Paavai Institutions Department of MBA

UNIT-V
CONFLICT MANAGEMENT AND ETHICS IN
INTERNATIONAL BUSINESS MANAGEMENT

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LEARNING OBJECTIVES

At the end of this unit the student will be able to understand the basic
concepts of conflicts in international business, negotiation, ethical issues and
decision making.

CONTENTS

UNIT – V CONFLICT MANAGEMENT AND ETHICS IN

INTERNATIONAL BUSINESS MANAGEMENT

1.1 DISADVANTAGES OF INTERNATIONAL BUSINESS

1.2 CONFLICT IN INTERNATIONAL BUSINESS

1.3 FACTORS CAUSING CONFLICTS

1.4 SOCIAL AND ETHICAL ISSUES

1.5 NEGOTIATIONS

1.6 BARGAINING PROCESS

1.7 ROLE OF INTERNATIONAL AGENCIES IN CONFLICT

RESOLUTION

1.8 CORPORATE CITIZENSHIP

1.9 ETHICAL ISSUES IN INTERNATIONAL BUSINESS

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1.10 PROCESS OF ETHICAL DECISION-MAKING

1.11 ORGANIZATIONAL CULTURE:

1.12 ORGANIZATIONAL FACTORS

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1.1 DISADVANTAGES OF INTERNATIONAL BUSINESS

As is said that, "life is not a bed of roses", international business is not all that lovely. It
has its problems. The important problems include:

Political Factors: Political instability is the major factor that discourages the spread of
international business. For example, in the Iran-Iraq war, Iraq-Kuwait war, dismantling of
erstwhile USSR, Civil Wars in Fiji, Malaysia, and Sri Lanka, military coups in Pakistan,
Afghanistan, frequent changes of political parties in power and thereby changes in government
policies in India etc., created political risks for the growth of international business. Also,
Indo-Pak Summit at Agra in July, 2001 ended in a no compromise situation, which affected
international business. Though there are political problems between India and China, business
houses of these two coteries have developed opportunities for Indo-China business relations.
In fact, these two countries are also working in this direction.

Huge Foreign Indebtedness: The developing countries with less purchasing power are
lured into a debt trap due to the operations of MNCs in these countries. For example, Mexico,
Brazil, Poland, Romania, Kenya, Congo, and Indonesia.

Exchange Instability: Currencies of countries are depreciated due to imbalances in the

balance of payments, political instability and foreign indebtedness. This, in turn, leads to
instability in the exchange rates of domestic currencies in terms of foreign currencies. For
example, Zambia, India, Pakistan, Philippines depreciated their currencies many times. This
factor discourages the growth of international business

Entry Requirements: Domestic governments impose entry requirements to multinational For

example, an MNC can enter Eritrea only through a joint-venture with a domestic company
However, with the establishment of World Trade Organization (WTO), many entry requirements
the host governments are dispensed with.

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Tariffs, Quotas and Trade Barriers: Governments of various countries impose tariff
import and export quotas and trade barriers in order to protect domestic business. Further
these barriers are imposed based on the political and diplomatic relations between or among
Governments. For example, China, Pakistan and the USA (before 1998) imposed tariff
quotas and barriers on imports from India. But the erstwhile USSR and present Russ
liberalized imports from India.

Corruption: Corruption has become an international phenomenon. The higher rate bribes.
And kickbacks discourage the foreign investors to expand their operations.

Bureaucratic Practices of Government: Bureaucratic attitudes and practices of Government

delay sanctions, granting permission and licenses to foreign companies. The best example is
Indian Government before 1991.

Technological Pirating: Copying the original technology, producing imitative products,

imitating other areas of business operations were common in Japan during 1950s and 1960s, in
Korea, India etc. This practice invariably alarms the foreign companies against expansion.

Quality Maintenance: International business firms have to meticulously maintain quality of

the product based on quality norms of each country. The firms have to face server
consequences, if they fail to conform to the country standards. Consumers' forum/
associations also inspect quality in addition to the government machinery in various foreign
countries.

High Cost: Internationalizing the domestic business involves market survey, product
improvement, quality up gradation, managerial efficiency and the like. These activities need
larger investments and involve higher cost and risk. Hence, most of the business houses
refrain themselves from internationalizing their business.

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CONCLUSION However, the benefits of international business outweigh the problems. Added
to this, globalization is the order of the day. Most of the countries eliminated the barriers and
paved the way for the growth and expansion of international business. In fact, international
business, during the third millennium (2001 and beyond) is just an extension to inter-regional
business within a country.

1.2 CONFLICT IN INTERNATIONAL BUSINESS

INTRODUCTION Conflicts arise between the foreign companies and host country and foreign
companies and domestic companies. Global companies also have the conflicts with the home
country companies and governments. Conflicts arise mostly due to the conflict of interests of
global companies with those of:

 host country's companies

 host country's government
 host country's customers
 host country's society
 home country's companies
 home country's government and
 home country's customers

Thus, various factors contribute for the conflicts in international business. Now, we shall
discuss these factors.

1.3 FACTORS CAUSING CONFLICTS

The objective of most of the global companies is to maximize profits worldwide along with
earning as much profits as possible in each country. The purpose of most of the countries in
inviting or allowing foreign companies is to get the long term benefit from their operation. These
varying goals result in conflicts. Broadly, causes of conflicts can be studied from the view point
of host country and home country.

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Conflicts from the Point of View of Host Country Host country particularly a developing
country prefers the global companies to contribute to its economic and social development. It
also prefers the global companies to pay tax and discharge other obligations to it. Host country
demands the global- companies to create employment opportunities in its country rather than in
other countries.

