How does MNE`s sustainable focus and government efficiency of the host country influence conflict situations with indigenous communities? : a quantitative analysis on the dynamics of conflict resolution

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U

NIVERSITEIT VAN

A

MSTERDAM

How does MNE`s sustainable focus and government

efficiency of the host country influence conflict

situations with indigenous communities?

A Quantitative Analysis on the Dynamics of Conflict Resolution

Master Thesis

Business Administration – International Management track

Name: Altair Bekturov Student Number: 11186550 Date: 27-01-2017

Thesis Supervisor: dr. Ilir Haxhi Second Reader: drs. Erik Dirksen

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Statement of originality

This document is written by Altair Bekturov who declares to take full

responsibility for the contents of this document.

I declare that the text and the work presented in this document is original and

that no sources other than those mentioned in the text and its references have

been used in creating it.

The Faculty of Economics and Business is responsible solely for the

supervision of completion of the work, not for the contents.

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Abstract

The focal unit of analysis of the study is the conflict resolution between indigenous communities and MNEs. Despite the increasing awareness towards indigenous peoples, there is still a limited research exploring the influence of MNE`s CSR focus and government effectiveness of the host country on conflict resolutions with indigenous communities. Most of the previous studies on indigenous communities mainly focused on qualitative analysis that analyzed specific cases in certain geographic locations. Although these studies do provide interesting specific and detailed analysis of the particular cases, their findings are unclear in terms of degree of generalizability. In order to fill this important literature gap, we will study the dynamics of conflicts between MNEs and indigenous peoples from a broad quantitative perspective. First, we investigate whether the sustainable focus and policies toward indigenous communities positively influence length of conflict. In contrast to the findings of previous studies, the results show that MNEs with a strong sustainable focus tend to engage in more lengthy conflicts than MNEs that do not pursue sustainable strategies. Furthermore, our results also show that MNE`s stated policies toward indigenous communities does not have a significant moderating influence. Finally, while the findings show that government effectiveness does not influence type of conflict, thereby rejecting the third hypothesis, MNE`s previous experience does have a significant moderating influence on the relationship between government effectiveness and type of conflict. By looking at 706 cases of conflict across 63 countries, this study contributes to the existing literature by examining which factors determine the duration of the conflict and which factors influence the type of conflict. Finally, by refining current knowledge on conflict resolution, our findings open avenue for future research and provide valuable insights for managers in the field of international management, as well as indigenous communities and national governments.

Keywords: Multinational Enterprises (MNEs); indigenous peoples; conflict resolution;

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6.1 DESCRIPTIVE STATISTICS ... 33 6.2 MULTICOLLINEARITY TESTS ... 33 6.3 CORRELATION ANALYSIS ... 34 6.4 REGRESSION ANALYSIS ... 36 Hypotheses 1-‐2 ... 36 Hypotheses 3-‐4 ... 38 7. DISCUSSION ... 40 7.1FINDINGS ... 40 7.2THEORETICAL IMPLICATIONS ... 41 7.3PRACTICAL IMPLICATIONS ... 42 7.3LIMITATIONS ... 43 7.4FURTHER RESEARCH ... 44 8.CONCLUSION ... 46

9. THE REFERENCE LIST ... 48

10. APPENDIX ... 54

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List of Figures & Tables

Figure 1: Conceptual model………26

Table 1: Description of the variables………...31

Table 2: Summary regression analysis on length of conflict………...32

Table 3: Summary regression analysis on type of conflict………..32

Table 4: Multicollinearity statistics for length of conflict………...34

Table 5: Multicollinearity statistics for type of violence……….34

Table 6: Scale means, SD`s and correlations….……....……….36

Table 7: Regression results on length of conflict….………...37

Table 8: Regression results on type of conflict…….………..39

Table 9. Distribution and frequency of countries represented in the dataset.……….54

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1. Introduction

Fundamental changes in political ideologies and economic systems among a large number of countries over the past few decades, together with rapid advances in transport and communication technologies have led to increasing interdependence and integration of the world economy (Dunning, 1998). As national economies are accelerating their integration process, there have been increasing concerns related to the globalization and its impact on issues ranging from rising income inequality and poverty within and among nations to environmental degradation and cultural imperialism (Heshmati & Lee, 2010). Some theorists consider globalization a discriminative force that makes the poor, poorer and the rich, richer. In their views, many people of developed counties would benefit of globalization while developing and undeveloped countries would drop behind due to lack of facilities to compete in this area (Danaeefard & Abbasi, 2011). Developing and underdeveloped countries might also be forced to engage in a “race to the bottom” in a variety of policy areas, such as social, labor and environmental standards, in order to distinguish themselves as comparatively attractive investment destinations (Hecock & Jepsen, 2013).

Needless to say that one of the most important engines of economic globalization is activity of multinational enterprises (MNEs). Even though, MNEs are generally considered to be fundamental engines of economic growth and development, often their operations are questioned from both social and environmental viewpoints (Lertzman & Vredenburg, 2005). MNEs` global search for natural resources often takes them to lands inhabited by indigenous peoples. The encounters between “modern” “economically rational” and “global” organization unit, represented by MNEs, and one, if not the most, marginalized, poor and “traditional” groups, represented by indigenous peoples, often result in uncooperative interactions (Huemer & Cox, 2006).

Despite accounting for only around 5% of the world`s population (UN, 2009), with the current level of NGO and media attention to the issue of indigenous peoples` rights and introduction of laws in regulation in many countries, indigenous societies often manage to create considerable obstacles and challenges for companies operating in a resource extracting industry. Main risks associated with conflicts with indigenous people for MNEs include both temporary and permanent disruptions in operations, reputational risks and risks of litigation (EIRIS, 2007). Simultaneously, there are also risks for indigenous peoples, such as decreased

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access to and control over land, identity and cultural survival, and lethal outcomes (Sandt, 2009).

