How far away is the response?
Human Rights and Multinationals
A research paper on the effect of cultural and economic distance on the choice of response bymultinationals after human rights allegations.
Supervisor: Michelle Westermann-Behaylo
Name: Susanne Kat
Student n.: 10730257 Second reader: Johan Lindeque
Abstract
This research paper looks at the relationship between cultural and economic distance on the choice of response of multinationals after a human right violation, in particular the violations in environmental pollution and developmental issues. By use of two simple regression analysis conducted, both relationships were found significant.
Statement of originality
This document is written by Student Susanne Kat 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.
Executive Summary
This research paper looks at the relationship of economic distance and cultural distance on MNE responses after a human right allegation. For international business scholars this field has become more important the last couple of years. Corporations that operate overseas and especially the businesses that operate in underdeveloped countries are prone to violate human rights. One of the most recent frameworks directed at ethical business practices is by John Ruggie (2008) referred to as ‘Respect, Protect and Remedy’. In this framework businesses are urged to remedy when a human right has been violated by their operations. So this research paper looks at MNE responses after environmental pollution and developmental issues. This paper makes use of data obtained by the CHRDatabase. This is a unique database that is still under construction and makes it possible to conduct systematic research to human right violations by businesses. The relationship that is being tested with a simple regression analysis, is if economic and cultural distance have an effect on MNE responses after a environmental and developmental human rights allegation. Both variables show a significant relationship. Meaning that both economic as well as cultural distance influence the response of an MNE after a environmental and/or developmental human rights violations. More research is necessary to come to a better understanding of the relationship.
Content
1. INTRODUCTION ... 5
2. LITERATURE REVIEW ... 9
2.1HUMAN RIGHTS ... 9
2.1.2 Right to a clean environment ... 10
2.1.3 Right to development ... 12
2.2CONCLUSION – INTERLINKED CONCEPTS ... 13
2.3BUSINESS AND HUMAN RIGHTS ... 14
2.3.1 Responses to human rights ... 17
2.3.2 Business and the environment ... 18
2.3.3 Business and development ... 19
2.4DISTANCE ... 20
2.4.1 Cultural distance ... 21
2.4.2 Economic distance ... 22
3. THEORETICAL FRAMEWORK ... 23
3.1CULTURAL DISTANCE AND HUMAN RIGHTS ... 23
3.2ECONOMIC DISTANCE ... 24
4. METHODOLOGY ... 27
4.1SAMPLE SELECTION AND DATA COLLECTION ... 27
4.2VARIABLES ... 28
4.2.1 MNE responses ... 28
4.2.2 Human Right Allegation ... 29
4.2.3 Cultural Distance ... 29
4.2.4 Economic Distance ... 30
4.3STRENGTHS AND LIMITATIONS OF THE RESEARCH DESIGN ... 30
5. DATA ANALYSIS ... 32 6. DISCUSSION ... 36 6.1FUTURE RESEARCH ... 37 7. CONCLUSION ... 39 5. REFERENCES ... 40 6. APPENDICES ... 49
APPENDIX 1–RESOURCES AND SUSTENANCE RIGHTS: A TYPOLOGY OF CONFLICTS ... 49
APPENDIX 2–RESPONSE CATEGORIES ... 50
APPENDIX 3–DIVISION CATEGORIES FOR PRIMARY VIOLATION ... 50
APPENDIX 4–FREQUENCY TABLES HEADQUARTER AND VIOLATION COUNTRIES ... 51
APPENDIX 5–CROSSTAB WITH NINE CATEGORIES ... 52
APPENDIX 6–CROSSTAB WITH FOUR CATEGORIES ... 53
APPENDIX 7–MNERESPONSE CATEGORIES ... 54
1. Introduction
Economic growth is happening at a rapid speed in today’s world, with technology in its center and globalization as its outcome. Technology in the first place by the creation of the World Wide Web, where information about any subject imaginably can be found and is shared at the same time. The way information is handled has therefore changed dramatically in the past decade. Information is available now for everyone, resulting in different stakeholder pressures for companies. So by entering this information age, old business models are not working the same way as they did ten years ago anymore. The public at large is nowadays demanding ethical practices by the corporations (Clapham and Jerbi, 2000). This rapid economic growth has lifted the standard of living in most of the Western world. However looking at today’s problems: severe pollution, climate change, abusive labor conditions, poverty; all are signs that societies are not able to handle the adverse effects that this economic growth brings. This creates a complicated matter, where multinationals, governments, and the society at large have to maintain an existence that does not compromise the living conditions of future generations. Already there are signs of climate change creating a real live threat to human security (UN News, 2014). Poverty is still a huge problem. Data shows that still more than 1 billion people live on less than 1,25 dollars a day (Worldbank Poverty Overview, 2014). It used to be states that people looked at for addressing these issues, but a shift has been happening over the last couple of years where multinationals are now urged by societies to play a part in solving these problems (Muchlinski, 2001). This because multinational corporations are great means to allocate scarce resources efficiently in a given market. At the same time big corporations are also the ones that are responsible for much of the pollution and imbalance in today’s world.
