Individual Assignment

Ethics in International Business

by
Div Teng
MSc International Business & Management
BMAN70012 Multinational Management / Term 2
2014/2015

Contents
1. The Underlying Capitalism Nature of Firms...........................................3
1.1

Tackling Taxation Issues: A Better Brand Value and Deterrence......4

1.2

Tackling Expansion: Better Education and Involvement..................4

2. Violation of Labour Standards................................................................5

2.1

Basic Monitoring and Screening is Insufficient.................................5

2.2

Beyond Contractual Governance.....................................................7

2.3

Upgrading As A Way of Breaking the Cheap Labour Cycle...............8

3. Income Inequality & Upgrading Challenges...........................................8

3.1

Dealership: Still Benefiting the Rich................................................9

3.2

Protecting Competency Resulting in Little Upgrading....................10

3.3

Upgrading Still Possible..................................................................10

3.4

Beyond Upgrading: Good Enough Reverse Innovation..................11

4. Other General Ways Firms Can Demonstrate and Encourage

Responsible Business Practices.................................................................12
4.1

Group Investment for the Future...................................................12

4.2

Government to Firm Level Collaboration........................................12

4.3

Transparency of Social Responsible Behaviour..............................12

4.4

Educate Shareholders & Restructuring..........................................13

5. Limitations: Addressing Matters on Environment................................13

6. Conclusion: Beyond Contracts into Actors Collaboration.....................14
7. References...........................................................................................15

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With firms as large as a few nations gross domestic product (GDP), their influence on
the production, consumption, investment and hiring are of importance. Matters are amplified
as firm operations are increasingly complicated offshoring, outsourcing and subcontracting.
However despite how the way the economy has been transforming, the higher social
obligation is one whose can be traced to the very purpose of why corporations were first
allowed to exist (reclaimdemocracy.org 2015).
Towards fulfilling the calling, many firms till date still face difficulty overcoming
issues of ethics vs legality, labour standards violation in their production lines and upgrading
of suppliers in their value chain. To a certain extent, these problems continue to be
experienced due to the capitalism nature of firms and humans but also due to the increasing
challenges to manage a complex operation and to protect their firm capabilities.

1.

The Underlying Capitalism Nature of Firms

Fulfilling shareholder value is the fundamental responsibility of all managers (Floyd

2001). Despite much activity at the supra national level, firms today still stretch the
boundaries of ethicality when in their quest for expansion and to maximise profits. In the
agricultural industry, firms secretly buy land (originally distributed to convert wasteland into
useful wealth redistribution tools for the poor) using third parties such as law firms and hedge
fund subsidiaries (Smallteacher & CorpWatch Blog 2013).
Such behaviour is not unique to the industry, many firms around the world from
different industries practice tax avoidance and governments of home and host country face a
great challenge to get firms to contribute back to where they get their value from (Rushe
2013; Holtzblatt et al. 2015; Newell 2008). While the use of the term corporation has been
around for a quite a long duration and therefore its meaning and governing rules has changed,
the fundamental principle of corporate taxation as a means of paying for the use of a
countrys resources and to redistribute income is enduring (Boadway et al. 1984; Levmore
1987). Hence firms should be expected to fulfil their social obligation. While governments
are attempting to fix loop holes in their tax system, it is after all a clamping down method. A
deeper understanding of the role of taxation suggest that there are opportunities available to
encourage shareholders to pressure managers about tax avoidance behaviour taxation
actually serves to reduce agency problems via stock options, tax shield encourages debt
financing and therefore greater managerial accountability (Levmore 1987; Miller 2005).

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1.1 Tackling Taxation Issues: A Better Brand Value and

Deterrence
Capitalism often associated with greed is but merely manifestations of how firms seek
to fulfil their obligations towards their shareholders. However the situation may be just a few
bad apples as firms are aware of the problem and are seeking to change such behaviour.
Recent matters of how Swiss banks strongly encourage firms to voluntarily participate in the
Offshore Voluntary Disclosure Program and a slowly but surely take up rate meant that firms,
middle mans financial institutions and governments see eye to eye on the need to fulfil their
financial contribution towards society (Dunn 2014).
In that light, while not all firms may voluntarily comply, financial institutions,
accounting and law firms are essential service providers to most large firms that may practice
aggressive tax avoidance and evasion. Hence more than just Swiss banks discussed earlier, if
more of these middle men start to encourage their clients to comply to taxation obligations
and deter them to do so by whistle blowing, tax avoidance and tax evasion would be greatly
reduced (Murphy 2014). But more than a threat or just social good will, firms need to
understand why such compliance is good for them. With the reminder of a potential damage
to brand value by practising tax avoidance and evasion, firms would therefore think of their
foothold in the market and voluntarily reduce such behaviour (Schmalz & Orth 2012).
However the elimination of tax avoidance and evasion is a never ending process of
educating firms to understand the financial benefits of complying and the closing of loop
holes in the tax system. Good Samaritan behaviour cannot be automatically expected and
deterrence should coexist governments still need to set up regulations that tackle the use of
shell companies, cross crediting, transfer pricing, as well as check-the-box, hybrid entities,
and hybrid instruments such as by treating foreign shell companies as home companies and
tighten earnings stripping rules and royalty source (Gravelle 2015).

