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Ethics in International Business

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2 Ethics in International Business
4 chapter Ethics in International Business McGraw-Hill/Irwin Global Business Today, 5e © 2008 The McGraw-Hill Companies, Inc., All Rights Reserved.

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INTRODUCTION Ethics refers to accepted principles of right or wrong that govern the conduct of a person, the members of a profession, or the actions of an organization. Business ethics are the accepted principles of right or wrong governing the conduct of business people. Ethical strategy is a strategy, or course of action, that does not violate these accepted principles. Internet Extra: Consumers International { an organization dedicated to protecting the rights of consumers worldwide. In doing so, it promotes ethical behavior on the part of companies. Go to the site and click on one of the organization’s current efforts. What are the issues that are being raised? How do they affect companies? Do you agree with the organization’s position? Why or why not?

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ETHICAL ISSUES IN INTERNATIONAL BUSINESS The most common ethical issues in business involve employment practices, human rights, environmental regulations, corruption, and the moral obligation of multinational companies.

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Employment Practices When work conditions in a host nation are clearly inferior to those in a multinational’s home nation, companies must decide which standards should be applied, those of the home nation, those of the host nation, or something in between

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Human Rights Basic human rights taken for granted in the developed world such as freedom of association, freedom of speech, freedom of assembly, freedom of movement, and so on, are by no means universally accepted

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Environmental Pollution When environmental regulations in host nations are far inferior to those in the home nation, ethical issues arise The tragedy of the commons occurs when a resource held in common by all, but owned by no one, is overused by individuals resulting in its degradation Management Focus: Unocal in Myanmar Summary This feature explores Unocal’s actions in Myanmar. Unocal, an American, oil and gas enterprise, formed a joint venture with a French company to build a pipeline from Myanmar to Thailand. Unocal made that investment as a number of other American companies were exiting the country in protest of the local government’s policy of brutally suppressing internal dissent. Suggested Discussion Questions 1. Why did Unocal’s investment become so controversial? Did Unocal behave in an ethical manner? 2. A 1996 law suit against Unocal was dismissed on the grounds that the Unocal could not be held liable for the actions of a foreign government against its own people, although the judge noted that the company was aware of what was going on in the country. Discuss the difference between acting in an ethical manner and acting according to the law.

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Classroom Performance System Multinational companies are concerned with ethics is all of the following areas except Employment practices Human rights Environmental regulations Trade regulations Classroom Performance System Answer: d

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Corruption In the United States, the Foreign Corrupt Practices Act outlawed the practice of paying bribes to foreign government officials in order to gain business The Organization for Economic Cooperation and Development (OECD) adopted a Convention on Combating Bribery of Foreign Public Officials in International Business Transactions in 1997 which obliges member states to make the bribery of foreign public officials a criminal offense

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Some economists suggest that the practice of giving bribes might be the price that must be paid to do a greater good These economists believe that in a country where preexisting political structures distort or limit the workings of the market mechanism, corruption in the form of black-marketeering, smuggling, and side payments to government bureaucrats to “speed up” approval for business investments may actually enhance welfare Other economists have argued that corruption reduces the returns on business investment and leads to low economic growth

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Moral Obligations The concept of social responsibility refers to the idea that business people should take the social consequences of economic actions into account when making business decisions, and that there should be a presumption in favor of decisions that have both good economic and good social consequences In its purest form, social responsibility can be supported for its own sake simply because it is the right way for a business to behave Advocates of this approach argue that businesses need to recognize their noblesse oblige (honorable and benevolent behavior that is the responsibility of successful companies) and give something back to the societies that have made their success possible Management Focus: News Corp in China Summary This feature explores the entry of News Corp’s, one of the largest media conglomerates in the world, entry into the Chinese market. According to critics, Robert Murdoch, head of News Corp, gained preferential access to the Chinese media market by systematically suppressing media content that was critical of China and publishing material designed to ingratiate the company with China’s leaders. Suggested Discussion Questions 1. Consider the allegations against Robert Murdoch. Did he behave in an ethical manner if he suppressed media content that was critical of China? 2. Newspapers and news programs are frequently criticized for giving biased reports of events. What standards should these organizations hold to? Did News Corp hold to these standards?

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ETHICAL DILEMMAS Ethical dilemmas are situations in which none of the available alternatives seems ethically acceptable.

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THE ROOTS OF UNETHICAL BEHAVIOR Personal Ethics Business ethics reflect personal ethics (the generally accepted principles of right and wrong governing the conduct of individuals) Expatriates may face pressure to violate their personal ethics because they are away from their ordinary social context and supporting culture, and they are psychologically and geographically distant from the parent company

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Decision Making Processes Studies show that business people may behave unethically because they fail to ask the relevant question—is this decision or action ethical?

