Coping with Corruption in Trading with China

Case Study

Coping with Corruption in Trading with China

Course Code: 525

Global and International Marketing

Prepared for,

Tahmina Khanam

Assistant Professor

Strategic and International Management (SIM)

Department of Management

University of Dhaka

Prepared by,

Md. Azim-Ul-Islam

ID: 325

Strategic and International Management (SIM)

Department of Management

University of Dhaka

Date of Submission: 24^th January, 2017

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Q-1: List all the different types of bribes, payments, or favors represented in this case under (a) FCPA, (b) Criminal Law of PRC, and (c) Law against Unfair Competition of the PRC. Why is each either legal or illegal?

Answer:

A.    List of all the different types of bribes, payments, or favors represented in this case under FCPA

Types of bribes, payments or favors	Legal/ Illegal	Reasoning
MNC paid for US apartment, car, university education and expenses for the child of Chinese officials.	Illegal	US regulation strictly forbids any kinds of unfair  payments for US companies to their host countries’ officials
A US firm paid a Chinese consultant more than $1m including gifts, hotels, shopping sprees and entertainment costs. They arranged a travel for two Chinese banking officials with their family members to Asia, Europe and America and beard all the cost for this informal tour.	Illegal	US regulation strictly forbids any kinds of unfair  payments for US companies to their host countries’ officials

B.     List of all the different types of bribes, payments, or favors represented in this case under Criminal Law of PRC

Types of bribes, payments or favors	Legal/ Illegal	Reasoning
Foreign trader offered Chinese bank official for overseas tour.	Illegal	It’s a favor given to Chinese officials to win a business deal which violates PRC’s Criminal Law
A Japanese firm invited Chinese CIB officials to Japan.	Illegal	The trips offer to CIB officials violates Criminal Law of PRC. Because it was done to avoid inspection.
A US firm paid a Chinese consultant more than $1m including gifts, hotels, shopping sprees and entertainment costs. They arranged a travel for two Chinese banking officials with their family members to Asia, Europe and America and beard all the cost for this informal tour.	Illegal	This is also a violation of PRC’s criminal law as it includes payment and other favors given to Chinese officials to win a business deal.

C.     List of all the different types of bribes, payments, or favors represented in this case under Law against Unfair Competition of the PRC

Types of bribes, payments or favors	Legal/ Illegal	Reasoning
Trader paid kickbacks to officials at a PRC foreign trade corporation.	Illegal	Violates the law against unfair competition as foreign traders paid kickbacks in order to sale their products.
MNC paid for US apartment, car, university education and expenses for the child of Chinese officials.	Illegal	As MNCs giving bribes and favors to Chinese trading officials it violates the anti-unfair competition law of PRC.

D.    No Violation

Types of bribes, payments or favors	Legal/ Illegal	Reasoning
A US firm refused to pay kickbacks in demand of Chinese official.	Legal	The company didn’t comply with unfair request by Chinese officials.

Q-2: For those practices that you listed as illegal, classify each as lubrication, extortion, or subornation, and explain your reasoning.

Answer:

Lists of Practices	Classification	Reasoning
MNC paid for US apartment, car, university education and expenses for the child of Chinese officials.	Subornation & extortion	Some MNCs are asked to pay for overseas education of the Chinese official’s children.
A US firm paid a Chinese consultant more than $1m including gifts, hotels, shopping sprees and entertainment costs. They arranged a travel for two Chinese banking officials with their family members to Asia, Europe and America and beard all the cost for this informal tour.	Lubrication & subornation	A US company facilitated a software contract by providing bribes and favors to Chinese government officials.
Foreign trader offered Chinese bank official for overseas tour.	Lubrication	The bank branch refused to issue letter of credit primarily but they   issued the letter of credit after the overseas tour offers.
A Japanese firm invited Chinese CIB officials to Japan.	Lubrication & subornation	The Japanese company offered this trip to avoid inspection of their product in China.
Trader paid kickbacks to officials at a PRC foreign trade corporation.	Extortion	Traders were asked to pay an specific percentage of kickbacks to do business in China.

