The ethical issues surrounding the complexity of transnational economy

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Executive Summary

The ethical issues surrounding the complexity of transnational economy has given rise to the urgent need for garment retailers to set policies that draw on business practice reflecting ethical standards. The debate behind these ethical issues stems from poor conditions that follow the profit pursuit by international commodity chains in the apparel industry.

Also, the pursuit for a competitive edge motivate retailers to demand garment supplies through unethical methods such as forcing workers to work excessive hours and produce quickly without ruining the quality of garments. In the process workers forfeit their breaks and are denied overtime pay.

Consequently, British clothing retailers are required to adopt a structure that involves cooperating with other firms, trade unions and human rights groups; encouraging employee organising and involvement; minimise the impact of price on wages and working conditions across the supply chain and making an ethical guideline to ensuring that all workers are paid a living wage.

Although majority of the garments are produced in India, Bangladesh and China, this report will focus mainly on China because of its strength in human resources and technology as well as potential as regards labour and natural resources.

Also this report will differentiate between minimum wage and living wage, highlight issues with wages along the supply chain, and identify competitors that have committed to living wage. In addition the report describes the nature of clothing industry in China, justifies the business case for decent working condition and points out barriers to introducing change and operating HR practices and policies.


Managing human resources is a key factor in determining the success or failure of a business. From a global viewpoint, Multi-National Companies strive to compete to exploit opportunities that globalization offers. This quest for success has paved way for the recognition and importance of effectively managing human resources (Scullion 1995). However, the pursuance of diverse interests of employees (Kelloway et al 2004) of Multi-National Companies (MNC) and the impact of poor HR practices and policies on their productivity, morale and well-being also contribute to failure in business. (Tayeb 2005)

In view of this, some theorists (Maslow 1943; Marx 1988; Smith 2003) argue that an employee's interest which lies in the ability to afford the basic necessities of life is determined by the wage earned and so wage is a primary means of survival. Given that wage is based on labour and work determines the framework to life, fulfilment and identity of an employee; it is important that wage underlines the value and dignity of work by providing a sufficient remuneration for carrying it out. In that way it creates a rationale to how employees make distinctions between their worth and themselves since the level of their confidence and financial security depicts the value of they earn.

Living wage vs. Minimum wage

Employers are ethically obliged to pay a fair wage whenever possible (Figart 2001). However, whether an employer is legally required to pay wages at least slightly above the basic subsistence level, it doesn't automatically mean that it is sufficient to provide a decent living for the employee as Figart (2001) argues. Waltman (2000) refers to the former as 'minimum wage' and the latter as 'living wage'. Therefore it can be argued that since a minimum wage is enforced by law in which the government is inclined to balancing the needs of workers as well as the interests of employers then a voluntarily paid living wage is more beneficial than the minimum wage.

The level of living wage is calculated using 'calculation approach' or 'negotiated approach' (Waltman 2000) and is based on the expenditure that is required for a decent standard of living as measured by the criteria of the society in which the employee lives (Waltman 2004).

Issues with wages along the supply chain

In the supply chain payment of wages to employees is given less priority because employers focus more low production cost or on deducting administration and raw materials costs and as such employees are paid partial wages or denied wages for months. What is more is that they disrespect minimum wage legislation, discriminate against migrant workers and neglect social contributions by paying informal employees in an informal way (Whitehead 2010).

Presently, campaign movements like Labour behind the Label (LBL), Clean Clothes Campaign (CCC) defend garment workers' efforts worldwide to improve their working conditions and they liaise with trade unions, consumer organisations, campaign groups, and charities to achieve their objective.

Commitment to living wage

LBL campaign reports that British clothing retailers like Burberry, Arcadia group, Aurora fashions, Primark, Gap, Next, Monsoon Accessorize and New look, Marks and Spencer (Johnstone 2010) are making commitments to a living wage project. For example, Burberry demonstrates commitment to paying living wage by stating 'living wages are paid' in section 5.2.5 of its Ethical Trading policy claiming that implementing an ethical sourcing strategy helps it achieve its business objectives.

Although many of these high profile British brands in the Clothing industry openly acknowledge the need to increase the poverty wages paid to garment workers in their commodity chain, they tend to concentrate more on workers' productivity rather than on rewards. Indeed the situation of wage behind the UK High street is disturbing as garment workers labour excessive hours in pitiable working conditions to provide to produce garments worth over £36 billion a year for high profile British Clothing retailers (LBL report 2009). In spite of this, these workers' wages are too low to afford them the basic necessities of life.

Having pointed out how some British clothing retailers have committed to paying a living wage, following is a brief description of the nature of clothing business in one of our supply base, China.

Nature of clothing industry in China

The clothing industry in China is a typical buyer-driven chain that is highly intensive in labour. [1] The workforce is made up of women where majority are migrants (Chan 2004). It is a typical factory norm to work beyond the legal limit [2] that is approved by the Chinese labour law [3] (Chan 2005).

