Ethics and Social Responsibility in International Business

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CHAPTER 5Ethics and Social

Responsibility in International Business

Chapter Objectives

After studying this chapter, students should be able to:

1.Describe the nature of ethics.2.Discuss ethics in cross-cultural and international contexts. 3. Identify the key elements in managing ethical behavior across borders.4.Discuss social responsibility in cross-cultural and international

contexts.5. Identify and summarize the basic areas of social responsibility. 6.Discuss how organizations manage social responsibility across

borders.7. Identify and summarize the key regulations governing international

ethics and social responsibility.

LECTURE OUTLINE

OPENING CASE: BP Safety First or Profits First

The opening case discusses BP, the explosion of the Deepwater Horizon oil drilling platform in the Gulf of Mexico, together with some other situation where it would appear that BP placed a greater emphasis on lowering costs and increasing profits in lieu of safety.

Key Points

On April 20, 2010, the Deepwater Horizon, a drilling rig operating in the Gulf of Mexico exploded, killing 11 and injuring 17.

BP had the contract to complete an exploratory well in the mile deep water in the Macando Project.

Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall

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After an independent investigation, it was suggested that BP was more concerned with controlling costs than promoting safety.

After the Deepwater Horizon incident, the Board of directors replaced CEO John Browne.

BP’s commitment to safety has been questioned, although BP continues to assert that safety is their number one priority.

CHAPTER SUMMARY

Chapter Five focuses on ethics and corporate social responsibility. It starts by working its way through definitions of ethics and then focuses on ethics in business. From there, it moves to a discussion of the social responsibilities that organizations have toward their stakeholders, the natural environment, and general social welfare. The chapter concludes by reviewing attempts to legally regulate ethical and socially responsible international business conduct (such as the Foreign Corrupt Practices Act and the Anti-Bribery Convention of the OECD).

NATURE OF ETHICS AND SOCIAL RESPONSIBILITY IN INTERNATIONAL BUSINESS

Ethics is defined as “an individual’s personal beliefs about whether a decision, behavior, or action is right or wrong.” Ethical behavior usually refers to behavior that conforms to generally accepted social norms. Unethical behavior describes behavior that does not conform to generally accepted social norms.

These definitions suggest the following generalizations: Individuals have their own personal belief systems about what constitutes

ethical and unethical behavior. Common cultural contexts usually lead to similar views on ethical and unethical

behavior. Individuals are able to rationalize behavior based on circumstances. Individuals may deviate from their own belief systems based on different

circumstances. Ethical values are strongly affected by national cultures and customs. Values

are the things a person feels to be important. Members of one culture may view a behavior as unethical, while members of

another may view that same behavior as perfectly reasonable.

ETHICS IN CROSS-CULTURAL AND INTERNATIONAL CONTEXTS

Ethical behaviors are discussed in the context of how organizations treat their employees, how employees treat their organizations, and how employees and their organizations treat other economic agents. Figure 5.1 (which depicts these relationships) should be introduced here.

How an Organization Treats Its Employees


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Hiring and firing. In some countries, ethical and legal guidelines suggest that hiring and firing decisions should be based solely on an individual’s ability to perform the job. In other countries, it is perfectly legitimate to give preference to some individuals based on gender, ethnicity, age, or other factors.

Wages and working conditions. Similarly, what constitutes appropriate working conditions and a fair wage differs across countries. Protection of employee privacy rights, for example, may vary widely.

How Employees Treat the Organization

Conflicts of interest. A conflict of interest occurs when a decision potentially benefits the individual to the possible detriment of the organizations. For example, in some cultures, giving and receiving gifts from suppliers is acceptable, while in others it is not.

Secrecy and confidentiality. In many cultures, there are laws restricting the disclosure of sensitive information by a firm’s employee to competitors. In China, noncompetition clauses in contracts (where an employee is prohibited for a certain time from “working for the competition”) are difficult to enforce.

Simply put, honesty is at the heart of many of these ethical issues. For example, is it okay to use the company telephone for personal calls? The answer to that question may vary from one culture to another.

How Employees and the Organization Treat Other Economic Agents

Bribery, pricing, financial disclosure, and advertising practices are all areas where practices vary from one culture to another. In all these instances, managers may be confronted with accusations of unethical behavior.

