International Business: Relationships, Economic Integration, and Ethics 10

Regulation of Relationships with Foreign Representatives

Agency Relationship

An agency relationship exists when one party (the agent) acts on behalf of another (the principal). The agent performs various functions under the direction of the principal.

Independent Contractors

Independent contractors, also known as independent agents, perform general tasks but maintain significant discretion and independence.

Liability

• A foreign principal may be legally responsible for the acts of an agent.
• However, they are generally not responsible for the acts of an independent agent.

Evergreen Contract

An arrangement that continues beyond the stated term is called an evergreen contract.

Factors Determining Independence

• Representatives who personally organize, pursue, and set the marketing schedule are more likely to be considered independent.
• Representatives serving more than one principal and compensated solely on commission are also more likely to be independent.

Supersession of Agreement with Representative

Some governments may interfere or supersede agreements to protect local interests.

Local Laws

• Local laws may mandate a higher commission rate.
• The foreign principal might need to make a substantial payment to the representative to terminate the arrangement.
• Laws may prohibit refusing to renew the agreement without “just cause.”

Termination Restrictions

Some countries strictly limit the termination of an agency (e.g., Dealer’s Act).

Just Cause

• Prohibition from refusing renewal without “just cause” is common.
• "Just cause" is often difficult to establish; even weak performance or minor contract violations may not suffice.

EU Protection

The EU aggressively protects local agents with mandatory provisions (EU Directive 86):

• Economic conditions alarm
• Commission payments
• Commission override

Economic Conditions Alarm

The principal must inform the agent if the agent's expected business volume and commission will be significantly lower than normal.

Commission Payments

Commission is required when a transaction results from the agent's efforts or occurs between the principal and a party previously acquired by the agent as a customer.

Commission Override

If a principal makes a sale in a territory or market sector reserved for the agent, the principal must pay the agent a commission, regardless of the agent's participation in the sale and the agency agreement's provisions.

Tax & Labor Regulation and Principal Liability

Dependent vs. Independent Agent

For tax purposes, a principal “opens an office” when hiring a dependent agent (detailed instructions, salary, specific expense reimbursement).

Principal Liability

Retaining a representative often leads to principal liability and to tax and labor law requirements.

Regional Economic Integration

Definition

Regional economic integration refers to the increasing economic interdependence that occurs when nations within a geographic region create an alliance to reduce barriers to trade and investment.

Significance

Over 50% of world trade today happens under preferential trade agreements signed by groups of countries.

Benefits of Cooperation

• Increased product choices, productivity, and living standards.
• Lower tariffs and prices.
• More efficient resource use.
• Trade creation (with economic integration) > trade diversion.

Economic Bloc

Definition

A geographic area consisting of two or more countries that agree to pursue economic integration by reducing tariffs and other barriers to the cross-border flow of products, services, capital, and, in advanced cases, labor.

Examples

GCC, European Union, USMCA, MERCOSUR, APEC, ASEAN.

Levels of Integration

There are five potential levels of economic integration:

1. Free Trade Area
2. Customs Union
3. Common Market
4. Monetary Union
5. Political Union

Five Potential Levels of Regional Integration

Free Trade Area

Members eliminate tariffs and non-tariff trade barriers with each other but maintain their own trade barriers with non-member countries.

• Examples: NAFTA, EFTA, ASEAN, Australia and New Zealand Closer Economic Relations Agreement (CER)

Customs Union

Common external tariffs are established.

• Example: MERCOSUR

Common Market

Free movement of products, labor, and capital.

• Example: Pre-1992 European Economic Community

Monetary Union

Unified monetary and fiscal policy by a central authority.

• Example: The European Union today exhibits common trade, agricultural, and monetary policies

Political Union

Perfect unification of all policies by a common organization; submersion of all separate national institutions.

• Example: Remains an ideal; yet to be achieved

Why Nations Pursue Economic Integration

Expand Market Size

• Increases the marketplace size for firms inside the economic bloc. For example, Belgium has a population of 10 million, while the EU has nearly 500 million.
• Buyers can access a larger selection of goods.

Achieve Economies of Scale and Productivity

• A larger market facilitates economies of scale.
• Internationalization inside the bloc helps firms learn to compete outside the bloc.
• Competition and efficient resource usage inside the bloc leads to lower prices for bloc consumers.

