Internationalization, development and political stability : factors influencing corporate human rights violation

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Internationalization, Development and Political

Stability – Factors Influencing Corporate Human

Rights Violations

Master Thesis

MSc Business Administration – International Management Author: Giuseppe Tata (11416580)

Supervisor: Dr. Michelle Westermann-Behaylo Second Supervisor: Dr. Mashiho Mihalache

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Statement of Originality

This document is written by Student Giuseppe Tata 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

This study examines the impact of the degree of internationalization of a firm on the human right violations that the firm is accused of as well as the moderating effect of human development in the home country and political stability in the host country on this relationship in the extractive industries. A theoretical framework containing the variables corporate abuse allegation, internationalization, human development and political stability has been developed. This model has been tested using a logistic regression. A sample of 100 companies active in countries with varying degrees of human development and political stability in Africa and Latin America were considered. The analysis shows a significant positive relationship between the degree of internationalization of a firm and the human right violations the firm is accused of. Furthermore, a significant negative moderation effect of the political stability in the host country on the aforementioned relationship has been found.

Keywords: International Business, Human rights violations, internationalization, development, political stability, extractive industries, developing countries

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Acknowledgement

I would like to thank my supervisor, Dr. Michelle Westermann-Behaylo, for all her efforts. With her excellent guidance and her useful comments, she encouraged me to work effectively and continuously encouraged me to improve my work. With much pleasure I have participated in Michelle Westermann-Behaylo’s course ‘International Business and Sustainable Development’ taught at the University of Amsterdam, which provided me with further helpful insights on the topic of my thesis. I would like to thank her for supervising me and her advice on academic writing. Secondly, I would like to thank my friends who supported me and helped me through this exciting time. Finally, I would like to thank my family, for keeping up my motivation and for their unconditional support throughout my study.

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Index of Tables

Table 1: Human Development Index and Political Stability Index ... 25

Table 2: Data Sources ... 28

Table 3: Tollerance and variance inflation factor ... 31

Table 4: Number of companies active in the investigated countries ... 32

Table 5: Means, Standard Deviation and Pearson Correlations ... 33

Table 6: Logistic regression ... 35

Index of Figures

Figure 1: Multinationality and Performance ... 12

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List of Abbreviations

BHRRC Business & Human Rights Research Center

CAA Corporate abuse allegation

CHRD Corporations and Human Rights Database

CSR Corporate Social Responsibility

DOI Degree of Internationalization

FDI Foreign Direct Investment

GNI Gross National Income

HDI Human Development Index

MNE Multinational Enterprise

OECD Organisation for Economic Co-operation and Development

SDGs Sustainable Development Goals

SRSG Special Representative of the Secretary General

UDHR Universal Declaration of Human Rights

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1. Introduction

By the turn of the millennium world leaders gathered together at the United Nations (UN) to postulate the Millennium Development Goals, which ranged from eradicating extreme poverty and hunger to developing a global partnership for development. During the United Nations Sustainable Development Summit 2015, these goals were translated into the Sustainable Development Goals (SDG) with the ambitious aim to realize these goals by the end of 2030. All of the SDGs can directly be linked to the Universal Declaration of Human Rights (UDHR), no matter if they are related to the environment, economy, health or development and therefore emphasize their global importance.

Over the course of the last years, increasing attention has been drawn towards developing countries. Not only because the portion of the global foreign direct investment (FDI) towards developing countries has steadily increased since the 1980s (UNCTAD, 2016), but also due to globalization and the fact that more and more multinational enterprises (MNE) have and continue to acquire subsidiaries in developing countries (Demirbag & Glaister, 2010). These companies mainly focus on profit maximization and performance (Friedman, 1970) and therefore prioritize their economic goals over fundamental human rights (Chu, 2005).

In the 1990s a number of significant cases concerning business and human rights violations “reflecting the dramatic worldwide expansion of the private sector” (Ruggie, 2011, p. 224), have been documented (Muchlinski, 2001). John Ruggie, Special Representative of the Secretary-General (SRSG) of the UN, worked to strengthen and implement the concept of business and human rights in the 21th century. He highlighted businesses’ impact on human rights and was involved in creating and developing frameworks like The United Nations Guiding Principles on Business and Human Rights (Ruggie, 2011b). This framework aims for

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the protection of individuals from human rights violations by large corporations around the world.

Even more than developed nations, developing countries often lack the institutional capacity to enforce national law and regulations supporting the prevention of human rights violations (Ruggie, 2008). Hence these human rights violations mostly occur in developing countries, where the level of education, life-expectancy and income is low, the political situation is instable, the rule of the law is weak and corruption is high (Ruggie, 2008). Therefore, the academic interest on research of the impact of MNEs on human rights violations in host countries, on a micro (individual firms and industries) and a macro (whole country’s economy and society) level, has grown in recent years (Giuliani & Macchi, 2014).

The low level of development is also a contributing factor to the phenomena of developing countries’ governments to compete to attract FDI by MNEs. The governments’ hope is that the advantages, which reach from employment to important technology spillovers, will not only have positive impacts and boost their economy (Madies & Dethier, 2012), but also favorable affect their society by achieving economic development objectives (Harrelson-Stephens & Callaway, 2003; Flanagan, 2006). Consequently, governments often suppress their responsibilities towards International Business and human rights (Chu, 2005) to make their countries more attractive to MNEs.

There are external and internal factors that have an influence on the human rights impacts of MNEs (Giuliani & Macchi, 2014). The external factors span from social capabilities and civil society of the host country to industry competition and level of technological intensity at the industry level. Contrary, internal factors consider subsidiary autonomy, strategic motivations and MNEs nationality (Giuliani & Macchi, 2014). Nationality takes on an important role in this study. Scholars found that the company’s nationality and especially the distance from the host country plays an important role in the

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corporation’s behavior towards human rights (Giuliani & Macchi, 2014). Since companies from advanced countries operate on higher-quality knowledge, they are more likely to respect human rights and generate positive spillovers, based on the presumption that advanced country firms are better able to transfer higher-quality knowledge and generate productivity and export spillovers. Thus, the Corporate Social Responsibility (CSR) practices from companies in advanced economies should be more transparent and accordingly respect the host-country’s human rights (Matten & Moon, 2008; Ardichvili et al., 2012).

