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International Business (MOD001055) Chapter 6: International ethical and ecological environment Zubair Hassan (2013): International ethical and ecological environment. International Business
Notes compiled by Zubair [email protected] or [email protected] 1
6.1. Introduction
This chapter covers one major components of learning objectives/outcomes that are
likely to examine via coursework or examination. This chapter will enable students to
build their knowledge on external influences on international business, such as the
ethical and ecological frameworks.
This chapter will cover the following topics:
Business ethics
Ethics and the corporate culture
Different ethical positions
International business ethics
International efforts to improve business ethics
Ecological/environmental issues
Global warming, ‘carbon footprint’ and tradable permits
6.2. Business Ethics
Some of the controversy about whether ethics can or should be taught may stem from
disagreement about what we mean by ethics. Ethics can be defined as “a set of moral
principles or values,” a definition that portrays ethics as highly personal and relative.
But the definition of ethics—the principles, norms, and standards of conduct
governing an individual or group—focuses on conduct. In here we expect employers
to establish guidelines for work-related conduct, including what time to arrive and
leave the workplace, whether smoking is allowed on the premises, how customers are
to be treated, and how quickly work should be done. Guidelines about ethical conduct
aren’t much different. Many employers spend a lot of time and money developing
policies for a range of employee activities, from how to fill out expense reports to
what kind of client gifts are acceptable, to what constitutes a conflict of interest or
bribe. If we use this definition, ethics becomes an extension of good management.
Leaders identify appropriate and inappropriate conduct, and they communicate their
expectations to employees through ethics codes, training programs, and other
communication channels.
In most cases, individual employees will agree with their company’s expectations and
policies. For example, who would disagree that it’s wrong to steal company property,
lie to customers, dump cancerous chemicals in the local stream, or comply with
regulations on defense contracts? At times, however, an employee may find the
organization’s standards inconsistent with his or her own moral values or principles.
For example, a highly religious employee of a health maintenance organization may
object to offering abortion as an alternative when providing genetic counseling to
pregnant women. Or a highly devoted environmentalist may believe that his or her
organization should go beyond the minimum standards of environmental law when
making decisions about how much to spend on new technology or on environmental
cleanup efforts. These individuals may be able to influence their employers’ policies.
International Business (MOD001055) Chapter 6: International ethical and ecological environment Zubair Hassan (2013): International ethical and ecological environment. International Business
Notes compiled by Zubair [email protected] or [email protected] 2
Otherwise, the person’s only recourse may be to leave the organization for one that is
a better values match.
Figure 6.1: Ethical decision making
Source: Interlocution to business. Available from:
http://media.wiley.com/product_data/excerpt/45/04712305/0471230545.pdf
According to Collins and Porras (1994, cited in Wall et al, 2010), the best companies
(long lasting and most profitable) are those that do not focus on profitability as their
primary mission. In their ranking, the highest performing corporation tendered to be
those that were governed by core beliefs, which transcended purely economic
pursuits, seeking rather to produce the finest products in the marketplace, to win
customer satisfaction, to serve employees and so on. Such findings are contrary to
much of the theory taught in most of the business schools.
6.3. Ethics and corporate culture
Organisation need certain ‘ways of acting or being’ (which can either explicit or
implicit) as a guide to ‘acceptable’ behaviour by members of organisation.
There are many ethical implication, which some parallels in international business.
Beyer and Nino pick out the following parallels.
Doing unto others as you would have them do unto you would be suicide in
business. Such attitudes encourage people to set for themselves self-interested
(organisational goals) and to pursue them relentlessly with little concerns for
their effects on others. Some forms of winning in business (getting a new
product to market, achieving assigned targets, taking over another firm) can
overwhelm broader based ethical principles.
If the group had no prior experience or models for jointly arriving at a
consensus about what to do. They came from four different cultures and
lacked a commonality of mutually accepted values that would give them
guidance as to what to do. Each group passed the problem on to the other
group. There was no strong culture to glue their actions together. This ‘buck-
passing’ between departments and multinational divisions is hardly unknown.
