark had the highest score at 9.3,
UK 7.7, USA 7.3, China 3.6, India 3.4, Russia 2.1
and Venezuela 1.9.
Slide 6.13
International ethical agreements
• OECD Guidelines for MNEs (1976)

• International Labour Office (ILO)
• Tripartite Declaration of Principles concerning
MNEs and Social Policy (1977)
• UNCTAD Code on Restrictive Business Practices
(1980)
• UN Code of Conduct for Transnational
Corporations (1983)
• Multilateral Agreement on Investment (MAI): still
unresolved.
Slide 6.14
Industry specific ethical agreements
• A number of industries have sought to develop

international codes of conduct:
– International Code of Marketing of Breast-Milk Substitutes
(1981): preventing misleading information being given by
manufacturers of breast-milk substitutes
– Code of Marketing Practices of the International Federation
of Pharmaceutical Manufacturers Associations (1984):
ensuring accurate information in marketing of a broad range
of pharmaceutical products
– Rugmark Initiative: established a code of labour practices for
producing rugs, e.g. to restrict the use of child labour. Those
who comply with this scheme’s criteria can use the rugmark
label for their products.
Slide 6.15
Company-specific agreements
• A number of individual companies have drawn up codes

of conduct that are meant to apply throughout their
organisation.
– Levi Strauss and Co. has been one of the pioneers in setting
out acceptable labour practices, with contracts terminated
for breaches of these standards
– Reebok and Nike have responded in this way after adverse
publicity on labour market practices by suppliers
– Mattel Inc., one of the world’s largest toy manufacturers,
announced its ‘Global Manufacturing Principles’ in 1997 to
establish minimum labour standards in its own plants and
those of its major subcontractors.
Slide 6.16
Bribery and corruption
• Organization of American States Inter-American

Convention against corruption (1994)
• OECD Convention on Combating Bribery of Foreign Public
Officials (1999): countries with laws that outlaw the
payment of bribes to foreign officials include Austria,
Belgium, Canada, Germany, Japan, Korea, the UK and
the USA. In fact, the USA was the first country to pass
laws to this effect
• US Foreign Corrupt Practices Act 1977: this made certain
payments to foreign officials illegal even when these
officials are located abroad, with penalties including
prison, fines and disqualification from doing business with
the US government.
Slide 6.17
Ecological/environmental issues
• Role of the environment

– Provides amenity services
– Provides natural resources
– Helps absorb waste products.
Slide 6.18
Environment and economy
Relationship between the economy and the environment. The environment is linked to the economy in terms
of providing natural resources and amenities as well as acting as a dumping ground for waste products
Slide 6.19
Sustainable development
• ‘Development which meets the needs of the

present without compromising the ability of future
generations to meet their own needs’.
(Brundtland Report, Our Common Future, 1987)
• Intergenerational equity often linked to the idea of
sustainable development, i.e. meeting current
development needs without damaging the
prospects of future generations.
Slide 6.20
Environmentally conscious consumers
• Widely accepted that consumer purchases are

increasingly influenced by environmentally
positive or negative characteristics of goods and
services
• E.g. annual sales of Fairtrade products in UK
have grown at over 40% per year over the past
decade.
Slide 6.21
Environmentally- and risk-conscious

producers
• MNEs are increasingly aware that failure to manage
environmental risk factors effectively can lead to
adverse publicity, lost revenue and profit and a
reduction in their official credit rating.
• Tesco, the UK’s leading supermarket chain, received
negative publicity as a result of a TV documentary
about the conditions for workers growing foodstuffs,
such as mange tout in Africa.
• It therefore established its own code of conduct and
set up a 70-strong team of ethical advisers to help
monitor the goods it sells in its stores.
Slide 6.22
Environmentally conscious
governments
• Businesses have a further reason for considering
the environmental impacts of their activities,
namely the scrutiny of host governments.
• Where production of a product causes
environmental damage, it is likely that this will
result in the imposition of taxes or regulations by
government.
Slide 6.23
Environment and Marginal Social

Cost (1)
• If the production process results in environmental damage that
the producer does not have to pay for, then marginal social cost
(MSC) will be greater than marginal private cost (MPC).
• The true cost to society of producing the last unit of output does
include the cost to the firm (MPC) of using factor input (since
these scarce factors are thereby denied to other firms).
• However, the true cost to society also includes any
environmental damage caused by producing the last unit of
output. We call any such damage the marginal external cost
(MEC).
• We can therefore state that:
Marginal Social Cost = Marginal Private Cost + Marginal External Cost
MSC = MPC + MEC.
Slide 6.24
Environment and Marginal Social Cost (2)
Figure 6.2 Impact of environmental damage (MSC>MPC) on price and output
Slide 6.25
Socially optimum output (1)
• A profit-maximising firm will equate MPC with

