Multinational Corporations

Obligations of Multinational Corporations toward Host Countries

Abstracts

In past few years, there has been an enthusiasm in most leading organizations towards globalization, in order to find cheap resources so that efficiency and economies of scale can be reached so that per unit costs can be reduced, which would result in higher profits. However this has been observed by corporate governance bodies and law enforcement watchdogs that multinationals have been engaged in unethical and unacceptable practices such as exploiting child labor, showing disrespect for host countries cultures etc. for such problems business ethics has been under constant debate which should be followed by the multinational firms in their operations in host countries, especially in those with developing economies. In this paper, it has been discussed that what are the business obligations and ethical needs which they should follow in terms of respecting host countries cultures and their local laws, preserve ecological well-being of the planet, and practicing special actions in helping developing countries.

Obligations of Multinational Corporations toward Host Countries

Introduction of Multinational Corporations

Multinational Corporations are large businesses with assets or machinery or other direct venture in more than one overseas country. It is also referred to as worldwide firm or an international corporation. Normally, the multinationals have been active in developing countries, where they supply technology, investment funds, and advertising skills in return for a gainful market. But even sophisticated industrialized nations may be the scenes of investment by such conglomerate companies. The influence that multinationals can exercise over foreign governments has been the target of criticism, but many host countries have forced policy that have given them a bigger share of profits, employment facilities, and markets. (Multinational Corporations, 2008)

As citizens of the world, multinational corporations have an obligation to abide by the local laws of the host countries

However, the extent of influence of multinationals have been under debate there has been an important need to realize that multinationals should respect the local laws of their host countries despite the fact that they bring with them vital resources to their host countries in terms of funds, technology and employment etc. Provided their immense economic supremacy and their worldwide practice, host governments have their restrictions in regulating their conduct. In view of multinationals aim of global income maximization, there could be variance of interests between their objectives and the policy of the host countries as they could indulge in restrictive business practices, manipulation of Transfer prices and other such practices. (World Trade Organization, 2002)

 Partly multinational have immense effects on the national income statistics of a host country; for example these multinationals may need to import machinery and parts from other countries and obviously sell their product to local and foreign customers, therefore exchange rates and demand-supply side elasticity would determine the income they are generating and what amount of expenses they are incurring this obviously adds to the countries incomes and expenses, this may be a case that to protect home economy governments would take protectionist measures to stop imports and encourage export here again a disagreement can occur between the government and the multinational companies , therefore it is justified that multinational corporations have an obligation to abide by the local laws of the host countries, as well being of home economy is more important for the host government rather than the well being of the foreign investment. (Bamford, 2003)

Conserve the Natural Health of the World

Today, we all know that our planet earth faces the problems of pollution and is in the worst situation in its history. It is a time for us to make out a way for our planet that reduces its fragility and interdependence. Our planet earth is perhaps the most tremendous creation of the Mother Nature which until today has been responsible for its well-being but at the same time it has taught us various ways in which we can preserve its existence and create healthy biological systems which include healthy necessities of life such as pure and clean water rich soil and fresh air along with good amount of forests and strong animal kingdom which guarantee its continuance for a longer period of time. (The Earth Charter, 2000)

However, the way most of our consumption and production is done we are today headed towards the loss of earth’s vital natural resources as we can see that most of our industry today faces a huge shortage of oil and other energy sources. And furthermore most of our valuable animal species have lost their existence for example a well-known bird Dodo and the Chinese panda is already on the verge of losing its continual (The Earth Charter, 2000).