International Business (MOD001055) Chapter 6: International ethical and ecological environment Zubair Hassan (2013): International ethical and ecological environment. International Business
Notes compiled by Zubair [email protected] or [email protected] 3
If there is a failure to act which then itself become the decision. This can often
happen in business, especially when something has been going on for some
time. The lack of guidance given to Nick Leeson, an inexperienced trader in
Singapore in 1996, is arguably one such example.
The decision makers are physically and mentally stressed and under time
pressures. It is precisely under these conditions in a hyper competitive world
that personal and corporate values are most severely tested.
Even though one of the people saw through all of these considerations as
regards his ethical responsibility, he did not get support he needed from the
others present to rescue the person in critical condition. It was beyond his
individual capacity, circumstances that often accoutres in business. Many
ethical decisions require the support of the corporate community. Ethically
sensitive and courageous individuals cannot often perform ethically without
the support of others.
6.4. Different ethical position
Actions of individuals are determined by the values people hold. Similarly individual
actions are also influences by their surroundings.
6.4.1. Corporate agency and responsibility
An organisation is neither an individual nor a total system. It is comprised of
individuals in various roles which may be authorised by the larger society to
function for specific, often narrowly defined purposes. The actions of an
organisation are often the result of collective, rather than individual decision
making.
According to Noble Prize economist Milton Friedman declared:
“There is only one social responsibility of business-
To use its resources and engage in activities designed to increase its
profits so long as it stays within the rules of the game, which is to say,
engages in open and free competition without deception or fraud”
(1970, p.126).
This doesn’t mean that ‘anything goes’. Law and common morality should
guide actions. However, the main assumption is that profit maximisation is the
core objective of business. This means we thin rationally. This means to say
that maximising self interest will lead to increase corporate profitability.
International Business (MOD001055) Chapter 6: International ethical and ecological environment Zubair Hassan (2013): International ethical and ecological environment. International Business
Notes compiled by Zubair [email protected] or [email protected] 4
6.4.2. The principle-agent problem
According Wall et al (2010), when the organisation is managed by people
who are not owners, the principle agent problem arises. In this case principle
is the owner and agent is the one who runs and manage the business on
behalf of the principle (owner). In case of public listed companies who traded
its share in stock exchange may have many owners (shareholders) that they
must appoint board of directors to manage the organisation on behalf of
them.
The principle agent problem arises when agents (directors) pursue a different
goals that are not compatible with shareholders (owners). The diagram below
shows the principle agent relationship
Figure 6.2. Principle-agent relationship
The conflict arises is referred to as a type of principle-agent problem and
emerges when shareholders (principals) a secondary party, the managers
(agents), to perform some tasks on their behalf. In return, the principals offer
their agents some compensation (wage payment).
However, the problem arises when agents do not act on the best interest of
shareholders (principals). This may be because these agents may have
superior knowledge about the company or they may have many years of
experience in running the business in the market makes them to take decision
to pursue their interest and not profit maximisation for the shareholders.
In order to make agents work for the best interest of the shareholders
(principals), shareholders assigned auditors, link the wages and salaries to
their performance and corporate profits.
International Business (MOD001055) Chapter 6: International ethical and ecological environment Zubair Hassan (2013): International ethical and ecological environment. International Business
Notes compiled by Zubair [email protected] or [email protected] 5
6.4.3. Social contract theory
Integrated Social Contract Theory (ISCT) suggested that there are basic
moral minimums or hypernorms that governs all social relationships on the
macro level. These might include:
1. Not causing gratuitous harm
2. Honouring contracts
3. Respecting human rights
4. Treating people and organisation fairly.
On micro level there maybe a moral ‘free space’. This means that
communities can spell out the specific norms deemed acceptable among
themselves as long as these are compatible with hypernorms.
