The Competitive Strength of Multinational Enterprises - Essay Example

?The competitive strength of MNEs by following ethical standards in developing new business Introduction Multinational enterprises (MNE) are businessorganizations whose business activities are located across the country borders. It is the form of an organization that defines the Foreign Direct Investment (Elsevier Science Ltd, 2001). In the era of globalization, the meteoric rise of the global multinationals has increased the need for governance in conducting the business. The growing revenues and increasing expansion of these giants beyond their own geographical boundaries have made their presence formidable in the International Political Economy. The sheer size of these corporations have made them almost like political actors, in the countries they are present and it is believed that their decisions and actions can affect the demography in both positive and negative ways (Holland, 2010). The emergence of the Corporate Social Responsibility (CSR) can be traced to this very point which is concerned with the issue of reducing negative impacts of the corporate on the population of the country. The CSR deals with the ethics and social responsibility of the company, the two major factors in the strategic management process of a country (Godiwalla and Damanpour, 2006). Ethical conduct is a major requirement of the MNEs in countries in which they operate. The expectations of the countries, in which these companies operate, are the major determinant of the ethical and social conduct of an organization. This essay aims to understand the ways in which MNEs are expanding their new business networks, considering the ethical considerations and the way these contribute in building competitive strength of the companies. Business Ethics: Definition There are numerous definitions of business ethics that can be considered. For the purpose of this essay, business ethics can be defined as the principles, values and standards, which guide the business in its conduct with the external world (Ferrell, Fraedrich and Ferrel, 2011). Principles include the basic rights like, freedom of speech, justice and equal rights, which are universal and form the basis of the rules. Values, on the other hand, comprise of social norms established by conventions in the society which are socially enforcing. These include integrity, accountability and trust and the standards for these are largely determined by investors, employees and interest groups and influence the society’s acceptance of what is permissible or not by the business. Strategic ethic management has the potential of improving both the economic and ethical goals of MNEs, when they consider expanding the existing business to new geographies. Research work has shown that there is a positive correlation between ethical business conducts and long-term financial development of the companies (Takei, 2011). This prompts companies to take ethical issues seriously in their expansion. The causality relationship between the profitability growth and business ethics are yet to be confirmed. Empirical evidences show that there are positive correlation between financial growth and ethical considerations. These discoveries imply that the strategic management must take into consideration the aspect of business ethics in their management process (Krishnamurthi, 2008). Rationale for business ethics Business ethics forms an important responsibility of the manager who conducts the business. The need for implementation of business ethics is more severe for managers who have the responsibility of conducting foreign operations as they face more pressing ethical issues which are absent within the domestic borders (Luminita and Constantin, n.d.). There are various reasons responsible for this difference like: Firstly, the difference in the legal and political structure of a country in which the business is likely to operate. These differences are further pronounced by the ethical and traditional conventions of the society. Secondly, the differences between the economic organizations of countries in which the company wishes to operate and the difference in the level of economic development of these countries. Thirdly, lack of stringent regulatory framework, in the less developed countries, adds to the corporate social responsibility of the MNE. These countries are often characterized by conflicting national, regional and political interests and lack of adequate business framework for conducting business. It has been observed that the multinationals, which are emerging from the developing countries, do not have a proper ethical regulatory framework which might underpin their long-term economic development (Doh, Husted and Yang, 2013). Finally, in the era of globalization, the growing power of the MNEs, along with their scope to evade the regulations in the weak countries and rising corruptions in every part of the world, raises the importance of business ethics. There is a slight difference between corporate code of conduct and code of conduct for multinationals (Yuksel and Murat, n.d.). Corporate codes of conduct can be defined as the one which characterizes ethical standards for the individual company or in other words, the principles that a company follows while conducting their business (United States Bureau of International Labor Affairs, 2012). Code of conduct for multinationals can be defined as the code of conduct which are imposed on a company from an external environment and are expected to be followed by the multinational, when it starts up a new business in any country (Mujih, 2012). Three decades ago, the drilling by Royal Dutch Shell required lower environmental standards to be followed in Africa compared to Europe. However, the standardization of codes of multinationals, an integral feature of globalization, requires the multinationals to follow similar environmental standards across continents. The corporate code of conducts is concerned with the impact of multinationals on two main areas of social conditions and the environment. The trade agreements in the World trade organizations and the impact of globalization on labour and environment has increased the importance of the code of conducts for the companies. In contrast to this code of conduct, the code of conduct or multinationals had gained prominence only in the 70s. The intergovernmental guidelines for the multinationals had emerged because of the rising unfair practices followed by companies in the developing countries. The rising concerns of the governments of host countries and additional pressures from the labour organizations led to drafting of new laws that the multinationals needed to consider, while establishing their business networks. In 1976, the OECD countries adopted the “Declaration on International Investment and Multinational Enterprises”. According to this declaration, the members of OECD needed to adhere to a political commitment that would improve the direct investment in the member countries (Yuksel and Murat, n.d.). The next decades saw the other world giants following similar steps and incorporating code of conduct for multinationals in their standard business model. Business ethics: Examples from Multinationals According to recent trends, there has been an