It costs millions of dollars to start a business, let alone expand it to another market. If it is doing business globally and the market is a foreign one, costs can skyrocket. Often before an organization even knows what’s happening.
There are not only costs in the host country for a multinational enterprise (MNE), but there are costs in the home country as well. MNEs must indeed take stock of exchange rates in their home countries. Also the possible regulations preventing them from setting up shop and doing business globally.
Yet there are other intangible costs associated with many global business decisions. These costs are the ethical ones that can occur when businesses move into foreign markets. They are many. Three of the biggest ones can possibly make MNEs take a step back from certain markets.
Businesses are all about their profits. They are also all about their reputations. If the PR isn’t good, the profits won’t be either. When businesses engage in dubious practices, especially in global markets, not only do their profits take hits, but it’s their reputations which suffer the most damage.
Fiji Water became the target of bad PR and a huge reputation hit when it was accused of greenwashing. This relatively new term is a product of modern business’s efforts to appear more environmentally friendly and the failure to actually be so.
The bottled water giant’s reputation was tarnished when it became clear that its claims of negative-carbon bottling practices were likely misreported. It has since come to pass that many of Fiji’s green practices are not green at all. To top it off, the people of the MNE’s host country don’t have limited access to clean drinking water while they bottle water for global consumption.
Doing business in host countries has historically meant greasing certain wheels. This is simply a historical fact of business. For some countries, it is still common practice to take bribes for facilitating entry into markets like China, Russia, or Brazil, essentially the BRIC nations.
The costs of bribery in global markets are financially quite high. But with billions of dollars in fines being levied against MNEs, the ethical cost may be greater. Harvard Business School researchers found the greatest cost of bribery is its negative impact on company morale.
The research is telling. Based on who made the under-the-table deal, how it was detected by the reporting party, and the response of the organization, determine the internal damage to the firm. Most of the respondents of the Harvard survey who had not dealt with a bribery scandal speculated that it would have greater repercussions for the firm.
Instead, the research showed these types of corporate disgraces had a greater impact on organizational culture influences like pride. Cultures like pride and empowerment are some of the ways organizations keep employees engaged. When these are damaged, the costs are greater than the profits.
In terms of profits, organizations have responsibilities to their stakeholders to increase growth. These stakeholders not only include boards of directors and shareholders at large but employees and customers. The University of Maryland Professor in Entrepreneurship, Rajshee Agarwal, argued in a Washington Post article that ethical free trade combats poverty.
For some organizations, the concept of free trade becomes an ethical decision because of corporate tax rates and other regulations. In the United States, the corporate income tax is the highest among developed nations. This creates not only a fiscal barrier to free trade but an ethical one. As businesses have a responsibility to increase growth, they cannot do so if nearly half their revenue is eaten up by taxes.
Yet creating subsidiaries in host countries with lower corporate tax rates is also seen as unethical. Businesses’ responsibilities are torn among their stakeholders and their ethical duties to their home countries. Where do these organizations draw the line?
Which Costs are Worth It?
Doing business costs more than money, no matter the location. The ethical costs, from a hit to the reputation to a hit in morale, can be more damaging than a cost to growth or profits.
When confronted with the decision to give a bribe, tell a lie, or shelter profits, businesses must think about the ethical costs. Are these worth the price organizations pay in the long run? They definitely are not.
Image courtesy of Going Global: What Corporations Should Consider During Globalization infographic by Rutgers University I the author have permission to use this image.