Multinational enterprises and human rights : investigating the impact of international new ventures on labor abuse in the Latin American context

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Multinational Enterprises and

Human Rights: Investigating the

impact of International New Ventures

on labor abuse in the Latin American

context

MSc Thesis

Lionel Rigazzi

Student nr. 10671293

MSc. Business Studies - International Management

University of Amsterdam

August 15, 2014

First Supervisor: Dr. Michelle Westermann-Behaylo Second Supervisor: Dr. Lori DiVito

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Abstract

While there have been a multitude of studies investigating the impacts of globalization on organizational growth, there are surprisingly few studies investigating globalization’s impact on workers’ rights. This is a notable omission within the literature, as globalization and the technological revolution have served to alter the nature of competition between organizations. In turn, this has facilitated the emergence of a new breed of firm, commonly referred to as International New Ventures (INVs). These firms challenge traditionally held assumptions within the internationalization literature as they expand globally almost immediately after being founded. This clash with traditional international expansion models such as the Uppsala Model therefore raises the question of the effects of rapid internationalization on individuals’ labor rights. Therefore, the aim of this exploratory research study is to investigate whether a firm’s classification as an INV could be an accurate predictor of increased frequencies of labor abuse. Regression analysis was used to investigate this relationship, while the interaction effects of Cultural Distance and Geographic Distance were also investigated. The analysis revealed that there was no statistically significant evidence that INV expansion leads to higher instances of labor abuse. Similarly, the moderators of Cultural Distance and Geographic Distance were not found to be statistically significant. Nonetheless, this study paves the path for the development of future research streams investigating INV expansion and human rights and further highlights the importance that managers should attribute to respecting individuals’ labor rights.

Keywords: International New Ventures (INVs), Accelerated Internationalization, Human Rights, Labor Abuse, Multinational Enterprises (MNEs), Cultural Distance, Geographic Distance

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1 - Introduction

Increasingly liberalized global trade policies and the technological advances that have accompanied the digital revolution have both served to dramatically alter the nature of competition between firms. A central tenet spurring these changes has been the globalization of production networks (Greenhill, Mosley & Prakash, 2009). Over the last few decades this has resulted in many developing nations adopting more liberal trade policies which have given organizations additional incentives to expand internationally and participate in foreign direct investment (FDI) activities (Mosley & Uno, 2007). Together with the reduction of transportation and communication costs, these developments have altered the international business landscape, because while international business activities used to be a privilege uniquely reserved for large, economically powerful organizations, the gates have opened to allow smaller, less powerful organizations to conduct their business activities overseas (Oviatt & McDougall, 1994). Despite their comparatively limited resources, these developments have allowed such firms to raise the necessary capital in order to manufacture and sell their products worldwide (Oviatt & McDougall, 1994), ultimately opening the door to business opportunities that were previously restricted to large multinational enterprises (MNEs). In essence, it is the entrepreneurial nature of these firms that allows them to exploit business opportunities by viewing the world as one single market (Chetty & Campbell-Hunt, 2004).

This relatively new subset of MNEs was originally identified by Oviatt and McDougall (1994), and are systematically referred to using several terms, including international new ventures (INVs), born globals, accelerated internationalization, and international entrepreneurship (IE) (Zahra, 2005). For

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the purposes of this study, these firms will be referred to as INVs. An INV is formally defined as “a business organization that, from inception, seeks to derive significant competitive advantage from the use of resources and the sale of outputs in multiple countries” (Oviatt & McDougall, 1994, p. 49). Such firms are distinguished from their counterparts due to their international origins, as evidenced by their resource commitments being in more than one country (Oviatt & McDougall, 1994). Crucially, it is the resourcefulness of the firm, and not the amount or types of resources that it possesses, that matters for its survival and success (Zahra, 2005).

Seeing as the phenomenon of INV expansion has only recently started gaining traction within the last decade (Rialp, Rialp, & Knight, 2005), the effect of economic and socio-cultural factors on these firms is still not understood well (Fan & Phan, 2007; Zahra, 2005). As such, explanations as to why these firms skip stages in the traditional international expansion process have not been adequately explained in existing internationalization models (Freeman, Hutchings, Lazaris, & Zyngier, 2010). It is thus necessary to further analyze how INVs are able to account for and manage the additional challenges involved when their resource bases and competitive advantages are dissipated throughout the globe (Prashantham & Young, 2011). One such factor which has yet to be thoroughly investigated in this realm concerns the labor abuses associated with increasing levels of globalization (Davies & Vadlamannati, 2013). Seeing as INVs inherently conflict with traditionally accepted international expansion theories, the effects of accelerated international growth on a firm’s ability to ensure the proper treatment of employees is worthy of investigation.

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In a similar realm, while several studies have been undertaken linking economic openness and growth, there have been relatively few systematic analyses of globalization’s impact on workers, suggesting that the phenomenon of economic globalization should be further disaggregated and analyzed (Mosley & Uno, 2007). The issue is that a large percentage of the business literature treats globalization as a monolithic entity and process, which is inaccurate as there are numerous factors that play a role in affecting a country’s economic openness, such as industries, interest groups, governmental policies and the nature of the country’s political institutions (Mosley, 2011). These factors combine to ultimately influence national policy choice decisions, as for example, trade openness has been empirically linked with declines in social spending in Latin America (Kaufman & Segura-Ubiergo, 2001).

Despite recent attention paid to labor rights abuses by human rights activists, this is not a new phenomenon as workers around the world are often treated poorly and are denied basic labor rights by their governments and employers alike (Mosley, 2011). Large labor abuse scandals such as that of Nike in the early 2000s have helped to bring the issue to light, such that more attention is being paid by shareholders, nongovernmental organizations (NGOs) and consumers in applying pressure on companies to ensure the ethical conduct of their operations (Greenhill et al., 2009). This study therefore aims to contribute to the existing discourse by specifically focusing on whether a firm’s classification as an INV will result in a higher number of labor rights abuses. As an extension, the physical and psychic distances associated with international expansion will be accounted for by analyzing the moderating effects of cultural and geographic distance on the occurrence of labor abuse.