In order to preserve our earth’s assets we will have to think individually, first that at the personal level we will have to create a thought that every single person strives for our planets well-being. However our industries can have crucial effects on the ways our current production and consumption are done, as they have better and researched knowledge of what, why and how people want. Especially multinationals who have knowledge of peoples preferences in the countries they operate can have far-ending impacts. (The Earth Charter, 2000)

What Role Can the Multinationals Play

With unique anxiety for natural miscellany and the ecological methods that protract living, multinationals can defend and re-establish the uprightness of earth’s natural systems. Such rehabilitation and development schemes which make natural maintenance and conservation fundamental to all improvement initiatives should be undertaken by all multinational business and authorities at all levels of their activities. In order to continue earth’s existence sustain system, safeguard our ecological inheritance, and preserve biodiversity they should develop and maintain feasible and possible biosphere provision and reserves which may include vigorous waters i.e. seas and oceans and healthy lands with strong ecological systems that not only supports animal existence but also help the species which are at their threshold of extinction. Another important step genetic engineering has developed to vast level of advancement however it intentionally or unintentionally has been responsible for the introduction of such organisms which have proved to be harmful for the original or natural ecosystems and species. Such organisms should be rectified and produced in controlled surveillances. Partly the consumption of renewable resources marine products, forest goods and soil, water etc should be done in a way that rate of consumption does not exceed the rates of their rejuvenation. And so that non-renewable resources such as fossil fuel, natural energy, and minerals are not depleted and no sever environmental damage is reached their extraction and utilization should be monitored and also measures should be taken in order to discover new non-renewable and renewable resources. Ways of consumption, reproduction and production that enhances earth’s restorative capacities should be incorporated. Raw materials and resources combined in production and consumptions techniques can be and should be reduced, recycled and reused and used up to the fullest extent which means that idle unused resources shouldn’t be wasted away, also proper techniques of disposal of harmful waste should be integrated. Important safety measures should be taken when using energy with efficiency and control energy cannot be wasted and should rely on energy sources which renewable for example wind energy and solar energy. Technologies which are environmentally strong should be distributed over the production units all over the world and implementation, and development of such techniques be encouraged. The externalities should be incorporated products which give out social costs , these external costs  should be adjusted in their selling prices and the production and processes which gives social or external benefits to the society should be encouraged the benefits of  such productions should also be internalized by the multinational companies so that they are not under produced. Awareness should be created about such products which are injurious to human and ecological health so that disadvantages of such goods are minimized. The conventional awareness and spiritual intelligence that contributes to the enhancement of natural systems should be recognized, preserved and used. Trade which wires the use of sustainable resources, is environmental friendly and incorporates progressive   working conditions should be ensured. International corporations and multinational organizations should be liable for the outcomes of their practices  and should be binding upon all intercontinental firms that their actions are clearly obvious and transparent to the host countries watch dog bodies, government and public. (The Earth Charter, 2000)

Respect the Host Culture

In order to preserve a competitive edge in the current dynamic and advanced economic panorama and because of the rapid increase in internationalization of business practices over the world, most of the multinational organizations have recognized the importance of host countries cultural and ethical needs. However it’s a difficult task to practice your own business out of your home country, if managers are not sufficiently aware of host countries cultures. Therefore businesses have to be diligent in prepare their cross-national delegations, projects and prospects, so that such problems can be overcome. Therefore human and technical criterion should be in mind of the managers when a delegation to foreign is prepared. Failure to understand these important points firms have failed to achieve their financial objectives.

According to the study of Tung Askawa, under which he examined the success rate of U.S and Japanese firms he concluded that that Japanese firms were far more success full than the U.S firms as they, along with the technical issues also considered the relational and behavioral skills of their mangers as his ability to interact with subordinates, peers and functional heads. Whereas U.S firms focused on the technical issues only which caused directed them into the failure of achieving their goals. Therefore the in sending delegations overseas companies should be selective and realize the need to understand analyze and abide by the cultures of the host countries carries large importance to the multinational firms themselves.  Therefore in the context of the above discussion, for non-native managers intercontinental can be significant, they should be provided with cross-cultural awareness on the nation-wise basis so that it adds to their correspondence skills and better results could be obtained if the family is also involved in this training. One feature of abroad mission is being responsive to civilizing differences and nuances. (Herbig, n. d)

According to experts the key to success in the global corporate world and to have eminent reduction in investment risks, is to have right people, with fair extent of authority, responsibility and accountability, with their right placement within the business premises. As discussed already that continual of business in a foreign country is a complicated and demanding job however these could be catered if the business realizes that each countries environment and ethical needs are different. Therefore good analytical skills along with experienced business intelligence as a quality of multinational manager can play a vital role in the decision making and success full operation, and reduction of such differences (Geer, 127). And if there is a lack of managers who have sophisticated global skills most multinationals believe that they can lose their competitiveness in the world market. Therefore for overseas assignments firms are recruiting such managers, leaders and supervisors who have such abilities and the number is increasing on continues basis (Herbig, n. y).

