International Business

International Business
Lecture Notes
Collin Starkweather1
September 2012

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Copyright c Collin Starkweather 2012. All rights reserved.

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Contents
1 International Business Culture and Practices
1.1 Values . . . . . . . . . . . . . . . . . . . .
1.2 The Determinants of Culture . . . . . . . .
1.2.1 Hofstede’s Cultural Dimensions . . .
1.2.2 Trompenaars’s Cultural Dimensions
1.2.3 Country Clusters . . . . . . . . . . .
1.3 Social Stratification . . . . . . . . . . . . .
1.4 Cultural Diversity . . . . . . . . . . . . . .

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2 International Norms in Business Ethics and Corporate Social Responsibility
2.1 Roots of Unethical Behavior . . . . . . . . . . . . . . . . . . . . .
2.2 Ethical Decision Making . . . . . . . . . . . . . . . . . . . . . . . .
2.3 Corruption and the FCPA . . . . . . . . . . . . . . . . . . . . . . .
2.4 Corporate Social Responsibility . . . . . . . . . . . . . . . . . . . .
2.4.1 Response to Social Obligations . . . . . . . . . . . . . . . .
2.5 Supplemental Material: Ethical Concerns in Europe . . . . . . . . .
2.5.1 Bribes and Corruption . . . . . . . . . . . . . . . . . . . . .
2.5.2 Women in the Workplace in Europe . . . . . . . . . . . . .
2.6 Supplemental Material: Ethical Concerns in Japan . . . . . . . . . .
2.6.1 Political and Business Scandals . . . . . . . . . . . . . . . .
2.6.2 Women in the Workplace . . . . . . . . . . . . . . . . . . .
2.6.3 Lobbying by Japan . . . . . . . . . . . . . . . . . . . . . .

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3 Introduction to Negotiation
3.1 Introduction . . . . . . . . . . . .
3.2 Common Failures of Negotiators .
3.3 Negotiation Myths . . . . . . . . .
3.4 Preparing to Negotiate . . . . . .
3.4.1 Self-assessment . . . . . .
3.4.2 Sizing Up the Other Party
3.4.3 Situation Assessment . . .

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4

CONTENTS

4 Special Topic: Resolving Disputes in International Business
4.1 How Claims are Made and Rejected . . . . . . . . . . . .
4.2 Interests and Culture . . . . . . . . . . . . . . . . . . . .
4.3 Rights and Culture . . . . . . . . . . . . . . . . . . . . .
4.4 Power and Culture . . . . . . . . . . . . . . . . . . . . . .
4.5 Procedures for Resolving Disputes . . . . . . . . . . . . .
4.5.1 Changing the Focus of Disputes . . . . . . . . . .
4.5.2 Dealing with Emotions . . . . . . . . . . . . . . .

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Chapter 1

International Business
Culture and Practices
I hope that the primary message that students take away from this section is that while culture can be informative, individual variation subsumes cultural variation.
That is, there is much more variability between individuals than there is between cultures, so when doing business, focus on the individual, not the culture.
Side Note 1.0.1 (Diversity in the United States) One thing that the United States does well is blending people from diverse cultures into a functioning business environment. There are a variety of nationalities in my office, with my colleagues coming from countries including Brazil, Argentina, Peru, Ireland, Romania, Bulgaria, China, and Russia. We recognize and appreciate each others’ cultural differences, and if we were unable to put any cultural differences aside, we could not function effectively as a business.
Hence, one of the primary goals of this course is to provide you with cross-cultural literacy, which is important to success in a multi-cultural working environment.
Definition 1.0.1 (Cross-Cultural Literacy) An understanding of how cultural differences across and within nations can affect the way business is practiced.
In subsequent classes, we will discuss strategies and practical considerations when managing across cultures. In order to introduce this topic, we will first discuss what is meant by culture and cultural differences that are important to recognize when managing across cultures.
Definition 1.0.2 (Culture) A system of values and norms that are shared among a group of people and that when taken together consistute a design for living.[2,
p. 89]
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6CHAPTER 1. INTERNATIONAL BUSINESS CULTURE AND PRACTICES
In other words, it is acquired knowledge that people use to interpret experience and generate social behavior. This knowledge forms values, creates attitudes, and influences behaviour.
Definition 1.0.3 (Values) Abstract ideas about what a group believes to be good, right, and desirable. In other words, values are shared assumptions about how things ought to be.[2, p. 89]
Values are at their core basic convictions that people have regarding what is right and wrong, good and bad, important and unimportant.
Definition 1.0.4 (Norms) The social rules and guidelines that prescribe appropriate behaviour in particular situations.[2, p. 89]
Values can be divided between folkways, which are social rules describing routine conventions, such as punctuality,1 and mores, which are norms perceived as central to the functioning of society, such as prohibitions against murder or cannibalism.
Definition 1.0.5 (Society) A group of people who share a common set of values and norms.[2, p. 89]
Societies can exist at the level of a country or within or across countries.
Side Note 1.0.2 (Diversity of Cultures) There are a variety of cultures and subcultures within the United States, ranging from Southern American to MexicanAmerican to Chinese-American to African-American, and even subcultures that span a variety of demographics such as art, baseball, or hip-hop culture. Americans may typically associate themselves with several different subcultures.
I would include Scandinavian and Southern American cultures among my influences.
Scholars generally agree on the following characteristics of culture:[4, pp. 93–94]
• It is learned. Culture is not inherited. It is acquired by learning and experience.
• It is shared. People as a group, organization, or society share culture; it is not specific to single individuals.
• It is transgenerational. It is passed down from one generation to the next.
• It is symbolic. It is based on our ability to symbolize or use one thing to represent another.
1 Note that differences in conventions regarding punctuality can differ between groups. For example, in my profession, consulting, time is highly valued as fees are charged by the hour and punctuality is expected.

1.1. VALUES

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Figure 1.1: Hodgetts Table 4–2: U.S. Values and Possible Alternatives
• It is patterned. It has structure and is integrated; changing one part will bring changes to another.
• It is adaptive. It is based on the human capacity to change or adapt. Culture changes and adapts to changes in a society’s make-up and situation.

1.1

Values

Side Note 1.1.1 (U.S. Values and Possible Alternatives) See Hodgetts Table
4-2 [4, p. 99].
Which of these values would or would not be welcome in a Chinese organization?
Researcher George England found that personal value systems change slowly. However, managerial values change more quickly as a result of both culture and technology.
Side Note 1.1.2 (Values That Make Successful Managers) Hodgetts cites studies2 in which managers in several cultures were tested and found that the cultural values that were the best predictors of success were
2 William

Whitely and George W. England, “Variability in Common Dimensions of Man-

8CHAPTER 1. INTERNATIONAL BUSINESS CULTURE AND PRACTICES
• Pragmatic (solving problems by using the most practical solution),
• Dynamic (valuing change), and
• Achievement-oriented (rewarding achievement rather than other factors, such as seniority).
England also found that less successful managers tended to have values associated with a static and protected environment in which they take relatively passive roles.
Side Note 1.1.3 (Common Personal Values) See Hodgetts sidebar titled “Common Personal Values.” [4, p. 100]
How do Chinese personal values compare? Which of the values listed for other cultures apply in China?

1.2

The Determinants of Culture

There are a variety of determinants of and influences on culture, and these determinants and influences exist in a symbiotic relationship where each influences the other. Side Note 1.2.1 (Figure 3.1: The Determinants of Culture) See Hill Figure 3.1
[3, p. 57]
Hill proposes that the determinants of culture include social structure, language, education, economic philosophy, political philosophy, and religion.
Definition 1.2.1 (Social Structure) The basic social organization of a society.
Charles W. L. Hill identifies two dimensions which he believes are particularly important to explaining the differences between cultures: The degree to which the unit of social organization is the individual, as opposed to the group, and the degree to which society is stratified into classes or castes.[3, p. 57] agerial Values due to Value Orientation and Country Differences,” Personnel Psychology,
Spring 1980, pp. 77–89. Their sample included 833 Americans, 301 Japanese, 281 Australian,
161 South Korean, and 485 Indian managers. Generally speaking, this study identified significant differences between values held by managers from different cultures. George W. England and Raymond Lee, “The Relationship Between Managerial Values and Managerial Success in the United States, Japan, India, and Australia,” Journal of Applied Psychology, August 1974, pp. 418–419. This article surveyed 878 Americans, 312 Japanese, 301 Australian, and 500 Indian managers. Generally speaking, they found that there is a reasonably strong relationship between success achieved by managers and personal values and that while there are country differences in the relationships between values and success, findings across the four countries were quite similar. [4, pp. 98–99]

1.2. THE DETERMINANTS OF CULTURE

Figure 1.2: Hodgetts Sidebar: Common Personal Values

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10CHAPTER 1. INTERNATIONAL BUSINESS CULTURE AND PRACTICES
Definition 1.2.2 (Group) In the context of social structure, a group is an association of two or more individuals who have a shared sense of identity and who interact with each other in structured ways on the basis of a common set of expectations about each others’ behaviour.

1.2.1

Hofstede’s Cultural Dimensions

Dutch researcher Geert Hofstede conducted a survey of over 116,000 respondents from over 70 countries. All respondents were employees of IBM and did not include unskilled manual workers, which led to some criticism of his study. [3, p. 71]
However, his survey examined four cultural dimensions of management:
1. Power Distance
2. Uncertainty Avoidance
3. Individualism
4. Masculinity
Definition 1.2.3 (Power Distance) Defined by Dutch researcher Geert Hofstede and GLOBE as the extent to which less powerful members of institutions and organizations accept that power is distributed unequally.
Definition 1.2.4 (Uncertainty Avoidance) Defined by Dutch researcher Geert Hofstede as the extent to which people feel threatened by ambiguous situations and have created beliefs and institutions that try to avoid these.
Defined by GLOBE as the extent to which members of an organization or society strive to avoid uncertainty by reliance on social norms, rituals, and bureaucratic practices to alleviate the unpredictability of future events.
Definition 1.2.5 (Individualism) Defined by Dutch researcher Geert Hofstede as the tendency of people to look after themselves and their immediate family only.
Definition 1.2.6 (Masculinity) Defined by Dutch researcher Geert Hofstede as a cultural characteristic in which the dominant values in society are success, money, and things.
Definition 1.2.7 (Collectivism) The opposite of individualism. The tendency of people to belong to groups or collectives and to look after each other in exchange for loyalty.
Definition 1.2.8 (Femininity) The opposite of masculinity. A cultural charteristic in which the dominant values in society are caring for others and the quality of life.