1.2 Tackling Expansion: Better Education and Involvement

With regards to the behaviour of using third parties to gain land for expansionary
purposes, while stretching the legal boundaries is bad, the need to acquire more land and
resources would not have been a matter of discussion if it did not possibly damage the
welfare of the locals. Farmers were made worst off because land that was issued to (possibly
uneducated) locals serves to provide a way of self-sustenance. To tackle the matter, insights
on the reason for social problems in Exxon Mobiles expansion into Papua New Guinea
would be drawn farmers and tribe leaders used the proceeds of their land in a lavish manner
to celebrate and buy wives (Onishi 2010). Hence the underlying problem beyond finding a
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fair price is to ensure proceeds are used in a way that sustains the livelihood of the locals. To
tackle these problems, firms could choose two approaches. Firstly, they could buy
land/resources at fair value and educate the sellers on money management. Secondly instead
of buying, joint development with a majority stake would ensure locals receive proceeds
continuously and therefore would not be in lack or short changed. There are of course
challenges involved in executing such measures as operating in developing countries meant
that expropriation could happen easily and therefore the ability to full own and defend it
(even with private military) might be high valuable to firms. Firms will therefore need to
consider how to share the pie in a way that governments would support capitalism intrusion
into their grounds.

2.

Violation of Labour Standards

Another topic closely related to geographical expansion of operations would be labour

standards. Despite much discussion on international round tables, violation and setting of
labour standards are still a prevailing problem. The latter would be of great concern as some
nations, intentionally relax formal institutions to encourage investment such as the setting
ridiculously low labour standards or advancement of labour ethics only in health and safety
(Davies & Vadlamannati 2013; Barrientos & Smith 2007). As every equation takes two hands
to clap, there will therefore be firms that are attracted to these institutional weaknesses and
behave in a way that violates Rawls Principle of Justice Difference Principle which
identify, from the socioeconomic perspective, the least advantaged representative man in
society. Requires the greatest benefit accrue to the least advantaged representative members
of society (Sandel 2010; Chan & Shenoy 2010). Hence despite the topic being repeatedly
surfaced, it is still highly relevant.
In addition to the nature of behaviour, an area firms find it difficult to manage is the
enforcing of good production standards to ensure high quality and zero downtime due to
human error or naps. At times, firms demand these employees to work extremely long hours
and fine them a days worth of bonuses for taking a nap or defects produced in their lines
(Chang & Corpwatch Blog 2014).

2.1 Basic Monitoring and Screening is Insufficient

In a modern context, meeting of labour standards is further challenged due to the
increasing complication in the supply chain made of outsourcing to offshoring. Towards these
problems, firms have embarked on coalition monitoring and screening to ensure their supply
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chain complies with labour standards (Bremer & Udovich 2001; Cella 2011). However,
monitoring of the impacts of the ethical standards is highly challenging and therefore any
claims of compliance from firms should be taken with a pinch of salt. When considering the
global value chain (GVC) structures of governance, compliance usually take place between
relational suppliers and not modular or contractual ones (Barrientos & Smith 2007). Hence,
firms that are mere excellent marketers and designers but do not manufacture their own
products such as Uniqlo find it challenging to monitor their supply chain often modular and
contractual (Chang & Corpwatch Blog 2014). As shown in Fig 1, 63% of developing
countries (or possibly higher as countries such as mainland China have been excluded from
the data) have a less than or equal to 0.5 inspection rate per 10,000 employees employed and
shown in Fig 2, again developing countries tend to be the ones that work the most per week;
these firms struggle to monitor their suppliers in developing countries (where violations are
most recorded) at greater capacity due to impossibility of zero cost of monitoring (Barrientos
& Smith 2007). Consequentially, some firms have turned to better screening and the referring
to databases that state supplier compliance ratings by other firms (Cella 2011).
Countries with <= 0.5 Labour Inspection Rate per 10,000 employed persons

