Global Supply Chain Sustainability: the Role of Non-governmental Enforcement Mechanisms

Michela Limardi () and Francesca Battista ()
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Michela Limardi: RIME-Lab - Recherche Interdisciplinaire en Management et Économie Lab - ULR 7396 - UA - Université d'Artois - Université de Lille, CES - Centre d'économie de la Sorbonne - UP1 - Université Paris 1 Panthéon-Sorbonne - CNRS - Centre National de la Recherche Scientifique
Francesca Battista: Virginia Tech - College of Liberal Arts and Human Sciences

Université Paris1 Panthéon-Sorbonne (Post-Print and Working Papers) from HAL

Abstract: Non-governmental organizations (NGOs) exert pressure on multinational enterprises (MNE) to force the application of social and environmental standards for subcontractors in developing countries. Non-governmental regulation relies on voluntary standards defined by the NGOs,or by the MNE themselves. This leads to an uncertainty and social regulation. In this respect, external pressure from NGOs constitutes a reputational risk for the company. MNEs, in turn, try to manage those risks by increasingly monitoring the environmental and social impact of their global suppliers. Two forms of non-governmental enforcement currently prevail: warning (i.e.disclosing information of a violation to the company) versus immediate punishment (i.e. penalizing a company without disclosing information). A theoretical model is developed to determine whether disclosing (or not) information to the MNE about reputational risk is more effective. The results demonstrate that MNEs with a low reputation (or a high degree of out-sourcing) will have a higher incentive to conduct inspections of its global suppliers in a warning regime. Conversely, when MNE visibility is high, disclosing information in advance does not provide additional incentives.

Date: 2022-06-17
New Economics Papers: this item is included in nep-env and nep-int
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Published in 2022

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