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Enforcing higher labor standards within developing country value chains: Consequences for MNEs and informal actors in a dual economy

Abstract

The 2013 collapse of the Rana Plaza building in Dhaka, Bangladesh, led external stakeholders to insist on higher labor standards in apparel global value chains (GVCs). Stakeholders now expect MNEs to take ‘full-chain’ responsibility. However, the increased monitoring and enforcement costs of a large network of suppliers have been non-trivial. MNEs instead implement a ‘cascading compliance’ approach, coupled with a partial re-internalization. Elevated costs are further exacerbated in developing countries where the informal and formal sectors are linked, and cost competitiveness greatly depends on this duality. Monitoring actors in the informal sector is difficult, and few informal actors can achieve compliance. GVCs have therefore reduced informal sector engagement by excluding non-compliant actors and investing in greater automation. By seeking to strictly enforce compliance, MNEs are attenuating some of the positive effects of MNE investment, particularly the prospects for employment creation (especially among women), and enterprise growth in the informal sector. I discuss how these observations might inform other cross-disciplinary work in development, ethics, and sociology. Finally, I note implications for IB theory from the disparities between the ownership, control, and responsibility boundaries of the firm.

Resume

La catastrophe de Rana Plaza en 2013 a amené les parties prenantes externes à insister sur des normes du travail plus strictes dans les chaînes de valeur mondiales (CVM) du vêtement. Les parties prenantes s’attendent maintenant à ce que les EMN assument la responsabilité de la «chaîne complète». Cependant, les coûts accrus de surveillance et d’application d’un grand réseau de fournisseurs ont été non négligeables. Les EMN appliquent plutôt une approche de «conformité en cascade», associée à une ré-internalisation partielle. Les coûts élevés sont encore exacerbés dans les pays en développement où les secteurs informel et formel sont liés, et où la compétitivité des coûts dépend fortement de cette dualité. Il est difficile de surveiller les acteurs du secteur informel et peu d’acteurs informels peuvent s’y conformer. Les CVM ont donc réduit l’engagement du secteur informel en excluant les acteurs non conformes et en investissant dans une plus grande automatisation. En cherchant à appliquer strictement la conformité, les EMN atténuent certains des effets positifs de leurs investissements, en particulier les perspectives de création d’emplois (en particulier chez les femmes) et de croissance des entreprises dans le secteur informel. Je discute comment ces observations pourraient éclairer d’autres travaux interdisciplinaires sur le développement, l’éthique et la sociologie. Enfin, j’explique les implications des disparités entre les limites de propriété, de contrôle et de responsabilité de la firme pour la théorie en IB.

Resumen

El desastre del 2013 en Rana Plaza llevó a los grupos de interés externos a insistir en estándares laborales más altos en las cadenas globales de valor (CGV) de ropa. Los grupos de interés ahora esperan que las EMN asuman responsabilidad por “toda la cadena”. Sin embargo, los costos cada vez mayor del monitoreo y de hacer cumplir las normas de una gran red de proveedores no ha sido trivial. Las EMN en su lugar implementan un enfoque de “conformidad en cascada” junto con una re-internalización parcial. Los costos elevados se agravan aún más en países en desarrollo donde los sectores informal y formal están ligados, y la competitividad de los costos depende en gran medida de esta dualidad. El monitoreo de los actores en el sector informal es difícil, y pocos actores informales pueden lograr el cumplimiento. Por consiguiente, las CGV han reducido la participación informal al excluir los actores que no cumplen e invertir en una mayor automatización. Buscando hacer cumplir estrictamente el cumplimiento, las EMN están atenuando algunos de los aspectos positivos de la inversión de las EMN, en particular las posibilidades de generación de empleos (especialmente para las mujeres), y para el crecimiento de las empresas en el sector informal. Discuto cómo estas observaciones podrían informar otros trabajos interdisciplinarios en desarrollo, ética y sociología. Finalmente, observo las implicaciones para la teoría de negocios internacionales desde las disparidades entre la propiedad, el control y la frontera de las responsabilidades de la empresa.

Resumo

O desastre de 2013 no Rana Plaza levou stakeholders externos a insistirem em padrões de trabalho mais elevados nas cadeias globais de valor do vestuário (GVCs). Stakeholders esperam agora que MNEs assumam responsabilidade sobre “toda a cadeia”. No entanto, o aumento dos custos de monitoramento e execução de uma grande rede de fornecedores não tem sido trivial. Em vez disso, MNEs implementam uma abordagem de “conformidade em cascata”, juntamente com uma re-internalização parcial. Custos elevados são ainda mais exacerbados nos países em desenvolvimento, onde os setores informal e formal estão ligados, e a competitividade em termos de custo depende grandemente dessa dualidade. Monitoramento de atores no setor informal é difícil, e poucos atores informais podem alcançar conformidade. CGVs reduziram, portanto, o envolvimento do setor informal, excluindo atores com não-conformidades e investindo em maior automação. Ao buscar o cumprimento rigoroso de conformidades, MNEs estão atenuando alguns dos efeitos positivos do investimento de MNEs, particularmente as perspectivas de criação de emprego (especialmente entre as mulheres) e o crescimento de empresas no setor informal. Discuto como essas observações podem informar outros trabalhos interdisciplinares em desenvolvimento, ética e sociologia. Finalmente, observo implicações para a teoria em IB a partir das disparidades entre os limites de propriedade, controle e responsabilidade da empresa.

摘要

2013年的热尔纳大厦(Rana Plaza)灾难导致外部利益相关者坚持服装全球价值链(GVCs)有更高的劳工标准。利益相关者现在期待跨国公司承担“全链”责任。然而, 大型供应商网络的监控和执法成本的增加并非小事。相反, 跨国公司实施“级联合规”的做法, 加上一部分的重新内化。在非正规和正规行业相互联系的发展中国家, 成本上升进一步加剧, 成本竞争力在很大程度上取决于这种二元性。监控非正规行业的行为者是困难的, 很少有非正规行为者能合规。因此, 全球价值链(GVCs)通过排除不合规的行为者以及投资更高的自动化来减少非正规行业的参与。通过寻求严格执法, 跨国公司正在削弱 跨国公司投资的一些积极影响, 特别是创造就业的前景(特别是在妇女中), 以及非正规行业的企业成长。我讨论这些观察如何对发展、伦理以及社会学的其它跨学科的工作能提供指导。最后, 我讨论了公司的所有权、控制和责任边界之间的差距对国际商务(IB)理论的启示。

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ACKNOWLEDGEMENTS

I would like to thank Khadija van der Straaten of University of Amsterdam for both her research assistance and useful constructive comments on the various drafts. Mohammed Shakil Wahed, doctoral candidate at Reading, has been instrumental in arranging the interviews and visit to Bangladesh, and also provided considerable assistance in understanding the Bangladeshi economy. Comments from Saul Estrin, Gabriel Benito, Liena Kano, Alain Verbeke, and Giulio Nardella are much appreciated, as was an essay by Alison Holm for the Henley masterclass on IB and development.

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Accepted by Liena Kano, Guest Editor, 20 July 2019. This article has been with the author for four revisions.

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Narula, R. Enforcing higher labor standards within developing country value chains: Consequences for MNEs and informal actors in a dual economy. J Int Bus Stud 50, 1622–1635 (2019). https://doi.org/10.1057/s41267-019-00265-1

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Keywords

  • economic development in emerging markets
  • value chain
  • transaction cost theory
  • internalization theory
  • MNEs and economic development