Managing Interdependence : Global Management
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1. The concept of international social responsibility includes the expectation that MNCs should be concerned about the social and the economic effects of their decisions regarding activities in other countries.
2. Moral universalism refers to the need for a moral standard that is accepted by all cultures.
3. Concerns about MNC social responsibility revolve around issues of human rights in other countries, such as South Africa and China. Many organizations develop codes of conduct for their approach to business around the world.
4. International business ethics refers to the conduct of MNCs in their relationships to all individuals and entities with whom they come into contact. Ethical behavior is judged and based largely on the cultural value system and the generally accepted ways of doing business in each country or society. MNC .managers must decide whether to base their ethical standards on those of the host country or those of the home country and whether these different standards can be reconciled.
5. MNCs must balance their responsibility to various stakeholders, such as owners, creditors, consumers, employees, suppliers, governments, and societies.
6. Questionable payments are those payments that raise significant questions about appropriate moral behavior either in the host nation or other nations. The Foreign Corrupt Practices Act prohibits most questionable payments by U.S. companies doing business in other countries.
7. Managers must control their activities relative to interdependent relationships at all levels, from simple, daily business transactions involving local workers, intermediaries, or consumers to global concerns of ecological responsibility.
8. The MNC-host country relationship is generally a love-hate relationship from the host-country's viewpoint in that it wants the economic growth that the MNC can provtde but does not want the dependency and other problems that result.
9. The failure to effectively manage interdependence will result in constraints on strategy, in the least, or in disastrous consequences for the local area, the subsidiary, and the global reputation of the company.
10. Managing environmental interdependence includes the need to consider ecological interdependence as well as the economic and social implications of MNC activities.
In conclusion, when research findings and anecdotal evidence indicate differential attitudes toward ethical behavior and social responsibility across cultures, MNCs must take certain steps. For example, they must be careful when placing a foreign manager in a country whose values are incongruent with his or her own, because this could lead to conflicts with local managers, governmental bodies, customers, and suppliers. As discussed earlier, expatriates should be oriented to the legal and ethical ramifications of questionable foreign payments, the differences in environmental regulations, and the local expectations of personal integrity, and they should be supported as they attempt to integrate host-country behaviors with the expectations of the company's headquarters.78
Social responsibility, ethical behavior, and interdependence are important concerns to be built into management control-not as afterthoughts, but as part of the ongoing process of planning and controlling international operations for the long-term benefit of all.
In Part 2, we will focus on the pervasive and powerful influence of culture in the host-coantry environment in which the international manager operates. In Chapter 3, we will examine the nature of culture: What are its various dimensions and roots? How does culture affect the behavior and expectations of employees and what are the implications for how managers operating in other countries should behave?
International managers-and all people-can no longer afford to ignore the impact of their activities on the environment. As Ward and Dubois put it; Now that mankind is in the process of completing the colonization of the planet, learning to manage it intelligently is an urgent imperative. [People] must accept responsibility for the stewardship of the earth. The word stewardship implies, of course, management for the sake of someone else.As we enter the global phase of human evolution, it becomes obvious that each [person] has two countries, his [or her] own and the planet earth.
Effectively managing environmental interdependence includes considering ecological interdependence as well as the economic and social implications of MNC activities. There is an ever-increasing awareness of, and a mounting concern, worldwide, about the effects of global industrialization on the natural environment. This concern was evidenced by the gathering of world leaders at the Earth Summit in Rio de Janeiro to discuss ecological preservation and decide on action. Government regulations and powerful interest groups are demanding ecological responsibility regarding the use of scarce natural resources and production processes that threaten pennanent damage to the planet. MNCs have to deal with each country's different policies and techniques for environmental and health protection. Such variations in approach reflect different levels of industrialization, living standards, government-business relations, philosophies of collective intervention, patterns of industrial competition, and degrees of sophistication in public policy. For an MNC to take advantage of less stringent regulations (or expectations) is not only irresponsible but also invites disaster, as illustrated by the Union Carbide accident in Bhopal.
