Much like a small business expanding its operations, a domestic organization seeking to enter the global market should be aware of the risks associated with spreading out into different corners of the world. A thorough analysis of the financial, market, political, and other risks should be conducted before deciding to enter the global arena (Gupta & Govindarajan, 2004). When conducting a risk assessment, the issue of ethics should be examined, as ethical differences between cultures and the decision to enter the global market can lead to ethical implications. The purpose of this paper is to analyze how ethics (or lack thereof) creates significant risk for American global business endeavors. More specifically, this essay focuses on the risks American businesses face by outsourcing manufacturing to Southeast Asia and attempting to enter into contracts where bribery is an accepted form of practice. Each of these trends is discussed in detail, followed by an assessment on the risks a U.S. company may face by choosing to participate in the global economy in these manners. A discussion on how the existing U.S. federal legal and regulatory environment contributes to increasing the risks that domestic firms face when attempting to enter the global arena is also presented.
Outsourcing manufacturing to Southeast Asia
In an effort to increase profitability, U.S. firms are outsourcing their manufacturing operations to companies in Asia, where manufacturing costs are significantly lower than in the United States (Schwartz & Gibb, 1999). The latest major U.S. manufacture to announce plans to outsource manufacturing to the Pacific region is Pfizer, Inc., which plans to outsource up to 30% of its production (Associated Press, 2007). Other U.S. based companies that have already decided to outsource their manufacturing to Southeast Asian firms have seen the benefits of doing so, including Mattel, Nike, and Philips (Knight Ridder, 2006).
Aside from cost savings and improving the bottom line, outsourcing blue collar jobs can also allow a company to operate around the clock without incurring overtime costs (Koremans, 2007). Outsourcing to foreign countries has its list of disadvantages as well. Approximately 50% of outsourcing operations are estimated to fall below expectations (Collins, 2007). There are also “branding, regulatory, social, geopolitical, human capital and legal risks that companies may not anticipate” (Collins, 2007, par. 7) which can end up costing the organization greatly (Collins, 2007). American companies can also face problems defending intellectual property rights once they enter the Asian arena:
“Intellectual property is a big issue when dealing with China and in the Asian Pacific region in general. Copying, reverse engineering and even counterfeiting products is not an unusual business practice in these countries. It is now obvious to most U.S. companies that the Asian view of business ethics is much different than the U.S. view of business ethics. Even a signed contract may be no protection (Collins, 2007, par. 8).
Lastly, there is the issue of poor quality. In 2007, China was subject to embarrassment, and companies who rely on Chinese manufacturers began to see the financial risk of relying on substandard quality. News about lethal petfood, lead paint in children’s toys and poor quality tires gave China a bad reputation (Hilton, 2008), which lead to a fall in consumer confidence with companies who did not manufacture their toys within the country.
The use of bribery to land contracts.
Outsourcing manufacturing is just one way a company can break into the global economy. Organizations specializing in engineering, consulting, or construction find themselves biding on overseas projects. U.S. firms engaging in this activity are not as successful as those in other countries due to existing regulations, primarily the Foreign Corrupt Practices Act (FCPA) which makes it illegal for a U.S. firm doing business outside of the United States to use any form of bribery to influence business.
“Bribery alone is causing U.S. firms to lose billions of dollars in overseas contracts. Since 1994, the U.S. government has learned of almost 100 cases of foreign firms using bribery to undercut U.S. firms' efforts to win international contracts worth about $45 billion. The foreign firms that offer bribes typically win about 80 percent of the deals” (Anonymous, 1996, par. 4).
Inability to bribe due to the constraints of the FCPA makes it difficult to compete with other countries where bribery is not only accepted, it is also an allowable expense on the foreign firms’ financial statements (Anonymous, 1996). This leaves U.S. firms at a disadvantage in terms of auditing standards. Should a domestic company decide to engage in such practices it would be required to report the activity in its financial statements, either on the income statement or as a supplemental note to the financial statements, as required under the disclosure principal (Horngren, Harrison, & Bamber, 2006).
Other countries bidding for these projects employ aggressive tactics to attract foreign business and contracts. For example, France
”uses government lobbying--such as phone calls, letters, and high-level visits--as well as generous Financing packages and trade shows to win market share in foreign countries. The French promote exports in all of the major growth sectors, especially high-technology projects such as high-speed trains, nuclear power plants, and telecommunications” (Anonymous, 1996, par. 6).