Another problem is that when companies do not understand host countries cultures they are not able to achieve their objectives which can be costly. This is because when objectives are not achieved in such cases the whole cost of investment in the foreign region becomes worthless as no profits were derived from it. Furthermore a multinational company would lose its image and goodwill in the international arena and also the managers will get less motivated (Herbig, n. y).

However, the list of problems are not exhaustive but it is possible to reduce or perhaps eradicate them from roots by developing simple skills discussed as follows,  and can be adapted with no difficulty by the individuals working in the multinational firms. Self orientation along with motivation, mental and physical mobility, and ability to deal with estrangement and segregation, and stress reduction can be some of these. Furthermore enthusiasm to correspond, ability to use and understand non-verbal ways of communication, affiliation skills, possession of respect towards other cultures and be generally respectful, and also open mindedness under which comes tolerance for uncertainness and misbehaviors (Herbig, n. y).

Importance of Overall Ethical Standards

What ideas should be regarded as the business ethical standards is difficult to say without digressing into a theoretical. A definition of ethical standards is not easy to give as it covers a large discussion. An integrative common approach is a broad explanation that would determine the multinationals practices across the globe. Norms can possibly be a widest ethical standard, which can be used to judge an action. However, a set of actions have been collected in order to determine, to a more or lesser extent which can be regarded as the ethical standards which should be followed by the multinational corporations. They are as follows:

•                    The right to fair examination

•                    The right to a liberty and material movement

•                    The right to unbiased dealing

•                    Necessary communal competence • The right to independence  from torture

•                    The right to continuation

•                    The right to autonomy of speech, expression and alliance

•                    The right to political involvement

•                    The right to necessary learning

•                    the right to physical safety

Now as we have discussed what ethics are, we can now discuss some of the problems which can go against the international ethical standards, and multinationals have been facing criticism due to these problems. (The Impact of Foreign Direct Investment on Ethical Standards, n.d.)

One of the foremost unethical act in which multinational have been recently found to be involved and which is under huge debate is the problem of child labor. In simpler words child labor is thought to be unethical because under age individuals are being made use of as workforce. Furthermore the official definition given and used for child labor is by the ILO (International Labor Organization), according to the ILO there are three basic levels of child labor first being the economically active individuals who are younger than fifteen years of age. Second levels counts for those children who are younger than twelve years of age and are involved in light work and finally those children who are involved in hard and demanding work in very harsh working condition. Poverty is one of the main causes of child labor as children’s income could be used for survival, partly malfunctioning of the labor market mechanism has also added to the percentage of child labor. Moreover, as the case in most developing economies most of the children have to work on their family owned farms or businesses. Not only above but multinational firms also add to the child labor problem as multinationals create their production units in other countries in search of cheap resources therefore if cheap child labor is available to them in developing countries they would employ it for sure. However this should not be done as this is quite unethical and condemned by corporate law enforcing bodies over the world. Another unethical which is due to multinationals is the creation of corruption in the host countries. A proper definition of  corruption could be as follows; in order to obtain legal licenses, working permits, long-term loans and other premium government services, the extent to which an individual or an organization go that it needs to bribe the government employees. This creation of corruption is said to be unethical because it carries with itself very disastrous effect on a country in terms of its politics, economy, judiciary and education levels, this is because due to corruption the absence of competition is created which results in the overall inefficiency of the economy, policies are biased and cultural dimensions are distorted. (The Impact of Foreign Direct Investment on Ethical Standards, n.d.)