1.2. THE DETERMINANTS OF CULTURE

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Definition 1.2.9 (Risk Averse) A common term used in economics. A person is risk averse if they avoid risk.
Definition 1.2.10 (Risk Tolerant) Another common term used in economics. The opposite of risk averse.
Side Note 1.2.2 (Hofstede’s Findings) See Hodgetts figures 4–3 to 4–7, [4, p. 104–
7].
• Figure 4–4: Individualism vs. Per Capita GNP
– I don’t like this figure. The figure makes it look as if individualism is correlated with per-capita GNP. I think it really simply represents that
Western countries, which are culturally more prone to individualism, were the first to develop.
• Figure 4–5: Power-Distance vs. Individualism
– Countries with a small power distance (mostly Western countries) tend to correlate to those that are individualist.
– Likewise, countries with a large power distance (mostly Eastern and Latin
American countries) tend to correlate to those that are collectivist.
– Americans are brought up to believe that (ideally if not in practice) everyone is equal and has equal potential. Every schoolchild is brought up to believe that anyone who works hard enough and is smart enough can be president, though the practical application of that concept is sometimes not readily apparent.
– Based on the definitions of power distance and individualism, this makes sense. • Figure 4–6: Power-Distance vs. Uncertainty Avoidance
– Power distance and uncertainty avoidance do not seem to be as strongly correlated with each other than power distance and individualism.
– Hong Kong3 and Singapore seem to exhibit large power distance and weak uncertainty avoidance, whereas Japan and Korea exhibit strong uncertainty avoidance. Where would mainland China fall?
– Why is there more risk aversion in Japan and Korea? Is it a purely cultural characteristic or are there economic incentives at play?
• Figure 4–7: Uncertainty Avoidance vs. Masculinity
3 Note

that this study was conducted before Britian’s lease on Hong Kong expired and it was returned to China. However, although they are culturally very similar in many ways, there are some cultural differences between mainland China and Hong Kong, so even if this study were conducted today, it would be interesting to consider Hong Kong separately from mainland China.

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– I think that masculinity and femininity are unfortunate uses of terms, as gender implies much more than I think Hofstede intended to imply and leads to value judgements.
– Where would China fall on this chart?
– The chart reflects that Scandinavian countries are very feminine. I think that their policies reflecting gender equality and family leave support this. Definition 1.2.11 (Correlated) Mutually related.4
Mathematically, correlation is the degree to which two or more quantities are linearly associated. In a two-dimensional plot, the degree of correlation between the values on the two axes is quantified by the so-called correlation coefficient.5
Definition 1.2.12 (Delegate) To entrust to the care or management of another; to transfer; to assign; to commit.6

1.2.2

Trompenaars’s Cultural Dimensions

Another Dutch researcher, Fons Trompenaars, performed a study with a similar focus as Hofstede.
However, due to time constraints, Trompenaars’s study will not be discussed in detail this class.
In 1994, Trompenaars, using 5 value orientations derived by sociologist Talcott
Parsons, published results from a 10 year research project based on questionnaires administered to over 15,000 managers from 28 countries.
Trompenaars’s value orientations included
1. Universalism vs. particularism
2. Individualism vs. Communitarianism
3. Neutral vs. Emotional
4. Specific vs. Diffuse
5. Achievement vs. Ascription
Definition 1.2.13 (Universalism) A value orientation in which people hold the belief that ideas and practices can be applied everywhere without modification.
4 Source:

http://www.dict.org, September 1, 2012. http://mathworld.wolfram.com/Correlation.html, September 1, 2012.
6 Source: http://www.dict.org, September 1, 2012.
5 Source:

1.2. THE DETERMINANTS OF CULTURE

Figure 1.3: Hodgetts Figure 4–4: Individualism vs. Per Capita GNP

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Figure 1.4: Hodgetts Figure 4–5: Power-Distance vs. Individualism

1.2. THE DETERMINANTS OF CULTURE

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Figure 1.5: Hodgetts Figure 4–6: Power-Distance vs. Uncertainty Avoidance

16CHAPTER 1. INTERNATIONAL BUSINESS CULTURE AND PRACTICES

Figure 1.6: Hodgetts Figure 4–7: Uncertainty Avoidance vs. Masculinity

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Definition 1.2.14 (Particularism) A value orientation in which people hold the belief that circumstances dictate how ideas and practices should be applied.
The U.S. and U.K. are examples cultures with a high degree of universalism.
Venezuela and China, on the other hand, are generally cultures that express a high degree of particularism.
Definition 1.2.15 (Individualism) A value orientation in which people regard themselves as individuals and derive what they consider to be the important aspects of their character from their personal talents and accomplishments.
Definition 1.2.16 (Communitarianism) A value orientation in which people regard themselves as part of a group and derive what they consider to be the important aspects of their character from the group or groups to which they belong.
The U.S. (with an index of 67), U.K. (69), and China (54) are examples of cultures that are more individualistic than communitarian. Korea and Malaysia, on the other hand, are generally more communitarian.
Definition 1.2.17 (Neutral) A value orientation in which it is considered important to hold emotions in check.
Definition 1.2.18 (Emotional) A value orientation in which it is considered acceptable to openly and naturally express emotions.
Japan and the U.K. are cultures that are predominantly neutral. China, the U.S., and Mexico, on the other hand, are examples of cultures that are generally more emotional. Definition 1.2.19 (Specific) A value orientation in which individuals have a large public space they readily share with others and a small private space they guard closely and share only with close friends and associates.
Definition 1.2.20 (Diffuse) A value orientation in which public and private space are similar in size and people guard their public space carefully.
The U.S. and the U.K. are cultures that are oriented towards specificity. China and Venezuela, on the other hand, are examples of cultures that are generally more diffuse. Definition 1.2.21 (Achievement) A value orientation reflecting a culture in which people are afforded status based on how they perform their function.

18CHAPTER 1. INTERNATIONAL BUSINESS CULTURE AND PRACTICES
Definition 1.2.22 (Ascription) A value orientation reflecting a culture in which status is attributed based on who or what a person is.
The U.S. and the U.K. are cultures that are achievement-oriented. China and
Indonesia, on the other hand, are examples of cultures that are more ascriptive.
Trompenaars divided countries into clusters, as did the researchers Simcha Rosen and Oded Schenken. This will be discussed in more detail in section 1.2.3 below.
Stopped here with groups 2 and 3 on Monday, September 10, 2012. Group 2 has not yet discussed the Hodgetts sidebar on cultural priorities (i.e., Hodgetts table
4–1). Stopped at “specific vs. diffuse” with group 1 on Tuesday, September 11,
2012.
One additional interesting result that is worth discussing is the question of determination of one’s own fate.
Trompenaars asked managers to choose between
• What happens to me is my own doing, or
• Sometimes I feel that I do not have enough control over the directions my life is taking.
The following percentage of respondents believed that what is happening to them is their own doing:
1. U.S.: 89%
2. Switzerland: 84%
3. Australia: 81%
4. Belgium: 76%
5. Indonesia: 73%
6. Hong Kong: 69%
7. Greece: 63%
8. Singapore: 58%
9. Japan: 56%
10. China: 35%
Side Note 1.2.3 (Observations Regarding the Tropmenaars Study) The Trompenaars study is now almost 20 years old, and China has changed significantly in the last 20 years.

1.2. THE DETERMINANTS OF CULTURE

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Personally, I believe those who think they are masters of their own fate (regardless of the extent to which it is true) are more likely to be successful.
A recent study found that successful entrepreneurs are not necessarily greater risk takers, but in fact have an almost irrational self-confidence and belief in their own assured success.

1.2.3

Country Clusters

Based on a thorough literature review, researchers Simcha Rosen and Oded Shenkar
[4, p. 108] placed countries into clusters based on four characteristics:
1. The importance of work goals,
2. Need deficiency, fulfillment, and job satisfaction,
3. Managerial and organizational variables, and
4. Work role and interpersonal orientation.
Side Note 1.2.4 (Country Clusters) See Hodgetts figure 4–8 [4, p. 109].
Research indicates that international managers could be a cluster in and of themselves. There would seem to be either some cultural convergence among international management or some common selection mechanism for international managers.

Side Note 1.2.5 (Trompenaars’s Cultural Orientations) See Hodgetts figure 4–
9 [4, p. 111].
Note that Trompenaars divided his countries into clusters as did Rosen and Shenkar.
Trompenaars’s country clusters consisted of
1. Anglo Cluster – The U.S. and the U.K.
2. Asian Cluster – Japan, mainland China, Hong Kong, Indonesia, and Singapore
3. Latin American Cluster – Argentina, Mexico, Venezuela, and Brazil
4. Latin European Cluster – France, Belgium, Spain, and Italy
5. Germanic Cluster – Austria, Germany, Switzerland, and Czechoslovakia

20CHAPTER 1. INTERNATIONAL BUSINESS CULTURE AND PRACTICES

Figure 1.7: Hodgetts Figure 4–8: A Synthesis of Country Clusters

1.3

Social Stratification

The degree to which a society is divided into social classes is important insofar as it determines the degree to which members of society can move between classes on the basis of merit, and hence the incentives of members of that society to attempt to advance themselves economically and otherwise.
Definition 1.3.1 (Social Strata) The characteristics, such as family background, occupation, and income, that stratify society into hierarchical social categories.
Social strata can include castes and classes.
Definition 1.3.2 (Social Mobility) The characteristics, such as family background, occupation, and income, that stratify society into hierarchical social categories.
Some societies, such as those of Great Britian and the United States, have historically been based on class systems whereas others, most notably India, have been based on castes.
Definition 1.3.3 (Caste System) A closed system of social stratification in which social position is determined by the family into which a person is born, and change in that position is usually not possible during an individual’s lifetime. India is commonly associated with a caste system.

1.3. SOCIAL STRATIFICATION

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Figure 1.8: Hodgetts Figure 4–9: Trompenaars’s Relationship Orientations on
Cultural Dimensions

22CHAPTER 1. INTERNATIONAL BUSINESS CULTURE AND PRACTICES
Definition 1.3.4 (Class System) A form of open social stratification in which the position a person has by birth can be changed through his or her own achievements or luck.
Side Note 1.3.1 (Family History) In the United States, there has traditionally been a relatively high degree of social mobility. For example, my father grew up on a farm, but achieved a high level of education and advanced to a higher level in the economic social strata. Though my family had no guanxi,7 both my father and I would consider ourselves to have had successful careers and have crossed economic social strata.

1.4

Cultural Diversity

Side Note 1.4.1 (Table 4-1: Priorities of Cultural Values) See Hodgetts table
4-1 [4, p. 95].
Which of these values do Chinese people value most? How would they conflict with
American values?
How does culture impact management approaches?
• Centralized vs. decentralized decision-making – In some societies, decisionmaking is very hierarchical. In others, middle- and low-level managers make many important decisions.
• Safety vs. risk – In some societies, decisions reflect risk-aversion. In others, risk-taking is rewarded.
• Individual vs. group rewards – In some countries, the top-performing people are given bonuses and commissions. In others, rewards and honours are given to groups.8
• Informal vs. formal procedures – In some societies, much is accomplished through informal means. In others, formal rules are followed rigidly.9
• High vs. low organizational loyalty – In some societies, people identify very strongly with their organization or employer. In others, people identify with their occupational group, such as engineer or nurse.10
7 I would consider myself to have some guanxi now, but did not begin my career with connections, family or otherwise.
8 In the U.S., bonuses and rewards are more often conferred on individuals.
9 I get the impression that China is a formal culture; however, when following the rules does not make sense, informal means are used to work around the rules.
10 In the U.S., as fewer and fewer people expect lifetime employment, organizational loyalty has dropped dramatically.

