IBM_ADE UCM Chapter 1 PDF

International Business Management Bachelor's Degree in Business Administration PRINCIPLES OF THE INTERNATIONAL BUSINESS Chapter 1 Principles of the © M.A. Montoro Sánchez international business 1.1. The phenomenon of gl...

International Business Management Bachelor's Degree in Business Administration PRINCIPLES OF THE INTERNATIONAL BUSINESS Chapter 1 Principles of the © M.A. Montoro Sánchez international business 1.1. The phenomenon of globalization 1.2. Reasons for the internationalization of the company 1.3. Theories and approaches of international business 1.4. International ethics, social responsibility and sustainability Principles of the © M.A. Montoro Sánchez international business References: Cavusgil, S.T.; Knight, G.; Riesenberger, J.R. (2013). A framework for international business, Pearson-Prentice-Hall. Chap. 1 & 2. Cavusgil, S.T.; Knight, G.; Riesenberger, J.R. (2024). International Business: The new realities. Edición global, Pearson. 6th. edition. Chap. 1 & 2. Doh, J.P.; Luthans, F. (2023). International Management Culture, Strategy, and Behavior. McGrawHill. 10th. edition. Chap. 3. ICEX_CECO_Manual_de_Internacionalización_2023. Chap. 1 & 2. Lasserre, P.; Monteiro, F. (2022). Global strategic management. Bloomsbury Publishing. 5th. edition. Chap. 1 & 4. Pla Barber, J.; León Darder, F. (2016). Dirección internacional de la empresa. McGrawHill, Madrid. Chap. 1, 2 & 4. 1.1. The phenomenon of © M.A. Montoro Sánchez globalization  Nowadays concepts such as: globalization, global industries, global competition, global strategies, global corporations…. are widely used but not well understood... For example... Globalization... There is a lot of confusion:  For some people it means expanding the company abroad.  For others, it means standardizing a product and selling it worldwide.  Even for others, it denotes a management approach in which decision making is centralized in corporate headquarters.  The main reason for this confusion: globalization is a relatively new concept. Before the 1970s nobody talked about globalization. The most frequent terminology for referring to companies operating in various parts of the world was "multinational" or "transnational." Multinationals have existed for many years (The East Indies company dates from the early 17th century). 1.1. The phenomenon of © M.A. Montoro Sánchez globalization  GLOBALIZATION OF MARKETS refers to continuous economic integration and the growing interdependence of countries worldwide.  Firm internationalization refers to the tendency of companies to systematically increase the international dimension of their business activities  Globalization is associated with the internationalization of many companies and the enormous growth in the volume and variety of transactions of cross-border goods, services and capital flows. It leads to a diffusion of products, technology and knowledge worldwide.  Globalization forces and facilitates the abroad growth. As a result, the global economy is more integrated than ever (positive and negative events are rapidly spreading, 2008 economic crisis, covid-19, 2020, Ucrania, 2022, etc). 1.1. The phenomenon of © M.A. Montoro Sánchez globalization  Globalization is an economic and social phenomenon derived from the high degree of integration and interdependence between the economies of different countries.  It implies that the relationships between people and organization that used to occur locally and in person now have a broader geographical scope:  Activities are carried out in interaction with agents located anywhere in the world  Facts occurred in other locations may affect us  Globalization indicators at country level: foreign trade flows (imports + exports), foreign investment flows (issued + received), social indicators (frequency and ease of traveling abroad, percentage of the population with internet access, percentage of population that speaks other languages, entrance of tourists, etc.). 1.1. The phenomenon of © M.A. Montoro Sánchez globalization DETERMINANT FACTORS OF GLOBALIZATION  Worldwide reduction of barriers to trade and investment. Tarifss have declined nearly to zero in many countries, encouraging freer international exchange of godos and services.  Market liberalization and adoption of free markets. The collapse of the Soviet Union’s economy and demoliton of the Berlin Wall in 1989, free-market reforms in China and other East Asian economies as South Korea, Malasia, Indonesia and India, along with privatization of state-owned industries in many countries opneded roughly one-third of the world to free international trade and investment.  Industrialization, economic development and modernization. Developing economies (Asia, Latin America and Eastern Europe) are becoming competitive producers and exporters.  Integration of world financial markets. It makes posible for internationally active firms to raise capital, borrow funds, pay suppliers, engage in foreign currency transactions. The Society for Worldwide Interbank Financial Telecommunication (SWIFT) network connects more than 11,000 financial institutions in 204 countries and works uninterruptedly 24 hours a day and seven days a week.  Advances in technology. Discoveries and new capabilities in information technology, communications, manufacturing and transportation. The cost of international communications has plummeted over time just as the number of Internet users has grown dramatically. 