ISL452U-BUSINESS ETHICS
Chapter 8: Business Ethics in the Global Environment
Introduction
In order to understand business ethics, it is necessary to identify the effect of various factors at different levels. Ethical issues could be related to “individual decision- making, organizational design, the structures and the rules of the industry, or societal and legal aspects, or have a global dimension”.
It is important to understand the global environment and related factors which form critical considerations for business ethics, so this chapter is devoted to this. Global environment consists of many relations of politics and governmental relations, laws and regulations, technologies, cultural differences of employees and customers, interests of various stakeholders.
Globalızation And Connected Economy
Privatization and deregulation of trade policies, elimination of trade barriers among countries, along with rapid development of information and communications technologies, facilitated globalization especially after World War II. As a result of these developments, the borders among countries are minimized creating a new global economy. Today, consumers purchase and use different varieties of products which are “made in” other countries than their home countries. This has led the world to become a “global village”.
What is Globalization?
Globalization which is about interdependent and interconnected nations, has become a buzzword especially in the last four decades. It was first defined by Theodore Levitt in 1983, since then has become an ongoing worldwide phenomenon. Most definitions about globalization consist of internationalization, liberalization, universalization and westernization.
Friedman, who created the flat-world view suggests that globalization is not new and it has 3 stages. According to Friedman, Globalization 1.0 started with discovery of the New World by Columbus; covering the era from 1492 to about 1800, this period was characterized by nationalism and religion so the focus was on industrial production of companies. Starting from 1800, Globalization 2.0 continued until the beginning of the 21st century. This period is characterized by the development of multinational corporations. Globalization 3.0 began in 2000 and the period since then is characterized by advancements in technology and communications. Recently, it has been discussed that the fourth period of Globalization (4.0) began with the automation and smart services in every aspect of life. These ongoing developments will continue to make the world more flatter by removing the borders.
Opportunities and Risks Associated with Globalization
On the one hand, globalization provides opportunities for companies. The main benefits of globalization in general is about increasing international trade and provision of
alternative goods and services, foreign direct investments, flow of capital among nations, contribution to employment by providing job opportunities internationally, and advancement of technology. As well as nations, companies also benefit from globalization by outsourcing their operations and gaining cost advantages, accessing to different resources that are not owned in their home countries and besides having the opportunity to sell their products/services to a larger market. Apart from all of its opportunities, globalization on the other hand encounters important risks, both for countries and its citizens as labor, financial crises, environmental damages, job loss in some countries, are some of these risks. Although having important advantages, globalization brings critical disadvantages that can treat the sustainability of businesses.
Multinational Enterprises (MNEs)
Globalization implies a borderless world which results in dramatic changes for the way of doing business. With increasing international demand for goods and services, it is obvious that businesses became increasingly global and the ones that operate in a global scale act as agents of globalization. Such companies are named as multinational enterprises (MNEs); they are also called either as multinational companies (MNCs) or transnational corporations (TNCs). Although MNEs activities are more recent, the origins of such corporations go back more than four centuries. The first MNE is often considered as ‘British East India Trading Company’ which was founded in 1600. The motivation of the first MNEs in the 17th century was trading activities and territorial acquisitions in Asia, Africa and Americas. Later in the late 19th century following the industrial revolution, modern MNEs started to emerge, and their activities grew especially after the Second World War.
Since, MNEs are considered as critical agents for globalization, it is important to take into consideration these enterprises while defining globalization. There are many definitions for MNEs and most of the definitions indicate that these organizations are corporate organizations that operate on a global scale without significant ties to any one nation or region. Based on the existing definitions Caves (1982) defined MNEs as “an enterprise that controls and manages production establishments located in at least two countries”. But most MNEs operate not in two but in many geographically dispersed markets and they engage in different business activities through their subsidiaries (DeGeorge, 2009). These subsidiaries in these markets face different conditions that in return make their behavior unique (Ghoshal and Bartlett, 1990). MNEs mostly have their management headquarters in one country called the home country, although rarely they can have headquarters in more than one country; their operations are in other countries called the host countries. MNEs are characterized by a global strategy of investment, production and distribution.
With their economic power, MNEs can also gain political influence through donations for political campaigns and by lobbying activities. Besides, since MNEs are not tied to any country, they can easily transfer their production facilities and therefore also their profits to other places. The freedom of this mobility makes countries compete with each other to attract these corporations. With such economic power accompanied by political and social power, MNEs can strongly impact particularly developing countries and local communities. Because of that, these corporations have been subject to ethical concerns for a long time.