1.4. CULTURAL DIVERSITY

Figure 1.9: Hodgetts Table 4–1: Priorities of Cultural Values

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24CHAPTER 1. INTERNATIONAL BUSINESS CULTURE AND PRACTICES
• Cooperation vs. competition – Some societies encourage competition between people while others encourage competition.11
• Short-term vs. long-term horizons – Some cultures focus on short-term goals, such as profits and efficiency. Others focus on long-term goals, such as market share and technological development.12
• Stability vs. innovation – Some countries resist change, while others place a high value on innovation and change.13
Side Note 1.4.2 (Management Culture in the U.S.) Centralized vs. decentralized decision-making – At both Lexecon and Chicago Partners (now Navigant Economics), the companies I worked for in Chicago, the corporate structure was very flat and decision-making was very decentralized because everyone was highly educated and highly competent. At other companies in the U.S., it is much less so. I am under the impression that companies with more educated and competent workers tend to be more decentralized, which makes intuitive sense.
Individual vs. group rewards – In the U.S., bonuses and rewards are more often conferred on individuals.
Informal vs. formal procedures – In the U.S., formal procedures are not as important as getting the job done. Larger, more rigid and structured businesses have more rules than smaller, more nimble businesses. However, in most businesses, formal procedures are often ignored when they don’t make sense.
High vs. low organizational loyalty – In the U.S., as fewer and fewer people expect lifetime employment, organizational loyalty has dropped dramatically.
Cooperation vs. competition – At GE (General Electric), former CEO Jack Welch famously introduced a policy in which the lowest performers (perhaps the lowest 5% or so) in the company were automatically fired. How would this go over in China?
Short-term vs. long-term horizons – In the U.S., companies are perceived to be much more focused on short-term goals than in other countries, though many in the U.S. perceive this as a fault.
Stability vs. innovation – In corporate culture in the U.S., a high value is placed on innovation and change.
Side Note 1.4.3 (Business Customs in Japan) See Hodgetts sidebar “Business
Customs in Japan.”[4, p. 96]
Do these same recommendations apply in China?
In the U.S., in general,
11 At GE (General Electric), former CEO Jack Welch famously introduced a policy in which the lowest performers (perhaps the lowest 10% or so) in the company were automatically fired.
12 In the U.S., companies are perceived to be much more focused on short-term goals than in other countries.
13 In corporate culture in the U.S., a high value is placed on innovation and change.

1.4. CULTURAL DIVERSITY

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Figure 1.10: Hodgetts Sidebar: Business Customs in Japan
• People speak frankly. It is acceptable to criticize people or bring bad news in front of others, though (as with all cultures) you must be tactful.
• People are direct. They are not ambiguous. If you say you will do something, do it. If you cannot do something, say you cannot do it.
• Business is results-oriented. People get ahead by producing, not by saying that they will produce. Even if people are personally unpleasant, if they produce, they will be rewarded.
• Relationships are important in any culture, but less so in the U.S. than in
China. This is possibly due to stricter contract enforcement, and I believe the importance of personal relationships will diminish as more people do business over the internet.
• The U.S. is called a “melting pot,” as it is a place in which people from many different cultures have assembled. In the U.S., on an individual level, cultural differences are highly valued and Americans try to be sensitive to cultural differences. However, if you do business with Americans, you will be expected to speak English.

26CHAPTER 1. INTERNATIONAL BUSINESS CULTURE AND PRACTICES

Chapter 2

International Norms in
Business Ethics and
Corporate Social
Responsibility
As multinational corporations become more prominent, they become increasingly important not only as business entities, but as leaders in the community.
This can be problematic as multinationals cross cultural boundaries. What may be perfectly acceptable to one culture may be unacceptable to another.
Side Note 2.0.4 (Conflicting Cultural Values) Cultural values may be perfectly acceptable in one part of the world but not in another.
• Married women are considered to be acting against the teachings of the Koran if they work outside the home. Furthermore, in some Islamic nations, such as Saudia Arabia, they are not allowed to drive or go out in public without covering their hair or face.
• Child labour is considered abhorrent in the U.S. and Europe but a commonly accepted practice throughout the developing world. Prison labour is also considered improper in the U.S. Note that during the industrialization of the
U.S., child labour was used.
• In some (but not all) states in the United States, it is considered acceptable to execute murderers,1 but it is considered barbaric in many countries in Europe.
1 I understand that execution is also legal in China for murder and other crimes, such as particularly eggregious instances of corruption.

27

28CHAPTER 2. INTERNATIONAL NORMS IN BUSINESS ETHICS AND CORPORATE SOCIAL RE
• Gift giving is an important part of Chinese culture. However, some forms of gift giving can make many Westerners uncomfortable as it might be viewed as a form of bribery.
– For example, as a policy, I do not accept gifts from students. While
I realize that gift giving is perceived differently in China, it makes me uncomfortable to accept gifts from students.
• Recently, Foxconn (also known as Hon Hai) has been in the news because the New York Times reported that they “forced” and “compelled” vocational student interns to work on assembly of the iPhone 5 to meet production deadlines in Zhengzhou. Foxconn replied that the student interns were free to leave at any time, that they strictly follow all Chinese labor laws and that they “recruit the students under the supervision of the local government, and the schools also assign teachers to accompany and monitor the students throughout their internship.”2
– Is this even an ethical issue?
– If it is an ethical issue, who is responsible? Foxconn? Apple? The schools whose students have been working at Foxconn?
Which brings us to the subject of this lecture: Ethics. Note that the purpose of this section is not to proscribe a certain ethical standard, but to engage in a discussion that will allow students to determine their own personal ethic based on their individual circumstances and preferences.
Definition 2.0.1 (Ethics) The study of morality and standards of conduct.
Definition 2.0.2 (Business Ethics) The accepted principles of right and wrong governing the conduct of businesspeople. [3, p. 79]
Definition 2.0.3 (Personal Ethics) The generally accepted principles of right and wrong governing the conduct of individuals.3 [2, p. 132]
Definition 2.0.4 (Ethical Strategy) A strategy, or course of action, that does not violate business ethics. [3, p. 79]
Definition 2.0.5 (Social Responsibility) The idea that businesspeople should consider the social consequences of economic actions when making business decisions, and that there should be a presumption in favor of decisions that have both good economic and social consequences. [2, p. 130]

2 See http://www.nytimes.com/2012/09/11/technology/foxconn-said-to-use-forced-student-labor-to-make-iphone
September 10, 2012.
3 Note that the term personal ethic is often used to refer to what an individual feels about what is right and wrong.

29
In our previous discussion, we focused on cultural differences in an international business setting. An understanding of cultural differences in ethics is an important part of an overall understanding of how cultural differences impact business relationships in an international setting.
Side Note 2.0.5 (The Importance of Cultural Differences to Business) Understanding cultural differences is very important for doing international business:
1. How do cultural perceptions influence international management when Easterners do business with Westerners?
• In general, it is much harder to understand the many subtle clues that someone is trustworthy when they are from another culture.
• Because of this, Western business people may not initially trust their
Chinese counterparts and Chinese business people may not initially trust their Western counterparts. This is something both Western and Chinese business people should be aware of.
2. What aspects of Western culture make it difficult for Chinese people to do business with Western people and vice versa?
• Westerners and Easterners build trust in different ways. For example,
Easterners tend to trust people after observing a pattern of consistent behavior. Westerners rely more on contracts.
• Because guanxi is practiced differently in the West, business people put less emphasis on socializing and are more comfortable doing business with others they do not know well or do not personally like. However, relationships are important everywhere.
• Westerners from different countries can be quite different. For example,
Scandinavian countries are perceived as among the least corrupt whereas other Western countries, such as Italy and Greece, are perceived as more corrupt.4 • Of course, these are all generalizations and individuals may differ significantly from their cultural affiliations.
3. Why is corruption an important business issue?
• See sidenote 2.2.2.
While many developed economies often claim a high ethical standard, scandals such as Enron, Parmalat, WorldCom, Qwest, and Tyco make it clear that even developed economies have significant ethical shortcomings.
4 The Scandinavian countries composed several of the top 10 countries perceived as least corrupt in the 2011 Transparency International Corruptions Perception Index. Source: http://cpi.transparency.org/cpi2011/results, September 16, 2012. I come from a Scandinavian background and can attest that in Scandinavia, a high value is placed on honesty and personal integrity, and those who display dishonesty or a lack of personal integrity may suffer harsh social penalties. See sidebar 2.0.5.

30CHAPTER 2. INTERNATIONAL NORMS IN BUSINESS ETHICS AND CORPORATE SOCIAL RE

2.1

Roots of Unethical Behavior

On April 14, 2001, the ten largest global (or multinational) corporations were:5
1. Exxon Mobile,
2. Wal-mart stores,
3. General Motors,
4. Ford Motors,
5. General Electric,
6. Citigroup,
7. Enron,
8. Intl. Business Machines (IBM),
9. AT&T, and
10. Verizon Communications
As of December, 2001, Enron was bankrupt. At the time, this was the largest bankruptcy in history.6
Following Enron’s bankruptcy, I worked with a former University of Chicago professor7 to review the role of Enron’s board of directors in the events leading to
Enron’s collapse. The pattern of malfeasance that I saw at Enron was common to other fraud cases I’ve worked on. It seemed to start with a modest effort to use fraudulent practices to “smooth over” a rough patch in earnings in anticipation of improved conditions in future quarters, then snowball as subsequent quarters did not produce the anticipated improvement in results and the fraudulent practices from prior quarters require additional fraud to conceal as do ongoing performance shortfalls. A related ethical issue arose when another team in my firm accepted an engagement to assist Jeff Skilling,8 the CEO of Enron, in his defense. An ethical wall was put in place to separate the teams working on each engagement.9 Would this be considered an acceptable solution to the possible conflict of interest in China?
5 Source: International Management Instructor’s Resource CD-ROM, Chapter 1 Instructor’s Manual.
6 I subsequently worked on the Lehman Brothers bankrupcy of 2008, which was also at the time the largest bankruptcy in history.
7 Bob Hamada, who was the former Dean of the University of Chicago Booth School of
Business.
8 Jeff Skilling is mentioned in Hill chapter 4 [3, p. 88].
9 An ethical wall is a process for avoiding conflicts of interest by limiting disclosure of information to certain individuals within a firm or corporation.
The limitations are intended to build a virtual wall between the holders of information at the firm who represent interests which conflict.
Also known as a Chinese wall. http://law.yourdictionary.com/ethical-wall, September 18, 2012.

2.1. ROOTS OF UNETHICAL BEHAVIOR

31

Definition 2.1.1 (Conflict of Interest) A situation in which a person’s or organization’s impartiality or obligations to a third party are limited by interests in or obligations to a second party.
For example, if a lawyer represents plaintiffs adverse to a company, but is also heavily invested in that company’s stock, that would represent a conflict of interest.
Definition 2.1.2 (Ethical Dilemma) Situations in which none of the available alternatives seems ethically acceptable.
Side Note 2.1.1 (Ethical Dilemmas) I’ve faced a variety of ethical dilemmas in my career, as do many people, including
• When laying off employees, I have had to choose between employees who are more technically competent and those who are less technically competent but rely on their jobs to support their families.
Hill cites five factors which can influence ethical behavior [3, pp. 85–88]:10
1. Personal Ethics – Personal ethics can sometimes conflict with professional ethics, especially with managers working abroad in multinational firms. This can be exacerbated by both geographic and psychological distance from one’s home country and the fact that sometimes it is difficult to do business while maintaining a personal ethic in an environment that does not share the same ethics. 2. Decision-making Processes – Business managers can make decisions based purely on business objectives, and sometimes do not consider the ethical implications of their actions.
3. Organizational Culture – Reflects the values and norms that employees of an organization share. The values reflected by the leadership in a company can impact the values of the firm as a whole.
• The book cites Kenneth Lay’s excesses, including the enrichment of family members through his relationship with Enron, as an example. [2,
p. 135]
• Do you consider it ethically improper for a CEO to favor his or her own family when conducting business for his or her company?
4. Unrealistic Performance Expectations – Pressure to meet unrealistic performance goals can lead to cutting corners or acting in an unethical manner.
• Hill cites Jeff Skilling, who put a performance system in place that resulted in 15 percent of employees being weeded out every six months.
This resulted in energy traders who engaged in unethical practices, such as falsifying their performance. [3, p. 88]
10 See

Figure 4.1 [3, pp. 86].

