CHAPTER FIVE



Chapter FIVE

gLOBALIZATION AND SOCIETY

OBJECTIVES

• To identify problems in evaluating the activities of MNEs

• To evaluate the major economic impacts of MNEs on home and host countries

• To establish the foundations for responsible behavior

• To discuss some key issues of globalization and society—ethics and bribery,

the environment, pharmaceuticals, and labor issues

• To examine corporate responses to globalization

Chapter Overview

Globalization has become a major socioeconomic force and topic of debate in the twenty-first century. While Chapter One examines the forces and criticisms associated with the globalization process, Chapter Five focuses upon the impact of foreign direct investment on home and host countries. Following an explanation of the balance-of-payments effects of FDI, a series of ethical issues concerning the social responsibilities of MNEs is explored. The cultural and legal foundations of ethical behavior are examined, and the challenges of global warming, pharmaceutical sales, and child labor are highlighted. The chapter concludes with a brief discussion of the need for corporate codes of ethics.

Chapter Outline

OPENING CASE: ENVIRONMENTAL CHALLENGES

FOR NEWMONT MINING IN INDONESIA

[See Map 5.1.]

This case illustrates the effects of the changing and conflicting attitudes of the national and local Indonesian governments toward foreign direct investment. Headquartered in Denver, Colorado, Newmont Mining is the second largest producer of gold worldwide. Nonetheless, Newmont has decided to close one of its two Indonesian mining operations, Minahasa Raya on the island of Sulawesi. As Indonesia evolved politically, Newmont faced an uncertain political and increasingly aggressive legal landscape. Local groups and courts demanded major investments in social responsibility programs. Further, Newmont was challenged in its Minihasa Raya operations by the activities of illegal miners, environmental protests regarding its waste disposal methods, decreasing gold reserves at the site, and a significant decline in the price of gold. Following a local campaign against the company that triggered a $550 million dollar lawsuit, a police investigation, the detention of company officials, and extensive international media coverage, Newmont determined that it could no longer continue to operate the mine. Will Newmont’s mine at Batu Hijau on Sumbawa suffer the same fate? What can Newmont do to effectively manage the environmental pressures it now faces in other countries as well?

Teaching Tips: Carefully review the PowerPoint slides for Chapter Five, as well as the opening case regarding Newmont Mining, which is cited throughout the chapter. In addition, review the corresponding video clip, “Global Business and Ethics” [12:07].

I. INTRODUCTION

Multinational enterprises (MNEs) have their greatest impact on countries when they engage in foreign direct investment (FDI) via wholly-owned subsidiaries and/or joint ventures. Although not all MNEs are huge, the sheer size of some troubles their critics. Further, their global orientation causes many to believe that MNEs are insensitive to national (local) concerns. Depending upon their particular perspectives, pressure groups in both home and host countries continue to urge their governments to devise policies that either encourage or restrict MNE activities. [See Fig. 5.1.]

II. EVALUATING THE IMPACT OF FDI

FDI has come to be seen as a major contributor to economic growth and development by bringing capital, technology, management expertise, jobs, and wealth to host countries. However, FDI is not without controversy. Over time the structure of FDI has shifted toward services and away from many extractive and other industries. Many countries that opened their markets have experienced economic and social disruptions as MNE investments have constrained or eliminated domestic competitors. At the same time many firms made large foreign investments that have seriously underperformed. As MNEs continue to allocate resources across a variety of countries in their quests to optimize performance, governments will, in turn, enact policies that reflect their own interpretations of the relative benefits and costs of FDI.

A. Trade-offs Among Constituencies

To survive and prosper, companies must satisfy a variety of stakeholders, i.e., shareholders, employees, customers, suppliers, and society. Depending upon the objectives of different constituencies, FDI can result in win-win, win-lose, or lose-lose (positive, neutral, negative) outcomes. Advocates of corporate social responsibility (CSR) believe that capitalism fails to serve the public interest and that managers of companies must thus be pressured to act responsibly. Others argue that managers are best equipped to serve the interests of their shareholders and that governments should deal with social issues and externalities whenever private sector benefits and costs differ significantly from public sector benefits and costs.

