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A multinational enterprise (MNE) is a company that has an integrated global philosophy encompassing both domestic and overseas operations. Discuss the ethical and social impact of the MNE, and consider the economic, political, and legal implications on domestic as well as foreign countries. Evaluate the ethical implications of issues, such as b usiness strategies, control, and other variables.


As more organizations engage in international trade, firms will be faced with an increasingly complex business environment. One important facet of conducting business as a multinational enterprise is understanding the ethical significance of various issues. This study analyzes the economic, political, and legal implications on domestic as well as foreign countries. Specific issues examined are corporate responsibility, the introduction of the Caux principles, and business strategy. The implications of common multinational ethics dilemmas, such as social pressures, economic impacts, control, external and domestic factors, and illicit operations are discussed.


“A multinational enterprise (MNE) is defined as a company that has an integrated global philosophy encompassing both domestic and overseas operations; sometimes used synonymously with Multinational Corporation or transnational corporation” (Daniels & Radebaugh, 1998, p. G-9). To analyze the ethical and social impact of the MNE, one must consider the economic, political, and legal implications on domestic as well as foreign countries. Multinationals must also consider business strategy, control, and the ethical implications of such issues.

Current literature suggests that business ethical issues are multiplied for MNEs because they function in many different environments. An ethical issue exists any time someone needs to make a decision. Ethical issues arise when a person, in pursuit of his or her goal, engages in behavior that affects the ability of another person to pursue his or her goal. The same concept would apply to an organization. If the effect of the behavior is unjust, then the behavior is considered unethical. Some MNE ethical issues include: social pressures, economic impacts, control, external and domestic factors, and illicit operations.

The literature suggests that a consistent, conscientious legal and ethical framework be imposed to guide multinationals, for example, the CauxRoundTable Principles of Business Ethics. The purpose of the principles would encourage businesses to contribute to the social improvement of countries where they operate, as well as the world at large. The principles are also concerned with human rights, education, and welfare.

In an MNE environment, one must remember that stakeholders are pushing companies to respond more responsibly to the numerous pressures that today’s organizations face. Haley (2002) and Clarkson (1995) note that primary stakeholders, such as owners, employees, customers, and suppliers, who are viewed as being on the “inside” of the company, are one source of pressure. Another source of pressure is secondary stakeholders, including nongovernmental organizations (NGOs), activists, communities, and governments that are also seeking greater corporate responsibility.

Waddock, Bodwell, and Graves (2002) indicate that a third source of pressure is general social trends and institutional expectations, reflected in the proliferation of “best of” rankings. Other pressures include: the steady emergence of global principles and standards that define expected levels of corporate responsibility and new initiatives to publicly report the triple bottom lines for measuring economic, social, and environmental performance. Companies respond to the demands by accepting greater corporate responsibility and by developing systemic approaches to balance their liabilities.

Numerous exposés of exploitative labor practices in global supply chains compelled multinational brands and retailers to adopt corporate codes of conduct. Stakeholder demands—and social-institution expectations—increased further, driving firms to not only introduce codes of conduct, but also to pressure their suppliers to adopt these codes. The pressures have increased with the recent fall of Enron and renewed calls for greater corporate integrity (Waddock et al., 2002).

Because of the pressures and the current attention to corporate integrity, many companies find that being recognized for responsible business practices is profitable. Social change, therefore, becomes the new business imperative. Multinationals observe that socially responsible management is a significant source of competitive advantage for companies taking the lead (Waddock et al., 2002).


Kapstein (2001) observes that, around the world, corporate codes of conduct on human rights, labor standards, and environmental performance are growing. The codes reflect the growing demands being placed on firms by NGOs, activist shareholders, and the portfolio managers of “socially responsible” investment funds. A type of corporate ethics crusade has been launched and has been successful in encouraging executives to consider its concerns.

Some apprehension about this movement exists, however, because MNEs and NGOs in industrialized nations are beginning to form relationships that could actually harm the least powerful members of the world economy. They include: developing countries, small- and medium-sized enterprises, and the poor ( Kapstein, 2001).

