The International Organization of Production in the Regulatory Void

Philipp Herkenhoff and Sebastian Krautheim

No 6922, CESifo Working Paper Series from CESifo

Abstract: In recent decades, a large and increasing number of leading firms in a diverse set of industries have faced allegations of ‘unethical’ practices along their international value chains. In many cases this has triggered consumer boycotts and NGO campaigns, introducing a new link between upstream (un)ethical choices and downstream consumer demand. Does this feedback effect shape the international organization of production, as casual observation of NGO campaigns seems to suggest? In an explorative empirical investigation, we indeed find that - over and above the effects of established determinants of the integration vs outsourcing decision - high potential cost savings of ‘unethical’ production in an industry favor international outsourcing and most strongly so for sourcing from low-regulation countries. Motivated by these findings, we introduce a cost-saving ‘unethical’ technology, consumer boycotts, and advocacy NGOs into a standard property-rights model of the international organization of production. Contracts are incomplete, limiting a firm’s control over both investment and (un)ethical technology choices of integrated as well as independent suppliers. We identify the unethical outsourcing incentive as a novel determinant of the international organization of production. It implies that high potential cost savings from ‘unethical’ production incentivize keeping the supplier at arm’s length, rationalizing our empirical findings.

Keywords: international outsourcing; intrafirm trade; property-rights theory; environmental regulation; ethical production; consumer boycotts; NGOs (search for similar items in EconPapers)
JEL-codes: D23 F12 F18 F23 F61 L23 L31 Q53 (search for similar items in EconPapers)
Date: 2018
New Economics Papers: this item is included in nep-com, nep-cta, nep-hme, nep-int and nep-lab
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Persistent link: https://EconPapers.repec.org/RePEc:ces:ceswps:_6922

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