“United Kingdom… uses high-level visits more frequently than any other rival… Approximately one-fifth of British diplomats abroad are engaged full-time in commercial work, and London is expanding the provision of favorable financing through its Export Credit Guarantee division. The United Kingdom has also developed strategic initiatives that target geographic areas, including its "North America Now," "Priority Japan," and "Know-How Fund" (focusing on Central Europe) programs” (Anonymous, 1996, par. 7)
Germany also uses the tactic of frequent high-level visits (Anonymous, 1996) “with particular emphasis on infrastructure and machinery. Economic Minister Rexrodt stated that promoting exports will be at "the very top of the priority list" of the German government and that all politicians must actively support German enterprises in expanding their markets” (Anonymous, 1996, par. 8).
While a firm is not expected to earn every contract bid upon, a 20% success rate among all U.S. based companies is low, indicating that the risks involved in bidding are high in terms of the time and effort spent developing blueprints and the actual bid itself. The risk of failure to obtain the bid and the risk of loss of time and money invested in preparing the contract are high.
Existing legislative environment
The U.S. federal government has played an active role in encouraging major domestic corporations to enter the global economy, specifically countries that practice protectionism, by way of trade agreements (Gupta & Govindarajan, 2004) and tax incentives (anonymous, 2000). At the same time, the federal government failed to enact its own level of protectionisms to protect its people and American jobs. Faulty tires, lethal dogfood, and lead-tainted toys have been allowed to enter the country in support of global trade and for the sake of lowering a trade deficit. Business ethics between U.S. firms and those in developing countries are often not on the same level, and, while most U.S. companies have taken matters into their own hands, there are still a number of companies that continue to allow harmful, defective products to reach into the hands of the American consumer. When U.S. businesses fail to push for ethics reform, it then becomes the responsibility of the federal government to enact appropriate regulation. Lack of appropriate government involvement in this matter has been a contributing factor. The U.S.U.S. companies to compete more effectively in the global marketplace. Lastly, the U.S. government failed to create its own laws of protectionism to deal with a growing base of displaced American workers. government is also a contributing factor to the failure of domestic firms’ bidding by enforcing the FCPA and not amending it to allow
Summary
The purpose of this paper was to analyze how ethics (or lack thereof) creates significant risk for American global business endeavors. More specifically, this essay focused on the risks American businesses face by outsourcing manufacturing to Southeast Asia and attempting to enter into contracts where bribery is an accepted form of practice.
U.S. companies who wish to take advantage of lower manufacturing costs in Southeast Asia as well as other parts of the world must be aware that there are risks involved that may outweigh the improved bottom line. There are socio-political regulatory, and geographic, factors to consider. Also, as with any decision to outsource, the issue of controlling quality of the product must be considered. As was witnessed in the fall of 2007, consumer confidence fell with companies who outsourced their manufacturing operations to China and brought back substandard products. Organizations bidding on overseas projects step onto an uneven playing field. They cannot compete effectively due to the FCPA, which prohibits bribery.
The U.S. federal government failed to enact its own doctrine of protectionism to safeguard its people and American jobs and repeatedly failed to appropriately regulate domestic companies doing business overseas. The U.S. government is also a contributing factor to the failure of domestic firms’ bidding by enforcing the FCPA and not amending it to allow U.S. companies to compete more effectively in the global marketplace. Perhaps changing regulations to punish corporations that are doing the wrong thing may enforce companies to employ a standardized level of conduct across their respective corners of the globe.
References
Anonymous. (1996, October). Foreign practices. Across the Board, 33(9), 11-12.
Anonymous. (2000, December 16). Finance and economics: Going too far in support of trade. The Economist, 357(8201), 88.
Associated Press (December 1, 2007). Pfizer considers outsourcing manufacturing to Asia. The Grand Rapids Press. Retrieved March 3, 2008 from the ProQuest database.
Collins, M. (December, 2007). Outsourcing: the good, the bad, and the ugly. Industrial Maintenance & Plant Operation, 68(12). Retrieved March 3, 2008 from the EBSCOhost database.
Gibb, B., & Schwartz, P. (1999). When good companies do bad things: Responsibility & risk in an age of globalization. New York: John Wiley & Sons.
Gupta, A. K., & Govindarajan, V. (2004). Global Strategy and Organization. New York: John Wiley & Sons.
Hilton, I. (February, 2008). When bad news is good news. Ecologist, 38(1). Retrieved March 3, 2008 from the EBSCOhost database.
Horngren, C. T., Harrison, W, & Bamber, L. Accounting. Upper Saddle River, NJ: Prentice Hall, 2006.
Knight Ridder (September 18, 2006). Philips to consolidate HQ in NCR by ’08. Knight Ridder Tribune Business News. Retrieved March 3, 2008 from the ProQuest database.
Koremans, S. (October 19, 2007). Outsourcing: how to make it work. B&T Weekly, 57(2633). Retrieved March 3, 2008 from the EBSCOhost database.
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