1.1. The phenomenon of © M.A. Montoro Sánchez globalization DIMENSIONS OF GLOBALIZATION Integration and interdependence of national economies. Rise of regional economic integration blocs. Growth of global investment and financial flows. Convergence of buyer lifestyles and preferences. Globalization of production activities. Globalization of services. 1.1. The phenomenon of © M.A. Montoro Sánchez globalization REGIONAL ECONOMIC INTEGRATION BLOCS  They refer to the growing economic interdependence that results when two or more countries withing a geographic region forms an Alliance aimed at reducing barriers to trade and investment. More than 50% of world trade today takes place under somer form of preferential trade agreement signed by groups of countries.  Objectives of regional integration: expand market size, achieve scale economies and enhanced productivity, attract direct investment from outside the bloc, acquire stronger defensive and political posture.  Levels of regional integration: free trade area, customs union, common market, economic and monetary union, political union.  Leading economic blocs: EU (European Union), NAFTA (North American Free Trade Agreement), MERCOSUR (Mercado Común del Sur), etc…. 1.1. The phenomenon of © M.A. Montoro Sánchez globalization Fuente: Cavusgil et al, 2013, pp. 17 1.1. The phenomenon of © M.A. Montoro Sánchez globalization CONSEQUENCES OF GLOBALIZATION Contagion: Rapid spread of financial or manetary crises from one country to another. Loss of national sovereignty. Offshoring and the flight of jobs. Effect on the poor. Effecto on the natural environment. Effecto on national culture. Internationalization of the firm’s value chain. Global Value Chain. 1.1. The phenomenon of © M.A. Montoro Sánchez globalization 1.1. The phenomenon of © M.A. Montoro Sánchez globalization 1.2. The internationalization © M.A. Montoro Sánchez of the company INTERNATIONAL BUSINESS refers to the performance of trade and investment activities by firms across national borders (cross-border business). It describes an entreprise-level phenomenon. (Cavusgil et al, 2013). International trade International investment To aggregate cross-border flows of products (goods and The transfer of assets to another country or the acquisition services) between nations (economists). It describes the of assets in that country. These assets include capital, macrophenomenon of aggregate flows between nations. technology, managerial talent, and manufacturing Products cross the national borders. infrastructure (economists refer to such assett as factors Exporting (Outbound flow): the sale of products of production). The firm itself crosses borders to secure (goods and services) to customers located abroad, from ownership of asset located abroad. a base in the home country or a third country. International portfolio investment: the passive Importing or global sourcing (Inbound flow): the ownership of foreign securities such as stocks and bonds procurement of products (goods and services) from for the purpose of generating financial returns. It does not suppliers located abroad for consumption in the home entail active management or control over these assests. country or a third country. Short-term interest in the ownership of these assests.. Foreing direct investment: the firm establishes a physical presence abroad through acquisition (partial or full ownership) of productive assets such as capital, technology, labor, land, plant, and equipment. Long-term. 1.2. The internationalization © M.A. Montoro Sánchez of the company ¿WHO PARTICIPATES IN INTERNATIONAL BUSINESS?  FOCAL FIMS:  Multinationals entreprise (MNE)  Small and medium-sized entreprises (SMEs)  Born global firms: young entrepreneurial company that initiates international business activity very early in its evolutions, moving rapidly into foreign markets.  NONGOVERNMENTAL ORGANIZATIONS (NGOs). Foundations, etc. (arts, education, research,…) operating internationally either to conduct their activities or to raise funds. 1.2. The internationalization © M.A. Montoro Sánchez of the company MOTIVES FOR THE INTERNATIONALIZATION (Pla & León, 2016:49-52):  PUSH MOTIVES: Difficulties in local markets. The company is internationalized because it has no development possibilities in its home market and is underusing its productive capacities. Internationalization is a reaction to: saturated national market or with high competition, product life cycle in decline in the national market, unfavorable conditions (economic, demographic, legal...) in the home market.  PULL MOTIVES: Proactive vision of the company's direction to internationalization, exploiting opportunities in international markets. Reasons related to: the market (markets with high growth rates), obtaining resources (search for all types of resources in host markets), the search for efficiency (government benefit of assets geographically dispersed by economies of scale, diversification of risks, etc.), strategic reasons (reaction and/or follow-up to competitors or customers). 