Consider the connection of labor and environmental standards to multilateral trade agreements. Improving working conditions and air and water quality are praiseworthy goals, and firms should do so whenever it is economically and technically feasible. NGOs add to that process by providing governments and firms with information, advice, and policy alternatives. Nevertheless, forcing the standards of industrialized nations on developing countries and the firms that operate in them could backfire by reducing investment and job creation. Most likely, more workers would be chased into the informal economy, which has even lower standards ( Kapstein, 2001).

Kapstein (2001) also notes that activists who wish to establish ethical codes need to reconcile their aspirations with the fact that most nations do not generally share common laws or regulations on labor rights and the environment. Differing levels of wealth explain much of this difference, but the individuality of political systems and social organizations has left its mark. The ethics crusade represents, in effect, an attempt by one group to impose its values on other groups. Far from making economic relations more harmonious, that effort could lead to greater conflict, which could actually hurt those it intends to help.

The primary criticism is that MNEs are inadequately concerned about national societal interests because of their global bases of operations. Further, the sheer size of many of these companies alarms the countries where they do business. For example, the sales of General Motors (GM), Exxon, and Mitsubishi exceed the gross national product (GNP) of such medium-sized economies as those of Argentina, Indonesia, Poland, and South Africa. Large firms have considerable power in negotiating business arrangements with governments, and outcomes are sometimes of greater consequence than are many treaties among countries. In fact, the executives of multinationals frequently deal directly with heads of state when negotiating the terms under which their companies may operate (Daniels & Radebaugh, 1998). Under such circumstances, an MNE may have a powerful impact on a nation―negative or positive. The actions of even small multinationals influence the economies of their nation and host countries.

Ethical Implications of the Economic Impact of the Multinational Enterprise

Carlson and Blodgett (1997) found that t he North American Free Trade Agreement (NAFTA) provides guidance for the analysis of international trade issues, because it addresses issues concerning employment, intellectual property, and trade. These provisions are included in NAFTA for their trade implications and, in effect, encompass ethical concerns that belong in corporate codes of ethics. While NAFTA’s provisions deal with some of the issues within the global environment, Carlson and Blodgett note the international interest found in the CauxRoundTable Principles of Business Ethics.

Caux Round Table Principles of Business Ethics

Simultaneous with the implementation of the multilateral NAFTA among the United States, Canada, and Mexico―to promote free trade by eliminating tariff and nontariff barriers―was the creation of the CauxRoundTable Principles of Business Ethics (also known as CRP or Caux). Considered the first international code of ethics for business, the Caux originated at a meeting of international business leaders in Caux, Switzerland. These businesspeople represented the United States, Europe, and Japan. The Caux principles are based on the Minnesota principles, which originated from the Minnesota Center for Corporate Responsibility (MCCR), affiliated with the University of St. Thomas in the Twin Cities, Minnesota (Carlson & Blodgett, 1997).

The Caux principles are an effort to set forth universal moral values that are correct for all cultures, independent of what a culture assumes. The principles represent an ethical universalism. Caux affirms the necessity for moral values in business decision making. Beauchamp (2001) suggests that, without moral values, “stable business relationships and a sustainable world community are impossible” (p. 624).

The Caux Round Table (2003) general principles include:

1. Responsibilities of businesses: beyond shareholders toward stakeholders.

2. Economic and social impact of business: toward innovation, justice, and world community.

3. Business behavior: beyond the letter of law toward a spirit of trust.

4. Respect for rules.

5. Support for multilateral trade.

6. Respect for the environment.

7. Avoidance of illicit operations.

Ethical Implications and Social Impact of the Multinational Enterprise

The concern that even the actions of a small multinational corporation will affect the economies of its own nation and its host countries ties in with Principle 2 of the Caux Round Table (2003): The economic and social impact of business: toward innovation, justice, and world community―which concludes that business has a responsibility to help the community where it resides.

Utilitarian theory (Utilitarianism, 2003) applies to this thinking and is consistent with the greatest good for the greatest number of people. This principle means that businesses set up in foreign countries to develop, produce, or sell should also contribute to the social advancement of those countries by generating productive employment and helping raise the purchasing power of their citizens. This concurs with ethical relativism, which asserts that what is good for the country where the business operates will, ultimately, be good for the business. The country and the business are able to benefit from each other. People are able to improve their well-being and support their families.