Ethical Criticisms for Multinational Enterprises
Many MNEs have been accused for their unethical activities and have been under community and media scrutiny. Examples of recent unethical behaviors which turned into corporate scandals include, oil spill of BP oil rig in Gulf of Mexico (2010), Facebook harvest of data from millions of users (2013), Volkswagen cheat of emission tests (2015).
First of all, MNEs are criticized for the gap between higher income and lower income countries. Misuse of natural and human resources by MNEs are among the most argued critics. It is criticized that MNEs sell the products made from natural resources such as oil, minerals and timber with a much higher price, and the country where such resources are exploited, benefit much less from the sales price mainly due to tax exemptions or other incentives provided to these corporations. Besides, MNEs can create barriers of entry and economies of scale. As a result some local businesses may be put out of business. Although they may face antitrust violation activities from local governments, they already create income inequality.
As indicated, MNEs are subject to much criticism. Weiss summarizes the criticisms for MNE practices in host countries as follows;
• MNEs can dominate and protect their core technology and research and development (R&D), thus keeping the host country a consumer, not a partner or producer. • MNEs can destabilize national sovereignty by limiting a country’s access to critical capital and resources, thereby creating a host-country dependency on MNE’s governments and politics. • MNEs can create a “brain drain” by attracting scientists, expertise, and talent from the host country. • MNEs can create an imbalance of capital outflows over inflows. They produce but emphasize exports over imports in the host country, thereby leaving local economies dependent on foreign control. • MNEs can disturb local government economic planning and business practices by exerting control over the development and capitalization
of a country’s infrastructure. Also, by providing higher wages and better working conditions, MNEs influence and change a country’s traditions, values, and customs. “Cultural imperialism” is imported through business practices. • MNEs can destroy, pollute, and endanger host- country and environments and the health of local populations in less developed countries
Global Culture And Ethical Decisions
Although removal of national borders as a result of globalization and emergence of MNEs contributed to the world becoming flat as Friedman (2005) argued; there is no global strategy for companies that have international operations, and engaging in global business is not still easy for many other companies. Corporations that have operations in different markets face diverse ethical issues. Ethics covers a system of moral values and standards which are influenced by socio-cultural factors also including religious factors resulting from the culture in which individuals are born and grown. So that culture is an inevitable factor influencing ethical values and decisions. As a result, it is almost impossible to expect a universal ethic based on universal values.
Culture, Values and Practices
It is obvious that global issues are related to cultural differences, and these differences create cultural distance. When conducting global business, individuals encounter values, beliefs and ideas that may differ from their own because of those cultural differences. This necessitates companies to be sensitive to other national cultures’ values, norms and standards. It is important to understand that there is no real right or wrong; since people’s values and reasoning are based on their culture. And since values, traditions and ethical standards differ among individuals, companies and even societies; beliefs about ethical issues regarding global business activities, which of the business activities are acceptable or unethical differ among countries which have distinctive cultures.
Cross-Cultural Differences
Global business environment is characterized by the presence of different ethical standards, cultural traditions and business practices. One of the most critical questions that corporations face in cross-cultural environments is about: ‘depending on which values or ethical standards to take decisions for their businesses’. The question arises from either to adapt to the cultural norms and values of the home country or to impose the values and norms of their own culture.
Relativism is simply the belief that ethical values and beliefs of one culture are not better than others.
Absolutism is the opposite view of relativism, which indicates that depending on universal ethical standards, the
companies should conduct the behavior of their home countries while they operate in host countries.
Donaldson indicated that MNEs should consider both relativism and absolutism while making decisions, because of the existence of differences between home and host countries’ cultural values and conditions. The author suggested that the real world of business decision-making is neither one of the extreme beliefs but the businesses should act somewhere in between which suggests the idea of pluralism.
Ethical Decision-Making in Cross-Cultural Context
Ethical decision making involves using ethical principles to make decisions; and it depends on both individual factors as well as situational factors. Ethical decisions in the host and home countries could be totally different for global businesses; but the managers while taking decisions should consider not only the benefit of their companies, but also their decisions should favor employees and local society. In line with its importance especially in international contexts, many corporations and institutions developed ethical decision-making frameworks. One of these frameworks developed by Markkula Center for Applied Ethics of Santa Clara University, is a widely acknowledged and used framework for ethical decision- making.
