CH-3-4 The Institutional Context of Multinational Management – Multinational Management: A Strategic Approach : Chapter Notes

This Document Contains Chapters 3 to 4 CHAPTER 3 THE INSTITUTIONAL CONTEXT OF MULTINATIONAL MANAGEMENT Learning Objectives •Understand the national context and how it affects the business environment •Understand the influence of the institutional context of countries on individuals and organizations •Define social institutions and understand their basic forms •Explain how social institutions influence both people and organizations •Describe the basic economic systems and their influence on multinational operations •Understand the basic stages of industrialization and their implications for multinationals •Discuss the world’s basic religions and how they shape the local business environment •Develop an understanding of education and its effects on multinational operations •Define social inequality and its implications for multinationals •Understand the importance of the national context and its connection with other international management areas Introduction •There are other elements besides national culture that can produce important business-related differences among societies •Understanding the institutional context of countries is thus extremely critical to better multinational management •At a basic level, a complete understanding of any society cannot be fully achieved unless both the national culture and the institutional context are examined •National context – national culture and social institutions that influence how managers make decisions regarding the strategies of their organizations. Exhibit 3.1 The National Context and Multinational Companies (Shows a model of how the national context is extremely critical to multinational management) Social Institutions and Their Influence on Society •Social institution – a complex of positions, rules, norms, and values organizing relatively stable patterns of human resources with respect to sustaining visible societal structures within a given environment •It has profound effects on people’s life conditions and provides the context for psychological differences among people •It provides boundaries and norms that prescribe how people will behave •Three key social institutions most likely to influence the business environment •Economic systems (e.g., capitalism or socialism) •Level of industrialization •Types of religion Economic Systems •Economic system – system of beliefs (concerning work, property, and wealth), activities (extraction, production, and distribution), organizations (business firms, labor unions), and relationships (ownership, management) that provide the goods and services consumed by the members of a society •Economic systems are usually reflected in their governments’ influence, specifically in terms of whether productive activities are state owned or privately owned •Economic systems can be typified by the extremes of capitalism and socialism with mixtures of elements of both in the mixed economy •Capitalist or market economy – system where production is decentralized to private owners who carry out these activities to make profits. •Socialist or command economy – production resources are owned by the state and production decisions are centrally coordinated •Mixed economy – combines aspects of the capitalist and socialist economies •Economic systems have two major implications for strategic multinational management •Dominant market type •Market transitions Dominant Market Type •At a basic level, decisions to operate in a country can be based on the dominant economic type •Index of economic freedom – determines the extent of governmental intervention in a country •Ten indicators, ranging from trade freedom, taxation policies, and level of governmental intervention in the economy, to property rights and business freedom. Exhibit 3.2 Index of Economic Freedom (Shows selected top and bottom ten countries on the 2009 assessment of economic freedom) Market Transitions •Market transitions – changes that societies go through as they move from socialism toward a market-based economy •An important aspect of transition for many multinationals has been an increase in international strategic alliances •Also important to understand socialism and its effect on people and organizations in order to better understand the workers’ reactions to market mechanisms •Drastic measures have to be taken to turn around formerly inefficient companies into firms that can perform essential business functions o Managers’ thinking has to be changed so that they understand management functions o Financial systems and firms have to be left unregulated o Workers must be trained to trust each other o Mentality that personal relationships are key to success must be changed, as more open systems such as meritocracy are introduced Industrialization •Industrialization – cultural and economic changes that occur because of how production is organized and distributed in society •Pre-industrial society – characterized by agricultural dominance and shaping of the economic environment. •In pre-industrial societies, religious norms and tradition are emphasized while social mobility is discouraged •Occupational placement tends to be based on ascription (family background) and social status is largely determined through inheritance •Industrial society – characterized by the dominance of the secondary or manufacturing sectors •Reflects the prevalence of technological development that makes rapid economic growth possible •Requires wider ranges of skills in their workforce relative to pre-industrial societies •Occupational placement is based on universalistic criteria such as achievement. •Postindustrial society – characterized by emphasis on the service sectors •The dominance of employment by the service sector leads to a drastic expansion of the role of formal education as there is a need for highly skilled workers with specialized skills Exhibit 3.3 Distribution of Production Activities by Sector (Shows selected countries and the distribution of employment by primary, secondary, and tertiary sectors) •Pre-industrial societies tend to be the least economically developed •Other characteristics of pre-industrial societies •Tend to provide fewer opportunities •Relatively cheap labor compared to more industrialized societies •Poorer infrastructure and business support, and thus may be more costly to operate in such societies. •Multinationals have generally shunned most of the American countries because of political instability, but the future for some African countries is bright •Industrial societies tend to be more economically developed than pre-industrial societies •Other characteristics of industrial societies •Focus on innovation and individualism as opposed to tradition and communal obligations heavily influenced by religious norms typical of pre-industrial societies •Economic achievement becomes the top priority •Access to an environment very favorable to businesses and a labor force that is often educated and motivated •Tendency of less non-market risks, such as government appropriation, to businesses Exhibit 3.4 Materialist Values for Selected Countries (Shows the materialist scores for selected countries) •Materialist scores indicate how much societies value such goals as economic growth and maintaining discipline, both indicators of the degree of industrialization •A postindustrial society is characterized by the domination of the service sectors in production activities •Other characteristics of a postindustrial society •Demise of the agricultural sector, and significant decline in the manufacturing sector •Significant rise of information-rich occupations such as managerial, professional and technical jobs •Jobs require higher skills and advanced educational achievement •The “emphasis on economic achievement as the top priority is now giving way to an increasing emphasis on