Q-3: Which of the payments, favors, or bribes are illegal under the Foreign Corrupt Practices Act (FCPA)?

Answer:

According to Foreign Corrupt Practices Act (FCPA-1977) it is illegal for companies to pay bribes to foreign officials, candidates, or political parties. Penalties can be assessed against company officials, directors, employees, or agents found guilty or paying a bribe or of knowingly participating in or authorizing the payment of a bribe.

However, there are exceptions which, says payment can be made only for the purpose to facilitate routine governmental action of host countries. 

The payments, favors, or bribes are illegal under the Foreign Corrupt Practices Act (FCPA) are-

·         MNCs’ payment for US apartment, car, university education and expenses for the child of Chinese officials.

·         A US firm paid a Chinese consultant more than $1m including gifts, hotels, shopping sprees and entertainment costs.

·         They arranged a travel for two Chinese banking officials with their family members to Asia, Europe and America and beard all the cost for this informal tour

Q-4: Assuming that the FCPA did not exist, what is the ethical response to each of the payments, favors, or bribes you have identified?

Answer:

There are three ethical principles which provide a framework to help a marketer to distinguish between right or wrong in case of markets where these terms are not defined by laws. Which are-

Utilitarian Ethics- Does the action optimize the common good or benefits of all constituencies? Who are the pertinent constituencies?

Rights of the Parties- Does the action respect the rights of the individuals involved?

Justice of Fairness- Does the action respects the canons of justices or fairness to all parties involved?

In this case there is a dilemma. Agreeing with foreign corrupt officials will be unethical because it benefits only a few rather common people. Because MNCs add these costs to the selling price of the product. So ultimately common people have to pay the money and a few Chinese officials enjoy the facilities.  On the other hand disagreeing will lead to limitationof scope  for doing business in China.

General ethical response to these payments will be not to involve in these deals. A more conclusive response to solicitude the problem can be making a counter offer that the amount of money asked by Chinese officials will be paid in form of CSR activities and making the offer publicly as much as possible.

Q-5: In your view, which of the expenses detailed in the lawsuit could be in violation of the FCPA, and which could be legitimate business expenses as the American Company contends?.Discuss.

Answer:

Expenses that could be in violation:

·         Giving expensive gifts

·         Paying for hotels

·         Entertainment costs

·         Sony Camera

·         Luxury outfits

·         Vacations unrelated to business

·         Funding of daughter’s European trip or son’s tennis & golf membership

The Expenses listed above are unjustifiable and unrelated to any business activities.

Legitimate business expenses:

·         Giving fees to Chinese consultant

·         Corporate jet (for business trips)

·         Apartment in Shanghai for business purposes (perhaps company member need to stay in the city or can be used as a place to entertain foreign officials)

·          

Q-6: Discuss the legal/ethical issues raised by the comments by the retired Foreign Service Agent and the consultant.

Answer:

A US Foreign Service agent raised question about how strictly US Foreign Corrupt Practice Act is imposed. He raised a legal issue that, all American firms doing business in china will lose its business if they follow US FCPA act. So he indirectly says that to do business in corrupt practicing economies a firm has to focus on acting ethically rather than acting legally. Ethical practices are those which do not harm common goods.

Q-7: List alternatives to paying bribes in international markets and discuss the plusses and minuses of each.

Answer:

Alternative 1: Stay out of the deals where corrupt practices are in act

Pluses: 

a.       Protecting Company’s reputation.

b.      Remaining clear to regulatory authority

c.       Escape from future difficulties

Minuses:

a.       Losing business deals.

b.      Losing competition.

c.       Bypassing opportunities.

Alternative 2: Proposing counter offer and paying by legal means.

Pluses:

a.       Improving brand value

b.      Escaping corruption

c.       Building customer loyalty

Minuses:

a.       Increasing costs

b.      Potential disagreements etc.