In recent years, the export of hazardous wastes from developed countries to less developed ones has increased considerably. One instance was the dumping of over eight thousand drums of waste, including drums filled with polychiorinated biphenyl (PCB), a highly toxic compound, in Koko, Nigeria.70 While not all dumping is illegal, the large international trade in hazardous wastes (as a result of the increasing barriers to domestic disposal) raises disturbing questions regarding social responsibility. Although the importer of waste must take some blame, it is the exporter who shoulders the ultimate responsibility for both generation and disposal. Often, companies choose to dispose of hazardous waste in less developed countries to take advantage of weaker regulations and lower costs. Until we have strict international regulation of trade in hazardous wastes, companies should take it upon themselves to monitor their activities, as Singh and Lakhan demand:
To export these wastes to countries which do not benefit from waste- generating industrial processes or whose citizens do not have lifestyles that generate such wastes is unethical. It is especially unjust to send hazardous wastes to lesser developed countries which lack the technology to minimize the deleterious effects of these substances.
The exporting of pesticides poses a similar problem, with the United States and Germany being the main culprits. The United States exports about 200 million pounds of pesticides each year that are prohibited, restricted, or not registered for use in the United States. One MNC, Monsanto Chemical Corporation, for example, sells DDT to many foreign importers, even though its use in the United States has been essentially banned. Apart from the lack of social responsibffity toward the people and the environment in the countries that impo't DDT, this action is also irresponsible to American citizens because many of their fruits and meat products are imported from those countries.
These are only two of the environmental problems facing countries and large corporations today. According to Graedel and Allenby, the path to truly sustainable development is for corporations to broaden their concept of industrial ecology:
The concept [of industrial ecology] requires that an industrial system be viewed not in isolation from its surrounding systems, but in concert
with them. It is a systems view in which one seeks to optimize the total materials cycle from virgin material, to finished material, to component, to product, to obsolete product, and to ultimate disposal.
Essentially, this perspective supports the idea that environmental citizenship is necessary for a firm's survival as well as responsible social performance.
It is clear then, that MNCs must take the lead in dealing with ecological interdependence by integrating environmental factors into strategic planning. Along with an investment appraisal, a project feasibility study, and operational plans, such planning should include an environmental impact assessment. At the least, MNC managers must deal with the increasing scarcity of natural resources in the next few decades by (1. looking for alternate raw materials, (2. developing new methods of recycling or disposing of used materials, and (3. expanding the use of by-products. Multinatioflal corporations already have had a tremendous impact on foreign countries, and this impact will continue to grow and bring about long-lasting changes. Even now, U.S. multinational corporations alone account for about 10 percent of the world's GNP. Because of interdependence both at the local level and the global level, it is not only moral but also in the best interest of MNCs to establish a single clear posture toward social and ethical responsibilities worldwide and to ensure that it is implemented. In a real sense, foreign firms enter as guests in host countries and must respect the local laws, policies, traditions, and culture as well as those countries' economic and developmental needs.
Richard Heckmann, U.S. Filter's CEO, realized early on that alliances with trustworthy Mexican partners provided the answer to many problems and to achieving the interdependent goals of both countries and their firms. He knew, for example, that the political reality was that Mexican officials would favor their ties to Mexican firms and steer bids to those companies. So he contracted with a Mexican construction company, Plar SA, with strong political connections. Plar SA benefits from the deal by getting technical and financial help from U.S. Filter to upgrade its technology. Also, in order to reach his smaller potential customers, Mr. Heckmann has formed a joint venture with Enrique Anhalt, a local Mexico City water- purification supplier to 250 manufacturers and other customers with small systems, assuming that when they upgrade they will turn to a local supplier.
The environmental cleanup efforts in Mexico clearly exhibit the interdependence of NAFTA and will benefit everyone in the long run. Funding from the United States is helping with projects such as the sewage-treatment plants at 11 cities south of the border. In turn, that business is going to many U.S. environmental-services companies, such as San Diego Gas & Electric Co., which is building natural gas pipelines to Mexicali and Tijuana to supply clean fuel to industrial plants.
The autoindustry is another agent of massive change in Mexico-building an industrial base south of the border that will help strengthen the Mexican economy. The auto industry has the unusual abifity to.jump start a middle class, according to David Cole, director of the University of Michigan's automotive-studies office.67 While the average Ford worker in Hermosillo still earns considerably less than his counterpart in Wayne, Michigan, that wage does represent a considerable increase for Mexican workers. In addition, every new auto plant in Mexico trains thousands of Mexicans, most of them new to factory work. While those factors don't console auto workers in the United States who have lost their jobs, it does mean that American auto manufacturers can be more globally competitive.