Economic Factors of the Multinational Enterprise

The harsh realities of balance-of-payment effects are that one country’s surplus is another’s deficit. Each country, therefore, “attempts to regulate trade and investment movements and the capital flows that parallel those movements” (Daniels & Radebaugh, 1998, p. 441). Countries do this through incentives, prohibitions, and other types of government intervention.

Multinationals are concerned about how to satisfy the various interests of each organization with which they have contact. Most MNEs have global objectives, but the host countries are usually interested in national priorities only. That leaves the MNE to interpret conflicting interests and to handle cross-national controversies in a way that will serve their own global business objectives (Daniels & Radebaugh, 1998).

Acquisitions and mergers are two examples of this type of economic activity. In both, there are agreements that have to be worked out that affect companies both domestically and internationally.

In Table 1, Daniels and Radebaugh’s graph shows many of the impacts that an MNE can have on an economy (1998, p. 452).

Table 1. Economic impact of MNEs.

Other economic factors include, but are not limited to, effects of Foreign Direct Investment (FDI), growth, employment effects, home-country gains/losses, and host-country gains/losses.

Economic factors tie in to the idea that there are universal principles or moral standards that should be followed by all MNEs, because ethical or unethical actions will influence the organization’s growth. Beauchamp and Bowie (2001) note that cultural relativism is true when applied to surface ethical principles only. An example is when

U. S. companies do business internationally; their ethics codes need to address different international ethics standards, because the failure to recognize these differences could be devastating to the organization.

The Caux Round Table Principles for Business Ethics (2003) seek to establish a worldwide standard for ethical and responsible corporate behavior. Principle 1: The responsibilities of businesses: beyond shareholders toward stakeholders focuses on the classical dispute of corporate responsibility. Opposing the Friedman or the stockholder view, Principle 1 reinforces the stakeholder theory that a company is responsible to all involved, including employees, customers, suppliers, competitors, shareholders, and the community at large. This principle has a universalism viewpoint that a company has an inherent responsibility to all and a role in shaping the future of the communities where it operates (Beauchamp, 2001).

However, to what degree is this true? Where is the balance between maximizing shareholder profit and the concentration on stakeholders, which may make the most of profits above the level of shareholder focus? Many argue that stakeholder interests are not equal, and because of the obligation to shareholders, there should be no other consideration (Beauchamp, 2001).

The Clarkson Principles of Stakeholder Management cite weighty dependence on the communication, consultation, acknowledgment, and cooperation of managers and stakeholders (Clarkson, 2002). The Global Sullivan Principles also strongly hold up stakeholder consideration for human rights, employee rights, fair competition, and adequate compensation (Sullivan, 1997). These stakeholder advocates support a balance from shareholders to stakeholders, while recognizing the need for companies to make money. This exemplifies the character of Principle 1, which supports corporate responsibility to both shareholders and stakeholders, with a prominence on stakeholders.

The first principle addresses the main question of the function of an MNE. The matter of whether stockholder or stakeholder interests should prevail in a business is a controversial subject in the realm of business ethics. The first principle’s declaration that “businesses have a role to play in improving the lives of all their customers, employees, and shareholders by sharing with them the wealth they have created” (Beauchamp & Bowie, 2001, p. 624) is consistent with the stakeholder rights theory.

Szwajkowski (2000) notes: “The more it can be shown that the stakeholder environment parallels that of the shareholder environment, in both operation and consequences, the easier it is to make a case for stakeholder management” (p. 379). Szwajkowski’s research found that employee relations, product quality, and safety are the most significant and reliable predictors of company reputation. He noted that these qualities best forecasted financial performance, whereas some stakeholder issues, such as diversity, environmental responsibility, and community relations, potentially limit financial performance. Swift (2001), citing studies by numerous ethicists, claims that the fundamental premise of organizational accountability is to stakeholders and to society.

Political and Legal Impact of the Multinational Enterprise

Multinational extraterritoriality exists when governments apply their laws to a company’s foreign operations. This results in a situation in which the home country and the host country have conflicting laws. Taxes placed on foreign income create the same problem. The company loses control and is in the middle of two nations (Daniels & Radebaugh, 1998).