CONFLICT BETWEEN THE HOST COUNTRY AND THE TRANSNATIONAL

COMPANY

Another area of conflict between national governments and MNCs is relating to the
transfer pricing policies. MNCs transfer the goods from one of its subsidiary to another or to its
headquarters. They price these products in such a way that they reduce the amount of tax
payable to the host government. This pricing policy might also deprive a country of a much
needed foreign exchange, over output levels (which have an impact on local employment). Now,
we discuss the conflicts between transnational companies and host country in the following
directions:

 Macro-economic Areas
 Production Areas
 Marketing Areas
 Finance Areas
 Human Resource Areas
 Social and Ethical Areas,
 Environmental Issues, and
 Competing Areas.

Macro-Economic Areas: Multinational companies enter various global economies with a

view to produce and market those products which are profitable. Production of consumer goods
is more profitable involving less risk. As such most of the MNCs prefer to produce consumer
and consumer durable goods.

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Macroeconomic areas include:

 Structural factors
 Exploitation of Natural Resources.

Structural Factors: The host countries particularly developing ones prefer the MNCs to
establish core, infrastructural and capital goods industries in their countries in order to build
national economic competencies.

The goal of the developing host countries i.e., building national competencies may not be
served by the MNCs. The practice of the MNCs lead to a lop unbalanced industrial development.
In fact, many developing countries experienced this consequence. For example, HLL, Colgate,
Procter and Gamble and Johnson and Johnson established consumer goods industries in many
developing countries. This practice ultimately results in conflict between the MNCs and host
countries.

Exploitation of Natural Resources: Another major macro-economic area of conflict is the

utilization of natural resources of the host country. Host country expects the MNCs to use its
natural resources conservatively. But the MNCs exploits the natural resources of the host country
mostly on commercial lines of cost benefit analysis rather than keeping the interest of the future
generations of the host country in mind.

This practice of the MNCs results in conflict of interest in conserving national resources
of the host country. There is another area of conflict in this regard. MNCs conserve the national
resources of the home country and exploit the national resources of the host country. For
example, it is criticized that the USA has the richest petroleum resources in the world and the
American MNCs conserve the home country's petroleum resources and exploit the petroleum
resources of the Middle East countries.

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Multinational companies established their oil refining units in Nigeria and exploited the
petroleum resources during 1970s and 1980s by conserving the petroleum resources of their
respective home countries. Nigeria suddenly became rich in 1-970s and became poor country by
1990s when majority of its petroleum resources were exhausted. Thus, MNCs exploit the natural
resources of host countries, produce products out of them and sell the products in their home
countries and in various foreign countries. This practice of MNCs leads to conflict between host
countries and MNCs.

In addition to the macro-economic aspects, various micro economic aspects result in

conflicts. Production Areas of Conflict: Production factors include location of manufacturing
facilities, technology, product ingredients, using scarce local resources.

Host countries normally prefer the MNCs to locate the manufacturing facilities in
backward areas in order to contribute to the balanced regional development. But MNCs locate
their manufacturing facilities in highly developed areas in order to take the advantage of
infrastructural facilities, proximity to the markets etc., and causing problems to the local
authorities of the host country. This practice leads to conflict between host country and MNCs.

Host countries expect the MNCs to adopt the latest technology in the units established in
their countries. Domestic companies can get the benefit of the high technology of the foreign
companies. But the foreign companies export the outdated technology in their home countries to
various foreign countries. As such host countries conflict with the MNCs.

Host countries prefer the MNCs to produce the products which are compatible with the
culture of the country, environment of the country and long-run health of the people. But the
MNCs design the products; decide the product ingredients and production process which would
result in lowest cost of production and/or offer excitement to the customers. Thus, the MNCs
aim at high market share and profit maximization whereas the host governments prefer products
to contribute to the people's well-being. It is criticized that the Coca-Cola and Pepsi-Cola used
excessive pesticides in their products which harm the health of the people in the long run in
India. This difference in the interest results in conflicts between MNCs and host countries.
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The host country government expects the MNCs as well as domestic companies to make
use of the scarce resources more cautiously. But the MNCs use the scare resources of the host
country more on cost-benefit and profit principles rather than on social considerations. It is
criticized that the scarce drinking water in Hyderabad and Secunderabad cities was used by the
Coca Cola during the summer of 2003. The public criticized the corporation of Hyderabad for
supplying drinking water to Coca-Cola.

Marketing Areas: The conflicting situations in marketing areas mostly include conflicts in'
promotional programmers, pricing and place of markets.

Host countries prefer the MNCs to be ethical in advertising and personal selling. It does
mean that the MNCs are expected to provide accurate information to the customers rather than
misleading information or inappropriate information. However, MNCs design the advertising
copy involving excitement, adventures, luring and attracting the customers. In addition the
advertising copies are designed based on the psychological weaknesses of the people. Sometimes
these advertisements provide misleading and false information. Thus the MNCs, sometimes act
against the wishes of the host governments and well-being of the host country people. These
incidents result in conflict.

Pricing is another area of conflict between host country and foreign companies. Foreign
companies are mostly interested in making higher profits and also get back its investment as
early as possible. Therefore, they fix relatively higher prices by following the 'Skim-the cream'
pricing policy. Many middle and low income group people in developing countries are deprived
of using the MNC's products. As such the host country prefers the MNCs to fix lower prices by
following the penetration pricing policy.

The area of marketing location is another area of conflict between MNCs and host countries.
MNCs prefer to sell in 'those geographical locations or to those income groups where they can
earn a higher price. This practice is in contrast to the interest of the people and government in
host countries.

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Finance Areas: The important area of conflict between the MNCs and host countries is
division of profits between MNCs and local operations. MNCs try to maximize their share by
paying less to various stakeholders like suppliers of various inputs, bankers and financial
institutions, employees, taxes to government, contributions to society etc But the host country's
government, ancillary industrial units, suppliers of inputs, financial institutions etc., would
expect a fair share due to them in the operations. Further, MNCs manipulate accounting
procedures and take advantage of the laws of the host country for their benefit by turning down
the interest of the host countries.

Human Resource Areas: Host countries expect that the entry of MNCs contributes to the
economic development of their countries by boosting industrial activity. This in turn enhances
the employment opportunities directly as well as indirectly.