B. Cause-Effect Relationships

Just because two factors (such an in increase in both FDI and employment) move in similar directions, it does not necessarily mean that they are causally related and interdependent. Technological developments, competitors’ actions, and government policies are just three of the many intervening variables that can distort the analysis of cause and effect.

C. Individual and Aggregate Effects

Evaluating MNEs and their activities on an individual basis can be both time-consuming and costly. On the other hand, applying the same policies and control mechanisms to one and all is a far from perfect approach, especially if policies are based on exceptions, and not the general rule.

D. Potential Contributions of MNEs

The sheer scale of many MNEs means they have assets that can contribute to a wide range of national objectives. In addition to controlling a large portion of the world’s capital and accounting for a majority of the world’s exports, MNEs are also important producers and organizers of technology. [See Fig. 5.2.]

III. ECONOMIC IMPACT OF THE MNE

The investments and operations of MNEs may affect national balance-of-payments, economic growth, and employment objectives in ways that are positive, neutral, or negative for both home and host countries.

A. Balance-of-Payments Effects

Although foreign direct investment involves both capital and earnings inflows and outflows, many people fear (irrationally) that the net balance-of-payments effects will necessarily be negative.

1. Place in the Economic System. If a country runs a trade deficit, it must compensate for that deficit by (a) reducing its capital reserves, (b) attracting an influx of capital via the receipt of foreign direct investment, (c) the purchase of public or private debt by foreign governments or individuals, or (d) the receipt of unilateral transfers (e.g., foreign aid). Ultimately, one country’s trade surplus is another country’s deficit.

2. Effect of Individual FDI. The effect on the host country of a single foreign direct investment may be positive, neutral, or negative. When FDI results in import substitution, i.e., when products that were formerly imported by a country are subsequently produced within that country, its foreign exchange reserves should increase.

The formula for calculating the balance-of-payments effects is:

B = (m – m1) + (x – x1) + (c – c1)

where B = balance-of-payments effect

m = import displacement

m1 = import stimulus

x = export stimulus

x1 = export reduction

c = capital inflow for other than import and export payments

c1 = capital outflow for other than import and export payments

Although the equation is straightforward, determining the value of each variable is difficult because the data used must be estimated and are subject to assumptions. The net import effect (m – m1) is positive for the host country if the FDI results in the substitution of local production for imported products and is negative if it results in an increase in imports to supply the new productive capacity. (The marginal propensity to import reflects the fraction of a change in imports due to a change in income, i.e., the portion of increased income spent on imports.) The net export effect (x – x1) is particularly controversial because underlying assumptions are widely debated. That said, the effect is positive for the host country if the FDI results in the generation of exports but negative if it results in a decline. (FDI may also stimulate home country exports of complementary products to the host country.) Net capital flows (c – c1) are difficult to assess because of the time lag between an outward flow of investment funds and the subsequent inward flow of remitted earnings from that investment. Although initial capital flows to the host country are positive, they may be negative in the long run if capital outflows eventually exceed the value of the investment. Finally, indirect effects such as those derived from the transfer of technology and managerial skills are difficult to measure but may be critical to the development of the economic efficiency of the host country.

3. Aggregate Assumptions and Responses. Generally, FDI is initially favorable to the host country and unfavorable to the home country, but this effect may reverse over time if aggregate repatriated profits exceed the value of the initial investment. Thus, governments must learn to maximize the benefits while minimizing the long-term adverse effects of FDI flows.

B. Growth and Employment Effects

In contrast to the balance-of-payments effects, the effects of FDI on economic growth and employment should not be a zero-sum game because MNEs may use resources that were either underemployed or unemployed. The argument that both home and host countries can gain from FDI rests on two assumptions: (i) resources are not fully employed and (ii) capital and technology cannot be easily transferred from one activity to another.

1. Home Country Losses. As manufacturers seek lower-cost foreign production sites, home countries claim that FDI outflows create jobs abroad at the expense of jobs in the home country.

2. Host Country Gains. Host countries gain through the transfer of capital, technology, and managerial expertise, as well as the creation of new jobs.