MANAGING ETHICAL BEHAVIOR ACROSS BORDERS

Even though ethics reside in individuals, many companies try to manage the ethical behavior of their employees by clearly specifying what the company considers to be ethical or unethical. This clear specification often takes the form of ethical guidelines or codes, ethics training, organizational practices, and/or corporate culture.

Guidelines and Codes of Ethics

Codes of ethics are written guidelines that detail how employees are to treat suppliers, customers, competitors, and other constituents. A multinational must make a decision as to whether to establish one overarching code for all of its units around the globe, or whether it should tailor each code to its local context.

Ethics Training

Given that it is probably impossible to foresee all potential ethical dilemmas and cover them in a code, some multinational corporations address ethical issues proactively, by offering employees training on how to cope with ethical dilemmas. For expatriates in particular, it is important that they receive some training in the business practices and values of the society where they are stationed.


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Organizational Practices and the Corporate Culture

Organizational practices and corporate culture contribute to establishing the ethical climate of the firm. If top leaders in a firm behave in an ethical manner and violations of ethical standards are promptly and appropriately addressed, the rest of the organization quickly understands the expectations for their own behavior.

In particular countries, bribery is practically a way of life. Organizations need to be very clear about their practices in such environments if they wish their employees to adhere to company standards instead of local standards.

VENTURING ABROADSiemens Pays and Pays and PaysThis section provides background information on Siemens AG, a German-based manufacturer of sophisticated technology, and provides information for firms considering whether they should pay a bribe to secure a lucrative contract.

SOCIAL RESPONSIBILITY IN CROSS-CULTURAL AND INTERNATIONAL CONTEXTS

Social responsibility is the set of obligations an organization undertakes to protect and enhance the society in which it functions. Ethics relates to individual employees. Social responsibility relates to the organization itself.

AREAS OF SOCIAL RESPONSIBILITY

Organizations may exercise social responsibility toward their stakeholders, toward the natural environment, and toward general social welfare. Some organizations acknowledge their responsibilities in all three areas and strive diligently to meet each of them, while others emphasize only one or two areas of social responsibility. And a few acknowledge no social responsibility at all.

Organizational Stakeholders

Organizational stakeholders are those people and organizations that are directly affected by the practices of an organization and that have a stake in its performance. Main stakeholder groups include customers, employees, and investors. Organizations that are socially responsible try to treat all the groups with fairness and honesty.

The Natural Environment

Not long ago, many organizations indiscriminately dumped sewage, waste products from production, and trash into streams and rivers, into the air, and onto vacant land. Today legal standards and social expectations have changed. Still, abuses continue and the socially responsible firm continues to seek ways to protect the natural environment.

General Social Welfare


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Some argue that, in addition to treating their stakeholders and the environment responsibly, business organizations should also promote the general welfare of society. This can be done through philanthropy, taking a role in public health and education, and attempts to correct social inequities (such as global poverty). Much remains to be done in this area.

MANAGING SOCIAL RESPONSIBILITY ACROSS BORDERS

BRINGING THE WORLD INTO FOCUSShould Firms Practice Corporate Social Responsibility?This section highlights the debate of whether firms should engage in socially responsible activities. Some argue that firms are granted a license to operate by society and therefore owe society something in return. They often claim that firms need to pay attention to three bottom lines: economic performance, social performance, and environmental performance. Others argue that firms – as economic entities – should concentrate exclusively on economic performance. The social responsibility of the firm in this case would be to maximize shareholder profits. Shareholders can then decide to use their gains in a socially responsible way if they choose.

Approaches to Social Responsibility

Some people advocate a greater social role for organizations, while others argue that the role is already too large. Likewise, firms adopt a wide range of positions on social responsibility. Most of these positions can be incorporated into four different “stances” (use Figure 5.2 here).

Obstructionist Stance. These are organizations that do as little as possible in the area of social responsibility and would try to hide or cover up any behavior that might be criticized by outsiders.

Defensive Stance. These firms are one step removed from the obstructionists. They see their responsibility as being to play by the rules – that is, to obey the law but nothing more. For example, such a firm would install pollution control devices on their equipment if required by law, but only to the extent required by law.

Accommodative Stance. These firms not only meet legal and ethical requirements but also will go beyond them in selected instances. They might match employee contributions to charity or donate to worthy causes (once they are persuaded the causes are worthy). They don’t necessarily go out looking for ways to do good, but might respond positively when asked to go that extra step.