Direct employment opportunities arise from the MNCs operations. Host country expects
the MNCs to contribute to enhancing the direct employment by adopting labor-intensive
technology and by employing the locals. But the MNCs never think of adopting labor-intensive
technology in view of its limitation. Further, the transnational companies prefer to follow
geocentric approach in employment policies in view of its advantages. As such the expectation
of the host country in this regard would not be fully fulfilled by the MNCs.

The transnational companies follow geocentric approach even in all other areas of
business operations. Therefore, the indirect employment opportunities may not be created as
expected by the host countries.

However, the advanced countries may impose conditions on the developing countries
regarding labor standards and environmental issues with a view to have competitive advantage.
This control would result in conflict

It is further viewed that the transnational’s prefer to employ the locals only at the lower
levels rather than at the managerial levels. MNCs do not invest considerably on the human
resource development of the local employees.

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MNCs structure low ceiling careers and low ceiling pay scales and benefit programmers.
MNCs do not recognize trade unions in host country companies and in fact they discourage
them. Thus, most of the human resource management areas result in conflicts between the MNCs
and host countries.

1.4 SOCIAL AND ETHICAL ISSUES

The social concern and ethical issues on the one hand and profit orientation of the MNCs
on the other hand result in conflicting situations between the MNCs and the host countries. Both
the MNCs and the host countries should strike a balance between social and ethical
considerations and profit considerations.

In fact, the business, let it be domestic or transnational should live in the society, draw
the inputs from the society and sell the output to the society of the host countries to a greater
extent. As such, it is viewed that the transnational companies should discharge its responsibilities
towards the society of the host country. Similarly, the MNCs should be ethical in doing business
in host countries as the unethical practices adversely affect the customer's health, domestic
business operations and so on so forth.

But, the MNCs concentrate exclusively on business principles upholding Milton's point
of view on social responsibilities in case of host countries and follow the modern point of view
on social responsibilities in case of home country. For example, the Tobacco majors of the USA
take all possible care and follow the government regulations in selling cigarettes in home
country, but forget these regulations in marketing their products in host countries particularly in
developing countries.

Similarly, the US based pharmaceutical MNCs and transnational’s producing baby

products follow the Government regulations in their home country, but follow exploitative and
unethical approaches in developing host countries. The same also holds well in case of European
MNCs and Japanese transnational’s in implementing their home countries outdated technology
in host countries.

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Now, we shall discuss the environment issues.

Environmental Issues: Some of the US companies shifted their manufacturing facilities to

Mexico due to the stringent environmental regulations in the USA and polluted Mexican
environment. This resulted in a conflict between the USA and Mexico as these companies
initially polluted Mexican environment and latter the US environment. This happened because
the US companies located their manufacturing facilities in Mexico but close to the US border.
USA solved this conflict by admitting Mexico into NAFT A.

Union Carbide polluted the Bhopal environment. This conflict is not resolved to the
satisfaction of the Bhopal gas victims and Indian Government.

MNCs shift their manufacturing facilities to developing and underdeveloped countries

due to the stringent environmental regulations in developed countries. They, in turn, pollute the
environment of the host countries.

Competing Areas: MNCs operating in developing countries formulate the strategies resulting
in competition rather than collaboration with the domestic business of the host countries.
Consequently, host country's small industries became m\oral and large industries became sick,
which, in turn, resulted in wastage of economic and human resources. This situation is more
prevalent in most of the developing countries including India after globalization.

In addition to these conflicts, company level conflicts between MNCs and domestic firms
arise over a number of issues.

Company Level Conflicts: Company level conflicts include the conflicts between the partners
of the joint ventures, partners of the business alliances like amalgamations, absorptions, mergers,
etc. These conflicts also include: conflicting objectives of the MNCs, conflicts between MNCs
and governments of the host countries, conflicts between MNCs (for example, conflicts between
Coca-Cola and Pepsi-Cola in India), conflicts between the MNCs and various stakeholders like
input suppliers, market intermediaries, customers, etc.,

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1.5 NEGOTIATIONS

We discuss the conflict resolutions and negotiations in the following lines:

 Negotiation strengths
 Bargaining process
 Behavioral Aspects in Negotiations
 Bilateral and Multilateral Agreements
 Corporate Citizenship

NEGOTIATING STRENGTHS: GOVERNMENT AND COMPANY

Government formulates regulations to control and prevent disputes and conflicts.

Companies comply with these regulations. Highly developed and politically stable countries
attract foreign companies as they offer large markets and high degree of political stability. The
USA, Canada and Germany are large recipients of foreign investments. Governments of these
countries have biggest bargaining strengths.

A number of factors influence the bargaining strengths of companies. Ownership in

traditional products like agriculture and extractive industries cannot have more bargaining
strength. If more companies offer the same services or products and compete among themselves
their bargaining position becomes weak. General Motors and Ford competed to build Sedans in
China and General Motors and Daewoo competed to acquire a public sector company in Poland.
Then the host country would be in strong position. MNCs can have strong bargaining power
when there are a few competitors and when they control over certain assets like:

Technology:

IBM entered many countries including France in view of their strength of technology.

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Marketing Expertise:

Coca-Cola entered many countries in view of its strength of marketing

expertise.

Product Diversity:

Companies with diversified products have the advantage in bargaining strength.

Joint Companies:

Both the host country and the MNC can negotiate in a balanced way when
they operate through a joint venture.

Joint venture reduces the dependence of host countries on MNCs; the risk can be spread to
other party and enhances the strength of MNCs in dealing with the host country governments.

1.6 BARGAINING PROCESS

Comprehensive bargaining between MNCs and host countries long before they agree on
terms of operations. Agreements between the parties takes place only there are overlapping
acceptance zones in the bargaining process. The outcome of foreign negotiations will depend
partly on other recent negotiations. Both the parties have outer limits for bargain. If these
bargaining zones arise when the outer limits of both the parties overlap. The developing
countries offer incentives to attract the foreign investment. The two parties negotiate with each
other the various issues like labor problems, dumping, employing locals at managerial levels, and
appointment of market intermediaries.

