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1. What is the institutional context of a business and how these components impact global businesses? Why it is crucial to look closely to the institutional context of business for a global company?

2. What is the national context of a business and how managers take its components into consideration for business decision making? What impacts the national context has on decision making in a MNC.

3. What are various stages of industrialization and what are their implications for businesses? How MNC’s look at various stages of economic development in a country an why?

4. What is corporate social responsibility (CSR) and how it helps corporate ethics and business? What impacts CSR has on customers and profit of a MNC.

5. What are various kinds of stakeholders and by what mechanism they can impact corporations to make right decisions? Who are stockholders and how they can influence a company’s decisions?

6. How ethics impact decision making in a company? What processes they use for ethical decision making.? How those decisions impact the stockholders of a company?

Chapter
© 2017 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning management system for classroom use.

3
The Institutional Context of Multinational Management

© 2017 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning management system for classroom use.

Learning Objectives (1 of 3)
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.

Learning Objectives (2 of 3)
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.

Learning Objectives (3 of 3)

Define social inequality and its implications for multinationals.
Understand the importance of the national context and its connection with other international management areas.

Institutional Context (1 of 2)

Institutional Context: Includes other elements of society besides national culture such as:
Education
The government
The legal system
These can affect important business-related differences among societies.
May encourage adoption of values inconsistent with national cultures.

Institutional Context (2 of 2)
It is important to understand the dominant institutional context of any society, and appreciate its influence on individuals and organizations.
Understanding the institutional context is critical to effective multinational management.
At a basic level, a manager cannot completely understand any society without examining its national culture and institutional context.

National Context
National Context: The national context is composed of the respective national cultures and social institutions of a society.
Intertwined with national cultural forces are social institutions such as:
The economic system
Religion
Education

Exhibit 3.1:
The National Context and Multinational Companies

Social Institutions and Their Influence on Society (1 of 4)
Social Institutions: may be defined as:
A complex of positions, roles, norms, and values organizing relatively stable patterns of human resources that sustain viable societal structures within a given environment
Social institutions have profound effects on people’s life conditions, and provide context for psychological differences among people.

Social Institutions and Their Influence on Society (2 of 4)
Social institutions can have regulative, normative, or cognitive influence on individuals.
A regulative social institution constrains and regularizes behaviors through its capacity to establish rules, to inspect and review conformity, and to manipulate consequences to reinforce behaviors

Social Institutions and Their Influence on Society (3 of 4)
The cognitive dimension refers to the widely shared knowledge regarding how things are done in a society.
The normative dimension refers to the values and norms promulgated by the social institutions.

Exhibit 3.2:
Cross-national Distance as Measured by Institutions
Source: Adapted from Berry, H., Guillen, M.F., and Zhou, N. 2010. “An institutional approach to cross-national distance.” Journal of International Business Studies, 41, 1460-1480.
Institution Meaning Examples
Financial Differences in importance of financial sector Credit available
Listed companies
Economic Differences in macroeconomics indicators GDP
Exports
Inflation
Political Differences in democracy; political risk; stability Democracy score
Index of economic freedom
Size of state
Administrative Differences in religious and language systems Common religion
Legal system
Connectedness Differences in Internet use; tourism activities Per capita tourism visits
Per capita Internet users
Demographic Differences in demographic segments Birth rate
Population by age groups
Geographic Physical distances between countries Distance between countries

Social Institutions and Their Influence on Society (4 of 4)
Three key social institutions that influence business environment:
The economic system
The level of industrialization
Types of religions
Additionally,
Education
Level of social inequality

Economic Systems (1 of 3)
Economic systems: network or system of beliefs, activities, organizations and relationships that provide the goods and services of a society
Typified by extremes of capitalism, socialism and a mix of both
Important implications based on
Dominant market type
Market transitions

Economic Systems (2 of 3)
Capitalist/market economy: production is decentralized to private property rights owners who act to make profits in competitive market
Socialist/command economy: production resources are owned by the state, and production decisions are centrally coordinated
Mixed economy: combines aspects of capitalist and socialist economies
E.g., Sweden, France, Denmark, Italy and India

Economic Systems (3 of 3)

Economic systems have two major implications for strategic multinational management:
Dominant market type
Market transitions

Dominant Market Type (1 of 2)
Dominant Market Type: Whether the market and economic system of a country are predominantly capitalist, socialist or mixed.
The decision whether to operate in another country may depend on the dominant market type.
In mixed economies, MNCs should subordinate their economic goals and respect social objectives
Multinational managers may want to consider the Index of Economic Freedom.