Proactive Stance. These are firms that truly take to heart the arguments in favor of corporate social responsibility. They view themselves as citizens in a society and proactively seek opportunities to contribute. They go beyond accommodative firms and take the initiative in performing socially responsibly.

Managing Compliance


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Legal Compliance is the extent to which the organization conforms to regional, national, and international laws.

Ethical Compliance is the extent to which the members of the organization follow basic ethical (and legal) standards of behavior.

Philanthropic Giving is the awarding of funds or gifts to charities or other social programs.

Informal Dimensions of Social Responsibility

In addition to the formal dimensions of managing corporate social responsibility listed above, leadership, organizational cultures, and how an organization responds to whistle- blowers also shape people’s perceptions of the organization’s stance on social responsibility.

Organization Leadership and Culture. When top management at firms like Johnson & Johnson for years provide a consistent message to employees about the importance of responsible behavior toward stakeholders, employees can be expected to act, almost instinctively, in socially responsible ways.

Whistle-Blowing is the disclosure by an employee of illegal or unethical conduct on the part of others within the organization. How an organization responds to whistle-blowing (whether it accepts the information and seriously investigates it or whether it considers it a betrayal to the organization) shapes the internal attitudes toward ethics and social responsibility.

Evaluating Social Responsibility

Organizations that are serious about social responsibility track their efforts to ensure they are producing appropriate results. Many organizations choose to conduct formal evaluations of the effectiveness of their social responsibility efforts through routine collection of information in the form of a corporate social audit. This audit, usually undertaken by top-level managers, evaluates the firm’s social performance and makes suggestions for improvement.

DIFFICULTIES OF MANAGING CSR ACROSS BORDERS

Different countries have different expectations as far as corporate behavior. What is socially acceptable behavior in one country may not be acceptable in another. Furthermore, corporations play very different roles in the political process of individual countries. Dutch CSR experts Tulder and Van der Zwart suggest that the interplay among the state, the market, and civil society lead to three regional behaviors toward CSR. The Anglo-Saxon approach views the state, market, and civil society as separate,

competitive, and antagonistic.


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The Asian approach believes in a close collaboration between the state and the market, with a lesser role for civil society.

The Continental European approach sees all three actors as relatively equal collaborators.

REGULATING INTERNATIONAL ETHICS AND SOCIAL RESPONSIBILITY

The Foreign Corrupt Practices Act, passed by the U.S. Congress in 1977, prohibits U.S. firms from paying or offering to pay bribes to any foreign government officials so that they may influence the officials’ actions or policies in order to gain or retain business. However, the FCPA does not disallow routine payments (however large) to government officials in order to expedite normal commercial transactions.

The Alien Tort Claims Act was passed by the United States in 1789. Under some recent interpretations of the law, U.S. multinationals may conceivably be held responsible for human rights abuses by foreign governments in the companies benefited from those abuses.

The Anti-Bribery Convention of the Organization for Economic Cooperation and Development was developed in and ratified by Canada in 2000. A total of 33 other countries have ratified it since then. Its centerpiece mandates jail time for those convicted of paying bribes.

The International Labor Organization (ILO) has become the major watchdog for monitoring working conditions in factories in developing countries. ILO inspections of factories in developing countries helps multinational corporations looking for responsible business partners in developing countries and helps certify that overseas operations of MNCs are performing responsibly.

EMERGING OPPORTUNITIESConflict DiamondsSmuggled diamonds have helped finance some of the bloodiest civil wars in Africa. Peace in some of these wars will only be possible if trade in these “conflict diamonds” can be stopped. The diamond industry (that likes to project an image of love and sophistication associated with diamonds) could be seriously damaged by the sale of conflict diamonds (and the image of violence and butchery associated with them). 70 countries agreed that, as of 2003, trade in diamonds will be limited to those stones carrying a certificate of origin from countries outside the conflict zones.

