Policy Transfer, Economic Institutionalism, and Legitimacy
Policy transfer theory
One studied dimension of globalization and trade integration is the tendency of policies established in one institutional sphere, or geographic jurisdiction, to extend to others. This phenomenon is reflected in the policy transfer literature, which maintains that policy approaches “transfer” via international organizations and bodies, resulting in policy convergence between and among nations (Evans, 2006, 2009a, b; Fang & Stone, 2012). This process involves information and knowledge exchange among national governments, input and advocacy by non-governmental organizations (NGOs), and assimilation through international organizations and trade agreements (Dolowitz & Marsh, 2000; Stone, 2000, 2001, 2012).
Scholars suggest that as problems become more globally dispersed, policy transfer occurs at higher frequencies and intensities as countries engage in more cross-border agreements and organizations aimed at collective problem solving (Hulme, 2005; Marsh & Sharman, 2009). For example, concern about disparities in gender equality, especially in developed countries, rose in the 1960s and 1970s. In response, countries in Europe first introduced initiatives that eventually prompted the United Nations (UN) to marshal member states to develop the UN Convention on the Elimination of All Forms of Discrimination Against Women. Since its creation in 1979, 189 countries have ratified the agreement, which has in turn led to policy implementation supporting gender equality in the individual member states. This demonstrates a process of institutional convergence as member states align their domestic policies with the standards created by the international organizations and agreements. Thus, these international bodies serve as critical receptors and integrators of divergent national institutions and, in turn, sources of new policy initiatives that influence and constrain national regulations.
Another example can be found in the labor and environmental provisions established in NAFTA. Although each member state of NAFTA retains sovereignty over its domestic laws and regulations, the trade agreement requires that each party implement domestic regulatory policy changes to ensure that “high labor standards” and “high levels of environmental protection” are effectively enforced (Williams, 2018) and that, if one of the NAFTA countries does not observe these requirements, others can pursue a dispute settlement process, potentially resulting in fines or sanctions. These policy changes then influence domestic companies and foreign firms operating within North American borders as new labor and environmental expectations unfold to which firms must adhere (Lattanzaio & Fergusson, 2016). Consequently, worker’s rights protections have improved markedly in the automobile manufacturing industry in Mexico since the ratification of NAFTA (Cimino-Isaacs & Villarreal, 2016).
Although policy transfer ultimately results in greater convergence, the processes leading to it are often not symmetric among actors (Dussauge-Laguna, 2013; Petridou, 2014) in that individual policymakers have considerable influence on these decisions. Power, proximity, and timing all matter. States with higher levels of power have greater influence over the construction of global policies (Dolowitz, 1999; Dolowitz & Marsh, 2000) and powerful states often encourage the creation of global policies that already align with their own domestic policies (Stone, 2004). Conversely, less powerful countries do not have as much influence over the creation of global policies. However, policymakers and trade ministers from both types of countries have agency in influencing the terms of these agreements and deciding whether or not to enter into negotiations, sign, and ratify them.
Economic institutionalism and the adoption of CSR standards
As famously asserted by North (1990: 3), “institutions are the rules of the game in a society.” Traditionally, new institutional economics scholarship in IB has examined the construction of domestic institutions and sought to understand how institutional forces influence firm strategy (Dau, 2016; Peng, 2002; Peng et al., 2008). In particular, this stream of research focuses on domestic regulations and policies, and provides insights for how these policies pressure and guide firm strategy (Peng, 2002). While it is valuable to understand the implications of domestic regulations and policies, it is also important to understand how these domestic policies and actors are influenced by supranational forces (Moore, Brandl, & Dau, 2019; Moore, Dau, & Doh, 2020; Moore, Dau, & Mingo, 2021) and how the resulting national diplomatic initiatives influence the strategies and practices of domestic firms.
Integration in international trade agreements represents one such supranational force. When a country signs and ratifies a trade agreement through the WTO, it pledges to uphold the terms of that agreement. Thus, higher levels of integration indicate a willingness to engage in a degree of policy convergence. While these agreements promote economic liberalization and a reduction of entry barriers, they increasingly also incorporate non-trade, or “flank,” considerations related to social and environmental concerns and protections (Peels, Echeverria, Aissi, & Schneider, 2016). By linking social and environmental commitments to trade agreements, supranational institutions permeate domestic borders (Hepburn & Kuuya, 2011; Waleson, 2015) and influence the standards and regulations being created domestically through policy transfer.1
This type of policy transfer has important impacts for firms. As domestic policies become more closely aligned with supranational ones, firms will be subject to increased pressure to follow these new standards to obtain legitimacy from external stakeholders and safeguard their ‘license to operate’ as members of global society (Bansal & Song, 2017). Specifically, as global initiatives continue to incorporate more explicit CSR commitments, policies that are transferred between states through global organizations continue to both regulate and place a premium on CSR. This results in increased CSR expectations from a variety of stakeholders (both global and domestic) (Rodgers, Stokes, Tarba, & Khan, 2019). Although not all firms have to maintain the same level of legitimacy (see King, 2014 for a discussion on reputational dynamics of firms as it relates to ethical “grey areas”), we believe these cross-institutional pressures created via policy transfer constitute a potentially important driver of firm behavior.
