Multinationals and Human Rights:
Entry mode choice and the chance of human rights
violations
Master Thesis Natascha Schippers
10670432
MSc. Business Studies – International Management University of Amsterdam
First supervisor: Dr. M.K. Westermann-Behaylo Second supervisor: dhr. D.J.H.M. van den Buuse
Date: 30-6-2014
Abstract
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This exploratory research examined the relationship between the MNE’s choice of entry mode (e.g. non-equity, joint venture, and wholly owned subsidiary) and the chance of human rights violations linked to the MNE. More explicitly, this research investigates how the differences between specific entry modes in the degree of control, resource commitment and risk can be associated with the direct or indirect involvement of the MNE in environmental and health violations. Data provided by the CHRD Database, ORBIS and additional secondary data on nine firms, active in three different industries (textile and apparel, gas and oil and the mining industry), were coded and analyzed to identify the entry mode with the lowest chance of human rights violations and the underlying mechanisms (i.e. degree of control, resource commitment and risk) that cause this difference. The findings seem to support the proposition that from the three entry modes, a wholly owned subsidiary has the lowest chance of becoming accused of human rights violations. Both non-equity and joint ventures seem to have a higher chance of having their foreign operation accused of human rights violations. These findings may have implications (1) for future research to elaborate further on the proposed theory and test theory using quantitative studies, and (2) for managers to strategic decisions based on human rights violations when entering a foreign country.
Key words: Globalization, Entry mode, Human rights violations, Multinational Enterprises (MNEs)
Contents
1. Introduction ... 5 2. Literature review ... 8
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2.1 Human rights and the transnational corporation ... 8
2.2 Foreign direct expansion motives ... 12
2.2.1 Resource-seeking firms ... 12
2.2.2 Efficiency-seeking firms ... 13
2.3 Entry modes and entry mode characteristics ... 14
2.4 Entry mode characteristics and human rights violations ... 17
2.4.1 Risk exposure and environmental and health violations ... 17
2.4.2 Control and environmental and health violations... 19
2.4.3 Resource commitment and environmental and health violations ... 19
2.5 Entry mode and health and environmental violations ... 20
2.5.1 International experience ... 23 3. Methodology ... 25 3.1 Grounded theory ... 25 3.2 Multiple-case study ... 25 3.2.1 Case selection ... 26 3.3 Data collection ... 28 3.4 Data analysis ... 33 3.4.1 Within-case analysis ... 34 3.4.2 Cross-case analysis ... 35 4. Results ... 36 4.1 Within-case analysis ... 36
4.1.1 Violators: MNEs using a license/contract entry mode ... 36
4.1.2 Violators: MNEs using a joint venture entry mode ... 41
4.1.3 Non-violators: MNEs using a wholly owned subsidiary entry mode ... 46
4.2 Cross-case analysis ... 49
4.2.1 Textile and apparel industry ... 49
4.2.2 Gas and oil industry ... 50
4.2.3 Mining industry ... 51
4.2.4 Experience ... 52
5. Discussion ... 53
5.1 Contributions to existing theory and managerial implications ... 56
5.2 Limitations and recommendations for future research ... 56
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1. Introduction
It seems that wherever large multinational enterprises (MNEs) expand their operations and activities, the amount of human rights violations expands with them. Too often the media brings the news of MNEs that are accused of violations of human rights. Take the example of the collapse at the Rana Plaza factory in Bangladesh, where more than a thousand people working for the supplier of big brands like Primark, Mango and other western high street retailers, were killed (Burke, 2013). This has shed a light on the bad working conditions in the garment industry where extremely low wages are accompanied by bad factory working conditions such as unsanitary bathrooms, long working shifts and abusive supervisors (Manik & Yardley, 2013).
The most concerning is that the example of the Rana Plaza collapse is only one of the numerous cases where the activities of large multinational enterprises are causing harm to human rights. Especially when it comes to their foreign affiliates in developing countries where governments lack control or MNEs seem to have issues with compliance to human rights. While the amount of allegations is substantial, the phenomenon has only been on the radar of international business researchers since the nineties. Moreover, most of these studies focus on the legal or political perspective of business and human rights (i.e. Ruggie, 2013; Wettstein, 2012; Cragg, 2012), and hardly any research has been done on the managerial perspective and the relationship between strategic decision making by MNEs and human rights practices.
However, since the power of MNEs is increasing, and consequently the observance of corporate compliance to human rights is growing as well, it is becoming more important for firms to prevent human rights accusations linked to their operations abroad (Ratner, 2001). Especially since MNEs seem to have more influence on human rights than national
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governments, which is shown in figure 1.1 (Leisinger, 2006). In 1998, the concerns about this growing power of MNEs led to the establishment of a group of experts by the UN Sub-Commission, to work on the issues concerned with business and human rights (Ruggie, 2007). Eventually in 2011, this resulted in the UN “Guiding Principles on Business and Human Rights” (UNHRC, 2011), in which the firms’ obligations to respect human rights and act due diligence are outlined (Ruggie, 2013). The principle of due diligence refers to the “process whereby companies not only ensure compliance with national laws, but also manage the risk of human rights harm with a view to avoiding it. The scope of human rights related due diligence is determined by the context in which a company is operating, its activities, and the relationships associated with those activities” (Ruggie, 2008, p. 194). The establishment of these principles helps to guide MNEs in their compliance with human rights standards, including their indirect activities, and help authorities to prosecute MNEs in cases where they seem to fail to comply (Ratner, 2001).
Figure 1.1 Spheres of influence in business and human rights
Adapted from ‘On corporate responsibility for human rights’ by ‘Leisinger, K. M. (2006). Novartis Foundation for Sustainable Development, Basel.
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In addition to the attention of the UN, growing numbers of investors and consumers demand better standards and practices as well (Blanton & Blanton, 2007; Weissbrodt & Kruger, 2003). This tendency has made businesses more aware of how human rights violations can affect their reputation, making them more prone to raise their standards for their operations abroad (Blanton & Blanton, 2007; Jerbi, 2009). This resulted in the integration of human rights responsibilities in corporate policy statements and business practices by codes of conduct and other comparable guidebooks (Jerbi, 2009).
However, a study done by Cuesta et al. (2012), examining how Spanish listed companies state their compliance to human rights, showed that in practice most firms don’t plan their human rights strategy (Cuesta et al., 2012). This may be caused by the gap in empirical findings that demonstrates a possible link between a firm’s strategic choices and the risk of corporate abuses (Jerbi, 2009). Therefor many MNEs struggle with implementing corporate abuse prevention while considering their strategic choices and just follow the steps of the industry’s market leaders (Cuesta, 2012).
To address the gap between corporate strategy and human rights due diligence, this study focuses on one main strategic decision that all corporations expanding internationally have to make; the entry mode decision (Chu & Anderson, 1992; Luo, 2001; Pan & Tse, 2000). More explicitly, the objective of this study is to investigate how the choice for a specific entry mode influences the chance that an MNE fails or exceeds to comply with human rights standards. Building on the existing theory on entry modes a comparison will be made between non-equity modes, joint ventures and wholly owned subsidiaries (Hill et al., 1990; Pan & Tse, 2000). The aim of this research is to find out if the different characteristics of these three entry modes lead to higher or lower chances of human rights violations. The working propositions are explored using data on MNEs entry mode decisions and worldwide corporate abuse allegations of extractive and efficiency seeking companies in South America and Africa.