3. Host Country Losses. Critics argue that FDI inflows often displace domestic investment and drive up local labor costs. They claim that MNEs have access to lower-cost funds than local competitors do and that MNEs can spend more on promotion activities. In addition, while it is true that MNEs often source inputs locally, critics claim that they also destroy local entrepreneurship. Further, as MNEs gain valuable knowledge in their foreign operations that can be shared across their entire organizations, critics fear that local firms subsequently suffer a competitive disadvantage.

IV. FOUNDATIONS OF ETHICAL BEHAVIOR

Whether they engage in trade, licensing, or foreign direct investment, MNEs must act responsibly. However, because ethical behavior is rooted in both cultural and legal traditions that vary from one country to another, dilemmas often arise.

A. Cultural Foundations for Ethical Behavior

Beliefs may vary because of different family and religious teachings, different laws and social pressures, different observations, experiences, and perceptions, and even different economic circumstances. Within a country an individual’s values may differ from his/her employer’s policies, which may differ from prevalent societal norms or laws. At the international level, cultural complexity increases geometrically. While many actions elicit universal agreement on what is clearly right and wrong, others are less clear. Cultural relativism holds that ethical truths depend upon the groups subscribing to them; thus, intervention in local issues and traditions by outsiders is clearly unethical. On the other hand, cultural normativism holds that there are universal standards of behavior that everyone should follow; thus, non-intervention in local violations of global standards is clearly unethical.

Many argue that managers the world over must exhibit ordinary decency, i.e., principles of honesty and fairness. In addition, they argue that MNEs are obligated to set good examples that can serve as the standards for responsible behavior. From a competitive standpoint, it is argued that responsible acts create strategic and financial success because they lead to trust, which in turn leads to commitment. The Interfaith Center on Corporate Responsibility (ICCR) is but one of many nongovernmental organizations (NGOs) that actively monitor and publicize corporate practices. Such efforts are designed to educate firms about the environmental and economic consequences of their operations and practices, on the one hand, and to increase shareholder value on the other. In addition, many multilateral agreements exist that can aid in ethical decision-making; they deal primarily with employment practices, consumer and environ-mental protection, political activity, and human rights in the workplace. Still, no set of workable corporate guidelines is universally accepted and observed.

B. Legal Foundations for Ethical Behavior

Ethics teaches that people have a responsibility to do what is right and to avoid doing what is wrong. The appropriateness of behavior can be measured in the sense that individuals and organizations must seek justification for their behavior, and that justification is a function of both cultural values (many of which are universal) and legal principles. However, legal justification for ethical behavior is not sufficient because: (i) everything that is legal is not necessarily ethical, (ii) the law is slow to develop in emerging areas of concern, (iii) the law is often based on moral concepts that cannot be separated from legal concepts, (iv) the law may need to be tested by the courts, and (v) the law is not efficient in terms of achieving ethical behavior at a minimum cost. Nonetheless, the law does serve as a useful basis for examining ethical behavior because it embodies cultural values. The law provides a basic guide for proper conduct, which when followed, establishes a good precedent. Further, the law puts everyone on an equal footing and should reflect careful and wide-ranging deliberations.

In addition to the fact that laws vary among countries, strong home-country governments may attempt to extend their legal influence to foreign countries. Extraterritoriality refers to the extension by a government of the application of its laws to the foreign operations of its domestic firms. In cases of health and safety regulations, differences may not be insurmountable, but in other instances, home- and host-country laws clearly conflict. Civil law nations tend to have a large body of law dealing with business operations, but common law nations rely more on precedent than statutory regulations. Externalities refer to the by-products of activities that affect the well-being of people and/or the environment. Although externalities are not reflected in standard cost ac-counting practices, they must be included in the calculation of stakeholder value.

V. ETHICS AND BRIBERY

Bribery consists of payments, or promises to pay cash or something else of value, to public officials and/or other people of influence. It affects the performance of countries and companies alike. Anecdotal information indicates that in recent decades, questionable payments by MNEs to government officials have been prevalent in both industrial and developing countries. High levels of corruption tend to correlate with lower rates of economic growth, as well as lower levels of per capita income. Corruption may also erode the legitimacy of a government. Both the legal definition of a bribe and the likelihood of paying brides abroad vary by nationality. [See Fig. 5.4.]