32CHAPTER 2. INTERNATIONAL NORMS IN BUSINESS ETHICS AND CORPORATE SOCIAL RE
5. Leadership – Leaders tend to establish the culture of an organization and provide .
• The book again cites Kenneth Lay as an example. While he often cited
Enron’s code of ethics, he clearly did not follow it himself. [2, p. 135]
Side Note 2.1.2 (Example: Ethics at Navigant) Every professional at Navigant is required to agree to and sign a code of conduct which defines the ethical standards that the company expects its employees to maintain. The firm takes the standards very seriously, and people who violate those ethics can face serious consequences.
In addition, every professional is required to take an online instructional course on the Foreign Corrupt Practices Act (FCPA) and pass a test on the provisions of the
Act.
As a consulting firm that is entrusted with proprietary information and data from some of the most prominent firms in the world, both clients and government regulators and courts with whom we work must trust that we maintain the highest level of professional integrity in all of our dealings.

2.2

Ethical Decision Making

Hill proposes that there are five things that an international business and its managers should focus on when considering business decisions with ethical implications
[3, pp. 94–98]:
• Hiring and Promotion – Businesses should strive to hire people with a strong sense of personal ethics and employees should find out as much as they can about the ethical climate of a prospective employer.
– See Hill Table 4.1 [3, p. 95] for a list of questions an employee might want to consider when seeking employment.
• Organizational Culture and Leadership – Consider whether the leadership of an organization and the organizational culture promote ethical behavior.
– Does the business promulgate a code of ethics? Does it promote the behaviors proscribed by the code of ethics?
– Do the leaders in the company actively make decisions that reflect the company’s ethical position?
• Decision-making Processes – Business people should be able to think through the ethical implications of decisions in a systematic way. Experts on ethics have proposed three questions which business people should consider asking themselves when confronting an ethical choice, with the ethical choice being that to which the answer to each question is “yes”:

2.2. ETHICAL DECISION MAKING

33

– Does my decision fall within the accepted values or standards that typically apply in the organizational environment (as articulated in a code of ethics or some other corporate statement)?
– Am I willing to see the decision communicated to all stakeholders affected by it – for example, by having it reported in newspapers or on television?
– Would the people with whom I have a significant personal relationship, such as family members, friends, or even managers in other businesses, approve of the decision?
• Ethics Officers – Some firms have ethics officers which audit decisions.11
• Moral Courage – Companies should promote standards that permit employees to exercise moral courage, which may result in a manager walking away from a profitable but unethical deal.12
Side Note 2.2.1 (Example: Navigant’s Code of Ethics) Navigant’s Code of Ethics includes sections detailing expected ethical conduct by employees regarding
1. Compliance with laws, rules, and regulations, including the FCPA
2. Prohibition against insider trading
3. Corporate conflicts of interest
4. Fair dealing13
5. Protection and proper use of company assets
6. Public company reporting and internal controls
7. Reporting of illegal and unethical behavior14
For more information, see the Navigant Consulting Code of Business Standards and
Ethics.15
11 Navigant asks employees to report possible ethical violations to General Counsel, the Vice
President and Controller (who is also the leader of Navigan’t Disclosure and Internal Controls
Assessment Team), or the Board of Directors. The company has also set up a telephone number or web site employees can use to report possible ethical violations.
12 Navigant’s policy states that no employee will be penalized for making a good-faith report of violations of this Code or other possible illegal or unethical conduct, nor will we tolerate retaliation of any kind against anyone who makes a good-faith report.
13 Navigant’s policy on fair dealing states that each employee, officer and Director must endeavor to deal fairly and in good faith with the Companys clients, suppliers, competitors, shareholders and employees. No employee, officer or Director shall take unfair advantage of anyone through manipulation, concealment, abuse of privileged or confidential information, misrepresentation of material facts or any other unfair dealing practices.
14 See the note above regarding Navigan’t reporting policy and Moral Courage..
15 The text of Navigant’s Code of Business Standards and Ethics can be round at http://www.navigant.com/about nci/corporate governance/code of business standards and ethics as of September 12, 2012.

34CHAPTER 2. INTERNATIONAL NORMS IN BUSINESS ETHICS AND CORPORATE SOCIAL RE
Note that this is just one example of a corporate code of ethics in the United States.
Codes of ethics may differ depending on a variety of factors, including the industry in which a firm operates.
Personally, I have found that a strong sense of personal ethics has been helpful in my career. I believe that it has benefitted me because
• Conducting business in an ethical manner helps to establish trust.
– Note that ethical decision-making often involves short-term sacrifices but can have long-term career benefits.
– Even if clients may sometimes pressure you to make unethical decisions, most will actually respect your choice if you make an ethical decision.
– Other businesspeople often pay more attention to your actions than your words. • A personal ethic simplifies decision-making.
– If you are confident about your personal ethic and consistent in your decisions, not only does it make your decision-making simpler, but other people with whom you do business know what to expect and have greater confidence that you will act in the way that they will expect you to act.
• Ethical decision-making contributes to overall social welfare.
– Generally speaking, although there are instances in which corruption can improve efficiency, corruption results in a decrease in social welfare.
– Although most of us only contribute in small part to the overall social welfare, you can feel good about acting in an ethical manner because it improves overall social welfare.
Side Note 2.2.2 (Corruption and Efficiency) Corruption is of concern for business people because
• It increases risk.
– In the wake of Enron, WorldCom, and Tyco, investors in the United
States had to reevaluate the risk associated with owning stock.
– If business leaders cannot count on other business leaders and public officials to act in a fair and consistent way, they must factor additional uncertainty into their calculations.
• It increases the cost of doing business.
– A bribe is a business expense that goes to no productive purpose and decreases profits.

2.2. ETHICAL DECISION MAKING

35

– Executives who steal from their company do so at the expense of profits which would be realized by shareholders.
– Corporate corruption in the United States has increased costs in the form of additional regulation and monitoring, such as the SarbanesOxley (SOX) Act, which requires strict monitoring and verification of financial information.
• On a macroeconomic level, it is simply inefficient.
– Resources are diverted from more productive uses (such as building buildings) to less productive uses (such as conspicuous consumption by corrupt officials or business leaders).
• However, economists have noted that in some situations, corruption can actually be efficiency enhancing.
– For example, if a bribe is paid to circumvent economically inefficient regulations, and the cost of the regulation is greater than the amount of the bribe, overall economic efficiency may actually be increased.
There has been considerable research devoted in economics to the question of the impact of corruption on economic efficiency. Although there are situations in which corruption can actually improve efficiency, economists generally believe that corruption decreases social welfare through a decrease in both the level and growth of economic activity.16
In general, this conclusion seems consistent with the fact that corruption generally seems correlated with a lower level of economic activity and growth.
While the United States has introduced legislation to try to address corporate corruption, the additional regulation has resulted in increased compliance costs for U.S. firms. Side Note 2.2.3 (Sarbanes-Oxley Act (SOX)) As a result of Enron, the SarbanesOxley Act (SOX) was passed in the U.S. in 2002 that set standards for corporate boards, management, and accounting firms. Among other things, it specified rigorous reporting requirements for corporate financial statements and requiring the
CEO and CFO to approve and declare accurate public financial statements. Criminal penalties if the CEO and CFO sign statements later found to be false or misleading.
These regulations can impose significant costs (in the form of reporting burdens) on multinational firms operating in the United States. There is currently debate as to the effectiveness of the regulations relative to the costs.
16 See, for example, Ma del Mar Salinas-Jimnez and Javier Salinas-Jimnez, “Corruption, efficiency and productivity in OECD countries,” Journal of Policy Modeling,
Vol.
29 No.
6, 2007, pp.
903-915.
The text of the article can be found at http://www.sciencedirect.com/science/article/pii/S0161893807000889, September 16,
2012.

36CHAPTER 2. INTERNATIONAL NORMS IN BUSINESS ETHICS AND CORPORATE SOCIAL RE

2.3

Corruption and the FCPA

In 1977, the United States passed the Foreign Corrupt Practices Act (FCPA) in an attempt to stop American MNCs from perpetuating corruption in foreign governments and to improve the image of American businesses abroad [4, p. 43]17
Side Note 2.3.1 (Foreign Corrupt Practices Act (FCPA)) The Foreign Corrupt
Practices Act was enacted in 1977 to make it unlawful for American businesspeople, corporations, and foreign issuers of securities in the U.S. to make payments to foreign government officials to obtain or retain business. According to the U.S. Department of Justice, “[s]pecifically, the anti-bribery provisions of the FCPA prohibit the willful use of the mails or any means of instrumentality of interstate commerce corruptly in furtherance of any offer, payment, promise to pay, or authorization of the payment of money or anything of value to any person, while knowing that all or a portion of such money or thing of value will be offered, given or promised, directly or indirectly, to a foreign official to influence the foreign official in his or her official capacity, induce the foreign official to do or omit to do an act in violation of his or her lawful duty, or to secure any improper advantage in order to assist in obtaining or retaining business for or with, or directing business to, any person.”18
The FCPA also requires companies whose securities are listed in the United States to meet its accounting provisions. These provisions require that corporations
• Keep books that accurately and fairly reflect the transactions of the corporation and
• Maintain an adequate system of internal accounting controls.
Amendments to the FCPA passed in 1998 extended the anti-bribery provisions of the FCPA to foreign firms and persons “who cause, directly or through agents, an act in furtherance of such a corrupt payment to take place within the territory of the United States.”19
Hodgetts et al. note that while U.S. firms are constrained by the FCPA with regards to bribery and other corrupt practices,20 U.S. MNCs do not appear to have
17 The FCPA was passed as a result of the Watergate investigation, during which questionable payments made by U.S. corporations to foreign public officials were uncovered. The
Watergate investigation, which led to one of the biggest scandals in U.S. history, was an investigation by the Washington Post, a prominant newspaper in Washington, D.C., which tied illegal activity to the President of the United States, Richard Nixon. Reporting by the Washington Post and other U.S. newspapers, including the New York Times and Time Magazine, led to Richard Nixon’s resignation, the only time a President has been forced to resign in U.S. history. [4, p. 43]
18 http://www.justice.gov/criminal/fraud/fcpa, September 14, 2012.
19 http://www.justice.gov/criminal/fraud/fcpa, September 14, 2012.
20 Hodgetts et al. note two executives for Lockheed Martin were actually fined a substantial amount of money ($20,000 and $125,000 respectively) and one was sent to jail for 18 months for bribing a member of the Egyptian parliament [4, pp. 68-69].