the quality of life” •People are more likely to espouse individual expression values and a movement towards a more humane society Exhibit 3.5 Postmaterialist Values for Selected Countries (Shows selected countries and their scores on the postmaterialist scale) •More developed countries have high postmaterialist scores •People tend to value jobs over which they have the most control •Workers more likely to prefer noneconomic incentives over monetary rewards Religion •Religion – shared set of beliefs, activities, and institutions that have based on faith in supernatural forces •Religions continue to be an important aspect of most societies •Religions, work, and their interrelationships form the very foundations of human society •Protestant work ethic, formulated by German sociologist Max Weber, proposed that the domination of Protestant religions led to the emergence of modern capitalism in Western Europe •Religions provide its members with a way of dealing with issues that reflect individual wishes and activities •Four religions practiced by a large percentage of the world’s population: Christianity, Hinduism, Islam and Buddhism Exhibit 3.6 Religion by Percentage of World Population and Number of Followers (Shows the distribution of religions around the world, both in percentage of the world population and in number of followers) •Christianity – religion based on the life and teaching of Jesus, and is the most practiced religion around the world •Christianity started with the birth of Jesus Christ around 2,000 years ago and has evolved considerably into different forms because of many internal feuds and divisions •Christians believe that Jesus is the incarnation of God who was sent to clean sinfulness of humanity •The impact of Protestantism on the development of capitalism is seen as a major evidence of the link between religion and economic structuring of societies because Protestantism emphasized wealth and hard work for the glory of God, which allowed the focus on goals attached to economic development and wealth accumulation •In general, Christians agree “on the value and dignity of human life, labor and happiness”. There is a general support for the freedom to accumulate wealth and possessions •However, human greed and selfishness is nevertheless viewed with contempt and attempts are made to ensure that there is equality of opportunity and fairness for the less fortunate •Ten Commandments provides the basis for what is considered as ethical behaviors •Islam – religion based on the submission of the will to Allah (God), as described in the Qur’an •Islam can be traced back to Muhammad, a prophet born in 570 CE •Muslims do not ascribe divinity to Muhammad - rather, he is seen as the messenger of Allah’s (God) revelations •Muslim society is heavily influenced by Islamic standards and norms •Islam provides encompassing guidance in all spheres of life, both social and economic •The Shari’ah requires Muslims to live based on five pillars: Confession, Prayer, Alms Giving, Fasting, and Pilgrimage to Mecca •The above pillars have important implications to multinational strategic management such as accommodating daily prayer, Ramadan rituals, etc. •In general, the Qur’an is supportive of entrepreneurship and earning of profits through legitimate business activities •Muslims are likely to condemn the pursuit of profits through exploitation of others •Muslims (and organizations) are required to share the accumulated wealth by charitable giving to the poor •Islam prohibits the payment or receipt of interest •Many Muslim societies have been working in profit sharing plans to avoid the payment or receipt of interest •Multinationals are likely to be presented with significant opportunities in the Muslim countries in the years to come •Many Muslim societies are strictly divided by gender; thus, multinationals must be aware of implications of their business actions based on gender roles •Hinduism – acceptance of the ancient traditions of India that are based on Vedic scriptures •Hinduism has no specific founder and Hindus place no special significance on historical events or sequences of events •The quest for Brahman (ultimate reality and truth) is the ultimate goal for most Hindus •Hinduism generally believes in the reincarnation of the atma (soul) based on one’s karma, (the effects of one’s past actions) •Those who live life according to the principles of dharma (principles of righteousness and moral order), will be reincarnated in successively more favorable atmas until one reaches Brahman •Multinationals must be aware of the caste system – the ordering of Indian society based on four occupational groups o The highest caste includes priests, followed by kings and warriors o The fourth caste includes manual laborers and artisans •Hinduism provides clear guidelines regarding ethical behaviors, among which performing one’s duty and respect for one’s parents are prominent •Hinduism does not condemn the pursuit of material possessions and multinationals can generally expect an environment that is conducive to business and wealth accumulation •Buddhism - religious tradition that focuses primarily on the reality of worldly suffering and on the ways one can be freed from suffering •Gautama Buddha, born as a prince around the six century BC in India, founded Buddhism •Buddha proposed that to remove the suffering, one had to follow the Eightfold path of right understanding, right intention, right speech, right action, right livelihood, right effort, right mindfulness, and right concentration •Buddhism also believes that the way to end suffering is to meditate to train and soothe the mind to ultimately reach enlightenment or nirvana. •Buddha’s teachings suggest that Buddha saw poverty as the major reason for ethical behavior decline in society •Buddhism therefore prescribed a work ethic that encouraged workers to engage in their best efforts and qualities such as taking of initiative, persistence and hard work •Buddhist workers generally have a positive view of work, but need an environment that values teamwork and ethical means to achieve success at work •Given that Buddhism has a stronger emphasis on compassion and love, it has even been suggested that Western profit oriented companies should adopt Buddhist principles •Another Buddhist principle is the acknowledgement that the positive action of others makes life possible, so multinationals should recognize efforts of workers through ethical treatment •Work is a key component of life, but multinationals should respect a balanced work design for their workers Education •Education – organized networks of socializing experiences that prepare individuals to act in society •Education is seen as a critical path to economic development and progress •Education has obvious implications for multinational strategic management •Educational levels indicate the skill and productivity of workers •The more educated workers are, the more skills they possess and the more likely they are to contribute to a country’s production, both in terms of products and services •Additionally, having an abundant supply of well-educated individuals allows countries to facilitate the absorption of technology from developed countries •Multinationals can thus gauge the educational levels of various countries they are involved in to determine what to expect from their workers Exhibit 3.7 Tertiary Enrollment as Percentage of Relevant Age Group (Shows, for a selected number of countries, the percentages of individuals within the relevant age groups enrolled in tertiary education. The scores reported give a very rough estimate of educational potential.) •Multinationals may thus be also interested in the skills and experience that can be potentially gained from the educational system of the country Exhibit 3.8 Total Expenditures on R&D Percentage of GDP (Shows the percentage of GDP that goes to research and development in selected