Attract Direct Investment from Outside the Bloc

• Foreign firms prefer investing in countries belonging to an economic bloc compared to stand-alone countries. LG ES, Samsung, and SK On have invested heavily in EU-member countries.

Acquire Stronger Defensive and Political Posture

• Belonging to a bloc provides member countries with a stronger defensive posture relative to other nations and world regions. This was a key motive for the formation of the European Union.

Implications of Regional Integration for the Firm

Internationalization by Firms Inside the Economic Bloc

Regional integration facilitates company internationalization. Expansion into neighboring countries provides valuable experience, prompting internationalization to other markets worldwide.

Rationalization of Operations

By restructuring and consolidating company operations, managers can develop strategies and value-chain activities suited to the region as a whole, not just individual countries. The goal is to cut costs and redundancy and increase efficiencies via scale economies.

Regional Products and Marketing Strategy

Firms cut costs by standardizing products and services. Case Inc. reduced its Magnum line of tractors from 17 to only a few versions in Europe following the integration of the EU.

Case: FTA and Korea

• 20 years since the first FTA with Chile
• Singapore (2007), India (2010), EU (2011), USA (2012), China (2015)… with 59 countries, 85% of global GDP
• Global trade ranking: 12th -> 7th (Ex+Im: $332$ bil -> $1,275$ bil)
• GDP per capita: $16,480$ (2004) -> $33,190$ (2023)
• Average annual growth rate of agricultural export: $6.2$
• R&D for improving taste and quality for apples, pears, grapes, strawberries, meat…
• Cows ($1.84$ mil -> $3.29$ mil) and pigs
• Consumer benefits: wine, coffee, meat, fresh salmon… more consumption and choices

Integrity, Ethics, and CSR

Ethical Dilemma

Imagine you are a manager and visit a factory owned by an affiliate in Colombia and discover the use of child labor in the plant.

You are told that without the children’s income, their families might go hungry. If the children are dismissed from the plant, they will likely turn to other income sources, including prostitution or street crime.

What should you do? Make a fuss about the immorality of child labor, or look the other way? Or overlook it?

Improving the lives of Bangladeshi Garment Factory Workers

• 75% of total export revenue, employing 4 mil people
• Most workers are female and from rural areas, remarkable improvement in public health, primary education, and poverty alleviation
• Suppliers have very limited bargaining powers, and working conditions and pay have not met expectations, price elasticity, and limited switching costs for buyers
• Constant pressure to production efficiency and low-cost advantages, health and safety issues
• ILO, fair trade agencies, and trade unions are working to raise minimum wages by 77% and improve safety and environmental regulation compliances

What is Integrity?

A general sense of honesty and reliability is expressed in a strong commitment to doing the right thing, regardless of the circumstances.

• Honesty, reliability, and fairness in business practices.
• An essential element of successful business relationships.
• It is as much about what to do as it is who to be.

Four Types of Responsibilities for Small Businesses

• Economic: Be profitable (Required)
• Legal: Obey all laws, adhere to all regulations (Required)
• Ethical: Avoid questionable practices (expected)
• Discretionary: Be a good corporate citizen and give back (Desired/Expected)

“Big Three” Primary Stakeholders—Owners, Customers, and Employees

• Managerial Integrity
• Promoting the Owners’ Interests
• Valuing Employees
• Caring about Customers

Ethics and Corruption

Ethics are moral principles and values that govern the behavior of people, firms, and governments regarding right and wrong.

• Ethical behavior: Doing the right things for the company, the employees, the community, the government, and the natural environment.
• CSR (Corporate Social Responsibility): A manner of operating a business that meets or exceeds the ethical, legal, commercial, and public expectations of customers, shareholders, employees, and communities.
• Sustainability: Meeting humanity’s needs without harming future generations.

Corporate Governance

The system of procedures and processes by which corporations are managed, directed, and controlled.

Corruption

Corruption is the practice of obtaining power, personal gain, or influence through illegitimate means, usually at others’ expense.

• Corruption is a major or severe concern in the global activities of many MNEs.
• Bribery is common and may take the form of grease payments (small inducements intended to expedite decisions and transactions) or gain favors.

Inappropriate Corporate Conduct Abroad

• Firms may:
  • Falsify or misrepresent contracts or official documents.
  • Pay or accept bribes, kickbacks, or inappropriate gifts.
  • Tolerate sweatshop conditions or abuse employees.
  • Do false advertising or other deceptive marketing.
  • Engage in deceptive or discriminatory pricing.
  • Deceive or abuse intermediaries in the channel.
  • Undertake activities that harm the natural environment.