exponential rise in the number of companies, who got nominated or nominated themselves, for the award of Most Ethical Companies conferred by Ethisphere Institute of New York. This implies that there is a growing consensus between the companies about the increase in competitive strength that can be reaped from following the global ethical standards. The Institute had featured 145 companies in the latest list published in 2012 and it is the longest one since 2007, the year of initiation for the awards. The companies nowadays have realized that conducting business in the correct way is always beneficial for the business and emphasize on a corporate culture which is built on this notion (Smith, 2012). The companies which have been involved in any type of law suits in the last five years are eliminated from the nominations. The companies, related to the manufacturing of alcohol, tobacco or firearms, are also dropped from the list. The list published in 2012 has more winners from the category of global companies. This implies that the MNEs, wishing to establish new business networks, must focus on the business standards. Few of the top American companies that had featured in the list include PepsiCo, Colgate-Pamolive, Accenture, Marks and Spencer and TATA Steel Ltd., to name a few. If ethical policies are effectively designed, they can greatly add to the value of the brand, but if the companies fail to manage this, their performance gets adversely affected. Superior management information on the social, environmental and ethical performance is extremely important for proper vigilance of social and environmental impacts of the company. This information is also imperative for compiling reports of the company and demonstrates the effectiveness of corporate governance (Smart and Barman, 2010). In the last ten years, around 28 companies have lost its position in the S&P 500 index and its primary reason was not the changes in technology and market environment, but rather their involvement in huge scandals and non-compliance to the ethical standards. For example, Eron and World Com were involved in huge scandals which had lost them their position. In the recent downturn of the global economy, the results became more evident with the collapse of financial services. The collapse of giant investment banks like, Lehman Brothers, Bear Stearns and Wachovia, bears a testimony to the fact that these firms had chosen short-term gains over long-run profits, which had affected them adversely. It has been found out that corporations coercively adhere to ethical practices, only when they are forced by the society. The example of Wal-Mart in this context validates the argument (Babetti, 2013). After being caught in any scandal, the companies strongly implement high standards to win back the trust of their customers. Wal-Mart in its expansion strategies had heavily relied upon unethical practices like, discriminating against women in the workplace, the Bangladesh factory fire that had killed many of its outsourced employees and using child labour in Bangladesh. When these issues were made public, Wal-Mart behaved in a more conscious manner to improve its social image for gaining back the consumer confidence. These examples can explain the importance of following ethical practices for achieving the long-run development (Dimitriades, 2012). In this section, few companies, adhering to the code of ethics, have been considered. Business ethics is an important part of the business model followed by Kimberly-Clark, a 100 years old personal product producer in the United States (Kimberley-Clark, 2011). This business house has maintained the highest ethical standards in maintaining its relationship with the employees, customers and stakeholders. The role of the CEO has been a crucial one in promoting the model of sustainable development, hinged on business ethics. In the business operations of large multinational companies, they have to deal with large supply chains, which have a complex interrelationship. The monitoring of these data becomes an uphill task for an organization. Kimberly Clark had, however, dealt effectively in the compliance to supply chain issues in order to minimize the social impact. They have come up with a multi-year development model to minimize the social impact evaluation, which is a dynamic one and flexible enough to accommodate the changes in the country’s political and legal environment. The stringent adherence to the ethical standards has enabled the company to win Ethisphere’s most ethical company award in 2012 (Kimberley-Clark, 2012). The experience of PriceWaterhouse Coopers (PWC), in the context of sustainable development, is an exemplary one. The company has its basic set of professional standards, laws and regulations, which is universal for any country it operates in. In addition to the basic set, the MNE also considers shared values while operating the code of conduct for the country it operates (PWC, 2013a). PWC uses a vibrant CSR monitoring and measurement techniques which improve the key areas of business operations like, employer-employee relationship, reduces the adverse effects of its impacts on the environment and client satisfaction (PWC, 2013b). The company has been heavily promoting its CSR practices in Poland, not only in its own corporate culture, but also in the alliances that it has formed with the Polish organizations. It has been observed that most of the Polish companies do not have a proper CSR framework. The contribution of PWC to these organizations in Poland, to frame an efficient CSR framework, will improve the overall development of the nation. Another example that can be cited is of TATA Group, another company which has always been driven by value in its business expansion. The values, which have been followed by the organization, have positively contributed towards growth of the business. TATA has been following a five layered policy in the context of ethics. These are integrity, understanding, excellence, responsibility and unity (Singh and Singh, 2012). Conclusion The primary objective of this essay was to understand the importance of business ethics in conducting of business by the multinationals. The rationale behind following the ethics arises from the fact that they bestow the firms with competitive strength. Studying the experiences of companies has revealed that there is a direct relationship between the degree of ethical standards followed by the company and the level of long-term business growth. The advent of globalization had witnessed a growing concern among the multinationals to improve their adherence to the ethical standards. It has been observed that law suits and other cases of corruption like, actions of fraudulence followed by companies, can only result in the loss of reputation in the modern era, a risk that companies cannot afford to take. The key to the success of new business ventures by the multinationals lies in the strict compliance to business ethics and flexibility to adjust the standard rules of the company, according to the culture of the country where the new business is to be set up. Reference List Babetti, H., 2013. Ethical Responsibilities of Multi-National Corporations: A Critical Analysis of Why Morals Matter. 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