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Organization Culture In firms with an organization culture (the values and norms that are shared among employees of an organization) that does not emphasize business culture, unethical behavior may exist

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Unrealistic Performance Expectations Pressure from the parent company to meet performance goals that are unrealistic, and can only be attained by cutting corners or acting in an unethical manner can cause unethical behavior Leadership If leaders are not acting ethically, other employees may not act ethically Management Focus: Pfizer’s Drug Testing Strategy in Nigeria Summary This feature raises questions as to whether pharmaceutical giant, Pfizer, acted ethically when testing a new drug. In 1996, Pfizer, was seeking FDA approval for a new antibiotic. The company lacked the necessary test results to have the drug approved for children. The company saw an opportunity to quickly test the drug when an outbreak of bacterial meningitis hit a town in Nigeria. In 2003, two dozen Nigerian families sued Pfizer arguing that their children either died or were injured as a result of the drug testing. They allege that Pfizer did not take the appropriate steps to properly test the drug, and that the company acted in an unethical manner. Suggested Discussion Questions 1. Was Pfizer irresponsible when it tested its experimental drug in Nigeria? How could the company have acted more ethically? 2. Pfizer saw the bacterial meningitis outbreak in Nigeria as a means of quickly getting a large pool of sick children to test its new antibiotic on. Consider the dilemma facing pharmaceutical companies. In order to get FDA approval to introduce their new drugs, numerous studies must demonstrate the efficacy of the drugs, studies that, as the Pfizer example demonstrates, can be difficult to complete. Would you have been tempted to follow Pfizer’s strategy? If you waited, and completed the testing in the United States, what might be the effect on your company’s bottom line? Would you be acting in the best interests of your stakeholder by waiting, or by testing in Nigeria?

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The causes of unethical behavior are shown in Figure 4.1.

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Classroom Performance System Which of the following does not contribute to unethical behavior by managers? Unrealistic performance goals Leadership Organizational culture Restrictions on bribes Classroom Performance System Answer: d

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PHILOSOPHICAL APPROACHES TO ETHICS Straw Men Straw men approaches to business ethics are approaches that are raised by business ethics scholars primarily for the purpose of demonstrating that they offer inappropriate guidelines for ethical decision making in a multinational enterprise. Four such approaches are the Friedman doctrine, cultural relativism, the righteous moralist, and the naïve immoralist.

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The Friedman Doctrine Economist’s Milton Friedman’s position is that the only social responsibility of business is to increase profits, so long as the company stays within the rules of law Cultural Relativism Cultural relativism is the belief that ethics are culturally determined and that firms should adopt the ethics of the cultures in which they operate, or in other words, “when in Rome, do as the Romans do”

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The Righteous Moralist The righteous moralist approach claims that a multinational’s home country standards of ethics are the appropriate ones for companies to follow in foreign countries The Naïve Immoralist The naïve immoralist asserts that if a manager of a multinational sees that firms from other nations are not following ethical norms in a host nation, that manager should not either

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Utilitarian and Kantian Ethics Utilitarian approaches to ethics hold that the moral worth of actions or practices is determined by their consequences An action is judged to be desirable if it leads to the best possible balance of good consequences over bad consequences

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Problems with the approach is measuring the benefits, costs, and risks of a course of action, and the fact that philosophy fails to consider justice Kantian ethics are based on the philosophy of Immanuel Kant who argued that people should be treated as ends and never purely as means to the ends of others

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Rights Theories Rights theories recognize that human beings have fundamental rights and privileges that transcend national boundaries and culture Moral theorists argue that fundamental human rights form the basis for the moral compass that managers should navigate by when making decisions that have an ethical component The idea that some fundamental rights transcend national borders and cultures was the underlying motivation for the UN’s Universal Declaration of Human Rights (specifies the basic principles that should always be adhered to irrespective of the culture in which one is doing business)

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Justice Theories Justice theories focus on the attainment of a just distribution of economic goods and services A just distribution is one that is considered fair and equitable

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One theory of justice was set forth by John Rawls who argued that all economic goods and services should be distributed equally except when an unequal distribution would work to everyone’s advantage Impartiality is guaranteed by the veil of ignorance (everyone is imagined to be ignorant of all his or her particular characteristics) where people would agree that each person is permitted the maximum amount of basic liberty compatible with a similar liberty for others, and that once equal basic liberty is assured, inequality in basic goods social goods are to be allowed only if they benefit everyone Rawls formulates the difference principle, which is that inequalities are justified if they benefit the position of the least advantaged person

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Classroom Performance System Which philosophy claims that a company’s home-country standards of ethics are the appropriate ones to follow in foreign countries? Cultural relativism Righteous moralist Friedman doctrine Naïve immoralist Classroom Performance System Answer: b

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IMPLICATIONS FOR MANAGERS Firms that ensure ethical issues are considered in business decisions: favor hiring and promoting people with a well grounded sense of personal ethics build an organizational culture that places a high value on ethical behavior makes sure that leaders within the business not only articulate the rhetoric of ethical behavior, but also act in manner that is consistent with that rhetoric put decision making processes in place that require people to consider the ethical dimension of business decisions develop moral courage

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Hiring and Promotion Businesses should strive to identify and hire people with a strong sense of personal ethics Prospective employees should find out as much as they can about the ethical climate in an organization

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Organization Culture and Leadership Businesses need to build an organization culture that places a high value on ethical behavior: the business must explicitly articulate values that place a strong emphasis on ethical behavior, perhaps using a code of ethics (a formal statement of the ethical priorities a business adheres to) leaders in the business should give life and meaning to the code of ethics by repeatedly emphasizing their importance, and then acting on them the business should put in place a system of incentives and rewards that recognize people who engage in ethical behavior and sanction those who do not

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Decision Making Processes A moral compass can help determine whether a decision is ethical. If a manager can answer “yes” to the following questions, the decision is ethically acceptable. does my decision fall within the accepted values of standards that typically apply in the organizational environment? am I willing to see the decision communicated to all stakeholders affected by it? would the people with whom I have significant personal relationships approve of the decision?