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2. Literature review
Human rights refer to the freedom and autonomy of every human being, the fundament of moral rights that applies universally (Wettstein, 2012). They were designed as protection for people from government activities where governments are seen as the primary rights observers (Bishop, 2012). This means that the basic design of human rights has historically been focusing on governments and their actions, not on the actions of corporations.
2.1 Human rights and the transnational corporation
The discussion about the responsibilities of transnational corporations concerning human rights has been rising since the 1990s, stemming from the increase of companies that were expanding across their national borders. This resulted in global policy makers putting the link between business and human rights on the agenda. While the amount of transnational companies is growing rapidly, the impact of this growth in transnational economic activity on human rights becomes more apparent as well (Ruggie, 2011). Many critics even perceive the globalization process as a threat to human rights (Goodhart, 2003), but until recently no global guideline was established to set standards.
When the UN in 2005 decided to assign John Ruggie as a Special Representative of the Secretary General, this finally resulted in the UN “Guiding Principles on Business and Human Rights” (UNHRC, 2011), setting guidelines for MNEs to engage in due diligence concerning human rights. This due diligence refers to the State’s duty to protect human rights, a corporate responsibility to respect human rights and the need to provide remedies to respond to violations of human rights by business (Ruggie, 2011). Thus the role of corporations in protecting human rights has become more vital.
The need for the UN Framework is apparent due to the growing influence that corporations have on many people’s lives. This is comprehended by the term globalization which is forced
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by the increase of foreign investment by MNEs in the developing world, the power of MNEs that erodes the power of governments, and the revolution of telecommunications which increases worldwide attention to human rights conditions (Ratner, 2001). Corporations employ people, they have customers in developed and developing countries, they are seeking for more customers, and their operations are situated near peoples’ homes. This makes that they’re embedded in peoples’ life, which requires them to at least respect human rights on moral grounds (Bishop 2012). The challenge of controlling these transnational corporate networks lies in the different relationships between the MNE and its subsidiary or supplier. Purchasing from unrelated suppliers is seen as an arm’s length market exchange and the subsidiary is a separate legal entity. Therefor the parent company is often not legally accountable for the violations committed by its subsidiary and the violations are only indirectly linked to the MNE. Only in cases where operational control is really high the MNE can be held legally liable (Ruggie, 2007). The UN Framework extends the existing principles of human rights concerning governments and builds upon the fundamental principle of corporate responsibility to operate with respect for human rights, even if this is not obliged by law (Cragg, 2012).
Besides the influence of MNEs on communities, their power also puts pressure on the ability of governments to control violations of human rights. National and international agreements and laws encourage the extension of the economic significance and scope of MNEs and have a diminishing effect on the governmental control on the conditions under which goods are produced and manufactured (Ratner, 2001). In other words, due to the globalization processes and the increasing power of MNEs, national governments lose their capacity and willingness to accomplish their human rights duties (Cragg et al., 2012). This increases the chance of human rights violations since the concept of state sovereignty makes the prevention of human rights abuses a duty of the host government. Thus the challenge of preventing corporate
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abuses still relies heavily on the environmental and human rights regulations posed by the host country (Shinsato, 2005). This adds up to the intensifying discussion about the corporate responsibilities of large MNEs.
Conversely, there is also an optimistic view with regard to corporations and their operations in developing countries that points to the occurrence of positive spillovers from the home country to the host country. Since host countries are often characterized by conflicts, corruption and dysfunctional governments - generally referred to as high-risk countries – the influence from an MNE from a home country with higher standards could be positive (Cragg et al., 2012). A growing number of researchers has therefor been looking at the positive spillover effects that could accompany MNEs when they are acting due diligence (Kok & Lefant, 2012, Mena et al., 2010), and how this even could lead to diffusion of the parent’s home country human rights practices to the affiliate’s human rights practices (Cao et al., 2013). If MNE raises the standards for its operations abroad, the subsidiary or partner has to comply to do business. This underlines that there is a shift going on in the protection of human rights by the public to the private sector, which might turn out positive when guided in the right direction.
The problem is that the implementation of the UN Framework is justified by the foundation of self-interest (Cragg, 2012), referring to the gap between the principles and the extent to which corporations are obligated to act due diligence. So before positive spillover effects will occur, this gap needs to be closed. This is emphasized by the results derived from a study done by Cuesta et al. (2012) who found that many Spanish listed companies are not approaching human rights from a managerial perspective and the drivers for a better management of human rights are often external. Most corporations follow the industries’ leaders instead of planning their own strategy concerning human rights (Cuesta et al., 2012).
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Fasterling and Demuijnck (2013) discuss that the effectiveness of the due diligence principal is depending more on the moral commitment of corporations than on an obligation. Because of the absence of legal restrictions, the strategic implementation of the guidelines is often very limited (Fasterling and Demuijnck, 2013). This effect is even strengthened by the effect of distance. Campbell et al. (2012) found that the greater the distance between home and host country, the less corporations are willing and able to invest in strategies that consider responsible acting in the host country (Campbell et al., 2012). This causes critics to consider that for the UN framework to be brought into practice worldwide, and that to improve the standards of corporate operations and respect for human rights, an underlying structure of legal sanctions should be added (Cragg, 2012; Fasterling & Demuijnck, 2013).
This growing attention to MNEs and their influence on human rights makes it clear that it is important that corporations comply to human rights standards and even take a lead in the implication of the fundamentals of human rights wherever they are active. This tendency now also seems to have come to the attention of MNEs themselves. As Pucheva-Michelotti et al. (2009) point out that firms become more aware of the effect of allegations concerning corporate abuse on corporate reputation, requiring managers to take human rights into account during strategic decision making processes (Pucheva-Michelotti et al., 2009). Using “private regulatory systems” like codes of conduct MNEs try to translate these improvements of human rights into action (Egels-Zandén, 2013), which is by some researcher seen as a great promise for improving the working conditions (Egels-Zandén, 2013; Ruggie, 2007; Zadek, 2004).
However, the question that remains is why still many MNEs are violating, or accused of violating human rights. Even if firms use private regulation, they seem often more interested in the signaling effects that a code of conduct has instead of really implementing it (Dimaggio & Powell, 1983). One explanation is the fundamental efficiency principal that drives most
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MNEs. As Egels-Zandén (2013) points out that, in general, production costs increase and suppliers’ ability to meet production deadlines decreases when workers’ rights are improved. So when the demand from external buyers is high, compliance with codes of conduct is perceived as less important than reaching production demands (Egels-Zandén, 2013).