6
Developed
Developing

10

Fig 1: Proportion of Countries with Low Labour Inspection Rate (International Labour Organisation 2015)

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Top 20 Countries In Terms of Total Hours at Work

Developed
43%

Developing

57%

Fig 2: Proportion of Countries with the Most Hours Per Week (International Labour Organisation 2015)

2.2 Beyond Contractual Governance

When tracing to the supposedly home country of these firms USA and UK, we will
find that UK firms appear to have made progress on the matter as they attempt to embark on a
collaborative learning and relational approach with governments from home and host
countries as a well as host country suppliers (Hughes et al. 2008). This is much more
effective than the US system which tends to be hard facts of to check whether lead firm
suppliers comply with the labour standards.
Moving forward, the US system could consider taking some of the effective methods
of handling labour standard conformity as contractual governance is a tool of restricted reach
and punishments against supplier firms for non-compliance are often a demonstration and not
practiced (Hughes et al. 2008; Holley 2014). Instead, a truly effective change requires all
actors in the global production network to think and act alike in a way that everyones
concerns are heard and considered. Hence it is not just the responsibility of contracting firms
to ensure labour standards are adhered. As in the case of Nike, working environment was
improved because fundamental problems such as better scheduling of work shifts and the
improvement of quality and efficiency was done alongside monitoring (Locke et al. 2007). If
lead firms did not take the effort to understand the challenges suppliers face, probably
scheduling, quality and efficiency flaws as root problems would not have been identified;
instead suppliers may put up shows for when inspectors arrive to portray compliance.

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2.3 Upgrading As A Way of Breaking the Cheap Labour

Cycle
Other firms such as Apple, GE and Wishpool are reshoring manufacturing activities
back to United States because they believe that they can make more money by employing
workers that are better paid and of higher standard (Denning 2012). Even though there are
fewer activities of hiring cheap labour at poor conditions, reshoring is an incomplete solution
as unemployment would be created in the original host country of production or another
company would engage the supplier services and restart the cycle. As per all countries that
shifted from developing into developed economies gradually move up the value chain from
offering parts to OEM and OBM, therefore producing higher GDP and earning higher wages,
firms need to think about upgrading of their contractors, allowing them to produce higher
value added goods and services and therefore be able to offer their employees a higher wage
because it is rightfully demanded economically and not out of moral obligation (Gereffi
1999). Of course this does not change problems faced by lowest hierarchy value chain
activities as power relationships in the GVC ae unlikely to be altered, but it makes the
problem temporal and not perpetual to the geographical location (Lund-Thomsen &
Lindgreen 2013).

3.

Income Inequality & Upgrading Challenges

While upgrading appears to be a glimpse of hope for the developing countries (and

therefore its low skilled labour) to escape the poverty cycle, the fundamental issue lies with
are these countries truly able to escape poverty or is it all false hope. As shown in Fig 3
below, approximately 72% of the world lives below the average of the world while 28% of
the world live above, of which the average of these 28% is approximately double that of the
average world standard. Hence, not all countries are like Taiwan, Singapore and South Korea
which were successful in transiting from a manufacturing based economy to a
service/knowledge based economy.

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Fig 3: Real GDP Per Capita and Shares of Global Population, ICP 2011 (International Bank for
Recpnstruction and Development 2015)

Matters are made worst due to the race to the bottom as institutions continually lax
regulations, firms and shareholders capture the wealth and prots, while the social and
environmental costs are externalized to the state and the public to pay for and absorb using
tax revenue (Newell 2008). Consequentially firms lack the incentive to upgrade. In addition,
lobbying by firms with tax revenue and employment level as bargaining chips meant that
social and political power of the state is weakened in comparison to firms and therefore even
if host countries do not provide a warm welcome, they have no choice but to contest to
Multinational Enterprises (MNE) request.

3.1 Dealership: Still Benefiting the Rich

Though upgrading seems impossible, firms have gradually have progressively provide
bigger roles to host employees. Such as in the case of fast moving consumer goods
conglomerate Unilever, locals were given the opportunity to sign on as dealers for their
respective geographic region of influence (Rohatynskyj 2011). However the effectiveness of
the program was highly questionable as successful dealers tend to have deep (family)
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pockets, existing networks and male support. Biasness towards well to do dealers also took
place as poor woman had to come up with money (often borrowed) to buy their inventory but
well to do dealers were given credit terms.
Hence while this seems to be a trendy way of empowering woman and hiring
employees before the basic role of manufacturing, since only the rich are able to benefit from
the scheme, the mass majority of the population are most likely not able to benefit and would
remain stuck in the functions of manufacturing.