This study extends this approach and tries to identify a link not just between the MNE’s nationality, but also the internationalization of companies and their relation towards corporate human rights violations. Furthermore, this study evaluates the impact of the political stability of the host country and the development of the home country on the above-mentioned relationship. While operating in a foreign country, a firm is exposed to the risks of its host country. Political instability is one of the country risks that can have an impact on the business operations of MNEs.

The aim of this study is to shed more light on the interplay between these disciplines, while developing a concept that allows the consideration of different variables, micro and macro variables as well as economic and political variables, and evaluate if these variables have a significant impact on the human rights violations committed by the corporations in the host country. This study positively contributes to existing academic research, as it will explore the relation between home and host country factors as well as economic and political factors that have an influence on the human rights violations by corporations operating in developing countries. The following results broaden and enhance the current interdisciplinary knowledge of International Business and human rights and will furthermore assist institutions and managers to conduct their work in developing countries.

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This paper is structured as follows: Section 2 outlines the literature review which has an important implication for understanding the theoretical topic and will summarize the current status of International Business and human rights and explains the theoretical framework, with respect to the extractive industry sector. Data and Methods used for this study as well as the empirical results are presented in section 3 and 4. Section 5 discusses the results and evaluates limitations and recommendations for future research. Finally, the last section concludes.

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2. Literature Review

This section reviews the current state of academic literature on human rights, internationalization, human development and political stability, also with respect to the extractive industries. This literature review is the basis for the conceptual model of this study as well as for the hypotheses development in the section that follows. Based on the literature review the hypothesis are tested in the results section.

2.1 History of Human Rights

One of the biggest milestones after the Second World War was the Universal Declaration of Human rights (UDHR) drafted by representatives from various educational and cultural backgrounds of the United Nations in 1948. The idea of the world leaders was to complement the United Nations Charter with a road map to guarantee basic human rights to every individual everywhere (UN General Assembly, 1948). With the dramatic rise and worldwide expansion of the private sector in the 1990s, special attention was drawn to the issue of business and human rights violations. This wave was observed precisely by the United Nations and initiated to highlight the social awareness of businesses’ impacts on human rights (Ruggie, 2011). This corresponds with Shermann (2001) who’s research found that globalization increases the responsibilities of the corporations.

Examples of “Soft Law” approaches are the Guidelines for Multinational Enterprises by the Organization for Economic Co-Operation and Development (OECD) in 1976 and the Tripartite Declaration of Principles Concerning Multinational Enterprises by the International Labour Organization, which reference the UDHR. These approaches, which became the world’s largest corporate social responsibility initiatives, are voluntary and engage civil societies and corporations in promoting UN principles within different sectors including human rights, labor standards and environmental protection (Ruggie, 2007). Still, the

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international community is in an early phase of protecting the individuals and the communities from human rights abuses by multinational corporations.

Corporate human rights abuses, especially in the extracting industries as well as in the footwear and textile sectors were the trigger for the UN Sub-Commission on the Promotion and Protection of human rights to establish a working group in 2003 composed of twenty-six experts. After the Commission requested the United Nations secretary-general (Koffi Annan) to nominate a special representative of the secretary general, John Ruggie was appointed in 2005 as the SRSG with the mandate to identify and clarify international standards and policies in relation to business and human rights. Three years later, this appointment resulted in the ‘Protect, Respect and Remedy’ framework for business and human rights. The foundation for this framework is represented by three guiding principles: the state duty to protect against human rights abuses by third parties, the corporate responsibility to respect human rights, and the need for more effective access to remedies. Ergo: protect, respect and remedy (Ruggie, 2008). Ruggie (2008) states, that the roots of this problem are buried in the governance gaps created by globalization. This governance gap paves the way for wrongful actions by corporations and so far there have been no consequences (Ruggie, 2008).

2.2 Human Rights Today

According to the World Bank, human rights and development have experienced a rapprochement in recent years, due to their intrinsic and instrumental role (contribution to governance/accountability, constructive role, protective role and empowerment role). Reasons for this include the growth in the formal acceptance of human rights law and the increased rate and number of ratifications of legally binding agreements (e.g. International Covenant on Economic, Social and Cultural Rights). This positive development demonstrates the

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importance of human rights as foundational norms and values at international level (World Bank, 2010).

More than thirty years ago, the Declaration on the Right to Development set a new milestone in the history of human rights and the struggle for greater human dignity, freedom, equality and justice when it was adopted by the United Nations General Assembly resolution 41/128 (UN General Assembly, 1986) and is as relevant today as it was the day it was drafted. It emphasizes that development is a comprehensive economic, social, cultural and political process, aiming at the “permanent improvement of the well-being of the entire population and of all individuals on the basis of their active, free and meaningful participation in development and in the fair distribution of benefits resulting therefrom” (UN General Assembly, 1986, p.1).

Also emphasizing the economic, social, cultural and political process, Ruggie (2008) addresses the importance of businesses and their relation towards respecting human rights, which is in line with Drimmer (2010), who argues that the protection of human rights is one of the primary duties of the state, but also that businesses have the obligation to respect the human rights. Hamm (2001) considers human rights and development to be interdependent. He states that for many years the only indicator for development process has predominantly been economic growth. But today development is more understood as sustainable human development, addressing the human being, which relates to Sen’s (1990) Human Development Index (HDI) approach (UNDP, 1990).

It is important to achieve a realistic integration between human rights and development. Therefore, it has to be emphasized that the protection of human rights should not solely be the responsibility of the state, but also of international organizations and firms that sometimes influence human rights realization to a considerably stronger degree than

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states alone (Sano, 2000). This is exactly what the framework by Ruggie (2008) aims to address.

Many scholars, (Martin-Ortega, 2008; Drimmer, 2010; Slack, 2011; Ruggie, 2007) point out, that corporate human rights abuses can be observed especially in the extractive industries sector, which was also a reason for the call by the UN to establish a working group on business and human rights. According to Drimmer (2010), lawsuits against extractive companies are mostly related to security, labor and environmental violations. Particularly in developing countries around the world human rights violations can be observed in the extractive industries sector (Slack, 2011). Slack (2011) argues that the origin of the prevailing problem is represented by the companies’ business models, as Corporate Social Responsibility is not fully integrated. Especially in developing countries, it is observed that the government oversight of extractive industry operation is weak or nonexistent, which also leads to human rights violations. Supporting this argument, Li and Gaur (2014) argue, that a collective effort from all firms is required to improve the human rights conditions in the environment of the host country.