2.2 Foreign direct expansion motives
Elaborating further on the fundamental efficiency principal (Dimaggio & Powell, 1983), the variation between firms and their compliance with human rights can also be explained by the industry they are active in. Particularly the extractive industries and textile industry are associated with high human rights violation rates (Ruggie, 2007). This is further explained by Dunning’s (1998) research on foreign direct expansion motives in which he defines four types of motives; resource-, efficiency-, market- and strategic asset seeking. Besides this his study also outlines which variables influence the location choice for the value adding activities of MNEs. He found that most investment in developing countries is driven by resource-seeking motives, like the gas, oil and mining industry (extractive) and efficiency-seeking motives, like in the textile industry (Dunning, 1998). This study will now elaborate further on these two entry motives and their link to human rights violations.
2.2.1 Resource-seeking firms
The goal of resource-seeking firms, like gas and oil extracting firms, is making profit by taking strategic decisions based on the availability, quality and price of natural resources (Dunning, 1998). The choice for a specific location is often based on geology or climate and since the 90’s increasingly influenced by the policies of the host country concerning infrastructure and access to resources (Blanton and Blanton, 2009; Dunning, 1998). The problem with resource-seeking firms is that because of their dependency on countries that possess specific natural resources, they are frequently restricted to host countries that are
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riddled by conflicts and with hardly any human rights regulations. The decision whether to invest in a specific location, therefore won’t often be determined by human rights risks (Blanton and Blanton, 2009), which makes the occurrence of human rights violations more evident.
This is not the only risk concerning the host country. As Zaharia et al. (2011) point out, the environmental standards of developing countries are often less strict than those in the home country (Zaharia et al., 2011). For the sake of development these countries are, in many cases, prepared to sacrifice their environmental and human rights regulations in order to make it more profitable for MNEs to do business in these countries (Weissbrodt and Kruger, 2003). MNEs that choose to operate in host countries with governments that fail to enforce companies to comply with human rights are therefore exposed to a higher risk of becoming accused of violations themselves (Zaharia et al., 2011). Especially in the extractive industries where the investment expenses are high and return on investment is most often realized on the long term, the firm is often committed to a host country with high risk (Blanton and Blanton, 2006).
2.2.2 Efficiency-seeking firms
Efficiency-seeking firms in the textile and apparel industry are driven by a high demand for cheap cloths by customers in developed countries. This leads textile firms to cut down the costs by looking for host countries with low labor costs (Kaeb, 2008). They often move parts of their production process to reduce overall production costs by lowering manufacturing costs or by achieving economies of scale (Blanton and Blanton, 2009). Tracking their suppliers’ performance is problematic and the monitoring by the MNE is often inadequate (Emmelhainz and Adams, 1999).
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Considering the sections above about the foreign expansion motives, both the extractive and textile industry are frequently linked to violations of human rights, especially environmental and health violations. In many cases these two are interrelated, since environmental violations often affect the health of the people living in the abused area (Wright, 2008). However, within these industries some MNEs have been accused of violations and others have not, meaning that there is a significant difference between these firms. This makes it applicable to look into the variance in specific strategic decisions that firms make when entering a foreign country.
2.3 Entry modes and entry mode characteristics
As pointed out before, one of the important strategic decisions that a MNE needs to make is the mode by which the company will precede its foreign business activities (Hill et al., 1990). A firm can choose from different entry modes, for example an arm’s length relationship by licensing or contracting a partner alias non-equity mode, partner up with one or more companies alias a joint venture (JV), or decide to keep full ownership over their subsidiary alias a wholly owned subsidiary (WOS) (Hill et al., 1990; Luo, 2001; Pan & Tse, 2000). This decision is linked to the MNEs’ core competencies, the parent-subsidiary relationship and the firm’s exposure to changes in the host country (Luo, 2001).
To guide management in making the entry mode decision, Pan and Tse (2000) have provided a hierarchical framework where they divided the entry modes in equity and non-equity based entry modes. Within the equity mode, a decision has to be made between a wholly owned subsidiary (WOS) and a joint venture (JV) (Pan & Tse, 2000). A WOS is considered a full control entry mode whereby the MNE enters the foreign market through internalization, keeping the activities of its operations within the boundaries of the firm (Pehrsson, 2008). On the contrary, a JV is a form of collaboration with one or more partners. JVs can be majority- or minority owned, depending on the deviation of the percentage of ownership (Pan & Tse, 2000; Pehrsson, 2008). Within the non-equity mode category there is a division into
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contractual agreements and export, and further into other subdivisions (Pan & Tse, 2000). However, all non-equity modes are considered to have some sort of licensee or contractual partner who bears the majority of the costs and owns all the revenue generating assets of the foreign operation (Ahmed et al., 2002; Hill et al., 1990). Therefor this study will refer to these kinds of entry modes as non-equity modes.
Evolving from the decision for a specific equity or non-equity mode there are implications for the degree of control the MNE has over its subsidiary, the risks it must endure and the resources it will commit to the foreign operation (Anderson & Gatignon, 1986; Chu & Anderson, 1992; Hill et al., 1990; Luo, 2001). The degree of control is referring to the authority the MNE has over the operational and strategic decisions made by its subsidiary or partner (Hill et al., 1990). It is brought into practice by the instruments that the MNE applies to ensure the accomplishment of organizational objectives and strategies (Brenner & Ambos, 2013). This occurs by three kinds of transactions between the MNE and the subsidiary, namely through capital-, product-, and knowledge flows (Gupta & Govindarajan, 1991; Williamson, 1985). The lowest degree of control is associated with licensing and the highest degree of control with a wholly owned subsidiary. The degree of control in the case of a joint venture depends on the number of companies involved and the split of ownership and is most often described as moderate (Hill et al., 1990).
A second characteristic that differentiates entry modes is the difference in the degree of risk. Based on terminology of earlier research the entry mode risk in this study refers to the managerial perceived risk concerning the loss of money (Forlani et al., 2007; March & Shapira, 1992). Factors influencing this risk are the degree of financial investment and currency exposure, which are high in cases of WOSs and low in the case of licensing (Forlani et al., 2007). This makes non-equity entry modes the preferable option in cases of uncertain
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foreign environments where the return on investment and the stability of the currency are questionnable (Anderson & Gatignon, 1986; Forlani et al., 2007).
The third entry mode characteristic this research addresses is the degree of resources the firm has committed to its subsidiary. This resource commitment is mainly concerned with overhead and switching costs related to the transfer tangible and intangible assets. As Harrigan (1981) points out, a higher degree of resource commitment creates an exit barrier which decreases strategic flexibility and increases trade-off barriers (Harrigan, 1981). For example, MNEs entering with a WOS invest in tangible assets (e.g., buildings and machines) an intangible assets (e.g., technology and knowledge), while licensing is limited to monitoring the behavior of the licensee by contracts. This difference makes that in the case of licensing the licensee retains all the profit generating assets while in the case of a WOS all profit is retained by the MNE (Hill et al., 1990). These variables thus vary on a continuum, meaning that the degree of each variable is low for non-equity modes and rises when choosing an equity mode (Chu and Anderson, 1992, Hill et al., 1990).