MR, producing output 0Q and selling this at price
0P.
• However, the government may realise that from
society’s point of view the appropriate output is
that which equates MSC with MR (here we
assume MR to represent both marginal private
benefit and marginal social benefit), producing
output 0QS and selling this at price 0PS.
Slide 6.26
Socially optimum output (2)
• To achieve this ‘social optimum’ solution, the government

may try to tax the product (e.g. by raising MPC to MSC).
• This would be an attempt to ‘internalise the externality’ by
making the producer pay for any damage the producer
causes.
• If MPC is now raised by the tax so that it is equal to MSC,
then the profit-maximising firm would itself choose to
produce output 0QS and sell it at price 0PS (at this output
and price, MPC = MSC = MR and profits are a maximum).
• Alternatively, the government might seek to regulate the
firm by preventing it producing more than output 0QS.
Slide 6.27
Environmental codes and regulations
• Some important environment-specific codes and

regulations, which are relevant to international business
include:
– ISO 14001: the International Organization for
Standardization has developed ISO 14001 as a means of
certifying companies that adopt certain minimum standards
of environmental management.
– Regional Agreements: bilateral investment agreements
between nations (e.g. Bolivia – USA bilateral investment
treaty) often contain minimum environmental standards as
do broader based ‘regional’ treaties such as NAFTA (North
American Free Trade Agreement).
– Multilateral Agreements: various protocols have been
agreed (e.g. Montreal, Kyoto) as to reductions in
greenhouse gas emissions, etc.
Slide 6.28
Global warming and ‘carbon footprint’
• Global warming refers to the trapping of heat between the

earth’s surface and gases in the atmosphere, especially
carbon dioxide (CO2).
• Carbon dioxide constitutes some 56% of these
‘greenhouse gases’, with chlorofluorocarbons (CFCs),
used mainly in refrigerators, aerosols and air-conditioning
systems, accounting for a further 23% of such gases, the
rest being methane (14%) and nitrous oxide (7%).
• By trapping the sun’s heat these gases are in turn raising
global temperature (global warming).
• On present estimates, temperatures are expected to
increase by a further 1 ºC in the next two decades.
Slide 6.29
Stern Report
• The Stern Report (2007) was regarded as a

major factor in encouraging governmental policy
makers to make still greater efforts to reduce CO2
emissions.
• Key findings include the following:
– CO2 in the atmosphere around 1780, i.e. just
before the industrial revolution, has been estimated
at around 280 ppm (parts per million)
– CO2 in 2006 had risen as high as 382 ppm
– Greenhouse gases (CO2, methane, nitrous oxide,
etc.) in 2006 were recorded at 430 ppm in CO2
equivalents.
Slide 6.30
Stern Report : Do nothing scenario
• Temperature rise of 2oC by 2050

• Temperature rise of 5oC or more by 2100
• The damage to the global economy of such
climate change is an estimated reduction in
global GDP per head (i.e. output per head) of
between 5% and 20% over the next 2 centuries
• This occurs via rising temperatures, droughts,
floods, water shortages and extreme weather
events.
Slide 6.31
Stern Report : Intervene scenario (1)
• Stern Report advocates measures to stabilise greenhouse

gas emissions at 550 ppm CO2 equivalents by 2050.
• This requires global emissions of CO2 to peak in the next
10 to 20 years, then fall at a rate of at least 1% to 3% per
year.
• By 2050, global emissions must be around 25% below
current levels.
• Since global GDP should be around 3 times as high as
today in 2050, the CO2 emissions per unit of global GDP
must be less than one third of today’s level (and
sufficiently less to give the 25% reduction on today’s
levels).
Slide 6.32
Stern Report : Intervene scenario (2)
• The Stern Report estimated the cost of

stabilisation at 550 ppm CO2 equivalents to be
around 1% of current global GDP (i.e. around
£200bn). This cut in expenditure will be required
every year, rising to £600bn per annum in 2050 if
global GDP is three times higher.
• Stabilisation would limit temperature rises by
2050 to 2oC, not prevent them. Otherwise
temperature rises well in excess of 2oC are
predicted – possibly as much as 5oC by 2100.
Slide 6.33
Tradable permits (1)
• Tradable permits are a market-based solution to the

problem of pollution.
• With this policy option the polluter is issued with a
number of permits to emit a specified amount of
pollution.
• The total number of permits in existence places a limit
on the total amount of emissions allowed.
• Polluters can buy and sell the permits to each other,
at a price agreed between the two polluters. In other
words the permits are transferable.
• Allocation of permits: various mechanisms, e.g.
‘grandfathering’.
Slide 6.34
Tradable permits (2)
Figure 6.3 Using permits to control pollution