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2 - Literature Review and Hypotheses Formulation

2.1 - Labor Abuse

2.1.1 - Human Rights Abuses and the MNE

The state-based system of global governance has struggled for over a generation in trying to adjust to the growing expansion and power of MNEs (Ruggie, 2007), therefore meaning that the international community is still in the early stages of implementing more effective protection for individuals against human rights abuses (Ruggie, 2008). The main causes of today’s predicament between business and human rights can be traced to the governance gaps that have been created by globalization (Ruggie, 2008) More specifically, this refers to the scope and impact of organizations opposed against the fragmented abilities of societies to collectively manage their actions (Ruggie, 2008). These gaps in governance have been exacerbated by the lack of authoritative actors in the form of businesses, states and civil society, who together have allowed for the continuation of human rights abuses without adequate sanctioning and punishment.

The international community has gradually acknowledged the need for individuals around the world to be protected against such abuse, and this has culminated in the creation in 2005 of the UN “Guiding Principles on Business and Human Rights”, spearheaded by John Ruggie, the United Nations Secretary-General’s Special Representative for Business and Human Rights from 2005-2011 (Ruggie, 2008). The framework is comprised of three core principles, namely: the duty of the state to protect against human rights abuses, the responsibility of MNEs to respect human rights, and the need to create adequate repercussions in order to appropriately respond to instances of human rights abuse (Ruggie, 2008).

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The framework is commonly referred to as “Protect, Respect and Remedy” (Ruggie, 2008), and its aim is to instill human rights due diligence, a concept where organizations ensure compliance with national laws and simultaneously manage the risk of human rights abuses with the ultimate objective of avoiding abuse (Ruggie, 2008).

In implementing human rights due diligence, organizations must adequately construct a monitoring system that identifies, prevents, and addresses human rights abuses (Ruggie, 2008). At a minimum, this involves the thorough analysis of organizational policies and procedures vis-à-vis individuals’ human rights as stipulated in the International Bill of Human Rights and the core conventions of the ILO (Ruggie, 2008). Under the “Protect, Respect and Remedy” framework, organizations must carry out human rights due diligence by thoroughly and proactively analyzing the country contexts in which they are operating in order to identify specific human rights challenges that may arise (Ruggie, 2008). This analysis includes the potential impacts of the firm’s actions on the human rights situation in the host country and whether or not the firm’s relationships with outside parties such as suppliers, business partners and governmental bodies may contribute to potential instances of human rights abuse (Ruggie, 2008). These objectives can be attained through the company-wide adoption and integration of a human rights policy, impact assessments such as risk and social impact assessments, and the implementation of a monitoring and auditing system in order to receive regular updates to ensure continuous improvement (Ruggie, 2008). Top management leadership is crucial for the successful implementation of human rights due diligence, as human rights considerations are often isolated within different organizational divisions, making

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it more difficult for the consistent application of an organization-wide human rights policy (Ruggie, 2008). This framework notably holds MNEs to a much higher degree of responsibility in preventing human rights abuses, which is a notion that has traditionally been resisted by the global business community (Kinley & Chambers, 2006).

The creation of frameworks such as that of the Guiding Principles on Business and Human Rights represents a challenge to the traditional viewpoint that only states and governments are responsible for human rights violations (Muchlinski, 2002). This challenge is a reflection of the greater economic and social power that MNEs have gained following the increasing integration of the global economy (Muchlinski, 2002). As a result of globalization, many organizations now hold more effective power than a number of nation-states, thus meaning that MNEs also have a direct impact on the economic, political and social landscapes in the countries where they operate, and - as an extension - on individuals and their human rights (Monshipoori et al., 2003). Because of their increasing power, organizations are thus now being held more accountable for human rights abuses as they now possess powers that were traditionally held only by state actors (Monshipoori et al., 2003). One of the contributors to the reduction in power of national governments has been the privatization and deregulation of economies which has reduced the state’s influence on the economic lives of individuals (Cernic, 2008). The scope of MNEs’ power is now so vast that their activities have the ability to affect virtually all internationally recognized rights (Ruggie, 2008). This confers upon businesses a much higher moral responsibility in upholding human rights and human dignity as organizational activities are now inherently intertwined in peoples’ daily lives, whether as a source of employment

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or through supplying individuals with essential resources such as food and clothing . A general consensus is thus developing which views the scrutiny of MNEs and their human rights records and policies as perfectly acceptable (Muchlinski, 2002).

MNEs worldwide should further consider the implementation of human rights due diligence practices as international expansion involves more than just the transfer of capital and technology to a new location (Spar, 1998). Importantly, international expansion implicitly means that MNEs also take their brand names, reputations and international images abroad, which then results in increased scrutiny from Western activist groups (Spar, 1998). This is commonly referred to as the spotlight effect (Spar, 1998). The vigilance of such activist groups and NGOs in monitoring potential human rights abuses through global networks and use of mass media channels have the ability to expose MNEs’ actions and harm their reputations (Muchlinski, 2002). This can then result in negative publicity in the form of consumer boycotts and mass action campaigns, further damaging the organization’s reputation and financial results. The advantages of international expansion such as lower labor costs and weaker regulatory frameworks must then be weighed against the potentially crippling effects of negative publicity and a damaged brand image (Spar, 1998).

2.1.2 - Labor Rights in the International Context

A consensus on the general principles of basic labor rights and standards has been reached through a combination of different actors and institutions, including international and regional human rights charters, common labor laws and practices among democratic countries, as well as conventions and

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recommendations as put forward by the International Labor Organization (ILO) (Compa, 1993). Some examples include the United Nations’ Universal Declaration of Human Rights and the ILO’s Convention number 98 concerning the right to organize and bargain collectively. As stated by Compa (1993) the culmination of these labor rights principles are summarized as follows:

- The right of association, and the conjoined rights to form trade unions and bargain collectively with employers, as well as to participate in civil and political affairs of a society;

- Free choice of employment, with absolute prohibitions on the use of forced or compulsory labor;

- Prohibitions on child labor, and limitations on youth labor; - Non-discrimination in employment;

- Adequate wages, limits on working hours, health care and other features of social security, and occupational safety and health protection. (p. 169)

The ILO’s 1998 declaration on the “Fundamental Rights and Principles at Work” further advances global society’s sentiments that labor rights are inherently intertwined with human rights. This declaration embodies the seven core conventions of the ILO, namely the “freedom of association and collective bargaining (convention numbers 87 and 98), freedom from forced labor and discrimination (Nos 29, 105, 111), and abolition of child labor (No. 138)” (Singh & Zammit, 2004, p. 86). The notion that labor rights are inherently intertwined with human rights is evidenced through governments, employers and workers’ obligations to fulfill the aforementioned labor rights principles regardless of whether or not they have ratified the relevant conventions (ILO, 2004). These are

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universal rights have been integrated into the United Nations Global Compact and are seen as inherent to individuals’ social and economic lives (ILO, 2004).