Furthermore this entry mode choice is influenced by a variety of factors concerning the home country, host country, and the industry the company operates in (Pan and Tse, 2000). Contextual risks of the host country “include the political risk (e.g., instability in the political system), ownership/control risk (e.g., expropriation, intervention), operations risk (e.g., price control, local content requirements), and transfer risk (e.g., currency inconvertibility, remittance control)” (Pan & Tse, 2000, p. 540). When a firm decides to enter a host country that has little governmental regulations it will choose a contract or license over a JV or WOS, since the lather exposes the company to more external uncertainties (Pan and Tse, 2000). However, human rights violations are often the result of governmental failures, thus human rights violations could be considered as a host country contextual risk factor. Especially in the extractive and textile industry where the search for lower factor costs and the increasing
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demand for resources is driving MNEs to increase investments in host countries that are often characterized by higher risks (Feinberg and Gupta, 2009; Ruggie, 2007). This implies that the strategic decision for a specific entry mode may be very important for firm performance and compliance with human rights
2.4 Entry mode characteristics and human rights violations
Building on the entry mode theory, the differences in the degree of the risk exposure, control and resource commitment can be linked to environmental and health violations. In this section the links between these entry mode characteristics and violations are further defined.
2.4.1 Risk exposure and environmental and health violations
The managerial perceived risk, that mainly emphasizes the chance of losing money (Forlani et al., 2007; March & Shapira, 1992), is higher when the host country is characterized by factors like instable political systems, violence, and expropriation (Pan & Tse, 2000). This implies that there is a direct link between entry mode risk (managerial) and host country risk (Alon & Herbert, 2009; Luo, 2001). Therefor the MNE should choose the entry mode that reduces this risk, unless they have adequate capabilities to overcome the uncertainties. Elaborating on the framework of Pan and Tse (2000), most companies that seek to operate in a high risk country choose a license or joint venture as an entry mode to decrease risk exposure (Pan & Tse, 2000), especially since cooperation increases knowledge and experience (Luo, 2001). Although large MNEs commonly have more of these capabilities giving them more power to minimize risks, their willingness to choose a wholly owned subsidiary over a joint venture or non-equity mode is negatively related to high risk perceptions (Luo, 2001). Furthermore, by not fully owning a subsidiary the MNE can more easily withdraw when business gets to tough or the situation in the host country gets too risky (Pan & Tse, 2000).
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Additionally, the legal liability of the MNE is also less when the subsidiary is not wholly owned (Ruggie, 2007). This implies that if a MNE chooses to enter a host country with a wholly owned subsidiary after all, and thus exposes its parent and subsidiary to a higher degree of entry mode risk, the MNE assumes it has the capabilities to overcome both the managerial perceived risks (profit/loss) and contextual risks (Luo, 2001),. Considering the legal liability of the parent for its wholly owned subsidiary this will decrease the chance of environmental and health violations, since these violations will be directly linked to the MNE (Ratner, 2001; Ruggie, 2007).
Regarding the extractive industry, the most commonly used entry mode is a JV with a host country firm or government. This is explained by the research of Meyer et al. (2008) on the influence of institutions on strategies in which they found out that resource-seeking strategies are often characterized by equity modes to overcome inefficiencies or to gain access to resources (Meyer et al., 2008). Therefore, many oil and gas companies have to engage in a joint venture with the host country’s companies or government to get access to the oil, for example in the case of the Nigerian oil industry. Environmental and health violations, including gas flaring and oil spills characterize the industry since the government is afraid to enforce regulations that may cause the revenue to decline and oil MNEs to leave Nigeria (Shinasato, 2005). Because of the importance of the oil industry and the extent to which governments try to protect it to community protests, the MNE may become intertwined with human rights violating governments (Kaeb, 2008). This in combination with the increasing legal liability of MNEs for their operations abroad poses a higher risk to the MNE.
Risk exposure is thus related to human rights violations in such a way that non-equity or JV entry modes, which are considered to be accompanied by a low or moderate degree of risk, will have a bigger chance on violations of human rights by their foreign operations.
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2.4.2 Control and environmental and health violations
As mentioned before, entry modes also differ in the degree of control (Brouthers & Brouthers, 2003; Luo, 2001; Pan & Tse 2000). Although high control is desirable, it also increases the exposure of the firm to uncertainties (Anderson & Gautignon, 1986). Low control entry modes like licensing are therefore in general considered best suited for situations where the MNE does not want to integrate with the host country (Brouthers & Brouthers, 2003). Considering this in terms of human rights, low control would also be preferred because of the limited liability for violations committed by a firms’ subsidiary because of its indirect contribution to possible violations. Although the legal system concerning MNEs is changing, the higher the operational control (WOS) the higher the legal liability (Ratner, 2001; Ruggie, 2007). This indicates that, because of this direct link, an MNE using a WOS will probably put more effort in preventing human rights violations by its subsidiary.
Furthermore, in the case of a license, the only control the firm has over the human rights practices by its operations abroad is by the terms set out in the licensing contract (Hill et al., 1990). However, codes of conduct and other terms concerning human rights are harder to monitor in contrast to a wholly owned subsidiary. Within a wholly owned subsidiary ultimate control is practiced by the MNEs headquarter and only day-to-day operations and some strategic decisions are made by the subsidiary making it less hard to control the practices of their subsidiary concerning human rights due diligence. Joint ventures are in the middle, since the degree of control depends on how the ownership is divided between the partners (Hill et al., 1990) and they thus also rely on the compliance to human rights by their partners.
2.4.3 Resource commitment and environmental and health violations
The chance that an MNE violates human rights by its operations abroad may also depend on the degree of resource commitment, referring to the dedicated assets by the MNE to the
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subsidiary (Hill et al., 1990). Observing the textile and apparel industry, the most commonly used entry mode is outsourcing to low-cost labor countries in order to seek for efficiency (Blanton & Blanton, 2009). Since the dedicated assets by the MNE are low and the licensee owns the revenue generating assets the MNE is not strictly attached to the licensee which makes it is easy to switch (Fosfuri, 2004). This low exit barrier is considered as a pro when a firm wants to enter a country with higher associated risk, because the MNE did not dedicate tangible or intangible assets to its subsidiary. Therefore, this arm’s length relationship may lead to an increasing chance of violations by the subsidiary.
The transfer of intangible assets from the MNE to the subsidiary also plays a role in the chance of human rights violations since this transfer leads to a considerable increase of knowledge and technological improvement at the subsidiary level (Forlani, 2007). The subsidiary will have higher skilled personnel which could reduce the chance of environmental and health violations (Meyer, 2004).
The above leads to the proposition that the different entry mode characteristics can be linked to the chance of human rights violations by MNEs. In the next section this is further spelled out into working propositions and a conceptual framework linking the three entry modes to the chance of human rights violations.
2.5 Entry mode and health and environmental violations
Since the chance of human rights violations can be linked to the degree of control, resource commitment, and risk, the link can be made to the specific entry modes. By internalizing, in other words keeping full control, companies can overcome institutional hazards (Feinberg & Gupta, 2009). However as mentioned before, in some industries where companies rely on the resources of the host country, it is not always possible to enter by a WOS. To find out how managers can try to predict the chance that their company will be implicated with human
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rights violations or allegations when investing in operations abroad, this study will try to get an answer to the question how the choice of a specific entry mode influences the chance that a company will get involved in human rights violations leading to company focused accusations. This has led to the following working propositions.