2.3 Extractive Industry Sector

There are just a few industrial sectors that have an environmental footprint and are able to influence society like the extractive industries. If managed properly, the wealth derived from oil and mining activities could provide sustainable growth and financial enhancement and raise the living standard of local populations that are exposed to highly prevalent poverty. This is particularly important for developing countries, especially in Africa, Latin America and Asia (Hilson, 2012). Considering sustainable development, the extractive industries are confronted with a trade-off. On one hand, natural resources are a source of energy and labor and help developing countries to eradicate poverty, but on the

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other hand companies active in this sector also contribute to the high carbon emissions as well as the rising degree of corporate human right violations in this industry, which conflict with the intention of sustainable development.

Many of the countries in sub-Saharan Africa are heavily dependent on the exploration and exportation of natural resources. The economies of these countries are often characterized by poor economic growth, low living standards, corruption and political authoritarianism (le Billion, 2005). Taking this into account, it is straight forward, that six of the most indebted countries in sub-Saharan Africa represent the major fuel exporters. A large body of literature evolved in the past trying to explain the relation between the natural resource wealth of developing countries and the poor political and socio-economic development in those regions (Hilson & Maconachie, 2008). The first empirical findings (Sachs & Warner, 1995, 1997) on the relationship between developing countries and natural resources showed countries with a low ratio of natural resources exports to GDP tend to experience low economic growth. Due to civil conflicts, particularly in rural areas, poorly developed agricultural and manufacturing sectors and oftentimes one-dimensional economies, developing countries are generally highly susceptible to fluctuations in the market values of minerals.

Looking at the performance of oil- and mineral-dependent countries, Ross (2001) finds that the majority of countries rank low on the Human Development Index, which he considers to be “the most comprehensive measure of living standards available” (Ross, 2001, p.8). Furthermore, he examines that oil increases the likelihood of conflicts and that petroleum production fuels civil war.

Since the end of 2012, price indices of minerals, ores and metals have declined steadily as well as the oil prices have been dropping since mid-2014. Affected by the decline of commodity prices in the oil and gas industry, companies like BP reported a net loss of $6.5 billion in 2015, being the largest loss in at least 30 years. At a global level, the low

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commodity prices and the potentially positive impact on activity and FDI in other sectors will have an impact on the FDI inflows to extractive industries. This holds especially for Africa and Latin America, since the FDI inflows to commodity-exporting countries have strongly and adversely been affected (UNCTAD, 2016). Especially these economies in developing countries, whose exports rely heavily on oil and metals as well as the geographic internationalization of MNEs are threatened by this challenging situation.

2.4 Internationalization

Internationalization is referred to as the process of increasing involvement in international operations (Daszkiewicz & Wach, 2012) as well as the expansion into other countries and has been center of many academic contributions in the International Business literature (Hymer, 1960; Dunning, 1998; Johanson & Vahlne, 1977). Literature on the topic of geographic diversification agrees that the primary benefit of international expansion is the exploration of market imperfections (Rugman, 1979). Hence scholars tested the relationship between multinationality and firm performance and were able to show that a higher degree of internationalization leads to a higher firm performance, implying that internationalization is necessary for superior financial success (Errunza & Senbet, 1984). After that period (1970-1990), research started focusing not only on the benefits, but started acknowledging that internationalization brought costs as well as benefits for the firm entering a new country. The cost of internationalization could even exceed the benefits at high levels of internationalization. The basis for this argumentation was that the global complexity of the internationalization process would strain the managerial and organizational capacity (Ruigrok & Wagner, 2003).

Today, Internationalization can be seen as a trade-off between losing control of the firm and the organizational learning process of the firm. The benefits are described by the

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theories of FDI and theories of the multinational firm. FDI theories, mainly economics-driven, highlight the imperfections in the international product, factor and financial markets as the main advantage of internationalization. International Business and industrial organization economics scholars focus on the economies of scale and scope (Buckley & Casson, 1976; Caves, 1971), whereas financial economics scholars underline portfolio diversification and its effect on the firm’s risk-return performance (Lessard, 1976; Levy & Sarnat, 1070). Theories of the multinational firm on the other hand take a closer look at the organization’s internal environment. Therefore, the theories of the multinational firm identified the proactive induction and exhaustion of intra-firm comparative advantages as the source of benefits, and not the reactive exploitation of the external resources.

Opposing, Sinddharthan and Lall (1982) state that a rising degree of internationalization and its accompanying organizational and environmental complexity may overcharge managerial capacity. Hofstede’s cross-cultural study especially points out the communication, coordination and motivation problems arising when expanding to countries with a high geographical and cultural distance (Hofstede, 1980). Internationalization also leads to an increase in governance and transaction costs. These costs can overweigh the organizational learning effect of internationalization and result in losing control over the business operations. Hence these social costs for the international operating firm can result in human right violations. Reason for these costs is the geographical and cultural dispersion of the various principals and agents in the multinational firm. External costs of internationalization are the political and financial risks that the multinational firm is exposed to when expanding to other countries (Ruigrok & Wagner, 2003). Political uncertainty can especially arise when foreign governments enforce unanticipated change to the business environment of the firm, including boycotts, fund remittance control and expropriation (Boddewyn, 1988).

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Lu and Beamish (2004) analyzed the relationship between international diversification and firm performance and found a non-linear relationship. At very high and very low levels of internationalization the extent of geographic diversification is negatively associated with firm performance whereas at moderate levels of internationalization the geographic diversification is accompanied by higher performance. As shown in the following figure this leads to a horizontal S-shaped relationship.

Figure 1: Multinationality and Performance

Source: Lu & Beamish, 2004, p. 600

Besides the possible benefits like exploration and exploitation of advantages, economies of scale and scope and increased market power, possible costs such as liability of newness and liability of foreignness and especially managing the distance between home and host countries can lead to a considerable disadvantage.

As shown by extant literature, a firm can benefit from a rising degree of internationalization, but nevertheless, there are also disadvantages accompanied by the

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internationalization of the firm. One major disadvantage with respect to internationalization is the different degree of political stability in the host countries, that is discussed in the next section.