countries) •A final issue is the extent to which educational systems actually encourage students to be innovative and creative Social Inequality •Social inequality – degree to which people have privileged access to resources and positions within societies •In societies that have high social inequality, a few individuals have the ability to control and use important resources as sources of control •Multinational companies are facing significant criticisms and negative publicity for their operations in countries with high social inequalities •Many multinational companies are realizing that it is sometimes in their interest to be more socially responsible to mitigate social inequalities •Multinational companies can consider the GINI index as an indicator of the degree of social inequality Exhibit 3.9 GINI Index for Selected Countries (Shows the GINI indices for selected countries) •One social inequality study showed the following: •Social inequality negatively impacts the degree to which people are attached to work •Social inequality provides job opportunities only to some highly placed individuals •High levels of social inequality likely result in a less favorable work environment Summary and Conclusions •To get a full understanding of any society, it is essential to understand both national culture and the institutional context •We examined how both national culture and social institution combine to form the national context •We gained more specific background information on four important social institutions and their implications both for companies and the people they employ •The chapter covered the following items: •Definition of social institutions and how they affect individuals and organizations •Economic systems, especially their extreme types o Socialist systems – government owns systems of production o Capitalist systems – private individuals make production decisions •Two major implications of economic systems for multinational strategic management o Extent of governmental intervention o Transition from socialist to free-market economy •Pre-industrial, industrial and postindustrial societies and their implications for multinational strategic management •Four major religions and their business implications: Christianity, Islam, Hinduism and Buddhism •Educational systems and their implications regarding available skills and experiences of the workforce in society •Social inequality and its implications for multinational companies •Social institutional differences are important now and in the future •Successful multinational managers are the ones who can properly assess the institutional context of the society they operate in and design work environments that fit the institutional context Chapter 3 Case Notes Google in China Synopsis This case involves an ethical dilemma involving Google’s philosophy of “Do No Evil” when they decided to censor search results in China. The case begins by discussing the birth of Google in 1998, and the subsequent launch of the Chinese version, Google.cn, in 2005. Google ran a “pay per click” business model to earn advertising revenue, and then offered supplemental products such as Google Earth & Maps, Blogs, and Gmail. In order to gain agreement from the Chinese Government to do business in the Chinese market, Google agreed to a self-censor feature of Google.cn, by which certain search results that were not approved by the Chinese government would be purged. Google faced a significant public backlash for their decision, including human rights groups and freedom activists. Google defended their position, insisting it served the greater advantage to the greatest number of people, but still were forced to question whether their motto of “Do No Evil” was still appropriate. Case Discussion Questions 1. What immediate and longer-term issues does Google’s censorship decision create? Immediate and Long-Term Issues Created by Google’s Censorship Decision Immediate Issues: • Public Backlash: Google faced significant criticism from human rights organizations and activists for compromising its principle of "Do No Evil" by agreeing to censor search results. This backlash tarnished Google's reputation as a champion of free information. • Loss of Trust: The decision to censor search results may have caused Google to lose the trust of users who saw the company as betraying its founding values. • Compliance vs. Ethics: Google’s agreement to self-censor in China presented an immediate conflict between business growth (expanding into the lucrative Chinese market) and maintaining ethical consistency. Long-Term Issues: • Brand Reputation: The decision could have long-term effects on Google’s global brand image as a defender of free speech and access to information. It raised questions about whether Google was compromising its values for financial gain. • Setting a Precedent: By complying with Chinese censorship laws, Google may have set a dangerous precedent, signaling to other authoritarian governments that it was willing to compromise its principles to enter their markets. • Internal Conflict: Within Google, the decision could create ongoing tension between the company’s leadership and employees who joined Google believing in its ethical stance. 2. Prior to the launch of Google.cn, what factors should Google have considered in reaching their decision to comply with Chinese government censorship laws? Factors Google Should Have Considered Before Launching Google.cn • Ethical Implications: Google should have considered the ethical consequences of self-censorship and how this decision would conflict with its motto of "Do No Evil." This includes the impact on global human rights and freedom of information. • Cultural and Legal Environment: Google needed to evaluate China’s legal and regulatory environment, particularly its stance on controlling information flow. The authoritarian nature of the Chinese government should have prompted deeper reflection on the trade-offs between growth and corporate ethics. • Market Entry Alternatives: Google could have explored alternative business models that would allow it to operate in China without directly engaging in censorship. For example, Google could have offered less controversial products (such as Gmail or cloud services) while avoiding areas subject to strict censorship. • Stakeholder Reactions: Google should have anticipated the likely reactions from various stakeholders, including users, employees, and global human rights organizations. Balancing stakeholder expectations should have been a priority. • Corporate Social Responsibility (CSR): Google’s CSR strategy should have considered how entering the Chinese market would impact its reputation as a company that promotes transparency, democracy, and access to information. 3. Assess Dr. Schmidt’s statement “We actually did an evil scale and decided that not to serve at all was worse evil.” Was Google being evil? Assessing Dr. Schmidt’s Statement Dr. Eric Schmidt’s statement, “We actually did an evil scale and decided that not to serve at all was worse evil,” implies that Google was trying to balance two undesirable outcomes: • Lesser of Two Evils Approach: Dr. Schmidt suggests that by complying with Chinese censorship laws, Google was still providing some access to information, which he believed was better than withdrawing entirely from China, leaving the population without access to the benefits of Google’s services. From this perspective, Google aimed to maximize the greater good, even if it required a compromise. • Was Google Being Evil? While Dr. Schmidt framed the decision as pragmatic, critics could argue that Google's willingness to censor search results compromised its core values, which could be seen as "evil" in the context of its own motto. The act of self-censorship could be viewed as participating in the oppression of free speech, especially given China’s history of suppressing dissent. Evaluation: Whether Google was "evil" depends on the ethical framework used. From a utilitarian perspective, Google might argue that providing some information is better than none, but from a deontological perspective (where actions are judged by adherence to principles), Google compromised its ethical values, making the decision morally wrong. 