BEHAVIOURAL ASPECTS IN NEGOTIATIONS

Various cultural factors affect the negotiation process; Misunderstandings may result due
to differences in culture, nationalities, languages, customs and professions. Cultural differences
among negotiators arise as follows:

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 Some negotiators speak point blankly like Americans while some negotiators speak
indirectly like Japanese.
 Some negotiators make fast decisions accurately.
 Some negotiators take a pragmatic view while others take a holistic view.
 Some expressions of the negotiators may not be translated accurately.

Hence, negotiations, to be effective may be based on own culture, culture of the counter
party and hybrid cultures.

BILATERAL AND MULTILATERAL AGREEMENTS

Many countries establish bilateral agreements with MNCs in order to improve investment
climate in their countries. These agreements provide insurance and guarantee of the foreign
investment in host countries. In fact the World Bank provides guarantees for the private
investments. Similarly, Export-Import Banks of various countries also provide guarantees for
foreign investments.

MNCs prefer to have third country intervention in dispute settlement, if the government
and other agencies of the host country fail to resolve the conflicts. The third party role is
generally played by the International Chamber of Commerce in Paris, the Swedish Chamber of
Commerce and the specialized commodity agencies in London.

Government to government trade disputes are now resolved by the Dispute Settlement
Body of the World Trade Organization.

The USA and Iran had a difference and could not resolve between them. Two
Governments froze each other's assets due to political confrontation. Iran had more investments
in the USA than the USA had in Iran. The issue was referred to the board of arbitrators and Iran
has settled with US investors on a case-by-case basis.

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The World Bank provides for settlement of disputes through the International Centre for
Settlement of Investment Disputes. In addition the World Bank established Multilateral
Investment Guarantee Agency (MIGA). MIGA provides insurance against losses from
expropriations, war, civil disturbances, currency convertibility and breach of contract.

Intellectual Property Rights: Key areas of business-government and government-to-

government conflicts in international business recently have been intellectual property rights.
The GATT agreement from the Uruguay Round provides for IPR reciprocity - a country must
grant to foreigners the same property rights as are available to its own citizens. The intellectual
property rights include: patents, trademarks, copy rights and piracy. The disputes relating to
these areas can be prevented by following the GATT agreements from the Uruguay Round.
WTO has taken over the intellectual property rights administration.

1.8 CORPORATE CITIZENSHIP

Foreign companies recently realized that by being a good and responsible corporate
citizen, they can minimize the conflicts and disputes with the host country and with all
stakeholders of the host country. MNCs have to satisfy a number of stakeholder’s viz., higher
salaries for employees, low price products for the customers, high rate of dividend for the
shareholders, prompt payment of taxes to the government etc.

MNCs may invite local participation in equity in order to reduce criticism and increase
supporters. Some MNCs undertake social functions to build local support and enhance their
performance. Dow Chemical’s financed a Kindergarten in Chile, Citibank participated in a
reforestation programmed in the Philippines and Johnson and Johnson financed the study
programmed in Nursing abroad for Kenyans. MNCs should keep the host country government in
gaining face as they need government support continuously.

1.7 ROLE OF INTERNATIONAL AGENCIES IN CONFLICT RESOLUTION

International agencies perform conflict preventive functions. Now we shall discuss the role
of these agencies in preventing conflicts in international business.

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The United Nations Code of Conduct for Transnational Corporations, 1983: This code is
a comprehensive set of recommendations regarding the behavior of MNCs and host countries
in preventing conflicts.

The coverage of these codes include: respecting the national sovereignty

of host countries, adhering to nations economic and social goals, observing domestic laws,
respecting human rights, not engaging in corrupt practices, disclosing information to host
government, etc.

UNCTAD Codes: United Nations Conference on Trade and Development Codes include
negotiations to achieve common approaches to control restrictive trade practices, dissemination
of information on restrictive business practices, flexibility to relax the rules of developing
countries in order to encourage foreign investment, technology transfer, etc.

The OECD Code of Practice on MNC operations: The 1976 declaration sought to encourage
MNCs to contribute positively to the economic and social development of the host nations.
The provisions of this declaration include: Contribution to host country's science and
technology, not to acquire dominant position in the host country, provide full information to
tax authorities, encourage employee participation in management, contribute to the host
country's balance of payments, etc.

The ILO Declaration for MNCs and Social Policy

This code is adopted in 1977. This code deals with the issues relating to employment,
vocational training, working conditions, and industrial relations, employee participation in
management, employee consultations, providing information to workers' representatives, etc.
These codes help the MNCs and host countries to prevent conflicts and disputes among MNCs,
host country business firms, host country governments, 'etc.

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Dispute Settlement System in World Trade Organization

WTO provides a more powerful mechanism to solve disputes arise due to trade among
member countries. The rules are set out in the WTO Dispute Settlement Understanding (DSU).
Disputes between or among member countries arise as one country adopts the trade policy that is
viewed by other members as breaking the WTO agreements.

A third group of countries may have an interest in the issue as the outcome of the dispute
settlement might affect it. This group of countries enjoys some rights in the hearing process of
the case. This group of countries is known as 'third party'.

1.9 ETHICAL ISSUES IN INTERNATIONAL BUSINESS

Introduction to International Business Ethics

International business ethics, as the name implies, is that part of business ethics that deals with
international issues. It encompasses moral judgments made about these issues, as well as the
various theoretical considerations connected with explaining and/or justifying such judgments.
Beyond this, the term has no precisely defined agreed upon meaning, and it is used in many
different ways to refer to a variety of topics. For some people, it refers to the ethical dimension
of any business relation involving two or more countries. Thus the NAFTA treaty among the
U.S.A., Canada, and Mexico, when considered from an ethical point of view, is a topic in
international business ethics.

