International Business Ethics

Intense competition and profitable opportunities are forcing companies worldwide to enter
the global market place, whether they are ready or not. This development presents a host of
ethical problems that managers are often unprepared to address. Some of these problems arise
from the diversity of business standards around the world and especially from the lower
standards that generally prevail in developing countries.

Environmental standards in developing countries are also invariably lower than those of
developed countries. Multinational companies often exploit the cheap labor, lower standards,
and natural resources of developing countries without making commensurate investments that
would advance local economic development.

Even though developing countries invariably benefit to some extent from the activities of
MNCs, the distribution of the gains is usually unequal. Critics ask whether it is fair for
corporations from developed countries to return so little to the less-developed parts of the
world from which they derive so much.

Operations in foreign countries also raise questions about the proper role of corporations in
political affairs. Most multinationals consider themselves to be guests in host countries and
refrain from influencing local governments. However, Google was widely criticized for
enabling the Chinese government to censor the Internet and thereby maintain its dictatorial
control. MNCs have an opportunity to play a constructive role in countries making the
transition from a socialist, planned economy to a free market. The high levels of repression
and corruption in some of these countries, though, present special challenges.

The various ethical problems that multinational companies may face in their foreign
operations, especially while conducting business in less-developed countries include:

Different Standards

The main charge against multinational corporations is that they adopt a double standard,
doing in less-developed countries what would be regarded as wrong if done in the developed
world. However, many criticized practices are legal in the countries in question and may not
be considered unethical by local standards. Similarly, it is morally permissible for managers
of MNCs to follow local practice and “do as the Romans do” in some situations but not
others. Even if there are special ethical standards for international business, these cannot be
applied without taking into account differences in cultures and value systems, the levels of
economic development, and the social, political, and legal structures of the foreign countries
in which MNCs operate.

How should multinational corporations conduct business in countries with different

cultures and value systems?

In answering this question, there are two extremes.

 The absolutist position is that business ought to be conducted in the same way the
world over with no double standards. In particular, U.S. corporations ought to observe
a single code of conduct in their dealings everywhere. This view might be expressed

as, “When in Rome or anywhere else, do as you would at home.”

 The opposite extreme is relativism, which may be expressed in the familiar adage,
“When in Rome, do as the Romans do.” That is, the only guide for business conduct
abroad is what is legally and morally accepted in any given country where a company
operates.

Neither of these positions can be adopted without exception. However, “When in Rome, do
as the Romans do” is not wholly justified either. The mere fact that a country permits bribery,
unsafe working conditions, exploitive wages, and violations of human rights does not mean
that these practices are morally acceptable, even in that country. Bribery, for example, is
almost universally condemned, but the people in some countries may consider it to be less
offensive than those elsewhere, and it may be tolerated (but not approved) as an unavoidable
practice. In such situations, what is the local standard with regard to bribery? The debates
over absolutism and relativism—two of the positions on the “what to do in Rome” question—
revolve around four important points:

 relevant differences between countries,

 the influence of different outlooks,
 the right to decide, and
 business necessity.
 1. Relevant Differences

If Rome is a significantly different place, then standards that are appropriate at home do not
necessarily apply there.

First, practices may have different impacts under different conditions, so that what is
unethical in one country may not be so in another.

Example: With regard to one powerful but dangerous antibiotic, which is prescribed in the
United States only for very serious infections, doctors in Bolivia claim that this limited use is
a luxury that Americans can afford because of generally better health. “Here,” they say, “the

people’s general health is so poor that one must make an all out attack on illness.” Thus, an
antibiotic that should be marketed in the United States with one set of indications might be
justifiably sold abroad with a more extensive list if, indeed, the drug’s benefits vary
according to conditions.

Second, the relative level of economic development must be taken into account in
determining the appropriate standards for different countries.