1.2. The internationalization © M.A. Montoro Sánchez of the company MOTIVES FOR INTERNATIONALIZATION (managerial expectations) Obtaining better host country Avoiding poor home country Managerial actions conditions conditions BUY BETTER (Exploit existing host Exploitation of SELL MORE (Exploit existing home country resourses and capabilities to existing resources country resources and capabilities to avoid the higher costs of operating in and capabilities obtain additional revenues) the home country) UPGRADE (Explore for new resources Exploration of new ESCAPE (Explore for better and capabilities in the host country to resources and conditions in the host country to avoid obtain resources needed to upgrade capabilities the constraints of the home country) home operations) 1.2. The internationalization © M.A. Montoro Sánchez of the company RISKS OF INTERNATIONALIZATION:  Cross-cultural risk: arise from differences in language, lifestyles, mind-sers, customs, and religion…. Values unique to a culture tend to be long-lasting and transmitted from one generation to the next. They can influence the mind-set and work style of employees and the shopping patterns of buyers. Language challenges can impede effective communication and cause misunderstandings, inappropiate business strategies, and ineffective customer relationships.  Country or political risk: the potentially adverse effects on company operations and profitability caused by developments in the political, legal, and economic environment in a foreign country.  Currency or financial rish: the risk of adverse fluctuations in exhanges rates. Inflation and other harmful economic conditions experienced in one country may have inmediate consequences for exchange rates due to the interconnectedness of national economies.  Commercial risk: loss or failure from poorly developed or executed business strategies, tactics, or procedures (partner seleciton, timing of market entry, pricing, promotions, etc.). 1.3. Theories and approaches © M.A. Montoro Sánchez of international business Theoretical approaches that explain the process of internationalization of companies:  Internationalization from an economic perspective: analysis of the international operations of the multinational enterprise, and more specifically, of its direct investment activities. Theories describe the internationalization process from a cost-based and economic advantages perspective of internationalization.  Internationalization from a process perspective: conceives internationalization as a process of incremental learning commitment based on the accumulation of knowledge and the increase of resources committed in foreign markets.  Network Theory: develops new ideas that focus on the internationalization process as a logical development of the interorganizational and social networks of companies.  Born global: international companies of recent creation (follow a global approach since its creation or internationalionalization in the first two years of life). New emerging perspective of the internationalization process very useful to understand the internationalization of companies in the 21st century. 1.3. Theories and approaches © M.A. Montoro Sánchez of international business INTERNATIONALIZATION FROM AN ECONOMIC PERSPECTIVE: Theories that from an economic perspective try to explain in a general way the reasons why the international expansion of the companies can take place and the conditions under which the decisions of optimal location of the production could be determined. These approaches that emerged in the seventies and eighties are intended to explain the existence of the multinational enterprise, so the common characteristic under this economic-rational approach lies in considering that decision making and business behavior are totally rational processes.  Monopolistic advantage theory  Internalization theory  Dunning's Eclectic Paradigm 1.3. Theories and approaches © M.A. Montoro Sánchez of international business MONOPOLISTIC ADVANTAGE THEORY:  The existence of imperfections in the markets of factors or products allows companies to internationalize.  For companies to have productive facilities abroad, they must have some kind of exclusive competitive advantage.  The competitive advantage may have its origin in production, technology, organization, management style or marketing.  The advantage has a monopolistic nature: companies can compete with foreign companies in their own markets, which although they can be better established and have greater knowledge of the market, can be forced to bear the cost of developing such an advantage, and, therefore, they are unable to compete with foreign companies. 1.3. Theories and approaches © M.A. Montoro Sánchez of international business INTERNALIZATION THEORY:  At the end of the seventies a new line of research emerges, the theory of internalization.  The internalization paradigm is the most important contribution of microeconomists to the knowledge of the multinational enterpise, being used to explain hierarchical transactions between countries.  The internalization theory of the multinational company has its origin in the theory of transaction costs.  When markets are perfectly competitive, no control mechanism is necessary, since the threat of being replaced by another company eliminates the possibility of developing opportunistic behavior and forces companies to act efficiently.  When the number of suppliers decreases, then the company has less chance of replacing them and, therefore, transaction costs increase, because a rigorous negotiation is necessary and assuming supervision costs to ensure that the contract is fulfilled in the conditions that had been established. 1.3. Theories and approaches © M.A. Montoro Sánchez of international business INTERNALIZATION THEORY:  The analysis of transaction costs predicts that the company will internalize the markets, when the specificity of the assets is high.  