2.5 Political Stability

When a firm operates a foreign country, it has to deal with several novel circumstances, especially with uncertainties. While doing so, the firms try to minimize risks associated with operating in the host country (Demirbag & Glaister, 2010). Political instability is one of the country risks, defined by Gatignon and Anderson (1988), since the political environment can have a significant impact on the stability of business operations. MNEs mostly face new political systems and a new institutional environment when entering a new country; therefore, political risk plays an important role not just when entering the new country but also while operating in a foreign country. Hahn et al. (2009) find that risks for offshore projects do not just include macroeconomic and other financial shocks, but also political risk. Kobrin (1982) defines the political risk as the likelihood of unanticipated government actions having an impact on business operations. Following this definition, the power of the state forces firms to operate according to the new regulative and political environment (Demirbag & Glaister, 2010).

Several studies regarding the entry mode of MNEs (Ahmed et al., 2002; Henisz & Delios, 2001) show that MNEs use low commitment (e.g. equity ownership level) when political risk is high. In concurrence, Doh et al. (2009) and Hahn et al. (2009) find evidence that firms seek relatively low risk locations for their offshore projects. Violent conflict, the opposite of political stability can be a serious threat to the firm profitability or even its survival (Oetzel & Getz, 2007). The consequences of violent conflict can also result in business disruption, property damage and physical threats to personnel which create major

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complications for the business operations. Oetzel & Getz (2007) suggest that the best way to deal with the political risk after a firm established FDI is bargaining power, representing the firm’s ability to influence multiple stakeholders related to the conflict in question and therefore its willingness to intervene.

Political Stability and the absence of violence is, as Kaufmann et al. (2003) state, the idea that quality of governance in a country can be jeopardized by the probability of sudden changes in the government. These changes can disrupt existing policies and limit the ability of citizens to select and replace the government peacefully. Political stability is especially important for foreign firms because sudden changes of politicians can lead to policy changes regarding foreign investors (Heinz & Williamson, 1999). Although every MNE, operating in a developing country, can suffer from political instability, MNEs that are headquartered in developing-countries are used to political instability and violence in their home country and therefore may be better at dealing with such situations in their host countries (Cuervo-Cazurra & Genc, 2008).

Particularly interesting for the industries closely connected to natural resources are the findings of Asiedu (2006). Asiedu shows that natural resources and large markets promote foreign direct investments. Likewise, lower inflation, good infrastructure, an educated population, less corruption and political stability have a similar effect. These results suggest that countries that are small or lack natural resources can attract foreign direct investments by improving their institutions and policy environment, showing the link between political stability and internationalization.

Taking into account that developing countries are often exposed to political instability, the next section discusses the economic and human development.

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2.6 Human and Economic Development

It is widely recognized that with the ongoing globalization, the contemporary state of technological advancement and the development of developing regions, the traditional role (e.g. resources, capital and technology) of a location a firm operates in loses its importance and it is no longer necessary to locate near large markets to serve them. The consequence is that more and more companies are outsourcing their activities and relocating many facilities to low-cost locations (Porter, 2000). But there are also some industries, such as the extractive industries, often located in developing regions, where the location is still of high importance. Extractive industry companies need to extract in these regions and sell their commodities on the global markets. Therefore, we observe a rising degree of FDI inflows to developing countries (UNCTAD, 2016).

Cuervo-Cazurra and Genc (2008) analyze the advantages and disadvantages of developing-country multinational enterprises in comparison to developed-country MNEs. Developing-country MNEs tend to be less competitive than developed-country MNEs because they are exposed to underdeveloped institutions in their home country. Nevertheless, this disadvantage can be transformed into an advantage when both MNEs (developed and underdeveloped) are operating in countries with “difficult” governance conditions. The reason for that transformation is the fact, that developing-country MNEs are used to operating in such conditions (Cuervo-Cazurra & Genc, 2008).

Compared to developed-country MNEs, MNEs from developing countries often have to deal with difficulties such as smaller size (Wells, 1983), possessing technology that is less cutting-edge (Lall, 1983; Wells, 1983) and resources that are less sophisticated (Bartlett & Ghoshal, 2000; Dawar & Frost, 1999). Nevertheless developing-country MNEs can be successful abroad when they operate in countries with similar difficult conditions. Given their

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ability to manage in difficult institutional conditions, they have advantages compared to developed-country MNEs by making use of their home-country experience.

Generally, it is accepted that developed-country MNEs have more advantages than their developing-country competitors. They tend to have stronger ownership advantages in branding and advertising (Lall, 1983) and technology (Bartlett & Goshal, 2000). The fact that host government favors the establishment of developed-country MNEs, hoping to bring more advanced technology to the country (Stopford & Strange, 1992) is also an advantage for developed-country MNEs. Furthermore, developing-country MNEs often experience late-mover disadvantages when entering a new country and competing with developed-country MNEs as well as local firms with their superior knowledge of their home-country characteristics (Bartlett & Ghoshal, 2000). Though Cuervo-Cazurra & Genc (2008) argue, that developing-country MNEs may also experience advantages. Due to their home-country knowledge of clients, production facilities and distribution networks, they are able to better adapt to the conditions of a country that is similar to their home-country (Lall, 1983). Developing-country MNEs know how to operate in the challenging institutional environment with the absence of well-established infrastructure, well-developed market mechanisms, and a well-developed contracting and intellectual property rights regime.

Taking all of this into account, Cuervo-Cazurra & Genc (2008) show, that home country development has an influence on the operations of MNEs in their host-country. In fact, developing-country MNEs can make use of their superior knowledge of the less developed institutions alongside the characteristics of their home country.

Nevertheless, development should not be measured by economic factors alone, such as Gross National Income (GNI), but it should also include the people and their capabilities. Due to this fact, Amartya Sen, most highly respected, Nobel prize-winning development economics scholar, established the Human Development Index in 1990, which embodies the

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capability approach to understand human well-being (UNDP, 2017). The capability approach is a broad normative framework for the evaluation and assessment of individual well-being and social arrangements, the design of policies, and proposals about social change in society. This approach sets its focus on what people are effectively able to do and to be; that is on their capabilities, in contrast to the philosophical approaches that focus on people’s happiness, or on income, expenditure and consumption (Robeyns, 2005). It emphasizes the importance of ends (decent standard of living) over means (income per capita) (Sen, 1985) and uses the variables health, education and income. Taking this into account the capability approach is prominently used in development studies, welfare economics, social policy and political philosophy, to evaluate aspects of people’s well-being, such as inequality and poverty. Consequently, the HDI can be used to question national policy choices and evaluate how the development outcomes of two different countries with the same level of GNI per capita can differ from each other (UNDP, 2017).

