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Economic Issues That Should Influence Ethical Multi-National Enterprises (MNE)

Economic Issues That Should Influence Ethical Multi-National Enterprises (MNE)

Multi-National Enterprises (MNE’s) are huge organisations whose boundaries of influence and philosophy exceed those of the home country they originate. They are a very real and important part of the business world in which we live today. Companies such as IBM, McDonald’s, Microsoft, Nike, Starbucks and Wal-Mart, to name but a few, are huge organisations whose sales and profits often far exceed the Gross National Product (GNP) and Gross National Income (GNI) of many countries or states. Such wealth and resources often, as in most walks of life, coincide with power. The way in which such organisations use their ‘purchased’ power is the topic of much debate. The emphasis they place on satisfying their ‘stakeholder needs’ can vary between companies and also between the countries they invest in. An MNE’s stakeholders are as numerous as they are varied, ranging from shareholders, employees and directors to government / political parties, local communities and environmental pressure groups. During the course of this essay the economic issues which will determine an MNE’s global decision making process will be examined and the effect on the Countries they locate and inhabit analysed.

Although difficult to refine, a common dictionary definition for the word Economic is ‘the production and management of wealth’ (Reference One: Webster’s Pocket Dictionary). Therefore it is logical that Economics with regard to a country or economy refers to the factors which contribute to the production and management of wealth (whether that be financial or other) through producing, distributing and consuming of resources. Economic issues are a wide topic area and they can range from ‘big to small, from local to national to international, from current to future; from the rising costs of raw materials to the market entry of a new rival, from the forthcoming Budget to the instability of international exchange rates, from the current availability of investment funds to the likely future cash flow from a new product.’. (Reference Two: Sloman, J, Sutcliffe, M.) They are forever changing and, although they can be predicted or estimated by Economists to Accountants, the future Economic state of a country or region can never be a certainty. The Economics of a country can change suddenly through politics, natural disasters, war and man-made disasters (such as 9/11 and the Boxing Day Tsunami) to name but a few. Such events are often not foreseeable, but MNE’s will always take into account the stability and potential for change within a country before making any form of investment.

Ethics is usually associated with levels of morality and general conduct. However ethics, with regards to business, are very difficult to gauge. Nearly every company in existence will claim publicly that their policies and actions are ethical, but in reality they are often anything but. The simple truth of business is that the vast majority of companies are in existence to create money for the shareholders and other internal stakeholders, thus if ethical policies assist in this they are implemented and if they don’t they are not. However, often what is good for the MNE is also of benefit to the host country. Sloman and Sutcliffe state ‘MNC’s bring with them investment, which is crucial to economic growth. They also provide the host state with foreign exchange, which might be crucial in helping purchase vital imports.’. (Reference Three).

Some countries have certain legislation referring to Ethical behaviour and Corporate Social Responsibility (CSR), but they often have little or no effect on MNE’s due to their vagueness and difficulty in monitoring and enforcing. It will always be the case that what appears ethical to one person may seem unethical to the next. This is highlighted in the present day climate by differing attitudes between westernised countries and those in the middle-east. For example in middle-eastern countries such as Saudi Arabia and Iran it is viewed as ethical and right that women are treated as inferior to men. However, to the westernised countries such as the UK and USA such treatment of the female species is considered unethical and sexism in most instances.

“Corporate Social Responsibility requires companies to acknowledge that they should be publicly accountable not only for their financial performance but also for their social and environmental record. More widely, CSR encompasses the extent to which companies should promote human rights, democracy, community improvement and sustainable development objectives throughout the world.” (Reference Four: Confederation of British Industry, 2001). It is interesting to note that the Confederation of British Industry use the world ‘should’ rather than ‘must’ when referring to corporate obligations. Due to such vagueness it is often left to independent groups or charities to make MNE’s ‘answerable for their actions’. However they often hold very little influence or power and are simply dismissed by large organisations, particularly as many MNE’s employ lobbyists to find favour with powerful government figures. For example the Anti-Globalisation Movement protests against the behaviour of MNE’s and aims to bring about policies which will regulate the activities of large organisations on the grounds of morals and ethics. However they openly admit they face numerous hurdles when trying to take action against any such MNE due to the power and political influence many of these MNE’s have gained.