2.3. CORRUPTION AND THE FCPA

37

been significantly impacted, and in fact at least one study has shown that exports to “bribe prone” countries has actually increased since the passage of the act.[4, pp. 43–44,68-69]
In fact, many feel that it has had a net benefit, as it gives the U.S. firms a reason to refuse to pay bribes. [4, pp. 43–44,68-69]
A treaty called the Convention on Combating Bribery of Foreign Public Officials in International Business Transactions was recently signed by OECD (Organization of Economic Cooperation and Development) nations also outlaws bribery, but does not outlaw payments to political party leaders [2, p. 129].21 The agreement makes bribes of foreign public officials a criminal offense, but (consistent with the FCPA) it excludes facilitating payments made to expedite routine government action from the convention. Are these kinds of payments unethical?
Side Note 2.3.2 (Corruption Around the World) The United States and Europe have been rocked by corporate corruption in the last decade, with scandals such as Enron, WorldCom, Tyco, and Parmalat, the 2008 credit crisis, and the
Greek debt crisis involving the largest financial institutions in the world resulting in investors losing billions of dollars. So how corrupt are these countries?
Transparency International ranks perceptions of corruption in 183 countries or territories with its “Corruption Perceptions Index” (CPI) score, where a 10 indicates
“squeaky clean” while a 0 represents highly corrupt. It should be emphasized that the index measures the perception of corruption, not actual corruption. The index is based on “different assessments and business opinion surveys carried out by independent and reputable institutions.”22
Important: Although it is widely cited, note that the Transparency International
Corruption Perceptions Index is just that: An index of experts’ perceptions, and does not measure actual corruption.
In 2011, the United States ranked 24 out of 183, with a score of 7.1. Countries ranked at about the same level as the United States include Ireland, Belgium, Chile,
Qatar, and France.23
New Zealand tops the list with a score of 9.5, making it the country that is perceived to be the least corrupt according to Transparency International’s surveys. Four of the five Scandinavian countries are at the top of the list, with Denmark and Finland tying for number 2 with scores of 9.4, Sweden number 3 with a score of 9.3, and
Norway ranked sixth with a score of 9.0. Iceland used to lead the index along with
Finland, but since the credit crisis in 2008, and probably in part due to the problems they encountered following the credit crisis, they have dropped to number 13 with a
21 The trade and finance ministers of the OECD signed the agreement in 1997 and it went into effect in 1999. Six of the 36 countries that have signed the convention are not OECD members. 22 http://files.transparency.org/content/download/101/407/file/2011 CPI EN.pdf,
September 16, 2012.
23 http://cpi.transparency.org/cpi2011/results, September 16, 2012.

38CHAPTER 2. INTERNATIONAL NORMS IN BUSINESS ETHICS AND CORPORATE SOCIAL RE score of 8.3. Among Asian countries or territories, Singapore is ranked the highest, coming in at fifth with a score of 9.2, Hong Kong is ranked the second-highest, with a score of 8.5 placing them in twelvth place, and Japan is ranked third-highest with a score of 8.0 putting them in fourteenth place, tied with Germany.
The countries that are ranked lowest include Somalia, North Korea, Myanmar, and
Afghanistan.

2.4

Corporate Social Responsibility

Definition 2.4.1 (Corporate Social Responsibility (CSR)) The actions of a firm to benefit society beyond the requirements of the law and the direct interests of the firm. Side Note 2.4.1 (Ben & Jerry’s) Ben & Jerry’s ice cream company is considered a model of a socially responsible company in the U.S. Their mission statement reflects their social values:
Ben & Jerrys is founded on and dedicated to a sustainable corporate concept of linked prosperity. Our mission consists of 3 interrelated parts:
Social Mission: To operate the Company in a way that actively recognizes the central role that business plays in society by initiating innovative ways to improve the quality of life locally, nationally and internationally.
Product Mission: To make, distribute and sell the finest quality all natural ice cream and euphoric concoctions with a continued commitment to incorporating wholesome, natural ingredients and promoting business practices that respect the Earth and the Environment.
Economic Mission: To operate the Company on a sustainable financial basis of profitable growth, increasing value for our stakeholders and expanding opportunities for development and career growth for our employees.
Underlying the mission of Ben & Jerrys is the determination to seek new and creative ways of addressing all three parts, while holding a deep respect for individuals inside and outside the company and for the communities of which they are a part.
Other companies, such as Whole Foods, a grocery chain, give customers the opportunity to donate to charity every time they go to buy groceries (and many do) or donate a fixed percentage of their profits to charity depending on which charities are most supported by their customers.
See http://www.benjerry.com/activism/mission-statement for more details.24
24 Accessed

September 17, 2012.

2.4. CORPORATE SOCIAL RESPONSIBILITY

39

Definition 2.4.2 (Nongovernmental Organizations (NGOs)) Private, not-for-profit organizations that seek to serve society’s interest by focusing on social, political, and economic issues such as poverty, social justice, education, health, and the environment. Prominent NGOs include
• Save the Children – Provides support for the children afflicted by poverty and malnutrition • Oxfam – A confederation of charitable organizations that support the alleviation of poverty, provide relief in the event of humanitarian disasters, and promotion of social equity
• CARE – Promotes community development, such as education and health care, and emergency relief in the event of humanitarian disasters
• World Wildlife Fund (WWF) – Promotes environmental conservation and protection for endangered species
• Conservation International – Promotes environmental conservation
• Rainforest Action Network (RAN) – An organization that “campaigns for the forests, their inhabitants and the natural systems that sustain life by transforming the global marketplace through education, grassroots organizing and non-violent direct action.” Their motto is “environmentalism with teeth.”25
Both political groups and businesses are influenced by NGOs. For example, Hodgetts cites a case in which Citigroup (recall that Citigroup was one of the 10 largest MNCs in the world as of 2001) divested from certain financial projects identified by RAN as harmful to the environment.
Side Note 2.4.2 (Why Would a Company Listen to an NGO?) Why would a company take actions that could impact its profits to satisfy an NGO?
• Good press and free advertising,
• To prevent a boycott or other consumer defections,
• And, last but note least, executives may actually feel that it is the right thing to do. Executives are people, too.
– Even socially responsible executives would consider the “bottom line” when making decisions, as executives of publicly traded companies are ultimately responsible to their shareholders.
25 http://ran.org,

September 17, 2012.

40CHAPTER 2. INTERNATIONAL NORMS IN BUSINESS ETHICS AND CORPORATE SOCIAL RE

2.4.1

Response to Social Obligations

MNCs are under increasing pressure to contribute positively to communities, societies, and the environment. Commitments that many MNCs have signed on to, such as the U.N. Global Compact, specify standards and codes of conduct in domestic and global operations.
Side Note 2.4.3 (Principles of the United Nations Global Compact) The U.N.
Global Compact specifies 10 principles which MNCs should abide by [4, p. 67]:
1. Support and respect the protection of international human rights within their sphere of influence,
2. Ensure that MNCs are not complicit in human rights abuses,
3. Freedom of association and recognition of the right of collective bargaining
(i.e., the right for unions to exist),
4. Elimination of all forms of forced and compulsory labor,
5. Elimination of child labor,
6. Elimination of discrimination with respect to employment and occupation,
7. A precautionary approach to environmental challenges,
8. Undertake initiatives to promote greater environmental responsibility,
9. Encourage development and dissemination of environmentally friendly technologies, and
10. Business should work against all forms of corruption, including extortion and bribery. 2.5

2.5.1

Supplemental Material: Ethical Concerns in
Europe
Bribes and Corruption

Although most western European countries are ranked relatively highly on Transparency International’s poll of corruption (Italy, at 40, is the notable exception), with most in the top 20 among over 150 countries included in the survey, their attitudes towards bribery when working in foreign markets differs from that of the
U.S.
Hodgetts et al. cites a study in which Europeans managers who were polled were much less likely to refuse to pay a bribe (or perceive it as unethical) than their
American counterparts.

2.5. SUPPLEMENTAL MATERIAL: ETHICAL CONCERNS IN EUROPE41
Side Note 2.5.1 (Is Paying a Bribe Unethical?) Do you consider it unethical to pay a bribe if it is necessary to do business in another country?

2.5.2

Women in the Workplace in Europe

France and Germany
While legislation exists to guarantee equal treatment and equal opportunity for women in both France and Germany, men are disproportionately represented in management positions, particularly in upper management. Although women have entered the workforce in large numbers in recent decades, there seems to be a glass ceiling due to social factors.

Definition 2.5.1 (Glass Ceiling) An invisible barrier that determines the level to which a woman or other member of a demographic minority can rise in an organization. 26

Great Britain
Things are generally considered better for women in Great Britian because
• Women have been more proactive in setting up organizations in Great Britian.
• More British companies have actively sought to recruit and promote women into management.
• Discrimination lawsuits are more commonplace in Great Britian, though compensation is limited relative to lawsuits filed in the U.S.

Side Note 2.5.2 (Why Would a Company Actively Recruit and Promote Women?)
Ask the class why a company would actively recruit and promote women even if not required to do so by legislation.
One possibility is that highly qualified and talented women are being underpaid and placed in positions that underutilize their talents. Companies may be able to recruit more qualified women than men at a given wage level if they promote the company as taking a proactive stance on gender.
26 Source:

http://careerplanning.about.com/library/glossary/bldef-glassceiling.htm.

42CHAPTER 2. INTERNATIONAL NORMS IN BUSINESS ETHICS AND CORPORATE SOCIAL RE

2.6

2.6.1

Supplemental Material: Ethical Concerns in
Japan
Political and Business Scandals

Japan has been beset by both political and business scandals. Several cabinet members were forced to resign after accepting exorbitant advisory fees or improper political donations.
Moreover, the political scandals do not appear to have been fully acknowledged and addressed. Hodgetts et al. cite the example of the chief prosecutor in Tokyo who was transferred to a remote city after an investigation into exorbitant entertainment spending by private firms on public officials.
Better known is the case of Japanese banks, which was insufficiently regulated and took on too much risky debt and did not write off bad loans in a timely manner.
This resulted in several banks being technically bankrupt [4, p. 58].
Side Note 2.6.1 (The U.S. Savings and Loan Scandal) The issue somewhat resembles the Savings and Loan scandal in the U.S.. Savings and loan institutions, also known as thrifts and which function like banks, were not as highly regulated as banks, and as a result made high risk investments in the late 1980s and early 1990s.
This resulted in the failure of 1043 institutions between 1986-1995 with losses estimated between $100 billion and $500 billion. The government was compelled to provide public money to bail out the institutions. 27

2.6.2

Women in the Workplace

Sexual harassment has also become an issue in Japan. This is exacerbated by the fact that
• There is a discrepancy in perceptions of gender in Japan, with many men of the opinion that working women are just biding their time until they marry and have children,
• Many men do not understand why sexual harassment constitutes a problem,
• Prosecuting these kinds of issues can be expensive and time consuming and may not ultimately result in a significant financial penalty.
Likewise, women have a difficult time being taken seriously, with many women finding their employment opportunities constrained.
27 Source:

http://www.fdic.gov/bank/analytical/banking/2000dec/brv13n2 2.pdf.

2.6. SUPPLEMENTAL MATERIAL: ETHICAL CONCERNS IN JAPAN 43
Side Note 2.6.2 (Sexual Harassment in the United States) Behavior considered socially acceptable elsewhere in the world may not be considered socially or legally acceptable in the United States. Furthermore, sexual harassment lawsuits result in significant penalties (e.g., in the millions of dollars) to those who are successfully prosecuted. It is considered a very serious issue, and for most public institutions and many large corporations, considerable attention and training is given employees to inform them what is acceptable and unacceptable in the workplace.
Hodgetts et al. cite two cases in which foreign firms operating in the U.S. have paid substantial penalties as a result of sexual harassment or discrimination based on race, gender, or other issues.
Definition 2.6.1 (Sexual Harassment) The definition of sexual harassment given by the United States Equal Employment Opportunity Commission is as follows:28
Unwelcome verbal, visual or physical conduct of a sexual nature that’s severe or pervasive and affects working conditions or creates a hostile work environment.
This definition has been further elaborated. Sexual harassment can occur in a variety of circumstances, including but not limited to the following:
• The victim as well as the harasser may be a woman or a man. The victim does not have to be of the opposite sex.
• The harasser can be the victim’s supervisor, an agent of the employer, a supervisor in another area, a co-worker, or a non-employee.
• The victim does not have to be the person harassed but could be anyone affected by the offensive conduct.
• Unlawful sexual harassment may occur without economic injury to or discharge of the victim.
• The harasser’s conduct must be unwelcome.