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2.7 Research Question

Taking all the above stated variables and arguments into account, this paper aims to determine whether the degree of internationalization of a firm has an influence on the human rights violations by said firm. Further, it is investigated as to whether the level of development of the firm’s home country and the political stability in the host country influence the relation between internationalization of the firm and human rights violations. Targeting to answer the above objections, the research question is described as follows:

Does the degree of internationalization of a firm have an influence on the

firm’s corporate human rights violations? Does the firm’s home country

development and the political stability in the host country have an influence on

the relation between the degree of internationalization and corporate human

rights violations?

2.8 Theoretical Framework

Internationalization and Human Rights

The rising degree of FDI (UNCTAD, 2016) towards developing countries highlights the current internationalization process of firms. As pointed out by the United Nations Economic and Social Council, local enterprises bear the risk of being crowded out by merger & acquisition activities of MNEs in the host country and that would in turn have adverse effects on domestic enterprises, initiatives and even local employment (UN ECOSOC, 2003, p.9).

As previously mentioned (figure 1), the relation between internationalization of a firm and performance of a firm can be illustrated by a horizontal S-shaped graph (Lu & Beamish,

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2004). Entering a new country, a firm starts overcoming the liability of foreignness and will improve its financial performance by expanding further in more international markets. Exceeding a certain point of internationalization, the firm’s performance starts to decline, leading to the S-shaped curve. A similar effect to the aforementioned relationship is expected to take place between internationalization of a firm and the human right violations the firm is accused of. The increasing loss of control over the business operations, due to international diversification, will dominate the effect of organizational learning. The increased complexity of the business operations, due to the internationalization process, leads to problems for managing the business operations. Therefore, businesses require due diligence, to ensure compliance with national laws but also manage risk of human rights. The companies require due diligence in order to respect human rights and prevent and address adverse human rights impacts (Ruggie, 2008). When the degree of internationalization exceeds a certain point, the benefits of internationalization will decrease and the negative impacts (e.g. losing control) will increase and lead to more human right violations.

Drawing on the literature review above, the degree of internationalization of a firm can have a negative impact on the managerial capacity. Described lack of control arises hand in hand with increasing organizational and environmental complexity during a firm’s internationalization, which can lead to governance cost and subsequently result in human rights violations committed by the MNE. Mentioned governance costs could be opportunity costs, proprietary costs and reputational costs (Aguilera et al., 2008).

Taking all of this into consideration the first hypothesis is:

H1: The degree of internationalization of a firm has a positive impact (+) on the human right

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The moderating effect of development

“Human Development and human rights are in fact two sides of the same coin – there is no development without human rights” (Fukuda-Parr, 2001, p.1). In line with this statement, the Human Development Report (2000) by the United Nations Development Program points out that human rights and development share the same common objectives of advancing human freedoms, dignity and equality. Although MNEs can contribute to reducing poverty in developing countries (Gereffi, 2004) and creating job opportunities by integrating local firms in their value chain (Clay, 2005), scholars (Barry et al., 2001) found that MNEs rely more and more on skilled workers labor and in turn increasing wages, with which the local companies cannot compete.

Looking at Emerging Markets Multinational Enterprises, Marano et al. (2016) find that the underdevelopment of the institutions in the home country of the firm influences the firm’s business practices in the host country. These institutional voids create liabilities of origin for firms, which do not equip the firms with the appropriate templates for action regarding their CSR practice.

Henderson (1991) shows that the level of economic development and growth has an influence on the likelihood of the government using repression. Since extractive MNEs are strongly reliant on local governments (Haufer, 2010), MNEs can indirectly enhance underdevelopment and inequality. Alongside, Mitchell and McCormick (1988, p. 487) emphasize the commonly accepted view that lack of economic resources (economic underdevelopment) creates fertile ground for political repression. Thus, in an advanced economy human rights violations are less likely (Henderson, 1991). Furthermore, Matten & Moon (2008) and Ardichvili et al. (2012) show, that CSR practices by advanced economies MNEs are more transparent and more likely to respect the host-country’s human rights, but these spillover effects are different between industries.

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Therefore, as the development of the home country increases, internationalization will have a weaker impact on human rights violation by the MNE which leads to the following hypothesis:

H2: The degree of development of the home country negatively (-) moderates the effect of

internationalization of a firm on a firm’s human rights violations.

The moderating effect of political stability

As stated in the UN General Assembly Resolution 41/128, “international peace and security are essential elements for the realization of the right to development” (UN General Assembly, 1986, p.1), and it highlights that peace and security are essential to achieve this objective. Corresponding to this statement, Miller (1992) shows that different environmental, industry and firm-specific variables have influence on the risk and uncertainties a business has to face. War, revolution, democratic changes in government and other political turmoil are general environmental uncertainties that have significant impact on the political stability in a country. Academic scholars (Gyimah-Brempong & Traynor, 1996) state that this political stability has a significant influence on the business operations and therefore also on the economic development. Frynas (1998) also found, that an unstable elite and frequent government changes play in favor of oil companies, by preventing the administration from passing and enforcing law to regulate and control the industry’s operations. This leads to the inability to govern the oil industry effectively and enhances the likelihood of unremedied human rights abuses as well as environmental harm.

Various studies find that democracies are less likely to commit human rights violations than autocracies (Hafner-Burton & Tsutsui, 2005, p. 1387). Democratic governments are more responsive to their citizens and therefore more likely to accommodate

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the demands of their citizens without violent conflict. Hence, in democratic states, where people have fewer grievances and political stability is achieved more easily, the likelihood of human rights violations is lower (Henderson, 1991). Furthermore, Busse and Hefeker (2007) show that FDI flows by multinationals towards developing countries are highly sensitive to political stability. Therefore, the internationalization of firms into more politically unstable countries makes the firm’s lack of control worse, since the firm starts losing control and becomes unable to do the necessary due diligence to avoid human rights violations.