HR Issues (China Supply Chain)

Low wage and piece-rate payment system [4] 

Tight labour control, [5] exploitation, [6] physical and sexual abuses, discrimination, health and safety neglect.

Workers are deprived the right to freedom of association and are persecuted for protesting or striking against unfair employment practices.

Chinese internal migration regulations subject migrant workers to the economic bondage and exploitation [7] .

This shows that Chinese garment workers 'sweat' high profits for British clothing brands at the detriment of their dignity, health and above all lives.

PEST Analysis:

Kotler (1998) argues that a PEST analysis (Luffman et al 1996) is a necessary technique to appreciate the potential and operations of a business.

Political Environment:

Government's trade restrictions, labour laws and policies (freedom of association).

Economic Environment:

Price of commodity, labour market (living wage), demand, customer behaviour, taxation on trade and workers.

Social Environment:

Fast fashion, employment conditions

Technological Environment:

Machineries, computers and tools used in the production, packaging and distribution units.

The business case for decent working condition

The awareness of poor working conditions in the garment industry calls for employers to apply ethical reasoning to business practices as well as play ethical roles in managing people. Just as Bohlander, Snell & Sherman (2001) argue that people play important roles in developing the competitive advantage of a business, a business case should be considered in order to improve general employment conditions operating within production units owned by suppliers. The rationale for this case is that if garment workers continue to work under inhumane working conditions, this could affect the business in the following ways:

Living wage

Smith (1776) argued that an employee who performs manual or industrial labour is more active and efficient when wages are high. Meanwhile, motivation theorists (Maslow 1954, Herzberg 1959, Alderfer 1972 cited in Hume 1995) link remuneration to motivation and Steel-Johnson et al (2000) relate motivation to ability and productivity. Therefore, unfair pay leads to less motivation, reduced productivity and decreased efficiency. Consequently, the company suffers high employee turn-over and since there's a shortage of skilled labour [8] in the supply base (China), recruiting more workers and retaining existing workers will be an unnecessary cost to put up with as research indicates [9] . For instance, Barclays bank has benefited from paying a living wage [10] . On the contrary, an economic critique argues that living wage contributes to unemployment, inflation and business failure (ibid). However, the unavailability of evidence (ibid) marks this argument unreliable. To this end, it can be argued that until there is a concrete proof that paying living wage produces adverse outcomes, there is nothing wrong with paying workers' wages that meet the cost of their basic needs and standard of living.

Branding, Business reputation and Customer relationship:

Researchers have linked branding to high profits (Gobe 2001), differentiation, enhanced customer loyalty and satisfaction (Hollensen 2003) and competitive advantage (Martin and Beaumont 2003).Therefore, a business is at the risk of losing customers and investors if the press and other interested groups like ILO, NGOs, 'ethical shoppers' [11] and campaign movements such as CCC, LBL find out about its poor employment conditions. The impact of this tainting exposure may affect the relationship it has with consumers. For instance, Marks and Spencer's (M&S) faced a high profile embarrassment in December 2010 for exploiting its workers in the garment industry [12] . Therefore retaining an unethical trading system will weaken customer relationship as well as tarnish the image and reputation of the business thus diminishing its opportunity for a competitive edge.

Statutory standards and Ethical Code compliance:

Moreover the risk of losing business and tainting corporate image is high if its suppliers do not adhere to the legal standards concerning wages, health and safety, work hours and child labour plus ethically apply codes of labour practice set by for instance the LBL's Ethical Trading Initiative Code (ETI). More so, if a company decides to take business somewhere else it contributes to unemployment and unsavoury outcomes; it is like adding insult to injury. For example, in year 2000, GAP suffered from such predicament [13] but made amends by ensuring its suppliers complied with ethical codes and legal standards.

Health, safety and work environment

Furthermore if workers produce in a hazardous work environment, it can affect the quality of work (garments will be badly sewn or soiled with dirt), disrupt their work pattern which will prolong production and supply time likewise the health and safety of workers. Of course the outcome is cost incentive (high staff turnover and low product turnover).

Management of migrant workers

Additionally, migrant workers dominate the supply chain and the attraction for recruiting migrant workers lie in their satisfactory work ethics. However, suppliers tend to indirectly recruit and employ migrant workers and this leads to high possibilities of abuse and increased costs. Also migrant workers are not provided with sufficient training, effective dispute resolution and are not protected under laws at national level. As such, Pfeffer (1998) argues that managing people effectively can significantly enhance economic performance. Therefore, managing people ineffectively can increase turnover, absenteeism, reduce productivity as well as tarnish corporate image and attract unnecessary media cost.

Buying practices

So far the issue of paying a living wage and improving working conditions have been raised. Similarly, purchasing patterns such as changing orders at the eleventh hour, shortening lead times and insisting on low prices from suppliers leads to unnecessary overtime and payment of low wage [14] . And so by adopting an ethical pattern to procurement, the business prevents substandard produce, delayed supply, extra cost and short-term supplier relationship. What is more is the reputational risk that follows with purchasing practices that violate human rights. Of course a sustainable retail company needs a long-term relationship with an ethical supplier.