Yet the ethical issues are concerning NAFT A that were raised in editorials and in journals prior
to the adoption of the agreement were very different in the U.S.A. than they were in Mexico or
Canada. Some in the U.S.A. questioned the morality of an agreement that would lead to the
transfer of US jobs to Mexico, while some Mexicans questioned the morality of an agreement
that would lead to greater dominance of U.S. business in Mexico. In both instances, international
business ethics was an extension of national approaches to business ethics issues.

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For this reason, other people prefer to think of international business ethics as the attempt
to transcend national viewpoints and to look at international business from an ethical viewpoint
that is internationally neutral.

Importance of International Business Ethics

Ethics play a very important role in business. The basic importance of ethics is described below:

1. Ethics Corresponds to Basic Human Needs: It is a human trait that man desires to be
ethical; not only in his private life but also in his business affairs where, being a manager,
he knows his decisions may affect the lives of thousands of employees.
2. Values Create Credibility with the Public: A company perceived by the public to be
ethically and socially responsive will be honored and respected even by those who have
no intimate knowledge of its actual working. There will be an instinctive prejudice' in
favor of its products, since people believe that the company offers value for money. Its
public issues will attract an immediate response.
3. Values Give Management Credibility with Employees: Values are supposed to be a
common language to bring leaderships and its people together. Organizational ethics,
when perceived by employees as genuine, create common goals, values and language.
The management has credibility with its employees precisely because it has credibility
with the public. Neither round business strategy, nor a generous compensation policy and
fringe benefits can win employee credibility; and perceived moral and social uprightness
can.
4. Values Help Better Decision-Making: Another point of great importance is that an ethical
attitude helps the management make better decisions, i.e., decisions which are in the
interest of the public, their - employees and the company's own long term good, even
though decision-making is slower. This is so because respect for ethics will force a
management to take various aspects - economic, social, and ethical - in making decisions.

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5. Ethics and Profit Go Together: A company which is inspired by ethical conduct is also
profitable one. Value driven companies are sure to be successful in the long run, though
in the short run, they may lose money.
6. Law Cannot Protect Society, Ethics Can: Where law fails, ethics can succeed. An ethical
oriented management takes measures to prevent pollution and protect workers' health
even before being mandated by law.

Ethical Values in International Business

The ethical values involved in the international business include:

 Utilization of the natural resources of the host country appropriately and in an optimum
way.
 Utilization of the natural resources for the production of goods for the consumption in the
domestic country.
 If these goods are exported, the benefit of foreign exchange should be provided to the
host country.
 Enter the foreign country mostly through joint venture with the business firms of the host
countries.
 Transfer of technology to the developing countries.
 Develop the managers and human resources of host countries and particularly of the
developing host countries.
 Discharge the responsibilities to various social segments of the host country. These
responsibilities include:
o Development' of medical facilities, construction of hospitals. Educational
institutes, public utilities, water, roads, etc.
o Donate medicines; books, computers and the like to the people, educational
institutes of the host country.
o Market qualitative and economically appropriate goods to the customers.
Avoid market.ing of outdated and spoiled products in the developing host
countries.

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o Avoid marketing of those products which harm the health of the citizens of
the host country.
o Avoid marketing of those products/services which do not have the
compatibility with the culture of the host country.
o Employ the local people to the extent possible and give them the opportunity
to earn income and develop the skills.
o Treat the foreign employees and local employees equally in offering salary,
career advancement, and providing the working life.
o Non-involvement in political affairs of the host country.
o Help the host Government during the periods of natural calamities like floods,
drought, earthquakes, cyclones, etc.
o Avoid bribing or corrupting the government officials of the host country.
o Pay the taxes to the Government of the country accurately.
o Maintain the accounts ethically as per the accounting standards of the host
country.
o Maintain sound business relations with the market intermediaries, suppliers of
raw materials and other inputs, bankers, and financial institutions.

Ethical Issues in International Business

It would be relevant to mention ethical issues that have been a subject of consideration
among international managers in recent years. These issues are as following:

Ethics and Human Rights:

It is often debated whether an international firm should move to a country, say, to China
where, human rights are found violated. One view is that, trade with' and investment in such
countries hardly deters human rights relations with China. On the contrary, dismantling of
apartheid in South Africa was possible through economic sanctions by some Western countries.

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The other view is that economic prosperity and political freedom go side-by-side. If
foreign trade and investment bring about improvement in the living standards, human rights
abuses would be contained. It is said that this was the philosophy behind President Clinton's
decision to decouple human rights issues from foreign trade policy formulation.

Safety and Environmental Issues:

It is often debated whether the multinational corporations should implement' home

country norms of safety and pollution measures in the host country. As one finds; the safety and
environment protection rules are very strict in Western countries. If those rules are followed in
developing host countries, the cost of production will be higher and, the competitive strength Vis
a Vis the local manufacturers will be eroded. If they are not followed, it goes against the ethical
norms of the multinational company. One such case is the employment of child labor, which is
unethical according to Western countries norms but very common in most developing countries.
In such cases the company should adopt consistency. This does not mean that the company
should act consistently everywhere its subsidiaries exist. It should abide by the local customs so
long as it is tolerable by its own standards. If it is beyond tolerance, the company should stick to
its own ethical norms.

Issue of Corruption:

In Western countries, bribery is highly unethical. In the United States of America,

there is a Foreign' Corrupt Practices Act that prohibits companies from bribing any foreign
official. The OECD countries do not allow their companies to enjoy tax deductions for bribing
overseas. Sometimes it is said that' making illegal payments speeds-up the approval and the
multinational corporations have not to wait longer for entry. But it cannot be denied that since
money moves to bureaucrats/politicians that remains unproductive and that weakens the growth
rate of the economy. In other words, bribery and corruption 'is counterproductive.