Trade restrictions come about through political motives and hurt or limit a multinational’s control to trade or to do business with certain areas of the world. Boycotts and secondary boycotts are restrictive and can do much damage to an MNE’s ability to trade (Daniels & Radebaugh, 1998). Principle 5: Support for multilateral trade (Caux, 2003) is a principle that both MNEs and governments need to adopt.

Antitrust laws, especially those of the United States, come under criticism because they prevent or delay the acquisition of foreign facilities. Such laws have forced U. S. companies to sell their interests in foreign operations and have restricted the entry of goods from foreign countries, even though those goods were produced partly by American enterprises (Daniels & Radebaugh, 1998).

Political concerns drive the business sector and vice versa. Key sector control and state-owned enterprises are two areas where politics―local, national, and international― exert considerable influence. “Closely related to the extraterritoriality issue is the fear that, if foreign ownership dominates key industries, then decisions made outside the country may have adverse effects on the local economy or may exert an influence on local politics” (Daniels & Radebaugh, 1998, p. 462).

State-owned enterprises are more prone to favor the home country; however, state-owned enterprises, in the end, tend to hinder the economy, especially as policy makers change policies, many times leaving the company at a loss. These factors raise issues that an MNE must consider when entering a host country or working within the home country (Daniels & Radebaugh, 1998).

Multinational independence (Daniels & Radebaugh, 1998) occurs when MNEs play one country against another. An example of this is the auto manufacturing corporation BMW, which used this tactic with the UK. BMW threatened to close its Rover Longbridge plant, if the British government did not help financially (Milberg, 1999).

As companies increase their commitments to international business operations, it is not clear-cut that their strategies toward governmental trade policies change as their levels of commitment change. Rather, companies’ attitudes toward trade policies differ, depending on how well they think they compete for each product from each of their production locations: with or without trade restrictions. Therefore, international companies should develop business strategies that consider the following factors of trade performance.

The external factors are access to foreign markets, capital inflows, fluctuations in world interest rates on outstanding debt, cyclical changes in demand for their products, declines in prices that can affect the rate of growth or trade, and so forth. Internal or domestic factors include trade policies and participation in the World Trade Organization (WTO), export concentration, macroeconomic policies, transportation, storage facilities, and telecommunications. In addition, a lack of a transparent, legal, and regulatory framework, including company and bankruptcy laws and investment codes, are important issues. Shortages of capital are also vital to discern. Firms should also consider the ethical and social responsibilities that coincide with their business strategies (Daniels & Radebaugh, 1998).

Access to foreign markets. It is imperative that MNEs understand the barriers to entry in certain sectors, as well as preference erosion, tariff escalation, and custom unions (World Trade Organization, 2003).

Capital inflows. The MNE has many offers of capital or government aid. To use public capital, as well as private capital, is a choice that has many implications (World Trade Organization, 2003).

Other external factors. Fluctuations in world interest rates on outstanding debt, cyclical changes in demand for their products, and declines in prices can affect the rate of growth or trade (World Trade Organization, 2003).

Trade policies and participation in the WTO. Most of the time, a strong correlation exists between high levels of protection and stagnant exports. Most MNEs are aware of this trade factor as they deal with mainly WTO members.

Export concentration. Commodity-dependent countries are probably better suited for production than other economies because labor is cheaper. High-tech divisions of some MNEs need economies with more highly educated workers (World Trade Organization, 2003).

Macroeconomic policies. Stable policies, structural reforms, and outward-oriented trade and investment regimes go a long way to provide economic stability (World Trade Organization, 2003).

Other Domestic Factors

Other domestic factors include transportation, storage facilities, telecommunications, and shortages of capital. In addition, a lack of a transparent, legal, and regulatory framework, including company and bankruptcy laws and investment codes, are important issues (World Trade Organization, 2003).

Interaction among External and Domestic Factors

The many external and domestic factors that determine a country’s export performance and the pace of its integration into the global economy do not operate independently of each other. A complex interaction occurs, both positive and negative; a factor in one category can interact with others in the category; and developments in external factors can improve or worsen the effects of domestic factors, and vice versa (World Trade Organization, 2003).

