Chapter 2

Managing Interdependence –
Social Responsibility, Ethics
and Sustainability

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 Question 1: In which of the following modes of
entry, does the domestic manufacturer give the
right to use intellectual property such as patent and
trademark to a manufacturer in a foreign country
for a fee
a. Licensing
b. Contract manufacturing
A
c. Joint venture
d. None of these

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Question 2: Outsourcing a part of or entire
production and concentrating on marketing
operations in international business is known as
a. Licensing
b. Franchising
c. Contract manufacturing
d. Joint venture B

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Question 3: When two or more firms come
together to create a new business entity that
is legally separate and distinct from its
parents it is known as
a. Contract manufacturing
b. Franchising
c. Joint ventures C
d. Licensing

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Question 4: Which of the following is
NOT an advantage of exporting?
a. Easier way to enter into international
markets
b. Comparatively lower risks
c. Limited presence in foreign markets
d. Less investment requirements

C
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Question 5: Which of the following is NOT a
political risk event in global management?
a. Expropriation of corporate assets without prompt
and adequate compensation
b. Loss of technology or other intellectual property
(such as patents, trademarks, or trade names)
c. Government modification of its fiscal and foreign-
investment policies
d. Barriers to repatriation of funds (profits or equity)

B
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 Chapter 2
Managing Interdependence –
Social Responsibility, Ethics
and Sustainability

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In this chapter you will learn:

The social responsibility of corporations toward their

various constituencies around the world, in particular their
responsibilities toward human rights
The strategic role that ethics must play in global
management and provide guidance to managers to
maintain ethical behavior amid the varying standards and
practices around the world
The importance of managing interdependence and include
sustainability and shared value in their long-term plans

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 _________ has spent over 40 years growing
its position as a key outsourcing hub and is
the second-largest apparel exporting
country in the world with a global market
share of 6.26 %.
A. China
B. Vietnam
C. Bangladesh
D. India
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The Bangladesh Disasters
The fire in the Tazreen Fashions Factory in
Bangladesh killed 1,127 workers in
November 2012
In April 2013, the collapse of a factory
complex in Dhaka killed more than 1,200
people and brought the problems of
oversight to the forefront.

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The Bangladesh Disasters
• Retailers (such as Walmart, Gap, Sears,…)
outsourcing production in Bangladesh
– say they did not know their clothing was being
produced there.
– claim ignorance for these terrible disasters
• These tragedies, in addition to increasing
political unrest there, have caused Western
companies to scramble in dealing with such
a devastating situation and the negative
public outcry.
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The Bangladesh Disasters
How should retailers balance their profitability against
their responsibilities and reputation in overseas
contracting?
Is the answer to move production to other countries?
Would that solve the supply chain oversight problem?
Moreover, how would that affect the 3.6 million workers in
the garment industry in Bangladesh?
Who are the parties who should be held accountable for
these disasters? Who are the stakeholders in this kind of
situation? Are you one of them?

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Social Responsibility
Managers today are usually quite sensitive
to issues of social responsibility and ethical
behavior
– because of pressures from the public, from
interest groups, from legal and governmental
concerns, and from media coverage.

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Social Responsibility
Includes the expectation that corporations
concern themselves with the social and
economic effects of their decisions
The two extreme opinions related to social
responsibility – Domestic firms

The only responsibility Business should anticipate

of a business is to and try to solve problems
make a profit in society

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Social Responsibility of
Multinational Corporations
More complex than domestic firms due to the
complex issues related to global business
– Economic development in a subsidiary’s host country
– Taking an active role in identifying and solving world
problems.
– Cultural issues
– Additional stakeholders in the firm’s activities through
operating overseas
– Legal and regulatory requirements and expectations
prevailing where the firm is operating.

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Additional stakeholders

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Social Responsibility of
Multinational Corporations
Two opposite arguments:
– Because MNCs operate in a global context, they should
use their capital, skills, and power to play proactive
roles in handling worldwide social and economic
problems and that, at the least, they should be
concerned with host-country welfare.
– MNCs already have a positive impact on developing
economies by providing managerial training,
investment capital, and new technology as well as by
creating jobs and improving infrastructure.

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Long-term competitive benefits
derive from CSR
Many of the benefits result from the
goodwill, attractiveness, and loyalty of the
various stakeholders connected with the
company.
These stakeholders may be government,
suppliers, employees, brand reputation, and
most importantly consumers.