Obligations toward the Developing Economies

There has been a resent debate among the leading corporate experts and advisors that what can multinationals do in order to help the developing countries and to deal with the foreseeable economic recession. Whatever the outcomes of this debate are there has been an important pressure on the directors and CEO’s of the multinationals from the international corporate consultants that multinational should work so that resources are distribute among the developed and developing economies equitably. For further social and economical development, exploiting productive engagement MNC’s must collaborate, and where people are sufficiently educated multinationals should be prepared to pay wages which are higher than the poverty line when unemployment is low. In order to help a developing economy provision of skilled and well trained labor can have social benefits to the society of the developing economy. This can be justified in a way that when more high paying jobs are available than less low paying jobs, then the element of poverty can be reduced to a marked improvement. This is the simple functioning of the demand –supply mechanism in labor market i.e. when wages are low lesser people are attracted towards a job however when the wages are increased more people are now willing to avail such job opportunities. However, it must be noted that it is not an ethical need of multinationals to pay wages in developing countries equal or more to the wage which they would give out in other host countries, the wage must also not exceed the average minimum level, however it should comply with the minimum wage levels set by local bodies. Other obligation can be debt forgiveness, famine and disease control. (Pitylak, 2006)

References

Bamford, Colin. (2002). Economics. Cambridge University Press.

Herbig, Paul. Cultural Influences on Expatriate Managers’ Success and Failures.    Retrieved October 13, 2008,

www.geocities.com/Athens/Delphi/9158/paper18.html – 39k

Multinational Corporation. (2008). Encyclopedia Americana. Retrieved October 13, 2008, from Grolier Online http://ea.grolier.com/cgi-bin/article?assetid=0278710-00

Pitylak, Ryan. (2006). How Multinational Corporations Can Ethically Engage In Developing Nations. Retrieved October 13, 2008, from http://www.ryanpitylak.com/Ryan_Pitylak/papers/phil_ethics.htm

The Earth Charter. (2000). Retrieved October 13, 2008, from http://www.earthcharterinaction.org/2000/10/the_earth_charter.html

The Impact of Foreign Direct Investment on Ethical Standards. Retrieved October 13, 2008, from http://www.worldbank.org/data/databytopic/classgroups.htm

World Trade Organization. (2002). Retrieved October 13, 2008, from www.oecd.org/dataoecd/7/20/33807220.pdf

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As for the social dimension, it would then relate to another one of the 3P’s that Elkington mentioned which is known as ‘people’. The social dimension is considered somewhat intrinsic with the environmental dimension. It is believed that in some way, one dimension can affect the other if there were changes in any one domain. What it mainly focuses on is the impact of organizations, firms or corporations have on the social system within in which it operates.

Due to this, “the expectations of diverse groups of internal and external stakeholders as well as interest groups comprising civil society are genuinely considered and skillfully balanced” (Jamali, 2006). In other words, this social dimension serves to maximize the positive and beneficial impacts of a firm’s operations on broader society not just limited among them. All in all, the social bottom line can be said to incorporate most issues or rather, any issues pertaining to public health, social issues or community issues, public controversies, social justice, human rights, working conditions, labor rights, equal opportunity and basically, anything in relation to human social elements.

From a social perspective, Torjman (2000) believed “that human well-being cannot be sustained without a healthy environment and is equally unlikely in the absence of a vibrant economy”. It is this ‘people’ factor that help strengthen social structure of organizations and come together to work towards a collective or common goal. The main priority however, of this section is that it was made to promote a healthier work environment, for both employee and employer, eradicate exploitation of labors, whether foreign or local labor, and also to keeping tabs of projects by monitoring and through effective collaboration.

Now that all three areas of the triple bottom line have been covered, it is safe to say that sustainability and the triple bottom line is indeed a necessity in today’s demanding world. After all that has been said thus far, it is a clear enough indication on how important sustainability is and how the integration of the triple bottom line is vital into today’s businesses or corporations. Therefore it is fair to say that sustainable development is considered a holistic approach which has the capacity to improve the quality of life (Kolk, 1999).