Even though these conflicts are of utmost importance for both MNEs and indigenous communities and have been on a research agenda for quite some time, little research has been done on the dynamics of these business and community relations (Calvano, 2008). Moreover, most of the few studies that have already been conducted mainly focus on the dynamics of conflicts from a qualitative research design (Calvano, 2008; Bebbington and Bury, 2009). These studies do provide in-depth analysis and details of the particular cases; however, it is unclear whether findings of these studies would generalize elsewhere. In order to fulfill this important literature gap, this thesis will study the dynamics of conflicts between MNEs and indigenous peoples from a quantitative perspective. Specifically, the thesis will focus on two main issues, namely, the impact of CSR focus of MNEs and government efficiency of host country on conflict resolution with indigenous communities. Finally, two moderating effects will be considered, namely, the moderating effect of MNE`s policies toward endogenous communities on the relationship between CSR focus and length of conflict and the moderating effect of MNE`s previous experience on the relation between government efficiency and type of conflict.

Over the past two decades the enterprises in resource extractive industries have witnessed the necessity and emergence of community relations and development functions, especially under the rubric of sustainable development (Kemp & Owen, 2013). The concept of sustainable development has been defined in many ways. It was first coined in 1972 at the United Nations Conference on Human Development. Sustainable development is commonly understood, as the development that meets the needs of the present without compromising the ability of future generation to meet their own needs (Brundtland Commission, 1987). Apart from focusing on basic CSR approach, there are also other sustainable development practices that address indigenous peoples directly, such as adapting policies that respect indigenous rights, providing free prior informed consultations/consent for indigenous people, disclosing employment data on indigenous people and policies avoiding involuntary resettlement (EIRIS, 2007). Despite a growing public expectation for improved ethical performance of resource industries to engage with indigenous peoples, these interactions are still often antagonistic (Lertzman & Vredenburg, 2005).

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Despite the growing importance of sustainable development in the management literature, less attention has been given to the role of indigenous people and their relationship with resource industries in the context of sustainable development (Lertzman & Vredenburg, 2005). There only have been a few qualitative studies that found the positive relationship between CSR focus and conflict resolution with indigenous peoples (Calvano, 2008). However, it is unclear whether this positive relationship is transferable across different geographical settings and industries. To address this literature gap, the following research question has been proposed:

RQ1. To what extent does the sustainable focus of MNEs affect the length of conflict between

MNEs and indigenous communities?

Ballard & Banks (2003) claim that neglect of indigenous rights by companies is the main reason for conflicts. Additionally, Calvano (2008) argues that MNEs that recognize indigenous communities as legitimate and important stakeholders are presupposed to engage more successfully in partnerships. Overall, MNEs that not only have a sustainability focus but also recognize indigenous communities as legitimate stakeholder in their corporate governance structures are hypothesized to engage more successfully with communities, which is likely to result in shorter conflicts

Often there is an enormous gap in welfare and employment between the indigenous peoples and the rest of the populations, such as in the case of Australia`s population and the Aboriginals (Crawley & Sinclair, 2003), indicating that some indigenous people even from highly developed countries are living in conditions similar to the third-world countries. Not to mention indigenous communities that inhabit the lands of developing countries. If there are no strong political institutions protecting indigenous peoples, these poor conditions could create additional ways in which MNEs may address the conflicts with indigenous peoples, apart from sustainable development practices. MNEs can directly donate money and materials goods to communities in exchange for their support. Although often the sums involved are not significant for the MNEs, they are significant for poor communities. This practice may pit individuals within communities against each other, allowing the MNEs to divide and conquer the opposition (Calvano, 2008).

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Moreover, the increasing number of scholarly literature, NGO reports and media news suggest that bribery of indigenous leaders is both common in nature and global in scope (Foster, 2015). For instance, the Massachusetts-based NGO Cultural Survival recently reported that a local subsidiary of U.S. Capital Energy, a Texas-based oil company, has offered money, vehicles, houses and tuition for their children’s education to the leaders of Maya communities in Belize in an effort to convince the leaders to drop legal proceedings that they initiated to block the company’s operations. Another NGO Minority Rights Group International has also made similar allegations against the same subsidiary, stating that the company not only provides benefits for the ones who support them within the community, but also deny jobs and other benefits to the oppositionists of their actions (Foster, 2015). It is difficult to measure how these practices affect the conflicts resolution directly, since most of the time these agreements made behind the closed doors and there is not enough clear evidence. However, it is clear that lack of government efficiency decreases the position of indigenous communities through a lack of legal systems, governmental instability and corruption (Ikelegbe, 2005). However, there is a limited quantitative research on how government efficiency affects the type of violence between MNEs and indigenous communities. To address this literature gap, the following research questions has been proposed:

RQ2. To what extent the government efficiency of host country affects the type of conflict

between MNEs and indigenous communities?

Some scholars also argue that in order to resolve conflicts efficiently there is a need to establish long-run relations between MNEs and indigenous peoples (Fontana, Sastre-Merino, & Baca, 2015). Companies must gain trust and build a bridge between the need of communities and the their own goals (Fontana et. al., 2015). The experience is even more relevant in the context of countries that lack government efficiency. It goes without saying that these relations cannot be built over night and require time. Thereby, more experienced is the company, better connections it is likely to have with the indigenous peoples and the national government and more likely it is going to use their available resources and capital in a more optimal way.

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This study contributes in the following ways. First of all, this study provides practical information on the relations between MNEs and indigenous people and the consequences of ignoring one another. Thereby, it could stimulate MNEs to increase awareness of communities and engage with them more actively. Increased understanding about the factors that influence conflicts could also help formulate and pursue policies and strategies for national governments that would decrease the length and type of conflicts in the future. Even though, there have already been a number of studies on the relations between MNEs and indigenous peoples (Calvano, 2008; Crawley & Sinclair, 2003; Lertzman & Vredenburg, 2005), most of these studies have been qualitative in nature. Since these studies focused on isolated cases in specific geographic locations, some important relationships in a broader context across countries and industries could have been overlooked.

Following the literature review on indigenous peoples and conflict situations, the theoretical framework, hypotheses and conceptual model are described. The theoretical framework includes sections on sustainable focus of MNEs, government effectiveness, policies toward communities and previous experience of MNEs. Methodology and data collection process is discussed in the following section. The remaining sections of the thesis are dedicated to the presentation and discussion of research findings.