ISCT model comprises of
1. Hypernorms: these moral minima include, for example fundamental
human rights or basic prescription common to most major religions. The
values they represent are, by definition, acceptable to all cultures and
organisation
2. Consistent norms: these values are more culturally specific than those at
the centre, but are consistent both with hypernorms and other legitimate
norms.
3. Moral Free Space: as one moves away from the centre of the circle one
finds norms that are inconsistent with at least some of the other legitimate
norms existing in other culture. Such norms often reflect strongly held
cultural beliefs, whether at the national, corporate or occupational level.
4. Illegitimate norms: These are norms that are incompatible with
hypernorms. When values or practices reach a point where they
transgress permissible limits(fundamental human rights) they fall outside
the circle and into the ‘incompatible zone is an expression of value falling
outside the circle.
International Business (MOD001055) Chapter 6: International ethical and ecological environment Zubair Hassan (2013): International ethical and ecological environment. International Business
Notes compiled by Zubair [email protected] or [email protected] 6
6.4.4. Stakeholder theory
Stakeholder can be defined as any individual or group which can affect or be
affected by the achievement of the organisation’s objectives. Such
stakeholders might include employees, customers, suppliers, consumers etc.
Source: Czinkota, Ronkainen and Moffet (2011)
Figure 6.3: Stakeholders in the firm
There is an increasing focus by the leading organisations on their obligation
to stakeholders. Stakeholder theory challenges the position that primary
purpose of a firm is to maximise the welfare of its stakeholders (e.g.
dividens), arguing instead that the goal of any firm should be to satisfy the
aspiration of all its responsibilities because of the unique and specifically
defined relationships between a particular organisation and its stakeholders.
6.5. International business ethics
Importance of ethics in the business world is superlative and global. New trends
and issues arise on a daily basis which may create an important burden to
organizations and end-consumers. Nowadays, the need for proper ethical behavior
within organizations has become crucial to avoid possible lawsuits (Mahdavi, n.d).
The recent expansion of global business and fall of trade barriers worldwide have
further underlined the interest in the topics of ethical behavior and social
responsibility. As multinational companies expand globally and enter foreign
markets, ethical conduct of the officers and employees assume added importance
since the very cultural diversity associated with such expansion may undermine the
much shared cultural and ethical values observable in the mores homogeneous
organizations (Mahdavi, 2001). Thus, concerns about unethical behavior of
International Business (MOD001055) Chapter 6: International ethical and ecological environment Zubair Hassan (2013): International ethical and ecological environment. International Business
Notes compiled by Zubair [email protected] or [email protected] 7
corporations in other countries, are manifested in legislations such as The Foreign
Corrupt Practices Act of 1977, and the Sarbane-Oxley Act of 2002 (Mahdavi, n.d).
“Ethics is the moral principle that individuals inject into their decision making
process and that helps temper the last outcome to conform to the norms of their
society” (Morf, 1999, p.265).
The truly global companies must come to grips with the legal and moral atmosphere
in which they operate. But above all, they need to establish an environment that
fosters ethical behavior, because in the final analysis to do otherwise cuts into their
profitability.
6.5.1. Approaches to ethical issues
According to Enderle (1995) there are four types of approaches that MNCs
might take to ethical issues
1. Foreign country type: This does not apply its own ethical norms to the
foreign country but conforms to the local customs, taking its direction
from what prevails as morality in the host country. The Swiss are often
identified with this approach to business.
In terms of ISCT, the danger with the foreign country type is that there is
nothing to limit the moral-free space of the host country culture. If the
government corruption and environmental pollution are accepted in the
host country , then the ‘foreign country’ type of approach to ethical issues
might be regarded as colluding with this unethical framework.
2. Empire type: This resembles the approach of Great Britain in India and
elsewhere before 1947. This type of company applies domestic ethical
concepts without making any serious modifications to local customs.
Empire-type companies export their values in wholesales function, and
often do so regardless of the consequences to host company or its
stakeholders.
The “empire” type sees itself as the bearer of moral truth. This means that
‘empire” type acts from fixed idea of what is wrong or right, and so will
suffocate the moral free space of the host country.