There is likely to be increasing interdependence among the Americas in the future as agreements open up further trade with other South American countries such as Chile and Brazil. These countries are tearing down their internal trade barriers also, in a wave that may eventually form a free-trade zone from Alaska to Tierra del Fuego. South Americans are realizing that they may get left out in the cold as both the European Community and North America form their own huge markets. As noted by Mr. Grisetti, an Argentine businessman, If the world is dividing into blocs, we have to form a bloc or disappear... it's a necessity.
If you don't have trustworthy Mexican partners, you can get into trouble here; only idiots try to figure it out themselves.
R. HECKMANN, CEO, U.S. FILTER.
For every factory opened in Mexico (whether by Asian, Canadian, European, or American firms), the U.S. wins service, transportation, or distribution jobs.65 Also, American firms which supply components to those factories are profiting from the boom south of the border. This is because primary components in products such as VCRs must be made in North America to benefit from NAFTA. U.S. and Mexican companies also benefit from orders for supplies from European and Asian firms.
While many Canadian and American companies are expanding into Mexico, taking advantage of the increased confidence and opportunities resulting from passage of NAFTA, most firms face an uphill battle because they make incorrect assumptions about the similarity of the market and distribution system. Problems include corruption, American arrogance, red tape on both sides of the border, and misunderstandings about the Mexican culture and how to do busi nes there. -
Coupling these problems with those in the infrastructure, it is easy to see why many foreign firms have had difficulties expanding into Mexico, often giving up. While it is easier now to get a business phone line, transportation and mail systems are still behind American expectations, and bill collecting often must be done in person because of numerous problems with the mail and required documentation. Electricity is sometimes cut off without notice, and the legal system is so difficult to figure out that foreigners risk going to jail without being accused of a crime. Mexican partners and alliances seem to be the answer-as even the giant Wal-Mart Stores Inc. found out when it ran into so many distribution problems in Mexico that it decided it would cost no more in the long run to use local distributors.
So why do American companies bother? Typically, because they want to take advantage of market expansion opportunities. One example is U.S. Filter, a water-purification company whose target in Mexico is 90 million people who can't trust their tap water, and a slew of companies under government pressure to clean up waste water.
It's not like ten years ago, when we wanted to talk to [U.S.] customers and no one would talk to us. Now, big [U.S.] customers are calling us.
VICTOR ALMEIDA, CEO, INTERCERAMIC.
The Almeida family of Interceramic (Internacional de Ceramica SA, Chihuahua, Mexico), always wanted to export to the United States, but it took the heightened interest in Mexico through the NAFTA agreement to really give them their breakthrough.
The manufacturer of glazed floor and wall tile is just one of the many savvy Mexican firms making inroads into the U.S. market. But in many ways it is harder for Mexican managers to go north than for U.S. managers to go south. While they both face the same sorts of cross-cultural managerial problems, Mexican companies are typically at a competitive disadvantage in the United States because they are not as advanced in technology or efficiency as American firms.
Interceramic, a traditional Mexican family business, had to learn the hard way that business is done differently in the United States. Victor Almeida, the CEO, fouiid that contractors buy most of the tile in the United States, compared to the homeowner in Mexico, and that customers in the United States demanded a much better level of service.62 He had to convince U.S. distributors that Interceramic had high-quality products and that the company was reliable, and it took some time to find the right U.S. managers to represent the company and interact with people on both sides of the border. He encouraged them to be more like Mexicans by showing their emotions more openly. In addition, he opened offices in Texas so that the export managers could be closer to the customer and thus get more input to custom design the tiles to suit American tastes. Although it has taken a few years, Mr. Almeida's efforts are now paying off, and he attributes much of that to NAFTA, as well as to his hard work.
But it's a different story for smaller, less efficient firms: many simply cannot compete with the resources of technology and access to capital that U.S. firms are bringing to Mexico. Corner stores and small businesses are getting driven out by the Wal-Marts, Grossmans, and Dunkin' Donuts-the same competitive situation that has hit towns in the United States. Mexican factories are finding it difficult to compete for employees with companies like GM which are offering subsidized housing. However, other businesses, in towns such as Nuevo Laredo, are booming as a result of servicing large companies such as Wal-Mart (known locally as Walmex), Mexico's biggest chain as of 2001.
By 2001, about half of all new jobs created in Mexico since the NAFTA
[will have] stemmed directly from that agreement, fostering a burgeoning middle class of consumers.