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2. Literature Review

This chapter introduces key concepts and gives an overview of the previous research. It starts with an introduction of indigenous people and their rights. The section two discusses the nature of the conflicts that often arise between MNEs and indigenous peoples and the ways in which MNEs and indigenous peoples are dealing with them. The two following sections discuss MNE characteristics, such as sustainability focus and stated policies toward communities that could affect the resolution of conflict. The two final sections of the chapter discuss the influence of the national government effectiveness of the host country on conflict resolution and how previous MNE`s experience can help enterprises to resolve conflicts in the context of an inefficient government.

2.1 Indigenous Peoples and their Rights

According to the UN (2009), there are around 370 million indigenous people in the world and 5,000 distinct indigenous cultural identities in more than 70 countries. Even though the concept of indigenous peoples is widely used, there is no consensus as to the precise meaning of the term. Indigenous people, also referred to as aboriginal or native people, can be broadly defined as groups protected in international or national legislation as having a set of specific rights based on their linguistic and historical ties to a particular territory, their cultural and historical distinctiveness from other populations (Coates, 2005). Often a distinction is made between “indigenous” and “tribal” peoples, the former referring to culturally-distinct groups that have descend from pre-conquest populations, and the latter to those that do not necessarily descend from pre-conquest populations, but are nevertheless regulated wholly or partially by their own customs or traditions or by special laws or regulations (ILO Convention 169, 1989). Nevertheless, the term “indigenous peoples” is used herein broadly to refer to either type of group.

By no means indigenous peoples is a homogeneous group; they differ greatly in their size, geographic location, culture, historical development, degree of isolation, degree of power within the nation state and degree of economic and political domination by outsiders (Coates, 2005). Indigenous peoples also confront a diverse range of concerns associated with their status and interaction with other cultural groups, as well as changes in their inhabited environment. Some challenges are specific to particular groups; however, other challenges are commonly experienced. These issues include cultural and linguistic erosion, loss of land,

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ownership and exploitation of natural resources, political determination and autonomy, poverty, and discrimination.

Garvey and Newell (2005) argue that the government can ensure the protection of the rights of indigenous peoples though policies and legal frameworks. Historically, indigenous communities located in western states enjoyed better treatment from the governments, compared to poorer nations in Asia and Africa where governments spent much less attention to the “special” status of indigenous peoples and have been reluctant to development of indigenous rights and mainly pursued other policies deemed in the interest of the broader population (Coates, 2005). There are a number of factors that could explain developing states` opposition toward indigenous peoples. First of all, the government may lack the necessary institutional capacity to efficiently enforce its laws or may have a financial stake in the project, making it reluctant to take any action that would diminish its profitability. The officials responsible for the law enforcement may also have prejudices against the indigenous peoples and give preference to the development goals (Foster, 2012). Finally, salaries in the country may be so low that government officials could be easily tempted to accept bribes for approving projects they have never even seen (Sizer & Plouvier, 2000).

When faced with threats or some other external pressure, indigenous groups tend to band together to create a collective identity to balance the power (Bruijn & Whiteman, 2010), as in the case of hydroelectric project in Quebec, Canada, in the 1970s. The native communities in the area consisted of highly individual indigenous communities that had little contact with each other. All of the communities in the area were opposed to the development of the James Bay hydroelectric project and formed the Cree Regional Authority, an organization representing all eight communities. By aligning the common interests of all communities, the Cree Regional Authority was able to negotiate an agreement with the governments of Canada and Quebec, which explicitly stated their rights as Indigenous Peoples (Wertman, 1983). Canada is not an isolated case, over the past fifty years, indigenous peoples in the United States, Australia, New Zealand and other countries mobilized against their states to demand change (Alcantara & Nelles, 2013). However, in most of the cases only MNEs have the political power to access the government decision-making, while the communities lack this power (Garvey and Newell, 2007).

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A number of external actors could also play a crucial role in protecting the rights of indigenous peoples. For instance, to recognize, promote, and protect the rights and the freedoms of the indigenous people around the world, the United Nations has signed a declaration on the right of indigenous people (UN, 2009). Today, many private financial institutions will no longer lend funds for high-impact projects unless the borrower has consulted with local stakeholders (Foster, 2012), such as indigenous peoples. Similar to United Nations and other private financial institutions, non-governmental organizations (NGOs) could pressure MNEs to pursue more sustainable practices when dealing with indigenous communities. Study conducted by Khor (2011), shows that certain MNEs operating in the palm-oil industry in Indonesia and Malaysia had to adjust their operations after being victims of boycotts promoted by NGOs.

2.2 Conflicts and the Stakeholder Theory

Very often indigenous peoples inhabit land, which is rich in minerals and natural resources (Coates, 2005). As the supply of natural resources becomes increasingly scarce in times of increasing demand, MNE exposure to indigenous groups increases as they seek out new sources (Adamson 2014), especially in the resource-extraction industry (Banerjee, 2000). Conflicts between MNEs and indigenous peoples can range from peaceful negotiations to high-level violence (Calvano, 2008). Violent conflict can be defined as “organized physical force resulting from grievances between two or more parties and leading to injury or death to persons or damage or destruction to poverty” (Oetzel et. al., 2007, p. 331). The length of the conflict is also an important factor, as this may be taken into consideration by companies to determine the necessity to intervene (Getz and Oetzel, 2009). Bond (2014) states that long conflicts lead to higher financial and reputational costs, and also could lead to a higher degree of violence.

An important part of contemporary conflict studies is concerned with why conflicts emerge and persist. To solve this issue, many scholars tend to use an actor-oriented approach that primarily considers the individual motives and interests of the conflicting parties as the main explanation. MNEs tend to see resource markets as an opportunity for profits, while indigenous peoples see ancestral lands as integral to who they are, their culture, spirituality, history, social organization, family, food security, economy and health (EIRIS, 2007). These differences lead resource extraction companies into ethically challenging situations, often

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resulting in conflict. The money and benefits that communities get from MNEs in return is often not enough to compensate the environmental damage (Fontana et. al., 2015).

Another broadly discussed topic in the international management literature that is often proposed, as an important mechanism to examine conflicts is the stakeholder theory. According to the theory, a firm can be described as a system of stakeholder groups that are connected by a complex set of relations. Each has different rights, goals, expectations and responsibilities and provides a particular resource or contribution to the firm (Mutti et. al., 2012). Firm`s performance and even survival in the worst cases can be threatened if such resources and contributions are withdrawn or become too costly to sustain (Freeman et. al., 2010). Stakeholder theory states that firms are responsible for delivering benefits to all their stakeholders rather than only to shareholders and customers. Stakeholders are generally defined as “the individuals and constituencies that contribute, either voluntarily or involuntarily, to firms’ wealth-creating capacity and activities and that are therefore its potential beneficiaries and/or risk bearers” (Post et. al., 2002, pp. 19).