Example: The accident at the Union Carbide plant in Bhopal, India, in 1984, which exposed
hundreds of thousands of poor local residents to 40 tons of highly toxic methyl isocyanate,
resulted from some safety lapses that would be morally wrong in any country. Some low
levels of safety may be regarded as violations of basic human rights anywhere. However, the
design and operation of the Bhopal plant, which produced a much needed pesticide, Sevin,
also resulted from trade-offs that were favored at the time by the Indian government to
promote agricultural development. The plant was located in populous Madhya Pradesh state
to increase employment there, manual rather than automatic gauges and valves were installed
to create more jobs and cut costs, and a less safe method for producing Sevin in which methyl

isocyanate was used to make the pesticide more affordable to poor farmers. Although these
trade-offs had tragic consequences, some of them might be considered reasonable given the
urgent need of India for a cheap pesticide to grow sufficient food for its burgeoning
population. Such trade-offs would not be made in the wealthier United States at the present
time, but this country made different trade-offs between safety and other values at earlier
stages of its economic development.
 2. Variety of Outlooks

Although some bedrock conceptions of right and wrong exist among people everywhere,
many variations occur due to cultural, historical, political, and economic factors. These
differences are important, first, because they may affect the meaning of acts performed. For
example, lavish gifts that would be considered bribes or kickbacks in the United States are an
accepted and expected part of business in Japan and some other Asian countries. This
difference in perception is due, in part, to the role that gift giving plays in building
relationships, which are more critcal in Asian business. Thus, giving gifts in Japan and China
is usually understood not as an attempt to improperly influence a person’s judgment but

rather as a means of cementing a legitimate relationship. Similarly, whistle- blowing, which

is generally viewed favorably in the United States as a moral protest, is regarded unfavorably
in Japan and China as an act of disloyalty.

3. Right to Decide

The absolutist position suggests that the primary responsibility for setting standards should
rest on the government and the people of the counry in which business is being conducted.
The fact that people approve of a certain practice does not make it right. The argument is
rather an expression of respect for the right of people to govern their own affairs, rightly or
wrongly.

A respect for the right of people to set their own standards does not automatically justify
corporations in inflicting grave harm on innocent people, for example, or violating basic
human rights. The governments of developing countries are, in many instances, no less
committed than those in the United States and Europe to protecting their people against harm,
but they do not always have the resources—the money, personnel, and institutions—to
accomplish the task.

Some countries with the capacity to regulate multinationals lack the necessary will. MNCs,
through the exercise of economic power, including bribery, are able to influence regulatory
measures. The governments of developing countries are also careful not to offend the
developed countries on which they depend for aid. Furthermore, the absence of laws against
unethical business practices is sometimes part of a pattern of oppression by local elites that
exists within the country itself, so that MNCs are taking advantage of the immorality of
others when they follow the law of countries with corrupt governments.

A genuine respect for the right of people to determine which standards to apply in their own
country requires a careful and sympathetic consideration of what people would do under
certain hypothetical conditions rather than what is actually expressed in the law, conventional
morality, and commonly accepted practices.

4. Business Necessity

We don’t necessarily agree with the Romans, but find it necessary to do things their way.”
American firms with contracts for projects in the Middle East, for example, have complied in
many instances with requests not to station women and Jewish employees in those countries.
Although discrimination of this kind is morally repugnant, it is (arguably) morally
permissible when the alternative is to risk losing business in the Muslim world.

A more complicated case was posed by the boycott of Israel, which was begun by the
countries of the Arab League in 1945. In order to avoid blacklisting that would bar them from
doing business with participating Arab League countries, many prominent U.S. companies
cooperated by avoiding investment in Israel. Other firms, however, refused to cooperate with
the boycott for ethical reasons. (Congress addressed this issue in 1977 by amending the
Export Administration Act to prohibit American corporations from cooperating with the Arab
League boycott against Israel.)

Guidelines for Multinationals

Guidelines for the conduct of multinational corporations are based on three main
considerations: rights, welfare, and justice. All of these are relevant moral concepts; the
challenge is determining exactly how they apply to international business. These three
concepts are further incorporated into a number of international codes for global business
practice.

1. Rights

Thomas Donaldson has proposed that corporations have an obligation to respect certain

rights, namely those that ought to be recognized as fundamental international rights. MNCs
are not obligated to extend all the rights of U.S. citizens to people everywhere in the world,
but there are certain basic rights that no person or institution, including a corporation, is
morally permitted to violate. Fundamental international rights are roughly the same as natural
or human rights, and some of these are given explicit recognition in such documents as the
United Nations Universal Declaration of Human Rights, etc.