Improper Ethical Behavior May Result When:

• Top management sets goals and incentives aimed at promoting good outcomes (e.g., profits) that instead encourages bad behaviors.
• Employees overlook unethical behavior in others because of peer pressure or self-interest.
• Managers tolerate lower ethical standards in value-chain activities performed by suppliers or third-party firms.
• Unethical practices are allowed to accumulate in the firm slowly over time, and questionable means are justified by good ends.
• Unethical testing for new medicines.

The Value of Ethical Behavior

• Ethical behavior is simply the right thing to do.
• Often prescribed within laws and regulations.
• Demanded by customers, governments, and the news media; unethical firms risk attracting unwanted attention.
• Ethical behavior is good business, leading to enhanced corporate image and selling prospects. A firm with a strong reputation is advantaged in hiring and motivating employees, partnering, and dealing with foreign governments.

Variation in Ethical Standards

Ethical standards vary from country to country.

• Relativism: The belief that ethical truths are not absolute but differ from group to group; “When in Rome, do as the Romans do.”
• Normativism: The belief that ethical behavioral standards are universal, and firms and individuals should seek to uphold them consistently around the world.

Examples of Variances

• In China, counterfeiters may publish translated versions of imported books without compensating the original publisher or authors.
• In parts of Africa, accepting expensive gifts from suppliers is acceptable.
• In the United States, CEO compensation is often 100 times greater than that of low-ranking subordinates.
• Finland and Sweden ban advertising aimed at children, but the practice is accepted in other parts of Europe.

Is This Decision Ethical?

Questions should be asked before decisions are made.

• Is it the truth?
• Is it fair to all concerned?
• Will it build goodwill and better friendships?
• Will it be beneficial to all concerned?
• Follow the Golden Rule: “Treat others as you would want to be treated.”

Intellectual Property

Intellectual property refers to ideas or works created by individuals or firms and includes a variety of proprietary, intangible assets: discoveries and inventions; artistic, musical, and literary works; and words, phrases, symbols, and designs.

Intellectual property rights are the legal claim through which proprietary assets are protected from unauthorized use by other parties via trademarks, copyrights, and patents.

• Laws enacted in one country are enforceable only in that country. Infringement arises in the form of piracy and counterfeiting, unauthorized reproduction, or use of copyrighted or patented work for financial gains. Annually, piracy and counterfeiting amount to $$2 trillion dollars.

Piracy and Counterfeiting Affect

• International trade: Exports of legitimate products must compete with trade in counterfeit goods.
• Direct investment: Firms avoid countries known for widespread intellectual property violations.
• Company performance: Sales, profits, and strategies are harmed.
• Innovation: Companies avoid doing research and development where piracy is common.
• Tax revenues: Pirates usually don’t pay taxes.
• Criminal activity: Often linked to organized crime.
• The natural environment: Intellectual property violators disregard environmental standards.
• National prosperity and wellbeing: Ultimately, job prospects, prosperity, and moral standards in affected nations are harmed.

Corporate Social Responsibility

Corporate social responsibility (CSR): Operating a business to meet or exceed the ethical, legal, commercial, and public expectations of customers, shareholders, employees, and communities. Corporate citizenship

Company strategies thoroughly consider the social, economic, and environmental impact of company actions and aim to improve the quality of life of employees and the environment, the community, and society.

Aims to do more for the betterment of others than is required by laws, regulations, or special interest groups.

Benefits of CSR

• CSR helps recruit and keep good employees.
• Can help differentiate the firm and enhance its brands.
• Cuts costs, as when the firm reduces packaging, recycles, cuts energy usage, and minimizes waste in operations.
• Helps the firm avoid increased taxation, regulation, or other legal actions by local government authorities.
• Contribution to profits and benefits society and the environment.

Social Responsibility and Small Business

• Environmental Protection
• Consumerism
• Support of Education
• Compliance with Government Regulations
• Response to Community Needs
• Contributions to Community Organizations
• Obligations to Stakeholders

Small Business and the Natural Environment

Sustainable Small Business
A profitable company that responds to customers’ needs while showing reasonable concern for the environment.

• Maximize the use of recycled or renewable raw materials and environmentally friendly energy.
• Minimize pollutants, design production lines to use water and energy efficiently, and constantly seek ways to reduce waste.