The market price for permits will be determined by the demand for and the supply of
permits. With the supply of permits fixed at Qs and the demand for permits being D1, the
price of permits will be P1. If demand increases to D2, the price of permits will rise to P2
Slide 6.35
Advantages of tradable permits
• It is politically easier to get companies to agree on

a pollution-control policy that begins by
distributing a valuable new property right.
• The emission allowance will have a market value
as long as the number of allowances created is
limited.
• They are cost effective.
• Companies have flexibility in that they can
achieve their emission reduction levels based on
their own strategy.
Slide 6.36
Disadvantages of tradable permits
• How are permits initially allocated?

• Should the permits be allocated free or
auctioned?
• The emission allowance will only have a market
value as long as the number of allowances
created is limited.
• Permits give the owner of a permit the right to
pollute. In other words, a permit to emit pollutants.
• The permits can act as a barrier to entry into the
sector for new firms who have no permits.
• Administrative costs.
Slide 6.37
The EU emissions trading scheme
• Tradable permits used to reduce greenhouse gas

emissions
• Helps the EU meet its commitments as part of the Kyoto
Protocol
• The EU took upon itself as part of the Protocol to reduce
greenhouse gas emissions by 8 per cent (from 1990
levels) by 2008–2012
• The idea behind the ETS is to ensure that those
companies within certain sectors responsible for
greenhouse gas emissions keep within specific limits by
either reducing their emissions or by buying allowances
from other organisations with lower emissions
• The ETS is essentially aimed at placing a cap on
emissions.
Slide 6.38
How emissions trading works
Figure 6.4 Emissions trading schemes

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Slide 6.

International ethical and

• Those ways of acting or being that are regarded

Corporate agency and responsibility

• ‘Organising principles’ by which people live

• Refers to a potential conflict over the ‘organising

Social contract theory (1)

• Thomas Hobbes suggested that human beings

Social contract theory (2)

• Donaldson and Dunfee (1999) take this approach

Integrated Social Contract Theory

Global norms in the Integrated Social

International business ethics

Enderle (1995) identified four approaches:

Bribery and corruption

• ISCT can be used to evaluate acts of bribery and

TI Corruption Perception Index (1)

• Comprehensive databases on corruption which it

TI Corruption Perception Index (2)

• Of the 180 countries included in the 2008 index,

International ethical agreements

• OECD Guidelines for MNEs (1976)

Industry specific ethical agreements

• A number of industries have sought to develop

• A number of individual companies have drawn up codes

Bribery and corruption

• Organization of American States Inter-American

• Role of the environment

Environment and economy

• ‘Development which meets the needs of the

Environmentally conscious consumers

• Widely accepted that consumer purchases are

Environmentally- and risk-conscious

Environment and Marginal Social

Environment and Marginal Social Cost (2)

Figure 6.2 Impact of environmental damage (MSC>MPC) on price and output

Socially optimum output (1)

• A profit-maximising firm will equate MPC with

Socially optimum output (2)

• To achieve this ‘social optimum’ solution, the government

Environmental codes and regulations

• Some important environment-specific codes and

Global warming and ‘carbon footprint’

• Global warming refers to the trapping of heat between the

• The Stern Report (2007) was regarded as a

Stern Report : Do nothing scenario

• Temperature rise of 2oC by 2050

Stern Report : Intervene scenario (1)

• Stern Report advocates measures to stabilise greenhouse

Stern Report : Intervene scenario (2)

• The Stern Report estimated the cost of

Tradable permits (1)

• Tradable permits are a market-based solution to the

Tradable permits (2)

Figure 6.3 Using permits to control pollution

Advantages of tradable permits

• It is politically easier to get companies to agree on

Disadvantages of tradable permits

• How are permits initially allocated?

The EU emissions trading scheme

• Tradable permits used to reduce greenhouse gas

How emissions trading works

Figure 6.4 Emissions trading schemes