There is widespread debate in the literature concerning the effects that increased globalization has had on the labor rights of workers, especially those in developing countries. Proponents of globalization cite the benefits that FDI and liberalized trade have brought to many countries, in turn leading to higher economic growth rates and better employment opportunities (Mosley & Uno, 2007). These opportunities are then said to positively enhance labor rights as trade openness and economic development lead to increased communication between states, which can then lead to political reform (Greenhill et al., 2009). Empirical evidence of this trend can be found through Islam and Deegan (2008), who investigated the Bangladesh Garments Manufactures and Exporters Association (BGMEA) and found that the protection of human rights was beginning to gain precedence in supplier relationships. Furthermore, developing countries with better human rights practices are said to attract more global production activity, and sustaining this increase in activity is in-turn more likely to lead to the continuous improvement of human rights (Blanton & Blanton, 2007) on the basis that similar human capital, as well as political and social stability factors may potentially be determinants of FDI in their own right (Kucera, 2002). Detractors, however, cite evidence of governments favoring the interests of firms over those of workers (Compa, 1993). The reasoning behind the notion is that lower labor standards and lower labor costs give certain countries a competitive advantage in regards to attracting large MNEs. As such, other countries will also look to gain similar advantages and will subsequently refrain

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from imposing strict regulations on workers’ rights (Collinsworth, Goold, & Harvey, 1994).

In a bid to further understand the complex relationships surrounding the effects of globalization, Kucera (2002) created a database collecting information about labor rights violations in over 90 developing countries from 1986-2002, paving the way for further investigation in this field. Through this database, Mosley and Uno (2007) were able to statistically test the relationship between labor rights violations and economic globalization in these countries, and found mixed results. While inflows of FDI were found to be associated with better collective labor rights, a country’s degree of trade openness was found to be negatively related to labor rights. Furthermore, a country’s level of democracy, income per capita, population, and occurrence of civil conflict were all found to be strongly correlated to labor rights (Mosley & Uno, 2007). These results illustrate the complexity of the relationship between globalization and collective labor rights, showing us that this relationship is not one that is black-and-white, as different elements of economic globalization affect the rights of workers in different manners (Kucera, 2002).

This ultimately depends on how a specific country has positioned itself to participate in the global market (Mosley & Uno, 2007). The lack of labor rights in certain developing countries is less related to the presence of MNEs than with the country’s degree of trade openness vis-à-vis the global economy (Mosley & Uno, 2007). More specifically, in the context of the violation of labor rights, what is essential in improving the situation is not how much a country trades, but with whom it trades (Greenhill et al., 2009). This important conclusion reached by Greenhill et al. (2009) highlights an important shortcoming present in the labor

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rights literature, namely its extant focus on classifying all trading relationships as the same, which is simply not the case. Disaggregating the concept of “trade globalization” allows for a more nuanced understanding of the complex relationship between economic globalization and labor rights (Greenhill et al., 2009).

The nationality of MNEs was also found to contribute to the variation in the instances of labor rights violations (Mosley & Uno, 2007), as potential investors’ preferences vary across host countries due to differences in corporate culture and beliefs regarding corporate social responsibility (CSR) (Doremus, Keller, Pauly, & Reich, 1999). This is becoming an increasingly important contingency to account for as the trend of higher amounts of FDI inflows to non-OECD nations (UNCTAD, 2004) has continued, such that in 2012 FDI flows to developing and transition economies surpassed those to developed economies (UNCTAD, 2012). This pattern of inflows has continued unabated, and in 2014 FDI flows to developing economies reached a new high, accounting for 54% of global FDI inflows (UNCTAD, 2014). In the context of aiming to reduce instances of labor abuse, this could potentially be worrisome for individuals’ labor rights, as labor standards may not be respected to the same degree in developing and transition economies as in OECD nations.

2.2 - INV Expansion

In the past decade, a variety of new firms have arisen that are active in the global economy, yet share very few similarities with the large MNEs that are traditionally associated with the domination of the international marketplace (Mathews & Zander, 2007). The defining characteristic of these INVs is

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accelerated internationalization (Weerawardena, Mort, Liesch, & Knight, 2007), where these firms are seen to almost skip the internationalization process and simply attack the world market through innovative strategies of integration (Mathews & Zander, 2007). Such firms adopt a global view of their markets and develop their international capabilities and goals at or near their founding (Knight & Cavusgil, 2004). This goes against the traditional reasoning of the gradualist view of internationalization, which stresses incremental and sequential learning through a path-dependent, more risk-averse learning process (Oviatt & McDougall, 1997).

Following previous empirical studies that have focused on INV expansion, a general consensus on the characteristics of an INV has yet to be reached. For example, the OECD (1997) considers a firm as an INV if it undertakes international expansion within three years of its founding. Shrader, Oviatt and McDougall (2000) demarcate an INV as a firm that is six years old or younger and one that has already expanded to include overseas operations. On the other hand, Rennie (1993) classifies INVs as firms that export 75% of their total sales, and do so after less than two years of operations, while Kuvalainen, Sundqvist and Servais (2007) denote an INV as a firm that has internationalized within three years of their founding and whose international sales form at least 25% of total sales. However, the common link between these classifications is that the expansion patterns of INVs represent the most apparent violation of the incremental internationalization process (Johanson & Vahlne, 1990). Firms that have been recently founded also represent the conventional operational definition of a new venture (Robinson & McDougall, 1998), as this is the most critical period that determines a firm’s future survival.

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2.2.1 - The Uppsala Model of International Expansion

Time is thus an issue that is at the center of the internationalization literature (Prashantham & Young, 2011), and the INV literature has challenged the traditional consensus on multinational business expansion, which has traditionally focused on large corporations (Oviatt & McDougall, 1994; Rialp et al., 2005; Spence, Orser & Riding, 2011) and their gradual internationalization through a series of evolutionary stages (Bell, McNaughton, Young, & Crick, 2003). In essence, traditional international expansion theory emphasizes gradual, incremental internationalization steps based on the progressive acquisition of knowledge of foreign markets over time (Bilkey & Tesar, 1977; Johanson & Vahlne, 1977; Johanson & Vahlne, 1990; Johanson & Wiedersheim-Paul, 1975). This stage-process of internationalization is evidenced in the literature through the Uppsala Stage Model, originally developed by Johanson and Vahlne (1977). The underlying assumptions of the model involve uncertainty and bounded rationality (Johanson & Vahlne, 2009), with the latter referring to the limits of the reasoning abilities of humans (Brian, 1991).