3.2 Protecting Competency Resulting in Little Upgrading

Another are of concern with regards to upgrading is the possibility of opportunistic
behaviour and therefore in general only upstream activities are outsourced while downstream
activities or core competence activities are still undertaken in home country headquarters
(Ietto-Gillies 2011). Hence if contracting firms only undertake repetitive activities in place
of machines as in the situation of producer-driven commodity chains, little learning can take
place (Gereffi 1999).

3.3 Upgrading Still Possible

Despite the disincentive to externalise core parts of production, there are evidence of
certain industries such as the textile industry upgrading from providing fibres to todays
OBM. The interaction between home and host country firms can be simplified into link,
leverage and learning, of which economic learning and organisational learning takes place not
just at the lead firm level but also with its contractual suppliers (Mathews 2006). As discussed
by Gereffi (1999) economic and organisational learning and upgrading takes the following
three forms. Within factories, upgrading involves the transition from low value goods &
services into higher valued. Within inter-firm enterprise networks, it takes the form of shifting
away from mass production of homogenous products into customisation or mass
customisation. Within regions, they shift from merely producing for lead firm and exporting
directly into OBM and OEM to manage production under them as in the case of textile under
the triangle South Korea, Taiwan and Hong Kong.
However while the triad has successfully upgraded itself, it may not be an optimistic
view for the industry as these three countries have shifted in their countries competitive
capabilities towards electronics and financial services. Hence upgrading might actually not be
truly upgrading but home countries shifting away to higher valued goods and services in
other industries altogether. In a similar way, as host countries providing manufacturing
services upgrade, home country economies are widening the capability gap. In other words,
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the real GDP graph in Fig 3 will shift towards an even taller left tailed graph though all
countries should expect to be better off resulting in an overall increase in the world average
real GDP. That being said, unlike the production life cycle theory, developing countries do
not exit and become redundant but continually upgrade (Gereffi et al. 2005). Hence we
might see more countries achieving the success of South Korea, Singapore and Taiwan.

3.4 Beyond Upgrading: Good Enough Reverse Innovation

It is beyond doubt that upgrading has its benefits but at the same time, the widening
gap between countries as discussed earlier suggest that firms need to look beyond serving the
wealthiest nations. Specifically, Emerging MNEs have limited ability to redefine the rules of
the game as Advanced Country MNEs (AMNE) have developed capabilities that allowed
them to take a firm foothold in the market that serves the consumers in developed economies
(R. R. Sinkovics et al. 2014). Hence for previously subcontracting firms to upgrade and leave
the shadows of AMNEs, reverse innovation to serve bottom of the pyramid economies is the
way out. Such an approach is highly plausible as economic activity only takes place when
demand and supply could justify a market. In other words, contractual firms that successfully
learn from lead firms (and usually when able to undertake cost reduction) can introduce
goods and services that meets the price point of bottom of the pyramid consumers. As in the
case of GE with the creation of an ultrasound machine at a fraction of the large equipment for
India and China has been successful, it is evident that other firms could replicate its success
(Immelt et al. 2009).
Of course the rosy picture requires diligent effort on a firms end to be made possible.
An observation by N. Sinkovics et al. (2014) shows that when social mission does underpin
the BOP business model, trigger constraints were reasons why some businesses were set up
and/or evolved, ie to overcome constraint. Hence firms need to involve themselves at the
ground level of developing nations to understand the constraints faced by the population in
general and use local resources to develop solutions in the form of products and services that
addresses these needs at the right price (Lewenstein & Kay 2013). Marketers will of course
face a challenge as poverty premium is entrenched deep within developing markets
consumers choosing the best brands because that is the only brand they know and they want it
to last (Hammond & Prahalad 2004; Prahalad & Hammond 2002). Hence the gaining of
credibility among (potential) consumers would be necessary and some ways to do so could be
prove quality at low prices with demonstrations at community gatherings and housewives
(which tend to be strong influencers of household decision making), partner with trusted
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competitors and intermediaries to ride on their brand image and ensure all goods produced
and delivered are of consistent quality and on time respectively (N. Sinkovics et al. 2014;
Acharya et al. 2010).