However, not all types of firms respond to institutions in the same way. Indeed, one variant of research has explored how differing ownerships structures – for example state-owned (SOEs) versus privately owned firms (POEs) – influence firm strategy, operations, and approaches to internationalization, proposing that for profit SOEs have unique features that allow them to operate independently of domestic institutions and regulatory structures because they possess powers that insulate them from these pressures (Cuervo-Cazurra, 2017; Dewenter & Malatesta, 2001; Fan, Wong, & Zhang, 2013; Meyer, Ding, Li, & Zhang, 2014).2 Although there is variance in scholarly views of SOEs’ accountability across countries, this stream of literature argues that SOEs are less accountable to domestic institutions than are POEs because they are an active part of the political strategy of the country (Liang, Reng & Sun, 2015). In other words, because the major shareholder for SOEs is essentially the government, they can maintain internal legitimacy even while violating domestic regulations. However, while extant literature has examined the relationship between SOEs and domestic institutions, it has given limited attention to how SOEs interact with supranational institutions. This is surprising given the rise in international trade and investment agreements. Thus, we seek to build on prior literature to offer a more finely variegated understanding of how SOEs are influenced by these agreements.
Global Integration and the Adoption of CSR Standards: Theory and Hypotheses
Globalization has positive and negative externalities (Stallings, 2007). Positive effects include increased cooperation across borders, trade-led economic growth, greater labor mobility and opportunity, and positive knowledge and technological spillovers (Obstfeld & Taylor, 2004; Prakash-Mani, Thorpe, & Zollinger, 2003). Negative effects may include increased pollution, more frequent and intense financial crises, global health epidemics like COVID-19 and Ebola that spread rapidly through borders, industries “hollowing out” and employment dislocation, and increased income and wealth inequality (Baden et al., 2014; Dau & Moore, 2020a, b; Kennedy & Nisbett, 2015; Wheeler, 2001).
Partly as a consequence of these negative impacts, global regulations – both public (state-led) and private (firm and NGO-led) – have emerged to establish common social and environmental standards and codes of conduct (Donno, 2010; Gimenez et al., 2012; Hacking & Guthrie, 2008). Global regulations apply to the global population (e.g., states, firms, citizens, etc.) and are often created by, and enforced through, international organizations, governing bodies, and trade agreements. The Kyoto Protocol, for example, is a relevant global environmental regulation that sets rules for carbon emission levels. This regulation, and others, have emerged, in part, from pressures emanating from civil society actors to encourage social responsibility by both states and the firms they host (Nikolaeva & Bicho, 2011; Tashman & Rivera, 2010) as well as the rise in global society (Meyer, Pope, & Isaacson, 2015), which has restructured actors’ international roles and commitments to CSR. This is evidenced through the increased CSR commitments not only promoted by global regulations and organizations, but also those increasingly attached to trade and investment agreements between countries (Peels et al., 2016).
Global integration and the adoption of CSR standards
Policy transfer theory provides a framework for understanding how policies converge and are transmitted between nations (Benson & Jordan, 2011; Dolowitz & Marsh, 2000). One critical mechanism through which policy transfer occurs is international trade agreements, whose members are national governments (Stone, 1999, 2001, 2004). When states join trade agreements, particularly deeper types of agreements, such as common markets or economic unions, they willingly concede portions of their sovereignty in order to conform their external trade policies, monetary policies, and employment standards with other member countries. Thus, higher levels of integration (in both number and depth of agreements) indicate that a participant country attaches high value in cross-border integration and is willing to engage in upward convergence and harmonization of policies.
Therefore, international trade and investment agreements create supranational institutions based on the collective decisions of member nations. They promote collective action and trust through transparency and policy transferal (Frenk, Gómez-Dantés, & Moon, 2014; Stoddard, 2002). For example, if a state breaks an agreed-upon rule in a WTO trade agreement, a dispute settlement body will rule on the issue and permit aggrieved parties to collect monetary damages and/or impose trade sanctions (Guzman, 2004). Thus, as states join more agreements the transfer of policy unfolds that results in the increased alignment of domestic regulations among participating nations.