CHAPTER REVIEW

1. What is ethics?

According to the chapter, ethics is an individual’s personal beliefs about whether a decision, behavior, or action is right or wrong. (LO 5.1; AACSB: Ethical understanding and


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reasoning abilities; Learning Outcome: Discuss the role of ethics and social responsibility in international business)

2. Distinguish between ethical and unethical behavior.

Ethical behavior refers to behavior that conforms or is consistent with generally accepted social norms. Unethical behavior, on the other hand, is behavior that violates generally accepted social norms. (LO 5.1; AACSB: Ethical understanding and reasoning abilities; Learning Outcome: Discuss the role of ethics and social responsibility in international business)

3. What role does culture play in the formation of ethics?

Culture plays a significant role in that culture helps shape a society’s values. Values, in turn, affect how individuals define ethical versus unethical behavior. Other aspects of culture, such as religion, also have a direct impact on the formation of individual ethics. (LO 5.2; AACSB: Ethical understanding and reasoning abilities; Learning Outcome: Discuss the role of ethics and social responsibility in international business)

4. How do organizations attempt to manage ethical behavior across borders?

The chapter focuses on three main approaches to managing ethical behavior across borders. The three approaches include (1) the use of formal guidelines and codes of ethics to specify ethical behavior and hold employees accountable for unethical behavior; (2) ethics training to enable employees to make ethical decisions – even in instances not clearly covered by a formal ethics code; and (3) corporate culture and practices which set standards of behavior throughout the organization. (LO 5.2 and 5.3; AACSB: Ethical understanding and reasoning abilities; Learning Outcome: Discuss the role of ethics and social responsibility in international business)

5. What is social responsibility?

Social responsibility, as defined in the text, is the set of obligations an organization undertakes to protect and enhance the society in which it functions. (LO 5.4; AACSB: Communication Skills; Learning Outcome: Discuss the role of ethics and social responsibility in international business)

6. What is the difference between ethics and social responsibility?

Ethics relates primarily to an individual’s personal belief system. Social responsibility is a corporate-level issue (see the definitions in Review Questions 1 and 5). (LO 5.1 and 5.4; AACSB: Ethical understanding and reasoning abilities; Learning Outcome: Discuss the role of ethics and social responsibility in international business)

7. Identify the major areas of social responsibility for international business.

The first area is behaving responsibly toward organizational stakeholders (customers, employees, investors, as well as other groups affected by the organization). The second area involves behaving responsibly in preserving and protecting the natural environment.


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The final area identified in the text is the firm’s responsibility in promoting general social welfare (protecting human rights, reducing poverty and disease, and so on). (LO 5.4; AACSB: Analytical Skills; Learning Outcome: Discuss the role of ethics and social responsibility in international business)

8. What are the four general approaches a firm can take with regard to social responsibility?

Obstructionist organizations are those that do as little as possible in the area of social responsibility and would try to hide or cover up any behavior that might be criticized by outsiders. Defensive firms see their responsibility as being to play by the rules – that is, to obey the law but nothing more. Accommodative firms will go beyond legal and ethical requirements in selected instances. Proactive firms are those that truly take to heart the arguments in favor of corporate social responsibility. They view themselves as citizens in a society and proactively seek opportunities to contribute. (LO 5.4; AACSB: Analytical Skills; Learning Outcome: Discuss the role of ethics and social responsibility in international business)

9. What is a whistle-blower?

A whistle-blower is an employee who discloses illegal or unethical conduct on the part of others in the organization. (LO 5.1; AACSB: Ethical understanding and reasoning abilities; Learning Outcome: Discuss the role of ethics and social responsibility in international business)

10. Identify and briefly summarize representative laws and regulations that attempt to address international ethics and social responsibility.

The text highlights three laws and one organization designed to promote ethical and socially responsible behavior on the part of MNCs: (1) The Foreign Corrupt Practices Act, which prohibits American firms from paying bribes to foreign government officials. (2) The Alien Tort Claims Act, which might allow U.S. firms to be held accountable for human rights violations by foreign government, if the U.S. firm benefits from the violation. (3) The Anti-Bribery Convention of the OECD, which mandates jail time for those convicted of paying bribes. (4) The International Labor Organizations that serve as a watchdog to promote adequate working conditions in developing country factories. (LO 5.7; AACSB: Ethical understanding and reasoning abilities; Learning Outcome: Discuss the role of ethics and social responsibility in international business)

QUESTIONS FOR DISCUSSION

1. While people from the same culture are likely to have similar views of what constitutes ethical versus unethical behavior, what factor or factors would account for differences within a culture?