Non-equity modes are associated with low resource commitment, risk exposure, and control (Chu & Anderson, 1992; Luo, 2001; Pan & Tse, 2000). This may cause companies to take more risks in terms of human rights, since they will not suffer a trade-off because of the invested assets, they will not be directly associated with human rights violations because they are not directly responsible for the control of the operation (the licensee is), and the risk of profit loss is small leading them to take higher risks when selecting the host country.
Joint ventures are, compared to non-equity modes, associated with a moderate resource commitment, risk exposure, and control (Chu & Anderson, 1992; Luo, 2001; Pan & Tse, 2000). The amount of tangible and intangible assets they invested in the foreign operation depends on the amount of ownership and their role in the venture. The same holds for the degree of risk exposure and control (Hill et al., 1990; Luo, 2001). Therefore, the chance that the firm will be accused of human rights violations is expected to be moderate, meaning that the chance will be higher compared to a wholly owned subsidiary and lower compared to a non-equity mode.
The entry mode with the highest degree of control, risk exposure and resource commitment is a wholly owned subsidiary (Chu & Anderson, 1992; Luo, 2001; Pan & Tse, 2000). Since the MNE has full control over its subsidiary, including legal liability, combined with a high degree of invested assets and exposure to risk this entry mode is expected to have the lowest chance of human rights violations.
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The differences between the entry modes and the expected chance of corporate human rights violations lead to the following working propositions and conceptual model (figure 2.1).
WP1a: Non-equity entry modes are expected to be associated with a high chance of corporate human rights violations.
WP1b: Joint ventures are expected to be associated with a moderate chance of corporate human rights violations.
WP1c: Wholly owned subsidiaries are expected to be associated with a low chance of corporate human rights violations.
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2.5.1 International experience
One important factor that was identified by Feinberg and Gupta (2009) is the effect of firm experience in entering high risk countries (Feinberg & Gupta, 2009). Using the terminology of Dow and Larimo (2009) by international experience is meant both the overall international experience measured in years, as well the prior experience in the host country (Dow & Larimo, 2009). Gaining experience leads to better strategic decisions and it advances the competency to operate independently in the host country (Delios & Beamish, 2001).
As explained before, high risk countries have higher associated contextual risks (Pan & Tse, 2000). In many cases, greater experience in entering countries with high risks will lead to higher control entry modes (Feinberg and Gupta, 2009). This can be explained by the assumption that the more international experience a firm has, the more it can reduce the cost and effectiveness of the monitoring of suppliers or subsidiaries (Dow & Larimo, 2009). Comparing a JV versus a WOS, inexperienced firms will rather choose to work with a local partner to seek for their guidance and local experience (Delios & Beamish, 2001). By doing so, they also take a risk of partnering with companies or governments with lower human rights standards. This leads to an increasing chance of human rights violations. However this reliance on local partners diminishes when MNEs become more experienced (Kuo et al., 2012), making a higher degree of control more attractive (Dow & Larimo, 2009).
The same argument holds for non-equity modes since inexperienced firms might have no clue on what selection criteria they should base the decision for the outsourcing partner on. When they have prior experience globally or in the specific host country, they will have a better understanding of the risks, including human rights violations (Delios & Beamish, 2001).
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This leads to the following proposition that the higher the international experience of the firm the lower the chance of human rights violations.
WP2: The international experience of an MNE is expected to have a moderating effect on corporate human rights violations.
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3. Methodology
This chapter outlines the methodology and research methods used in this research. It describes in detail how data was collected and analyzed in order to investigate the working propositions.
3.1 Grounded theory
Using grounded theory by iteratively and inductively building theory from observations while using theoretical sampling, the data are selected and analyzed. “Grounded theory involves constant comparative analysis whereby groups are compared on the basis of theoretical similarities and differences” (Gephart, 2004, p. 45). The analysis begins by the first bit of collected data and is used to direct the next search through data (Corbin & Strauss, 1990). Descriptive analysis is used to define the phenomena, namely the different entry modes and ownership structures that are used by these firms and the extent of the human rights violations they are accused of. Proposing that little ownership will increase the chance of firms becoming implicated with human rights violations compared to more/full ownership, a comparison between firms can be made to explain this difference. Correspondingly exploratory content analysis is conducted, seeking to extend and combine existing knowledge on corporate human rights abuses and different entry mode characteristics. By doing so, this study tries to build new theory on the possible relationship between them.
3.2 Multiple-case study
Multiple-case studies are used to create theoretical concepts from empirical evidence based on several cases (Eisenhardt & Graebner, 2007). Multiple-case studies use replication logic to find out if a finding in one case is supported by finding from another case. The selection process needs to be done judiciously so either literal replication or theoretical replication can be predicted (Yin, 2009). Literal replication entails the prediction of similar results (Yin, 2009); in this research for example the similarity between two MNEs with the same entry
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mode. Additionally, this research uses theoretical replication by contrasting the results (Yin, 2009) between MNEs with different entry modes. If expectations are met and the analysis of the cases is in line with the predictions, this would provide convincing support for the stated working propositions (Yin, 2009).
3.2.1 Case selection
The cases are selected based on the following selection criteria in order to collect a representative sample that makes it possible to build new theory and helps to cover the universe that this research is trying to explore. Given the research question about how entry mode choice might be related to human rights violations, the sample contains firms that were accused of violations and firms that were not. The sample consists of three firms of which two have been accused and one has not, in each of the following three industries: textile and apparel, gas and oil, and mining. These industries are all included in the CHRD database (explained below in the data collection section) and all have a history of human rights violations. The difference between the efficiency seeking nature of the textile and apparel industry and the resource seeking motivations of both the extractive industries represents the diversity across these industries.
Furthermore, the selection is based on the size of the firm; only large and very large firms are incorporated in this research, using the classification in Orbis. Because this research focuses on MNEs the choice for large firms is most suitable and almost inevitably correlated with MNEs in general. The period is 2000 to present since the CHRD database contains data on company human rights violations in the period 2000-present. Therefore the nine companies selected have been active in this period in the textile and apparel, gas and oil or mining industry.
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The CHRD database is not extensive and does not include all violations by MNEs over the whole world yet. The most widespread data are data on human rights violations by developed country MNEs in Latin America and Africa. This makes it applicable to draw a geographically stratified sample within each industry selecting three companies -all with headquarters in the U.S., Europe or Australia- representing at least one subsidiary or contract active in Latin America and one in Africa. This variety in industry and geographic location increases the representativeness of the sample and the generalizability of the results (Eisenhardt & Graebner, 2004).