The U.S. Foreign Corrupt Practices Act of 1997 outlaws the payment of bribes by U.S. firms to foreign officials, political parties, party officials, or party candidates; applies to firms registered in the United States and to any foreign firms that are quoted on any U.S. stock exchange; and was extended to include bribery by foreign firms operating in U.S. territory in 1998. (While the law seems to be a useful deterrent, an apparent inconsistency permits payments to foreign officials to expedite their compliance with the law, but not to other officials.) Federal government guidelines for establishing an effective antibribery compliance program involve setting high standards, communicating those standards to relevant employees, educating employees regarding their expected behavior, and monitoring compliance.

Multilateral efforts to confront bribery are numerous. They include: Transparency International’s Business Principles for Countering Bribery (2003); the OECD Convention on Combating Bribery of Foreign Public Officials in International Business Transactions (1997); the antibribery provisions of the revised OECD Guidelines for Multinationals; the International Chamber of Commerce (ICC) Rules of Combat to Combat Extortion and Bribery (1999); and the UN Convention Against Corruption (2003). In addition, Transparency International assists citizens in setting up national chapters to fight local corruption. It also regularly compiles an international Corruption Perceptions Index (CPI) based on surveys of business people, risk analysts, journalists, and the general public. [See Table 5.1.] Further, the Partnering Against Corruption Initiative brought together nearly fifty construction- and natural resource-based multinational enterprises at the 2005 World Economic Forum to sign a zero-tolerance pact against corruption.

POINT—COUNTERPOINT: Is Bribery Ever Justified?

POINT: Many argue in favor of paying bribes in countries where bribes are legally and culturally acceptable and even expected. Firms that must adhere to antibribery laws, such as those of the United States, often find themselves at such a serious competitive disadvantage they are effectively excluded from operating in certain countries at all. If such exclusions then result in the acquisition of inferior products, technology, and operations by clients in those countries, all parties lose. Finally, when governments offer foreign aid to countries in exchange for political concessions, they exhibit a double standard if they forbid their own firms to do likewise.

COUNTERPOINT: Others argue that bribery is unethical, regardless of the country where a firm does business. The making of anything other than “facilitation payments” to directly responsible officials upsets the concept of open and fair competition. Holding other countries’ policies toward bribery as the benchmark for one’s own actions is seen as faulty logic. The end does not justify the means. Bribery increases the cost of doing business and thus the price of delivered products. Further, bribery not only encourages other acts of corruption, but it results in unclear standards of behavior. Thus, it is crucial that a firm adhere to the same code of conduct throughout the world.

VI. ETHICAL BEHAVIOR AND ENVIRONMENTAL ISSUES

Environmental damage can occur from the extraction of resources, some of which are renewable, but some are not, and the contamination of the environment via production processes and the use of pollution-causing products. Sustainability means meeting the needs of the present without compromising the ability of future generations to meet their own needs, while taking into account what is best for society and for the environment. The issue of global warming, the Kyoto Protocol, and the potential impact of the Protocol on corporate behavior all serve to illustrate the challenges associated with responsible societal behavior.

A. Global Warming

Global warming results from the release of greenhouse gases that trap heat in the atmosphere, rather than allowing the heat to escape. At the heart of the international treaty known as the Kyoto Protocol, signed in 1997, is the theory that if global warming is not controlled and reduced, the rising temperature of the earth will result in catastrophic events. The Protocol, which is an extension of the UN Framework Convention on Climate Change, obligates signatory countries to reduce their greenhouse gas emissions to 5.2 percent below 1990 levels between 2008 and 2012. While the European Union has made the decision to set a target of an 8 percent reduction below 1990 emission levels (and countries such as Germany have established even higher goals), the United States, China, and India are not parties to the agreement, even though they generate a significant portion of the world’s greenhouse gases. Foreign firms operating in countries that have adopted the Kyoto Protocol are required to meet or exceed the same standards as local companies, regardless of the standards of their home countries. (Firms that are not in compliance with local standards may be able to buy credits from companies whose emissions are actually below the target levels.) While the legal approach to responsible behavior says that firms can operate according to local laws, the ethical approach says that firms should do whatever is necessary and economically feasible to reduce greenhouse gas emissions to the lowest possible levels.