The chapter suggests differences may be the result of individual rationalization, specific circumstances surrounding an event, religious formation, and an individual’s personal values (which may vary somewhat within a culture). (LO 5.2 and 5.3; AACSB: Ethical


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understanding and reasoning abilities; Learning Outcome: Discuss the role of ethics and social responsibility in international business)

2. Is it valid to describe someone as having “no ethics”? Why or why not?

Students will probably answer “no.” Those who answer “yes” often confuse “no ethics” with “unethical.” We all have individual values (which shape our ethics) – even a value of “there are no moral absolutes” is still a value and one’s ethical system would reflect that premise. (LO 5.1; AACSB: Ethical understanding and reasoning abilities; Learning Outcome: Discuss the role of ethics and social responsibility in international business)

3. People from which countries would likely have similar ethical beliefs as people from England? Why?

This question offers a great opportunity to integrate the material from Chapter Four with the material in Chapter Five. To the extent that individual ethics is affected by culture, people with ethical beliefs most similar to those of the U.K. would be the citizens of the countries with the least “cultural distance” from the U.K. For example, one could re-examine Figure 4.4 and suggest that, in some ways, countries in the lower left quadrant (such as the United States, Netherlands, and Australia, would be the closest to the U.K. on certain ethical norms. (LO 5.3; AACSB: Ethical understanding and reasoning abilities; Learning Outcome: Discuss the role of ethics and social responsibility in international business)

4. Under what circumstances is a code of ethics most and least likely to be effective? Why?

It will be most effective when the units of a company operate within similar parameters across the globe. When subsidiaries are required to adapt their operations extensively across different national environments, enforcement of a standardized code of ethics will be more problematic. (LO 5.1; AACSB: Ethical understanding and reasoning abilities; Learning Outcome: Discuss the role of ethics and social responsibility in international business)

5. What do you think is most likely to happen if the ethical behaviors and decisions of a new team of top managers of a firm are inconsistent with the firm’s long-entrenched corporate culture?

This will create confusion among the rank-and-file employees as to what is considered appropriate behavior. As various forms of behavior are adopted and practiced, ethical standards will become unclear and unenforceable. (LO 5.1; AACSB: Ethical understanding and reasoning abilities; Learning Outcome: Discuss the role of ethics and social responsibility in international business)

6. Do you think social responsibility for a multinational corporation is something best managed locally or globally?

Students will be able to present a case either way. One possible way of addressing this question is to offer a small preview of Chapter Eleven. Firms in global industries may manage social responsibility in a standardized, centralized fashion, while firms in multidomestic industries may take a decentralized, localized approach. (LO 5.6; AACSB:


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Analytical Skills; Learning Outcome: Discuss the role of ethics and social responsibility in international business)

7. Do multinational businesses ever do socially responsible things that are clearly of no benefit whatsoever to themselves?

Being socially responsible will always benefit some of the organization’s stakeholders. It may not necessarily (or in the short run) benefit shareholders, but it may benefit the local community (or some other group) in a country where the MNC operates. Socially responsible behavior, almost by definition, benefits someone. In that case, it should at least enhance the firm’s reputation in certain circles. (LO 5.6; AACSB: Analytical Skills; Learning Outcome: Discuss the role of ethics and social responsibility in international business)

8. What are the dangers or pitfalls that might be encountered if a multinational business attempts to be socially responsible, but only in ways that provide direct benefits to its profitability?

Such an approach may signal to other stakeholders that the MNC is driven entirely by its commitment to shareholders (at the expense of other stakeholder groups). Its reputation among other stakeholders could be damaged. (LO 5.6; AACSB: Analytical Skills; Learning Outcome: Discuss the role of ethics and social responsibility in international business)

9. Under what circumstances, if any, might you see yourself as a whistle-blower? Under what circumstances, if any, might you keep quiet about illegal acts by your employer?

Answers to this question will vary widely across students. It is an excellent way to encourage class discussion and is probably best used in class discussion to help drive home the issues faced by whistle-blowers and the different reactions a firm’s top management might display. (LO 5.1; AACSB: Analytical Skills; Learning Outcome: Discuss the role of ethics and social responsibility in international business)

10. Do you think there should be more or fewer attempts to regulate international ethics and social responsibility? Why?

This question seeks students’ opinions and has no right or wrong answer. At the heart of this question is the issue of who gets to set the rules. Some students may argue that rules developed by the United Nations are good – some may argue that rules, if developed by the WTO would not be good. Students who lean heavily toward cultural relativism may be more prone to oppose ethics regulation, while students with a more absolutist view of right and wrong may favor international standards (as long as the codes reflect the “right” values). (LO 5.6; AACSB: Analytical Skills; Learning Outcome: Discuss the role of ethics and social responsibility in international business)

11. Consider the plight of Mary, the Filipino woman discussed in this chapter (page 125). In response to the inquiries of Fortune’s reporter, Motorola issued a statement saying it “has a strict policy of adherence to the laws and labor practices in the countries where it operates, in addition to a rigorous code of conduct.” Is this an adequate response? In your opinion, what responsibility does Motorola have to workers like Mary? Defend your answer.