FORTUNE INVESTORS' GUIDE, DECEMBER 18, 2000
It may be too soon to judge the long-run success of NAFTA, but early results do reinforce the interdependent nature of the agreement between the three economies (Mexico, United States, and Canada) and the relative level of success attained for business firms, environmental issues, and people. Now, several years since NAFTA took effect, the Mexican border factories have boomed, with employment there rising to over one million. More importantly, many of those jobs are now high-tech, bringing training and a higher standard of living for many Mexicans. Indeed, Mexico's President Vincente Fox, a former Coca-Cola executive, set 2001 budget goals of 4% to 5% GDP growth.
It seems that because of lower labor costs for foreign companies, the devalued peso, and NAFTA-reduced tariff levels, NAFTA had a mitigating effect on the Mexican economic crisis. In a touch of irony, Asia's problems caused some global companies to relocate factories from Asia to Mexico. In fact, Mexico has overtaken mainland China as the volume leader of exports of textiles and garments to the United States. But, do the trade numbers tell it all? Perhaps we can compare perspectives from south and north of the border by looking at some examples and issues.
When managing interdependence, international managers must go beyond general issues of social responsibility and deal with the specific concerns of the MNC subsidiary and host-country relationship. Outdated MNC attitudes that focus only on profitability and autonomy are shortsighted and usually result in only short-term realization of those goals; MNCs must learn to accommodate the needs of other organizations and countries:
Interdependence rather than independence, and cooperation rather than confrontation are at the heart of that accommodation. . . the journey from independence to interdependence managed badly leads to dependence, and that is an unacceptable destination.
Most of the past criticism levied at MNCs has focused on their activities in LDCs. Their real or perceived lack of responsibility centers on the transfer-in of inappropriate technology, causing unemployment, and the transfer-out of scarce financial and other resources, reducing the capital available for internal development. In their defense, MNCs help LDCs by bringing in new technology and managerial skills, improving the infrastructure, creating jobs, and bringing in investment capital from other countries by exporting products. The infusion of outside capital provides foreign-exchange earnings that can be used for further development. The host government's attitude is often referred to as a love-hate relationship: it wants the economic growth that MNCs can provide but does not want the incursions on national sovereignty or the technological dependence that may result.5' Most criticisms of MNC subsidiary activities, whether in less developed or more developed countries, are along these lines:
1. MNCs raise their needed capital locally, contributing to a rise in interest rates in host countries.
2. The majority (sometimes even 100 percent) of the stock of most subsidiaries is owned by the parent company. Consequently, host-country people do not have much control over the operations of corporations within their borders.
3. MNCs usually reserve the key managerial and technical positions for expatriates. As a result, they do not contribute to the development of host- country personnel.
4. MNCs do not adapt their technology to the conditions that exist in host countries.
5. MNCs concentrate their research and development activities at home, restricting the transfer of modern technology and know-how to host countries.
6. MNCs give rise to the demand for luxury goods in host countries at the expense of essential consumer goods. 7. MNCs start their foreign operations by purchasing existing firms rather than by developing new productive facilities in host countries.
8. MNCs dominate major industrial sectors, thus contributing to inflation by stimulating demand for scarce resources and earning excessively high profits and fees.
9. MNCs are not accountable to their host nations but only respond to home- country governments; they are not concerned with host-country plans for development. Specific MNCs have been charged with tax evasion, union busting, and interference in host-country politics. Of course, MNCs have both positive and negative effects on different economies; for every complaint about MNC activities (whether about capital markets, technology transfer, or employment practices), we can identify potential benefits
Numerous conflicts arise between MNC companies or subsidiaries and host countries, including conflicting goals (both economic and noneconomic) and con flicting concerns, such as the security of proprietary technology, patents, or information. Overall, the resulting trade-offs create an interdependent relationship between the subsidiary and the host government based on relative bargaining power. The power of MNCs is based on their large-scale, worldwide economies, their strategic flexibility, and their control over technology and production location. The bargaining chips of the host governments include their control of raw materials and market access and their ability to set the rules regarding the role of private enterprise, the operation of state-owned firms, and the specific regulations regarding taxes, permissions, and so forth.53
MNCs run the risk of their assets becoming hostage to host control, which may take the form of nationalism, protectionism, or governmentalism. Under nationalism, for example, public opinion is rallied in favor of national goals and against foreign influences. Under protectionism, the host institutes a partial or complete closing of borders to withstand competitive foreign products, using tariff and nontariff barriers, such as those used by Japan. Under governmentalism, the government uses its policy-setting role to favor national interests, rather than relying on market forces. An example is the decision of Britain to privatize its telephone system.54