The way in which MNE’s approach decision making in the global environment will vary between companies, but the basic principles will remain the same. Obviously unethical companies may aid their cause via bribes, fraud, taxation evasion and other variations of corruption. Whilst it would be naïve to suggest such activities do not occur, it should also be considered that bribery and corruption are in most instances between individuals. Therefore it is highly unlikely that any MNE would actively promote bribery and corruption, yet may have individuals / groups situated in powerful positions who are willing to.

The classification of countries and regions into Economic Systems is a useful tool for MNE’s when deciding on FDI (Foreign Direct Investment) policy. Ever country is controlled by the Public Sector (e.g. Government, Military) or Private Sector (e.g. Industry, Large Private Organisations). The degree to which they are controlled by the Private or Public Sector leads to a further classification system of State Capitalism (Government intervention), Market Economy (Consumer sovereignty), Command Economy (Complete Government control) and Mixed Economy (Government intervention when required). The Economic System classification will allow MNE’s to compare the merits and potential problems of particular countries with regard to their business. In most instances it would appear that a Market Economy is the ideal location for MNE’s, but often this is not the case. Whilst having the benefit of free trade and limited regulations, Market Economies are often highly competitive, ‘dog eat dog’ environments where only the most efficient and effective survive. In contrast, a Command Economy (such as the regime in China) may offer Government incentives, protection from competition via strict import legislation and cheap labour (due to a lack of unemployment benefits).

Once a location has been chosen the MNE will then decide, with the aid of Cost Benefit Analysis, which strategy to implement. The three recognised strategies are National, Multi-domestic and Global. National Strategy is an export orientated strategy where all manufacture takes place in the ‘home’ country and the global markets are served via exports. Multidomestic or Autarkic Strategy involves self sufficient subsidiaries of the company working independently within the group. Finally Global Strategy involves subsidiaries having specific roles or tasks which they specialise in and operate interdependently within the group.

As stated earlier, the main purpose of any MNE is to attain healthy profits and to keep stakeholders and shareholders happy through good wages, bonuses and high dividend pay-outs. However, if the MNE deems itself and strives to be deemed ‘ethical’, it should not aim to make profits at the expense of the local economy it inhabits. Each MNE will have a Mission, Objectives and Strategies as their foundation. In most instances the company Mission will describe an ethical stance, but even if it is not contained within the Mission there will be objectives and strategies which relate to ethics.

Companies such as Nike and Adidas are major culprits with regards to making a profit at the expense of particular economies and countries. They own numerous production factories throughout Asia, particularly in China, which employ local people on extremely low wages, often working in excess of 90 hours per week in working conditions which would be outlawed in every developed country. Their products are then exported to affluent Western countries where they sell for up to fifty times the cost of production. It is rumoured that Nike’s main sponsorship investment, Michael Jordan, was paid in one year more than the entire Nike production staff based in Malaysia received in the same year period. And by no means are Adidas and Nike the sole offenders. Referring to Wal-Mart’s operations in China, The National Labour Committee and China Labour Watch stated ‘workers received on average 16.5 cents an hour when the legal minimum in China was 31 cents an hour.’. (Reference Five).

High unemployment is a common feature in many of the World’s economies. Areas of high unemployment often appeal to MNE’s, depending on the skills / background the unemployed possess. Areas such as Derby and Swindon (Toyota and Honda) were targeted by Japanese car manufacturing companies in the early 1980’s for that reason amongst others. Companies can take advantage of experience in areas where similar industries have re-located or closed leaving a skilled unemployed population. In terms of ethics the company should not look to exploit such a workforce but pay the ‘going rate’ based on experience, skills and productivity. However if the MNE uncovers a large excess of ‘easily replaceable’ skilled workforce the trend is to ‘drive down’ salaries. Sloman and Sutcliffe state ‘The growth of multinational corporations, with their ability to move finance and production to wherever it is most profitable, has weakened the power of employees, local interest groups and even national governments’ (Reference Six). Whilst the short-term gains of this are often beneficial to the MNE, they are often countered by long-term dissatisfaction of the workforce leading to high resignation rates.