2.6.3

Lobbying by Japan

Japan spends more money lobbying in the U.S. than any other. Many people who are paid significant sums to lobby for Japan and Japanese firms are former highranking U.S. politicians.
Definition 2.6.2 (Lobbying) To address or solicit members of a legislative body in the lobby or elsewhere, with the purpose to influence their votes; in an extended sense, to try to influence decision-makers in any circumstance.29
28 Source: http://labor-employment-law.lawyers.com/sexual-harassment/Defining-Sexual-Harassment.html,
September 2, 2012.
29 Source: http://www.dict.org, September 2, 2012.

44CHAPTER 2. INTERNATIONAL NORMS IN BUSINESS ETHICS AND CORPORATE SOCIAL RE
Note that lobbyists do not have any formal power. They only have the power of persuasion. Side Note 2.6.3 (Is this Ethical?) Do you consider it ethical for a former politician to charge high fees to lobby their former colleagues?

Chapter 3

Introduction to Negotiation
3.1

Introduction

Negotiation is a topic that is relevant to everyone, regardless of your career path or position in life. It is something that everyone does every day. We will begin with a definition that demonstrates the broad nature of what we term negotiation [5, p. 3]:
Definition 3.1.1 (Negotiation) Negotiation is an interpersonal decision-making process necessary whenever we cannot achieve our objectives single-handedly.
Negotiations can range from the simple to the very complex, depending on the amount of detail that needs to be considered to the number of parties that are negotiating. While there has been much literature on negotiation, you will find it to be mostly common sense. I can boil it down into three principles based on my own personal experience. Most of what we learn in class will be a refinement of these principles:
1. Do your homework - Doing your homework takes time. It takes time to prepare yourself for any important negotiation, and you must make the effort to understand the situation you are in.
2. Know your opponent - You must also consider how you appear to an opponent.
You can be your own worst enemy. Constantly evaluate and critique your own performance. 3. Follow the money - Do the math and run the numbers. Know both your own and your opponent’s incentives.
There are a variety of reasons that negotiating skills are more important than ever before: 45

46

CHAPTER 3. INTRODUCTION TO NEGOTIATION
• The dynamic nature of business - The speed of business is increasing dramatically, and at least in the U.S., where employees could once count on working for a single employer for their entire career, now many workers (e.g., high-tech workers) can count on working for half a dozen or a dozen employers over the course of their career.
• Interdependence - With the increasing ease of communication, interaction between people, both laterally and heirarchically, is increasing dramatically.
• Competition - Business is becoming increasingly competitive. Consider consolidation in the tech industry, or bankruptcies in the airline industry. In addition, globalization means that you are no longer competing with the company next door.
• Information age - Technology is becoming increasingly important, compressing the amount of time and changing the arena in which negotiations must take place (consider e-mail and fax versus snail mail) and increasing the amount of information available to negotiators.
• Globalization - Business managers more often negotiate with people from different cultures. In this class, after covering the basics of negotiation, I will focus on cross-cultural negotiation.

3.2

Common Failures of Negotiators

Most people who feel they are good negotiators are not actually good negotiators.
In a strictly controlled study performed by Leigh L. Thompson, less than 4% of managers tested actually negotiated optimally. 20% performed poorly. Many of those tested who performed poorly did not realize they had performed poorly after the negotiations had concluded.
There are four failures that experts cite as most common for negotiators:
• Leaving money on the table - a.k.a. a “lose-lose negotiation.” Negotiators fail to notice and exploit situations that leave all parties in the negotiation better off.
• Settling for too little - a.k.a. “the winner’s curse.” Negotiators often make too-large concessions.
• Walking away from the table - The table refers to the negotiating table.
Sometimes due to pride or miscalculation, negotiators often reject good offers.
• Settling for terms worse than the best alternative - a.k.a. “agreement bias.”
Often negotiators come to terms too soon; i.e., when a better alternative is available. 3.3. NEGOTIATION MYTHS

47

Definition 3.2.1 (The Winner’s Curse) If the other side accepts your opening offer, you probably did not ask for enough. This is known as the winner’s curse.
The reasons for these shortcomings are:
• Faulty feedback - Most people do not solicit or obtain accurate, immediate, and specific feedback during and after a negotiation to evaluate their own effectiveness. This is due to
– Confirmation bias - The tendency for people to see what they want to see when evaluating their own performance.
– Egocentrism - A tendency for people to view their experiences in a way that is flattering to themselves.
• Satisficing - The opposite to optimizing.1 Don’t settle for too little. When the opposite side gives you the terms you initially ask for, chances are you’ve asked for too little.
• Self-reinforcing Incompetence - In studies, students who score lowest on exams believe that they scored much higher before getting their exam results back.
Those who perform most poorly often do not critique their own performance effectively. 3.3

Negotiation Myths

There are many misconceptions regarding negotiation. You must be aware of these misconceptions so that you do not fall victim to them.
• Negotiations are fixed sum - A fixed sum game is one in which one player’s gain is the other’s loss. One negotiator’s gain is not always the other’s loss.
As we will discuss in some detail, the best negotiation results in both parties coming away with more than they intended. When negotiating, seek creative solutions that expand the pie rather than divide the pie.
• Negotiators need to be tough or soft - Leigh L. Thompson “vehemently disagrees” that the effective negotiator is either tough (which may result in walking away from the table) or soft (which may result in settling for terms less than the best alternative). Rather, the effective negotiator is somewhere in the middle.
• Good negotiators are born - Some people are naturally gifted. But most good negotiators are the product of a disciplined approach, practice, and good feedback. 1 Satisficing means pursuing a course of action satisfies the minimum requirements to achieve a goal.

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CHAPTER 3. INTRODUCTION TO NEGOTIATION
• Experience is a great teacher - Memories tend to be selective. Experience is important, but it must be combined with training.
• Good negotiators take risks - Good negotiators evaluate uncertainty accurately and take appropriate actions based on the uncertainty.
• Good negotiators rely on intuition - Good negotiators are deliberate planners.
What seems like intuition often comes from proper preparation.

3.4

Preparing to Negotiate

The goal in negotiation is typically to produce an “integrative” or “win-win” negotiation. We will begin looking at win-win agreements by defining what they aren’t.
• Compromise - A win-win negotiation may not entail compromise by either party. Rather, the goal is to increase the size of the pie rather than find a middle ground.
• Even split - As with compromise, an even split does not mean that a win-win negotiation has been found.
• Feeling good - Many people who come away from negotiations feeling satisfied or happy about the negotiation have left money on the table. Rely on your training and analysis skills, not your gut feelings.
• Building a relationship - Studies indicate that those most interested in building a relationship with the other party often fail to reach an integrative agreement.
Do not use building a relationship as an excuse for poor negotiation results.
Side Note 3.4.1 (Example: Even Split Not Being Optimal) For example, the juice/rind split of an orange may be the best outcome. If one party needs to rind2 for a recipe and another party would like a glass of orange juice, dividing the orange by splittig it in half is not the optimal outcome.3 This is just a simple example, but the principle is broadly applicable.
Side Note 3.4.2 (Example: Feeling Good Not Being an Optimal Outcome)
When playing poker, you may feel good after you win a hand. But if you have not played optimally, such as by not raising as much as you should have or by betting more than the odds would justify, professional poker players would conclude that you lost money.
Definition 3.4.1 (Integrative Negotiations) When all creative opportunities are exploited and no resources are left on the table, we call it an integrative negotiation.
Integrative negotiations are also called win-win negotiations.
2 The
3 See,

rind is the skin of the orange and is often used as a flavoring in cooking.
e.g., [5, p. 70].

3.4. PREPARING TO NEGOTIATE

49

We will focus on Leigh L. Thompson’s model of negotiation in this class. Dr.
Thompson proposes a model for negotiation that emphasizes three components of preparation: • Self-assessment
• Assessment of the other party
• Assessment of the situation

3.4.1

Self-assessment

The first thing to ask yourself is “What do I want?” and “What are the alternatives?” Poor negotiators often go into negotiations unclear on what they want or what the full range of alternatives are.
What Do I Want?
You must identify a target point (sometimes called an aspiration point ), which is your goal in the negotiation. There are three commen problems with identifying the target point:
• The underaspiring negotiator sets his target point too low. This is known as the winner’s curse. Example negotiating with Trackvia.
• The overaspiring negotiator sets his target point too high. A common failing for negotiators who want to appear tough. Failing to make concessions, these negotiators often reject superior offers and may later have to capitulate to later inferior offers.
• The grass-is-greener negotiator. Also known as reactive devaluation. The negotiator’s target point should not be impacted by who they are negotiating with. What is My Alternative to Reaching Agreement?
Perhaps the most important step in self-assessment. Determine at what point you are prepared to walk away from the table. Surprisingly, most negotiators fail to consider this before negotiations begin.
Definition 3.4.2 (BATNA) Best Alternative to a Negotiated Agreement.
There are two important points to keep in mind about a BATNA:

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CHAPTER 3. INTRODUCTION TO NEGOTIATION
• BATNA is not a passive concept - For example, when negotiating with two parties, your BATNA for one party is often impacted by the last offer made by the other.
• Do not let the other party manipulate your BATNA - Savvy negotiators try to influence other’s perceptions of their BATNA. You should listen least to those with the incentive to affect your BATNA. If you feel that the other party brings information that impacts your BATNA, take a time-out to carefully reevaluate your BATNA objectively.

Once you have determined your BATNA, you are in a good position to determine your reservation point.
Definition 3.4.3 (Reservation Point) A reservation point is the quantification (in terms of dollars and other relevant quantifiable numbers) of a negotiator’s BATNA.
Steps to determining your reservation point:
1. Brainstorm alternatives - When considering whether to rent a house, renting may be an alternative.
2. Evaluate each alternative
3. Attempt to improve your BATNA - Do your homework on each alternative.
Contact several vendors. What is the best you can expect to obtain from each alternative?
4. Determine your reservation price - Based on your alternatives, calculate your reservation price. Write it down!
See figure 3.1, taken from [5, pp. 17–19], for a more sophisticated example of the determination of a reservation point.
There are a variety of caveats to keep in mind when determining your BATNA.
• Focal points - Often irrelevant information forms focal points that impact your evaluation of your BATNA. The amount of money your friends make or the expectations of your parents should not impact your BATNA in a salary negotiation. • Beware of sunk costs - Sunk costs should not impact your reservation point.
For example, the amount of money you paid for a home should not impact the price you are willing to accept for your home.
• Do not confuse your target point for your reservation point - Do not let your target point form a focal point for your reservation point.

