Globalization
School of
Donough.
n (Wood-
Case Study
University
phen E
Global Profits, Global Headaches
MARK BAKER LAURA HARTMAN . BILL SHAWI
New York
product
Consumo
adle
Darden
5), and
Darden
N is a Fort Worth-based Nevada corporation that manufactures and
Harper-
Politics
fets textiles. It is a publicly traded firm whose name, for over 50
a been synonymous with men and women's work clothes. The last two
indes brought great changes to the textile industry. Among other things,
Hor costs have been on a steep incline. In K-PAN's North Carolina and
taas plants, costs were squeezing profits to the point that K-PAN's board
maded to follow its competitors overseas. Over a three year period, K-PAN
ed out its domestic operations with a generous re-training and re-
siement program for former employees in need of help; built a $28 mil-
wate-of-the-art plant in Nicaragua (with $20.5 million in bonds placed by
ng and purchased its remaining needs through local agents in Pakistan
i Indonesia.
ahor market conditions, labor laws, producer constraints and environmen-
Cost advantages of this globalization effort reflect international differences
wage rates, fewer effective labor unions, less effective labor laws, fewer
restrictions. A typical developing country has higher unemployment levels,
haver constraints, and lower environmental standards. In short, many
is can be produced at a much lower cost in developing countries than in
countries. By keeping production costs low, sweatshops provide a
desveloping countries. Increased exports bring jobs for the domestic econ-
and hard currency for international purchases. As a consequence, the de
wants called "Hangins," put a welcomed spike in its earnings, but also
The worldwide
Sice President for Academic Affairs at De Paul University. Bill Shaw is Woodson Cen-
Professor in Business Administration, University of Texas-Austin. Copyright © 1999.
Wak Baker is Associate Professor, University of Texas-Austin; Laura Hartman is the As-
popularity of one or Panis articles of clothing, a pair
565
and by permi
566 .
lobalization • 567
PART 5 CONTEMPORARY BUSINESS THEMES
operate
growing
hours
to work long
shops.
focused public attention on the corporation. In doing so, the company
came under closer scrutiny, not only from the financial markets, but also
from those whose avowed purpose was to monitor MNE's to assure confor-
mance with modern ethical principals.
The adverse publicity that had stunned Nike, The Gaps and Kathy
Lee, 4 amongst others
, began to haunt K-PAN with a vengeance. Ft. Worth res
idents, supported by a vocal group of former K-PAN employees and the
Amalgamated Textile Workers Union, assailed the firm via informational
picketing and through the media. In addition to a number of stories in the
local media, a group of radical citizens, calling themselves Terrorists Against
Multinational Suppressors created and circulated adverse e-mails, some of
which had no basis in truth. After some inquiry it became apparent that
K-PAN's "model" plant in Nicaragua exhibited a number of shortcomings
traditionally associated with “sweatshops” (long hours, low pay, environmen-
tal, health, and safety problems). None of these concerns violated the laws
of their host country and, in many ways, the plant greatly exceeded local
minimum standards in all areas.
However, the negative publicity generated by its Central American op-
erations paled in comparison to the outcry that stemmed from its link with
sweatshops in Southeast Asia. Its purchases through local agents in Pak-
istan and Indonesia allegedly contributed to the perpetuation of atrocious
working conditions and poor economic situation in those countries. This
predicament was similar to that suffered by Nike in connection with its In-
donesian suppliers. A study of Nike workers in Indonesia found that currency
devaluation compounded the problems of low wages.
While workers producing Nike shoes were low-paid before their currency, the
rupiah, began plummeting in late 1997, the dollar value of their wages has
dropped from $2.47/day in 1997 to 80 cents/day in 1998. Meanwhile, the prices
of basic goods have sky-rocketed. Workers reported that they had received a 15
percent pay raise earlier this year, meaning that their base salary had increased
from about Rp. 175,000 per month (approximately $17) to about Rp. 200,000
per month (approximately $20). However, they estimated that their cost of liv-
ing had gone up anywhere from 100 to 300 percent. ... We found that the cost
for a single male worker is $33.20/month and $35/month for a female worker.
The base pay for Nike workers, however, is $20/month-not enough to fulfill
the basic needs for one worker, much less a family.5
K-PAN's insistence that it owned and operated no facilities in those
countries couldn't begin to ward off attacks on its corporate policy. K-PAN's
internal code of conduct, entitled “K-PAN Ethics," has been in place since
1980 and was patterned after codes of prominent MNE's. Each employee is
given a copy of the code, asked to sign it, and subjected to a test on its prin-
ciples. The central focus of its code had been untouched since it was care-
fully crafted by K-PAN's founder, Mr. W, as he was widely known. K-PAN
ETHICS speaks of a "living wage," "shareholder satisfaction," "community
responsibility," and "customer confidence"; these components of the code
were met satisfactorily (or at least, they were un-protested) since their
inception.
Members of the marketing team came up with the following background
information regarding labor conditions in developing economies. Sweatshops
are a product of the industrial revolution. Creative entrepreneurs realized
rofits if they could find low-cost Valves to
the new machines. The workers were found when new agricultural
that they could
practices and the closure of the commons created provided factory owners a
urban-based pool of workers that could no longer grow what they
under unhealthy conditions for very low pay.