3. Interconnection Type: This regards the international sphere as differing
from the domestic sphere. Companies here do not necessarily see
themselves as protecting a national identity or ethical framework. The
notional interest becomes blurred with that of supranational. (e.g. EU)
The interconnection type is consistent with the ISCT approach by
acknowledging both universal moral limits at the micro level. While
notion of national interest is blurred, it does manage to balance moral
International Business (MOD001055) Chapter 6: International ethical and ecological environment Zubair Hassan (2013): International ethical and ecological environment. International Business
Notes compiled by Zubair [email protected] or [email protected] 8
principles with moral free space in a way that makes it somewhat more
convincing than its three counterparts.
4. Global Type: This abstracts from all national or regional differences,
viewing the domestic sphere as entirely irrelevant; citizens of all nations
need to become more cosmopolitan. Only global citizenry senses from
this perspective.
Global type seeks to impose moral truth-namely that since only global
citizenry makes sense, the company can be impervious to ethical
differences that mark a culture’s distinctiveness. The opportunity for host
cultures to define their own versions of moral and economic truth is lost.
6.5.2. Bribery and corruption
Bribery: gifts or payments to someone to expedite government action or to
gain some business advantages
Corruption: process where entrusted power is used for private gain
Levels of corruption and bribery vary significantly around the world. Figure
6.4 shows the top seven and bottom seven countries based on the 2005
Corruption Index. The index ranks from a score of 10 (no corruption) to 0
(highly corrupt).
Source: Transparency International
Figure 6.4: Level of Corruption among different nations
International Business (MOD001055) Chapter 6: International ethical and ecological environment Zubair Hassan (2013): International ethical and ecological environment. International Business
Notes compiled by Zubair [email protected] or [email protected] 9
Impact of Bribery and Corruption
According to Cullen et al (2010, p. 459) the impacts of bribery and
corruption include:
1. Corruption and bribery are both attracting lots of attention because of the
devastating effects on effective market functions. For instance, as
mentioned earlier, corruption often results in waste of public funds, as
only expensive and high-profile jobs get funded.
2. Some also argue that companies typically make up for bribery by
increasing the contract price by the amount of the bribe. As such, many
developing countries suffer because they are charged higher prices.
3. Many companies also routinely use poorer-quality products or materials
to cover for the bribe, thus resulting in inferior products.
4. Furthermore, corruption can result in collusion among firms, thereby
resulting in even higher prices. As such, corruption and bribery usually
result in higher public spending, lower-quality projects, undermined
competition and inefficient allocation of resources
5. Bribery can also have devastating effects on the effective political
functioning and democratic nature of the society. According to
Transparency International, corruption and bribery have the worst effects
on the “social fabric” of a society. Because of the norms supporting
corruption and bribes, most people tend to lose trust in the political
system and in politicians. As a result, there is less participation in the
democratic process. A weak democratic system supports the election of
more corrupt politicians, thereby resulting in a vicious circle
There are surprising amount of agreement to the contention that bribery is
unethical. Wall et al (2010, p.216) suggested three reasons for this ethical
perspective on bribery using the ISCT approach
1. Acceptance of bribery violates a micro-social contract specifying the
duties of agent (the bribed recipient) to the principal (the employing
body), whether the government or a private company.
2. Bribery is typically not a legitimate norm. All countries have laws against
the practice. Some countries, even where the practice is flourishing, have
draconian penalties. For example in China in 1994, the president of Great
Wall Machinery and Electronic High-Technology Industrial Group, Mr.
Shen Haifu, was executed for bribery and embezzlement offences,
despite the recorded prevalence of such practices in China.
International Business (MOD001055) Chapter 6: International ethical and ecological environment Zubair Hassan (2013): International ethical and ecological environment. International Business
Notes compiled by Zubair [email protected] or [email protected] 10
3. Bribery may violate the hypernorms of political participation and
efficiency. For example, in 1970s, Japan bought planes from American
aircraft manufacturer, Lockheed, Prime Minister Tanaka was
subsequently found to have accepted tens of millions of dollars in bribes.