The stakeholder approach is particularly relevant to discussions and analysis of the relations between MNEs in the resource extracting industries and indigenous peoples for a number of reasons. First of all, firms that operate within the resource extractive sector are heavily dependent upon the supply of natural resources (Adamson, 2014). Thereby, these firms are more exposed to indigenous communities. Firms that ignore this stakeholder group face risks associated with capital, regulation, reputation, and the legitimacy of their project (Voss, Greenspan 2012). Despite these risks, compared to other stakeholders, communities are rarely given as much priority as other stakeholders (Calvano 2008). These communities are only considered when they pose a significant threat to the firm’s survival or directly impact the income of the firm.

2.3 Corporate Social Responsibility (CSR)

The concept of sustainable development has first received global endorsement at the famous United Nations Conference on Environment and Development (UNCED), commonly known as the “Earth Summit”, in Rio, in 1992, where 116 heads of state, 8000 delegates from 172 countries and 3000 accredited individuals from non-governmental organizations gathered together to discuss practical strategies for tackling pressing global issues (Hilson & Murck, 2000). The concept was first coined in 1972 at the United Nations Conference on Human

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Development. Sustainable development is commonly understood, as the development that meets the needs of the present without compromising the ability of future generation to meet their own needs (Brundtland Commission, 1987).

Ever since UNCED, sustainable development has received significant international attention and has been the overarching goal of the international community. Several academics and practitioners have developed a number of policy frameworks, indicator sets and management guidelines for use by government and businesses (Hilson & Murck, 2000). Despite the efforts of governments around the world to implement and pursue such strategies as well as international cooperation to support national governments, there are continuing concerns over global economic and environmental developments in many countries (UN, 2012). In any case, today MNEs in the extractive industries, particularly those engaged in mining activities, are under constant pressure and scrutiny from various societal forces: environmental NGOs, indigenous peoples and human right movements. One of the reasons is that mining companies cause the most significant and frequently irreversible damage to the natural environment compared to other industries (Mutti et. al., 2012).

Initially, sustainable development was perceived as an essentially environmental issue, however, in the past decade there has been a resurgence of interest towards the social dimensions of development, which can be attributed to the fall of communism, the financial crises in Latin America, East Asia, and Russia, and the persistent problems of unemployment and social marginalization in even the most prosperous economies (Lehtonen, 2004). Today sustainable development has become commonly perceived as a combination of the environmental, economic and social “pillars” (Lehtonen, 2004). The classical model of corporate social responsibility (CSR) includes legal constraints while the neo-classical model also incorporates moral limits (Lertzman & Vredenburg, 2005).

Apart from CSR activities, MNEs can also directly donate money and materials goods to communities in exchange for their support. Although often the sums involved are not significant for the MNEs, they are significant for poor communities. This practice may pit individuals within communities against each other, allowing the MNEs to divide and conquer the opposition (Calvano, 2008).

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2.3.1 CSR and Corporate Financial Performance (CFP)

For decades, scholars have examined whether corporate social performance (CSP) and corporate financial performance (CFP) are positively or negatively associated (Barnett & Salomon, 2012). The classical argument proposed by Friedman (1970) was that the relationships between CSP and CFP ought to be negative since companies incur more costs by engaging in more socially responsible activities and, thereby, companies ought to do no more than abide by law. Contrasting view was introduced almost a decade later and is based on the stakeholder theory, the origins of which are commonly credited to Freeman (1984). According to stakeholder theory, better firm manages its relations with large number of groups that have interest or stake in the firm, the more successful it will be over time (Freeman, 1984). Increased social spending leads to improved stakeholder relations, reduces transaction costs and could become a source of competitive advantage of the firm (Jones, 1995).

Parkinson (1995) also argues that ignoring third parties can damage the reputation of the company, which in turn can reduce financial performance of the company in the long run due to decreased sales or difficulties with recruitment of new personnel. Thereby, apart from costs of engaging in CSR there are also benefits. According to this neo-classical model of CSR, as long as the main objective of a company is maximizing profits, the company should also ensure the welfare of third parties.

Even though, a large number of empirical studies that examined the effect of CSP on CFP have been published in the last decades, there is still no clear consensus. Many studies have found a positive relationship (Jo & Harjoto, 2012; Margolis, et al., 2009; Flammer, 2013), however, there are also some studies that have found a negative relationship (), some that have found no relationship of significance () and some that have found U-shaped relationship (Barnett & Salomon, 2012). One of the reasons for the occurrence of these different outcomes is the fact that CSP is difficult to measure. Companies might not disclose all the relevant information and the degree of accuracy varies as well (Chatterji, Levine, & Toffel, 2008). Some companies use CSP solely as a tool in order to protect their brand image. For instance in Argentina, there is a widespread public perception that CSR is a green-wash, and companies use CSR as rhetoric to promote corporate image without actually delivering any

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benefits for the communities (Mutti et. al., 2012). This view was captured during a grassroots movement meeting in Argentina:

“In Jujuy, mining companies have studied local cultures and use this knowledge. Mining

companies know that when the indigenous communities receive a gift they feel in debt and they ought to reciprocate. So many companies made their way into communities by giving gifts to local people who then feel in debt with the company and refrain to demonstrate against them” (Mutti et. al., 2012).

Finally, scholars also use different social ratings in order to measure the CSP. The most widely used social and environmental rating are one from Kinder, Lydenberg, Domini Research & Analytics (KLD) and the Dow Jones Sustainability Index (DJSI).

2.4 MNEs` policies toward indigenous communities

Apart from focusing on basic CSR approach, there are also other sustainable development practices that address indigenous peoples directly, such as adapting policies that respect indigenous rights, providing free prior informed consultations/consent for indigenous people, disclosing employment data on indigenous people and policies avoiding involuntary resettlement (EIRIS, 2007).