Luo and Peng (1990), analyze the relationship between organizational learning by experience in a host country and performance of multinational enterprises in transition economies. Arguing that experience leads to country specific knowledge, which will help firms to overcome liability of foreignness, Luo and Peng show that experience improves the performance of international operations. Additionally, Luo and Peng show that this relationship is moderated by the organizational environment of the host country, also taking political stability into account. Referring to Luo’s and Peng’s (1990) results, a similar effect of the political stability (political environment) is expected to moderate the relationship between internationalization of a firm and the CAAs of a firm. Furthermore Ruggie (2006) stresses that the worst corporate related human rights abuses occur in countries that are characterized by weak governance and rule of law.

Drawing on these results, and the close connectedness of internationalization and foreign direct investment, leads to the conclusion that political stability, internationalization and human right violations are interconnected.

This leads to the formulation of the third and last hypothesis in this study:

H3: The degree of political stability in the host country negatively (-) moderates the effect of

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Following, the conceptual model of the three hypotheses developed in this section is presented.

2.9 Conceptual Model

Figure 2: Conceptual model

Development of the firm’s home

country

Political stability in the firm’s host

country Internationalization

of the firm

H1 (+)

CAA

H

3 (-)

H

2 (-)

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3. Data and Method

Following the methodology for conducting the analysis as well as the sources of the data used for this study are presented. Additionally, the variables used in the analysis are explained.

3.1 Research Method

This section explains the methodology of this study and outlines the research methods and the procedure of the data collection. This study aims at finding a relationship between the degree of internationalization and the number of human right violation accusations against a firm. Political stability in the host country and human development in the home country are used as moderator variables to analyze their impact on the relation between internationalization and corporate human rights violations. Cross-sectional company and country data is used to test the hypotheses developed above. Following the development of the hypothesis, an empirical analysis is derived in order to test the hypotheses. For this purpose, a logistic regression is performed with the Statistical Package for Social Sciences IBM SPSS Statistics to analyze the relationship between the given dependent, independent and moderator variables. Additionally, Human Development and Political Stability are used as moderator variables to determine the impact of these two variables on the relationship between the dependent and the independent variable. This chapter explains data collection and the variables being used for conduction the analysis in this study.

3.2 Sample Selection

The sample for this study includes companies in the extractive industries (NACE Rev. 2 standard industry classification: 05 (mining of coal and lignite), 06 (extraction of crude petroleum and natural gas), 07 (mining of metal ores), 19 (manufacture of coke and refined

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petroleum products)) of five countries in Africa and Latin America. The FDI inflows amount to $54 billion for Africa and $168 billion for Latin America (UNCTAD, 2016). As stated by Ruggie (2007), due to the lack of global jurisdiction for transnational companies, governance gaps have resulted that led to human right abuses. That is especially the case for companies operating in the extractive industries. Another reason for the industry focus is the fact, that a rising degree of lawsuits against MNEs can be observed in the extractive industry sector (Drimmer, 2010). The non-random selection of the countries Angola, Chile, Nigeria, South Africa and Venezuela is based on the fact that all these countries differ in terms of human development, as well as in terms of political stability:

Africa HDI PSI

Angola 0.533 (low) -0.59

Nigeria 0.527 (low) -2.07

South Africa 0.666 (medium) -0.18

Latin America

Chile 0.847 (very high) 0.40

Venezuela 0.767 (high) -1.01

Table 1: Human Development Index and Political Stability Index

In order to analyze the impact of human development of the home country, companies that operate in the extractive industry with subsidiaries in the aforementioned countries have been selected in the Orbis database for this analysis. Due to the availability of data on the companies in the Orbis database, the sample-size had to be reduced from n=292 to n=100. This step is crucial for the purposes of this analysis as it depends on good data availability for the companies in this study. This selection allows the analysis of the dataset with respect to the influence on the home country development.

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3.3 Data Sources

Corporations and Human Rights Database

The human rights violations are collected from the Corporations and Human Rights Database (CHRD, 2017), a joint project from the Oxford University, the University of Denver and the University of Amsterdam. This database contains information about corporate abuse allegations (CAA) on human rights against over 6000 companies in more than 180 countries starting from the year 1996. The CHRD retrieves its data from the Business & Human Rights Resource Center (BHRRC, 2017) and has the most extensive data density of human rights violations, with an initial focus on Latin America (Olsen, 2014). Since the aim of this database, which is still under construction, is to collect and register all human rights abuses committed by corporations, the database is constantly being expanded to cover all developing markets. The CAAs are being coded via the online survey tool Qualtrics and they contain information not only regarding the company that was accused of a human rights violation, but also extensive information connected to the incident (e.g. abuse type, date and location, remedy attempts, state involvement and many more). As a result, the CHRD database allows a comprehensive analysis on the topic of human rights and corporations.

Orbis

Orbis is the flagship database provided by Bureau van Dijk and contains company information about more than 180 million companies worldwide. The database collects information about financial data, location data, private equity data, firm performance, industry sector, headquarters and subsidiaries, ownership structure and much more. In this study, companies that are active in Chile, Venezuela, Angola, Nigeria and South Africa in the extractive industries are being investigated. Due to the fact that the human development of the home country of the company is used as a moderator variable, companies that have

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subsidiaries in at least one of these five countries are being selected in the data collection of the Orbis database. In this way the selection makes sure to analyze the potential impact of the home county human development.

United Nations

The United Nations, founded in 1945, is in international organization with currently 193 member states. Guided by the purposes and principles contained in the founding Charter the UN takes action on the issues confronting humanity, such as peace and security, climate change, sustainable development, disarmament, terrorism, humanitarian and health emergencies, gender equality, governance, food production and last but not least human rights (UN, 2017). Considering their areas of expertise, the UN offers a wide range of databases publicly available. The database used for this study is provided by the United Nations Development Program. Integrated in the Human Development Report the United Nations Development Program annually releases the Human Development Index, which is analyzed in this study. Taking into account the three key dimensions life expectancy, education and income, the index tries to emphasize that people and their capabilities should be the ultimate criteria for assessing the development of a country, rather than just analyzing the economic growth of a country alone (UNDP, 2017).