Ford Motor Company came up against many of these controls when it decided to produce automobiles in Spain. The Spanish government set specific restrictions on sales and export volume: the sales volume was limited to 10 percent of the previous year's total automobile market, and the export volume had to be at least two-thirds of the entire production in Spain. Ford also had to agree that it would not broaden its model lines without the authorization of the government.55 The intricacies of the relationship and the relative power of an MNC subsidiary and a host-country government are situation specific. Clearly, such a relationship should be managed for mutual benefit; a long-term, constructive relationship based on the MNC's socially responsive stance should result in progressive strategic success for the MNC and economic progress for the host country. The effective management of subsidiary and host-country interdependence must have a long-term perspective. Although temporary strategies to reduce interdependence via controls on the transnational flows by firms (for example, transfer-pricing tactics) or by governments (such as new residency requirements for skilled workers) are often successful in the short run, they result in inefficiencies that must be absorbed by one or both parties, with negative long- term results.56 In setting up and maintaining subsidiaries, managers are wise to consider the long-term trade-offs between strategic plans and operational management. By finding out for themselves the pressing local concerns and understanding the sources of past conflicts, they can learn from mistakes and recognize the consequences of the failure to manage problems. Further, managers should implement policies that reflect corporate social responsibility regarding local economic issues, employee welfare, or natural resources. At the least, the failure to manage interdependence effectively results in constraints on strategy. In the worst case, it results in disastrous consequences for the local area, for the subsidiary, and for the global reputation of the company.
The interdependent nature of developing economies and the MNCs operating there is of particular concern when discussing social responsibility because of the tentative and fragile nature of the economic progression in those countries. MNCs need to set a high moral standard and lay the groundwork for future economic development; at the minimum they should ensure that their actions will do no harm. Some recommendations by De George for MNCs operating in, and doing business with, developing countries are as follows:
1. Do no intentional harm. This includes respect for the integrity of the ecosystem and consumer safety.
2. Produce more good than harm for the host country.
3. Contribute by their activity to the host country's development.
4. Respect the human rights of their employees.
5. To the extent that local culture does not violate ethical norms, MNCs should respect the local culture and work with and not against it.
6. Pay their fair share of taxes.
7. Cooperate with the local government in developing and enforcing just background (infrastructure) institutions (i.e., laws, governmental regulations,
unions, consumer groups, which serve as a means of social control).58
One issue that illustrates conflicting concerns about social responsibility and interdependence is the North American Free Trade Agreement (NAFTA), discussed in the Comparative Management in Focus.
Much of the preceding discussion has related to U.S. subsidiaries around the world. However, to highlight the growing interdependence and changing balance of business power globally, we should also consider foreign subsidiaries in the United States. Since much criticism about a lack of responsibility has been directed toward MNCs with headquarters in the United States, we need to think of these criticisms from an outsider's perspective. The number of foreign subsidiaries in the United States has grown and continues to grow dramatically; foreign direct investment (FDI) in the United States by other countries is in many cases far more than U.S. investment outward. Americans are thus becoming more sensitive to what they perceive as a lack of control over their own country's business.
Things look very different from the perspective of Americans employed at a subsidiary of some overseas MNC. Interdependence takes on a new meaning when people over there are calling the shots regarding strategy, expectations, products, and personnel. Often, resentment by Americans over different ways of doing business by foreign companies in the United States inhibits cooperation, which gave rise to the companies' presence in the first place.
Today, managers from all countries must learn new ways, and most MNCs are trying to adapt. Sadahei Kusumoto, president and CEO of the Minolta Corporation, says that Japanese managers in the United States need to recognize that they are not in Honshu [Japan's largest island] anymore and that one very different aspect of management in the United States is the idea of corporate social responsibility.
In Japan, corporate social responsibility has traditionally meant that companies take care of their employees, whereas in the United States the public and private sectors are expected to share the responsibility for the community. Part of the explanation for this difference is that American corporations get tax deductions for corporate philanthropy, whereas Japanese firms do not. Furthermore, Japanese managers are not familiar with community needs. For these and other reasons, Japanese subsidiaries in the United States have not been active in U.S. philanthropy. However, Kusumoto pinpoints why they should become more involved in the future:
In the long run, failure to play an active role in the community will brand these companies as irresponsible outsiders and dim their prospects for the future.
Whether Kusomoto's motives for change are humanitarian or just good business sense does not really matter. The point is that he recognizes interdependence in globalization and acts accordingly.