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IKEA - an example of a long-
term attitude to CSR
IKEA, quoted previously, is an example of a long-term
attitude to CSR. IKEA, the Swedish home retailer with 317
stores worldwide, gave up its plans to open dozens of
stores in India after the Indian government would not lift
limits on foreign investment in the retail sector.
Even so, IKEA plans to double the number of goods it
buys in India and is investing 125 million euro (about $163
million) in social programs to help women and children in
India and elsewhere in South Asia. These investments
made IKEA the largest corporate partner in the world to
aid agencies, including UNICEF and Save the Children.

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IKEA - an example of a long-
term attitude to CSR
Subsequently, IKEA announced in June 2012 that the
company had been granted permission to open 25 stores in
India under a policy change that allows some retailers to
own 100 percent of their units there. It would seem, from
this development, that the company’s benevolence did pay
off.

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Business benefits from CSR
Improved access to capital
Secured license to operate
Revenue increases
Cost decreases
Risk reduction
Increase in brand value
Improved customer attraction and retention
Improved reputation
Improved employee recruitment, motivation, and
retention
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CSR: Global Consensus or
Regional Variation?
There are commonly acknowledged regional variations in
how companies respond to CSR:
“The U.S. and Europe adopt strikingly different positions
that can be traced largely to history and culture.
– In the U.S., CSR is weighted more towards “doing business right”
by following basic business obligations; ...
– In Europe, CSR is weighted more towards serving—or at least not
conflicting with—broader social aims, such as environmental
sustainability.”
Financial times

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CSR: Global Consensus or
Regional Variation?
Moral universalism: the need for a moral
standard that all cultures accept.
It seems unlikely that a universal code of
ethics will ever be a reality, it is far
preferable to other approaches such as:
– ethnocentrism
– ethical relativism

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Ethnocentric approach
With an ethnocentric approach, a
company applies the morality used in its
home country—regardless of the host
country’s system of ethics.

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Ethical relativism
A company subscribing to ethical relativism, on
the other hand, simply adopts the local moral code
of whatever country in which it is operating.
Companies run into value conflicts
– continuing to do business in China despite home-
country objections to China’s continued violation of
human rights.
– public pressure in the home country often forces the
MNC to act in accordance with ethnocentric value
systems anyway

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 Public pressure
In addition, in 2011, “facing pressure from
universities and student groups, Nike
announced an agreement on Monday in
which it pledged to pay $1.54 million to
help 1,800 workers in Honduras who lost
their jobs when two subcontractors closed
their factories.”

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From CSR to Shared Value?

Creating Shared Value (CSV) expands the

pool of economic and social value and so
“leverages the unique resources and
expertise of the company to create
economic value by creating social value.”

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Nestlé's CSV philosophy

“To create value for our shareholders and

our company, we must create value for people
in the countries where we are present. This
includes the farmers who supply us, the
employees who work for us, our consumers
and the communities where we work.”

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Nestlé's CSV philosophy
• Nestlé Bangladesh sources raw materials from
local suppliers and farmers to ensure that the
farmers get fair prices for their produce and to
promote the company’s sustainability by reducing
dependence on imports.
• Under the Nestlé Clean Drinking Water project,
the company provides water tanks for schools in
Gazipur, benefiting more than 43,000 students.

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MNC Responsibility toward
human Rights
What constitutes
‘human rights’?
– Perceptions of people
– Priorities of people
US may say wages,
education, freedom
Other countries may
say safety and shelter

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MNC Responsibility toward
human Rights
“With almost all tech products now made by
contract manufacturers in low-wage nations
where sweatshops are common, ... Hewlett
Packard, Dell, IBM, Intel, and twelve other
tech companies decided to unite to create
the Electronic Industry Code of Conduct
(EICC).”
Business Week

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MNC Responsibility toward
human Rights
Regarding so-called sweatshops around the
world, former President Bill Clinton
established an Anti-Sweatshop Code of
Conduct, which:
– includes a ban on forced labor, abuse, and
discrimination
– and requires companies to provide a healthy
and safe work environment
– and to pay at least the prevailing local
minimum wage, among other requirements.
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MNC Responsibility toward
human Rights
Nike’s efforts to address its problems
include publishing its entire list of contract
manufacturers on the Internet to gain
transparency.
Many other global players now question the
morality of trading for goods that have been
produced by forced labor or child labor.

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MNC Responsibility toward
human Rights
Under pressure from their labor unions (and
perhaps their consciences), a number of
large, image-conscious companies, such as
Reebok and Levi Strauss, have established
corporate codes of conduct for their
buyers, suppliers, and contractors and have
instituted strict procedures for auditing their
imports.