The interaction of external and domestic factors also includes specific ethical and social issues. The MNE that adopts the Caux Round Table Principles will have fewer negative effects of such issues as access to foreign markets, capital inflows, trade policies, macroeconomic policies, or other domestic factors. The principles support businesses playing a role in the social improvement of countries where they function, in areas such as human rights, education, and safety. Firms help the social improvement of their host countries by contributing resources, participating in fair competition, and emphasizing innovation (Caux Round Table, 2002).

This position strongly replicates utilitarian theory (Utilitarianism, 2003) in its expectation that the best and most moral practices for firms operating globally are to provide the greatest good to the greatest number of people in specific countries as well as the world in general. Although most MNEs adopt policies that are in their interest, an ethical universalistic viewpoint requires companies to set aside parochial business or financial perspectives in favor of a moral set of laws to be used wherever a multinational does business.

The principles are founded in the rights theory that recognizes a firm’s obligation to observe certain human and governmental rights (Beauchamp & Bowie, 2001). The Kantian theory recognizes people as “ends” and not just as “means” and MNEs’ responsibility to act morally. The Draft (2002), UN Human Rights Principles, and Responsibilities for Transnational Corporations and Other Business Enterprises highlight transnational corporations’ obligation to promote human rights, equal treatment, security, safe working conditions, respect for national sovereignty, and consumer and environmental protection. Companies are obligated to justly treat foreign business environments and leave the environment better off than when the company arrived. The Caux principles, as well as the UN human rights principles, reverse the model of historical imperialism where empires entered a country or region, used all of its natural resources and assets, and then moved on to the next. Therefore, according to the Caux and UN human rights principles, developing countries that offer cheap labor, plentiful resources, or other advantages, can turn those advantages into economic and social development.

International companies have a wide variety of strategies as well as approaches for implementing those strategies. Nevertheless, many of the problems they face are very similar. Concerns are shared by all international companies: which objectives to pursue, where decisions should be made, how foreign operations should report to headquarters, and how to ensure that global goals are met. Behind each of these concerns is a more essential one―that of control (Daniels & Radebaugh, 1998).

Principle 4: Respect for rules (Caux, 1997) states that businesses should respect international and domestic rules. Although this principle has a universalism perspective in the background, it is more of a relativism viewpoint because it implies that there needs to be recognition by businesses of the different rules that exist in different cultures. This ensures that global objectives are met, while retaining strategic control and maintaining ethical considerations of the multinational and of the host country. The principle also states that, although some actions are illegal, they may still produce adverse consequences. The primary intent of this principle is to promote fair and equitable trade, fair competition, intellectual property rights, and copyright and trademark issues.

Principle 4, Respect for rules, takes its theoretical foundation from the common morality theory, which contends that all people share a common morality (Beauchamp, 2001). This basic common foundation forms the basis for fair business trade, consumer protection, stakeholder protection, and equal treatment. The Caux Round Table connects this to the current corporate governance issues of bribery, corruption, and distorting fair competition: false reporting (Caux, 1997).

An important feature of Principle 3: Business behavior: beyond the letter of law toward a spirit of trust (Caux, 2003) is not just about following the rules but following the spirit of the rules. This means not doing something even though it is “legal,” if it has other adverse consequences. Principles 3 and 4 focus on respect for rules, not merely observing the rules (Caux, 1997). These principles help multinationals create a culture of control founded in ethical and societal responsibility.

Furthermore, Barker (2000) observes that it is difficult to quantify the costs and benefits of considering ethical and cultural differences between the home country and the host country. The literature suggests that the consideration is necessary, and the MNE must accommodate the differences when developing a code of ethical standards that will apply to business practices at home and abroad. Society today is becoming more aware of how a firm operates, in addition to how it provides a product or a service.

Society is also demanding that businesses become more ethical in their operations. Recent examples range from consumers refusing to buy apparel produced using questionable labor practices to retirement funds that refuse to hold stock in companies that are not perceived to adhere to community standards. The labor issues include complaints about the manufacturing of products in countries that use prison or child labor and have substandard working conditions. The reasons given for the sale of stock include the promotion of cigarette and alcohol use and, more recently, concerns over the promotion of sex and violence in film or made-for-TV movies (Barker, 2000).