Dominant Market Type (2 of 2)
Index of Economic Freedom: Defines economic freedom as:
The absence of government coercion or constraint on the production, distribution, or consumption of goods and services beyond the extent necessary for citizens to protect and maintain liberty itself
The index includes 10 indicators ranging from trade and taxation policies, to property rights and regulation, including government intervention in the economy.

Exhibit 3.3:
Index of Economic Freedom

Market Transitions
Market Transitions: Changes societies experience as they move from socialism to a market based economy
Multinational implications:
Need to turn around inefficient formerly state-owned companies to become cost effective
Motivational issues with workers
Interpersonal trust, teams, meritocracy

Industrialization (1 of 2)
Industrialization: Cultural and economic changes that occur because of how production is organized and distributed in society
Stages of industrialization
Pre-industrial
Industrial
Postindustrial

Industrialization (2 of 2)
Pre-industrial society:
Agriculture dominates the economic environment
Religious norms, tradition emphasized
Industrial society:
Dominance of manufacturing or secondary sector
Technological development
Postindustrial society:
Emphasis on the service sectors
Need highly skilled workers with specialized skills

Exhibit 3.4: Distribution of Production Activities by Sector

Managerial Implications:
Industrialization
(1 of 2)
Direct correspondence between industrialization and economic development
Pre-industrial countries provide cheap labor and untapped markets
But poor infrastructure for business
Traditional and communal values
Industrial societies favor innovation and individualism
Governments provide favorable environment
Educated labor force

Managerial Implications:
Industrialization
(2 of 2)
Postindustrial societies
Dominance of service sector; knowledge based
Almost complete demise of agricultural sector
Significant decline in manufacturing sector
Increasing emphasis on quality-of-life
Non economic incentives favored
Post-materialist values, individual expression, and movement toward more a humane society

Religion
Religion: A shared set of beliefs, activities, and institutions based on faith in supernatural forces.
Religion is an important aspect of most societies.
Together, Christianity, Islam, Hinduism and Buddhism are followed by almost 71% of the world’s population.
20% of world’s population are nonreligious.
Different religions shape how people do business in different parts of the world.

Christianity
Christianity: A religion based on the teachings of Jesus
The most practiced religion around the world
Protestantism emphasizes wealth and hard work
Ten commandments – basis for ethical behaviors
Dignity of human life, labor and happiness
Implications for multinationals:
Business environment conducive to these values
Sunday holiday for prayer

Islam
Islam: Based on submission to the will of Allah (God).
The Prophet Muhammad was a messenger of Allah.
The second largest of the world’s religions and growing.
Islamic laws or Shari’ah, based on The Five Pillars.
Muslims pray five times a day, fast during Ramadan.
Implications for multinationals:
Islam prohibits profiting by exploiting others.
Islam prohibits the payment or receipt of interest.
Limited role for women in some Islamic societies.

Hinduism (1 of 2)
Hinduism: A broad and inclusive religion with no single founder
Based on the Vedic scriptures
Oldest, embodied in the ancient traditions of India
Currently 760 million Hindus worldwide
Quest for ultimate reality and truth
Hindus live life according to the principles of Dharma (righteousness and moral order)
Belief in Karma and reincarnation

Hinduism (2 of 2)
Implications for multinationals:
Spiritual achievement is an important value
Respect for elders, age and wisdom
Hinduism has clear guidelines for ethical behavior
Inequality in caste system, social structure of India

Buddhism
Buddhism: A religious tradition that focuses on the reality of world suffering and the ways one can be freed from suffering
Craving and desires produce suffering
Dominant religion in Asia
Implications for multinationals
Encourages hard work; laziness seen as negative
Emphasizes teamwork; all beings are interconnected