6 for solving social problems made it highly complicated for multinationals on what to do regarding social responsibility. There have been many different guidelines for just and ethical business practices written by all kinds of different international organizations. One of the most recent frameworks is directed at the protection of human rights, called ‘Respect, Protect, and Remedy’ (Ruggie, 2008). This framework looks at human rights protection based on the 1948 Declaration of Human Rights drafted by the United Nations (from here on out referred to as the UN). The debate about human rights protection shifted, where states were not the sole proprietors of violation these rights anymore (Weissbrodt & Kruger, 2003). Companies were also violators, especially where states were weak and only international law was protecting the society (Deva, 2003). Especially if companies are more focused on making the foreign investment no matter the possible human rights violation (Deva, 2003). So in order to address the challenges in the world, the focus on human rights protection by businesses became a priority for the UN (Hillemanns, 2003). In 2004 the High Commissioner of the UN appointed John Ruggie, a Harvard professor specialized in international affairs to research human rights violations by multinational corporations. After a few years of research Ruggie (2008) concluded that there was a governance gap, with on the one side multinationals that did not know which standards to uphold in al the different countries they operated and on the other side lack of governmental powers to provide adequate sanctioning and remedy options for victims of human rights abuse. With this in mind John Ruggie (2009) set up a framework of ‘Respect, Protect and Remedy’ in which multinationals were obliged to uphold all rights and to conduct a good due diligence when operating overseas. Also home states of the multinationals were given a task to regulate behavior of MNE’s overseas when the host country’s government lacked this capability due to conflict or other inefficiencies (Ruggie, 2009). This framework was endorsed by the UN in late 2006 and has had positive feedback from states and companies.
As incorporating this framework in business decisions has only been going on since 2008, not yet a lot of research has been conducted on this topic. Statistics or other research options are not readily available to companies. Research has not been filling the gap that is becoming wider. Since research is lacking, exploring the relationship between human rights violations and MNE behavior is important. One of the topics that could be of importance to understand the precedent of human rights violation is the reaction of MNE’s after the allegation. After a human rights allegation there has to follow a certain response of an MNE to the allegation and maybe also action that has to be taken in the form of a certain remedy. There are many factors influencing the decision of the response of a company, however not much scientific research has been conducted. In some cases the company is forced to react due to the outrage of the public or local government. In other cases multinationals are not forced to respond at all, but still sometimes voluntary action to remedy is taken. There are many factors that could be of influence on the way MNE’s react after human rights allegations. Two of these possible factors are cultural elements and economic elements. Whether an MNE succeeds or not has not only to do with MNE characteristics, but country characteristics are also important. In the sense of country characteristics there is the concept of distance influencing the successfulness of a company (Ghemawat, 2001). Distance between the home country of the MNE and the host country in which it operates should be taking into account when making business decisions. Distance according to the paper of Ghemawat (2001) is made up out of four different dimensions. One of these dimensions, cultural distance, has been the subject of many research papers and with culture as a business topic a field of study in itself. Economic distance encompasses the economic sophistication of a country, for example the GDP or available resources (Ghemawat, 2001). It is therefore expected that distance has an effect on how multinationals react after a human right violation.
8 This all falls down to the research question:
“What is the influence of cultural- and economic distance on the remedy mechanism of the agent of any given Multinational that committed a human right violation.”