Citing the difficulties associated with expanding to more distant countries, the model emphasizes that firms will first expand to culturally similar countries before expanding to those that are increasingly distant. Contrary to other internationalization models such as internalization theory (Buckley & Casson, 1976), transaction cost theory (Hennart, 1982), and the eclectic paradigm (Dunning, 1980), the Uppsala Model views internationalization through a behavioral approach rather than an economic approach (Johanson & Vahlne, 2009). Learning is therefore at the center of the model, as firms’ acquisition of knowledge regarding unfamiliar and foreign environments affects their

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investment behavior (Forsgren, 2002). Contrary to the economic-based theories of internationalization, the Uppsala Model more readily accounts for internationalization through the lens of the individual firm rather than the structure of the wider economic system (Johanson & Vahlne, 2013).

Key concepts that were introduced within the Uppsala Model to more accurately describe the phenomenon of gradual internationalization include the

establishment chain, psychic distance and liability of foreignness. The establishment chain refers to the increasing resource commitments that are associated with the

increase in sales when a firm expands to a new country. This is typically illustrated by a firm first expanding overseas through exporting, then through an agent’s representation and finally through the establishment of factories and sales organizations in the host country (Johanson & Vahlne, 2009). Psychic distance is defined as “factors that make it difficult to understand foreign environments” (Johanson & Vahlne, 2009, p. 1412) and include differences in aspects such as education systems, language and culture (O' Grady & Lane, 1996). The origins of the psychic distance construct can be traced to liability of foreignness, which is a term used to encapsulate the uncertainty and increased costs associated with a firm’s international expansion (Zaheer, 1995). This uncertainty stems from political, cultural and geographic differences between countries and the subsequent challenges involved with coordinating these factors across large geographic distances (Zaheer, 1995).

2.2.2 - The Rise of INVs and their clash with the Uppsala Stage Model

While it is true that internationalization stage theories have gained considerable support within the literature (Bell, 1995), the effects of psychic

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distance are argued to now be much less relevant due to increasingly homogenous markets and advances in communications and transportation infrastructures (Czinkota & Ursic, 1987). INVs are also able to leverage their knowledge, innovativeness and capabilities in a flexible, agile manner that is difficult for large MNEs to emulate (Knight & Cavusgil, 2004) as they tend to rapidly expand to be able to sustain growth in their narrow, niche markets, thereby compensating for high development costs and rapid product life cycles (Autio, 2005). Contrary to the Uppsala Model, then, the INV literature does not view youth, lack of experience and limited resources as limitations to international expansion (Knight & Cavusgil, 2004).

Empirical results concerning traditional international expansion models such as that of the Uppsala Model have not been fully supported either (i.e. Andersen, 1993; Andersson, 2004; Bell, 1995; O’Grady & Lane, 1996; Turnbull, 1987). Turnbull (1987) found that companies used a variety of sales methods when expanding overseas. These results conflict with the fundamental assumptions of traditional international expansion theory concerning incremental resource commitments in new and unfamiliar markets. Reid’s (1983) findings are also in line with those of Turnbull (1987), who argues that the traditional international expansion models are too deterministic in nature. As such, Reid (1983) proposed a contingency view of internationalization, where firms’ internationalization decisions are influenced more by prevailing economic and political circumstances than by their age and level of international experience. These findings were further supported by O’Grady and Lane (1996), who further challenged the Uppsala Model through their identification of the psychic distance

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necessarily be easier to manage as assumptions of similarity may prevent individuals from noticing critical cultural differences; assumptions of similarity thus do not necessarily lead to a reduction of the uncertainty associated with psychic distance (O' Grady & Lane, 1996).

INVs therefore naturally conflict with and challenge traditional internationalization theory as they skip certain stages of the traditionally accepted international growth process. Instead, INVs’ differing assumptions and observations of the market and competition ultimately leads them to identify different types of opportunities which they exploit in a different manner (Zahra, 2005). As an example, Knight and Cavusgil (2004) found that the degree of the firm’s international entrepreneurial orientation and international marketing orientation were crucial determinants of the international success of INVs, while determinants of success at the strategic level were found to hinge on global technological competence, the formation of strong relationships with distributors, the development of unique products, and a strong focus on quality.

Coviello (2006) focused on the network ties of INVs, stressing their need to be involved in networks which facilitate the rapid internationalization process as this allows them to overcome liabilities of newness and foreignness through access to resources and international opportunities. These network relationships are viewed as intangible resources which are essential to organizational growth (Coviello, 2006). Zhou, Barnes and Lu (2010) build on these findings by stressing that the learning advantages associated with early internationalization are not generated automatically, but are dependent on the degree to which senior management promotes a dynamic international learning environment. The firm’s international learning environment is a comprehensive concept which includes

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employees’ abilities to work proactively by regularly visiting international trade fairs, paying close attention to markets and market trends, and developing innovative products and solutions to best serve international markets (Zhou et al., 2010).

2.2.3 - Additional Risks of International Expansion for INVs

If one focuses on the firm’s supply chain, one can see that market globalization and shorter product and technological lifecycles have resulted in complex international supply network relationships (Christopher et al., 2002), resulting in a shift in the sourcing strategies of organizations (Barrientos & Smith, 2007). The increased globalization of supply chains and the more prevalent use of sub-contract manufacturing and offshoring have contributed to the complexity within these supply chains, sometimes resulting in what is referred to as a lack of

visibility – where a member of a supply chain has no detailed knowledge of what

is occurring in different areas of the supply chain (Christopher & Lee, 2004). These complex supply networks underlie much of today’s sourcing (Barrientos & Smith, 2007) and have resulted in the continuous spatial and functional reconfigurations of firms’ value added activities (Lier, 2009) as they seek to focus on their core competences and increase their flexibility vis-à-vis external environmental changes (Barnes, Peck, & Sheppard, 2012).