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Students’ answers will vary widely, though almost all will likely feel that Motorola’s response is inadequate. Nailing down what Motorola’s responsibility should be, however, is much more difficult. Motorola can apply pressure on its subcontractor, but to what purpose? Here is where students face the real challenge of defending their position and grappling with the difficulties associated with social responsibility in an international context.

(LO5.6; AACSB: Analytical Skills; Learning Outcome: Discuss the role of ethics and social responsibility in international business)

12. Consider the following scenarios: To assist the sale of your products in a particular foreign market, it is suggested that

you pay a 10 percent commission to a “go-between” who has access to high-ranking government officials in that market. You suspect, but do not know, that the go-between will split the commission with the government officials who decide which goods to buy. Should you do it? Does it make a difference if your competitors routinely pay such commissions?

You have a long-standing client in a country that imposes foreign exchange controls. The client asks you to pad your invoices by 25 percent. For example, you would ship the client $100,000 worth of goods but would invoice the client for $125,000. On the basis of your invoice, the client would obtain the $125,000 from the country’s central bank. The client then would pay you $100,000 and have you put the remaining $25,000 in a Swiss bank account in the client’s name. Should you do it? Would it make a difference if your client is a member of a politically unpopular minority and may have to flee the country at a moment’s notice?

Both these questions will force students to wrestle with their own code of ethics. They are good ways to force students to “go deeper” and personalize the content of Chapter Five. Both scenarios most likely describe unethical behavior, though the first one allows students more “wiggle room” (since it is unclear whether any bribery is truly taking place). The second scenario is clearly wrong (falsifying invoices, diverting funds) and almost all students will recognize it as such. (LO 5.3; AACSB: Ethical understanding and reasoning abilities; Learning Outcome: Discuss the role of ethics and social responsibility in international business)

BUILDING GLOBAL SKILLS

Essence of the exerciseStudents are to identify an industry of personal interest that includes several large multinational companies. They are then to examine the Web sites of the main firms in order to determine similarities and differences across the firms in terms of their ethical conduct and social responsibility.

Answers to the follow-up questions:

1. Symbolically, what potential role does the Internet serve in helping to promote ethical conduct and social responsibility as evidenced by the Web sites you visited?


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It provides easy access to information about the firm to all stakeholders. Stakeholders can readily compare firms on a variety of dimensions based on information provided on their Web sites. Firms may feel pressure to not be “outdone” by their competitors in the areas of ethical conduct and social responsibility. (LO 5.1; AACSB: Analytical Skills; Learning Outcome: Discuss the role of ethics and social responsibility in international business)

2. Which firm has the most effective Web site vis-à-vis ethics and social responsibility? In your opinion, what makes it the best?

The answer to this and the following questions will depend entirely on the industry selected and firms being compared by the student. (LO 5.1 and 5.6; AACSB: Analytical Skills; Learning Outcome: Discuss the role of ethics and social responsibility in international business)

3. Which firm has the least effective Web site vis-à-vis ethics and social responsibility? In your opinion, what makes it the worst?

4. How do the Web sites affect your view of each company from the standpoint of a potential investor? A potential employee? A potential supplier?

5. If asked, what advice might you offer to each company to improve its attention to ethical conduct and social responsibility as reflected by its Web site?

CLOSING CASE

A Pipeline of Good Intentions

The closing case describes the difficulties and risks associated with developing the Doba basin oil field in southern Chad. The case fits well with a discussion of corporate social responsibility as well as with a discussion of political risk.

Key Points:

Often the discovery of oil in a poor country has led to increases in poverty and social problems. This phenomenon is sometimes referred to as the “oil curse.”