Education

Education: organized networks of socialization experiences which prepare individuals to act in society
Central element in organization of society
Helps construct competencies, professions, and professionals

Managerial Implications:
Education
Gives an idea of the skill level of workers in any society
The more educated, the more skills workers have
Multinationals can look at educational attainment scores to determine the nature of the workforce
Other scores relevant:
Math and Science
R & D expenditure

Exhibit 3.9:
Tertiary Enrollment as
Percentage of Relevant Age Groups

Social Inequality
Social Inequality: Refers to the 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.
These select few use access to resources to acquire more power, thereby perpetuating inequality.
Social inequality negatively impacts the degree to which people are attached to work.

Managerial Implications:
Social Inequality
Many MNCs are facing significant criticisms for their operations in countries with high social inequalities
Criticized for paying low wages, using child labor.
Realizing social responsibility is also in their own interests.
Implications for Management:
Many key ethical issues arise in such countries.
Consider the GINI Index on the degree of social inequality.
Recognize that social inequality yields more demoralized workers, suspicious of management.

The National Context and International Management (1 of 2)
The national context’s role is not only limited to shaping of business practices.
The national context has significant influence on a company’s strategy.
The national context determines the comparative advantage of nations, which ultimately determines which strategies multinational companies choose.

The National Context and International Management (2 of 2)
The national context plays an important role in the human aspect of international management.
The educational and family system has important implications as to who is seen as an effective leader.
The national context can determine the nature of the relationship between workers and their superiors.
It also determines how people view work and sets the stage for motivation in an international context

Summary
To understand a society, it is essential to understand both its national culture and institutional context.
Social institutions affect individuals and organizations.
Differing economic systems have major implications for multinational strategic management.
The degree of industrialization of a society is linked to its economic development.
Religion, education & social inequality also impact multinational management strategy.

4
Managing Ethical and Social Responsibility Challenges in Multinational Companies

Learning Objectives (1 of 2)
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.

Learning Objectives (2 of 2)
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.

Ethical Challenges Facing MNCs Worldwide
Every Multinational company faces ethical challenges when operating in a foreign country:
Should we dump our waste in the river knowing the damage it will do, even if such conduct is not illegal?
Should we refuse to bribe a government official, and lose the contract to our competitor?
Should we use cheap child labor, even if its not illegal, just because our competitors do?

What Are International Business Ethics and Social Responsibility? (1 of 6)
Business Ethics: A part of the broader concern for ethical behavior, which affects people and their welfare
Ethics deal with the “shoulds” of life – the rules and values that determine actions people should follow when dealing with other human beings.
Although economic logic dominates business decision making, each business decision also has consequences for people, whether intended or not.
But ethical questions seldom have clear or unambiguous answers.

What Are International Business Ethics and Social Responsibility? (2 of 6)
International Business Ethics: unique ethical problems faced by managers operating across national boundaries.
International business ethics differs from domestic business ethics in two ways:
International business is more complex, as different cultures do not agree on what one “should” do.
MNCs often have power and assets that are equal to foreign governments, raising more ethical concerns over the use of such power.

What Are International Business Ethics and Social Responsibility? (3 of 6)
Corporate Social Responsibility (CSR): the idea that businesses have a responsibility to society beyond making profits
CSR is closely related to business ethics.
CSR is concerned with ethical consequences of company policies and procedures.
Practicing CSR, a business must take into account the welfare of other constituents in addition to stockholders.

What Are International Business Ethics and Social Responsibility? (4 of 6)
Primary Stakeholders:
those who are directly linked to a company’s survival; (i.e., customers, suppliers, employees, and shareholders)
Secondary Stakeholders:
those who are less directly linked to the company’s survival, but have impact; these include the media, trade associations, and special-interest groups
Addressing the needs of both groups is critical.
Shell Oil in Nigeria, Monsanto’s biotechnology products

What Are International Business Ethics and Social Responsibility? (5 of 6)
There are three important stakeholder attributes.
Power:
the degree to which that stakeholder can exert influence on a company and force them to implement changes.
Urgency:
the degree to which a company needs to respond to the needs of a stakeholder in order to keep those stakeholders satisfied.