Japanese press and other sources questioned whether he was discharging
his duties correctly in the context of established norms of political
participation. He resigned shortly after the bribery revelation was made
public.
6.6. International efforts to improve business ethics
6.6.1. International agreements
Many international agreements were signed to improve business ethics. Some
of these agreements are
1. United Nations Code of Conduct for Transnational Corporations (1983)
2. Organisation for Economic Co-operation and Development Guidelines
for MNE (1976)
3. International Labour Office Tripartite Declaration of Principles
Concerning MNE and Social Policy (1977)
4. UNCTAD Code on Restrictive Business Practices (1980)
5. Multilateral Agreements on Investment (MAI)
6.6.2. Industry –specific agreements
Some of the industry specific agreements intend to improve business ethics
include:
1. International Code of Marketing of Breast-Milk Substitutes (1981). This
sought to prevent misleading information as to the merits of their products
being explicitly or implicitly given by manufacturers of breast-milk
substitutes.
2. Code of Marketing Practices of International Federation of Pharmaceutical
Manufacturers Association (1984). This seeks to ensure accurate rather
than misleading marketing of a broad range of pharmaceutical products
3. Rugmark Initiatives. This establishes a code of labour practices for
producing rugs. This is an attempt to improve labour conditions in this
industry, especially to re-strict the use of child labour. Manufacturers who
comply with this scheme’s criteria can use the rugmark label for their
products.
International Business (MOD001055) Chapter 6: International ethical and ecological environment Zubair Hassan (2013): International ethical and ecological environment. International Business
Notes compiled by Zubair [email protected] or [email protected] 11
4. World Federation of Sporting Good Industry. This also sought to develop
a code of practice with regards to the manufacture of sportswear and
equipment.
6.6.3. Company-specific agreements
A number of company specific agreements intend to improve company
specific agreements
1. Levi Strauss and Co has been one of the pioneers in setting out labour
practices that contracting firms are expected to follow with contract
risking being terminated for breaches of these standards.
2. Reebok and Nike have responds in this way after adverse publicity on
labour market practices by suppliers
3. Mintell announced “global manufacturing principles’ in 1997 to establish
minimum labour standards in its own plants and those major
subcontractors.
6.6.4. The role of social activists
Social activities play an important role to ensure that MNCs behave ethically
while doing business. Some of the initiatives include
1. Infant Feeding Action Coalition (INFACT). This has sought to boycott
the Nestle’ Corporation as a result of its practices of selling baby formula
containing little objective nourishment to under developed countries.
After 15 years of lobbying , Nestle’ signed an agreement to stop these
practices and an independent audit commission was created to monitor its
compliances.
2. Coalition for environmentally responsible economies (CERES). This
seeks to engage with investors to promote corporate activities for a ‘safe
and sustainable future for our planet’. Organisation such as Greenpeace
are affiliated to CERES and pays particular attention to fishing industry.
3. Sullivan Principles. These principles were devised by the Reverend Leon
Sullivan, a Philadelphia minister, a black civil rights activist and board
member of General Motors. In 1977, he devised a set of principles that
requested companies to improve workplace and social condition for
blacks in South Africa during apartheid era.
International Business (MOD001055) Chapter 6: International ethical and ecological environment Zubair Hassan (2013): International ethical and ecological environment. International Business
Notes compiled by Zubair [email protected] or [email protected] 12
6.6.5. Bribery and corruption
Two important international conventions and a US Act have required
member countries to criminalise transnational bribery:
1. Organisation of American States Inter-American Convention against
corruption (1994)
2. OECD convention on Combating bribery of Foreign Public Officials
(1999). By mid 2000 some 20 countries had already adopted such laws
with another 14 close enacting them.
3. US foreign corrupt practice Act 1977. This made certain payments to
foreign officials illegal even these officials are located abroad, with
penalties including prison, fines, and disqualification from doing business
with the US government.