Any company that wants to internationalize will analyze the costs and benefits of expanding its internal markets or through external transactions.  The company locates its activities where the costs are lower.  The company grows internalizing markets, to the point where the benefits offset the costs.  Limitation: In reality, the external market cannot be eliminated a priori. 1.3. Theories and approaches © M.A. Montoro Sánchez of international business DUNNING'S ECLECTIC PARADIGM:  The eclectic theory proposed by Dunning (1981) attempts to reconcile all theoretical explanations of economic nature about the existence of the multinational company.  The eclectic paradigm tries to explain that the extension, the form and the pattern of international production of a company are based on the juxtaposition of the specific advantages of the company, the propensity to internalize foreign markets and the attractiveness of these markets to produce there.  The decision to enter foreign markets is therefore made in a rational manner, based on the analysis of the costs and advantages of producing abroad. 1.3. Theories and approaches © M.A. Montoro Sánchez of international business DUNNING'S ECLECTIC PARADIGM: OLI paradigm It relates the internalization of markets with international trade and other forms of international transfer of resources. Foreign investment conditions:  Existence of ownership-specific over a period of time (Ownership).  Localition-specific advantages available in the foreign market (Location).  The MNE itself must have internalize these advantages in foreign markets (Internalization). 1.3. Theories and approaches © M.A. Montoro Sánchez of international business DUNNING'S ECLECTIC PARADIGM:  The firm must have its own advantages when serving certain markets, compared to local companies (Industrial organization theory). These advantages may arise because the company has property rights or intangible assets (company structure, organizational capacity, teamwork, know-how) and, due to the advantages derived from the common government of an asset network (business advantages already established against the new and specific advantages associated with the idiosyncratic characteristics of being multinational).  The firm that owns these ownership-specif advantages has to be more advantageous to exploit them on its own before selling them or renting them to other companies located in other countries, that is, it must be more profitable to internalize these advantages by expanding its value added chain or through the execution of new activities (Theory of internalization).  It must be profitable for the firm to locate some part of its production plants abroad (attractiveness of certain locations due to its specific provision of non-transferable factors along its borders). (Theories of location and industrial economics).  For a firm to make a direct investment abroad its managers must consider that foreign production is in accordance with the strategy of the long-term organization. 1.3. Theories and approaches © M.A. Montoro Sánchez of international business DUNNING'S ECLECTIC PARADIGM: FIRM LOCATION MODE (Ownership) (Locational) (Internalisation) Firm characteristics Industry/Country characteristics Firm strategic decitions  Technology  Internal resources  Market size  Costs vs Benefits  Intangibles  Entry barriers  Risk vs Control  Relations Customers/  Comparative advantage of the country Providers  Oportunistic costs  Limitations:  Theory is biased towards the explanation of direct investment abroad.  Static theory: it does not explain how the process occurs over time.  It does not explain cooperation forms 1.3. Theories and approaches © M.A. Montoro Sánchez of international business INTERNATIONALIZATION FROM A PROCESS PERSPECTIVE Process of internationalization of the firm in a dynamic sense: how and why a strictly national firm becomes a great international and when it is prepared to take the different steps that will take it to its highest degree of internationalization  Model of the internationalization process of the Uppsala School.  Innovation approach  Vernon product life cycle 1.3. Theories and approaches © M.A. Montoro Sánchez of international business UPPSALA MODEL  The model predicts that the firm will gradually increase its committed resources in a specific country as it gains experience on the activities carried out in that market.  The development of the activity abroad would take place along a series of successive stages that would represent an increasing degree of involvement by the firm in its international operations.  When firm wants to enter a particular foreign market, it goes through four different stages (the so-called establishment chain). Four stages:  1st) Sporadic or non-regular export activities.  2nd) Exports through independent representatives.  3rd) Establishment of a commercial branch in the foreign country.  4th) Establishment of productive units in the foreign country. 1.3. Theories and approaches © M.A. Montoro Sánchez of international business UPPSALA MODEL  Each stage corresponds to a greater degree of international involvement of the firm in that market, both in terms of committed resources and in regard to the experience and information that the company has on the foreign market, and represents a way of different input.  