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Chapter SixStakeholders:

Their Concerns and Actions

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Chapter ObjectivesTo comprehend the concept of stakeholders and

their importance to companies’ operationsTo understand the stakeholder interests for

restricting or enhancing companies’ abilities to trade internationally

To learn about the different means countries use to restrict companies’ international trade

To conceive why countries encourage, prohibit, and regulate foreign direct investment

To recognize how conflicting stakeholders improve their positions to affect companies’ international operations

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Introduction Stakeholders: individuals and groups that benefit from

or are harmed by organizational actions• Stakeholders in business organizations include stockholders,

employees, customers, suppliers, and society at large

The international company must be aware of the various interests of stakeholders and serve them unevenly at any given period

Companies are stakeholders in society and act as pressure groups to governmental and international organizations whose actions can benefit or harm them

In a sense, countries are stakeholders representing the combined interests of their national stakeholders within international forums

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Introduction

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Trade RestrictionsIn general, governments influence trade to satisfy

economic, social, or political objectives

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Trade RestrictionsEvery country has full employment as one of its primary

economic and social objectives• A country may retaliate against another’s import restrictions by

imposing import restrictions of its own

• Even without retaliation, import restrictions may limit employment in related industries

• Import restrictions also cause consumers to pay higher prices and to have less choice, which may also reduce employment because they buy less

Because the trade account is a major component of the balance of payments for most countries, governments restrict trade to bring imports and exports into balance• Trade restrictions differ from other means of balance-of-

payments adjustments (deflation of the economy or currency devaluation) because of their greater selectivity

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Trade Restrictions Certain economic theories promote import restrictions to gain

economic growth by developing new industries with growth potential and by diversifying the economy through a broader industrial base• Import substitution policy: entices companies to initiate

production within the protected economy • Infant industry argument: government should guarantee an

emerging industry a large share of its domestic market until the industry becomes sufficient enough to compete against imports

Most emerging economies depend on commodities such as agricultural products and raw materials • Many emerging economies want to broaden their industrial

bases so that they are more dependent on manufactured products and less dependent on commodities

Terms of trade: the quantity of imports that a given quantity of exports can buy • The terms of trade have been deteriorating for many emerging

economies

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Trade RestrictionsSome companies and industries argue for the same

access to foreign markets that their foreign competitors have to their own markets

Arguments against the fairness doctrine include:• Countries gain advantages from freer trade and thus

restrictions may deny their own consumers lower prices

• Implementation of restrictions based on fairness requires government negotiate and enforce separate agreements for each of the products and services they might import and with each country that might export them

• Restriction of imports from countries with lax environmental and labor standards may make those countries poorer

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Trade Restrictions Much governmental trade protection is based not on economics, but

rather on political or cultural imperatives Governments sometimes restrict exports, even to friendly countries,

so that strategic goods will not fall into the hands of potential enemies

To protect their common identity, countries sometimes limit the availability of foreign products and services that might undermine this identity

There is a near consensus that governments should prohibit sales of products that are hazardous to people’s health or the environment

Governments use trade restrictions to coerce other governments to follow certain actions• Sanctions

They have the most impact when large or multiple countries impose them because they more deeply affect a sanctioned country

Sanctions seldom work successfully Companies from countries imposing sanctions can lose

business

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Forms of Trade Restrictions Trade restrictions are of four types: tariffs, quotas,

bureaucratic practices, and subsidies

• Tariff: a tax on goods moving internationally; also known as dutyAd valorem tariff: tariff on the percentage of

the value of the goods moving internationallySpecific tariff: per-unit basisCompound tariff: combination of ad valorem

and specific tariffsOptimum tariff: revenues shift from the

exporting to the importing country through income loss in the exporting country and tax collection gain in the importing country

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Forms of Trade RestrictionsImport tariffs are protectionist because governments assess

the tax only on foreign-made products or servicesExport tariffs are rare because governments fear the tax

will raise export prices and limit their companies’ ability to sell abroad

Tariffs also serve as a source of governmental revenue

• Quotas: quantitative limits on the maximum amount of product a country will trade in a given yearGovernments place quotas most commonly on importsGovernments usually use export quotas to increase foreign

prices or decrease domestic pricesEmbargo: a specific type of quota that prohibits all trade

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Forms of Trade Restrictions• Governments establish bureaucratic practices

ostensibly for reasons other than protection, however the practices often restrict imports from foreign countriesTesting standards: to protect the safety or health of

residentsGovernmental permissionGovernmental regulationsStandards for licensing

• Government subsidies may be direct or indirectGovernments may reduce its imports by enabling its

domestic companies to survive competitionGovernments may increase its exports by making its

companies competitive in foreign markets

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Influence on Foreign Direct Investment

Given the costs and benefits of receiving FDI, most countries allow FDI entry and even promote it• Emerging economies are depending more on MNEs

(multinational enterprises) to bring resources they need from abroad when they make foreign direct investments

• Countries can offer a variety of incentives to companies so they will invest there

• Tax postponement Generally, companies prefer to establish investments in highly

developed countries because of the large markets and a high degree of stability

Countries largely want FDI because of the potential positive effects on economic objectives of growth, employment, and balance of payments

Governments worry, however, that foreign investors merely displace what domestic companies would have otherwise done and are concerned that the long-term effects of FDI will be negative

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Influence on Foreign Direct Investment

In countries in which investors are headquartered, stakeholders have raised concerns about the possible loss of domestic jobs when companies invest abroad and the possible loss of future domestic competitiveness when companies transfer technologies abroad that might make foreign production more competitive in the future

Closely related to the question of job loss is the question of whether foreign investors’ outsourcing of production puts downward pressure on wages in their home countries

The sheer size of many foreign investors concerns stakeholders in the countries in which they do business• Extraterritoriality: the extension of a country’s laws beyond

its borders• Host-country stakeholders worry that MNEs will meddle in

local politics so that they get regulations favorable to their interests

• Key industries: those industries that might affect a very large segment of the economy or population by virtue of their size or influence

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Improving Stakeholder PositionsOne method of improving stakeholder positions is to

build allies:• The most likely allies are other stakeholders whose positions

are affected the same way

• Enlist the support of other groups that have different but complimentary stakes in the outcome

• Companies may lobby governmental decision makers, particularly those within their home countries

• Companies may survey stakeholders to determine opinions that might lead to pressure on managerial decisions

• Companies may foster local participation in their operations to reduce the image of foreignness and to develop local proponents whose personal objectives may be fulfilled by their continued success