Finally, the companies were selected on entry mode choice in order to compare the different entry modes and the violations of human rights (see figure 3.1). Following these criteria this study uses a theoretical sampling approach to ensure that the selected cases fall into the research spectrum (Eisenhardt & Graebner, 2007). As explained by Eisenhardt and Graebner (2007) one theoretical sampling approach that can be used is by selecting cases as “polartypes”, meaning the selection of extreme cases. This helps to observe contrasting patterns in the data, resulting in consistently supported theory, leading to the recognition of clear patterns of the central relationships and phenomenon (Eisenhardt & Graebner, 2007).
Figure 3.1 MNE entry mode typology and human right violations
Source: Author Levi Strauss Adidas - BHP Billiton (JV) Minefinders (JV) Pluspetrol (JV) Repsol (JV) Chantelle (WOS) Tolima Gold (WOS) Mart Resources (WOS)
E n tr y m od e Equity Non-equity Violations No Violations Human Rights
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A parallel multiple-case study approach is used to concurrently compare the nine firms and their activities during a period from 2000 to present (Thomas, 2011). This is done by selecting three cases in an industry, of which two companies that have been accused of human rights violations and a parallel case of one company that has not been accused. The six companies that were accused of violations are examined based on the characteristics of their entry mode; JV and non-equity. The same steps were taken to compare the three companies that were not accused of human rights violations. Afterwards, the violation and non-violation cases can be compared. In order to explore industry and entry mode level explanations, and to find out if the proposed theory also holds when comparing the cases on these concepts, this same approach is used. As Thomas (2011) points out, contrasting these different cases helps to enable to explore the proposed relationship between specific entry modes and human rights violations.
3.3 Data collection
This research uses several data sources: 1) qualitative data on human rights violations provided by the CHRD database, 2) company details provided by the Orbis database, and 3) archival data; including news articles, company websites, annual reports, CSR reports.
The CHRD database is a project of the University of Denver, designed to systematically code the information on the website of the Business & Human Rights Resource Centre (BHRRC), containing alleged corporate human rights abuses (Olsen & Payne, 2013, p. 2). Once coded, this information will form a large N-database on alleged corporate human rights abuses from 2000 to present. The BHRRC is the most comprehensive online archive and the information on the website is systematically organized using the online tool Qualtrics. The CHRD database mainly focuses on the allegation in order to capture a broader picture of corporations looking at size, ownership structure, and home/host countries in which they work (Olsen & Payne, 2013).
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The goal of the CHRD project is to code data on human rights violations of companies all over the world, starting with a pilot study of Latin America. This pilot study was then extended to data on companies active in Africa (Olsen & Payne, 2013). During April, missing data on companies active in the gas and oil and textile and apparel industry in Africa was coded, enhancing the comprehensiveness of the research based on this data.
More in-depth data, both qualitative and quantitative, is derived from the Orbis database. Orbis contains comprehensive information on companies worldwide, with an emphasis on private company information. The database can be used to research individual companies, search for companies by profile and to analyse companies. Orbis contains information on both listed and unlisted companies and has information on 120 million private companies. This makes this database a comprehensive source for company data, including ownership structures. To get data on country risk the Euromoney Country Risk Monitor is used. This survey monitors the political and economic stability of all countries and evaluates the investment risk of a country based on factors like political risk, economic performance, debt indicators, credit rating and more (Euro Money Country Risk [ECR], 2014).
During the course of the data collection, steps are taken to minimize informant bias (Eisenhardt & Graebner, 2004). By not only using archival data provided by company sources but also from third party sources like news articles and websites the bias of using only secondary data is limited. Another important part of the research is that it builds new theory which makes it applicable to have overlap in data analysis and data collection (Eisenhardt, 1989). Because the analysis of the cases caused some themes to emerge which were definitely important for building the theory of this study, this flexible data collection method gives the freedom to make adjustments during the collection of the data (Eisenhardt, 1989).
30 Table 3.1 Description of selected cases
Company
Levi Strauss & Co.
Adidas Group
Chantelle Group
Industry Textile and Apparel Textile and Apparel Textile and Apparel
HQ location San Francisco, USA (1850) Herzogenaurach, Germany (1949) Paris, France (1956) Entry Mode &
Location
Licensing Lesotho
Licensing Argentina
Wholly owned subsidiary Morocco
CAA Health (2009) Environment and Health (2010) -
Description Levi Strauss Co. is a manufacturing company based in the U.S. Since 2003, when Levi’s closed it last plants in the U.S., they only outsource their manufacturing to licensees in low labor countries in Asia, Africa and South America (Colwell, 2009) In 2009, Levi Strauss is accused of using suppliers, Nien Hsing and Formosa Textile LTD, who are accused of polluting the environment. A Sunday Times investigation has found that both suppliers, are dumping liquid waste in the Caledon river. Besides this, the investigation has also found that the two factories are dumping waste products at the Ha Tsotsane and Ha Tikoe dumps in Maseru (McDougall, 2009)
The allegation was confirmed by a third party; Tseliso Tsoeu, an environmental expert from Lesotho’s council of non-governmental organisations. Levi Strauss Co. has acknowledged the allegations after investigation by their environmental sustainability team and promised to implement a plan to change (McDougall, 2009.
Adidas Group designs, develops, produces and markets a broad range of athletic and sports lifestyle products. It offers its products through three main brands: Adidas, Reebok and TaylorMade-Adidas Golf. Adidas includes footwear, apparel and hardware, such as bags and balls. The products are designed and developed by Adidas and are manufactured by subcontractors on behalf of Adidas (Orbis, n.d.).
One of the suppliers of Adidas is SportTech, a company based in Argentina that keeps its workers in unsanitary environments that cause them to suffer from diseases like tuberculosis (Schaerer, 2010).
Reynaldo Tola Yupanqui, a worker at the SportTech factory, became sick in January 2010 with an ilness later diagnosed as TB. When he sought medical care the factory doctor took his pulse and told him to continue working.
The state reportedly knew about the TB issue, but did not allocate funds to deal with the problem (La Alamada, 2010)
Chantelle Groups is the European leader in high-end lingerie. Their international industrial and logistical structure is technologically innovating and meets their goals of efficiency, customer service quality, and flexibility regarding the market needs while respecting time limits and costs. The group has made the strategic choice
of mastering entirely the corsetry
production - heart of its activity - to be able to master the product's quality and production reactivity.
The Group mainly manufactures the Maghreb (Morocco, Tunisia, only African industrial bases), Eastern Europe (Romania and Hungary) and Southeast Asia (Vietnam and Thailand) (Chantelle Group, n.d.).
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Company
Pluspetrol Resources
Corporation B.V.
Repsol S.A.
Mart Resource Inc.
Industry Gas & Oil Gas & Oil Gas & Oil
HQ location Amsterdam, The Netherlands (1977) Madrid, Spain (1986) Calgary, Alberta, Canada (1994) Entry Mode &
Location
Joint venture (55% ownership) Peru
Joint venture (29,66% ownership) Ecuador
Wholly owned subsidiary Nigeria
CAA Environment, Health (2006) Environment (2001) -
Description Pluspetrol Resources Corporation B.V. is one of the private E&P companies in Latin America. With its first operations in Argentina, the Company is, at present, the largest oil and gas producer of Peru and one of the most important gas producers in Argentina (Pluspetrol, n.d.)