MNE’s decision to introduce an FDI in a country will be influenced by government policies in each country. They will often seek Government grants / benefits for choosing certain locations and will be well aware of any laws regarding Minimum Wage and Working Conditions / hours.

Exchange rates must be considered by MNE’s when deciding on FDI and global decisions as any sudden rise or fall can drastically effect profit margins. Other economic factors which need consideration are hostility of neighbouring countries, border and boundary controls, national resources (China has no oil supplies) and embargo’s or sanctions (as with the US Trade Embargo on Cuba) against the country. The MNE needs to be aware of all tariffs, such as Transit Tariffs, they may face on a regular basis.

In conclusion I believe MNE’s should strive to achieve maximum profits, but not at the expense of the economy / country they are operating from. This is of particular importance in developing countries were living conditions are often poor. MNE investments should serve the purpose of the organisation, but should also benefit the environment and community they operate within. Investments in infrastructure to aid transport of goods and raw materials should be built in dual benefit to the local community. Training of the work force should be wide-ranging and linked with education. The MNE’s should consider such countries as potential consumers of the future and strive to help them flourish.

However, I feel that the degree of expertise, technology and knowledge which is passed on to certain countries must be limited to preserve the economic balance. Countries such as China have been gaining expertise and knowledge in many fields over recent years, whilst blocking ‘free trade’ which may threaten them. The fear in many industries is that with their abundance of cheap labour and lack of human rights with regards to working practices they will be able to ‘under-cut’ the rest of the world once they have achieved the knowledge and experience. A recent conversation with a senior German colleague of mine resulted in the comment “We are about to enter a 3rd World War, a War of business against the Chinese”.

MNE’s will come under increasing pressure in future years to increase their moral outlook. Pressure already comes from a wide range of sources such as Protest Groups, Governments to Rock Stars and celebrities (e.g. Sir Bob Geldof, Bono). Such moral obligations may displease current shareholders or discourage potential shareholders, but any ‘forward thinking’ MNE’s should presently be striving towards policies which satisfy both parties. Future deterrents against immoral MNE’s will most likely include Government (both National and Continental, such as EU) Legislation, Public protests, high taxation and global adverse publicity. The new technology available to the media added to the enormity which is the World-Wide Web, combined with the recent Freedom of Information Act, means that all organisations are subject to global scrutiny and everyone is able to voice an opinion. MNE’s are continually being judged by the jury that is the human race. They must be aware of this and act accordingly through the global decisions they make. On a web-site debate run by the BBC, Isaac Brock of Canada wrote ‘If multinational companies are allowed to expand without some form of control we will eventually find that decisions that effect us as individuals will be made within the boardrooms by unelected individuals, not by elected governments.’. (Reference Seven). I suggest MNE’s should beware of amassing too much power within any one economy or country as with power comes responsibility. I doubt responsibility is something the majority of Shareholders want.

References:

One: ‘Webster’s Pocket Dictionary’ 2001 Edition, Trident Press International, Page 183.

Two: Sloman, J, Sutcliffe, M. (2004) ‘Economics for Business’, 3rd Edition, London, Prentice Hall, Page 42

Three: Sloman, J, Sutcliffe, M. (2004) ‘Economics for Business’, 3rd Edition, London, Prentice Hall, Page 119

Four: ingentaconnect.com/content/klu/, accessed 15/11/06

Five: corpwatch.org/bbdf/kul, accessed 20/11/06

Six: Sloman, J, Sutcliffe, M. (2004) ‘Economics for Business’, 3rd Edition, London, Prentice Hall, Page 121

Seven: news.bbc.co.uk/, accessed 28/11/06

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