4. Other General Ways Firms Can Demonstrate and

Encourage Responsible Business Practices
4.1 Group Investment for the Future
In addition to the recommendations discussed in the isolated challenges and
opportunities, there are also other ways firm could be more socially responsible. Loosely
speaking, as per how cities that transited from developing to Newly Industrialised Economies
occurred via the upward progression of the type of firm investment and that it occurred in a
way that rewarded shareholder, firms should consider replicating such success. To achieve
this in a way that is benefit for firms, firms need to consider the long term benefits of
investing into host country population in general as per the life time value of consumers. As
seen by the success of Toyota and Afriflora, a possible way to do so would be to collaborate
with complementary businesses such as infrastructure developers, financial services and
education providers to develop an ecosystem (International Finance Corporation & World
Bank Group 2015; Toyota City Hall 2009).

4.2 Government to Firm Level Collaboration

Another approach would be working with local and foreign government to match
make, partnerships with local firms to improve commitment, accountability and reliability of
partners from host country and obtain favourable institutional support for good works.

4.3 Transparency of Social Responsible Behaviour

Beyond the work on the ground, greater transparency should be made available to the general
public. Many firms discuss their Corporate Social Responsibility (CSR) activities in their
annual report either in long text or few numbers are published in a pdf format that makes
comparison difficult. Moving forward, firms could work together with supra national bodies
to stipulate a standard CSR reporting at least within their industry and publish these figures in
spreadsheet to allow consumers to make informed decisions/comparisons.

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4.4 Educate Shareholders & Restructuring

Although the earlier mentioned measures are likely to benefit the shareholders in the long
term, as the phrase long term might subtly imply, shareholders need to be educated of their
greater potential gains and if necessary restructuring to buy back shares from institutional
shareholders of short investment time horizon and/or long term but stable return should take
place. Hence the remaining shareholders who might have a greater risk appetite and patient
capital would exert less pressure upon board members and managers, allowing CSR activities
to take place at a greater level.

5.

Limitations: Addressing Matters on Environment

While much research has looked into the direct impacts on human and wealth,

impacts of firm behaviour on the environment is another area of concern. The principle of
universality is also violated as Egalitarian principle should be extended to all human beings
today and the future generations. All humanity has equal claim to it and have obligations
towards it. No one should take more than their fair share so as to deprive others of their fair
share or do anything that would have a detrimental effect on someone else because one would
not like others to do that to oneself. As a result, just as humans of this generation may point
fingers to the earlier generation for damaging the environment but not being the one bearing
the cost, firms (and consumers) of these generation should avoid doing the same to the next
generation.
Hence future research should look into ways firms can be more socially responsible
can look beyond the interrelated issues of labour, taxation, income inequality and upgrading
into environmental sustenance.

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6. Conclusion: Beyond Contracts into Actors

Collaboration
To what extent is the organization responsible for the actions and omissions of the
individual director or employee of the organization? Under law, a corporation is a separate
entity from shareholders and directors. However corporations are capable of moral
responsibility because its intentional acts and decisions are carried through its officers in
accordance with internal decision structures and they are able to foresee the consequences.
Hence the discussion of CSR behavior by firms is an important one.
Towards the future, the essay has demonstrated how enforcement alone is inadequate.
The insufficiency of language results in a failure to encompass all aspects thoroughly and the
lack of human foresight meant that a mere observing of the law is insufficient for ethical
business. In the long run, firms need to shift away from a mentality that capital investment
into CSR activities is merely a reaction to state and society-based pressures into the
embracing of responsible behaviour of firms does yield long term financial rewards (Newell
2008). Moreover, when striving towards these goals, the greatest challenge of course is not
just how firms should respond but also how firms have been making regulation for and not
regulation of businesses (Newell 2008).
That being said, until the market tangibly rewards good practice, the majority of firms
are unlikely to place ethical trade as their priority (Barrientos & Smith 2007). Fortunately
signs of rewarding behavior are increasing as we see firms such as TOMS that believe in
contributing their profits to social causes like a One for One which gives a pair of shoe to the
poor for every pair sold have become one of the largest footwear retailers in the world.
Nonetheless, the chase for a socially responsible business practice is more than just
philanthropy but the incorporation of good values and therefore behavior in corporations
which we first made to serve society. As more consumers revise their buying behaviors base
on firms behavior towards society and environment at large, pressure towards changing
factory management, workers and waste management would drive firms one step closer
towards building an economy filled with socially responsible firms (Lund-Thomsen &
Lindgreen 2013).

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7.

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