6.7. Ecological/environmental issues
In an era of increasing governmental and popular concerns with issues such as global
warming and sustainability, international business must pay careful attention to the
ecological and environmental perspectives with regard to all aspects of their
operations.
6.7.1. National and global issues
The environment has become an increasingly important focus of national and
international policy makers as global warming, erosion of the ozone layer
and other environmental threats are linked with worldwide growth in the
emission of harmful substances.
Role of the Environment
According to Wall et al (2010, p.224) there are three roles of environment
1. Amenity Services: the natural environment provides consumer services to
domestic households in the form of living and recreational space, natural
beauty, and so on.
2. Natural resources: the natural environment is also the source of various
inputs into the production process such as mineral deposits, forests, water
resources, animal populations and so on.
3. Waste products: both production and consumption are activities that
generate waste products or residuals. For example, many productive
International Business (MOD001055) Chapter 6: International ethical and ecological environment Zubair Hassan (2013): International ethical and ecological environment. International Business
Notes compiled by Zubair [email protected] or [email protected] 13
activities generate harmful by-products, which are discharged into
atmosphere or water courses.
Sustainable developments
When environment fails or unable to efficiently fulfil all three functions as the
economy grows over a period of time is called ‘unsustainable developments’
(Wall et al, 2010). The figure below highlights some of the sustainability risk
areas and their potential impacts on capital performance.
Source: Cullen and Parboteeah (2010, p. 311)
Figure 6.5: Sustainability risk areas and potential impact on investment
performance
The capacity of the economy to produce more products is constrained or
limited by the availability of natural resources. Even if the resources are
sufficient to permit economic growth, the extra production will simply ‘draw
through’ more materials and energy in products, which the environment must
ultimately assimilate, since matter and energy cannot be destroyed.
Therefore whenever possible materials must be recycled, renewable energy
sources must be used in preference to non-renewable sources and waste
emissions must be limited to the extent that the earth can safely absorb these
‘residuals’.
International Business (MOD001055) Chapter 6: International ethical and ecological environment Zubair Hassan (2013): International ethical and ecological environment. International Business
Notes compiled by Zubair [email protected] or [email protected] 14
This approach has led many economists to propose limiting the human
demand for goods and services in order to attain a level of economic growth
that can be ‘sustained’ over future generations.
6.7.2. Business issues
Numbers of driving forces are raising environmental concerns.
1. Environmentally conscious consumers: Consumer awareness of
environmental issues is creating a market for ‘green’ products’.
‘Sustainable’ and ‘sustainability’ are now key trigger words in the world
of advertising for positive, emotive images associated with words such as
‘green’, wholesome’, ‘goodness’, ‘justice’ and ‘environment’ among
others. They are used sophisticatedly to sell cars, nappies, holidays and
even lifestyle.
When core activities and products have few direct environmental effects,
consumer demand maybe significantly influenced by environmental
implications of backward or forward linkage. For example, Shell petrol
sales were adversely affected in 1996 when Greenpeace alleged that
proposed disposal of Brent Spar oil platform (backward linkages) at sea
posed a serious threat to the marine environment.
Similarly, Asea Brown Boveri, a Swiss-based multinational received
extremely adverse publicity around the same time from environmental
groups protesting at its alleged destruction of Malaysian rainforest (Wall
et al, 2010).
Reinhardt (1999 cited in Wall et al, 2010, p. 226) suggested that three key
conditions are required for success with ‘environmental product
differentiation’
The company must have identified a distinct market segment
consisting of consumer who really are willing to pay more for
environmentally-friendly products
The branding/corporate image must clearly and credibly covey the
environmental benefit related to the products
The company must be able to protect itself from imitations for long
enough to profit from its ‘investment’ in the previous two
conditions.
2. Environmentally and cost conscious producers
Producers are increasingly aware that adherence to high environmental
standards need not to be at the expense of their cost base. This means that
producers can be environmentally friendly at the same time as reducing
their cost base.