 Donaldson suggests the following fundamental rights moral minimum:

1. The right to freedom of physical movement
2.The right to ownership of property
3. The right to freedom from torture
4. The right to a fair trial
5. The right to nondiscriminatory treatment
6. The right to physical security
7. The right to freedom of speech and association
8. The right to minimal education
9. The right to political participation
10. The right to subsistence

2. Welfare

Richard DeGeorge offers seven basic guidelines for multinational corporations that cover a
variety of moral considerations, including rights. However, several of these rules concern
avoiding harm and providing benefits. His guidelines are as follows:

1. Multinationals should do no intentional direct harm.

2. Multinationals should produce more good than harm for the host country.
3. Multinationals should contribute by their activity to the host country’s
development.
4. Multinationals should respect the human rights of their employees.
5. To the extent that local culture does not violate ethical norms, multinationals
should respect the local culture and work with and not against it.
6. Multinationals should pay their fair share of taxes.
7. Multinationals should cooperate with the local government in developing and
enforcing just background institutions.
 3. Justice

The very possibility of market exchanges depends on the general observance of certain rules
of honesty, trust, and fair dealng (rules of the market). The foundational document for human
rights is the 1948 United Nations Universal Declaration on Human Rights.

Wages and Working conditions

The ethical issues in determining wages and standards for working conditions in
international business, and factors that multinational corporations and foreign
contractors should consider to improve on those set by market mechanisms.

1. Setting Wages

How should the standards for wages and working conditions be determined?

These standards should be set by the market. In developed countries, the determination of
wages and working conditions results primarily from the competition among employers for
desirable workers, which compels them, generally, to offer high wages and good working
conditions. On this view, there is nothing unjust about jobs with lower pay and poorer
working conditions. As long as workers are willing to accept employment on the terms
offered, then almost any mutually agreeable arrangement is justified. It then follows that no
wage can be too low in a free market. However, using the market as a mechanism for
determining acceptable standards for wages and working conditions in developing countries
encounters two obstacles.

I. Need for Minimum Standards. First, even developed countries do not rely solely on
the market but set certain minimum conditions by law, such as minimum wage laws,
fair labor standards, and health and safety regulations. These conditions reflect, in
part, the recognition of certain human rights that ought to be observed in all economic
activity. Thus, one rationale for minimum wage laws is that it is unjust to pay workers
 less than a certain amount. The standard should be a “living wage” that enables a
worker to live with dignity and support a family, given the local cost of living.
II. Poor Market Conditions. The second obstacle to using the market to set wages and
working conditions is the possibility that the conditions for a free market that
generally prevail in developed countries are lacking in the less-developed world. In
particular, the mass of unemployed, desperately poor people in less-developed
countries constitutes a pool of workers willing to accept bare subsistence wages. The
market for labor in any given country may also be artificially low because of lax
enforcement of worker protection laws and political repression that prevents workers
from organizing.

Argument in Favor of Market Wages

In support of the market mechanism, economists argue that the wages paid by multinational
corporations and their foreign contractors are usually above the minimum wage and the
prevailing market rate. If a government raises the minimum wage or multinationals and
foreign contractors are pressured to pay above-market wages, the result will be a reduced
incentive to relocate jobs from higher-wage countries, which tend to have more productive
workers and a better infrastructure for manufacturing. Workers in developed countries
command a higher wage because of greater skills and knowledge, as well as access to
technology; infrastructure, such as transportation and markets, further increases the
advantages of employing high-wage workers. Consequently, firms will have little reason to
move to a less-developed country unless it offers significantly lower labor costs to
compensate for the lower productivity and inferior infrastructure. Low-wage countries
include Korea, Taiwan, and Malaysia. This economic argument shows, first, why less-
developed countries should not raise the minimum wage beyond the market value of its labor.

A relatively small minority of urban workers, who already make above-average wages, may

benefit, but the vast majority will suffer for the lack of jobs, and the economy will not

develop for lack of foreign investment.

Arguments Against Market Wages

The “living wage” position seems to entail that no job at all is preferable to one below the
living-wage standard. Although developing countries are forced to keep wages low in their
competition with each other to attract foreign investment, they still seem to prefer all the low-
wage jobs they can get, regardless of whether they pay a “living wage.”

A second argument of critics is that higher pay could be offered without much impact on
multinational corporations or their customers in developed countries. Critics observe that the
labor cost for a pair of shoes or a shirt is usually a few cents and that paying a few cents more
would add little to the ultimate price. Proponents of a “living wage” believe, on the other
hand, that payment of wages above a certain level is morally required. To offer less than a
“living wage” is to unjustly exploit an opportunity for cheap labor.