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A five step process can also help managers think through ethical problems: business people should identify which stakeholders (the individuals or groups who have an interest, stake, or claim in the actions and overall performance of a company) a decision would affect and in what ways Internal stakeholders are people who work for or who own the business such as employees, the board of directors, and stockholders. External stakeholders are the individuals or groups who have some claim on a firm such as customers, suppliers, and unions.

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Then, managers need to determine whether a proposed decision would violate the fundamental rights of any stakeholders Next, managers need to establish moral intent (the business must resolve to place moral concerns ahead of other concerns in cases where either the fundamental rights of stakeholders or key moral principles have been violated) The company should then engage in ethical behavior Finally, the business must audit its decisions, reviewing them to make sure that they were consistent with ethical principles

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Ethics Officers To ensure ethical behavior in a business, a number of firms now have ethics officers Moral Courage It is important to recognize that employees in an international business may need significant moral courage

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Classroom Performance System A company’s formal statement of ethical priorities is called its Mission statement Code of ethics Code of values Organizational culture Classroom Performance System Answer: b

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Summary of Managerial Actions In the end, there are clearly things that an international business should do, and there are things that an international business should not do, but there are also actions that present managers with true dilemmas

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CRITICAL THINKING AND DISCUSSION QUESTIONS 1. Review the Management Focus on testing drugs in the developing world and discuss the following questions: (a) Did Pfizer behave unethically by rushing to take advantage of an epidemic in Nigeria in order to test an experimental drug on sick children? Should the company have proceeded more carefully? (b) Is it ethical to test an experimental drug on children in emergency settings in the developing world where the overall standard of health care is much lower than in the developed world, and where proper protocols might not be followed? Answer: Some students might argue that Pfizer was between a rock and a hard place. The company needed to test its drug on children prior to getting FDA approval, yet the company could not find enough sick children to properly test the drug. Most students will probably agree that the company acted irresponsibly with its testing in Nigeria, and that the company should have proceeded more carefully, but some students may also suggest that had the drug proved to be extremely successful in treating bacterial meningitis, Pfizer might have been seen as a hero, despite its questionable ethics.

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CRITICAL THINKING AND DISCUSSION QUESTIONS 2. A visiting American executive finds that a foreign subsidiary in a poor nation has hired a 12-year old girl to work on a factory floor, in violation of the company’s prohibition on child labor. He tells the local manager to replace the child and tell her to go back to school. The local manager tells the American executive that the child is an orphan with no other means of support, and she will probably become a street child if she is denied work. What should the American executive do? Answer: This question, illustrating a potentially very real ethical dilemma facing managers working in foreign subsidiaries, is designed to stimulate class discussion. Students should recognize that neither alternative—violating the company’s position on child labor, nor putting the child out on the streets—seems acceptable. In the end, many students may agree that allowing the child to continue to work in the factory is the lesser of the two evils.

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CRITICAL THINKING AND DISCUSSION QUESTIONS 3. Drawing upon John Rawls’ concept, the veil of ignorance, develop an ethical code that will (a) guide the decisions of a large oil multinational towards environmental protection, and (b) influence the policies of a clothing company to outsource its manufacturing process? Answer: According to John Rawls, a decision is just and ethical if people would allow for it when designing a social system under a veil of ignorance. Rawls’ veil of ignorance is a conceptual tool that can contribute towards the moral compass that managers can use to help them navigate through difficult ethical dilemmas. This question can produce some interesting responses particularly in a class with a diverse group of nationalities.

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CRITICAL THINKING AND DISCUSSION QUESTIONS 4. Under what conditions is it ethically defensible to outsource production to producers in the developing world who have much lower labor costs when such actions also involve laying off long term employees in the firm’s home country? Answer: This question is likely to stimulate some lively discussion, particularly if students have personally felt the impact of this practice. Many American companies are outsourcing not only blue collar work, but white collar positions to the developing world. Students are facing a tenuous job market where positions that they may have sought when they began their college degrees are being “shipped abroad.” Some students will argue that companies have to do what is best for all stakeholders, and if that means taking advantage of cheaper labor costs elsewhere, then that is the appropriate strategy. Others however, will probably argue that companies owe a social debt to their home countries, and that loyalty from long term employees should be rewarded.

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CRITICAL THINKING AND DISCUSSION QUESTIONS 5. Are facilitating payments ethical? Answer: Students will probably be divided on this question, and a lively debate should ensue. Certainly, the notion of when in Rome, do as the Romans do. However, those taking this perspective should recognize that it may be difficult to draw the line on exactly what is acceptable under this guise, and when bribery goes too far.

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