According to Bond (2014), there are two main methods of dealing with conflict. Namely, conflict management and conflict transformation. Conflict management often seeks to suppress, contain or otherwise avoid the consequences of conflict. While conflict transformation not only aims to end violence and change relationships between the conflicting parties, but also aims to change the political, social and economic structures that cause negative relationships. Bond (2014) argues that conflict transformation is more effective way of dealing with conflict, since it deals not only with the consequences of the problem but also with its roots, thereby, preventing conflicts in the future. Community recognition by MNEs can be seen as an example of conflict transformation. There are a lot of studies that highlight the importance of indigenous community recognition and the equal distribution of power among stakeholders (Calvano, 2008; Crawley and Sinclair, 2003). The underlying assumption is that recognition and involvement of the indigenous community will lead to more trustful relations and, thereby, to more peaceful negotiations.

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2.5 Government Efficiency

The quality of the national government is often seen as a main source and motivation for escalation, conflict, violence, crime and other struggles (Ikelegbe, 2005). National governance can be defined as “traditions and institutions by which authority in a country is exercised” (Kaufmann et. al., 1999). North (1991) defines these institutions as formal and informal rules of the game that are at play in a certain context. Informal institutions include norms, traditions, customs and religion, while formal institutions include the executive, legislative, judicial and bureaucratic functions of government in order to mandate social order (Williamson, 2000). Finally, Kaufmann et al. (1999) also mention the importance of the process by which governments are selected; the capacity of the government to effectively formulate and implement sound policies, and the respect of citizens and the state for the institutions that govern economic and social interactions among them. Depending on the strength of the national governmental institutions, Ikelegbe (2005) argues that the development of conflicts can vary significantly per country.

The protection of indigenous communities can be ensured by the government through policies and legal frameworks (Garvey & Newell, 2005). This can protect and promote the relative rights of communities and ensure that companies take responsibility for their impact on society. However, as mentioned before, especially in contexts that are portrayed by low institutional quality, the economic benefits MNEs bring often outweigh the social concerns (Ikelegbe, 2005). Moreover, regulatory frameworks vary significantly throughout the world, in selected instances, performing in line with legislation does not necessarily translate into sound social and environmental practices. In much of North America, Europe, and Australia, comprehensive social and environmental legislation has been in place for decades, but in a number of developing South American, African, and Asian countries, social and environmental laws are still in their infancy, and accompanying enforcement programs are far from effective (Hilson & Murck, 2000). Needless to mention that MNEs often have the political power to access the government decision-making both in developed and developing countries, while the communities lack this power (Garvey and Newell, 2007).

Frynas (2010) introduces the concept of the “resource-curse”, which in short entails that high amount of natural resources can have a negative effect not only on the quality of national governance, but also on conflict development. The scholar argues that corruption is more

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likely to occur in countries that are dependent on the incomes generated by extractive industries. Political instability and corruption are seen as important drivers for engaging in illegal operations, either by governmental officials or MNEs representatives. Furthermore, companies with genuine CSR programs, often face misallocations of the assigned financial resources towards indigenous communities through interception of national governments. Finally, there is less urgency for ensuring economic stability since the extractive companies often take responsibility for building infrastructure and provide actual financial benefit in terms of trade. As a result, the governmental dependency on resource extractive activities in less developed countries is likely to fuel opposition (Frynas, 2010).

2.5.1 Bribery of indigenous leaders

The number of reports shows that bribery of indigenous leaders is both common in nature and global in scope (Foster, 2015). The risk of corruption of this nature arises due to the fact that companies often seek to undertake projects on or near the lands of indigenous peoples. Common examples of these projects include the extraction of other natural resources, the damming of rivers to produce hydroelectric power, the construction of highways, pipelines, and other infrastructure, and agroforestry (Foster, 2015). These types of projects normally require de facto social license from formal governmental authorities in the countries hosting them, but also often require de jure license or some other type of cooperation of local landowners or communities (Laplante & Spears, 2008).

Even though U.S. law enforcement agencies have intensified their efforts to combat bribery in international business both in breadth and intensity under the Foreign Corrupt Practices Act (FCPA), bribery of indigenous leaders by multinational enterprises to secure these leaders` support for business activities has been mainly overlooked (Foster, 2015). Moreover, there is also limited published literature that has considered the wide variation in the nature of dealings between project executors and indigenous leaders, or that has examined in detailed how the FCPA and other anti-corruption regulations could be applied under various circumstances.

It is difficult to measure how these practices, such as directly providing benefits to the communities and their leaders both legally and illegally or having influence on the local governments, affect the conflict resolution directly, because most of the time these agreements made behind the close doors and there is no enough clear evidence.

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2.6 MNE`s experience

Apart from the CSR focus and stated policies toward communities, there is also another important company-related factor that can affect the duration and severity of the conflicts with endogenous peoples, namely firm`s previous experience with indigenous peoples. There is a number of reasons why previous MNE`s experience with endogenous peoples could lead to a better management of conflicts. First of all, previous experience means that there inevitably will be employees in a company who have experience and knowledge about endogenous peoples. These employees become “bi-culturally literal” and play crucial role in easing the interaction between parties (Lertzman & Vredenburg, 2005). These bi-culturally literal employees could use practices that have been successful in the past and the knowledge about the communities in order to apply them for the future interactions. Due to the previous experience, firms are also more likely to recognize the importance and legitimacy of these communities, which according to stakeholder theory is essential in resolution of conflicts (Reed, 1999).

On the other hand, companies that have previous experience not only become more experienced and knowledgeable about the communities, but also often manage to establish good connections with the communities and to get personal access to the leaders and other decision-makers of the communities that could be used to establish long-term relations with the communities. Moreover, the companies also often manage to create good relations not only with the communities but also with the government representatives that could force endogenous peoples to accept certain decisions. These connections are even more important in the context of weak institutional governments. Overall, the greater the number of positive experiences an MNE has in dealing with endogenous peoples, more likely they are to engage in the interaction again and apply all the lessons they have already learned (Alcantara & Nelles, 2013).