What Are International Business Ethics and Social Responsibility? (6 of 6)
Legitimacy:
the degree to which actions of a stakeholder is viewed as acceptable.
To address the needs of stakeholders appropriately, multinationals can examine the levels of the three attributes and respond accordingly.

Exhibit 4.3:
Stakeholder Attribute Combination and Potential Multinational Response

Ethical Philosophy (1 of 2)
Two approaches to ethical decision making:
Traditional Views
Teleological ethical theories
Morality of an act based on consequences
Utilitarianism: greatest good for greatest number
Deontological ethical theories
Actions are good or bad in and of themselves
Contemporary philosophy
Moral Languages

Ethical Philosophy (2 of 2)
Moral Languages describe the basic ways that people think about ethical decisions and explain their ethical choices
Six basic ethical languages:
Virtue and vice
Self-control
Maximizing human welfare
Avoiding harm
Rights and duties
Social contract

National Differences in Business Ethics and Social Responsibility
(1 of 2)
National culture and social institutions affect how businesses manage ethical behavior and social responsibility.
Cultural norms & values influence conformity to laws, and bribery, among others.
Social institutions such as religion and the legal system are key institutions that affect what ethical issues are important to a society and how they are managed.
Although there are differences between societies, some actions are universally condemned (i.e., harming children).

Exhibit 4.4:
A Model of Institutional & Cultural Effects on Business Ethics Issues & Management

National Differences in Business Ethics and Social Responsibility
(2 of 2)
Institutional Anomie Theory and other research:
Some national culture and social institutions are likely to encourage breaking norms, justifying ethically suspect behaviors.
National cultures that value high achievement, high individualism, high universalism, high materialism are all related to higher deviance from norms.
Social institutions such as high industrialization, capitalist systems, lower family breakdown, and highly accessible educational systems all encourage deviance from norms.

Questionable Payments
and Bribery (1 of 3)
Questionable Payments are:
Bribes or gifts to expedite government actions or to gain advantage in business deals
In many countries, such payments are expected, and people routinely offer gifts or bribes
Like the U.S., most countries have a law forbidding corrupt practices, but enforcement varies widely.

Questionable Payments
and Bribery (2 of 3)
Corruption and bribery can have devastating effects on societies.
Companies routinely use poorer-quality products or materials to make up for the bribe, thus resulting in inferior products with poor quality.
Corruption can also result in collusion among firms, resulting in even higher prices.

Questionable Payments
and Bribery (3 of 3)

To understand the level of corruption in countries, multinational companies can rely on the Corruption Perception Index (CPI).
CPI, developed by Transparency International, gives an idea of the perceived levels of corruption within countries.

U.S. Foreign Corrupt Practices Act (FCPA) (1 of 3)
The Foreign Corrupt Practices Act (FCPA) is the U.S. Law forbidding corrupt practices.
The FCPA forbids US companies from illegal payments or gifts to officials of foreign governments for the sake of getting or retaining business.
A firm may avoid liability if it has no “reason to know” that its agent has paid a bribe.

U.S. Foreign Corrupt Practices Act (FCPA) (2 of 3)
Tricky component is the “reason-to-know” component:
Firms are liable for bribes if bribes are made by agents of the company.
Firms often use local agents, as they have “local know how” in conducting business.
Firms are liable if its common knowledge that agents bribe officials to commit illegal acts.
If no knowledge or reason to expect illegal agent behavior, then firm is not held liable.

U.S. Foreign Corrupt Practices Act (FCPA) (3 of 3)
The FCPA does not prohibit some forms of payments that may occur in international business:
Payments made under duress to avoid injury or violence
Small payments to encourage officials to do legitimate and routine jobs
Payments which are lawful in a country
“Grease” payments which do not seek illegal ends, but are used to speed up normal business

Exhibit 4.8:
FCPA: Number of Convictions

Toward Transnational Ethics
Globalization dramatically increases contact among people from different ethical and cultural systems.
This contact creates pressure for ethical convergence, and the development of transnational agreements among nations to govern business practices.
Despite differences in cultures, there are growing pressures to follow the same rules in managing ethical behavior and social responsibility.