The advantages of incorporating this framework even go as far as to create a new job market. However, despite the advantages and benefits that TBL bring economically, environmentally or even socially, there are certain setbacks or limitations that come with. This is because although many appreciate the advancement that CSR has attained, there are still parties or quarters that are unhappy with certain corporations. It is alleged that these particular corporations are only acting in self interest.

There are even claims relating to multinational corporations that are pretending to be ethical in areas that are monitored or more regulated, for example North America. This however is not the same because consequently as this ethical practice is done, unethical practices are being done elsewhere in other parts of the world, some worrying even to the point of being involved with cheap child labour. Although some corporations are never charged for their indecencies or escape punishment, it is near impossible to escape the reality of the general public knowing of any indecent ordeal a particular corporation practices after being exposed (Robinson, 2000).

The problem is because many stubborn companies that claim to be socially responsible more often than none tend to not live up to such standards. Hence, more accountability needs to be practiced among corporations and more pressure by the public needs to be put to rest this problem (Elkington, 1999). In any case, with successive implementation of the triple bottom line, companies are expected to perform well in both financial and non-financial areas such as business ethics, environmental policies and human rights, to name a few. However, everything aside, ultimately, the important note to be made here is that many business leaders today have discovered what it means to measure performance against the triple bottom line (Kleine & von Hauff, 2009).

Evidently, the mix of economic growth concerns, environmental protection concerns and social equity concerns were once deemed an impossible and impractical ethic. Yet based on today’s outcome, the very mix once deemed impractical has now begun to define long term strategy and everyday practice for leading manufacturing corporations globally. Hopefully the essay’s question on why ‘The triple bottom line should be viewed as a new goal by businesses’.

In conclusion, sustainability and the triple bottom line is an ongoing process that still has the unfolding potential to contribute when it comes to corporate social responsibility. Van de Bergh too argued that “a balanced adaptive process of change in a multi-dimensional complex integrated system” (Van de Bergh, 1996). A new measure of corporate performance has been made possible and this is achieved through balancing traditional economic goals together with social and environmental concerns (McDonough & Braungart, 2002).

As the concept is still being digested by some parts of the corporate culture, many are already enjoying the perks and benefits of the implementation of the triple bottom line. With the triple bottom line framework, it encourages the growth in manufacturing products that not only enhance and maintain the well being of nature and culture but also generating extra economic value. Suffice to say, once the core principles in regards to ecologically intelligent design have been widely applied, the growth potential for both nature and commerce will be off the charts.

Though, time and time again, it must be stressed that the co-operation from corporations must be given in full extent for these methods to be successfully implemented. Keeping the environment clean and healthy is everyone’s responsibility. The future generation deserves a chance of being a part of this clean and healthy environment. Finally, the phrase ‘No Profit without Planet and People’ is the perfect rule to abide by in the context of triple bottom line and to conclude this essay.

References

1. Elkington, J. (1998), “Partnerships from cannibals with forks: The triple bottom line of 21st-century business”, Environment Quality Management, Vol. 1, 37-51.

2. Elkington, J. (1999), “The link between accountability and sustainability – theory put into practice”, paper presented at Conference on the Practice of Social Reporting for Business, ISEA, 19 January, Commonwealth Conference Center, London.

3. Elkington, J. (2004), “The triple bottom line: Does it all add up”, available at: http://www.johnelkington.com/TBL-elkington-chapter.pdf (accessed April 24, 2011).

4. Gray, R., Kouhy, R. and Lavers, S. (1995), “Corporate social and environmental reporting”, Accounting, Auditing ; Accountability Journal, Vol. 8 No. 2, pp. 47-77.

5. ICC (2002), Business in Society: Making a Positive and Responsible Contribution, International Chamber of Commerce, London.

6. Jamali, D. (2006), “Insights into triple bottom line integration from a learning organization perspective”, Business Process Management Journal, Vol. 12 No. 6, pp. 809-21.

7. Kleine, A. and von Hauff, M. (2009), “Sustainability-driven implementation of corporate social responsibility: application of the integrative sustainability triangle”, Journal of Business Ethics, Vol. 85, pp. 517-34.