Oil was discovered in southern Chad (Africa) in the 1990s. Chad is a very poor country plagued by civil wars, dictatorships, and invasions by foreign powers. Chad is also landlocked, meaning that a pipeline through neighboring Cameroon had to be built to allow for the shipping of Chad’s oil.

The governments of Chad and Cameroon, the World Bank, and a consortium of oil companies agreed on funding terms for the pipeline project, as well as on how the government of Chad would spend the proceeds from the transportation and sale of the oil.

The emphasis on the use of revenue from the project was alleviating poverty – in essence an attempt to avoid the “oil curse” and stem government corruption.


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Due to economic and political issues, in 2005 Chad’s National Assembly voted to significantly modify the framework for spending oil revenues. This was seen as a breach of the lending agreement with the World Bank, and the World Bank suspended all new grants and loans to Chad.

The consortium of oil firms is now caught in the middle. It has decided to withhold all revenues until Chad resolves its dispute with the World Bank. Chad’s government has stated that unless the consortium releases the funds, the government will demand that all oil production in Doba cease.

Case Questions

1. What is the oil curse? Why do you think it develops?

The “oil curse” is the phenomenon that occurs when poor countries discover oil and find that poverty and social problems increase thereafter. It develops in part because with the discovery of oil, pressure to develop and diversify the economy is reduced, and corruption often becomes more rampant.(LO 5.1 and 5.6; AACSB: Analytical Skills; Learning Outcome: Discuss the role of ethics and social responsibility in international business)

2. Why was the World Bank’s participation in the Chad-Cameroon pipeline critical?

The World Bank had several loans outstanding to Chad. It was felt that Chad would be more likely to honor its latest agreement if the World Bank was involved because several other deals with the World Bank would be jeopardized if Chad defaulted or violated the terms of the loan. (LO 5.6; AACSB: Analytical Skills; Learning Outcome: Discuss the role of ethics and social responsibility in international business)

3. Does the World Bank have a right to demand that sovereign countries like Chad spend their oil revenues in ways the World Bank deems appropriate?

This is a great discussion-generating question which encapsulates much of the debate surrounding the role of the World Bank. Ultimately, students will usually tend to agree that a lender has some legitimate claim on the behavior of the one who is receiving the funds. Further, such restrictions are often necessary in situations where there is a precedent of government corruption. (LO 5.6; AACSB: Analytical Skills; Learning Outcome: Discuss the role of ethics and social responsibility in international business)

4. If the World Bank and Chad’s government fail to settle their dispute over amendments to the Petroleum Revenue Management Law, what should the consortium do? Should they make funds available to Chad’s government in defiance of the World Bank’s wishes?


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This is a discussion question without a clear right or wrong answer. The best way to address it may be through a discussion of the pros and cons of this course of action. Whatever course of action is pursued in Chad will reverberate through operations in other poor oil-producing countries such as Nigeria. Ultimately, the consortium must behave legally and in compliance with the terms of its agreement with the governments of Chad and Cameroon. (LO 5.6; AACSB: Analytical Skills; Learning Outcome: Discuss the role of ethics and social responsibility in international business)

5. Subsequent to the signing of the pipeline agreement, world oil prices have increased substantially. Given the abject poverty of Chad, should oil companies offer to increase the royalties paid to Chad’s government once its dispute with the World Bank is settled?

If the payments to Chad are based on a percentage of the revenue from the sale of Doba oil, the payments to the government will automatically increase as the price of oil goes up. In such a case, the increase would occur automatically. If royalties are paid as a flat fee on the volume of oil shipped through the pipeline, the profits from the increased value of oil would accrue only to the oil companies in the consortium. In such an instance, a case could be made that the terms of the payment agreement should be renegotiated to provide for a more balanced distribution of the increased profits. (LO 5.6; AACSB: Analytical Skills; Learning Outcome: Discuss the role of ethics and social responsibility in international business)

PART ONE CLOSING CASES

CASE 1: A Rat in My Soup

This case is a humorous account of a visit by an American reporter to the Luogang Economic Open Zone in Guangdong, China. The American visits a couple of restaurants and comments on their menu – specifically the variety of rat dishes available.

Key Points:

Culinary preferences vary widely, even within China. The spirit of competition and capitalism is alive and well in China. We are all vulnerable to culture shock. Humor is sometimes an important asset in international travel.