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What is negotiation? Discuss common characteristics of all negotiation situations. Describe the situations in which avoiding negotiation is a better solution.

Negotiation

People get involved in negotiation all the time either knowing it or not knowing it.  They negotiate with other for coming to a decision, for settling dispute, for reaching an agreement and so on. They also negotiate with themselves about what to do next, where to go, what to eat etc. So the term negotiation is not a process, which needs to be done only by the executives or the important people or the lawyers.

The term negotiation can be defined as a win –win situation in which both the parties are trying to find a mutually acceptable solution to a complex conflict. This is a win-win situation because unlike bargaining in a negotiation both the parties ensure their gain by the agreement.

For example, when we go to a shop to purchase a personal PC salesman offers us a price then we counter offer a lower price. If the salesman agrees to that price he gives us the product or else he offers us another price which is closer to our offer and lower than previous one. The example is describing an interactive negotiation situation.

Common Characteristics of All Negotiation Situations

Authors from different books and articles have argued about some common characteristics of all negotiation situations, which are-

1.      Two or More Parties:  In a negotiation there are two or more individual, group or organization involved. Although people can negotiate with themselves, these are not noticeable by others so it is not considered as a negotiation.

2.      Conflict of Needs and Desires between Parties: People try to reach an agreement because there are conflict among their needs and desires. Without a conflict negotiation doesn’t take place.

3.      Parties Negotiate by Choice: Negotiation is a voluntary process, means in a negotiation parties negotiate by choice. If a party is forced by other party then it will not be termed as a negotiation rather we will describe the situation as there was no scope for negotiation.

4.      Give and Take Process: It’s a fundamental aspect of a negotiation situation. When we involve in a negotiation, we expect and accept that some give and take will be needed for the agreement. For example-when employers and candidates negotiate for recruitment, employers give money as remuneration to the employee in response they take working hours and effort of the employee. On the other hand employees give their efforts and take money as salaries.

5.      Intention for Negotiating: In a negotiation parties should have the intention for the negotiation and reaching out an agreement to a complex or conflicting situation rather than fight with each other. Negotiation occurs when the parties prefer to invent their own solution for resolving the conflict, when there is no fixed or established set for rules and procedures for how to resolve the conflict.

6.      Tangible and Intangible Factors: Successful negotiation involves management of tangible and intangible factors. Some tangible factors are ,

                               I.            The need to win, beat the other party or avoid losing to the party.

                            II.            The need to look good, competent or tough to the people one represent.

                         III.            The need to defend an important principle or precedent in a negotiation.

                         IV.            The need to appear fair or honorable or to protect one’s reputation.

Intangible factors are rooted in person’s values and emotion. It is necessary to stay cool for a successful negotiation but we find that people come with the baggage of values, attitudes and personal habits which effect the negotiation in great deal. 

Situations in Which Negotiation should be Avoided

Every situation doesn’t require negotiation. Sometimes it is a better strategy to avoid negotiation. Such situations are described below:

1.      Issue is Trivial: Negotiation process requires a lot of efforts, planning, and time. So if an issue is trivial or not significant enough to bring the sufficient return it is better to avoid negotiation. So it needs to be measured primarily that for what we are negotiating, what we can get from the negotiation, does the outcome really worth the whole negotiation process.

2.      Potential Dysfunctional Effect of confronting the other Party Outweighs the Benefits of Resolution: Sometimes other party holds strong position in negotiation. Thus it may be risky that negotiating may irritate other party and they can cancel the deal which will effect negatively to the situation. For example, in an interview between the recruiter and candidate demanding a specific amount of salary may motivate employer not to give you the job. This situation occurs when other party has a good BATNA (Better Alternative to a Negotiation Agreement).

3.      Cooling off Period is needed: Suppose you want to negotiate with your boss for increasing your salary or about a promotion. But your boss is currently very busy with a project or he is angry because employees could not give a good output to this month. So it is not a good situation to raise the issue about a salary increment or promotion. It is better to wait for the change of mood of your boss. So situation analysis is important before entering into a negotiation.