For instance, Rio Tinto, one of the leading international mining groups, first developed their policy toward endogenous peoples in 1995 that recognizes the economic, political, social and cultural impacts their business can have on indigenous peoples in Australia. For more than decade, the company has also been developing and refining a number of programs and approaches, working together with indigenous peoples, governments and non-governmental organizations. Managing Director of Rio Tinto Australia – Stephen Creese mentions: “There

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has been significant learning for all of us along the way. Rio Tinto has come to appreciate that continual learning and adaptation of our programs is critical to ensure that initiatives remain both relevant for our business and reflect the aspirations of Indigenous Australians” (Rio Tinto, Aboriginal policy and programs in Australia).

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3. Theoretical Framework

The first section discusses the mechanisms that influence conflict resolution. The second and third sections focus on the corporate governance characteristics. The second section focuses on how CSR policies can affect conflict resolution between MNEs and indigenous peoples, while the third section discusses the moderating effect of MNE`s stated policies toward communities on the relationship between sustainability focus and length of conflict. The following chapter discusses whether higher government efficiency of host country has a positive impact on conflict resolution with indigenous peoples. While the final section of the chapter discusses the moderating effect of previous MNE`s experience on the relation between national government efficiency and type of conflict.

3.1 The mechanisms influencing conflict resolution

The resource extraction industry is characterized by a number of violent conflicts between MNEs and indigenous peoples. Although these conflicts have been on the research agenda for a long period of time, not enough attention has been paid to the actual dynamics of these conflicts (Calvano, 2008). Moreover, most of the previous studies on indigenous communities mainly focused on qualitative analysis that looked at specific cases in certain geographic locations. For instance, Lertzman & Vredenburg (2005) analyze a case of Sustainable Forest Practices in Clayoquot Sound, Canada. The conflict in this area began in 1979 and lasted for nearly 20 years. It was successfully resolved after the establishment of the Scientific Panel, an independent scientific body responsible for developing sustainable forest practice standards in the area. Based on their analysis, authors suggest that ethical approach and sustainability focus of MNEs are the key factors to successful conflict resolution.

On the other hand, other authors (Ite, 2004; Kolk & Lenfant, 2013; Ikelegbe, 2005) also emphasize the role of national governance characteristics. Ite (2004), for instance, investigates the effectiveness of CSR practices in Nigeria. Despite a large number of development initiatives undertaken by companies in the area, they have not been successful since the high level of corruption led to misallocation of resources and unequal distribution of money. Although these above-mentioned studies do provide interesting specific and detailed analysis of the particular cases, their findings are unclear in terms of degree of generalizability. Thereby, a quantitative approach could help to enlighten these relationships and analyze conflict dynamics more broadly. Evaluation of different characteristics employed

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by MNEs and national governments can also shed light on the most effective characteristics in resolving conflicts.

First of all, this study argues that corporate governance characteristics, such as sustainability focus and stated policies toward communities influence the process of conflict resolution. Some scholars state that one of the elements promoting the development of social conflicts is the nature of the extractive industry, when its operation severely impacts the environment, pollutes water, air and land (Fontana et. al., 2015). As a number of studies indicate, since indigenous peoples tend to be highly dependent on their environment and view it as an integral part of their identity, harming the environment often leads to conflict situations (Calvano, 2008; Lertzman & Vredenburg, 2005; Bruijn & Whiteman, 2010). Apart from environmental sustainability practices, increased attention has been paid to the societal role of MNEs, mainly due to global opposition towards MNEs, increasing presence of NGOs and social movements, and rise of indigenous rights (Jenkins & Yakovleva, 2006). Overall, generic CSR practices have become a manifestation of corporate governance mechanisms for conflict management with different stakeholders (Jo & Harjoto, 2012).

The recent increase in CSR activities of MNEs in the extractive industry shows that companies started taking more responsibility for their business activities. However, due to the lack of knowledge on what the actual motivations behind the CSR policies are, and the difficulties caused by the complexity and multidimensionality of the concept, it is also important to look at the effect of specific policies towards communities. While extensive research has focused on the effect of generic CSR practices on the interactions between MNEs and indigenous peoples (Calvano, 2008; Bebbington & Bury, 2009; Lertzman & Vredenburg, 2005; Jenkins, & Yakovleva, 2006), less attention has been paid to examining the effect of MNE`s stated policies towards indigenous communities.

Apart from corporate governance practices it is also important to analyze the national governance characteristics of the host country since MNEs tend to pursue different strategies and adjust their activities depending on the institutional environment of the host country (Marquis & Raynard, 2015). Kolk & Lenfant (2013) argue that Western enterprises tend to perform their stated policies toward indigenous communities with more dedication in their home countries than in institutionally weaker foreign countries, where they give preference to

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situation in the country might also negatively impact the effectiveness of sustainable practices of MNEs and undermine the rights of indigenous peoples, which could lead to violence from both parties.

3.2 CSR and conflict resolution

Characteristics that reduce the length of the conflict represent a positive resolution for both MNEs and communities since they decrease the likelihood of violence and extra costs incurred by the conflict (Bond, 2014; Mitchell, Agle & Wood 1997). According to the stakeholder theory, a firm can be described as a system of stakeholder groups that are connected by a complex set of relations. Each has different rights, goals, expectations and responsibilities and provides a particular resource or contribution to the firm (Mutti et. al., 2012). Firm`s performance and even survival in the worst cases can be threatened if such resources and contributions are withdrawn or become too costly to sustain (Freeman et. al., 2010). Stakeholder theory states that firms are responsible for delivering benefits to all their stakeholders rather than only to shareholders and customers.

As a number of studies indicate, indigenous peoples tend to be highly dependent on their environment and view it as an integral part of their identity (Calvano, 2008; Lertzman & Vredenburg, 2005; Bruijn & Whiteman, 2010). Moreover, harming the environment often leads to conflict situations. Thereby, it is clear that if MNEs have a strong sustainability focus and act responsibly towards the environment and the community, it will help to build trustful relationships and in line with stakeholder theory should decrease the chance of any conflict situation. The following hypothesis is proposed:

H1. Does MNE`s sustainability focus positively affect the length of conflict?