Case Questions

1. Although the American who wrote this story visited Luogang's restaurants voluntarily, many international business practitioners working abroad involuntarily confront things they find odd or offensive. Suppose you had been invited by a very important customer to the New Eight Sceneries Wild Flavor Food City restaurant.


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What would you have done, if, like the author, you had been invited to pick out your dinner in the shed behind the restaurant?

If possible, grin and bear it. As a visitor to a foreign culture, one must attempt to not offend one's host. It wouldn't hurt, however, to try to learn as much as possible about the eating destination beforehand – in order to be psychologically prepared.

2. Cultural values play an enormous role in shaping attitudes toward food. Are there any foreign foods commonly available in your home country that you or your friends simply won't eat?

This, of course, is a subjective question without a "right" or "wrong" answer. Often, food available in Asian restaurants, such as squid and eel, are mentioned. Certain Mexican dishes involving various cattle organs are sometimes mentioned as well.

3. Are there any aspects of your home culture that foreign visitors might find offensive? If so, what are they?

This is a good, thought-provoking question that leads students to evaluate their own culture. Examples will vary, but to many Arabs, our consumption of pork (bacon, ham, etc.) is offensive. Going beyond food, the typical Western wardrobe may be offensive to many Middle Eastern cultures as well.

4. What measures can you take to protect your foreign guests from aspects of your home culture that they might find offensive?

In order to protect them, you must become familiar with their culture. The best you can do is to familiarize yourself with your guest's home culture as much as possible. In that manner, uncomfortable and awkward instances can be minimized.

CASE 2: The Oil Curse

This case ties in well with the closing case of Chapter Five. This case focuses on Nigeria, Africa’s largest oil producer, where oil was discovered in 1958, and the various political, economic, and environmental issues created by the oil exploration.

Key Points:

Oil revenues account for 95 percent of Nigeria’s exports, 20 percent of its GDP, and 65 percent of the government’s revenues.

Local citizens have benefited little from the oil boom. Foreign companies have come under repeated attacks from local groups stealing oil

and kidnapping employees. Hundreds of local residents have been killed in oil-related disasters, such as fires

and explosions (probably while oil was being stolen from pipelines).


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Radical groups such as MEND, Martyrs Brigade, and the Niger Delta People’s Volunteer Force have practiced violence against foreign-owned installations and abducted foreign workers.

Environmental groups have accused oil companies of polluting the area and ignoring damage caused by oil and gasoline spills.

Case Questions

1. Assess the political risks facing foreign oil companies operating in the Niger delta. Should they shut down operation in the area until security improves?

The political risks are high and the Nigeria government appears to be unable to provide safety for the foreign firms. The risks are relatively well known and companies are largely responsible for providing their own security. Most students will probably argue that the current high price of oil makes continued operation in Nigeria in the best interest of the oil companies. (LO 4.6 and 5.5; AACSB: Analytical Skills; Learning Outcome: Discuss the role of ethics and social responsibility in international business)

2. What is the responsibility of Western oil companies like Royal Dutch Shell and Chevron to the local community?

At an absolute minimum, these companies must obey local laws and regulations. Whether these laws are enforced or not does not mitigate the firms’ responsibility to obey them. Further, as guests in a foreign sovereign nation, the firms are responsible to do no harm by their presence. This is also important to the firms as they seek to protect their image in other areas around the globe. (LO 5.4 and 5.5; AACSB: Analytical Skills; Learning Outcome: Discuss the role of ethics and social responsibility in international business)

3. What responsibility does a company like Fred Olsen Energy have to its employees? In the case of kidnappings motivated by profit, should a company pay ransom?

These are difficult issues which should lead to a lively class discussion. Firms are responsible for providing safe working conditions for their employees. The firm’s response to ransom demands will vary according to the unique circumstances of each case. Paying a ransom has the potential of making all other employees desirable kidnapping targets. However, safely retrieving kidnapped employees must be a top priority of the firm. (LO 5.5; AACSB: Communication Skills; Learning Outcome: Discuss the role of ethics and social responsibility in international business)

4. Is the discovery of oil a blessing or a curse?

The answer is not clear cut. In many cases, the discovery of oil in poor countries has failed to benefit the broader population and has led to corruption, environmental damage, and internal strife. (LO 4.6 and 5.5; AACSB: Analytical Skills; Learning Outcome: Discuss the role of ethics and social responsibility in international business)


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