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MNC Responsibility toward
human Rights
SA 8000’s Proposed Global Standards
– Do not use child or forced labor
– Provide a safe working environment
– Respect workers’ rights to unionize
– Do not regularly require more than 48-hour
work weeks
– Pay wages sufficient to meet worker’s basic
needs

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Ethics in Global Management
Globalization has multiplied the ethical
problems facing organizations
Business ethics have not yet globalized
Difficult to reconcile consistent and
acceptable behavior around the world

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Ethics in Global Management
The term international business ethics
refers to the business conduct or morals of
MNCs in their relationships with
individuals and entities
– Based on the cultural value system
– Based on generally accepted ways of doing
business in each country or society

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Ethics in Global Management
Various national and cultural factors in a
particular host environment
– combine to determine ethical or unethical
societal norms
– Exhibit 2-4.

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Ethics in Global Management Dilemmas
Should managers of MNC subsidiaries base their ethical
standards on those of the host country or those of the home
country—or can the two be reconciled?
What is the moral responsibility of expatriates regarding
ethical behavior, and how do these issues affect business
objectives?
How do expatriates simultaneously balance their
responsibility to various stakeholders—to owners,
creditors, consumers, employees, suppliers, governments,
and societies?
The often conflicting objectives of host and home
governments and societies also must be balanced.

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Ethics in Global Management
Dilemmas
Approaching ethical dilemmas
varies among different MNC’s
from different countries.
– American approach is to
treat everyone the same by
making moral judgments
based on general rules
– Japan and Europe make
decisions based on shared
values, social ties, and
perception of their obligation

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Limits of Ethical Standards for International
Activities
• The biggest single problem for MNCs in
their attempt to define a corporate-wide
ethical posture
• is the great variation of ethical standards
around the world.
• Many practices considered unethical or
even illegal in some countries are accepted
ways of doing business in others.

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Ethics in uses of technology
The ethical use of technology around the
world poses a considerable challenge to
have consistent practices
– because of the varied expectations about the use
of technological devices and programs as they
intersect with people’s private lives.

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Ethics in uses of technology
“European citizens care deeply about
protecting their privacy and data protection
rights, ... Any company operating in the
E.U. market or any online product that is
targeted at E.U. consumers should comply
with E.U. rules.”
Vivienne Reding, European Justice Commissioner

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Ethics in uses of technology
The electronic data privacy laws in Europe
– A U.S. company wanting personal information
must get permission from that person and
explain what the information will be used for;
– The company must also guarantee that the
information won’t be used for anything else
without the person’s consent.

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Ethics in uses of technology
Regulators in some E.U countries were focusing
on whether Apple’s iPhone and iPad violated
privacy rules by tracking the location of users.
Google, also, had previously started a firestorm in
Germany when it was discovered to have been
gathering information for its street mapping
service from people’s unsecured wireless
networks.
Sony acknowledged a breach of data of 77 million
users of its PlayStation network.
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Ethics in uses of technology
Facebook has been accused of violating EU data
protection rules by tracking all visitors.
– Facebook places tracking cookies on users’ computers
without their consent if they visit any page on the
facebook.com domain
Facebook’s parent company, Meta, has been fined
€17 million (~$18.6 million) by the Irish Data
Protection Commission (DPC) over a string of
historical data breaches.

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Questionable payments
This is a specific ethical issue for managers
in the international arena
payments in question are political
payments, extortion, bribes, sales
commissions, or “grease money” –
payments to expedite routine transactions
Also called: tokens of appreciation, ‘la
mordida’, ‘bastarella’, and ‘pot-de-vin’

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The Foreign Corrupt Practices Act

The Foreign Corrupt

Practices Act (FCPA),
enacted in 1977, prohibits
U.S. companies from
making illegal payments
or other gifts or political
contributions to foreign
government officials for
the purposes of
influencing them in
business transactions.

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Three Tests of Ethical Corporate Actions

Is it legal?
Does it work (in the long run)?
Can it be talked about?

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Ethical Behavior and Social Responsibility
Guidelines Developed by MNCs
Develop worldwide codes of ethics
Consider ethical issues in strategy development
Given major, unsolvable, ethical problems,
consider withdrawal from the problem market
Develop periodic “ethical impact” statements

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Making the Right Decision

How is a manager operating abroad to know what is the

“right” decision when faced with questionable or
unfamiliar circumstances of doing business? Here is a
suggested sequence:
– Consult the laws of both the home and the host countries
– Consult the International Codes of Conduct for MNEs (as shown in text
Exhibit 2-2)
– Consult the company’s code of ethics
– Consult your superiors
– Use your own moral code of ethics
– Follow your own conscience