4. Using Thomas Donaldson’s Ethical Algorithm, assess the censorship issue and determine whether Google could be said to have acted ethically based on this model. Is the Ethical Algorithm model adequate when making ethical decisions outside of the company’s home country? Using Thomas Donaldson’s Ethical Algorithm Donaldson’s Ethical Algorithm provides a model for making ethical decisions in global business, considering both universal principles and respect for local traditions. • Step 1: Is there a conflict of relative development? Yes, Google’s operations in China conflicted with Chinese laws that restrict free speech and information. In contrast, the U.S. supports free expression. • Step 2: Does the local law or practice violate universal principles? Yes, censorship in China violates the universal principle of freedom of speech and the right to access information. • Step 3: Is there a way to balance universal principles and local customs? Google attempted to balance this by providing partial information to Chinese users while adhering to local laws. However, this approach compromised universal values. Ethical Outcome: According to Donaldson’s Ethical Algorithm, Google’s decision may not be fully justified since it violates universal principles (free speech) and does not adequately reconcile those principles with local traditions. While Donaldson’s model helps assess global ethics, it may not always provide clear solutions in cases where local laws significantly contradict global ethical standards. 5. It has been said that “[in the U.S. Constitution] the First Amendment does not reflect universal values. There is very little to say in favor of a single global standard of speech.” Do you agree/disagree with this statement, and how would you relate it to this case? Assessing the Statement on the First Amendment and Global Standards of Speech Statement: “[In the U.S. Constitution] the First Amendment does not reflect universal values. There is very little to say in favor of a single global standard of speech.” • Agree: One could agree with this statement, arguing that freedom of speech, while valued in the U.S. and many Western nations, is not universally accepted or practiced. In countries like China, the government places a higher value on maintaining social stability and controlling dissent, which clashes with the Western notion of free speech. • Disagree: On the other hand, one could argue that the right to free speech should be a universal value, as it underpins democracy, personal freedom, and innovation. Limiting speech leads to the suppression of ideas and human potential. Relation to Google’s Case: Google’s decision to comply with Chinese censorship laws illustrates the tension between applying U.S. values (free speech) in a global context (China’s controlled environment). While free speech is not universally recognized, many believe that companies like Google should uphold universal values when doing business internationally, rather than conforming to local practices that infringe on human rights. 6. What should Google do? Google faces several options regarding its presence in China: • Withdraw from China: Google could choose to withdraw entirely from the Chinese market, as some critics have urged, to maintain its ethical integrity and avoid complicity in censorship. • Operate with Transparency: Google could continue operating in China but be more transparent with users about what content is being censored and why. This would allow users to understand the limitations they are facing and help preserve some of Google’s ethical standing. • Push for Policy Change: Google could engage with the Chinese government to advocate for greater internet freedom and access to uncensored information. While this would be challenging, Google’s influence as a major technology company could have some impact. Recommended Action: Google should aim for a middle path by maintaining its presence in China while clearly communicating the restrictions imposed on its services. It could also consider developing tools that help users access uncensored information when legally possible. Finally, Google should continue advocating for human rights and freedom of information on the global stage. Analysis Arguments for Google • An argument can be made that in order for Google to do business in China, they must comply with the government’s regulations – so, they are merely complying with the local law, which is a requirement for doing business in any country • Google was not the only search engine that filtered results – Microsoft and Yahoo! also did. • When Google censored the results, they included a disclaimer at the bottom of the web page, indicating that the results had been filtered. Their competitors did not do this. • Google.com still worked in China; therefore, any user who wanted to access uncensored information could still do so by searching Google.com rather than Google.cn. Furthermore, China doesn’t Arguments Against Google • This biggest backlash was with regard to human rights and individual freedoms – something jeopardized by a censored search result. • Google should be considered an agent or collaborator with the Chinese government – a repressive regime that denies fundamental human rights to its citizens (such as the freedom of expression in this case) • Even though competitors do it, and in cases such as Yahoo’s they have gone far beyond what Google has done, it still legitimizes censorship. Legitimizing censorship as a business practice is dangerous and unethical. The following web site contains a list of the sites that Google agreed to block, and a comparison of the search views between Google.com and Google.cn. http://blogoscoped.com/censored/ The following video clip can be used to answer the case discussion questions in greater detail: DIGITAL AGE - “Did Google Sell Out to China?” http://video.google.ca/videoplay?docid=5427513967121468291&q=google+china Lessons • This cases explores a difficult multinational ethical issue • The importance of crafting a strategic philosophy that is congruent with the legal, political, and social cultures in each of the countries in which you conduct business • This case highlights the extreme difficult in balancing ethical decisions with business growth aspirations • We also get a glimpse into the governmental influence in a formerly Communist country, and how that impacts business and commerce CHAPTER 4 MANAGING ETHICAL AND SOCIAL RESPONSIBILITY CHALLENGES IN MULTINATIONAL COMPANIES Learning Objectives •Know the definitions of international business ethics and social responsibility •Understand some basic principles of ethical philosophy relevant to business ethics •Understand how social institutions and national culture affect ethical decision making and management •Understand the implications of using ethical relativism and ethical universalism in ethics management •Identify the basic principles and consequences of the U.S. Foreign Corrupt Practices Act •Understand how international agreements affect international business ethics •Understand the differences among economic, legal, and ethical analyses of business problems •Develop skills in international decision making with ethical consequences Introduction •Managers at all levels face ethical issues every day •The power that multinational firms have, and the competition for foreign investment, both limit the ability (or willingness) of developing countries’ governments to regulate them Exhibit 4.1 Selected Companies from the Ethisphere Institute’s List of the World’s Most Ethical Companies (The Ethisphere describes itself as