2. Literature Review
Before business and human rights are discussed, first an overview of human rights in general will be given. Afterwards the topic of business and human rights will be addressed, in particular the literature so far on environmental human rights and developmental human rights. Lastly this thesis will look at the topic of distance as an international business topic, with an exploration of economic- and cultural distance.
2.1 Human Rights
Inspired by the Second World War, President Franklin D. Roosevelt together with Winston Churchill made plans to create a global organization that could enhance peace in the world. After the Second World War these plans to create a world organization became concrete and so it was that on the 24th of October 1945 the United Nations were born. The UN became the world largest organization to maintain international peace and to address fundamental issues in the world. Only three years later the Universal Human Rights Declaration was created. This declaration incorporates in total 30 universal human rights, which address cultural, social, economical, civil and political issues (Sengupta, 2002). The UN defined human rights as
“Rights inherent to all human beings, whatever our nationality, place of residence, sex, national or ethnic origin, colour, religion, language, or any other status. We are all equally entitled to our human rights without discrimination. These rights are all interrelated, interdependent and indivisible.” (UN Assembly, 1948).
The Universal Declaration in itself is not a legally binding treaty, it only contains general principles. Both the International Covenant on Civil and Political Rights (ICCPR) and the International Covenant on Economic, Social and Cultural Rights (ICESCR) are legally binding instruments for which the Universal Declaration of Human Rights can be enforced. These three treaties - The Universal Declaration of Human Rights, International Covenant on
10 Civil and Political Rights (ICCPR), and the International Covenant on Economic, Social and Cultural Rights (ICESCR) - make up the International Bill of Human Rights. The International Covenant on Civil and Political Rights contain as the name predicts it, the political and civil rights of human beings. This includes for example freedom of speech, freedom of assembly and right to life. The International Covenant on Economic, Social and Cultural Rights contains labor rights, right to a standard living, right to education, and right to health. The United Nations is the biggest international organization responsible for cooping with human rights issues in the world. The coordination of all these issues falls under the responsibility of the High Commissioner for Human Rights. The Human Rights Council is the main body of the UN and its main task is to promote human rights protection around the globe (OHCHR, 1996). One way to enforce human rights is by International Law, which is for the human rights part based on the 1948 Declaration (Clapham & Jerbi, 2000; Koh, 1998). International human rights law can be enforced on a domestic, regional, or international level (Koh, 1998; Risse & Sikkink, 1999).
The next part will go into depth about two human rights in particular, the right to a clean environment and the right to development.
2.1.2 Right to a clean environment
The environment impacts many aspects of life; it has an impact on the basic needs, the well-being of a person, human security, and even economic prosperity (Donohoe, 2003). Despite all these threats to the environment, back when the Universal Human Rights Declaration was drafted environmental problems were not a priority. This means that there is no mention even to this day of the environment in the declaration (Atapattu, 2002). But environmental problems did become a priority in the later years. After the Second World War the way the
western world developed was by rapid economic growth. Technology and globalization made it possible to improve the standard of living to such an extent that the gap between the west and other parts in the world became enormous (Mebratu, 1998). With this increase in the standard of living, environmental problems arose due to exploitation of the planet (Mebratu, 1998). By some the belief was that if this kind of rapid economic growth would continue, the human race would eventually destroy itself (Mebratu, 1998). Within this regard the call to battle environmental problems suddenly became a priority (Mebratu, 1998). In 1968 Sweden called for a conference to discuss action to the growing environmental issues. This resulted in the 1972 Stockholm Declaration of Human Environment (Atapattu, 2002). This declaration exists out of 26 agreements. All though it did not have any legislative power, it was the first step in acknowledging environmental problems (Sohn, 1973). In response to this meeting, the United Nations Environmental Program (UNEP) was created. This agency is in charge of implementing global environmental protection programs and helps developing countries with setting up environmental policy. This was necessary since globalization had made it possible for companies to manufacture in countries with high economic benefits, such as low labor and material costs, mostly found in developing countries that did not have any environmental policy put into place. In 1987 the Brundtland commission published a report called “Our Common Future” – in which sustainable development issues were addressed. This report is one of the first to address the topic of sustainable development as the key to overcome environmental problems (Mebratu, 1998). The report also inspired the formation of another conference on environmental issues in Rio de Janeiro, which resulted in the Earth Summit in 1992. From this Summit Agenda 21 was created. This agenda point went further than only addressing environmental problems, but connected sustainable development with battling environmental issues. So was poverty and external debt by developing countries, stress in demographics, unsustainable consumptions patterns, and several others, made priority in this
12 agenda. From there on out it could be concluded that sustainable development was a term that was adopted by the world.