This model contemplates the progressive international commitment of companies, as a process of gradual and sequential expansion as consequences of the interaction between the market commitment and its knowledge.  Discussion or lack of consensus that the investment of resources of a firm in foreign markets is basically explained as an isolated and unique operation or as a gradual commitment that is increasing. Ambiguous definition of "gradual commitment". 1.3. Theories and approaches © M.A. Montoro Sánchez of international business UPPSALA MODEL  Basic hypothesis: lack of knowledge about foreign markets is a major obstacle to the development of international operations. As this knowledge increases, the level of resources committed in international activity is higher.  Market knowledge is something that develops gradually through the experience of acting in the foreign market. Increasing the experience in these markets will appear new market opportunities, for example, the possibility of establishing new business relationships and the development of existing ones, which gives the company a greater knowledge of the new environment.  The accumulated experience is shown in two complementary ways: (1) changes in the knowledge acquired and, (2) changes in the skills to use the knowledge. International companies have great knowledge based on the experience of activities that cannot be used in foreign markets until this knowledge is combined with that acquired through the actions carried out in that particular market. The additional knowledge will act as a catalyst for the development of new business activities, even in the case of companies with international experience. 1.3. Theories and approaches © M.A. Montoro Sánchez of international business UPPSALA MODEL Source: Johanson and Vahlne (1977, 26-27, 1990, 12) 1.3. Theories and approaches © M.A. Montoro Sánchez of international business INNOVATION APPROACH:  Internationalization is a process of business innovation.  This trend focuses on the study of export activity as a basic internationalization method for small and medium enterprises.  Parallelism between the internationalization decision and the innovation decision:  They are creative and deliberate decisions, developed within the limits imposed by the market and the internal capabilities of the firm.  They are taken in conditions of uncertainty, their consequences being unknown, so that the managers responsible for making these decisions are assigned the central role in promoting the process.  In both processes, factors governed by a manifestly cumulative, non-deterministic sequence are recognized, since both benefit from the temporal dynamics that characterize those decisions based on the learning process. The experience accumulated by the organization through a continuous learning process is the key to acquiring the necessary skills to compete in international markets.  The decisions that have been made in the past and, in turn, will condition those that have to be made in the future. 1.3. Theories and approaches © M.A. Montoro Sánchez of international business VERNON PRODUCT LIFE CYCLE:  Vernon (1966) tries to combine the classical notions of international trade theory with a perspective based on the individual behavior of each firm, so he eliminates the lack of realism of the theory of comparative advantage, introducing aspects that have implications in international business such as product innovation, the effects of economies of scale and the uncertainty.  The different stages through which these new products go through will determine the decisions on the location of the production of the firms and, therefore, will have an effect on their internationalization. 1.3. Theories and approaches © M.A. Montoro Sánchez of international business VERNON PRODUCT LIFE CYCLE: Product life cicle stages Internationalization stages Description The product is manufactured and selled in the country where it was Orientation towards the home developed. Introduction country The objective of achieving economies of scale in production can justify the export of the product to other industrialized countries. Orientation towards the main The export activity increases and investments are made in Growth host industrialized countries manufacturing plants in expanding demand countries. The main product markets are saturated and the product has been Maturity Relocation of direct investment standardized. Manufacturing is diverted to countries with cheaper labor. Demand for the product in the home country is almost non-existent. Decline Leaving the home country Manufacturing leaves the home country. 1.3. Theories and approaches © M.A. Montoro Sánchez of international business NETWORK THEORY:  The entry into foreign markets is a function of the continuous interorganizational interactions between local companies and their networks.  Entry into foreign markets is an exchange between individuals who have complementary resources and information.  The opportunities of the foreign markets reach the local company through the members of the network.  The possibility of taking advantage of business opportunities depends on the size of the network and its diversity.  As firms internationalize, the number of actors with whom they have to interact through the network increases and relationships with them are strengthened. 1.3. Theories and approaches © M.A. Montoro Sánchez of international business BORN GLOBAL:  The arise of global born companies with three important factors:  The new market conditions (specialization and market niches).  