In this realm, the global sourcing of goods and suppliers makes it more difficult for companies to monitor the processes undertaken by suppliers in producing the product (Roth, Tsay, Pullman, & Gray, 2008). The monitoring of suppliers through the imposition of quality codes and codes of conduct may also become more difficult as geographic dispersion increases. Due to the geographic,

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economic and cultural diversity that suppliers in different countries have from one another, the enforcement of such codes creates agency problems (Ganesan, George, Jap, Palmatier, & Weitz, 2009). It may also be the case that suppliers simply do not have the necessary resources and management skills needed to improve the working conditions of their employees in a cost-effective way (Ganesan et al., 2009).

While the fragmentation of firm activities and supply chains opens additional channels for the economic growth of these organizations, this poses a number of challenges for labor rights (Mosley, 2011). Mosley (2011) associates these indirect forms of sourcing with increases in labor rights abuses due to the lower levels of control that the firm has over its supply chain. The negative aspects of these lower levels of control are expected to be much more acute for INVs as they are considered as small and medium enterprises (SMEs) within the academic literature, and are therefore characterized as having fewer resources, expertise, market knowledge and network relationships than traditional MNEs (Coviello, 2006). To further compound this issue, INVs are also pushed to expand overseas due to the rapid obsolescence of their typically narrow product offerings and limited local demand for their products (Crick & Spence, 2005). This may therefore result in additional pressures for INVs to expand internationally as compared to traditional MNEs, and could result in oversights being made by management in regards to selecting the proper suppliers and monitoring the enforcement of labor policies in a geographically dispersed context.

To further exacerbate the effects of the lack of visibility, there has also been a large increase in direct sourcing from networks of global suppliers, but crucially with no legal ties (Barrientos & Smith, 2007). This is suspected to be related to a

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race to the bottom, a term that was originally identified by trade unions and NGOs

to describe the competition for FDI between countries or regions by offering investors ever greater concessions such as tax breaks and weaker regulations (Kucera, 2002), also in the realm of employees’ labor rights. Although a recent OECD study concluded that there was no decisive evidence of this occurring between countries, it is the prisoner’s dilemma nature of this competition that creates a permanent danger of such wars (Oman, 2000).

Davies and Vadlamannati (2013) build on the findings of Oman (2000) and Kucera (2002) by associating the race to the bottom of labor standards less to governments’ failures in instituting adequate labor laws and more to organizations’ labor practices, where labor abuses are said to occur through a failure of adequate enforcement by organizations. After all, in the grand scheme of the global economy, governmental monitoring of possible labor violations represents but one institutional actor with the ability to regulate the actions of MNEs (Barrientos & Smith, 2007). Davies and Vadlamannati (2013) therefore attribute these occurrences of labor abuse to firms’ reluctance in incurring increased costs through instituting adequate enforcement mechanisms of labor practices, one such example being workers’ rights to bargain collectively; countries with weaker labor standards and lower costs are thus seen as more attractive for firms’ international expansion. Bearing in mind the limited resource base of INVs as compared to MNEs, the occurrence of this phenomenon is expected to be more probable in INVs than traditional MNEs.

Undertaking international business activities is thus seen as being inherently risky due to the potential loss of profits and assets associated with political, legal, economic and social changes in the countries where MNEs operate

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(Roth, 1992). Shrader et al. (2000) found that while established MNEs have the ability to move assets and knowledge among different countries in order to manage this risk, INVs cannot benefit from this luxury. Instead, they must be able to thoroughly analyze the tradeoffs between the economic and political risks in the country of concern, as well as the amount of foreign revenue exposure in the host country without the ability to move assets and knowledge between countries to manage risk. International business activities can thus be more challenging for INVs, especially due to the limited resources that they possess compared to traditional MNEs.

The reasons cited above therefore lead to the formulation of the following hypothesis:

H1: International expansion undertaken by INVs will lead to higher instances

of labor abuse.

2.3 - Ghemawat’s CAGE Framework

Many companies nowadays continually overestimate the attractiveness of foreign markets, due in part to the analytic tools used by management to judge market entry decisions (Ghemawat, 2001). These programs emphasize the potential sales levels that could be attained if a firm were to enter a new market, but do not take into account the difficulties and increased costs and risks associated with undertaking business in a new market (Ghemawat, 2001). Most of these unforeseen costs and risks arise as a result of distance, which can fall under the realm of cultural, administrative, geographic or economic distance (Ghemawat, 2001). In the context of this research topic, cultural distance and geographic distance are the two factors identified by Ghemawat (2001) that will be used.

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2.3.1 - Cultural Distance

One of the main highlights of the contemporary global economy is the multinational nature of production networks and increasing levels of international trade (Mosley, 2008). As a result, developing nations have been able to benefit from increased participation and integration in these networks, as evidenced by increasing FDI inflows to these countries (Mosley, 2008). However, in order to successfully benefit from these increasing capital flows, foreign and domestic partners alike must account for cultural distance in their everyday activities, lest they allow the transaction costs and risks of doing business to increase (Tihanyi, Griffith & Russell, 2005).

Culture is defined as “the collective programming of the mind that distinguishes one group or category of people from another” (Hofstede, 1980). This particular definition stresses that culture is a collective attribute that is common to some, but not all individuals - and while not readily visible - is manifested through actions (Hofstede & McCrae, 2004). Among the first scholars to classify cultural constructs was Geert Hofstede (1980). By analyzing survey data from over 117,000 IBM employees working in 40 different countries, he was able to use this information to identify the cultural attributes that distinguished national cultures from one another, commonly referred to as cultural distance, which is formally described as “the extent to which the shared norms and values in one country differ from those in another” (Drogendjik & Slangen; Kogut & Singh, 1988).