With a presence in Latin America and in
Africa, Pluspetrol has developed its
operations with the conviction that it is possible to operate in highly complex environments. Pluspetrol has many wholly owned subsidiaries but also some joint ventures among which Pluspetrol Norte S.A., where China National Petroleum Corp. owns the other 45%. (Orbis, n.d.)
In 2006 Pluspetrol Norte S.A., was responsible for a large oil spill in the Corrientes River in Loreto that caused serious health complications among the 8000 members of indigenous communities that inhabit the area (Salazar, 2006).
Repsol S.A. was created on January 11, 1986 and is a Spain-based company active in the oil and gas industry. Repsol is engaged in the exploration, development and production of crude oil and natural gas. It operates in three business segments: Exploration and Production, Refining and marketing, and New Energy (Orbis, n.d.).
Together with Alberta Energy Co. Ltd., Agip Petroleum, Kerr-McGee, Occidental
Petroleum Corp., Argentina's Perez
Companc and construction firm Techint, Repsol S.A. operates the OCP pipeline (Noticias, 2002).
Hill, a U.S. citizen, was deported after protesting against the companies who are not complying with environmental standards in the construction of the pipeline. More activists are protesting to have them stop financing the pipeline. The state has supported the companies and their right to build the pipeline, and is actively pushing back against environmentalists and protestors. The Constitutional Tribunal rejected the legal recourse presented by these groups in June, 2001 (Toro, 2002).
Mart Resources Inc. is an international oil and gas exploration and development company, with major oil field development partnerships and projects in Nigeria. The Company is also an independent oil & gas company focussing on bringing African oil fields into production that are proven but have not yet been developed. The Company's main activities have been in the development of Nigerian Marginal oil fields in joint ventures with the indigenous field operators, while keeping their subsidiaries under wholly owned constructions.
The Company participates in and provides technical and financial services to Midwestern Oil and Gas Plc and Suntrust Oil Limited on the Umusadege farm out area that covers an area of 3,771 gross acres. The Umusadege field is a multiple-horizon onshore hydrocarbon reservoir situated in the North Central area of the Niger Delta basin (Mart Resources Inc., n.d.)
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Company
Minefinders Corporation Ltd.
BHP Billiton PLC.
Tolima Gold Inc.
Industry Mining Mining Mining
HQ location Vancouver, Canada (1975) London, United Kingdom (1996) Toronto, Canada (2011) Entry Mode &
Location
Joint venture (78,74% ownership) Mexico
Joint venture (33,75% ownership) Peru
Wholly owned subsidiary Colombia
CAA Environment (2008) Health & environment (2012) -
Description Minefinders Corporation Ltd. engages in the exploration, development, and mining of precious and base metal properties. The company principally owns interest in the Dolores gold and silver mine, located in the Madera Mining District in the state of Chihuahua, Mexico. It also has property interests in Sonora, Mexico; and in Nevada and Arizona, the United States (Orbis, n.d.) Compañía Minera Dolores S.A. de C.V is a joint venture of Minefinders and Panamericana (Mexico). In November 2006, the Huizopa community in Chihuahua, Mexico signed an agreement with Minefinders that gave the company 16 years of access to the land for US$3.7 million. Carlos Montemayor spoke out on the communities’s behalf, saying that the situation was an example of Canadian
mining companies habit of entering
countries with corrupt governments like that of Mexico.
The company response primarily addressed the development (prior consultation, community support) component of this allegation. However, the company states that it has followed environmental regulations for the entire duration of the project (Cevallos, 2008).
The principal activities of the Group are minerals exploration, development, production and processing (in respect of alumina, aluminium, copper, iron ore, metallurgical coal, energy coal, nickel, manganese ores and alloys, diamonds, titanium minerals and uranium), and oil and gas exploration, development and production (Orbis, n.d.).
Compania Minera Antamina S.A., owned by BHP Billiton, Xstrata (33,75 %), Teck (22,5 %) and Mitsubishi Corporation (10%). operates the Antamina mining complex. In July of 2012 there was a spill of copper concentrate affecting the health of local communities.The government's occupational and environmental health agency, CENSOPAS, reportedly performed blood tests on community members, but did not inform them all of the results. Community members complained about the inaction on the part of the government.
The company response states that Compania Minera Antamina has provided specialists to treat people affected by the spill.The response states that 210 people were treated by these specialists, but the company will continue to support the medical treatment (Green, 2013).
Tolima Gold is a gold exploration and development company in Colombia, incorporated in Ontario, Canada in 2011. Tolima Gold controls 27 properties between concessions and applications for concessions with an strategic area of 14,660 hectares (ha) in the Middle Cauca gold belt (ANCAL properties) currently being operated by IAMGOLD Corporation and Solvista Gold Corporation, a package of 26 properties between concessions and applications for concessions with an area of 39,741 hectares (ha) in the department of Tolima (NORTOL properties), 8 properties between concessions and applications for concessions, covering a total area of 1,261 hectares (ha) in the Northeast of Antioquia (REMEDIOS properties) and a package of 2 properties between concessions and applications for concessions with an area of 1,974 hectares (ha) in the department of Tolima (PAPAYO properties).
All these properties are wholly owned subsidiaries of Tolima Gold Inc (Tolima Gold Inc., 2012).
33 3.4 Data analysis
According to Miles and Huberman (1984) the analysis of qualitative data “consists of three concurrent flows of activity: data reduction, data display, and conclusion-drawing/verification” (Miles & Huberman, 1984, p. 23). The process of data reduction occurs constantly during the qualitative project and is part of the analysis process in a sorting, eliminating and organizing manner in order to draw conclusions (Miles & Huberman, 1984). In this research this is done by anticipatory data reduction through the construction of a conceptual framework, the establishment of working propositions, sampling of the cases and the choice for a specific data collection method.
Inductively developed themes and codes are used to reduce the amount of the collected data
(Miles and Huberman, 1989). The themes derived from the theoretical framework; degree of ownership, degree of control, degree of risk, degree of resource commitment, experience, firm size, environmental violations, and health violations, are complemented by some themes derived during the data analysis; host country government, corporate social responsibility, and monitoring supply chain. Using these themes the data can be managed and coded (Miles & Huberman, 1989).
To enter the codes and to determine the patterns within the transcripts the software program NVivo 10.0 is used. In order to determine whether the patterns, derived from the frequency stats from NVivo, are expressing real relationship between the phenomena and to give an answer to the research question every case is explained in detail on the basis of these computer outcomes (Yin, 2009). This is completed by assigning different codes to different text sections. For example, when an article mentioned political unrest this was assigned to the code host country risk. The coded text differs in length and amount of words and a section of text can be assigned more than one code when more than one phenomenon is found.
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The nine MNEs of the sample all use different steps and ways of structuring their ownership when entering a foreign country, nevertheless patterns can be drawn from coding these different steps and linking them to human rights abuses. As suggested by Pratt (2009), it is important to provide the collected data in both the body of the paper and in tables. The quotes that are used in the body of this research will be the most convincing in illustrating the points of the research and tables are used to provide additional quotes that will underline the illustrations in the text (Pratt, 2009).