a “leading international think-tank dedicated to the creation, advancement and sharing of best practices in business ethics, corporate social responsibility, anti-corruption and sustainability.”) What Are International Business Ethics and Social Responsibility? •Ethics deal with the “oughts” of life – the rules and values that determine the goals and actions people “ought” to follow when dealing with other human beings •Most business decisions have also have consequences for people •Ethical questions seldom have clear or unambiguous answers that all people accept •International business ethics – unique ethical problems faced by managers conducting business operations across national boundaries •International business ethics differs from domestic business ethics on two accounts •International business is more complex because business is conducted cross-nationally •Large multinationals often have power and assets equal to those of some foreign governments •Corporate social responsibility – idea that businesses have a responsibility to society beyond making profits •In practice, ethics and social responsibility are not easily distinguished •The ethical and social responsibility issues faced by multinational companies are complex and varied •Primary stakeholders – people directly linked to a company’s survival, including customers, suppliers, employees, and shareholders •Secondary stakeholders – people less directly linked to the company’s survival, including the media, trade associations, and special-interest groups •As important as primary stakeholders in terms of their effect •MNC managers must weigh and balance the economic, legal, and ethical consequences of their decisions Ethical Philosophy •Two ways to approach ethical decision making •Traditional ethical philosophy •Contemporary philosophical view of how we can think about ethics Traditional Views •Two basic systems of ethical reasoning that dominate ethical philosophy •Teleological ethical theory – one that suggests that the morality of an act or practice comes from its consequences o Utilitarianism – argument that what is good and moral comes from acts that produce the greatest good for the greatest number of people •Deontological ethical theory – focuses on actions that, by themselves, have a good or bad morality regardless of their outcomes o Some argue that morality is intuitive and self-evident; others rely on an essential moral principle or value, such as the Golden Rule Exhibit 4.2 Areas of Ethical and Social Responsibility Concerns for the Multinational Company (Identifies some of the stakeholders in the multinational company and shows typical problems that MNCs face and that affect the stakeholders) Moral Languages •Moral languages – descriptions of the basic ways that people use to think about ethical decisions and to explain their ethical choices •Six basic ethical languages identified by Thomas Donaldson, an international business expert •Virtue and vice: Identifies a person’s good or virtuous properties and contrasts them with vices •Self-control: Emphasizes achieving perfection controlling thoughts and actions, such as passion •Maximizing human welfare: The basic language of the utilitarian view, emphasizing the greatest good for the greatest number of people •Avoiding harm: Also sees good or bad in the consequences of behavior or action, but focuses on avoiding unpleasant outcomes or consequences as opposed to maximizing benefits •Rights and duties: Focuses on principles that guide ethical behaviors (this language fits well into a legal context) •Social contract: Structures ethics as a form of agreement among people •Ethical philosophies provide a language or a structure for thinking about ethical decisions and dilemmas National Differences in Business Ethics and Social Responsibility •National culture and social institutions affect how businesses manage ethical behavior and social responsibility Exhibit 4.3 A Model of Institutional and Cultural Effects on Business Ethics Issues and Management (A simple model of the relationships among national culture, social institutions, and business ethics) •Despite differences in ethical views, some actions are universally condemned from an ethical standpoint (i.e. lying, harming/killing innocent children, etc.) Exhibit 4.4 Some Examples of Cultural Variations Regarding Acceptance of Ethically Suspect Behaviors (Shows there are significant differences in how actions with moral consequences are viewed) •Cullen, Parboteeah, and Hoegl suggest possible applications to multinational ethics, as follows: •National culture and social institutions are likely to encourage people to break norms and thereby justify ethically suspect behaviors •Societies with national cultural values of high achievement, high individualism, high universalism, and high pecuniary materialism are likely to have a greater number of people engaging in deviant acts of crime •Social institutions, the type of economic system, family, and education should be related to the breaking of norms •Seleim and Bontis examined how cultural dimensions of the GLOBE studies affect corruption •Countries that rate high on future orientation have relatively low levels of corruption •Societies high on institutional collectivism practices tend to have low levels of corruption •Societies high on in-group collectivism has relatively high levels of corruption Questionable Payments and Bribery •In many societies, people routinely offer, or are expected to pay, bribes or gifts to expedite government actions or to gain advantage in business deals. •Negative consequences of corruption and bribery •Many developing countries suffer due to increased prices from companies making up the cost of the bribe •Other companies use poorer quality products or materials, and put out inferior products •Collusion among firms drives prices higher •Corruption discourages entrepreneurship because bribery becomes a form of taxation •Corruption Perception Index (CPI) is a rating of the perceived levels of corruption in a country Exhibit 4.5 CPIs for Selected Countries (Shows the CPIs for selected countries where high CPIs indicate the least corruption) •Most countries have formal laws forbidding corrupt practices, but enforcement differs greatly •In 1977, in response to several investigations by U.S. government agencies, President Jimmy Carter signed the Foreign Corrupt Practices Act – commonly known as the FCPA Exhibit 4.6 Excerpts from the Foreign Corrupt Practices Act (Shows excerpts taken directly from the FCPA) •Foreign Corrupt Practices Act (FCPA) – forbids U.S. companies to make or offer illegal payments or gifts to officials of foreign governments for the sake of getting or retaining business •FCPA permits some forms of payments that may occur in international business •Payments made under duress to avoid injury or violence •Small payments that merely encourage officials to do their legitimate and routine jobs •Payments that are lawful in a country •A tricky component of the FCPA for U.S. companies focuses on the “reason to know” provision of the law •The reason to know provision means that a firm is liable for bribes or questionable payments made by agents hired by the firm – even if members of the firm did not actually make the payments or see them being made •If it is common knowledge that these agents use part of their fees to bribe local officials to commit illegal acts then the U.S. firm is breaking U.S. law •If, the U.S. firm has no knowledge of the behavior of the agent nor any reason to expect illegal behavior from the agent then the U.S. firm has no liability under the FCPA Exhibit 4.7 Number of Convictions under FCPA (Source: Based on Weissman, J. 2012. “The corruption law that scares the bejesus out of corporate America.” Atlantic, April 25, online edition, http://www.theatlantic.com/business/archive/2012/04/the-corruption-law-that-scares-the-bejesus-out-of-corporate-america/256314/.) Exhibit 