McGraw­Hill/Irwin Transnational Management: Text and Cases, 5e Copyright © 2008 The McGraw­Hill Companies, Inc. All rights reserved.

The Future of the Transnational Enterpr ise:

by Paul W. Beamish November 8, 2007

Adapted from Chapter 8 by Christopher Bartlett and Paul Beamish

An Evolving Global Role

8­2

Damaged Reputation of MNEs

l Is following the letter of the law sufficient for the court of public opinion?

l Examples; n Nike (use of child labour/sweatshops) n Pharmaceuticals (patent fight to prevent production of cheap AIDS drugs)

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“Globalization” or “Exploitation”?

Growing economic wealth but… Growing economic disparity

Reduction of trade barriers but… Many industries most important to developing countries still closed

Less poverty in rapidly industrializing countries

but… Absolute levels of poverty still high in many countries

8­4

MNEs as a Model of Success?

l Foreign Aid has failed to address the world’s most serious social problems for the past 50 years

l Foreign Investment has illustrated a “win­win” result for both MNEs and members of developing societies

l New emerging partnerships between national/ supra­national governments, NGOs, and MNEs are replacing previously adversarial relationships

“ The faster the poor gain wealth, the faster they become a customer”

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Four Types of MNEs

“ Exploitive” Views differences in wages, working conditions and living standards

as exploitable opportunities.

“ Transactional” Engages in law­abiding, non­exploitive,

commercial interactions.

“ Responsive” Acts in a way that is sensitive and responsive to the needs of all its immediate stakeholders.

“ Transformative” Commits to leading initiatives to bring life­enhancing changes

to the broader society.

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The Exploitive MNE

l Single­minded focus on maximizing profits regardless of social impact

l Attracted to developing countries for lower labor­ related costs including minimum wage, hour, and age restrictions, as well as lower safety requirements, preferential treatment through bribery, or uninformed consumers

l Response to stakeholder pressures is often to use indirect channels or move to another exploitable area

l An MNE type that is in decline

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Examples of Exploitive MNEs

l Jordanian factory producing for Target & Wal­Mart exploiting workers

l United Brands bribing the president of Honduras l ITT working to overthrow the democratic government of Chile

l Nestle pushing infant formula on mothers in developing countries

l Union Carbide refusing to be held accountable for gas leak that killed thousands

8­8

The Transactional MNE

l Maximizing shareholder return is the primary goal, but other stakeholder concerns are incorporated that do not conflict with that goal

l Adhere to the “spirit” as well as the “letter” of the law in developing societies – do no harm

l Response to stakeholder pressure can be adversarial, but is often conciliatory and one of guarded optimism

l Most popular type of MNE at the present time

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Examples of Transactional MNEs

l McDonald’s and KFC abiding by the laws but encouraging unhealthy eating

l Nike directly engaging in child labor or sourcing from unethical companies

8­10

The Responsive MNE

l Stakeholder and Shareholder concerns are equally important for long­term survival

l Decisions are based on moral principles rather than legal codes

l Attempt to be proactive rather than reactive in dealing with stakeholder pressures – often incorporate concerns during the planning process

l Most rapidly growing type of MNE

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Examples of Responsive MNEs

l Hindustan Lever changing products to adapt to rural communities in India

l GE introducing a basic line of CT scanners as well as refurbished machines

l Starbucks offering incentives for suppliers who meet high ethical standards

l Heineken covering AIDS treatment for employees as well as their families

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The Transformative MNE

l Willing to sacrifice potential profits in order to address social issues at their core

l Employee practices are of the highest ethical standard and are constant regardless of local standards

l Actively exerting their own influence on entire societies to bring about positive change in partnership with NGOs and other stakeholders

l Type of MNE garnering a great amount of international attention

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Examples of Transformative MNEs

l Nokia creating a durable yet inexpensive cellular phone for illiterate individuals and harsh climates

l Bestseller support for a design school for traditional artisans in India

l IKEA sourcing from suppliers who do not use child labor

l Pharmaceutical companies developing/providing drugs irregardless of the customer’s ability to pay (Merck − River Blindness; Genzyme − Gaucher disease; Novo Nordisk − hemophilia)

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Drivers of the Current MNE Trends

l NGOs have successfully established themselves as the “watchdog” of MNEs given the inability of national governments

l Supranational agencies, such as the United Nations have served as mediators of dialogue and voluntary cross­sector initiatives

l Corporations themselves have begun to adopt a broader, long­term perspective to social issues as a means to ensure sustainable streams of income and maintain their very existence

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The Global Compact Pr inciples

1. Businesses should support and respect the protection of internationally proclaimed human rights.

2. Make sure that they are not complicit in human rights abuses. 3. Businesses should uphold the freedom of association and the effective

recognition of the right to collective bargaining. 4. The elimination of all forms of forced and compulsory labour. 5. The effective abolition of child labour. 6. The elimination of discrimination in respect of employment and

occupation. 7. Businesses should support a precautionary approach to environmental

challenges. 8. Undertake initiatives to promote greater environmental responsibility. 9. Encourage the development and diffusion of environmentally friendly

technologies. 10. Businesses should work against all forms of corruption, including

extortion and bribery.

MNE/Stakeholder Relationships in Emerging Markets: A Typology

Stakeholders Economic Societal Political/Regulatory

Shareholders Customers Employees/ Suppliers

Local Communities

Gov’t and Supra­National

Agencies/ Regulators

NGOs

Exploitive

Views differences in wages, working conditions and living standards as exploitable opportunities

Adopts classic Milton Friedman view: Its only legitimate role is to maximize returns to shareholders.

Sells existing products and services, even if they have negative social or economic Impact

Exploits existing local wages, working conditions and suppliers, driving them lower if possible.

Accepts no community responsibility for its social or environmental impact.

Seeks concessions and subsidies, using bargaining power to play national investment boards against each other. If bribery and corruption exist, engages in local practices to win benefits.

An adversary: NGOs actively working to force the MNE to change its behavior through protests, boycotts, political activism, etc.

Transactional

Engages in law­abiding, non­ exploitive, commercial interactions.

Focus on shareholder returns, but believes a pure Friedman approach is inconsistent with the long ­term interests of its shareholders.

Treats it as any other market. Makes product adaptations if they are economically viable and can increase market share.

Complies with local labor laws and workplace regulations. Uses cost efficient local sources, pressuring them on price.

Adopts a Hippocratic Oath approach toward communities: (ie. “ Do no harm” ).

Obeys local laws and regulations, but uses country differences to gain competitive advantage.

A watchdog: NGO monitors the MNE’s actions, urging or pushing it to do more.

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MNE Stance

MNE/Stakeholder Relationships in Emerging Markets: A Typology

Stakeholders Economic Societal Political/Regulatory

Shareholders Customers Employees/ Suppliers

Local Communities

Gov’t and Supra­National

Agencies/ Regulators

NGOs

Responsive

Acts in a way that is sensitive And responsive to the needs of all its immediate stakeholders.

Feels a Responsibility to be a “ good corporate citizen” in the environments in which it operates.

Invests in potentially significant product or service developments and/or adaptations to meet local needs.

Committed to caring for its employees and developing their skills. Actively engages local sources, using its buyer power to improve working conditions for their employees.

Aims to affect positively those whose lives it touches in communities in which it operates.

Sets its standard of behavior above minimum local legal requirements. Conforms to higher International standards (e.g. Set by ILO or UNESCO).

An observer: NGO may be neutral or partially engaged with MNE. Limited mutual trust.

Transformative

Commits to leading initiatives to bring life­ Enhancing changes to the broader society.

Persuades investors of the need for companies to be part of the solution by bringing their resources to bear on the root causes of problems.

By helping to move people out of poverty, it will create stability and goodwill, and help grow the world’s customer base. Develops products or services speci­ fically to meet local needs.

Committed to upgrading the lives of its employees, Inside and outside the workplace. Brings work­ standard compliant local suppliers into global supply chain networks.

Leads in developing the quality of life in the broad community (eg. upgrading health, education).

Actively raises local standards (e.g. by

transferring developed world workplace health and safety standards.) Supports change agenda of international agencies (eg. WHO or UNESCO).

A Partner: NGO works with and supports the MNE working towards the same objectives.

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MNE Stance