Corporate Social Responsibility (CSR)

Embracing a CSR strategy towards improving employment conditions requires the moral obligation of a business towards others who are affected by the organisations actions (Sims 2003). Sinzig (2010) argues that CSR is the 'voluntary engagement of a company to undertake ethical practices in labour and employment by enhancing the workplace of all employees by going beyond existing regulatory standards and meeting stakeholder's claims'. In a nutshell, Zadek (2007) argues that the pursuit of CSR strategy provides the organisation with at least the following specific business and HR benefits;

Improved customer loyalty

Improved employee productivity, satisfaction, commitment, retention and recruitment practice

Less legal issues and reduced conflict

Higher profits and lower capital costs

Access to capital

Risk management

Increased organisational performance

Superior brand name

Innovation and Learning

Barriers to introducing change:

There are obstacles that work against introducing change. They are listed below as follows:

Living wage:

Academics (Briscoe and Schuler, 2004) argue that paying a living wage results to unemployment, inflation, business close down, immigration pitfall and work shortage yet economist argue that it increases purchasing power and enhances productivity (Sidney and Webb 1897). Similarly, Waltman (2004) argues that there are no evidences to prove the reality of adverse outcomes claimed by anti-living wage supporters and Arkin (2011) concurs by asserting that the added value from higher pay is proportionally greater than the cost of the increase. Nevertheless an obstacle here is computing a fair profit rate taking into account the company bears cost in organising production, selling finished products, ensuring continuity and capital risk. In addition, because paying a living wage is not bound by law, suppliers would argue that the government increases the statutory minimum wage in preference to committing to paying a non-statutory living wage. It could then be argued that minimum wage should represent a floor while living wage should represent ethical practice standard but bearing in mind that minimum wages differ according to countries - Britain is £5.93 per hour (ONS 2010) and China is 800.0 RMB per month (£75.3) (TRAVAIL legal databases 2009) -, it becomes problematic tackling the following questions;

Since living wage in London is £7.85, will it be ethical to pay workers in China the same? How realistic is this?

Compliance and monitoring:

Another barrier to introducing change is the issue of compliance. Regarding suppliers complying with ethical standards, retailers adopt a 'cookie-cutter' method in bringing in change because it saves them the time to supervise. Unfortunately this doesn't help in China because suppliers tend to falsify documents, train workers to lie or bribe auditors [15] in order to sustain good relationship with retailers. Therefore audit results become unreliable to work with. Likewise when a supply base is used by several brands, it tends to be shady about its work practices when undergoing an audit from an external firm.

Barriers to operative HR policy and practice:

Convergence and Divergence:

Brewster et al (2002) point out that the effectiveness of global HRM depends on the ability to judge the extent to which an organisation should implement similar practices across the globe (Converge) or adapt them to suit local conditions (Diverge). Therefore reaching a balance between laws, practices or policies to be implemented (International or local) and which will achieve better outcomes tend to frustrate the operationalization of HR policies and practices.

Environmental factors:

Gerhart and Fang (2005) argue that there are discrepancies in centrality of markets, institutions, regulations, collective bargaining and labour-force characteristics between global environments and the influence of these issues create problems in managing people. For example, the ban on freedom of association in China by the government is seen as infringing on civil rights in a British and international setting. Therefore implementing policies and practices like employee involvement and collective bargaining over wages can be difficult to guarantee because of persecution workers receive from the Chinese government.

Recruitment and cost:

The need to allocate to senior management the responsibility of implementing this ethical trade action plan in the supply base requires intensive training. On the other hand, the size of the supply factory will entail recruiting and financing more human resources to execute the project. And so, this could delay operations. Also it is expensive to hire audit specialist considering the size of the supply base and economy. Besides, recruiting and training an internal workforce to on skills that will prepare them to strictly inspect and report labour practices will attract a higher financial plan. What is more is the issue of measuring expatriates' operations since performance standards differ across borders.

Recommendation and Conclusion

A living wage should underline the value and dignity of work as well as be sufficient to afford basic needs. The benefit of setting up a policy that guides the conduct of the business as well as its workers varies from legal protection to better consumer and public relationship.

Therefore, it is important that the retail company considers its current business practices and provide its suppliers with improved working settings through incorporating ethical trading practices. This can be done by employing a systematic plan of action that embraces commitment in integrating ethical trading, monitoring and supervising development effectively as well as training employees within the organisation and its supply base.

It is clear that retaining a 'low road' competitive strategy rather than a 'high road' approach to competitiveness can hinder profit and also violate human rights. Therefore to ethically apply a cost minimization strategy, retailers should improve on technology used in the production unit. Replacing manual processes with automated operations and increasing the flexibility of machines will speed up the production cycle and reduce lead time, cost of labour and production. This innovation will control purchasing practice, overtime and maximise profits which will be needed to pay worker a living wage.