3.3 Policies toward communities and conflict resolution

Apart from focusing on generic CSR practices, there are also other sustainable development practices that address indigenous peoples directly, such as adapting policies that respect indigenous rights, providing free prior informed consultations/consent for indigenous people, disclosing employment data on indigenous people and policies avoiding involuntary resettlement (EIRIS, 2007). Crawley and Sinclair (2003) argue that companies that exceed the “basic requirements” of sustainability practices tend to have more successful interactions with indigenous communities and thus more likely to effectively exercise conflict management. Bond (2014) argues that conflict transformation is more effective way of

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dealing with conflict, since it deals not only with the consequences of the problem but also with its roots, thereby, preventing conflicts in the future. Community recognition by MNEs can be seen as a clear example of conflict transformation. Thereby, it is expected that MNEs that not only have strong sustainable focus but also have stated direct policies toward indigenous communities are even less likely to engage in the lengthy conflict.

H2. Does MNE`s policies toward indigenous communities positively moderate the relation between sustainability focus of MNE and length of conflict?

3.4 Government efficiency and conflict resolution

In his study devoted to the role of institutions, Hodgson (2006) argues that they are the most important structure in the social sphere and defines them as the systems of entrenched and prevailing social norms that shape human interactions. More specifically, he argues that by providing a framework and coherence to social interactions, institutions can both restrain and facilitate certain behaviors. MNEs operating in different countries in most of the cases have to adjust to the environment that is shaped by local institutions. Authors, such as Kolk & Lenfant (2013) and Ikelegbe (2005) emphasize the importance of the quality of national institutions and argue that weak national institutions have a direct negative effect on conflict dynamics. Governments that are characterized by weak political institutions and high levels of corruption might engage in “race to the bottom” and favor the presence of MNEs above that of communities due to economic reasons. In addition, Sambanis (2004) argues that parties involved in conflict that do not rely on the government’s ability to effectively enforce parties to adopt legal solutions, are likely to find more incentives to continue protesting and fighting. On the other hand, communities that live in countries characterized by strong institutions are more likely to rely on court protection.

To address the possible relationship between the government efficiency of the host country and type of violence the following hypothesis is proposed:

H3. Does national government efficiency of the host country positively affects the type of conflict?

3.5 Previous MNE experience and conflict resolution

Sastre-Merino & Baca (2015) argue that in order to be able to resolve conflicts successfully, MNEs must be focused on strategic, political, social and ethical dimensions and also have to

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gain trust and build a bridge between the needs of the indigenous communities and their own needs. In his study, Berkes (2009), also emphasizes the importance of engagement in social learning and building of trust between companies and indigenous communities. The importance of building strong relationships with indigenous communities can be clearly seen in the case of Teck Resources, one of the leading mining companies that managed to establish an agreement with Dease River First Nation in Canada in 2014. Both parties agreed to collaborate on the project, which resulted in revenue sharing, creation of new job opportunities for indigenous peoples, long-term mutually beneficial relationships and no violence from any of the sides (Aboriginal Affairs and Northern Development Canada, 2014). It is clear that MNEs cannot earn trust and build strong mutually beneficial relationships overnight. Quite the opposite, often companies need time and experience in order to do so.

On the other hand, MNEs that have previous experience not only become more experienced and knowledgeable about the communities, but also often manage to establish good connections with the communities as well as with the government representatives that could force endogenous peoples to accept certain decisions. These connections are even more important in the context of weak institutional governments. This line of thinking identifies the following hypothesis:

H4. Does MNE`s previous experience positively moderates the relation between government efficiency of the host county and type of violence?

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4. Conceptual Framework

Figure 1.1 shows the conceptual model containing the relations between the independent, dependent and moderating variables. It is proposed that sustainable focus of MNEs positively influences length of conflict (H1), while government efficiency has a positive influence on type of conflict (H2). Furthermore, it is proposed that MNE`s policies toward endogenous communities will have a positive moderating effect on the relationship between sustainability focus and length of conflict (H3), while MNE experience will have a positive moderating effect on the relationship between government efficiency and type of conflict (H4).

Sustainability focus Government effectiveness Length of conflict Type of conflict Policies toward communities MNE experience H1 H2 H3 H4 • Community autonomy • MNE`s home country • Political stability

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5. Methodology

5.1 Sample

The study uses a cross-sectional research design to examine the conflicts between MNEs and indigenous peoples. The data has been collected for a specific period of time starting from early 1960s until today in mainly resource extracting industries. A conflict is classified as interactions between opposing forces that range from minor disagreements to violent conflicts (Kemp, Owen, Gotzmann & Bond, 2011). The analysis is done from a firm-level perspective and focuses on conflicts between MNEs and indigenous peoples on all the continents and includes 700 unique MNE-indigenous peoples conflict cases from more than 40 countries that were collected and codified according to the similar characteristics by a total of 6 students. Due to a lack of previous quantitative studies related to these conflicts, most of the variables have been derived from previous qualitative studies. In these studies conflicts are qualitatively assessed, resulting in the set of possible drivers and solutions to conflict resolution, integrated in a list of variables.

5.2 Data Collection

This study was constructed by using only secondary data. Secondary data refers to data that was collected by someone other than the user. The starting point in the data collection method was finding suitable conflict cases, where MNEs and indigenous communities are directly involved in a conflict, and contain sufficient information related to the designed variables. Data was mainly collected from the following databases: EJOLT, Intercontinentalcry, Business & Human Rights Resource Center, Minewatch, and Environmental Justice Atlas. A number of other websites was used for additional information on the cases, such as the websites of the World Bank, national governments, MNEs, indigenous communities and other. The data used in the paper have been selected primarily based on the availability and the reliability of the source.

5.3 Dependent Variables

Both dependent variables that are used in this study measure conflicts between MNEs and indigenous peoples. The first dependent variable corresponding to the Hypotheses 1-2 is

length of conflict. Increased length of conflict could lead to great costs for the multinational

enterprises because of the potential project delays, damaged infrastructure, shutdown time and legal costs (Kemp, Owen, Gotzmann & Bond, 2011). Moreover, the firm is less likely to

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actively intervene in the conflicts if it appears that the conflict is likely to be short-term or non-recurring (Getz and Oetzel, 2009).

A lot of cases included conflicts that were ongoing on the date of collection. In order to still be able to examine them, they have been coded with an end date of November 2016 (the collection period of the data). In this study the length of the conflict is measured in the number of months and divided by short-term and long-term conflicts. To determine what defines short-term and long-term conflicts, the median of the overall sample was used. The median of conflict length is 84 month. Conflicts that took over a longer period of time are coded as long-term conflicts and conflicts that took over a shorter period of time are coded as short-term conflicts.