DOES GEOGRAPHY MATTER?

The Amazon

The Amazon rain forest, most of which lies in Brazil, covers an area the size of Western Europe. It comprises one-third of the world’s remaining tropical forests and is home to 30 percent of the world’s plant and animal species. The Brazilian rain forest is seriously threatened because of both legal and illegal logging and burning operations. Environ-mentalists from within and outside of Brazil argue that the rain forest is a global resource, but many Brazilians claim that it is theirs to control and use. Historically, the Brazilian government has been hesitant to take any action that might curtail economic growth. However, following the 2005 killing of an elderly nun who was trying to protect the rain forest, the government has agreed to crack down on clearly illegal activities and to try to slow the destruction on other fronts as well.

VII. ETHICAL DILEMMAS AND PHARMACEUTICAL SALES

How can pharmaceutical MNEs such as GlaxoSmithKline generate sufficient revenues to create new products, their major source of competitive advantage, while being responsive to the very real health problems of developing countries? Most research-based pharmaceutical firms sell products at high prices so long as those products are covered by patents. Many firms also used tiered pricing schemes whereby consumers in industrial countries pay market prices for products, but consumers in developing countries pay lower (subsidized) prices. Legal generic products comply with patents while allowing for the purchase of drugs at lower costs; unauthorized (illegal) generic drugs may or may not be reliable. The WTO Agreement on Trade-Related Aspects of Intellectual Property (TRIPs) provides a mechanism for poor countries facing health crises (such as AIDS in Africa) to either produce or import generic products. Governments and private foundations enable countries to issues bonds to generate the funds needed to purchase vaccines via the International Finance Facility for Immunization. In addition, governments are pressured to reduce tariffs and other barriers that disadvantage their own people.

VIII. ETHICAL DIMENSIONS OF LABOR CONDITIONS

A major challenge facing MNEs is the globalization of the supply chain and the working conditions of laborers. Pressures from external stakeholders to adopt responsible employment practices in overseas operations are extensive. Some of the many international labor issues that companies, governments, trade unions, and nongovernmental organizations must deal with include: fair wages, child labor, working conditions, working hours, and freedom of association. These issues are especially critical in retail, clothing, footwear, and agricultural industries, where so many MNEs outsource production to independent firms in foreign countries. [See Fig. 5.6.] The Ethical Trading Initiative Base Code focuses upon the employment practices of MNEs by getting them to first adopt ethical employment policies and then monitor compliance with their foreign suppliers. [See Table 5.2.]

The use of child labor is a particularly sensitive issue. According to the UN’s International Labor Organization (ILO), more than 250 million children between the ages of 5 and 17 are working worldwide; nearly three-quarters of those are young children or are working in ways that endanger their health or well-being because of hazards, sexual exploitation, trafficking, and/or debt bondage. Those who argue in favor of child labor claim that in many instances, children are better suited to perform certain tasks than adults, and that if the children were not employed, they would in fact be worse off. While some firms simply avoid operating in countries where child labor is used, others try to establish responsible operating policies in those locales. Often, however, it is difficult for MNEs to hire and/or retain local workers; even though the working conditions and wages that MNEs offer may be higher, the number of hours they allow their employees to work may be lower.

IX. CORPORATE CODES OF ETHICS

Firms need to act responsibly for at least four reasons. First, unethical and/or irresponsible behavior could result in legal sanctions, especially in the areas of bribery and product safety. Second, such behavior could also result in consumer boycotts, even though the effectiveness of such actions is unclear. Third, unethical behavior can lower employee morale. Fourth, the cost to firms of bad publicity can be enormous. A major component of a company’s strategy to realize ethical and socially responsible behavior across the entirety of its organization is a corporate code of conduct. External codes provide guidelines, recommendations, and rules that are issued by entities within society in order to enhance corporate responsibility, but they are somewhat inconsistent across organizations.