2.1.3 Right to development
Development can be addressed by looking at individual level and group level. At the individual level development means enabling a skill set (Udombana 2000). On a group level development is considered economic growth, where society has an increased capacity to deal with its environment (Udombana 2000). However, development is not necessarily only economic growth, all though it is a condition that needs to be met for development to happen (Udombana 2000). A holistic view of development is needed, one where development encompasses a technological, economic, managerial and organizational side. Only taken together the maximization of resources can be brought together (Udombana 2000).
Development and poverty are two interlinked concepts. Poverty inhibits people from going to a doctor when ill, get an education, or have access to sufficient nourishment (Ray, 1998; Pogge 2005; Pogge 2002). So far there are 2,4 billion people living under the poverty line of 2 US Dollars a day in 2010 (World Bank Poverty Overview, 2014).
The right to development came up in the late 80’s early 90’s (Uvin, 2007; Alston, 1988). In this period the Cold War ended between the USA and the former Soviet Republic. There was again room for a discussion about development and this was also necessary. Most of the development programs that had been running were failing due to governments not being able to be held accountable for their inhumane actions (Uvin, 2007). The professionals working in the field were looking for an approach that was holistic and not only economic growth (Uvin, 2007).
Development in their 1986 declaration. The Declaration starts with “Recognizing that
development is a comprehensive economic, social, cultural and political process, which aims at the constant 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 Assemby, 1986). This included a
more holistic approach to development, where economic growth was only means to an end and not an end in itself.
As written in the previous paragraph, in 1992 the Rio de Janeiro meeting was held where different states discussed the environment and development. This meeting brought together the environment and social issues in the world. It holds 27 principles around these topics. To discuss the topic of development there was another summit held in New York in 2000, better known as the UN Millennium Summit. From this meeting several points for a more just world were drafted as well as deadlines for certain collective actions. This collective agreement was from there an out referred to as the UN Millennium Development Goals. Eight of these goals set in 2000 have their deadlines in 2015.
2.2 Conclusion – interlinked concepts
In the previous two paragraphs the importance is shown of the right to a clean environment and development. These two concepts are heavily interlinked (Giorgetta, 2002). Environmental issues have an effect on people’s livelihood, where environmental degradation is a perquisite for developmental problems1 (Sachs, 2004). Agriculture is heavily under threat by environmental pollution, to also look that still today 2,4 billion people depend on agriculture as their main economic source. Moreover, where developmental problems are evident, lack of sufficient and effective institutions is part of the problem as well. A weak
14 government that cannot provide protection to its own civilians, most of the times also mean that there will be no repercussions for MNE’s that violated environmental laws. It is therefore important to not look only separately at both development and environment, but to look at these concepts together.
2.3 Business and human rights
So the last couple of years the decisions in respect to human rights are becoming more important (Bernhagen et al., 2010; Lim & Tsutsui, 2012). All though the topic of human rights and business is quite recent, the question of responsibility of corporations in social issues is addressed in numerous studies evolving around Corporate Social Responsibility. CSR and human rights are interlinked concepts, but they cannot be interchanged. Corporate social responsibility, shortened as CSR, has many definitions and viewpoints. The World Business Council for Sustainable Development defines it as: “the continuing commitment by
business to behave ethically and contribute to economic development while improving the quality of life of the workforce and their families as well as of the local community and society at large” (Holmes & Watts, 1999). So CSR has companies abide more than just the laws of a
given state. Human rights on the other hand are commands that count for every human being, no matter what background they are from. This means that they are not solemnly directed at corporations, but to every single individual. The Declaration has been the foundation of human rights law, so by definition these rights are protected by the rule of law.
For companies there are a lot of different guidelines to consider on how to operate in a just and ethical way. In the next section several guidelines regarding just and ethical business practices are briefly explained.
the OECD, the Organization for Economic Cooperation and Development. The OECD guidelines were written in 1976, with revisions made several years later, the most recent one in 2011. These guidelines should produce the maximum positive effect from businesses on economical, environmental, and social progress in the world. These guidelines were non-legally binding, which companies could uphold voluntarily. In 2011 the OECD added an extra chapter about human rights and businesses, also including the UN framework of ‘Respect, Protect, and Remedy’ (a framework which will be discussed in the next section).