International Business (MOD001055) Chapter 6: International ethical and ecological environment Zubair Hassan (2013): International ethical and ecological environment. International Business
Notes compiled by Zubair [email protected] or [email protected] 15
For example, between 1975 and 1996 the multinational such as 3M,
reduced its waste released to environment by 1.4 billion pounds in weight
and at the same time saved over $750 million in cost. Similarly between
1992 and 1998 the multinational such as S.C. Johnson, reduced its waste
output by 420 million pounds in weight while saving over $125 millions.
3. Environmentally –and risk conscious producers
MNCs are increasingly aware that failure to manage environmental risk
factor effectively can lead to adverse publicity, lost revenue and profit
and perhaps even more seriously a reduction in their official credit rating
, making it more difficult and costly, (e.g. higher interest rates) to
finance future investment plants.
For example, TESCO has in the past received publicity as a result of a
TV documentary about the conditions for workers growing foodstuffs,
such as mangetout in Africa, which are exposed to the supermarket chain.
It has therefore established its own code of conduct and set up 70 strong
team of ethical advisers to help monitor the goods it sells in its stores.
4. Environmentally conscious government
Business have a further reason for considering the environmental impacts
of their activities, namely the scrutiny of host governments. Where
production of a product causes environmental damage, it is likely that this
will result in the imposition of taxes or regulations by the government.
6.7.3. Environmental codes and regulations
Some important environment-specific codes and regulations, which are
important to international business include
1. ISO 14001. The international Organisation for Standardization has developed
ISO 14001 as a means of certifying companies that adopt certain minimum
standards of environmental management
2. Regional Agreements. Bilateral investment agreements between nations (e.g.
Bolivia- USA bilateral investment treaty) often contain minimum
environmental standards as do broader based ‘regional’ treaties such as
NAFTA (North American Free Trade Agreement).
3. Multilateral Agreements. Various protocols have been agreed (e.g. Montreal,
Kyoto) as to reduction in greenhouse gas emissions etc.
International Business (MOD001055) Chapter 6: International ethical and ecological environment Zubair Hassan (2013): International ethical and ecological environment. International Business
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6.7.4. Supporting environmentally friendly activities
Government normally impose heavy tax on negative environmental activities
while relaxed the tax levied on environmental friendly products or business
activities by giving subsidies or charging very low tax or giving tax
exemptions.
Rules and regulation are made to prevent using products that do not meet
certain environmental conditions.
6.8. Global warming, ‘carbon footprint’ and tradable permits
6.8.1. Global warming
Global warming refers to the trapping of heat between the earth’s surface and
gases in the atmosphere, especially carbon dioxide (CO2) (Wall et al, 2010,
p.231).
Currently some 6 billion tonnes of carbon dioxide are released into the
atmosphere each year, largely as a result of burning fossils fuels. In fact
carbon dioxide constitutes some 56% of these “greenhouse gases’, with
chlorofluorocarbons (CFC). CFC were mainly used in refrigerators, aerosols
and air-conditioning systems, accounting for a further 23% of such gases,
the rest being methane (14%) and nitrous oxide (7%). By trapping the sun’s
heat these gases are in turn raising global temperature (Global warming)
(Wall et al, 2010).
The importance of global warming and its association with CO2 emission has
become increasingly high profile in recent years. The increasing occurrence
of extreme weather conditions across many continents, and the
overwhelming collections of scientific evidence on the reality of global
warming has led to increasing pressure on individual and organisations to
reduce their ‘carbon footprint’ and demonstrate a responsible attitude to the
environment.
6.8.2. Carbon footprints and climate change
A carbon footprint is the total amount of greenhouse gas, expressed in terms
of equivalent amounts of carbon dioxide, for which an individual,
organization, product or event is responsible (Kane, 2010, p.50).
Carbon footprint is measured based on ‘greenhouse gas protocol’. Some of
the greenhouse gases include CO2, methane, Nitrous Oxide,
Hydrofluorocarbons etc.