In creating its own code of corporate ethics a firm should: set global policies that must be complied with wherever the company operates; communicate the code to all employees within the organization and to all suppliers, subcontractors, and customers; ensure that its policies are carried out in all instances; and report results to its stakeholders. Generally, codes of conduct address such areas as employment practices, human rights, standards of ethical conduct, and care of the environment. In addition to the efforts made by firms themselves to ensure compliance, they may also choose to use NGOs such as the Fair Labor Association or global audit firms, such as KPMG, to help monitor their practices. While management is charged with maximizing the long-term value of the assets of the shareholders, it is the role of government to deal with the externalities associated with corporate behavior.

LOOKING TO THE FUTURE:

Will FDI Be Welcome and Will Foreign Investors Act More Responsibly

as the Twenty-First Century Progresses?

In all likelihood, governments will continue to compete for larger shares of the benefits from the activities of MNEs. In the short term, most will probably work to create more favorable business environments for foreign investors because investment inflows can aid with trade deficit problems as well as foster economic development and growth. In the longer term, however, FDI may be less welcome because attitudes tend to vary according to economic conditions. If, in the future, people perceive themselves to be economically disadvantaged, even if only in a relative sense, they may, at least to some degree, blame FDI for their socio-economic distress and thus lean toward the restriction of foreign investment activities.

CLOSING CASE: Anglo American in South Africa

Anglo American PLC is a mining conglomerate that operates in 61 countries via eight key businesses. Founded in 1917 as the Anglo American Corp. of South Africa and now headquartered in London, Anglo American is the largest producer of gold in the world. With a South African workforce of more than 90,000 employees in its primary operations and another 44,000 spread across its subsidiaries, the firm is one of the largest in the region. Heavily affected by the HIV/AIDS epidemic, Anglo American was one of the first companies to establish a proactive, comprehensive strategy to combat the raging effects of the disease on its workforce and production systems. Along with many other MNEs, Anglo American also joined the Global Business Council on HIV/AIDS, an organization that focuses on (a) alleviating the effects of AIDS throughout the world and (b) protecting the rights of infected workers. In response to the failure of its AIDS prevention policy, the company announced in 2001 that it would be running a feasibility study to determine whether it would make antiretroviral treatments available to its workforce. (The prevalence of HIV-positive workers had risen to an average of 21 percent across all of its operations and was increasing by nearly 2 percent annually.) However, just a year after the announcement, Anglo American decided to abandon the study, citing the risk and the expenses involved as being too great and numerous other factors as being too difficult to manage. However, the company insisted that it had not completely abandoned the idea of a pilot study and expressed hopes that a more reasonable arrangement could be made involving the entire industry and the South African government.

Questions

1. What choices does the government of South Africa have in the face of the HIV/AIDS epidemic? What do you think it should do?

South Africa suffers one of the highest rates of HIV infection in the world—approximately 5.3 million cases in a population of 45 million people. Each day another 1,500 South African people are infected with the virus. Despite the dire threat posed by the epidemic, the South African government has proved to be one of the least committed to effective intervention. It has diverted little of its budget to dealing with the crisis and has been very resistant to the widespread distribution of antiretroviral drugs on the grounds that such action would be far too expensive and difficult to do effectively. However, the government needs to confront the crisis! It should begin with the development of a health care system and infrastructure adequate to deal with the sheer number of people in need of care. The government should also seek to partner with international aid agencies, other international organizations, and the private sector, including pharmaceutical firms, to develop a feasible, comprehensive strategy. [Note: student responses to the latter part of the question will vary, given their individual beliefs regarding the role of government in society.]

2. Why did Anglo American halt its pilot study on the feasibility of providing antiretroviral therapy to its employees? Do you agree with the decision? What recommendation would you give the company concerning its HIV/AIDS policy?

Anglo American claimed that the risk and the expenses associated with the study were too great. In contrast, however, by 1991 Coca-Cola was providing free anti-retroviral drug therapy to 1,500 AIDS-infected employees in Africa, and De Beers (in which Anglo American has a 45 percent stake) was paying 90 percent of the costs of the treatment for its AIDS-infected employees and their spouses. Given that the company expressed hopes that a more reasonable arrangement could be made involving the entire industry and the government, it appears that Anglo American is attempting to shift at least part of the responsibility for solving the crisis to the government and to other stakeholders. [Again, student responses will vary, given their individual beliefs regarding the role of the private sector in society.]