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On the contrary, there are many cases of illegal payment reported from different comers
of the globe. In China, reciprocal gifts are common and not unethical. In such cases, an
international manager has to draw a line between what is ethical from the viewpoint of local
custom and what is clearly unethical and then to take a decision:

Issue of Consumerism:

In developed countries, a lot of consumer protection activities take place. But in

developing countries, they are lacking. It is reported that multinationals sell many harmful
products in emerging economics. For example, companies market a number of medicinal
products that are banned in their home country. They often perform human trials, especially on
those who are uneducated.

Companies manufacturing tobacco products sell them in developing countries without

sufficient warning, whereas in the home market, they are sold under heavy marketing
restrictions. Thus, it is advisable for multinational companies to care for social responsibility
wherever they operate. They need apply home country norms in order to abide by ethical norms.

Issue of Transfer Pricing:

Transfer pricing is a means to encourage illegal transfer of funds among the

different units of a company through over invoicing/under invoicing of export and imports. In
many countries, there are strict rules restricting transfer pricing. Customs authorities are vigilant
to check such practices. Even so, such practices are common. It is a fact that such practices lower
the tax burden of the firm as a whole and smoothens the firm's international cash management,
but it is unethical as it brings about loss to the exchequer in both the home country and the host
country.

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Ethical Decision Making

The real identity of a manager is to make decisions regularly and correctly. According to
Alvin Trailer, "The very speed of change introduces a new element into management, forcing
managers to make more and more decisions at a faster and faster pace". Nowadays management
simply has become the process of decision- making. All the parts of management-pass through
decision-making towards goal achievement like.

Management
Goal
o Planning
o Organizing
Achievement
o Leading.
o Controlling

Whatever decision of any kind has been taken by any manager has some ethical implications:

1.10 PROCESS OF ETHICAL DECISION-MAKING

A logical five steps analytical structure has been developed to help out the students how
they should make the decisions? Identification of the present situation is the basic foundry and
most crucial step. A manager must understand the very nature of the problem or circumstances.
Again ethical considerations are involved in alternations generated by decision-maker, now
evaluations and selection depend upon so many factors it involves ethical reasoning of the
decision-maker. Structure of ethical decision making can be easily understood by looking at
following figure

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Identify the Problem

Generate Alternative Solutions

Evaluate Alternatives using Cost

Benefit Approach

Select the Solution

Implement the Chosen Solution

Features of Ethical Decision Making Process Model

The main features of the decision process model include:

Personal Traits:

Business decisions are made by individuals or by committees, thus the ethics of business in
reality is the ethics of the individuals making-up the business. A person's ethics are influenced by
his personal values, ego strength, field dependence, locus of control, stage of moral development,
moral approbation and also by the culture' of the organization:

Values:

The individual's attitudes are based on the personal value system of the decision-maker:
A value is a belief on which a man acts by preference. A value is a prescriptive belief. Thus,
ethical values are prescriptive beliefs about what is right and whilst is 'wrong.

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Ego Strength:

Ego strength is actually another term for self-confidence. Ego strength is associated with
personal beliefs. A person with high ego strength would be expected to rely more on his own
personal values and beliefs of what is right and what is wrong and be less influenced by others.

Field Dependence:

Individuals with high field dependency make greater use of information provided by
others to clarify issues when situations are ambiguous. Field-independent persons tend to rely on
the information they possess, Decisions made by field-independent persons are more likely to be
based on their personal values and are likely to deviate less from similar decisions they would
make outside the organization.

Locus of Control:

Locus of control reflects an individual's understanding of the control they have over
life's events. An 'external' believes that life's events are controlled by destiny fate or luck. An
'internal' believes that life's events are controlled by his own actions.

V. Moral Development:

There are six stages ~f moral development and an individual develop sequentially
through the stages. The criteria for determining morally correct action differ for each stage.

The criteria are:

Stage 1: Actions that avoid punishment,

Stage 2: Actions that serve one's needs,

Stage 3: Actions that gain approval from others;

Stage 4: Actions that abide laws and authority,

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Stage 5: Actions taken to abide by social contracts, and.

Stage 6: Actions supported by universal principles.

All six stages provide rationale for moral action.

VI) Moral Approbation:

Moral approbation is the desire to avoid moral disapproval; Human beings have a
need to be moral. This need may be biological, social or religious; it motivates individuals to
gain moral approval from others and to avoid moral disapproval, Moral approbation theory is
based on four Components of an act:

 Magnitude of Consequences The magnitude of consequences of an action is the sum of

all harms and benefits -associated with the act.
 Certitude of Evil: The degree of moral ambiguity in a situation is referred to as the
certitude of evil. The moral responsibility on an individual is greater when an act is
clearly immoral than when it is morally ambiguous.
 Degree of Complicity: The degree of complicity describes the extent of personal
involvement in causing or failing to prevent an immoral act. The .moral responsibility of
a person is directly related to his degree of involvement in the act. Extent of Pressure to
 Comply: The extent of pressure to comply refers with the degree of freedom an
individual possessed when engaged in any immoral act. The greater the freedom, the
greater the moral responsibility, External pressure may take the shape of economic,
physical or psychological pressures.

1.11 ORGANIZATIONAL CULTURE: It is the common set of assumptions, beliefs and

values that has developed within the organization to cope with the external and internal
environment and which is passed-on to new members to guide their actions within these
environments.

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The underlying organizational values are the core of the firm's culture:

 Trust and respect individuals,

 Focus on a high level of achievement and contribution.
 Conduct business with integrity.
 Achieve common objectives through team-work.
 Encourage, flexibility and innovation.

While organizational culture serves as its overall structure, specific aspects of an

organization culture need individual treatment. Organizational climate and organizational goals
are' parts of organizational culture.

Decision Processes:

Management, problems may, be divided into 'strategic and. tactical ones. Strategic
problems involve long-term commitments of resources, e.g., where to locate a new plant.
Tactical problems involve short-term resource deployments supporting strategic decisions such
as how many production lines to operate in the plant next month. Tactical decisions are made by
lower-level managers while strategic decisions are made by upper-level managers. A decision of
either type resulting in unethical behavior is not to be condoned.