3.4. PREPARING TO NEGOTIATE

Figure 3.1: Thompson Box 2–1: Developing a Reservation Point

51

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CHAPTER 3. INTRODUCTION TO NEGOTIATION
• Identify the issues in the negotiation - In a salary negotiation, your salary is not your only negotiating point.
• For each issue, identify alternatives - For example, there may be several kinds of financing options when buying a car
• Identify equivalent packages or offers - How much additional vacation is equivalent to how much salary? If you do not take this step, you risk being a positional negotiator.
• Assess your risk propensity - Understanding and evaluating the value of risk is essential for a good negotiator. We’ll go into more detail on this below.
• Endowment effects - Your valuation of an object should not be influenced by who owns (or is endowed with) the object.
• Am I going to regret this? - Engage in counterfactual thinking
• Violations of the “sure thing principle” - If you will make the same decision regardless of the outcome of some uncertain future event, then do not let that uncertainty impact your decision-making.
• Do I have an appropriate level of confidence - In the same vein as the caution against being too tough or too soft, you do not want to be overconfident or underconfident. Most people in third-party arbitrations believe a priori that the arbitrator will decide in their favor. Note, however, that studies have shown that negotiators who are overconfident about the value of the other party’s BATNA perform better.

Definition 3.4.4 (Sure Thing Principle) One of the basic axioms of the theory of rational decision making under uncertainty is the sure thing principal, which states that if alternative X is preferred to Y in the condition that some event, A, occurs, and if X is also preferred to Y in the condition that some event, A, does not occur, then X should be preferred to Y , even when it is not known whether A will occur.4
[5, p. 27] In other words, if you prefer X to Y regardless of the outcome of A, then
A should not affect rational decision-making.
Definition 3.4.5 (Positional Negotiator) A negotiator that determines a set of terms in a negotiation and does not budge from those terms.
Definition 3.4.6 (Counterfactual Thinking) Thinking about all the actions the other party might take and the possible outcomes of a negotiation before the negotiations begin.
Side Note 3.4.3 (What are Issues in Salary Negotiations Other than Salary?)
What issues can you identify other than salary in negotiating for a job?
4 See,

e.g., Savage, L.J. (1954). The Foundations of Statistics. New York: Wiley.

3.4. PREPARING TO NEGOTIATE

53

• Vacation time,
• Travel time,
• Job responsibilities,
• Annual bonus,
• Stock options,
• Terms, such as vesting, for pension or other retirement benefits
• Possible severance if layoffs occur.

3.4.2

Sizing Up the Other Party

It is as important to understand the other party’s motivations and incentives as it is to understand your own.
There are several important pieces of information to assemble:
• Who are the other parties? - Often the most important decision-makers are not at the negotiating table. Identify the decision makers. In diplomatic negotiations, the treaties may ultimately need to be approved by parties other than the negotiators at the negotiating table.
• Are the parties monolithic? - Does everyone sitting across the bargaining table have the same set of goals and incentives?
• Issue mix - After taking the time to identify the issues that are important to you, perform the same exercise to identify the issues you imagine the other side will have.
• Other’s interests and positions - Do your homework and research others’ interests and positions.
• Other negotiators’ BATNAs - When you initially try to estimate your opponents’ BATNAs, you will likely find that you do not have enough information.
Before the negotiation is the time to perform that research.
Definition 3.4.7 (Hidden Table) Decision-makers who are not at the negotiating table. 54

CHAPTER 3. INTRODUCTION TO NEGOTIATION

3.4.3

Situation Assessment

Perhaps the most preparation time will be spent assessing the situation. Before beginning any negotiation, assess the following:
• Is the negotiation one-shot, long term, or repetitive? - Most negotiations are not one-shot affairs. Both the negotiators’ reputations and future profits are on the line. In long-term relationships or repetitive negotiations, trust becomes much more important.
• Do the negotiations involve scarce resources, ideologies, or both? - Two major types of conflicts are
– Consensus conflict - Do one party’s beliefs or opinions differ with another’s in a way that makes them incompatible? The Israeli-Palistinian conflict is a prime example.
– Scarce resource competition - If scarce resources are at issue, each party may want to come away with a bigger share than the other.
• Is the negotiation one of necessity or opportunity? - If several things are being negotiated, focus on those that are necessary.
• Is the negotiation an exchange or dispute situation? - Be clear on whether exchanging resources or resolving a dispute.
• Are linkage effects present? - Does the outcome of the negotiation affect issues not being negotiated? For example, a company negotiating a merger should pay attention to the incentives that must be offered to key employees after the merger to ensure a smooth transition.
• Is agreement required? - If an agreement cannot be reached at the present time, present negotiations may set the stage for later negotiations.
• Is it legal to negotiate? - In many countries, selling kidneys is legal. In the
United States, it is illegal to negotiate the selling of human organs.
• Is ratification required? - While you may reach an agreement with the parties with whom you are negotiating, often times before such an agreement takes effect, another party must ratify the agreement. Many political negotiations have this characteristic. On the other hand, one side may tell the other the agreement may need to be ratified for strategic reasons when it actually does not. It gives them an excuse to reconsider the agreement. The car salesman who states that he needs his manager’s approval is a key example.
• Are time constraints or other time-related costs involved? - Keep in mind a deadline for one negotiator is also a deadline for another. Also be careful to distinguish time-related costs from deadlines.

3.4. PREPARING TO NEGOTIATE

55

• Are contracts official or unofficial? - In the U.S., negotiations often conclude with a handshake between parties that trust each other. (In the old west, the parties would typically spit in their hands.) In Japan, the equivalent involves the two parties taking tea together. However, be sure that your approach is consistent with the other party’s approach.
• Where do negotiations take place? - Often times, the belief in the “home court advantage” is so strong that parties want to meet in a neutral location.
This is often particularly important in political negotiations.
• Are negotiations public or private? - Be aware that your opponent may use the court of public opinion to sway the outcome of a negotiation. Know beforehand whether the negotiations will be public or private.
• Is third-party intervention a possiblity? - In many cases, impasses in the negotiation may result in the use of arbitration or mediation. Be aware if this is a possibility. We will discuss this in more detail later.
• What conventions guide the process? - In the U.S., the prospective buyer of a home customarily makes the first offer. This is particulary important in a cross-cultural context.
• Do negotiations involve more than one offer? - Negotiating for a home in the
U.S. may be a time-consuming process involving many offers. However, if too much time is spent and too many offers are made in a salary negotiation, the employer will often take this as an indicator of a lack of interest or integrity and retract its offer. Moreover, stating “this is my final offer” can be embarrassing if the other party does not view the statement as credible.
• Do negotiators communicate explicitly or tacitly? - We will cover this in more detail later in the semester.
• Is a power differential a factor between parties? - When you are negotiating with your boss for salary, you are negotiatinig with someone who clearly exercises power over you. However, you should also recognize that your actions have a significant amount of bearing on his or her career.
• Is precedent important? - Negotiators often cite precedent as a way of cutting off negotiations. Some are often wary of setting a precedent with the results of a negotiation.
Side Note 3.4.4 (Time Constraints and Time-Related Costs) What are some examples of time constraints and time-related costs?
• Time Constraints
– In many of the merger and acquisition matters I participated in, the
U.S. Department of Justice, Federal Communications Commission, and other bodies maintained strict timetables to ensure fairness and reduce uncertainty during the process.

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CHAPTER 3. INTRODUCTION TO NEGOTIATION
– Often times, one business arrangement depends on the timely completion of another. For example, a refinery may only have capacity for a limited time based on other contracts, so negotiating the delivery of the crude oil to the refinery may involve a binding time constraint.
• Time-Related Costs
– If negotiations are underway for products that are perishable, obviously time constraints may come into play.
– If unutilized real estate is being sold, the mortgage or other payments must be paid until the sale is closed.
– If negotiating for parts necessary for a factory to operate, late delivery may result in costs involved with keeping a factory idle.

Side Note 3.4.5 (Public Versus Private Negotiations) In what situations would a public negotiation be advantageous? Private?
• In almost all negotiations in a business setting, privacy is preferred to avoid communicating information to competitors or with other parties with whom negotiations are taking place.
• In negotiations with public bodies, taxpayers in the U.S. often expect to be informed regarding the actions of those negotiating on their behalf.
• In intense conflict situations (e.g., the Israeli-Palestinian conflict) privacy may be crucial. Neither party wants to appear weak, but may be more willing to negotiate in good faith in a private setting.
• In negotiations with extreme public interest, often times one party or the other will try to influence the outcome of the negotiations by influencing public opinion. Negotiations with sports organizations is a typical example.
I will end the discussion of preparing for negotiations by giving one final, personal recommendation. Write it down. Whether on a piece of paper, spreadsheet, or back of an envelope, write down your calculations, important research and strategies when you prepare.
See figure 3.2, taken from [5, p. 39], for a summary of the kinds of questions you should ask (and resolve) to prepare for a negotiation.

3.4. PREPARING TO NEGOTIATE

57

Figure 3.2: Thompson Table 2–1: Presentation Worksheet for Negotiations

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CHAPTER 3. INTRODUCTION TO NEGOTIATION

Chapter 4

Special Topic: Resolving
Disputes in International
Business
In this chapter, we will discuss dispute resolution with an emphasis on cross-cultural negotiation techniques.1 This topic is both deep and nuanced, and this brief exposition should be considered only a cursory introduction. For more detail, see
Negotiating Globally by Jeanne M. Brett [1].
Why do disputes arise in a business setting? Disputes arise from claims that are rejected and can be generally traced back to one of several different kinds of conflict that we will focus on:
• Task conflict,
• Procedural conflict, and
• Interpersonal conflict.
Definition 4.0.8 (Dispute) Where conflict is a perception of differences, a dispute is a rejected complaint.
Definition 4.0.9 (Task Conflict) Disputes over goals and resources.
Definition 4.0.10 (Procedural Conflict) Disputes over means, including the dispute resolution process itself.
Definition 4.0.11 (Interpersonal Conflict) Disputes over personal characteristics and issues, such as the honor and self-respect of the disputants.
1 Detail

in this chapter was taken primarily from chapter 3 of [1].

59

60CHAPTER 4. SPECIAL TOPIC: RESOLVING DISPUTES IN INTERNATIONAL BUSINESS

4.1

How Claims are Made and Rejected

The way that claims are rejected and the underlying interests behind disputes can be based on a variety of factors influenced by culture. For example, generally speaking, in many Western cultures, people expect to resolve disputes directly whereas in many other Asian cultures, disputes tend to be resolved more indirectly.
When working in multicultural environments, we need to employ techniques that can resolve disputes whether they are direct or indirect and that focus the dispute on the parties’ interests.
We will examine three ways to resolve disputes based on:
• Interests,
• Rights, and
• Power.
Side Note 4.1.1 (Brett Exhibit 3.11) See figure 4.1 [1, p. 109]: Concentric circles with “Interests” in the interior circle, and, leading outward, “Rights” and
“Power.”
This indicates that “[n]egotiations focused on the reconciliation of interests occur within the context of who is right and wrong” and “[n]egotiations focused on the determination of who is right and who is wrong occur within the context of who is more powerful.”

Definition 4.1.1 (Interests) The needs and concerns underlying parties’ positions on the issues, e.g., in a dispute.
Interests are the reasons that claims are rejected.
Definition 4.1.2 (Rights) Rights are standards of fairness, contract, law, or precedent.
Definition 4.1.3 (Power) Power is your ability to get what you want from a dispute – to have your claim granted or rejection upheld.
Power is also a measure of dependence. The more dependent you are, the less powerful you are.
When selecting a focus (either interests, rights, or power), you should have a clear strategic reason for doing so.

4.2. INTERESTS AND CULTURE

61

Figure 4.1: Brett Exhibit 3.11: Use of Attacks in the Summer Interns Study

4.2

Interests and Culture

Culturally, interests are impacted by the degree of self-interest promoted by a culture.
• In collectivist cultures, group interests often take precedence over individual self-interests. • In individualist cultures, self-interests often take precedence over group interests.
• While cultural differences may give rise to opportunities to trade off differences in interests, more often they simply result in frustration and misunderstanding.
Keep in mind that when dealing with someone from a different cultural orientation,
• Try to frame the discussion of interests in a way that appeals to their cultural interpretation of interests. For example,
– If you are from a collectivist culture negotiating with an individualist, when communicating your interests, it would be advisable to communicate the importance of relationships and harmony within the group in terms of your own individual risks and rewards.