As a result, international organizations and trade agreements also influence actors within states, such as firms. Although firms do not directly join the majority of international trade and investment agreements, they are embedded and accountable within the policy networks created around those agreements in that the commitments governments actively make compel changes in the way firms are regulated and operate. For example, if a state joins an agreement that contains specific labor standards, those standards are typically then reflected in domestic law or regulation, and therefore firms within that state will have to adhere to these now harmonized standards. These enforcement mechanisms are coercive in the sense that they are reflected in laws and rules established by member states, but also support the development of a shared understanding about what is acceptable or legitimate both between and within states (Bitektine, 2011; Kölbel & Busch, 2019).
As a result, the more integrated a country becomes in global trade networks, the greater likelihood firms in that country will experience institutional pressures to accede to higher CSR standards, and the more extensive the scope of the agreement, the more intense will be those pressures because the greater likelihood that those more comprehensive agreements include social and environmental provisions. Put differently, the increasing upward harmonization of trade and economic practices that are a function of accession to, and compliance with, trade and investment obligations also spills over to indirect pressures to adhere to higher social and environmental practices that are becoming increasingly expected at the global level. Indeed, we find evidence within our sample indicating that as countries integrate into both more and deeper trade agreements, there is a rise in the number of companies adopting CSR standards. For example, from 2000 to 2004 Australia entered into 12 new trade agreements and in the 5 years that followed 31 Australian companies joined the UNGCI. Austria, Bangladesh, the Netherlands, and Portugal all too experienced increases of at least 15 companies joining the UNGCI in the years following an increase of at least six agreements. As a result, we expect that firms within countries that actively participate in global trade and investment arrangements are incentivized to adopt social responsibility practices.
Global integration has a positive effect on firm adoption of CSR standards, ceteris paribus.
Firm ownership and the effects of global integration on the adoption of CSR standards
However, not all firms respond the same to global integration. The basic ownership structure of firms – private or state owned – varies in relation to a range of economic and institutional pressures. Although the literature is unsettled regarding the overall accountability of SOEs to governments (see Cuervo-Cazurra, Inkpen, Musacchio, 2014 for a discussion on the current debate), in terms of CSR, research shows that POEs and SOEs face different pressures when deciding whether, and how, to participate in social initiatives (Heath & Norman, 2004; Hofman, Moon, & Wu, 2015).
One stream of literature suggests that SOEs reflect ideological and political priorities of government motivations and are held accountable and derive legitimacy primarily from their political benefactors (Cuervo-Cazurra, 2017). Thus, they are protected to a greater degree from national-level regulatory pressures because they are part of the state’s agenda and strategy, and as such deeply interwoven with the state’s plans (Boardman & Vining, 1989; Claessens, Djankov, & Lang, 2000). Indeed, extant literature has shown that even when SOEs violate national regulations like anti-corruption policies, they do not suffer in terms of profitability (Nguyen & Van Dijk, 2012). Conversely, POEs are more likely to comply with standards and rules established by national governments because they face consequences that SOEs may not (Dewenter & Malatesta, 2001; Megginson & Netter, 2001). Moreover, because members of the boards of SOEs often also serve in political offices, they contribute to the creation of national-level regulations. This is not to suggest that all SOEs influence policies that work in their favor, but it is unlikely that a board member of an SOE would promote a national regulation that directly conflicts with, or penalizes, the SOE.
However, while scholarship has examined the relationship between SOEs and domestic institutions, less attention has been given to the relationship between SOEs and supranational institutions. As SOEs become more globally visible and expand to other jurisdictions, they are often viewed as inefficient, poorly managed, unresponsive to shareholders, and producing poor quality goods and services (Dewenter & Malatesta, 2001). While this reflects poorly on the SOE itself, it also has negative implications for the SOE’s home country, given that the SOE is a direct representation of the state itself.
Thus, we suggest that when states integrate into more trade agreements, SOEs face pressure from their home-country governments to engage in the adoption of CSR standards to overcome criticisms described above because they are often seen by other countries and actors as vestiges of the state themselves. In other words, SOE engagement in the adoption of CSR standards will demonstrate to the global community that the country is interested and actively working towards the collective global agenda – in this case holding firms accountable to promote the protection of people and the planet.
An anecdotal example (directly from our sample) of this behavior can be seen through Petrobras, the large Brazilian state-owned petrochemical company. Despite Petrobras’ involvement in domestic corruption and other scandals, the company is an advanced participant in the United Nation’s Global Compact Initiative and has been for over a decade. Further, it is actively engaged in several other global initiatives that advance CSR, including the Global Reporting Index, the Pro-Gender and Race Equality Program, and the Oil and Gas Climate Initiative. From a Brazilian perspective, Petrobras is an essential part of the country’s domestic and global energy strategy. It is in Brazil’s strategic political interest that external and global stakeholders look favorably on the company. Indeed, this interest is evidenced by Petrobras’ apparent heightened CSR initiatives that followed environmental scandals in 1997 and 2000 (Gabrielli de Azevedo, 2009) that were described as “harmful to the bottom line” and “demoralizing for all employees and Brazilians” (ibid). Thus, for Brazil to remain as an active participant in the international community more broadly, it was essential that Petrobras, which has always been part of the government’s development strategy, better adhere to CSR standards.