Pressures for Ethical Convergence
There are four basic reasons for ethical convergence.
The growth of international trade and trading blocks
Interaction between trading partners which increases pressures to imitate business practices
Employees of varied cultural background who require common standards for conduct
An increasing number of business watchdogs

Prescriptive Ethics for the Multinational (1 of 4)
Prescriptive Ethics: Suggested guidelines for the ethical behavior of MNCs
Three moral languages should guide MNCs:
Avoiding harm
Rights and duties
Social contract
These three are the easiest to specify in written codes
Are also most appropriate in heterogeneous cultures

Prescriptive Ethics for the Multinational (2 of 4)
Sources of international ethics guidelines:
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

Prescriptive Ethics for the Multinational (3 of 4)
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
These may be sources for the Code of Conduct for the Multinational Company.

Prescriptive Ethics for the Multinational (4 of 4)
There are two rationales that support the rationales in the code of conduct for the multinational company
Basic deontological principles dealing with human rights (such as the right to work, right to be safe)
History of experiences in international business interactions (MNCs often ignore the environment)
MNCs may not always follow ethical principles.
Even if such Codes are not enforceable, they provide a safe guide to ethical conduct for management.

The Ethical Dilemma in Multinational Management:
How Will You Decide? (1 of 4)
Ethical relativism vs. Ethical universalism
Ethical relativism: Each society’s view of ethics must be considered legitimate and ethical. (When in Rome…)
Ethical universalism: Basic moral principles transcend cultural and national boundaries
Difficulty in following either standard
Ethical relativism can become convenient relativism.

The Ethical Dilemma in Multinational Management:
How Will You Decide? (2 of 4)
Convenient Relativism occurs when companies use the logic of ethical relativism to behave any way they please, using differences in cultures as an excuse.
Similarly, extreme moral universalism can lead to problems of cultural imperialism in which managers assume they know the correct and ethical ways of behaving, viewing other values as inferior.

The Ethical Dilemma in Multinational Management:
How Will You Decide? (3 of 4)
Should a MNC follow local or universal norms?
Five steps to make the decision
Identify if there are questionable practices of a decision.
Understand whether the questionable practice violates any laws.
Decide if the questionable practice is simply a cultural difference or an ethics problem

The Ethical Dilemma in Multinational Management:
How Will You Decide? (4 of 4)
Five steps to make the decision (cont.)
Assess whether the ethics problem or cultural difference violates any industry or other international code.
Assess whether a company has leverage (something of value to give) in the host country so that it can follow its own practices.

Individual Ethical Decision Making for the Multinational Manager (1 of 3)
Forms of analyses:
Economic analysis: focuses on what is the best decision for a company’s profits
Legal analysis: focuses on only meeting legal requirements of host and parent countries
Ethical analysis: goes beyond focusing on profit goals and legal regulations to consider what is the “right” thing to do.

Individual Ethical Decision Making for the Multinational Manager (2 of 3)
Ethical analysis has 3 components:
One’s organization
The national culture where the firm operates
Personal ethical beliefs
Purely ethical issues must be weighed against economic and legal analyses.
MNCs are guests in other nations, and their actions will impact their host country and its inhabitants.

Individual Ethical Decision Making for the Multinational Manager (3 of 3)
Consider GE’s principles for high ethics and integrity
Committed leadership and leading by example
Going beyond financial, legal, and country rules
Staying ahead of regulators
Assigning responsibility to all employees
Letting employees have a say in ethics
Holding leaders accountable with ethics metrics

Exhibit 4.10:
Decision Points for Ethical Decision Making in Multinational Management

Summary
Chapter 4 provides background on business ethics.
Multinational managers face ethical dilemmas similar to their domestic counterparts.
Challenges are magnified by the complexity of working across different countries and cultures.
National contexts influence ethics in organizations.
Despite some convergence, ethical differences exist.
The individual MNC manager must decide.

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