62CHAPTER 4. SPECIAL TOPIC: RESOLVING DISPUTES IN INTERNATIONAL BUSINESS

Figure 4.2: Brett Exhibit 3.1: Positions and Interests Chart
– If you are from an individualist culture, you should incorporate collective interests as well as individual interests in your positions and interests assessments. For example, prepare a positions and interests chart like figure 4.2 [1, p. 85].
• Culture impacts the priorities of interests and hence of the outcome of a negotiation. For example,
– Culture affects self-interest versus collective interests
∗ Do not underestimate the importance of self-interest if you are negotiating from a collectivist culture or the importance of collective interest if negotiating from an individualist culture.
• Cultural differences can affect the means by which you may want to elicit interests from parties with whom you are negotiating.
– “Why? ” is the primary question for eliciting interests when negotiating with people from cultures that favor direct communication.
– If you are negotiating with someone from an indirect culture, make proposals to uncover their interests.
• When interests are well-understood, more creative agreements can be designed than simple trade-off agreements.
Ultimately, knowledge of culture is often critical to understanding interests in a cross-cultural dispute resolution.

4.3. RIGHTS AND CULTURE

63

For example, in individualist cultures negotiating with disputants from collectivist cultures, those from the individualist cultures underestimate the importance of concerns for the collective.
Often, managers in collectivist cultures are more like union leaders or political leaders2 than business managers in the United States.

4.3

Rights and Culture

There are two primary problems with rights-based dispute resolution.
1. Different cultures have different standards, and there are many different potentially relevant rights standards, and
2. Imposing a rights standard on a dispute generates a distributive (rather than integrative) outcome. Note that
• Different standards generate different distributions, and
• What one side wins, the other loses. People resist negotiating losses.
• Because rights-based standards are only likely to be proposed by those it benefits, they are often perceived to be self-serving, are suspect, and are generally discounted.
A rights-based argument implies a distributive argument. If the other party was prepared to give you what you are demanding with the rights-based argument, you wouldn’t need the rights-based arguments.
In addition, most negotiators tend to reciprocate rights arguments with rights arguments, so it is the kind of action that escalates a situation.
There are three times you may want to use a rights-based arguments.
1. When you thnk you have a rights standard that the other party has not considered and will force the other party to come to an agreement.
2. When you have a rights standard the other party will perceive as fair and will also benefit you.
3. To make it clear that if a dispute cannot be resolved, a third party will be used to resolve it based on a particular rights standard.
Although integrative agreements are preferred, when using a rights-based standard, it is recommended that
2 Particularly in that their office depends more on their ability to deliver value to their group. 64CHAPTER 4. SPECIAL TOPIC: RESOLVING DISPUTES IN INTERNATIONAL BUSINESS
• Either propose something that you know the other side will consider fair, or
• Provide credible new information that makes the proposed standard appear fair. Without new information, the argument is unlikely to be effective.

4.4

Power and Culture

Although power-based arguments are common, they are difficult to use effectively because figuring out who is more powerful is often difficult.
Power-based arguments are often more difficult in a cross-cultural setting because perceptions of power are strongly influenced by culture.
Side Note 4.4.1 (Linked BATNAs) In deal-making negotiations, BATNAs are not usually linked. If no agreement is reached, the parties can walk away from the table and receive their BATNAs.
However, in dispute resolution negotiations, they are more commonly linked. This means that instead of thinking about the best alternative if no agreement is reached, you should consider the worst thing the other party can do to you.
This gives rise to the concepts of LATNA (see definition 4.4.1) and WATNA (see definition 4.4.2).
Definition 4.4.1 (LATNA) Least (desirable) alternative to a negotiated agreement. A concept more germane to dispute resolution negotiations, in which one party can cause the other harm if no agreement is reached, than to deal-making negotiations, in which failure to reach agreement typically means each party receives their BATNA.
Definition 4.4.2 (WATNA) Worst alternative to a negotiated agreement. Also known as a LATNA (definition 4.4.1).
Definition 4.4.3 (Attack) In a dispute resolution setting, an attack is defined as an uncooperative, accusatory, or disapproving statement.
Definition 4.4.4 (Threat) In a dispute resolution setting, a threat is defined as an ultimatum, attempt to intimidate, or suggestion of negative consequences.
Threats are very strong statements that entail a clear communication of power. In high-context, hierarchical cultures with a high power distance, such as Japan, where the use of power and threats in negotiation is more common, it is more difficult to immediately determine whether a threat can be discounted or taken seriously.

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Figure 4.3: Brett Exhibit 3.8: Use of Attacks in the Summer Interns Study
Figures 4.3 through 4.5 detail a study in which U.S., Japanese, and German negotiators were tested and evaluated based on their use of attacks, threats, and allusions to others who were in a position of power.
In hierarchical cultures,
• When power is uncertain, disputants are more likely to talk about power.
– In figure 4.3 [1, p. 102], Japanese are more likely to engage in attacks
(see definition 4.4.3).
• Disputants are more likely to engage in threats.
– In figure 4.4 [1, p. 102], Japanese were more likely (see definition 4.4.4) than U.S. or German managers to use threats.
• Disputants are more likely to involve a boss or another high-level manager.
– In figure 4.5 [1, p. 103], Japanese negotiators were more likely than U.S. or German managers to allude to powerful people.3
– In egalitarian cultures, this might be viewed as power grabbing, which carries a negative connotation.
Strategically, using power in a dispute can be effective in limited situations.
3 Jeanne Brett notes that in a similar study with Hong Kong Chinese and U.S. managers,
Hong Kong Chinese were more likely than U.S. managers to involve upper management in the dispute [1, p. 101].

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Figure 4.4: Brett Exhibit 3.9: Use of Threats in the Summer Interns Study

Figure 4.5: Brett Exhibit 3.10: Allusions to Powerful People in the Summer
Interns Study

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• When you need to bring the other party to the table.
– Note, however, that this kind of use of power often incurs costs.
• When negotiations have broken down, you need to bring the other party back to the table, and other means have failed.
– When your BATNA is poor and you cannot get the other party to the table, the use of power may be justifiable.
Side Note 4.4.2 (Threats) In general, threats should only be used if the person making them is willing to act on them. If you make a threat and cannot follow through, you will lose face and credibility.
In the U.S., threats are immediately either [1, pp. 112–113]
• Discounted as a negotiating ploy or
• Taken seriously.
Also, in the U.S., threats are generally timed to fall at two points in the negotiation.
• At the beginning of a negotiation, when the disputants are trying to gain dominance, and
• In the middle of the negotiation, when the disputants are trying to claim distributive gains.

4.5
4.5.1

Procedures for Resolving Disputes
Changing the Focus of Disputes

While most dispute negotiations will involve some degree of rights or power statements, as with all negotiations, turning the focus to interests will make a successful, integrative negotiation more likely.
Interests are particularly important when the bargaining range is very small. In this case, focusing on interests may be the only way to resolve the dispute.
In order to change the focus from rights or power to interests, [1, p. 115]
• Do not reciprocate – This significantly increases the likelihood that the other party will discontinue rights- or power-based arguments. Sometimes you must refuse to reciprocate several times before the other party’s behavior will change.

68CHAPTER 4. SPECIAL TOPIC: RESOLVING DISPUTES IN INTERNATIONAL BUSINESS
• Declare the process ineffective – Turn the conversation to changing the process with a statement like, “Let’s agree to disagree and just move on.”
• Combine reciprocity with a change of focus – This is common with U.S. negotiators.4 Respond to a rights- or power-based argument with your own, then offer a change of focus to interests. In negotiation studies of U.S. negotiators, this was found to be roughly as effective as the “do not reciprocate” strategy.

4.5.2

Dealing with Emotions

Some negotiators become emotional during disputes, others simply use emotion strategically during negotiations.
Culturally, people from individualist cultures are more likely to use emotions, and in particular, tantrums, strategically. In collectivist cultures, a focus on saving face and group harmony limits the effectiveness of tantrums. [1, p. 110]
Definition 4.5.1 (Tantrum) Emotional outburst. For example, children are said to “throw a tantrum” when they scream or cry to get their parents to acquiesce to demands. Using tantrums strategically can have several drawbacks.
• It is emotionally draining for both the person having the outburst and those who have to deal with them.
• In a cross-cultural setting, it is often difficult to guage the impact that your tantrum will have.
• It is more difficult to avoid interaction with emotional negotiators when BATNAs are linked, as in dispute negotiations and people often react to repeated outbursts by simply saying no regardless of the merit of the other’s claim.
Generally speaking, it is unproductive to make concessions to those who experience an emotional outburst. Alternatively, [1, pp. 115–116]
• Do not reciprocate with your own emotional outburst – Refusing to respond does not make you appear weak. It makes you appear more in control. Focus on bringing them onto your playing field, where emotional outbursts are not a productive way to negotiate.
• Do not take an emotional outburst personally – It’s business. Focus on the reasons the other party may have for making their emotional outburst. This will take your emotional focus off of the outburst itself.
4 In

fact, I find that I do this roughly as often as the “do not reciprocate” strategy.

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• Deescalate and refocus on interests – Use any of the above suggestions to shift the focus on interests.
• Consider putting the party’s behavior on the table – Tell them that you think the emotional behavior is unhelpful to the negotiations and ask what can be done5 to reduce the tension.
• Try apologizing for the other party’s emotional state – If anything, this will diffuse the situation. However, you should be sincere in your apology. “I’m sorry you feel the need to be unreasonable” does not cut it.
• Call for a cooling-off period – Take a break. This will also give you time to think. • Suggest involving a third party – Third parties are useful for buffering emotions.

5 Other

than unreasonable concessions, of course!

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Bibliography
[1] Jeanne M. Brett. Negotiating Globally. John Wiley & Sons, Inc., San Francisco,
California, 2001.
[2] Charles W. L. Hill. International Business: Competing in the Global Marketplace.
McGraw-Hill Companies, Inc., New York, New York, 7th edition, 2009.
[3] Charles W. L. Hill. International Business: Competing in the Global Marketplace.
McGraw-Hill Companies, Inc., Beijing, China, 7th edition, 2009.
[4] Fred Luthans Richard M. Hodgetts and Jonathan Doh. International Management: Culture, Strategy, and Behavior. McGraw-Hill Companies, Inc., New
York, New York, 6th edition, 2006.
[5] Leigh L. Thompson. The Mind and Heart of the Negotiator. Prentice Hall,
Upper Saddle River, New Jersey, 2005.

71

Bibliography: [1] Jeanne M. Brett. Negotiating Globally. John Wiley & Sons, Inc., San Francisco, California, 2001. McGraw-Hill Companies, Inc., New York, New York, 7th edition, 2009. McGraw-Hill Companies, Inc., Beijing, China, 7th edition, 2009. [4] Fred Luthans Richard M. Hodgetts and Jonathan Doh. International Management: Culture, Strategy, and Behavior. McGraw-Hill Companies, Inc., New York, New York, 6th edition, 2006. [5] Leigh L. Thompson. The Mind and Heart of the Negotiator. Prentice Hall, Upper Saddle River, New Jersey, 2005.