In response to the Nike factory ‘sweatshops’ in Asia in the 1970’s, the International Labor organization responded with their own policy document about multinational enterprises and social policy. This document was established in 1977 and is still updated till this day.
But it went further; in 2000 the Global Compact was created. This is a platform established by the UN in which ten principles evolving around environmental protection, human rights, corruption, and labor are stated. Adapting to the ten principles is voluntary for companies, but so far almost 8000 businesses that have pledged to uphold the principles in over 135 countries making it one of the largest initiatives in the world (UN Global Compact ‘After the Signature’, 2012).
All though all these guidelines had good intentions, they still did not manage make a big change. There was no practical part that the companies could find in these guidelines. So it was in 2005 that the High Commissioner of Human Rights asked John Ruggie – a Harvard professor who was part of the creation of the Global Compact in 2000 – to come up with a solution to this problem. John Ruggie was asked to become the Secretary General’s Special Representative on business and Human Rights. Ruggie is in charge of reporting directly to the Human Rights Council on all matters concerning human rights and enterprises. After a few years of research he presented his framework of ‘Protect, Respect and Remedy’ to the Human Rights Council. The framework was received with positive reaction and the mandate was
16 extended to 2011 in order to make the framework operational. Together with one country from each region (Norway, Russia, Argentina, Nigeria, and India) as co-sponsors, the framework was extended with an operational guideline program (Ruggie, 2009). This framework was different in nature from the former guidelines set by the other organizations mentioned in the paragraph above. First of all, the practical part was incorporated in the framework making it useful to companies. Moreover this framework does also not give a list of commands or principles that need to be respected. Instead, as companies could possibly affect all the international recognized human rights, it is their core responsibility to respect all these rights. So not only a subset of rules, but all rights recognized by the Declaration of Universal Human Rights and its two accompanying treaties need to be respected and not violated. Second of all, not only businesses were addressed. States were also given responsibility and with that not only the host states in which the violation had taken place, but also the home country of the corporation. The home country was to put pressure on the company to respect the rights of people in the host country. In total this framework is based on three pillars, which are as follows:
1. States, who will have to protect against human right violations from third parties, including corporations.
2. Business themselves, who have the responsibility to not violate human rights and conduct a proper due diligence.
3. The possibility to remedy, both non-judicial as judicial by victims.
The duties of states should include the effectiveness of policies and legislation. They should focus on best practices with businesses and share these practices (Ruggie, 2009). Businesses have to make use of a good due diligence process. This means conducting thorough research to become aware of any possible problems in a certain area or partner. Furthermore if the
company still finds itself in a situation where it violated any of the human rights, the company is obliged to remedy.
2.3.1 Responses to human rights
Looking at the framework of John Ruggie, the last part discusses the remedy the company needs to offer when it violated a human right. Most of the companies have some kind of code of conduct. These codes discuss the ethical business practices that the company will uphold in their business practices. Also CSR reports are published every year by most big corporations, in which they address their role in sustainability and what has been done so far in this area. However, these kinds of soft law instruments do not always render a positive outcome after for example a human right violation. Mostly since the codes are only voluntary of action and are reviewed by the company itself, making it not transparent and a difficult to track process. Furthermore since there are not many mechanisms to enforce human rights, it is quite difficult to punish the violators (Koh, 1998; Hathaway, 2002). Countries for example that did ratify a human right treaty are not always putting this into practice (Hathaway, 2002). This also counts for most of the guidelines explained in the previous section. The reality still shows that most of the guidelines successfulness depends on the commitment of the company to uphold the standards effectively (Fasterling and Demuijnck, 2013). Nevertheless it is sometimes also in the best interest of the company to at least react to a human rights allegation in an active way. Evidence shows that local employees show a positive attitude towards their employer when it upholds good CSR practices (Reimann et all, 2012). At the same time these local employees also drive the company to uphold these standards (Reimann et all, 2012).
In the next section business in regard to a clean environment and development are discussed in more depth.