Though business owners were quick to figure out how to keep labor
were slow in finding a term to define the owners
The term "sweater" began to be used in the mid-1800s to describe an
shop came into use in the late nineteenth century to characterize subcore
employer that paid workers very low wages for monotonous works "Sweate
tracting systems where profit margins were increased by sweating the
workers---requiring employees to work long hours for very little pay. The
words sweating and sweatshop crossed the Atlantic as American employers
adopted British labor practices. 8
The Encyclopedia Britannica defines the term sweatshop based on a set
of employment practices: “a workplace in which workers are employed for
Several organizations define sweatshops based on compliance with national
labor law. According to the U.S. General Accounting Office, a place of work
with "an employer that violates more than one federal or state labor, indus-
trial homework, occupational safety and health, workers' compensation, or
industry registration law” is a sweatshop.10 Other groups add to compliance
and Textile Employees define sweatshop as a place of employment with sys
the concept of labor rights. The AFL-CIO Union of Needletrades, Industrial
tematic violation of one or more fundamental workers rights that have been
codified in international and U.S. law."ll Some would say that a variety of
sub-standard labor practices needs to be present before a place of employ-
ment can be called a sweatshop. Others, such as the Interfaith Center on
Corporate Responsibility, require only a single questionable practice:
"(though]
a factory may be clean, well-organized and harassment free
, un-
less its workers are paid a sustainable living wage, it's still a sweatshop."12
The word sweatshop is emotive and carries prejudicial connotations. The
undercurrent of invoked prejudicial emotions makes it difficult to engage in
open, multi-party collaboration to improve working conditions in develop
ing economies. In an effort to deal with these issues, the K-PAN Board of
Directors called a special meeting.
"If we forego profits to raise working conditions in the developing
world," remarked one board member, "we're just going to have to reduce
our purchases and that's going to cost jobs. Who'll be better off Yeah, and
our customers won't be happy with the higher prices either. They could
ers for this to happen," said another. "I really wish all companies worldwide
switch to Levis or Wranglers. It wouldn't be fair to our shareholders or work-
had to adhere to the same rules; that way we'd all be on a level playing field.
I wonder if such a set of rules or a proposal exists."
Manuel Smith, a longtime employee who had worked his way up from
plan designed to keep costs low but to also return profits to every employee
the minimum wage in each country and split the
of the
company. "Let's pay
profits with the employees." He liked the incentives this offered.
on of
color, reminded her colleagues that “good social work is good business, and
the pers
a policy of helping workers in developing countries will encourage enlight-
ened consumers to do business with K-PAN, thereby increasing sales; help-
ing costs stay low and maintaining our profits.” Her suggestion was to
all employees at the plant 150% of the local minimum wage, let the world
know of the good deed, and require all suppliers to sign and adhere to
K-PAN Ethics. Manuel echoed the sentiment of the group when he said,
"she's so young and naïve; consumers only care about the bottom line!”
Recognizing that some middle ground must be sought, Professor Dick-
inson, boyhood pal of the founder and the most recently elected board
member, referred members to his recent speech on the topic that included
the following remarks:
Economic growth requires market expansion and market expansion depends on
growing product demand. A developing country's export sector is the most
likely source of market expansion since its domestic markets will likely not ex-
pand until the general economy becomes robust. The International Labor Or-
ganization found that the most successful economies have been "those who best
exploited emerging opportunities in the global economy. An export-oriented
policy is vital in countries that are starting on the industrialization path and
have large surpluses of cheap labor.”13
Whether wages are low, working hours are long, or working conditions
are hazardous and unhealthy, the decision to accept employment by a
worker in an MNE is not forced slavery but instead made by the employee. 14
[I]f the choice is between (meeting] subsistence needs and ſhaving] 'decent
work hours, the work days will be very long. Or if the choice is between child
labor on the family farm or a smaller harvest, children will work long and hard
in the fields. 15
Workers wouldn't accept employment if other jobs were more attractive.
Research by Sargent and Matthews supports the economists' conclusion.
After conducting more than fifty interviews with workers in maquiladoras in
Mexico, the researchers found that there was no evidence that workers
found their present jobs less attractive than other jobs in that economy.16
It is not that economists are against better working conditions per se. But
they are extremely concerned about the manner in which improvements are
sought. According to the neoclassicists, improved working conditions will
not come from government controls that restrict child labor, raise minimum
wage, improve health and safety conditions, allow unionizing, or protect em-
ployee rights. At best, governmental controls will improve the working con-
ditions for only a few workers; however, workers in the export industries and
throughout the rest of the economy will lose their jobs as exports decline
and the economy falters.
Economists argue that the best way to improve working conditions is to
leave markets alone. In the short-run, sweatshops give workers a job and
some income. 18 In the long-run, an improved economy will give workers the
leverage they need to obtain better working conditions. When a developing
country's economy grows, the demand for labor increases and provides
workers with more employment opportunities. Producers must then offer
if they want to retain existing workers or attract new workers
higher wages, shorter work hours, and other improved working conditions
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