4.8 FCPA Civil and Criminal Fines (Millions of US $) (Source: Based on Weissman, J. 2012. “The corruption law that scares the bejesus out of corporate America.” Atlantic, April 25, online edition, http://www.theatlantic.com/business/archive/2012/04/the-corruption-law-that-scares-the-bejesus-out-of-corporate-america/256314/.) Toward Transnational Ethics •Contact among people with different ethical and cultural systems is creating pressure for ethical convergence and development of transnational agreements to govern business practices Pressures for Ethical Convergence •Ethical convergence – the growing pressures for multinational companies to follow the same rules in managing ethical behavior and social responsibility •Four basic reasons for ethical convergence 1. The growth of international trade and trading blocs, such as NAFTA and the EC, create pressures to have common ethical practices that transcend national cultures and institutional differences 2. Interaction between trading partners creates pressures for imitating the business practices of other countries 3. Companies that do business though out the world have employees from varied cultural backgrounds who need common standards and rules regarding how to behave 4. An increasing number of business watchdogs such as ethical investment company and nongovernmental organizations also are encouraging multinational to become more ethical Prescriptive Ethics for the Multinational •Multinational companies should be guided by the three moral languages of avoiding harm, right/duties, and the social contract (Donaldson) •Prescriptive ethics for multinationals – suggested guidelines for the ethical behavior of multinational companies o Multinationals should engage in business practices that avoid negative consequences to their stakeholders o While multinationals retain basic rights (i.e. seeking a fair profit), these rights also imply duties (i.e. providing a fair wage to local employees) o The multinational also has a social contract between itself and its stakeholders •These three moral languages are the easiest of ethical systems to specify in written codes such as contracts and international laws •For these moral languages to work, there must be codes of conduct to guide the multinationals that are independent of national boundaries •These codes must include prescriptive and proscriptive rules to guide multinational behavior •Prescriptive rules tell multinational managers and companies what they should do •Proscriptive rules tell multinational managers and companies what they may not do •Some scholars argue that such ethical guides currently exist based on various international agreements and on the codes of international governing bodies, such as the United Nations and the International Labor Office Exhibit 4.9 A Code of Conduct for the Multinational Company (Sources: Adapted from Getz, Kathleen A. 1990. “International codes of conduct: An analysis of ethical reasoning.” Journal of Business Ethics, 9, 567–578; HR Focus. 2008. “Why global ethics count and how HR can help.” October, 85(10): 13–15; Frederick, William C. 1991. “The moral authority of transnational corporate codes.” Journal of Business Ethics, 10, 165–177.) •Exhibit 4.9 summarizes ethical stipulations for the multinational company derived from: •The United Nations Universal Declaration of Human Rights •The United Nations Code of Conduct on Transnational Corporations •The European Convention on Human Rights •The International Chamber of Commerce Guidelines for International Investment •The Organization for Economic Cooperation and Development Guidelines for Multinational Enterprises •The Helsinki Final Act •The International Labor Office Tripartite Declarations of Principles Concerning Multinational enterprises and Social Policy •Two basic supporting rationales for the code of conduct for the multinational shown in Exhibit 4.9: •Basic deontological principles dealing with human rights •The history of experiences in international business interactions The Ethical Dilemma in Multinational Management: How Will You Decide? •This section looks at what ethical system one should use and includes an ethical decision model for the multinational manager Ethical Relativism versus Ethical Universalism •Ethical relativism – theory that each society’s view of ethics must be considered legitimate and ethical •Ethical universalism – theory that basic moral principles that transcend cultural and national boundaries •The difficulty for using moral universalism as a guide for multinational business practices is that there is little agreement on which moral principles exist in all cultures •Even when the same principles are used, there is not guarantee that all societies use the principles in the same way •Practical problems for following either ethical relativism or moral universalism •Convenient relativism – what occurs when companies use the logic of ethical relativism to behave any way they please, using the excuse of differences in cultures •Extreme moral universalism also has its pitfalls •The assumption that one can identify universal ethics that all people should follow can lead to ethnocentrism and what Donaldson calls cultural imperialism Individual Ethical Decision Making for the Multinational Manager •Although companies develop policies, procedures, organizational cultures, and business practices that have ethical consequences, individual managers ultimately must make decisions •Economic analysis – of an ethical problem, focuses on what is the best decision for a company’s profits •After considering the business impact, multinational managers must consider the legal and ethical consequences of their actions Exhibit 4.10 Decision Points for Ethical Decision Making in Multinational Management (Shows a decision flowchart illustrating the issues that multinational managers must consider beyond profits when confronted with ethical decisions) •Legal analysis – of an ethical problem, focuses only on meeting legal requirements of host and parent countries •Should the law not forbid something, it is ethical •In a combination of pure economic and legal analyses, managers should seek to maximize profits within the confines of the letter of the law •The legal analysis includes not only a test of whether behaviors or their consequences meet legal standards in the home and host country but, also a comparison against international standards (reference Exhibit 4.7) •2002 Sarbanes-Oxley Act requires multinational companies to hold their executives and senior management accountable for ethical conduct, and addresses the auditor-client relationship •Ethical analysis – one that goes beyond focusing on profit goals and legal guidelines •Three components to ethical analysis: one’s organization, the national culture in which the business operates, and personal ethical beliefs •Considers written codes of ethics and the unwritten norms of the company culture •Multinational managers are guests in other nations •The manager must ask his or her self whether what they are doing is consistent and respectful of local cultural norms •A manager may begin these analyses at different points (i.e. personal moral beliefs, legal), but ultimately must make a personal moral judgment •Managers are ultimately responsible; most courts of law around the world will not accept the defense, “The organization made me do it.” •For the multinational manager, the purely ethical issue in a decision must be weighed against the economic and legal analyses •There is no single accepted ethical theory or system that managers can use for a guide, but managers should make use of generally accepted ethical theories (reference Exhibit 4.8) Summary and Conclusions •The multinational manager faces ethical challenges similar to the domestic manager, but magnified by the complexity of working in different counties and cultures •This chapter covered the following items: •The