While it is indeed true that numerous studies have espoused the benefits of international expansion, for instance through obtaining new organizational competencies (i.e. Bartlett & Ghoshal, 1989), foreign expansion is not without its

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risks as it can also serve to increase organizational complexity and the uncertainty involved with entering a new market (Tihanyi et al., 2005). Evidence of this can be seen through the many attempts at international cooperation which have not been successful (van Oudenhoven, 2001), the failures of which have often been attributed to cultural misfits (Olie, 1994). In fact, a number of managers have stated that they prefer to collaborate with culturally similar partners, especially when intensive cooperation is necessary in order to make the partnership successful (van Oudenhoven & de Boer, 1995). After all, a country’s cultural attributes “determine how people interact with one another and with companies and institutions” (Ghemawat, 2001) and include aspects such as differences in religious beliefs, race, social norms, education systems and language (Ghemawat, 2001). In turn, these cultural aspects influence how a person behaves, communicates with other people, and interprets information (Carlson, 1974). Therefore, when establishing a new venture overseas, individuals may be confronted with others who act differently than themselves and have different belief systems and values (Hutzschenreuter & Voll, 2008). If not adequately accounted for, these differences may ultimately serve to adversely affect work performance as work units that are managed according to the expectations of local national cultures will perform better than work units whose management practices are not consistent with those of the local culture (Newman & Nollen, 1996). This is because national culture is a central pillar to how individuals understand and approach their work (Newman & Nollen, 1996) as it affects individuals’ perceptions, beliefs and behavior (Kirman, Lowe, & Gibson, 2006) and is reflected through their conflict management, decision-making and leadership abilities (Kirkman et al., 2006).

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Cultural distance factors are also manifested at the organizational level, where systems, processes and structures must also be adapted to the new institutional contexts, also known as the “rules of the game” (Meyer, Estrin, Bhaumik & Peng, 2009, p. 61). When examining the role of cultural distance at the organizational level, numerous studies have supported the notion that as the cultural distance between the firm’s home and host country increases, the ability of the firm to operate effectively in the host country decreases (Tihanyi et al., 2005) and perceived uncertainty increases (Kogut & Singh, 1988). This is because as the cultural distance between the home and host country increases, the complexity of managing the network increases as the firm has to deal with a larger number of external factors simultaneously (Scott, 1992). These factors interact with each other in such a manner as to erode a firm’s previous experiences by making them less valuable and applicable in increasingly different environments (Barkema, Shenkar, Vermeulen, & Bell, 1997), as larger cultural distances can contribute to the increase in costs of interpreting information between parties. This ultimately serves to heighten ambiguity and the probabilities of misinterpretations occurring between parties (Boyacigiller, 1990).

Traditional international expansion models such as the Uppsala Model (Johanson & Vahlne, 1977) imply that the aforementioned risks will be more acute for INVs, as they do not follow the traditional expansion paths of regular MNEs. In the academic literature, INVs are also considered as SMEs, and are therefore characterized as having fewer resources, expertise, market knowledge and network relationships than traditional MNEs (Coviello, 2006). Managers of these firms will thus not have the same scope and ability to acquire all of the necessary micro-level market information when they enter the new markets (Ojala &

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Tyrvainen, 2007). This ultimately implies that INVs will struggle more than traditional MNEs in establishing and managing their operations in host countries with high levels of cultural distance due to their lack of experience and familiarity in undertaking business in an international environment (Tihanyi et al., 2005).

2.3.1.1 - Hofstede’s Dimensions of Culture

Based on the survey data he collected, Hofstede created four original dimensions of national culture, namely “Power Distance”, “Uncertainty Avoidance”, “Individualism” and “Masculinity”. Together, these four dimensions may contribute in explaining increased occurrences of labor abuse due to differences in national culture.

Power Distance refers to “the extent to which people believe and accept that power and status are distributed unequally” (Hofstede, 1980; Hofstede, 1984). As an example, individuals who come from societies with higher levels of power distance are said to be more receptive towards hierarchical order, while those from smaller power distance societies will tend to strive for equality and will seek justification and explanations for differences in power between individuals (Hofstede, 1984). Power distance in the workplace is frequently reflected in the superior-subordinate relationship (Bochner & Hesketh, 1994) and is manifested in individuals’ behaviors, as those originating from higher Power Distance countries tend to behave submissively or are unwilling to disagree with their superiors (Bochner & Hesketh, 1994). Managers from higher Power Distance countries also tend to manage in a more autocratic fashion, as opposed to the more collaborative fashion seen in countries with lower levels of Power Distance (Bochner & Hesketh, 1994).

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The “Uncertainty Avoidance” dimension measures “the extent to which people are threatened by uncertain, unknown, or unstructured situations” (Hofstede, 1980) and analyzes how tolerant a society is towards ambiguity (Hofstede & McCrae, 2004). As such, societies classified by higher levels of uncertainty avoidance are said to try and minimize the occurrence of unstructured situations by implementing strict laws and rules, as well as rigorous safety and security measures and favoring and maintaining societal institutions that protect conformity (Hofstede, 1984; Hofstede & McCrae, 2004). On the other hand, societies with lower levels of uncertainty avoidance will tend to be more tolerant of differing opinions and beliefs to their own and will try and have as few rules as possible (Hofstede & McCrae, 2004). The Uncertainty Avoidance dimension is manifested in the workplace through the degree that plans, policies, procedures, and organizational systems are explained and clarified for all employees to understand and abide by (Newman & Nollen, 1996). Policies that are clearly elaborated and understood will help employees from higher Uncertainty Avoidance countries reduce their discomfort and potential anxiety when unknown situations occur. Therefore, compared to countries with lower Uncertainty Avoidance, employees from higher Uncertainty Avoidance countries tend to perceive uncertainty as a crisis and will react unfavorably to ambiguity in workplace policies and actions (Newman & Nollen, 1996).

The “Individualism” construct is measured on an “Individualism/Collectivism” continuum that assesses the “degree to which a society emphasizes the role of the individual as opposed to that of the group” (Hofstede, 1980). In more individualist societies, the ties between people are said to be looser in the sense that individuals are solely expected to take care of

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themselves and their immediate family (Hofstede & McCrae, 2004). On the other hand, in more collectivist societies individuals are born into a tightly-knit social structure, known as an in-group, where extended families provide support and protection in exchange for their unquestioning loyalty (Hofstede & McCrae, 2004).

Similar to the “Individualism” construct, the “Masculinity” construct is rated on a “Masculinity/Femininity” continuum which analyzes “the extent to which a society emphasizes traditional masculine values” such as competitiveness, assertiveness, achievement and material success as opposed to more feminine values such as a preference for relationships, modesty, quality of life, and nurturing and helping others (Hofstede, 1980; Hofstede, 1984). This dimension is ultimately centered on measuring and comparing how different societies allocate social roles to men and women, as some societies are classified by high levels of differentiation of social roles between the different sexes. As such, in countries that are considered to be more feminine, women are said to be able to take more assertive roles, while men are able to take less assertive roles due to the lower levels of social differentiation present in the society (Hofstede, 1984).