2. Working Conditions

Certainly, some deplorable working conditions are morally unjustifiable. However, the
economic argument about wages also applies to working conditions in as much as both are
matters of cost. In some instances, though, workplace abuses—such as degrading
punishment, forced overtime, and confinement to company quarters— have little or no
economic justification. However, costs, as well as benefits, are relevant factors in
determining a morally justifiable level for working conditions. According to a World Bank
report, “Reducing hazards in the workplace is costly, and typically the greater the reduction
the more it costs. . . . As a result, setting standards too high can actually lower workers’
welfare.”

One reason for this outcome is that investment to improve working conditions may come at
the expense of wages. More significantly, if higher standards inhibit foreign investment, then
fewer jobs are created and more of those available are in local industries with lower pay and
working conditions. Still, working conditions below some basic level should not be permitted
by any multinational corporation, and a consensus has emerged among multinational
corporations about this level. The main focus now is on how best to implement working
condition standards.

Developing A Code
For many companies, the first step has been to adopt codes of conduct for their own
operations and those of contractors. Nike adopted a “Code of Conduct” and a “Memo-
randum of Understanding,” which were included with all contracts. For e.g., Nike code
specified prohibition of hiring anyone under 18 in shoe manufacture and under 16 for
producing clothing (unless higher ages are mandated by law). Moreover, forced overtime was
permitted, provided employees are informed and fully compensated according to local law,
the code required one day off in seven and no more than 60 hours a week.

Industry Action

The challenges of managing foreign contractors are beyond the capability of any single
company and require an industry-wide approach.

 First, imposing higher standards on contractors, monitoring their factories, and

enforcing compliance are costly, and any firm that incurs these costs when its
competitors do not is put at a competitive disadvantage.
 Second, each firm deals with thousands of contractors, which in turn manufacture for
many brands. The only solution, therefore, is an industry-wide effort.

The first initiative occurred in 1997 with the launch of the Apparel Industry
Partnership (AIP), which Nike immediately joined. Convened by the White House, a
group of industry, labor, consumer, and human rights leaders com- mitted themselves
to develop a strong workplace code of ethics with internal monitoring and an
independent, external monitoring system.

Remaining Problems

Child labor presents an especially thorny issue. Although an estimated 150 million children
under the age of 14 work worldwide, less than 5 percent of these make goods for export. The
vast majority are employed in the informal economy that contains the most dangerous jobs.
Virtually every country bans child labor, but enforcement is often ineffective. Although
multinationals should abide by the law and refrain from employing children, the main
challenge is how to deal with existing factories that employ children. A New York Times
editorial observes, “American consumers are right to insist that the goods we buy are not
made with child labor. But these efforts will backfire if children kicked out of these factories
drift to more hazardous occupations.”

In response to this problem, the International Labour Organization has worked with
governments and businesses to establish special schools for approximately 10,000 children
who worked in garment factories and to pay their parents for the lost wages. Ultimately, the
solution to the problem of child labor is not merely to prohibit the employment of underage
workers but also to provide schooling for children and jobs for parents so that child labor is
no longer an economic necessity.

Foreign Bribery

The ethical problems with bribery, and the diverse means and strategies for combating
bribery

Bribery is one of the most common and controversial issues that multinational corporations
face. Bribery is universally condemned, and no government in the world legally permits the
bribery of its own officials. The issue of bribery is far from simple. There is need, therefore,
to develop a definition and make some distinctions, as well as to understand the factors that
foster bribery and allow it to flourish. An understanding of these causes enables us not only
to explain where bribery is more likely to occur but also to develop means to reduce it.

In a country with well- developed laws and regulations that allow little discretion for public
officials, and with a small public sector that leaves most business to be conducted in markets
by private individuals and corporations, there is little opportunity for bribes to be demanded
or offered. On the other hand, in a state-dominated economy in which much business is
conducted with the national or local government, where public officials make key decisions
about the purchase of goods, the approval of projects, and the like, great opportunities are
created for bribes to be demanded and/or offered.

What’s Wrong with Bribery?

The defenders of bribery begin with the observation that in many developing economies, the
government officials and other elites tend to dominate the economy for their own benefit, and
they are often indifferent or hostile to foreign investors and local entrepreneurs, who may
upset the cozy status quo. When outsiders are able to overcome this bureaucratic inertia by
paying bribes—which they can afford to do because of their greater efficiency in conducting
business—they aid development by putting resources to their most productive use. Indeed,
competition among potential bribers itself is a factor in promoting efficiency, since the party
that is able to afford the highest bribe is likely to be the most efficient producer. Combating
bribery, on this view, may impede development by maintaining an inefficient status quo.
Thus, the political scientist Samuel P. Huntington observes, “In terms of economic growth,
the only thing worse than a society with a rigid, over-centralized, dishonest bureaucracy is
one with a rigid, over-centralized and honest bureaucracy.”