Global Ethical Issues
Although at first instance, it may seem easy to identify unethical issues, there are many ethical challenges associated with global business and most of them create ethical dilemmas or conflicts. Ast (2018) classifies these global ethical issues into five topics as labour standards, environmental standards, human rights, cultural diversity and corruption.
Labour Standards
Since emerging countries have a cost advantage mostly due to lower labour costs, MNEs relocated especially their production facilities and contracted with local suppliers of such countries with lower social and environmental standards. On the one hand, such facilities contributed to employment and living conditions in emerging countries. However, with the lack of common laws, regulations or standards that the companies should obey, it also brought important ethical issues. One of the most significant of such issues is hiring of child labour.
Human Rights
The UN defines human rights as “rights inherent to all human beings, regardless of race, gender, nationality, ethnicity, language, religion, or any other status”. Human rights include the right to life and liberty, freedom from slavery and torture, freedom of opinion and expression, the right to work and education, and many more. Everyone is entitled to these rights, without discrimination. Fundamental human rights to be universally protected for the first time were set by The Universal Declaration of
Human Rights (UDHR). This Declaration which is regarded as a milestone document in the history of human rights, was proclaimed by the United Nations General Assembly in Paris on 10 December 1948, as a common standard of achievements for all peoples and all nations.
Cultural Diversity
Since more businesses have international operations, they face different cultures and in order for them to be successful in the international arena, the corporations should manage the diversity associated with culture. Cultural diversity indicates a group of people with different ages, genders, nationalities, socio-economic statuses and religions or ethnicities, working together. According to Unesco, cultural diversity is a mainspring for sustainable development for individuals, communities and countries. And it is essential for the operations of MNEs where cross-cultural teams are common because of their widespread operations. The corporations can benefit from diversity, in the way to better understand diverse markets, enhance employee engagement by showing the company understands and respects different cultures, give company freedom to go after the most talented people regardless of differences, and build trust in the brand with a diverse target market.
Corruption
Corruption is briefly the abuse of entrusted power for private gain. The World Bank (http-20), defines corruption similarly as “abuse of public office for private gain”. Transparency International indicates that corruption, which can happen anywhere and can involve anyone, erodes trust, weakens democracy, hampers economic development and further exacerbates inequality, poverty, social division and the environmental crisis. According to European Commission (EC), “corruption constitutes a threat to security, as an enabler for crime and terrorism” and it acts as a drag on economic growth, by creating business uncertainty, slowing processes, and imposing additional costs.
Global Cooperation To Support Responsible Business
For global businesses to be successful in global markets, it is expected that they have ethical conduct. It is obvious that all ethical values are bounded by national culture. However, the international organizations, by developing universal ethical standards and values influence norms and values of the companies which operate globally.
United Nations Global Compact
One of the initial universal standards was declared at the beginning of the 21st century in July 2000, named United Nations (UN) Global Compact; which is a voluntary strategic initiative based on CEO commitments to implement universal sustainability principles and to take steps to support UN goals.
OECD Guidelines for Multinational Enterprises
Organization for Economic Cooperation and Development (OECD) has been promoting co-operation in international business through a balanced framework of nonbinding principles and standards addressed to governments and enterprises.
ILO Declaration on Fundamental Principles and Rights at Work
In order to take up the challenges of globalization which has been the focus of considerable debate within the International Labour Organization (ILO) since 1994, ILO Declaration of Fundamental Principles and Rights at Work was adopted in June 1998.
Corporate Social Entrepreneurship
Globalization, economic crises, failure of social welfare systems, uneven distribution of resources among countries resulted in a growing interest for social entrepreneurship since the 1980s and especially after the global financial crisis of 2007-2008.
Definition of Social Entrepreneurship
A social entrepreneur is defined as “a person who pursues novel applications that have the potential to solve community-based problems”; these individuals are willing to take on the risk and effort to create positive changes in society through their initiatives.
MNEs as Social Entrepreneurs
Although the meaning of social enterprise differs among countries, it is clear that social entrepreneurship has a critical role in socio-economic growth of countries. Tasavori and Sinkovics introduced the concept of ‘corporate social entrepreneurship’ to describe MNEs socially entrepreneurial behavior. According to the authors, corporate social entrepreneurship refers to “embracing an economic and social mission (solving a social problem and offering solutions for the unmet needs of the disadvantaged groups) as the primary mission; employing corporate entrepreneurial activities to achieve the mission and creating social value”.