A key tenet about the Power Distance dimension and its relation to labor abuse allegations is the extent to which employees are allowed to participate in decision making (Newman & Nollen, 1996). Managers in countries characterized by higher levels of power distance tend to initiate organizational structures and partition tasks for subordinates in a manner such that they are told what to do instead of asked about their views (Bochner & Hesketh, 1994). In the context of potential labor abuses, this implies that it will be more difficult for employees in higher Power Distance countries to exercise and protect their basic labor rights as

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stipulated by convention number 98 of the ILO, such as the right to organize and bargain collectively and to form unions.

The Masculinity/Femininity dimension is also very relevant in the workplace and to labor CAAs, as more masculine cultures will stress and reward achievement, and advancement by emphasizing the achievement of objectives, while more feminine cultures will emphasize the quality of relations between employees as well as individuals’ work-life balance and the quality of their work life (Newman & Nollen, 1996). Similarly, a key aspect of the Masculinity construct is that more masculine cultures tend to be characterized less by thinking and observing in the workplace and more along the lines of doing and acquiring instead (Newman & Nollen, 1996). In the context of labor abuse allegations, more masculine countries could therefore potentially be characterized as having managers whose decisions are made more aggressively with lower levels of importance allocated to ensuring the proper support of employees and their labor rights. Crucially, those in more masculine countries will have a greater tendency to resolve conflicts by fighting them out as opposed to seeking a compromise (Hofstede, 1994). Along this dimension, higher levels of differences in beliefs between the home and host country could potentially play a role in affecting employees’ rights of association in the case of a disagreement between both parties, while risking their occupational safety and disrespecting caps on work hours and adequate compensation.

In organizations, the Uncertainty Avoidance dimension is manifested through the clarity of procedures, plans and systems (Newman & Nollen, 1996). Higher levels of formalization present in lower Uncertainty Avoidance countries should help employees understand their roles in the workplace and help them

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more readily realize if certain policies are not being properly followed and implemented by their employers or if a contract breach occurs. This should be less readily apparent in cultures with lower levels of Uncertainty Avoidance, due to the general opposition towards formal rules and procedures in society. As such, the concept of a labor violation occurring at the workplace should not be as readily apparent compared to cultures characterized by higher levels of Uncertainty Avoidance.

While Hofstede’s framework has its fair share of critics (i.e. Schwartz, 1994; Shenkar, 2001; Steenkamp, 2001), the validity of these dimensions has been confirmed by numerous studies (i.e. van Oudenhoven, 2001), which suggests that these dimensions are reliable both in classifying different countries according to their national cultures and determining the cultural distance between them (Drogendijk & Slangen, 2006).

This leads to the formation of the following hypothesis:

H2: For INVs, greater levels of cultural distance between the firm’s home and

host country will positively moderate the relationship between rapid international expansion and labor abuse allegations such that a greater number of labor abuse allegations will occur.

2.3.2 - Geographic Distance

Previous studies have found evidence in support of geographic distance being a major factor when firms select their countries of expansion (Chetty, 1999; Clark & Pugh, 2001; Dow, 2000; Ojala & Tyrvainen, 2007), as it is a construct that is generally seen as a source of risk and uncertainty (Malhotra, Sivakumar, & Zhu, 2009). The reasoning behind this is that larger distances between the home and host country will increase operational uncertainty - and in turn - the costs associated with overcoming the uncertainty and integrating the necessary policies

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and procedures into the firm (Malhotra et al., 2009). Ghemawat (2001) identifies geographic distance not only in terms of the physical distance between two particular countries doing business with each other, but also in terms of man-made geographic attributes, such as the state of a country’s transportation and communications infrastructures. The reason for including the latter in this characterization is because a country’s geographic attributes can also have a large influence on transportation costs. For example, if one is considering shipping perishable products, the time required to deliver these products increases when one has to cross geographic barriers such as mountain ranges. Without the adequate infrastructure present, the time required to deliver these goods will be much higher, and the reliability of delivery will diminish.

The impact of geographic boundaries can be further evidenced if one analyzes the costs of shipping freight around the world. While air transport prices have significantly declined in recent years, freight transport has not (Hummels, 1999). Frankel & Rose (2002) found that for every percentage increase in the distance separating two countries, bilateral trade declines 1%. These findings complement those of Dow (2000), who found that lower levels of geographic distance of the potential host country tends to be favorably viewed by Australian SMEs due to lower transportation costs. More geographically proximate destinations thus provide a clear cost advantage for firms, especially for those whose goods are expensive to ship (Brewer, 2007).

Economic globalization has also facilitated the rapid growth of international sourcing for components and finished goods alike (Levy, 1995), resulting in a greater number of factors for firms to consider when choosing to expand internationally. As a result, managers are now faced with increasingly

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difficult decisions in determining which activities in the value chain can be successfully sourced internationally and which need to be conducted in geographic proximity to each other (Levy, 1995). While many companies have responded to increased globalization by developing international supply chains - where the assembling of products is geographically dispersed in several countries (Levy, 1997) - a continuous oversight committed by managers in this regard is their underestimation of the increased costs associated with the disruptions that a geographically dispersed supply chain brings (Levy, 1997). The situation becomes even more complicated if products are of high technological complexity, are in early stages of their lifecycle, and when transportation costs are high (DuBois, Toyne, & Oliff, 1993). In addition, these factors are further exacerbated when frequent, face-to-face contact is necessary for coordination, such as when implementing engineering or volume changes in short time spans (Flaherty, 1986).

Geographic distance also plays a role in the costs associated with the parent company managing its foreign subsidiaries (Terpstra & Yu, 1988). Not only does geographic distance affect trade through transportation and depreciation costs of goods (Clark, Dollar, & Micco, 2004), but also through cultural distance, which ultimately influences the parent company’s monitoring and communication costs. This is because closer geographic proximities between home and host countries increase the probabilities of sharing very similar national cultures (Terpstra & Yu, 1988), which can aid in reducing monitoring and communication costs as well as potential miscommunications that arise due to increased cultural distance. In effect, more similar cultures, business practices and languages

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associated with lower levels of geographic distance serve to increase the attractiveness of certain host countries vis-à-vis other potential host countries.