Combating Bribery

Unfortunately, bribery is difficult to combat due to its secretive nature and deep penetration.
It occurs, of necessity, out of the public eye, and it often involves networks of individuals and
institutions that thwart efforts to prosecute wrongdoers and to bring about reform.

For example, when the proceeds from bribery are widely shared by government officials,
including bureaucrats, legislators, and judges, then everyone who might act constructively
has an interest in maintaining a corrupt system. Moreover, bribery is a classic collective
choice problem in that no single honest company or official can singlehandedly make any
difference: Any company that refuses to offer bribe or any official who declines to accept one
will have no effect as long as others are willing to engage in the practice. Any solution to the
problem must involve action that affects everyone. Finally, any effective action must address
the root causes of bribery, which are the conditions that create numerous opportunities for
bribes in substantial amounts without significant risk.

Anti-bribery Strategies

It has already been observed that the opportunities for bribery are created in the area of
overlap between business and government where public officials have discretionary authority
to make decisions that affect economic activity.

One strategy to combat bribery, then, is to alter the role of government in the economy.
Limiting government involvement and increasing the prominence of free markets is one
possibility.
Since much bribery involves civil servants in government bureaucracies, a second
strategy consists of civil service reform.

Pay might be increased, for example, in order to reduce the temptation among low-paid
officials to demand or accept bribes. Reform might also include more selective recruitment
and better training in order to build a more professional civil service. Higher pay for civil
servants, accompanied by good pension, may reduce the incidence of bribery not only by
removing the need for the income but also by making the jobs so attractive that the risk of
losing them will deter bribe taking.

A third strategy for reducing the opportunities for bribery consists of more careful
selection of government projects.

This might be done by eliminating those that are most vulnerable to bribery and closely
monitoring the ones that go forward. This check can be imposed most effectively on
developing countries by funding agencies, such as the World Bank and the International
Monetary Fund, as well as the investment banks that provide loans. These agencies and
banks, most of which have adopted formal anti-bribery policies and procedures, combat
bribery by evaluating the integrity of individual projects and the ability of the countries in
question to control bribery, as well as by providing expertise and other kinds of support for
well-intentioned governments seeking to reduce bribery. In other words, they recognize that
the economic function of lending cannot be separated from the politics of a country.

In addition to reducing the opportunities for bribery, the problem can be addressed by
more vigorous enforcement of antibribery laws and the activity of international
organizations.

For example, the Hong Kong Independent Commission Against Corruption and the Corrupt
Practices Investigation Bureau in Singapore are government-created units that have proven to
be highly effective at uncovering and prosecuting instances of bribery. Foreign Corrupt
Practices Act (FCPA) since 1997 is against U.S. law for an individual or a company to bribe
a foreign official for the purpose of obtaining or retaining business.

Constructive Engagement
Is it ethical to operate in a country with a repressive government that engages in
systemic human rights abuses?

Companies that operate in Burma and other “ethically challenging environments” commonly
defend themselves by describing their strategy as “constructive engagement.” The argument
is that although human rights abuses do occur, the company, on the whole, is making a
positive contribution that would not occur in its absence. Such a defense rests on utilitarian
grounds of benefit or welfare, which may be strong, but it does not address the possible
charge that a company may do some good but still be complicit in human rights abuses. The
success of a constructive engagement strategy depends on two factors:

 first, on the receptiveness of the government in a country to change and,

 second, on the commitment and effectiveness of a company with regard to such
change.

Constructive engagement is a high-minded approach, filled with good intentions, but it is

difficult to implement effectively.

Non-engagement occurs when a company chooses not to enter a certain country. Such a
decision may be based solely on sound business considerations. Among these considerations
are threats to a company’s brand image and intellectual property, exposure of employees to
risks of health and safety or human rights violations, and subjection of the company to risks
from corruption and social and political instability that would impede normal operations.
Alternatively, a company may decide for explicitly moral reasons not to engage. These
reasons may include an incompatibility of particular environments with a company’s mission
or values or a commitment to support certain social causes, including organized boycotts such
as the boycott in the 1970s designed to end apartheid in South Africa. For example, Robert
Haas, the CEO of Levi Strauss, made the decision in 1993 to discontinue relations with
suppliers in China and to defer any direct investment because of concern about pervasive
violations of basic human rights.