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Climate change is a long-term shift in the statistics of the weather (including
its averages). For example, it could show up as a change in climate normals
(expected average values for temperature and precipitation) for a given place
and time of year, from one decade to the next (NOAA, 2007).
The impact of climate change arise due to global warming has a significant
impact on water supply, water quality and demand for water. Due to the
scarcity of water, it impacts businesses. According to United Nations Global
Compact (2009, p. 5-6) highlighted some implication of climate change on
business organisations
1. Water scarcity directly affects business operations, raw material supply,
intermediate supply chain, and product use in a variety of ways. Declines
or disruptions in water supply can undermine industrial and
manufacturing operations where water is needed for production,
irrigation, material processing, cooling and/or washing and cleaning. For
example, information technology firms require vast amounts of ultra
clean.
2. Water quality risks are often overlooked but may have significant
financial implications. The quality of process water is critical in many
industrial production systems, and contaminated water supply may
require additional investment and operational costs for pre-treatment.
3. Water scarcity, changes in precipitation patterns, and glacier melt caused
by climate change directly affect power generation, curtailing hydro-
based power production, and also impacting any power plants that run
steam turbines. Whether fired by coal, natural gas, or nuclear energy,
electricity generation relies on having an adequate supply of cooling
water. Businesses that depend on highly reliable energy from these power
sources will be at risk.
4. Declines in water availability and quality can increase competition for
clean water. In water-scarce regions, tensions can arise between
businesses and local communities, particularly in developing countries
where local populations often lack access to safe and reliable drinking
water. For instance, in Kerala, India, opposition to beverage company
operations developed over concerns about the effects of bottling plants on
local groundwater levels and supplies. When villagers’ wells ran dry,
local government revoked company operating licenses, affecting both
revenues and company reputations.
5. Reputational risks increase as people become more aware of their rights
to access water. The concept of “access to clean water as a human right”
is gaining more recognition globally, yet the failure of governments to
provide 100 percent coverage for water services means that international
and local businesses may find themselves using copious amounts of water
in regions where people lack sufficient water to meet basic needs.
6. Water scarcity will increase water prices. Among other factors, water
scarcity is driving shifts toward full-cost pricing aimed at providing
economic incentives for efficient water use. In many places, artificially
low water prices are rising as subsidies are phased out. Utilities in
industrial countries are increasingly implementing “block” or “tiered
International Business (MOD001055) Chapter 6: International ethical and ecological environment Zubair Hassan (2013): International ethical and ecological environment. International Business
Notes compiled by Zubair [email protected] or [email protected] 18
rates,” where water users pay more for increased consumption. These
tariff structures are specifically designed to encourage commercial and
industrial users to use water efficiently.
7. Water-intensive products and services face increased socio-political risks.
As water scarcity becomes a serious problem in many parts of the world,
there may be corollary pressure, both regulatory and reputational, on
products that require a significant quantity of water. Products and
services that require large amounts of water or energy to produce or to
use may be phased out by law, lose market share to less water-intensive
products, or cause reputational damage for the company.
6.8.3. Tradable permits
Trade permits are a market-based solution to the problem of pollution. With
this policy option the polluter is issued with a number of permits to emit a
specified amount of pollution. Polluters can buy and sell permits to each other,
at a price agreed between the two polluters. This means permits are
transferable.
The underlying principle of trade permits is that those firms which at present
find it either too difficult or too expensive to meet the standard set.
Some benefits of carbon trading permits include
1. Predictable carbon emissions
2. Fewer political obstacles than a tax
3. Revenue can be returned via rebates and/or used for public goods
4. Revenue rises as emissions decline
Some of the disadvantages associated with Carbon trading includes
1. Total emissions are capped, but the dollar price is unknown and dependent
on many market variables.
2. Depending on the scope, method of allocation, and other design elements,
too many permits may be issued, and other market imperfections may
arise.
International Business (MOD001055) Chapter 6: International ethical and ecological environment Zubair Hassan (2013): International ethical and ecological environment. International Business
Notes compiled by Zubair [email protected] or [email protected] 19
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