One can pick any random business related book published after 1990 at a good library, open it on page one and read about how the world has gone through tremendous changes over the last few decades. The birth of the Internet moved people and businesses around the globe closer together, the increased availability of commercial air-travel, mass-production, mass marketing, the lowering of trade barriers and tariffs, and so on and so forth. Along this evolution the Multinational Corporations (MNCs) have been growing in size and influence, expanding their global operations. MNCs have even in some instances grown so large that the day-to-day operations have become too hard to handle with their current structures, even though these structures have endured the last century.

MNCs are more and more heading towards a flatter, more flexible and interdependent structure that is more responsive to this new global environment (Bartlett et al, 2003), adopting the strategy of the transnational corporations1 (TNCs). MNCs, therefore, have more transfers of all kinds between its units. This has led to more of a focus on, and increased importance of, the subsidiary as a unit and its operations. Simultaneously, this trend leads to more subsidiary independence and more cooperation with other subsidiaries and the parent company. This paper will, mainly, focus on two questions; why the role of the subsidiary has changed; and moreover, how does its role change? This will be done by reviewing, historically, the known structures of international entities as a whole, as seen by Bartlett et al (2003), but with emphasis on the subsidiary and their strengths and shortcomings.

When dealing with the concept of MNCs, researchers have been baffled by its size and complexity. According to Birkinshaw (1994) research in the field of MNCs, has mainly focused on the parent-subsidiary relationship and the subsidiary role. In a subsequent paper Birkinshaw and Hood (1998, p. 5, cited in Luostarinen and Marschan-Piekkari, 2001) add a third stream of research: the subsidiary development, which emphasizes more the evolutionary aspect of subsidiary activities. The reason behind this third stream is the above-mentioned complexity of the MNC, e.g. when research focuses on the MNC as a whole it tends to be generalizing. However, when the focus is narrowed, for example on the subsidiary role, it tends to disregard important variables.

All three streams will be covered in this paper. The first part of the paper will address the parent-subsidiary relationship along with the subsidiary role. The traditional role as well as the contemporary role will be addressed here. An explanation of the third and last stream – the subsidiary development – will then follow, since this factor is more dynamic in nature, than the two other factors, and thus, explains the continuous process of change, derived by the other two streams. This will enable a better approach to answering how the activities of subsidiaries in large and geographically dispersed MNCs are changing over time.

In the context of subsidiary evolution the concept of Centers of Excellence will be introduced. Thus, this paper will focus on subsidiaries in developed countries thereby delimiting the discussion from, for instance, asset-exploiting subsidiaries of the less-developed countries. The last part of the paper will present the case of LMD – the Danish subsidiary of Ericsson. Here, four different competencies within LMD will be presented and analyzed, and used in the context of our findings from the preceding parts of the paper.

“…each company is influenced by the path by which it developed – its organizational history – and the values, norms, and practices of its management – its management culture. Collectively, these factors constitute a company’s administrative heritage. (Bartlett et al, 2003)” A MNCs administrative heritage (Bartlett et al, 2003) is maybe the greatest asset it has, but it can also be the worst thing a MNC has do carry into the future – and sometimes both.

In the majority of cases it is probably both since it involves some factors that are the MNCs key competences, but these competences might also be the very factors that halter necessary change. This might, for example, be a manager or management in a foreign subsidiary that refuses to adapt to new policies or ways in management, set forth by the parent company. However, the same manager might have been employed for a whole generation and been one of the most value-adding assets the MNC has had. Thus, he has become both the greatest asset and a serious obstacle towards change.

According to Bartlett, Birkinshaw and Ghoshal (2003) and consistent to Dickens’ (2003) elaboration on Bartlett’s and Ghoshal’s framework, there are, historically, three archetypes of MNCs; the Multinational Company, the International Company, and the Global Company. They argue that a major part of the differences between the three archetypes lies in the administrative heritage. In order to understand what is meant by the term archetypes and how the three differ, it is helpful to clarify them one at a time. The same fundamental drivers – namely those of market access and securing key supplies, initially shaped all three archetypes.