The key tenet of geographic distance which applies to labor abuse allegations is that of the increased communication and monitoring costs associated with greater distances. Increasing levels of geographic distance between the home and host country make the monitoring of activities in the host country much more difficult. As such, closer geographic distances between the home and host country are thus said to encourage the transfer of information between parties (Ghemawat, 2001). However, these tasks are made even more challenging for INVs, because these firms will have the tendency to utilize the majority of their limited resources in establishing activities in the host country, therefore leaving few resources left for expensive investments in distribution channels (Moen & Servais, 2002). In comparison to traditional MNEs, INVs will therefore be left more vulnerable to the possibility of labor abuses occurring in their supply chains due to inadequate communication. Combined with the evidence that these firms tend to rely on hybrid structures when controlling their sales and marketing channels, for example through relying on close personal relationships with others and by seeking close partners whose skills complement those of the firm (Moen & Servais, 2002), the lack of adequate policies and procedures to monitor and manage relationships with suppliers will leave INVs with higher levels of risk to manage and fewer resources to adequately deal with them as compared with traditional MNEs.

However, after more than half a century of research surrounding the effects of increasing geographic distances to markets, concrete conclusions in the academic domain have been extremely difficult to reach (Ellis, 2007). It is

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reasoned that empirical results in the field are highly fragmented due to small sample sizes which make it challenging to deduce meaningful results (Ellis, 2007). To further compound this challenge, conclusions about geographic distance which are reached at the macro level (i.e. Frankel & Rose, 2002) are rarely observed at the level of the firm (Ellis, 2007), where the effects of geography are not as clear (Terpstra & Yu, 1988). For example, the financial risks and effects of increased international expansion through exporting strategies will be different than those associated with riskier expansion strategies such as FDI (Ellis, 2007). However, seeing as this is a firm-level analysis, reaching greater macro-level conclusions is beyond the scope of this particular study. Ojala and Tyrvainen (2007) further reason that due to the high correlation between geographic and cultural distance, it is often difficult to view their effects and impacts simultaneously. One such example of this would be when two countries have low levels of geographic and cultural distance from one another.

Despite these weaknesses, it is essential to investigate the impact of geographic distance on the frequency of labor abuse allegations. While numerous scholars point at the reduction of the importance of geographic distance due to technological advances, the miscommunications and misinterpretations that can arise due to geographic proximities that are increasingly distant are issues that must still be accounted for in the INV domain.

This therefore leads to the formulation of the following hypothesis:

H3: For INVs, greater levels of geographic distance between the firm’s home

and host country will positively moderate the relationship between rapid international expansion and labor abuse allegations such that a greater number of labor abuse allegations will occur.

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3 - Conceptual Model

Rapid INV

expansion Labor CAAs

Cultural distance Geographic distance H1 H2 H3

+

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4 - Research Methodology

4.1 - Research Setting

While labor rights are considered to be the subset of human rights that are most likely to be influenced by higher levels of globalization, there are relatively few studies that specifically investigate the relationship between globalization and human rights (Mosley & Uno, 2007). Because the focus of this particular research topic is centered on INV expansion and its subsequent influence on individuals’ labor rights through the investigation of labor abuses, a deductive research method is followed.

In aiming to answer the research questions of this study, a comparison of the instances of labor abuse allegations between INVs and traditionally expanding MNEs in the oil and gas, mining, and apparel industries in the Latin American context was undertaken. These industries were selected due to their high instances of recorded human rights abuses which continue to escalate at a high rate (Massarani, Drakos & Pajkowska, 2007; Ruggie, 2007). The chosen countries of analysis were Argentina, Brazil, Colombia, the Dominican Republic and Honduras. These countries were also selected on the basis of their comparatively high instances of labor abuse allegations, as well as for the diversity of industries that these abuses occurred in. Furthermore, the inclusion of multiple countries in the analysis allows for the results to be more generalizable as compared to simply choosing one country of analysis (Moen & Servais, 2002).

The research approach involves a quantitative analysis, as the study is undertaken in the realm of existing theories and will test for the subsequent confirmation or disconfirmation of the three aforementioned hypotheses (Newman & Benz, 1998). Using information obtained from the Orbis database and

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the Corporations and Human Rights Database (CHRD) in order to compare the instances of labor abuse between INVs and traditionally expanding MNEs, regression analysis was used as the primary determinant in testing these hypotheses. The method of regression that was selected was a multiple linear regression model, as the objective of this study is to evaluate the impact of one predictor variable on a particular outcome with the presence of moderating variables (Zou, Tuncali, & Silverman, 2003). In this study, the predictor variable was identified as INV expansion and the outcome was identified as occurrences of labor abuse. The moderating variables were identified as Cultural Distance and Geographic Distance, whose effects were each separately tested on the original relationship. This particular research approach was selected due to its broad applicability and generalizability to different populations, which simultaneously allows for quantitative-based predictions of labor abuse allegations to be made in the future.

4.2 - Data Collection

4.2.1 - CHRD Database

Labor abuse data was collected through the CHRD, which is designed to display all of the alleged corporate human rights abuses as archived online on the Business and Human Rights Resource Center (BHRRC) website. This database contains records of corporate human rights abuses committed by firms from 2000 until the present day, which are subsequently categorized in different violation types which include “Abuse”, “Development and Poverty”, “Environment”, “Health” and “Labor”. For the purposes of this study, the sole category of analysis used from the CHRD is “Labor”.

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The unit of analysis in the CHRD is not categorized as labor abuse, but instead as a Company Abuse Allegation (CAA), which is defined as “an instance in which some group and/or individual accuses a company of a human rights abuse” (Olsen, 2014, p. 2). Within this definition, a labor CAA is deemed to have occurred and is recorded in the database if any one of the following events are reported to have taken place:

 Child labor

 Forced labor

 Prison labor

 Denial of freedom of association/right to unionize

 Denial of freedom of expression (labor)

 Substandard wages

 Failure to meet basic labor standards

 Discrimination (Olsen, 2014, p. 32)

This classification thus identifies instances of labor CAAs that violate basic human rights of dignity as stipulated in the United Nations Universal Declaration of Human Rights, the ILO’s Fundamental rights and Principles at Work, as well as ILO Convention number 98 concerning the right to organize and bargain collectively. This culminated in a sample size of n=39 organizations with labor CAAs.

Multinational enterprises and human rights : investigating the impact of international new ventures on labor abuse in the Latin American context