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Managing Interdependence
Because multinational firms represent
global interdependency managers must
recognize that what they do has long-term
implications for the socioeconomic
interdependence of nations

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Foreign Subsidiaries in the US
Number of foreign subsidiaries in the US
has grown dramatically
FDI in the US is in many cases far more
than US investment outward
One different aspect of management in the
US is corporate social responsibility

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Host-Country Interdependence
International managers must go beyond
general issues of social responsibility and
deal with specific concerns of the MNC
subsidiary
Focus should be interdependence rather
than independence
Focus should be cooperation rather than
confrontation
Benefits and costs to host countries
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Criticisms of MNC Subsidiary Activities

MNCs raise their needed capital locally,

contributing to a rise in interest rates in host
countries.
The majority (sometimes even 100 percent) of the
stock of most subsidiaries is owned by the parent
company. Consequently, host-country people do
not have much control over the operations of
corporations within their borders.

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Criticisms of MNC Subsidiary Activities
(contd.)
MNCs usually reserve the key managerial and
technical positions for expatriates. As a result,
they do not contribute to the development of host-
country personnel.
MNCs do not adapt their technology to the
conditions that exist in host countries.
MNCs concentrate their R&D activities at home,
restricting the transfer of modern technology and
know-how to host countries.

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Criticisms of MNC Subsidiary Activities
(contd.)
MNCs give rise to the demand for luxury goods in host
countries at the expense of essential consumer goods.
MNCs start their foreign operations by purchasing existing
firms rather than developing new productive facilities in
host countries.
MNCs dominate major industrial sectors, thus contributing
to inflation by stimulating demand for scarce resources and
earning excessively high profits and fees.
MNCs are not accountable to their host nations but only
respond to home-country governments; they are not
concerned with host-country plans for development.

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Recommendations for MNCs Operating in
Developing Countries
(Suggested by De George)

Do no international harm. This includes respect for the

integrity of the ecosystem and consumer safety.
Produce more good than harm for the host country.
Contribute by their activity to the host country’s
development.
Respect the human rights of their employees.
To the extent that local culture does not violate ethical
norms, MNCs should respect the local culture and work
with and not against it.
Pay their fair share of taxes.
Cooperate with the local government in developing and
enforcing just background (infrastructure) institutions (i.e.
laws, governmental regulations, unions, consumer groups)
which serve as a means of social control.
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Comparative Management in Focus

NAFTA
– Brought together three largely different
economies
– Promised that it would create millions of jobs
– Promised that it would curb illegal immigration
– Promised that it would raise living standards

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Comparative Management in Focus
NAFTA – United NAFTA – Mexico
States – Promised to close
– Overall has enjoyed a wage gaps and lower
growth in exports illegal immigration
– Companies have – Gap in wages has
moved to Mexico for increased
cheaper labor – Companies are moving
– Increased to China for lower
unemployment in wages
many areas

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Comparative Management in Focus
NAFTA – Canada
– Has had mixed results
– Businesses are more export-oriented
– Created 500,000 new jobs last year
We went from a Canadian company with a 30 million
population market to a 300 million market. We do
not treat the boarder as a boarder.
- John Scarsella President and CEO Durham
Furniture

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Managing Environmental
Interdependence
“Now that mankind is in the process of completing
the colonization of the planet, learning to manage
it intelligently is an urgent imperative. [People]
must accept responsibility for the stewardship of
the earth. The word stewardship implies, of
course, management for the sake of someone
else…As we enter the global phase of human
evolution, it becomes obvious that each [person]
has two countries, his [or her] own and the planet
earth.” – Ward and Dubois

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Managing Environmental
Interdependence
Handling exporting of
hazardous waste
Exporting pesticides
Looking for alternative
raw materials
Developing new methods
of recycling
Expanding the use of
byproducts

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Looking Ahead
Chapter 3 Understanding the Role of
Culture
– Culture and Its Effects on Organizations
– Cultural Variables
– Cultural Value Dimensions
– Developing Cultural Profiles
– Culture and Management Styles

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MNC Stake Holders

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Socioeconomic Interdependence
The world is linked
through
– Securities markets
– Communication
Networks
– Subsidiaries

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Ethnocentric vs. Relativism
Ethnocentric Relativism
– Company applies the – Company adopts the
morality used in its local moral code in
home country – whatever country it is
regardless of the host operating – companies
country’s system of run into value conflicts
ethics with this approach

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A Moral Philosophy Model of Cross-
Cultural Societal Ethics

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2002 Corruption Perceptions Index

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MNC Benefits and Costs to Host
Countries

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