Technological developments in areas such as production, transport and communication.  The most developed capacities of people, including the entrepreneur who founded the born global firm.  In order to explain the phenomenon of global born firms, research has to integrate internationalization and entrepreneurship literature. 1.3. Theories and approaches © M.A. Montoro Sánchez of international business BORN GLOBAL: Source: Madsen and Servais, 1997 1.4. International ethics, social © M.A. Montoro Sánchez responsibility and sustainability  Recent concerns about ethics, social responsibility, and sustainability transcend national borders.  The ethical behavior of business and the broader social responsibilities of corporations have become major issues in all countries around the world.  There is a changing focus of corporations from the traditional emphasis on supply and demand models to now include social and environmental responsibilities and obligations.  Patagonia (arguably the most sustainable company in the world, see the video), Philips, and Tesla, like many other corporations, realized that environmental and social practices can yield a strategic advantage, which in the long term will produce positive financial results. 1.4. International ethics, social © M.A. Montoro Sánchez responsibility and sustainability ETHICS:  Ethics is the study of morality and standards of conduct.  It is important in the study of international management because ethical behavior often varies from one country to another.  Ethics manifests itself in the ways societies and companies address issues such as employment conditions, human rights, and corruption. A danger in international management is the ethical relativism trap—“When in Rome, do as the Romans do.”  Ethical scandals and questionable business practices have received considerable media attention, aroused the public’s concern about ethics in international business, and brought attention to the social impact of business operations. 1.4. International ethics, social © M.A. Montoro Sánchez responsibility and sustainability ETHICS:  There are a range of ethical theories and approaches around the world, many emanating from religious and cultural traditions.  Kantian—individuals (and organizations) have responsibilities based on moral principles that go beyond self-interest.  Aristotelian virtue ethics focus on core, individual behaviors and actions and how they express and form individual character.  Utilitarianism favors the greatest good for the greatest number of people under a given set of constraints.  Eastern philosophy tends to view the individual as part of, rather than separate from, nature. 1.4. International ethics, social © M.A. Montoro Sánchez responsibility and sustainability ETHICS:  In international management, executives may rely on one or more of these perspectives when making decisions involving ethics or morality.  Dilemmas that arise from conflicts between ethical standards of a country and business ethics, or the moral code guiding business behavior, are most evident in:  Employment and business practices.  Recognition of human rights.  Women’s rights and gender equity in the workplace.  Corruption. 1.4. International ethics, social © M.A. Montoro Sánchez responsibility and sustainability ETHICS:  Human rights issues present challenges for MNCs as there is currently no universally adopted standard of what constitutes acceptable behavior.  Political, economic, and cultural differences make it difficult to agree on universal employment practices.  Working conditions, expected work hours, and labor regulations also create challenges in deciding appropriate employment practices.  Child labor initially invokes negative associations and is considered an unethical employment practice. 160 million children aged 5 to 17 work in the world, many of them in hazardous work that directly endangers their health and development (https://www.unicef.org/protection/child-labour). 1.4. International ethics, social © M.A. Montoro Sánchez responsibility and sustainability ETHICS:  China’s human rights record continues to be a challenge for MNCs. Human rights lawyers are frequently detained by the government. Despite these violations, most MNCs continue their involvement in China, although friction still exists between countries with high and low human rights standards.  Women’s rights and gender equity can be considered a subset of human rights.  While the number of women in the workforce has increased substantially worldwide, most are still experiencing the effects of a “glass ceiling”, meaning that it is difficult, if not impossible, to reach the upper management positions.  Today, women earn less than men for the same job in most of the countries. France, Germany, and Great Britain have seen an increase in the number of women not only in the workforce but also in management positions.  Government corruption is a pervasive element in the international business environment. 1.4. International ethics, social © M.A. Montoro Sánchez responsibility and sustainability ETHICS:  The discussion about ethics, CSR and human rights prompts the question: How much responsibility do MNCs have in changing these practices?  One remedy could be to instill a business code of ethics that extends to all countries or to create contracts for situations that may arise.  Another response to globalization has been to transfer a large percentage of highly specialized jobs of all types to foreign locations, especially true in India.  MNCs adhere to a code of ethical conduct while doing business around the world, yet make adjustments to respond to local norms and values. 1.4. International ethics, social © M.A. Montoro Sánchez responsibility and sustainability ETHICS:  The emergence of organized civil society and NGOs has dramatically altered the business environment globally and the role of MNCs within it.  Some now regard NGOs as a counterweight to business and global capitalism.  NGO criticism has been sharp in relation to the activities of MNCs.  Many NGOs recognize that MNCs can transfer “best practices” from their home to host countries’ markets.  In some instances, MNCs and NGOs collaborate. 1.4. International ethics, social © M.A. Montoro Sánchez responsibility and sustainability CORPORATE SOCIAL RESPONSABILITY:  Corporate social responsibility (CSR) is the actions of a firm to benefit society beyond legal requirements and the direct interests of the firm.  Pressure for greater CSR emanates from a range of stakeholders, including nongovernmental organizations (NGOs).  Many MNCs take their CSR commitment seriously. Such firms integrate CSR into their core business strategies.  One response is the agreements and codes of conduct in which MNCs commit to maintain standards in their domestic and global operations.  The U.N. Global Compact (next slide).  The Global Reporting Initiative.  The social accountability “SA8000” standards.  The ISO 14000 environmental quality standards.  Fair trade is an organized social movement and market-based approach that aims to help producers in developing countries obtain better trading conditions and promote sustainability. 1.4. International ethics, social © M.A. Montoro Sánchez responsibility and sustainability CORPORATE SOCIAL RESPONSABILITY: The U.N. Global Compact  Human rights:  Principle 1: Support and respect the protection of international human rights within their sphere of influence.  Principle 2: Make sure their own corporations are not complicit in human rights abuses.  Labor:  Principle 3: Freedom of association and the effective recognition of the right to collective bargaining.  Principle 4: The elimination of all forms of forced and compulsory labor.  Principle 5: The effective abolition of child labor.  Principle 6: The elimination of discrimination with respect to employment and occupation.  Environment:  Principle 7: Support a precautionary approach to environmental challenges.  Principle 8: Undertake initiatives to promote greater environmental responsibility.  Principle 9: Encourage the development and diffusion of environmentally friendly technologies.  Anticorruption:  Principle 10: Business should work against all forms of corruption, including extortion and bribery. 1.4. International ethics, social © M.A. Montoro Sánchez responsibility and sustainability SUSTAINABILITY:  The term sustainability is no longer tied to fiscal results.  In the boardroom, the term sustainability may first be associated with financial investments or the hope of steadily increasing profits, but for a growing number of companies, this term means the same to them as it does to an environmental conservationist.  Companies realize loss of resources will eventually halt production.  Increased pressures from NGOs also play a part.  Corporations are now looking to be leaders in the “green” movement. 1.4. International ethics, social © M.A. Montoro Sánchez responsibility and sustainability SUSTAINABILITY:  Governments and corporations are increasingly collaborating to provide assistance to communities around the world through global partnerships.  Fighting malnutrition, controlling malaria, and immunizing children are identified as the best investments.  At the United Nations, world leaders placed development at the heart of the global agenda by adopting the Sustainable Development Goals.  The 17 goals are an ambitious agenda to improve the human condition by 2030.  The Global Fund to Fight AIDS, Tuberculosis, and Malaria, has committed over US$38 billion in grants to over 151 countries. 1.4. International ethics, social © M.A. Montoro Sánchez responsibility and sustainability SUSTAINABILITY:  Many poor, developing countries are more concerned with improving the quality of life for their citizens than about endangered species or air or water quality—the EKC (below) hypothesizes an inverted U-shape.  This graph shows the relationship between per capita income and the use of natural resources and/or the emission of wastes and is shown to have an inverted U-shape.  Reasons for the inverted U-shaped relationship are hypothesized to include income- driven changes in the composition of production and/or consumption, the preference for environmental quality, institutions that are needed to internalize externalities, and/or increasing returns to scale associated with pollution abatement.  Recent progress includes the Paris Agreement with 194 signatories as of 2019.  However, many companies continue to violate laws and/or jeopardize safety and environmental concerns in their operations.. 1.4. International ethics, social © M.A. Montoro Sánchez responsibility and sustainability SUSTAINABILITY:  International Business Management Bachelor's Degree in Business Administration PRINCIPLES OF THE INTERNATIONAL BUSINESS Chapter 1