relationship between ethics and social responsibility •How ethical philosophies underlay much of our ethical reasoning •Differences among financial, legal, and ethical analysis •Foreign Corrupt Practices Act (FCPA) •A decision model for making ethical decisions in a multinational setting •The multinational manager must be able to assess how a country’s social institutions and culture will affect their ability to manage ethical behavior •Multinational mangers can never ignore their home country laws •Managing ethically in the international environment is a challenge that will continue to grow with increasing interactions among nations Chapter 4 Case Notes Ethics of Offshoring: Novo Nordisk and Clinical Trials in Emerging Economies Synopsis The case discusses the complex ethical issues associated with the pharmaceuticals industry, and focuses on a company called Novo Nordisk based in Denmark. Novo operates globally and adopts a Triple Bottom Line approach, whereby the bottom line is measured in financial, environmental, and social terms. They subscribe to a higher level of ethical behaviour than is required. The case narrows in on the topic of clinical trials and placebo experiments, and the regulatory requirements surrounding them, especially as it relates to conducting trials outside of the EU, in more developing countries. In this case, the director of the company is contacted by a journalist who is researching clinical trials in the Third World. The end of the case is left with the question of if and how to respond, which requires a deeper look into the ethical issues surrounding the pharmaceutical practices in general, and of Novo specifically as well. Case Discussion Questions 1. Considering both economic and ethical aspects, is it appropriate for companies like Novo Nordisk to conduct clinical trials in, for example, India? What exactly are the principles that should guide such a decision? Is It Appropriate for Companies Like Novo Nordisk to Conduct Clinical Trials in Emerging Economies? Economic Aspects: • Lower Costs: Conducting clinical trials in emerging economies like India offers significant cost advantages, such as lower labor and operational costs, and faster recruitment of participants due to large populations. • Access to Untapped Markets: Trials in emerging markets could also provide early access to new potential markets for pharmaceuticals, which could benefit both the company and patients in those regions. Ethical Aspects: • Exploitation Risk: There is a significant ethical concern about exploiting vulnerable populations in these regions. Participants in emerging economies may not be fully aware of the risks involved or may participate due to economic necessity, rather than genuine informed consent. • Fair Distribution of Benefits: It is important to ensure that the populations where trials are conducted benefit from the results. This includes ensuring affordable access to the developed treatments and making sure the trial participants receive proper healthcare. Guiding Principles: • Informed Consent: Participants must fully understand the nature, risks, and benefits of the trials they are part of. Information must be provided in a language and format that is accessible. • Fairness: The benefits of the trials should be shared with the population, ensuring access to treatment once the drug is developed. • Transparency: Companies must be transparent about their processes and ensure that their trials meet the highest ethical standards, regardless of location. • Compliance with Local and Global Standards: The clinical trials should meet both the ethical standards of the home country (Denmark) and the host country (India) to avoid exploitation and ensure fairness. 2. If trials are conducted in an emerging economy, how should they be managed and which standards should apply? Management of Trials: • Ethical Oversight: Clinical trials should be conducted under the supervision of ethics committees, both in the host country and internationally. These committees ensure that the trials are ethical, respect human rights, and minimize exploitation. • Local Partnerships: Collaborating with local institutions (universities, hospitals) helps ensure that the trial aligns with local health needs and that ethical guidelines are followed. • Cultural Sensitivity: Companies should account for cultural differences when seeking consent and interacting with trial participants. Culturally appropriate education on the trial should be provided. Standards to Apply: • Declaration of Helsinki: This international standard provides ethical principles for medical research involving human subjects. It emphasizes the importance of voluntary participation, informed consent, and providing benefits to the population where the trial is conducted. • International Conference on Harmonization Good Clinical Practice (ICH-GCP): This ensures that clinical trials are conducted ethically and scientifically, with respect for participants’ rights and well-being. • Local Legal Requirements: While international standards are critical, compliance with local laws and regulations is equally important. Some countries may have stricter laws regarding participant protection and data privacy. 3. What interest groups are joining the public debate and why? How should businesses handle them? What is the role, respectively, of Danish, European, American and host country authorities and ethics committees in this process? Interest Groups: • Human Rights Organizations: These groups are concerned with the potential exploitation of vulnerable populations in developing countries. They advocate for ethical practices in clinical trials to protect participants from harm. • Health Activists: Local and international health activists are interested in ensuring that the health needs of the population where trials are conducted are met. They push for fair treatment and access to new medications for trial participants. • Government Authorities: Authorities from both home and host countries play a role in regulating clinical trials to ensure they meet ethical and legal standards. Governments are also concerned with protecting public health and ensuring national interests are upheld. • Media and Journalists: Media can influence public opinion by investigating potential ethical violations in clinical trials, bringing attention to the companies involved and putting pressure on them to maintain transparency and ethical integrity. Handling Interest Groups: • Open Communication: Companies should be transparent with all stakeholders and provide clear, accessible information about their practices. This can help build trust and preemptively address concerns. • Engagement: Engaging with human rights and health advocacy groups during the trial planning process helps ensure that trials are aligned with ethical standards. • Government Collaboration: Companies should work closely with both host and home country regulators to ensure that trials are compliant with all relevant laws and standards. 