Second variable is categorical and measures the type of violence of conflict. Different types of conflict are assessed from low violence to more high violence (Calvano, 2008). Type of violence was measured on a seven-point scale from 1 (low violence) to 7 (high violence), respectively: peaceful negotiations & peaceful protests, court actions, low-level violence (from either side) including intimidation tactics, high level violence including physical damage but no kidnapping or deaths, high-level violence (from either side) including kidnappings but no deaths and high-level violence (from either side) including deaths. If the conflict went through multiple stages of violence, the highest level was used in the coding scheme. Conflicts can be very different in type and intensity (Getz & Oetzel, 2009). In this research conflict severity is measured by measuring type of violence.

5.4 Independent Variables

The independent variables central to this study are related to the sustainability focus of the company and the effectiveness of the government in the countries in which conflicts take place. There is no universally accepted way of measuring sustainability (Lopez, Garcia & Rodriquez, 2007). In this study the MNE’s sustainable focus is measured using the Dow Jones Sustainability Index. The Dow Jones Sustainability index is a multidimensional construct that measures sustainability based on economic, social and environmental indicators. It includes the companies with the best sustainable practices in their respective industries (Lopez, et. al., 2007). The Dow Jones Sustainability index’s requirements concerning sustainability aspects are further reaching than in any other sustainability index. This makes the DJSI a very strong indicator of sustainable focus (Lopez, et. al., 2007).

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The second variable, namely government effectiveness, is one of the six dimensions of governance measured by the Worldwide Governance Indicators (WGI), is corresponding to Hypotheses 3-4. In order to analyze this variable, it was treated as a continuous instead of an ordinal variable. According to Rhemtulla, Brosseau-Liard and Savalej (2012), a categorical variable can be treated as continuous when it has at least five or more categories. In their study, Rhemtulla et al. (2012) found that the bias caused for using categorical variables as continuous becomes smaller as the number of categories increases, due to the variables approaching continuity.

This variable was retrieved from the World Bank database. The WGI are a result of an extended research project that aims to develop cross-country indicators of governance; they take into account several hundred variables from 31 different sources, that measure governance perceptions collected via survey respondents, public organizations, NGOs, and private organizations worldwide (Kaufmann et al., 2011). The dimension of government effectiveness captures the perceptions of the quality of the civil service, the quality of public services, as well as the level of independence from political pressures, the quality of the regulations and their implementation, and the credibility of the government’s engagement to stand by those regulations (Kaufmann et al., 2011).

5.5 Moderating Variables

The first moderator variable is MNE`s stated policies toward indigenous communities. This variable will be used to measure the degree of engagement with indigenous communities, as increased community awareness and engagement is beneficial to find solutions to conflict (Calvano, 2008; Bond, 2014). Stated policies will be evaluated based on the information provided on official company websites. MNEs will be divided into three groups: the ones that do not mention community consent or any community policy, the ones that mention ambiguous/vague statement towards indigenous community and ones that have a strong statement towards indigenous community.

The second moderator variable in this study is MNE`s previous experience, which influences the relation between national government effectiveness of the host country and conflict resolution. With experience, MNEs can build on their relationship with the external actors, such as indigenous communities and political actors, and prevent future clashes, especially in

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the context of ineffective national governance in the host country. This variable is measured by the number of years. The number of years reflects the amount of experience the MNE has in dealing with indigenous communities, starting from their first encounter until today. 5.6 Control Variables

Accroding to Berkes (2009), any analysis of control and access to resources requires inclusion of three major players in the sector: state, community and capital (multinational corporations). The research includes control variables at the country, firm, and community level, namely, political stability, MNE`s home country and community autonomy. Political instability is often seen as important driver for engaging in illegal operations, either by governmental officials or MNEs employees (Frynas, 2010) that tend to put indigenous communities into more disadvantageous position and lead to more violent conflicts. This variable was obtained through World Bank`s database for World Governance Indicators. The institutional framework of the home country is expected to influence formulated polices and strategies of the firm (Crane et al., 2013; Peng, 2002; Zhao et al., 2014). Differences in institutional framework, especially between Western- and non-Western countries (Crane et al., 2013) may cause a moderating effect and influence the formulated policies towards indigenous communities. This variable was coded by indicating in which country MNCs headquarters is located. This was followed by the creation of a new variable. A 0 indicated all Western countries, and a 1 indicated all non-Western countries. Companies with its headquarters in Western countries are more likely to have policies that address social issues and to take the livelihood of the affected stakeholders into consideration (Crane, et. al., 2013).

Government policies and legal frameworks protect and promote the relative rights and responsibilities of companies and communities. The relationship between state and community is important to determine the level of protection a community receives. Garvey and Newell (2005) explain that a government can play a positive or a negative role. Previous research suggests that recognizing indigenous communities and giving them more autonomy, will lead to less violent conflicts (Calvano, 2008; Waddock, 2008).

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Table 1. Description of the variables

Variable Description

Length of conflict 1. 0-84 months 2. 84-onwards

Type of conflict 1. Peaceful negotiations 2. Peaceful protests 3. Court action

4. Low-level violence and intimidating tactics

5. High-level violence, including physical damage but no kidnapping or deaths 6. High-level violence, including kidnapping but no deaths

7. High-level violence, including deaths Dow Jones Sustainability Index 0. MNE not included in the DJSI

1. MNE included in the DJSI Government effectiveness WGI score for the country:

1. 0-10th_percentile 2. 10-25th_percentile 3. 25-50th_percentile 4. 50-75th_percentile 5. 75-90th_percentile 6. 90-100th_percentile

Policies towards communities 1. No mention of community consent or no mention of specific policy 2. Ambiguous/vague statement towards indigenous community 3. Strong statement towards indigenous community

MNE`s experience Experience in number of years, starting from the first encounter Degree of community autonomy Degree of community autonomy as received from the government:

1. No autonomy at all 2. Cultural recognition

3. Limited recognition of rules

4. Partial recognition of rules or right of consultation

5. Almost full recognition of community rules by government with autonomy or right of consent

MNE`s home country Country in which the headquarter is located: 0. Western country

1. Non-western country Political stability WGI score for the country: