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Responding to public disclosure of corporate social irresponsibility in host countries: Information control and ownership control

Abstract

We extend the internalization literature by theorizing on how public disclosure of corporate social irresponsibility (CSI) can damage reputation-based firm-specific advantages of multinational companies (MNCs) and how foreign subsidiary governance can subsequently be used as strategic responses. Specifically, we distinguish between two foreign subsidiary governance mechanisms – information control and ownership control – that the prior literature has often assumed operate in parallel, and posit that they function in divergent directions in this context. Furthermore, we explain how two host-country characteristics – press freedom and regulatory quality – amplify the need for MNCs to utilize different governance mechanisms as responses to CSI disclosure.

Résumé

Nous élargissons la littérature sur l’internalisation en théorisant sur la façon dont la divulgation publique de l’irresponsabilité sociale des entreprises (ISE) peut nuire aux avantages spécifiques fondés sur la réputation des entreprises multinationales (EMN) et comment la gouvernance des filiales étrangères peut ensuite être utilisée comme réponse stratégique. Plus précisément, nous distinguons deux mécanismes de gouvernance des filiales étrangères - le contrôle de l’information et le contrôle de la propriété - que la littérature antérieure a souvent supposé fonctionner en parallèle et postule qu’ils fonctionnent dans des directions différentes dans ce contexte. En outre, nous expliquons comment deux caractéristiques du pays hôte - la liberté de la presse et la qualité de la réglementation - renforcent la nécessité pour les EMN d’utiliser différents mécanismes de gouvernance en réponse à la divulgation de l’ICE.

Resumen

Extendemos la literatura de internalización mediante la teorización sobre cómo la divulgación pública de la irresponsabilidad social corporativa (ISC) puede dañar la ventaja específica de las empresas multinacionales basada en la reputación de la empresa y como cómo la gobernabilidad de las subsidiarias en extranjero puede ser usado subsecuentemente como respuestas estratégicas. Específicamente distinguimos entre dos mecanismos de gobernabilidad de las subsidiarias en el extranjero -control de la información y el control de la propiedad – que la literatura anterior ha asumido con frecuencia que opera en paralelo y postula que funcionan en direcciones divergentes en este contexto. Además. Explicamos como dos características de país anfitrión -libertad de prensa y calidad regulatoria- amplifican la necesidad de las empresas multinacionales a utilizar diferentes mecanismos de gobernabilidad como respuesta a la divulgación de la ISC.

Resumo

Estendemos a literatura de internalização, teorizando sobre como a divulgação pública da irresponsabilidade social corporativa (CSI) pode prejudicar a vantagem específica da empresa baseada em reputação de empresas multinacionais (MNCs) e como a governança subsidiária estrangeira pode subsequentemente ser usada como respostas estratégicas. Especificamente, distinguimos entre dois mecanismos de governança de subsidiárias estrangeiras - controle de informação e controle de propriedade - que a literatura existente frequentemente supôs operar em paralelo e postulamos que eles funcionam em direções divergentes nesse contexto. Além disso, explicamos como duas características do país hospedeiro - liberdade de imprensa e qualidade regulatória - ampliam a necessidade de MNCs utilizarem diferentes mecanismos de governança como respostas à divulgação de CSI.

摘要

我们通过对企业对社会不负责任(CSI)的公开披露如何破坏跨国公司(MNCs)基于声誉的公司特定优势以及国外子公司治理随后将如何能用作战略响应的理论化拓展了内部化文献。具体来说, 我们区分了两个国外子公司治理机制 – 信息控制和所有权控制 – 以前的文献经常假定其作用等同, 并假设它们在这种情境下发挥不同作用。此外, 我们解释了两个东道国特征 – 新闻自由和监管质量 – 如何扩大跨国公司利用不同治理机制作为对CSI披露的回应的需求。

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Acknowledgements

We are thankful to the Editor Rajneesh Narula, three anonymous reviewers, and participants in the Paper Development Workshop of the AIB 2018 annual conference, particularly Guest Editors Christian Geisler Asmussen, Tailan Chi, and Sumit Kundu, for their respective helpful comments and conversations.

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Accepted by Christian Geisler Asmussen, Tailan Chi, and Rajneesh Narula, Special Issue Guest Editors, 12 January 2019. This article has been with the authors for four revisions.

Appendix A: Operationalization of Severity and Reach of CSI by RepRisk

Appendix A: Operationalization of Severity and Reach of CSI by RepRisk

RepRisk evaluates the degree of severity of CSI by examining (1) the direct consequences of the incidence (e.g., whether it has resulted in major injuries, deaths or property damage), (2) the horizontal extent of the incidence (e.g., whether it affects a small number or a large number of stakeholders), and (3) the cause of the incident (i.e., whether it is caused by accident, negligence, intent, or even systematically). The degrees of high, medium, and low are judged by the analyst panel. We use the CSI incidents of General Electric (GE) as an example to show the three levels of severity.

  • Low-level severity incident: In 2013, GE subsidiary General Electric Capital Aviation Services and its affiliated company, PK AirFinance, were accused of fraud in a UK court concerning the financing of aircraft for the German airline, Blue Wings. The associated issue was fraud, the location was the UK, and the level of criticism was low because of the amount of fraud was not significant.

  • Medium-level severity incident: In 2008, GE, as one of Beijing Olympic sponsors, received medium criticism for disregard of human rights abuses. The associated issues included impacts on communities, human rights abuses and corporate complicity, and poor employment conditions; the location was China; the level of criticism was medium because of the level of forced eviction of Chinese citizens from their homes to make way for new Olympic venues, exploitation of migrant workers who built these venues, and the jailing of activists who denounced such abuses.

  • High-level severity incident: GE received the most criticism for not accepting responsibility for the Fukushima nuclear disaster in 2011. The associated issues included impacts on communities, local pollution, and controversial products and services; the location was Japan; the level of severity was high because GE supplied the reactors for units 1, 2, and 6 for Fukushima, and the Fukushima nuclear disaster forced over 160,000 people to evacuate their homes.

RepRisk codes the degree of reach of CSI by examining the media influence based on the readership level. If a particular CSI incident appears in multiple levels, the reach score is from the highest level.

Specifically, the level of reach is defined as follows:

  • Low-level reach: The incident was only reported by local newspapers with a circulation of less than 150,000.

  • Medium-level reach: The incident was reported by a local or national news outlet with a circulation of more than 150, 000.

  • High-level reach: The incident was reported by international media outlets such as The Wall Street Journal, Financial Times, The New York Times, the BBC, CNN International, Forbes, Fortune, and The Economist.

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Wang, S.L., Li, D. Responding to public disclosure of corporate social irresponsibility in host countries: Information control and ownership control. J Int Bus Stud 50, 1283–1309 (2019). https://doi.org/10.1057/s41267-019-00224-w

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Keywords

  • corporate social irresponsibility
  • reputation
  • foreign subsidiary governance
  • internalization theory
  • firm-specific advantage
  • information control
  • ownership control
  • host-country press freedom
  • host-country regulatory quality