Question

MINI CASE: NIKE’S DECISION

Nike, a U.S.-based company with a globally recognized brand name, manufactures athletic shoes in such Asian developing countries as China, Indonesia, and Vietnam using subcontractors, and sells the products in the U.S. and foreign markets. The company has no production facilities in the United States. In each of those Asian countries where Nike has production facilities, the rates of unemployment and underemployment are quite high. The wage rate is very low in those countries by the U.S. standard; hourly wage rate in the manufacturing sector is less than one dollar in each of those countries, which is compared with about $18 in the U.S. In addition, workers in those countries often are operating in poor and unhealthy environments and their rights are not well protected. Understandably, Asian host countries are eager to attract foreign investments like Nike’s to develop their economies and raise the living standards of their citizens. Recently, however, Nike came under a world-wide criticism for its practice of hiring workers for such a low pay, “next to nothing” in the words of critics, and condoning poor working conditions in host countries.

Required: Evaluate and discuss various ‘ethical’ as well as economic ramifications of Nike’s decision to invest in those Asian countries.

Answer 1

I will first discuss the economic ramifications first and then the ethical ones.

Economic ramifications:

1. There is nothing wrong in multinational companies seeking avenues to cut their production costs. This can mean looking for substitute materials without compromising the quality or seeking the benefit of wage rate arbitrage. What Nike did is quite natural of any MNC. They made use of labor rate arbitrage by shifting production to countries where cheap labor are available in abundance.
2. Such a move by Nike has led to creation of employment opportunities in Asian countries which are plagued by high level of unemployment or underemployment. Such a step by Nike must have created jobs for many and in turn help improve economic conditions and quality of life of employees.
3. This will also add to GDP and GDP growth rate of the countries where Nike's production facilities were located.
4. This also promotes the culture of outsourcing.
5. This would have enabled Nike to reduce their sale prices and enabled them to introduce products in many countries where they would have otherwise been un-affordable had production facilities been located in USA.
6. This entire thing would have promoted cross border trade and movement of goods and services.

Ethical Ramifications:

1. While making use of labor rate arbitrage is advisable, it becomes unethical if such an arbitrage comes at poor labor practices.
2. Every employer shall ensure good, quality working experience for its own employees. If the quality of life, working conditions, health of employees are compromised, such a move by Nike would be called unethical.
3. If left unchecked, this would encourage many other companies to replicate exactly what Nike has done. This would promote a culture of outsourcing which will lead to further exploitation.
4. The third world countries will continue to be exploited by the developed nations. The tag of exploitation can be a very big and severe ramification of this act.