Jackson (1997) observes that MNEs “face an intricate multilayered array of cultural, ethical, and legal norms. The norms subsist at local, national, regional, international, and global levels, and the presence of such normative complexity and depth signals the need for ethics programs that assimilate such characteristics” (p. 1128). He also suggests a number of pragmatic steps toward building a “cosmopolitan” culture of ethical awareness in the multinational.

This cosmopolitan culture is one that is neither relativistic nor absolutist but one that is sensitive to cross-cultural differences regarding ethics. Such a culture goes beyond simple rule formulations or ethical rules. It lives by a higher level of moral sensitivity, based on ongoing education and teamwork among decision makers across cultures (Jackson, 1997). This notion of a cosmopolitan culture is similar to Vega’s (1997) concept of “common norming,” in which conflicting parties attempt to find the common moral ground through ongoing dialogue.

Buller and McEvoy (1997) note that making appropriate ethical decisions in a multinational is a complex process. Although situations exist in which the MNE can rightfully insist on universal moral principles, there may be other times when the firm should adopt the local ethical norms. Situations also exist in which the multinational is obliged, through collaboration and/or imagination, to develop a distinctive response to a cross-cultural ethical dilemma, a response that attempts to find the common ground among contrasting moral views.

Ethical Implications of Illicit Operations

Principle 7: Avoidance of illicit operations (Caux Round Table, 2003) addresses a classic challenge of ethical relativism in seeking to eliminate such practices as bribery, money laundering, terrorist activities, drug trafficking, organized crime, or corrupt business practices. The whole subject is controversial and confusing because so many cross-national differences exist in the rules governing payments, or the fear of nonpayment. Also, many differences exist in what is allowed to occur, what is considered acceptable, and what is not.

Many illicit operations are defended as the cost of doing business in other countries. Considered a type of tax, a relativist would say that these customs are justified because one must act according to local custom, for not to do so one risks losing one’s business or imposes a moralist viewpoint on another culture (Kay, 1997).

A universal viewpoint (Kay, 1997) is that certain standards be adopted internationally that denounce illicit behaviors, and that avoidance of such is necessary. For example, Donaldson and Dunfee (2001) make a case that bribery is a universal standard that affects the worldwide community, and thus a business is morally obligated to not bribe.

However, in today’s international society this is a hard principle to follow because the enticements for these types of conventions are high and because of the increased profits that illegal actions or practices bring to a firm. This corresponds with egoistic theory (Kay, 1997) in which individuals engage in illegal behavior for their own interests, knowing that the practices are illegal or unethical. This represents ethical relativism, in which the behavior is done wholly for self-interest.

Egoism states that when working with certain economic or sociological models, one may frequently assume that people will act in such a way so as to promote their own interests. This type of belief system appears to correspond to individuals or corporations that show no remorse and use others for profit or some advantage. In dealing with this type of individual or business, the individual or business seems to support the rationale that, if one does not do the behavior, someone else will, so why shouldn’t former have some “share of the pie.” The individual or organization also seems to believe in being the exception―that it can get away with the behavior (Kay, 1997).

Nevertheless, the Caux Round Table (2002) suggests that successful organizations exercise a high degree of corporate responsibility and ethical behavior. Strong organizations universalize these responsibilities with a focus on global accountability. Successful markets flourish on trust and confidence. Because single firms cannot thrive unless they buy and sell in thriving markets, each firm has a duty to society to improve the trust and confidence associated with the marketplace for capital, for labor, and for goods and services.

Multinational enterprises need to create strategies and controls to fulfill their objectives by using the best resources available to them and to consider the economic, political, and legal factors in both host and home countries. Multinational enterprises must also realize that successful organizations exercise a high level of corporate responsibility and ethical behavior.

Those firms perceived to act ethically position themselves to attract more customers, and this gives the firm an opportunity to increase earnings. This also applies when operations are established in other countries.

As the world moves toward a global society, a paradigm shift occurs from thinking and acting locally to thinking and acting globally as well as ethically. Firms that are able to make this shift will find their credibility enhanced in host countries. This will increase the MNEs’ competitiveness and lead to greater profits for the organization.


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