World Bank

With its 189 member countries, the World Bank is an international financial institution, who set itself the goal to foster sustainable solutions that build shared prosperity and end poverty in developing countries. Knowing that data and research is crucial to understand the challenges of the poorest people and to ensure that everyone benefits from economic growth, the World Bank offers a large set of data publicly available (World Bank,

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2017a). The Political Stability Index, as part of the world governance indicators, is one of these data points. The index measures the likelihood of a disorderly transfer of government power, armed conflict, violent demonstrations, social unrest, international tensions, terrorism as well as ethnic, religious or regional conflicts. Political Stability and Absence of Violence is measured as one part of the Worldwide Governance Indicators by the World Bank (World Bank, 2017b).

The following table provides an overview of the variables used in this study and the source correspondent:

Variable Source

CAA (dependent) CHRD

Internationalization (independent) Orbis / Annual Reports

Human Development Index (moderator) United Nations Development Program Political Stability Index (moderator) The World Bank

Table 2: Data Sources

3.4 Variables

Dependent Variable

The dependent variable in this study is Human Right Violations, referred to as company abuse allegation (CAA). To test the hypothesis, the sample of corporations that are present in Chile, Venezuela, Angola, Nigeria or South Africa that operate in the extractive industries are analyzed. The CAAs taken into account for this study include violations of rights in the categories: Abuses, Development & Poverty, Environment, Health, and Labor. In order to differentiate if a corporation violated human rights, corporations with human right violations are coded as n=1, whereas corporations without human right violations are coded as n=0.

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Independent Variable

The independent variable in this study is the degree of internationalization of a firm. This variable is measured as the amount of countries in which the corporation is operating. Due to the measurement, this variable is a numerical variable. This information is retrieved from the Orbis (Bureau van Dijk) Database. In addition, Annual Reports were used to complete missing data from the Orbis (Bureau van Dijk) Database. All the values have been manually gathered and double checked.

Moderating Variables Human Development

The first moderating variable is Human Development of the home country. This variable is derived from the Human Development Index provided by the United Nations and is measured and coded as numerical value ranging from 0.00 to 1. The Human Development Index sums up the average achievement in the key dimensions of human development: a long and healthy life, being knowledgeable and have a decent standard of living. Life expectancy at birth is the assessment for the health dimension, the mean of years of schooling is the assessment for the education dimension and the standard of living dimension is measured by gross national income per capita.

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Political Stability

The second moderating variable is Political Stability and absence of violence/terrorism of the host country. This variable is one of the six dimensions of governance measured by the Worldwide Governance Indicators starting in 1996: Voice and Accountability, Political Stability and Absence of Violence/Terrorism, Government Effectiveness, Regulatory Quality, Rule of Law, and Control of Corruption. This numerical variable is provided by the World Bank and measured as percentile rank among all countries ranging from 0 (lowest) to 100 (highest) rank. Political stability and absence of violence/terrorism captures perceptions of the likelihood that the government will be destabilized or overthrown by unconstitutional or violent means, including politically-motivated violence and terrorism (Kaufmann et al., 2010).

Control Variable Industry Sector

Industry Sector is the control variable used in this study, also obtained from the Orbis (Bureau van Dijk) Database. The industry sectors are coded according to NACE Rev. 2 standard industry classification. The standard industry classification taken into account in this study are the following: (1) 05: Mining of coal and lignite, (2) 06: Extraction of crude petroleum and natural gas, (3) 07: Mining of metal ores and (4) 19: Manufacture of coke and refined petroleum products.

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4. Analysis and Results

In this section, the result of the analysis concerning the sample of n=100 companies active in the extractive industries are being presented. The data analysis was conducted using the Statistical Package for Social Sciences IBM SPSS Statistics (version 24, Mac) from IBM Corporation.

4.1 Pre-tests

Before running the analysis, pre-tests must be performed in order to validate the outcome of the analysis. Due to the fact that the variables are not normally distributed, a linear regression is not suitable for this dataset. Therefore, a logistic regression has to be performed. Before running the logistic regression, it is necessary to check for linearity, multicollinearity and outliers. Considering linearity, the Durbin-Watson test gives information about autocorrelation, showing whether the independent variable is a predictor for the dependent variable. A value of d=1.585 for the variables in this study shows only a slightly positive autocorrelation, close to d=2 (no autocorrelation).

Secondly, the variables are tested for multicollinearity. Multicollinearity, which sheds light on the linearly relatedness of the variable, shows if one variable can be linearly predicted from the others with a substantial degree of accuracy. The following table shows that all the values for tolerance (T) are T >0.2 and all the values of the variance identification factor (VIF) are VIF < 10. These values show that there is no existence of multicollinearity.

Lastly, the check against outliers came to the result that outliers are not existent.

Collinearity Statistics Tollerance VIF

int .908 1.101

HDI .977 1.023

PSI .929 1.077

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4.2 Descriptive Statistics

In this study, a total of n=100 companies are investigated. The dependent variable CAA is coded as amount of company abuse allegation (n). The number of companies operating in the selected countries are shown in the following table:

Latin America # Africa #

Chile 34 Angola 7

Venezuela 17 Nigeria 21

South Africa 53

Table 4: Number of companies active in the investigated countries

The total number of CAAs of the investigated companies is 41. The number of companies with CAAs is 15, representing 15% of the total investigated companies and the number of CAAs per company range from 0 to 7.

The degree of internationalization (DOI) ranges from lowest 1 (multiple companies) to highest 100 (Total S.A.). The companies are divided into three different groups: (1) DOI:1-10, (2) DOI: 11-20 and (3) DOI: >21. Human Development is measured using the Human Development Index of the home country, taking on values from lowest .516 (Nigeria) to highest .929 (Norway). The political stability of the host country is measured using the Political Stability and Absence of Violence/Terrorism Indicator provided by the World Bank as percentile rank ranging from lowest .0659 (Nigeria) to highest .6394 (Chile) for the investigated companies.

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4.3 Correlation Analysis

Correlation analysis is performed in order to explore the strengths of the relationship of variables, giving an indication of both the direction (positive or negative) and the strength of the relationship. Taking on values from -1 to +1 the Pearson Correlation indicates if one variable increases as the other one increases (positive correlation), or vice versa (negative correlation) (Pallant, 2013). Table 5 provides the means, standard deviations and Pearson correlations between the independent, dependent, moderator as well as the control variable. The table shows a positive (0.293) significant (at the 0.01 level, 2-tailed) correlation between the degree of internationalization and CAAs of a company. Furthermore, the table shows a negative (-0.265) significant (at the 0.01 level, 2-tailed) correlation between political stability in the host country and internationalization of a firm. The sector has no significant (p>0.05) correlation with the other variables. Human Development has no significant (p>0.05) correlation with CAA, internationalization, political stability and sector.