The next step is to draw conclusions and meaning from the symmetries, configurations, explanations, and suggestions derived from the ordered data (Miles & Huberman, 1984). Relying on the theoretical propositions, which shaped the data collection, relevant analytical strategies are chosen. The proposition that the choice for a specific entry mode influences the chance that a MNE violates human rights was traced in case studies on several companies. The purpose for each study on a company case was to demonstrate how the specific characteristics of a certain entry mode increased or decreased the chance of the company becoming implicated with human rights violations. As a result, the proposition helps to filter and organize the data and to explain substitute justifications (Yin, 2009).
3.4.1 Within-case analysis
First within case analysis is conducted, giving a detailed overview for each of the nine cases, the way they enter a foreign country, and how they deal with the risks of human rights abuses. This will be mainly descriptive, but therefor not less important for generating insights in each of the cases and for coping with the large amount of data (Eisenhardt, 1989). From this analysis and from the theoretical framework, codes are deductively derived to form a basis to start from. During the process of analyzing the data more codes are inductively derived. By identifying and studying two or more cases with the same entry mode, literal replication can
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be sought for. For example, if the results of the analysis of a company using a joint venture show that the characteristics of that entry mode have the predicted outcome and this pattern is the same for another company using the same entry mode, literal replication is made (Yin, 2009).
3.4.2 Cross-case analysis
The strength of cross-case analysis is that is looks at the data in divergent ways using different tactics. For example by selecting categories, looking for within-category parallels, and then looking for differences with the other categories (Eisenhardt, 1989). This is what Yin (2009) refers to as theoretical replication; as the propositions made for one entry mode show the predicted pattern and this pattern is different from the propositions of another entry mode this leads to theoretical replication (Yin, 2009). In this research both literal and theoretical replication are thus used. By categorizing the cases by entry mode and then relate the similarities within the entry mode (within-case, literal replication), to the differences between the entry modes (theoretical replication) conclusions can be drawn. The categorization is made more concrete by using different dimensions –low vs. moderate vs. high- to measure the degree of the entry mode characteristics; control, risk and resource commitment.
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4. Results
In this chapter the results of the qualitative data analysis are presented. As stated in the previous chapter first a within-case analysis is conducted, gaining acquaintance with the data and guiding the generation of theory on a preliminary basis. This first analysis is presenting the results of the data analysis based on the hierarchical framework of Pan and Tse (2000). The second part provides a cross-case analysis which enables data analysis through multiple lenses and looking beyond initial techniques to find cross-case patterns (Eisenhardt, 1989).
4.1 Within-case analysis
This section outlines the results of the data per category, thus per type of entry mode, linking entry mode characteristics to environmental and health violations.
4.1.1 Violators: MNEs using a license/contract entry mode
As was mentioned in the previous chapter (Table 3.1), both Adidas Group and Levi Strauss & Co. use licensing and contracting as the primary mode of entering countries for their manufacturing activities. Adidas uses two outsourcing models; direct and indirect sourcing (Adidas Group, n.d.). The suppliers that are tied to the company by a direct contractual relationship have independent ownership and are only evaluated on how management commits to the rules set by Adidas by factory inspections and risk assessments (Adidas Group, n.d.).
MNEs move parts of their production process to reduce overall production costs (Blanton & Blanton, 2009). In 2002, Levi Strauss & Co. has closed its last wholly owned U.S. based manufacturing plants and moved its production to low labor countries in Asia, Latin America and Africa by contractual agreements with locally owned factories (Strasburg, 2003). This is also the case for Adidas Group that outsources 95 percent of their production to independent suppliers (Adidas Group, n.d.).
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The existence of guidelines and agreements that suppliers need to act in accordance with indicates that these companies need to put an effort in order to increase the control on their suppliers. Despite this effort tracking and monitoring the performance of their suppliers is hard (Emmelhainz & Adams, 1999). Adidas Group has workplace standards in all languages supported by numerous guidelines to which their sourcing relationship needs to comply. The company is aware of the risks of entering specific countries with different human rights standards and selects a new manufacturer only after a comprehensive analysis that will be conducted by their Social & Environmental Affairs department (Adidas Group, n.d.). Levi Strauss & Co. has a comparable set of guidelines defined by the Sustainability Guidebook (Levi Strauss & Co., 2013).
However, despite these guiding principles to monitor and control their supply chain, both companies have been accused of violating human rights because of non-compliance of their suppliers. This indicates that because of the low degree of control the MNE has over its licensee or contractor, which is one of the characteristics of non-equity modes (Chu & Anderson, 1992; Pan & Tse, 2000), the MNE has less power to prevent human rights violations. As an illustration, Levi Strauss & Co. was not able to control their supplier Nien Hsing in Lesotho to prevent the environmental pollution which caused rivers to become toxic. Only after the violations were brought to light by a photographer who took pictures of people picking rags containing Levi tags out of toxic waste, the company investigated their supplier (Howden, 2010).
Another characteristic, namely the degree of risk, has played a role in the violations as well. The low risk associated with contractual agreements and licenses is caused by the fact that it is easier to withdraw from an agreement and to look for another supplier without the risk of losing profit (Luo, 2001). So in the case of outsourcing to a high risk country like Levi’s in Lesotho (ECR, 2014), all the risk of the business itself lies at the supplier or licensee.
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Subsequently Lesotho is one of the poorest countries of Africa where the importance of the textile industry for the national economy is of such high importance, that the government allows the discharge of toxic waste into the water (McDougall, 2009). This is what was pointed at by Cragg and Muchlinski (2012) that due to the globalization processes and the increasing power of MNEs, national governments lose their willingness to accomplish their human rights duties (Cragg & Muchlinski, 2012), which increases human rights risk. Although the first one accused is the supplier who is directly involved in the violations (The China Post News Staff, 2009), especially nowadays in the textile industry, also the brands associated with that supplier are linked to the violations. This implies that minimizing managerial perceived risk by entering with a license or contract has the opposite effect on the chance of getting indirectly involved with human rights violations. In other words, the risk that is generally associated with entry modes -in terms of profit and loss- might be seen as the opposite of the risk of human rights violations.
Furthermore, the low degree of resource commitment also seems to have an effect on the chance of human rights violations in both cases. Both companies have neither tangible nor intangible assets invested in the supplier and the knowledge transfer from and to the MNE’s headquarter is very small, which means that the trade-off of switching is low. The following quote from the Levi Strauss & Co. Sustainability Guidelines (2013) supports this by saying that “for existing suppliers with a violation confirmed by more than one source of information, LS&CO.’s approach is to work with existing suppliers to remediate violations immediately and endeavor to limit exit to circumstances when a supplier is unwilling to remediate or does not have the capability to remediate” (Levi Strauss & Co, 2013, p. 1). Adidas Group has a comparable remedy system where a supplier who fails to meet the Workplace Standards will get warning letters, investigations and eventually if non-compliance continues the manufacturing relationship will be terminated (Adidas Group, n.d.). These