4. How should Anders Dejgaard react when the journalist calls to discuss Novo Nordisk’s practices? What is the most effective way to communicate with the public? Response to the Journalist: • Transparency: Anders Dejgaard should be open and transparent in his communication with the journalist. He should provide clear and accurate information about Novo Nordisk’s practices, including how ethical standards are upheld in clinical trials in emerging economies. • Proactive Engagement: Rather than taking a defensive stance, Dejgaard should use this opportunity to explain Novo Nordisk’s commitment to ethical practices and the safeguards in place to protect trial participants. • Address Concerns Directly: Dejgaard should be prepared to address the ethical concerns that might be raised about conducting trials in the Third World. This includes discussing how the company ensures informed consent, benefits for participants, and compliance with both local and international ethical standards. Communicating with the Public: • Consistency: Ensure that the company’s messaging is consistent across all platforms, and align the response with Novo Nordisk’s Triple Bottom Line philosophy, emphasizing ethical behavior as a key company value. • Corporate Social Responsibility (CSR): Highlight the company's CSR initiatives and its efforts to ensure that the trials benefit the populations in which they are conducted. This could include providing access to treatment after the trial and contributing to local healthcare improvements. • Social Media & Press Releases: Use social media and official press releases to disseminate clear and factual information about the company’s practices. Address concerns head-on and provide examples of how the company maintains ethical integrity. Recommended Approach: Dejgaard should prepare a well-reasoned and transparent response, framing Novo Nordisk’s clinical trials as ethically sound, rigorously supervised, and beneficial to both the company and the local populations. Public communication should emphasize the company’s global commitment to ethical behavior and responsible clinical research. By doing so, Novo Nordisk can demonstrate that it not only adheres to high standards but also acts as a global leader in ethical pharmaceutical practices. Structure and Issues for Class Discussion I envisage the classroom discussion to consist of two major parts: the first part should identify the principles guiding ethical businesses and the stakeholders taking an interest in these principles and the second part should discuss the relationships with the media and with public opinion. The emotional nature of some of the issues, however, may make it challenging for instructors to stick to a precise debate structure. Flexibility is required. Analysis 1. Considering both economic and ethical aspects, is it appropriate for companies like Novo Nordisk to conduct clinical trials in, for example, India? What exactly are the principles that should guide such a decision? There are no simple answers to this question, and students will have differing views of what is appropriate. Key to understanding this case is to identify the two components at play, which are the business objectives – i.e. the responsibility to the shareholders and to profit; and the ethical issues involved in conducting clinical trials in lesser developed countries – i.e. scientific validity of results, medical risks to patients, lack of regulatory protection, etc. What matters most is that the employee forms an opinion for one side or the other, and be able to provide solid reasoning behind it. This is a good case/question for a debate discussion. Questions may help to clarify these principles: Scientific and Medical Ethics • How do we get the highest level of efficacy / validity in trial results? • What are the reasons for which individuals are volunteering participate in a trial? • Are there protections in place for the individuals who volunteers – are they allowed to say no? • What are the consequences if they do not volunteer? • Will they have access to these drugs after they finish the trial? Business Goals / Ethics • Is the drive for profit creating a situation that encourages the compromise of social ethics? • Will the goodwill Novo receives from conducting trials in Denmark make up for the increased cost? • How much control should stockholders have over the industry? • Would more regulatory control help or hurt the situation? Moreover, three complementary arguments suggest firms should apply the same standards across operations (and thus trial sites). In fact, business logic itself suggests against differentiating to take advantage of lower standards across sites: a) the validity of the scientific results demands it; b) global standards allow the standardization of operating procedures, which actually lowers costs compared to adaptation (whether that alone would compensate for high costs of high standards can’t be answered as a general case); and c) ethical standards have to live up to the same standards of the approving authorities. 2. If trials are conducted in an emerging economy, how should they be managed and which standards should apply? Consider the two cases mentioned – Tuskegee and Thalidomide. Which one is worse? The opinion on which standards should be applied will vary widely depending on an individual’s beliefs about the application of ethics as a whole. Some believe that a standard set of ethical principles applies globally, while others believe ethical principles are set according to local preference. This comes down to the principle question – what is right and wrong? 3. What interest groups are joining the public debate and why? How should businesses handle them? What is the role, respectively, of Danish, European, American and host country authorities and ethics committees in this process? Aside from the company and shareholders themselves, several groups are joining in the debate: • The public at large – will want to be assured that companies are operating ethically, whatever that definition might be. That definition may will vary according to the local area and individual, but in general, believe in a “right and wrong” in the interest of human rights and dignities • Ethical committees – their role is to protect stakeholders in particular interests. The Danish National Committee on Biomedical Research Ethics (http://www.cvk.sum.dk/English.aspx) aims to ensure the ethical standards are adhered to – protection of the rights, safety, and wellbeing of the patients • The patients themselves • The medical community (doctors, scientists, etc.) • Medical boards • Governments / politicians • Journalists are a particularly difficult group to fit into this scheme. Some may be primarily interested in objectively informing the public. Others (especially the tabloid press) may be primarily interested in writing stories around some scandalous event, even when they have little evidence and weak understanding of the broader issues. At the same time, journalists potentially have a pivotal mediating role between the firm and other stakeholders. 4. How should Anders Dejgaard react when the journalist calls to discuss Novo Nordisk’s practices? What is the most effective way to communicate with the public? In dealing with the journalist, it will be important to determine what his/her objective is. Some journalists are truly interested in objectively informing the public. Others may have another agenda – which may or may not be obvious – and Novo would be wise to anticipate what that is ahead of time. As for the options, the written reply is probably the safest one. It prevents any difficult in anticipating questions and having to “think on your feet,” and documents your reply in a written form. The down side is that this is seen as the easy way out. It may look like you are trying to avoid the journalist, which is – at best – irritating to the journalist, and – at worst – an indication that you may be hiding something. The other extreme is the one-on-one meeting. It says to the journalist that you are not afraid to face up to them and answer the questions, and it allows you to build a better rapport with the journalist. As you can see, the down side is that you are potentially put on the spot, so you will need to come well prepared and knowledgeable to handle any questions that are thrown your way. In addition, it also brings the risk of being misquoted. Lessons • Understanding the balance between business needs and medical / scientific and social ethics • The application of ethical principals • A deeper look into the medical industry, and the ethics of clinical trials in particular • Understanding of the deep complexities involving so many stakeholders Instructor Manual for Multinational Management: A Strategic Approach John B. Cullen, Praveen K. Parboteeah 9781285094946