3. What role do the pharmaceutical companies play in the HIV/AIDS epidemic in South Africa? What would you recommend to a pharmaceutical company that produced HIV/AIDS drugs?

The pharmaceutical companies have a unique role to play in the HIV/AIDS epidemic in South Africa and throughout the world because they are the source of the drugs with which to combat this plague. However, the enormity of the epidemic is truly daunting. Given the sheer number of people in need, on the one hand, and the utter lack of resources, on the other, one could easily conclude that there is relatively little that can be done to alleviate the suffering and stop the spread of the disease. Still in all, the pharmaceutical companies can seek to partner with aid agencies, international organizations, governments, and the private sector in their search for acceptable and effective solutions. Pharmaceutical firms will most surely be concerned about the issue of patent protection and generic drugs, as well as the prospect of tiered pricing and significantly lower profit margins. Governments, other members of the private sector, and other stakeholders will all need to be mindful of the tremendous costs and risks that are borne by pharmaceutical firms. Further, given the extent and the seriousness of the problem, a lack of commitment on the part of any stakeholder will be a serious setback in the march toward a community solution.

WEB CONNECTION

Teaching Tip: Visit daniels for additional information and links relating to the topics presented in Chapter Five. Be sure to refer your students to the online study guide, as well as the Internet exercises for Chapter Five.

_________________________

Chapter Terminology:

globalization, p.164

multinational enterprise (MNE),

p.164

foreign direct investment (FDI),

p.164

wholly-owned subsidiary, p. 164

joint venture, p.164

stakeholders, p.166

corporate social responsibility

(CSR), p.166

balance of payments (BOP), p.167

trade deficit, p.168

trade surplus, p.168

import substitution, p.168

net import effect, p.168

marginal propensity to import,

p.169

net export effect, p.169

net capital flows, p.169

relativism, p.172

normativism, p.172

ordinary decency, p.172

nongovernmental organizations

(NGOs), p.172

extraterritoriality, p.174

externalities, p.174

bribery, p.175

Business Principles for Countering,

Bribery, p.176

in Int’l Bus. Transactions,

p.176

International Chamber of

Commerce (ICC), p.176

Rules of Combat to Combat

Extortion and Bribery, p.176

Corruption Perceptions Index CPI),

p.177

Partnering Against Corruption

Initiative, p.178

sustainability, p.180

global warming, p.180

Kyoto Protocol, p.180

UN Framework Convention on

Climate Change, p.181

tiered pricing, p.183

generic products, p.184

International Finance Facility for

Immunization, p.184

_________________________

ADDITIONAL EXERCISES: Global and Societal Challenges

Exercise 5.1. Ask students if they believe that it is better for a country to encourage (a) international trade activities or (b) inward foreign direct investment. Then have them discuss the impact of foreign direct investment upon the international trade activities of the triad nations (West Europe, Japan, Canada, and the United States) as compared to the impact upon the BRICs (Brazil, Russia, India, and China). Finally, repeat the first question regarding their general beliefs. If positions have changed, explore why.

Exercise 5.2. Choose two to five countries that are economically diverse. Then lead the class in a comparative discussion of the impact of foreign direct investment upon those countries. What MNEs are headquartered in or have subsidiaries based in those countries? Conclude by asking the students to discuss the societal effects of foreign direct investment upon those and possibly other countries.

Exercise 5.3. During the late 1980s and throughout the 1990s, China was routinely cited by various governments and NGOs for human rights violations that included torture, beatings, imprisonment, and even the executions of political dissidents. At the same time, inflows of foreign direct investment into China from firms headquartered in democratic societies in West Europe, North America, and Japan were increasing at record rates. Ask the students to debate this phenomenon from an ethical perspective. Do they believe that China is a special case, and if so, why?

Exercise 5.4. Multinational enterprises such as Newmont Mining are increasingly subject to demands from both national and local governments to implement comprehensive social programs, engage in improved labor relations, and meet increasingly rigorous environmental regulations. Ask the students to explore the strategic options they feel are available to a firm such as Newmont Mining in Indonesia that has extensive property and capital assets at risk. Suggest they consider both proactive and reactive alternatives.

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