Ethical Issues

Ethics and Multinationals

Business ethics: the moral principles that guide a firm's decisions, about what is right as well as what is legal or profitable.

MNCs face more ethical choices than most firms. They work in countries where laws on pay, safety and pollution are weaker than at home, so something banned in the UK may be legal elsewhere. Acting ethically usually costs more, so there is often a trade-off with profit.

Stakeholder Conflicts

An MNC's stakeholders are spread across many countries, and their aims often clash (unit 1.1.3). Common conflicts:

• Shareholders and overseas workers: shareholders want higher profit → the MNC holds factory pay down → lower costs and bigger dividends, but workers stay poorly paid.
• Customers and suppliers' workers: customers in high-income countries want low prices → the MNC pushes its suppliers to cut costs → suppliers cut wages or skimp on safety.
• The MNC and the host community: a factory draws heavily on local water → less is left for farms and homes → the firm's costs stay low while local people bear the cost.

Pay and Working Conditions

Low wages are one reason MNCs produce in developing countries. Whether the pay is fair is an ethical judgement, and there are two views:

• It is a fair deal: MNCs often pay more than local firms or farm work → workers are better off than they would be without the job.
• It is exploitation: pay is below a living wage → workers need long hours or a second job to get by → the MNC keeps its costs low at their expense.

Living wage: the pay a worker needs to cover basic needs, such as food, housing and healthcare, where they live.

Working conditions raise the same questions: long hours, unpaid overtime, unsafe buildings and machinery, and bans on joining a trade union. Raising pay and standards → higher unit costs → higher prices or lower profit. Better-paid, safer staff tend to stay longer and work harder, which wins back some of that cost.

Environmental Considerations

Cleaner production costs money, so an MNC can cut costs by polluting where the rules are weak. The damage falls on people outside the firm, an external cost (unit 1.5.1).

• Emissions: a factory burns cheap, dirty fuel and fits no filters → lower energy and equipment costs → smoke harms local health, and greenhouse gases add to climate change.
• Waste disposal: chemicals or plastic are dumped in rivers or open land instead of treated → disposal costs fall → water and soil are poisoned for the farms and families nearby.

Keeping to home-country standards everywhere costs more, but it protects the MNC if local laws tighten or the pollution is exposed.

Supply Chain Considerations

Many MNCs own few factories. They buy from suppliers, who buy from other suppliers, so the people making a product may be several steps away from the firm that sells it. Two problems are hard to see from head office:

• Exploitation of labour: suppliers under pressure on price pay below the legal minimum, force unpaid overtime or keep workers' passports. At worst this is forced labour.
• Child labour: children work in factories, fields or mines instead of going to school, often producing raw materials such as cotton or cocoa far down the chain.

The Rana Plaza collapse shows the risk. In April 2013 a building near Dhaka, Bangladesh, housing garment factories that made clothes for European and North American brands, collapsed and killed more than 1,100 workers. The brands did not own the factories, but their names were tied to the disaster.

Marketing Considerations

Marketing raises two ethical issues:

• Misleading product labelling: a label claims a product is "natural", "eco-friendly" or healthier than it is → customers buy it on a false belief → sales rise at first, but the firm risks fines and lost trust when found out. False green claims are greenwashing (unit 1.1.3).
• Inappropriate promotional activities: promotion aimed at people the product could harm, such as advertising sugary snacks to young children → higher sales → harm to those buyers → complaints, boycotts and tighter rules.

The classic case is baby milk. From 1977 campaigners boycotted Nestlé for promoting formula milk in poorer countries, where clean water to make it up safely was often not available.

Ethics and Profit

Acting ethically affects an MNC's profit in both directions:

• Higher costs: better pay, cleaner production and supplier checks → higher unit costs → higher prices or lower profit, and a disadvantage against rivals who cut corners.
• Higher sales: a good reputation → customers who care choose the brand, and some pay more for it → higher sales and margins.
• Lower risk: fewer scandals → less chance of boycotts, fines and lost contracts → steadier profit over time.

Which effect is bigger depends on:

• How visible the brand is: a scandal hurts a well-known consumer brand far more than a firm that sells parts to other businesses.
• What customers will pay: where demand is price elastic, as for cheap clothing, buyers switch to rivals if prices rise, so ethical costs are hard to pass on (unit 2.2.1).
• The time period: ethical choices cost money now, while the gains in reputation and staff loyalty build up over years.