Framework for Ethical Decision Making

It is assumed that people make difficult decisions within an organization in the same way
they resolve difficult issues in their personal lives. Within the context of organizations, however,
few managers or employees have the freedom to decide ethical issues independently of
workplace pressures. Philosophers, social scientists, and various academics have attempted to
explain the ethical decision-making process in organizations by examining pressures such as the influence
of co-workers and organizational culture, and individual-level factors such as personal moral philosophy.
'

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Model of decision making is shown in figure 5.3. This model synthesizes current knowledge, of
ethical decision-making, I" the workplace within a framework that has strong support in the literature.
The model shows that the perceived Intensity of ethical and legal issues, individual factors (for example,
moral development and personal moral philosophy), and organizational factors (for example,
organizational culture and co-workers) collectively influence whether a person will make an unethical
decision at work. While it is impossible to describe precisely how or why an individual or work group
might make such a decision, it is possible to generalize about average or typical behavior patterns within
organizations. Each of the model's components is briefly described below in figure; the model is practical
because it describes. The elements of the decision- making process over which organizations have some
control.

Ethical Issue Intensity:

One of the first factors to influence the decision-making process is how important or
relevant a decision-maker perceives an issue to be - i.e., the intensity of the issue, The intensity
of a particular issue is likely to vary over time and' among individuals and is influenced by the
values, beliefs, needs, and perceptions of the decision maker, the special characteristics of the
situation, arid the personal pressures weighing on the decision.

Management can influence ethical issue intensity through rewards and punishments,
codes of conduct, and organizational values. In other words, managers can affect the perceived
importance of ethical issues through positive and negative incentives. If management fails to
identify and educate employees about problem areas, these issues may not reach the critical
awareness level of some' employees. For example, new employees who lack experience in a
particular industry may have trouble identifying both ethical and legal issues. Employees
therefore need to be trained as to how the organization wants specific ethical issues handled.
Identifying ethical issues that employees might encounter is a significant, step in developing
employee’s ability to make decisions that enhance organizational ethics.

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Individual Factors:

One of the greatest challenges facing the study of organizational ethics involves the
role of individuals and their values. Although most of persons would like to place the primary
responsibility for decisions with individuals, years of research point to the primacy of
organizational factors in determining ethics at work. However, individual factors are obviously
important. In the evaluation and resolution of ethical issues. Two significant factors in workplace
integrity are an individual's personal moral philosophy and stage of moral development:

Personal Moral Philosophy:

Ethical conflict occurs-when people encounter situations that they cannot

easily control resolve. The situations, people tend to base their decisions on their own
principles of right or wrong and act accordingly in their daily lives: Moral philosophies -
the principles or rules that individuals use to decide what is right or wrong - are often
cited to justify decisions or explain behavior. People learn these principles and rules
through socialization by family member, social groups, religion, and formal education.

There is no universal agreement on the Correct moral' philosophy to use in

resolving ethical and legal issues in the workplace. Moreover, research suggests that
employees may apply different moral philosophies in different decision situations; and
depending on the situation, people may even change their value structure or
moral philosophy when making decisions, Individuals make decisions under pressure and
may later feel their decisions were less than acceptable, but they may not be able to
change the consequences of their decisions.

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Stages of Moral Development:

One reason people may change their moral philosophy has been
proposed by Lawrence Kohlberg, who suggested that people progress through stages in
their development of moral reasoning. Kohlberg contended that different people make
different decisions when confronted with similar ethical situations because they are at
different stages of what he termed cognitive moral development. He believed that people
progress through the following three stages:

 The pre-conventional stage of moral development, in which individuals

focus on their own needs and desires.
 The conventional stage of moral development, in which individuals focus
on group-centered values and conforming to expectations.
 The principled stage of moral development, in which individuals are
concerned with upholding the basic rights, values, and rules of society.

Obviously, there is some overlap among these stages; so cognitive moral development
should probably be viewed as a continuum rather than a series of discrete stages. Although
Kohlberg did not specifically apply his theory of cognitive moral development to organizations,
its application helps in explaining how employees may reason. When confronted with an ethical
dilemma. Kohlberg's theory suggests that people may change their moral beliefs and behavior as
they gain education and experience in resolving conflicts, which in turn accelerates their moral
development.

1.12 ORGANIZATIONAL FACTORS:

Although individuals must make ethical and legal decisions at work, they often
make these decisions in committees and group meetings and through discussions with
colleagues. Decisions in the workplace are guided by an organization's culture and the influence
of others - co-workers, supervisors, and subordinates:

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Organizational Culture:

Organizations, like societies, have cultures that include a shared set of values, beliefs,
goals, norms, and ways to solve problems. As time passes, an organization comes to be seen as a
living organism, with a mind and will of its own. Although most organizational cultures
reinforce ethics, some organizations, like Tyco, create a culture that supports unethical decisions.
If a company derives most of its profits from unethical or illegal activities, individuals who join
this organization will have a difficult time surviving unless they too participate in these
activities.

Influence of Co-Workers and Supervisors:

Just as employees look for certain types of employers, they are also particular about the
people with whom they work. Managers and co-workers within an organization help people deal
with unfamiliar tasks and provide advice and information daily in both formal and informal
contexts. Managers provide direction regarding workplace activities to be performed. Co-
workers offer help in the form of discussions over lunch or when a supervisor is absent. In fact,
one often hears new or younger employees expressing fear about approaching "the boss" on a
tough ethical issue. Thus, the role of informal culture cannot be underestimated.

Finally, it should be mentioned in passing that individuals also learn ethical or unethical
conduct from close colleagues and others with whom they interact regularly. Consequently, a
decision-maker who associates with others who behave unethically will be more likely to behave
unethically as well.

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Opportunity:

Together, organizational culture and the influence of co-workers may foster conditions
that limit or permit misconduct. When these conditions provide rewards of financial gain,
recognition, promotion, or simply the good feeling from a job well done, the opportunity for
unethical conduct may be encouraged or discouraged. For example, a company policy that does
not provide for punishment of employees who violate a rule, (as not to accept large gifts from
clients) provides an opportunity for unethical behavior.