Thus, we argue that when countries are more economically integrated they face increased pressure to adopt global CSR standards and that the country’s officials then transfer this pressure to SOEs as they are viewed as operating on behalf of the country itself.
The effect of global integration on the adoption of CSR standards by firms is positively moderated by state ownership, ceteris paribus.
Regulatory quality and the effects of global integration on the adoption of CSR standards
Although global integration and ownership structures can have a critical impacts on a firm’s adoption of CSR standards, we maintain that the quality of a country’s formal regulatory institutional environment also matters (Dau, Moore, & Kostova, 2020a, b; Dau, Moore, & Newburry, 2020a, b; North, 1990). Regulatory quality refers to the strength of the formal institutional environment of a country (Busenitz, Gómez, & Spencer, 2000; Laffont & Tirole, 1990). It includes the quality of laws and regulations to facilitate business activities, governance systems to encourage stability and trust in the business environment, and enforcement mechanisms to curb malfeasance and corruption (North, 1990; Dau, Moore, & Bradley, 2015). Higher levels of regulatory quality reduce corruption and provide stable business environments (Dau, 2013), facilitating and promoting private sector development and business growth. Countries that have stronger and clearer regulatory frameworks have more capacity to monitor and influence firm behavior (Dau, Moore, & Kostova, 2020a, b).
There is a growing debate on the motivations behind the adoption of CSR standards and the role that institutional and governance may play in that process. Some scholarship has focused on the impact of host-country institutions (Rathert, 2016); the impact of institutions across different types of market economies such as liberal market economies, coordinated market economies, and state-led economies (Jackson & Apostolakou, 2010; Jackson & Rathert, 2016); and the impacts of actors that influence an institutional environment, such as NGOs, external stakeholders, and other public and private actors (Campbell, 2007). We build on this discussion by proposing that as global governance mechanisms are enforced through trade agreements, there is pressure for national governments to transfer these global institutions domestically. Additionally, however, we argue that in countries with high levels of regulatory quality, firm-specific transaction costs to adopt these obligations are reduced in that the overall strong regulatory environment provides a higher baseline from which to make these changes. This, in turn, allows firms more capacity to adopt CSR standards, and they are incentivized to do so to augment market legitimacy (Bansal & Song, 2017). Thus, in countries with higher regulatory quality, governments have more capacity to monitor firms’ adoption of CSR standards and firms are more incentivized to adopt them to remain legitimate.
Regulatory quality has a positive effect on firm adoption of CSR standards, ceteris paribus.
The interaction between norms and standards at the national and supranational levels jointly influences firm behavior (Kang & Moon, 2012). In our model, global trade integration reflects the supranational-level and a nation’s regulatory profile represents the country-level. Within the framework of economic integration and policy transfer, increased global trade agreements encourage accountability and policy transferal between states (Dolowitz & Marsh, 2012; Marsh & Evans, 2012), prompting states to adhere to the supranational institutions and transfer policies cultivated within the trade agreements. This, in turn, promotes increased domestic regulatory quality to reduce conflict between domestic and global actors (Ford, 2002; Ossa, 2014; Van Hoa, 2010). However, this process is not equal across all countries, as some countries experience additional obstacles to implementing supranational standards based on their domestic capabilities (Nye & Keohane, 1971; Park, 2005). Countries with more power have higher influence over agenda setting and policy creation within the trade agreements (Bohman, 1998; Fang & Stone, 2012). Consequently, these constructed policies are often based on the domestic policies and agendas of the most powerful and influential countries (Dolowitz & Marsh, 1996; Stone, 2008).
As a result, policy transfer is easier and faces fewer obstacles for countries with more power because these countries have fewer policies to adapt and change domestically (Clifton & Díaz-Fuentes, 2014; Mossberger & Wolman, 2003). Conversely, countries with less power and influence have more transfer obstacles resulting in difficulties of actual policy transfer since they will have more regulations to change domestically. These countries may not have the agency or capabilities to enact all of these policy transferals, but they will experience pressure to do so to remain active members in the WTO and their trade agreements. Increased difficulties of policy transfer and adaptation means that the effects of global integration on firm adoption of CSR standards is lower within countries with lower initial regulatory quality levels. More practically, domestic reforms are often stimulated by international treaties, and in turn, influence the pace and degree of domestic reforms, but only where domestic regulatory quality is able to execute those regulatory changes. Thus, as global pressures mandate stronger harmonization of CSR standards, states that want to engage in the global community and international trade and investment must increase their domestic CSR standards, but this process is less challenging for countries with stronger existing regulatory quality.
The effect of global integration on firm adoption of CSR standards is higher in countries with stronger regulatory quality, ceteris paribus.