Mean SD 1 2 3 4 5 CAA .15 .36 - int 1.55 .74 .293** - HDI .83 .11 -.107 .149 - PSI .38 .20 -.133 -.265** -.013 - sector 2.85 .97 .007 .004 -.107 .147 - *p<.05, **p<.01, ***p<.001.

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4.4 Logistic Regression Analysis

Due to the fact that not all variables are normally distributed a linear regression is not feasible and therefore a logistic regression has to be run. The logistic regression evaluates the impact of different factors on the likelihood of companies to violate human rights. Conducting a logistic regression allows the assessment of the accuracy on how well the predictor variables explain the dependent variable. The outcome of the logistic regression provides an indication of the adequacy of the model by assessing the ‘goodness of fit’ (Pallant, 2013). In this model, the effect of internationalization of a firm on the CAAs of the firm is analyzed. Human development of the home country and the political stability in the host country are moderator variables. Besides the variables used in the conceptual model, this model is controlled for sector. In order to perform a moderation analysis, all numerical independent variables and moderator variables need to be standardized. Therefore, the following variables have been standardized:

(1) int (internationalization) à Zint (standardized internationalization)

(2) HDI (Human Development) à ZHDI (standardized Human Development) (3) PSI (Political Stability) à ZPSI (standardized Political Stability)

Performing the analysis, taking all the variables into account, the model is statistically significant (at p<0.01). This proves that the entered variables are able to explain the dependent variable. The usefulness of the model is explained by the pseudo r-Squares (McFaddan, Cox & Snell and Nagelkerke). The values provide an indication of the amount of variation in the dependent variable explained by the model (Pallant, 2013). The values of McFaddan (0.2017), Cox & Snell (0.1568) and Nagelkerke (0.2747), provided in table 6,

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indicate that between 15.68 % and 27.47 % of the variance is explained by the set of variables in the model.

Summary

-2LL Model LL p McFaddan CoxSnell Nagelkrk n

67.4902 17.0516 .0091** .2017 .1568 .2747 100

Model

coeff se z p LLCI ULCI

constant -2.4726 .4498 -5.4965 .000*** -3.3542 -1.5909 HDI -.4865 .3296 -1.4760 .1399 -1.1325 .1595 int .7300 .3481 2.0971 .0360* .0477 1.4122 PSI .5148 .3196 1.6107 .1073 -.1116 1.1411 int_1 .0145 .3647 .0397 .9683 -.7004 .7294 int_2 -.7228 .3582 -2.0177 .0436* -1.4249 -.0207 sector .0096 .3114 .0309 .9754 -.6007 .6200

Product terms key:

int_1: int x HDI

int_2: int x PSI

*p<.05, **p<.01, ***p<.001.

Table 6: Logistic regression

After controlling for the sector, which had no significant impact on the model (p>0.05), the analysis shows that the sector of the company does not have an impact on the human right violations (CAA) the company is accused of. The degree of internationalization (int) on the other hand is significant at a p=0.0360<0.05 level and a coefficient (B) of 0.73. This indicates that the degree of internationalization of a firm has a direct positive impact on the human right violations the company is accused of, leading to the confirmation of the first hypothesis (H1). The results prove the hypothesized relationship and show that with a rising degree of internationalization a firm is more likely to be accused of human right violations. Moreover, this shows that the effect of business and environmental complexity predominates the effect of the organizational learning process.

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internationalization and the dependent variable CAAs, leading to the rejection of the second hypothesis (H2).

Looking at the second moderator variable (int_2 int x PSI) the analysis provides evidence that a moderation effect is taking place. At a significance level p=0.0436<0.05 the moderator variable PSI has an influence on the relationship between the degree of internationalization of a firm and the CAAs of a company, leading to the confirmation of the third hypothesis (H3). The negative coefficient (-0.7228) indicates that a rising degree of political stability weakens the positive effect of internationalization on CAAs. Conversely, the more unstable the political situation in the host country, the more that internationalization contributes to CAAs.

Considering the analysis, it can be concluded that the degree of internationalization of a firm increases the human right violation accusations of a firm (hypothesis 1) and this relationship is weakened by the political stability prevalent in the host country of the company (hypothesis 3). The human development of the home country (hypothesis 2), where the company originates from, has no impact on the relation between the degree of internationalization of a company and the human right violations the company is accused of.

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5. Discussion

Managing business complexity nowadays gets more and more difficult for international operating firms as their accountability for human rights gets questioned by international institutions (Ruggie, 2013). In his ‘Protect, Respect and Remedy’ framework, which is widely accepted by international organizations, governments, businesses and civil society, Ruggie (2011) stresses a company’s accountability for their human rights impact. This is also a reason why research on the topic of business and human rights has gained more attention lately (Arkani & Theobald, 2005). As shown by the literature, the organizational and environmental complexity of international operating firms can lead to a trade-off between the loss of control and the learning process of a firm (Sinddharthan & Lall, 1982). Being central to many economies in developing countries, the oil, gas and mining industries are often exposed to serious human right violations, devastating vulnerable communities (Human Rights Watch, 2017). Therefore, this paper sets its focus on the oil, gas and mining industries investigating host countries with a different degree of political stability, as well as a different degree of human development.

Sourcing from literature on the interrelated academic fields of international business, economics, political science and international law this study argues that the factors internationalization, Human Development and Political Stability have an influence on the human right violations the company is accused of.

In fact, the majority of firms included in this study originate from Canada (12), Great Britain (13) and the United States of America (16). Furthermore, the two companies with the most CAAs in the analyzed countries originate from the United States of America (Exxon Mobile) and United Kingdom (Royal Dutch Shell PLC - headquartered in the Netherlands and incorporated in the United Kingdom), which are both ranked as countries with one of the highest Human Development Index values (very high human development: HDI > 0.9).

Internationalization, development and political stability : factors influencing corporate human rights violation