Bellizzi and Hasty found a general tendency to discipline top sales performers more
leniently than poor sales performers for engaging in identical forms of unethical' selling
behavior. Neither, a company policy stating that the behavior in question was unacceptable,' nor
a repeated pattern of unethical' behavior offset the general tendency to favor the top sales
performer. A superior sales record appears to induce more lenient forms, of discipline despite
managerial actions that are specifically instituted to produce more equal forms of discipline.
Based on their research, Bellizzi and Hasty concluded that an opportunity exists for top sales
performers to be more unethical than poor sales performers.

Using Ethical Decision-Making Framework to Improve Ethical Decisions

The ethical decision-making framework cannot tell whether a business decision is ethical
or unethical. It bears repeating that it is impossible to tell what is right or wrong. The framework
is not a guide for how to make decisions but is intended to provide insights and knowledge about
typical ethical decision-making processes in business organizations.

Because it is impossible to agree on normative judgments about what is ethical, business

ethics scholars developing descriptive models have instead focused on regularities in decision-
making and the various phenomena that interact in a dynamic environment to produce
predictable behavioral patterns. Furthermore, it is unlikely that an organization's ethical problems
will be solved strictly by having a thorough knowledge about how ethical decisions are made.

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By its very nature, business ethics involves value judgments and collective agreement
about acceptable patterns of behavior. Gaining an understanding of typical ethical decision-
making in business organizations will reveal several ways that such decision-making could be
improved. With more knowledge about how the decision process works, one will be better
prepared to critically analyze ethical dilemmas and to provide ethical leadership regardless of his
role in the organization. One important conclusion that should be taken from the framework is
that ethical decision-making within an organization does not rely strictly on the personal values
and morals of individuals. Organizations take on a culture of their own, which when combined
with corporate governance mechanisms, may have a significant influence on business ethics.

Ethical Decision-Making Process

In the view of many, making and acting on an ethical decision involves:

Recognizing an issue as an Ethical One:

While the ethical thing to do is often also the legal, economic, or political thing to do,
failing to recognize the ethical dimension is not inconsequential. A rule may require something
unethical, or there may be no rule at all, or the application of a rule may be unclear. Recognizing
the ethical dimension of such situations important but may not occur because of:

 The level of our social or cognitive development (young children who cannot
comprehend the effect of their act on someone else are absolved of ethical and legal
responsibility)
 Our unawareness that other people are involved
 Our distance from the affected people (selling adulterated fruit juice or distributing
tainted medical supplies does not raise the same ethical concerns for many people when
done in faraway places rather than in their own country)
 The deliberate minimizing of an act's impact on potential victims (e.g., the military's
depersonalization of the enemy to ease ethical qualms of combat trainees).

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Making the Ethical Judgment:

Ethical dilemmas require ethical responses. While generally agreeing that

the process of formulating a response (or considering whether someone else's response is ethical)
is a cognitive one, experts disagree about its nature and, in particular, about the role of reason in
this process. Some believe that moral judgments are reached by a deliberate and conscious
reasoning process, and that the reasons we use to make ethical decisions evolve as we develop
and mature.

According to Lawrence Kohlberg, this evolution involved moving from the "pre-conventional"
level , (where "right" is what is in our self-interest) to the "conventional" level (where "right" is
fulfilling the expectations of others and upholding laws and the social system), to the "post-
conventional" level (where "right" is not limited to laws, but includes - and ultimately rests on -
higher ethical principles).

Resolving to do the Ethical Thing:

Once we determine 'an ethical response, we must take the next step, and accord it the
highest priority among all alternative courses of action. Doing so successfully depends on how
we perceive ourselves and the importance we attach to ethical values.

Actually Acting Ethically:

To be ethical, our intention to do the ethical thing must be followed by our really doing it.
Thus, individuals who, despite the negative pull exerted by rules, have recognized an ethical
issue, decided on an ethical response, and resolved to act on it} still need to contend with
pressures and other obstac1esthat interfere with actually implementing their decision; Among the
varied impediments that must be overcome even at this late stage are - once again =the rules
themselves. In the context of this inquiry, implementing an ethical decision will not be materially
affected by rules where following the rule also achieves the ethical result.

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While compliance with the rule may be difficult due to the rule's vagueness or
complexity, the rule is unlikely to be an obstacle to doing the right thing since the decision-
maker has already resolved' to do the ethical thing. Where that result would follow from
complying with the rule anyway, it is difficult to see how the nature of rules would cause the
decision-maker to stray from that desirable path.

Problems in Ethical Decision-Making

If one says or assures that unethical behavior in organization is just because of some
wrong doers or some greedy people, some bad individuals who are always behind money, then
somewhere one would be wrong.

Nowadays, people who look decent, who seem to be ethical, do involve in unethical
practices, though they do not think of doing 'anything illegal or immoral but they get backed into
doing something unethical by systems and practices of their own firms.

The-sources of ethical problems are various and varied:

 Due to globalization, as companies deal with other countries where cross cultural
diversity issues arise.
 Managers working in MNCs find it very difficult to standardize ethical standards as they
do change- as society change.
 Sometimes the decision-makers do not follow what they must follow as they have
conflict in individual values versus organizational goals.
 Individual moral standards affect whole organization decisions if they are morally strong,
ethical decisions would be the outcomes.
 If the decision-makers/managers/policy-makers who are greedy, look for shortcut routes
to earn in earliest possible time, they have an upper hand on the moral values, therefore
ethically the decision process would be corrupt.

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 Competitive pressure is also the main cause which forces decision-makers to choose such
path where they have to kill their morals, values and move on unethical path just to cope-
up with the competition.
 Poor decisions without deep thinking of implication.
 Ambiguous situations create problem which put the manager in dilemma as to which
decision they should make and follow.

 Pressures of budget systems.

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