2.3.2 Business and the environment
There are still numerous instances in which companies are negatively impacting the living conditions of people and the environment (Thorme, 1990; Shrivastava, 1995). Many environmental activists claim that MNEs manufacture in countries that have weak environmental policy or legislation to avoid extra costs of having to invest in less polluting production procedures (Christmann, 2004; Dam & Scholtens, 2008).
Even though there is still a lot to research on the effects of businesses on the environment, the popularity and importance of this topic is growing (Holtbrügge & Dögl 2012). Corporate managers are starting to understand that their adverse effect on the environment will have an effect on their performance. For example through climate change that is affecting the whole world (Rockström et al, 2009). A healthy clean environment is also adopted as an important part of the UN Global Compact initiative. Three out of the ten principles are regarding environmental protection. The UN calls for precaution to current environmental challenges, taking responsibility, and the creation of green technologies (UN Global Compact, 2000). This also comes back in the review article of Holtbrügge & Dögl (2012), which looks at 54 studies that are evolving around corporate environmental responsibility. Environmental CSR is defined as “practices that benefit the environment (or mitigate the adverse impact of
business on the environment) that go beyond those that companies are legally obliged to carry out”.
In order to address this topic several environmental options to protect the environment have been established. One of the first legally binding environmental agreements is the Kyoto protocol. Established in 1997 to ensure a limit on greenhouse gas reduction by developed industries (Böhringer & Vogt 2003; Manne & Richels, 2000). This protocol originates from the meeting held in 1992 by the UN Framework Convention on Climate Change. In 2005 the emission-trading scheme would be made effective in the EU (Manne & Richels, 2000). This
agreement made businesses rethink their current environmental strategies (Kolk & Pinkse, 2005), which created a change in strategies for most companies. The article by Kolk and Levy (2001) shows for example that three out of the four largest oil companies, changed their strategy to handle the stricter environmental legislation instead of fighting these new laws. However, not all companies welcome the stricter regulations and even try to lobby against them. For MNE’s it is therefore the question how they will respond to environmental issues. On the one hand convergence is necessary to cope with the global environmental issues. On the other hand there is the local pretext in which multinationals actually operate. It is possible due to convergence which leads to standardization of the environmental policies (Levy & Kolk, 2002) that multinationals are missing out on the local opportunities and are no longer able to exploit the country differences (Christmann, 2004).
2.3.3 Business and development
Even though globalization is making it possible for almost any company to go abroad to do business, these opportunities also bring along several challenges. The notion that any FDI made in a certain country will have economic growth as its outcome might not always be the case (Narula & Dunning 2010). Only FDI’s with a certain purpose and positive external forces creates economic growth for the country (Narula & Dunning 2010). So it is possible that an FDI could have a negative effect on the country, it can even enhance poverty in a certain region. In this regard there arise developmental issues that corporation have to deal with as well. So far most company’s CSR practices are not directed at aligning the core activities to developmental purposes (Newell & Frynas, 2007). Furthermore current CSR reports are completely missing out on poverty reduction or equality (Jenkins, 2005). So this means that on the one hand companies are still held responsible for causing poverty in the world (Boyle & Boguslaw, 2007), but on the other hand MNEs are also the agents that are
20 now urged to take a stand against poverty (Dunning & Fortanier, 2007; Boyle & Boguslaw, 2007; Marks, 2004). Companies are suddenly held responsible for promoting just institutions in countries that lack them (Hsieh, 2009). One example is by the UN Development Goals, there is a call for a ‘global partnership on development’ in which companies are urged to participate (Kolk & Van Tulder, 2006). The UN framework of ‘Respect, Protect and Remedy’ has as notion that a company should have as bottom line a do no harm policy. This is also regarding developmental purposes where if a corporation harms a certain society it is obliged to be part of the remedy.
2.4 Distance
The question of why companies go abroad to do business is a heavily researched topic. By going abroad to multiple countries, the MNE is born. But by going abroad the multinational has to overcome several challenges. There are many different components than only economic factors that the company needs to consider when choosing a new location. This is very necessary in order for a business to succeed in a foreign country (Ghemawat, 2001). Different customs, law systems, or social standards could form a challenge for a company. For example an FDI made into a foreign region or country, could bring along extra costs for the company than when they would have made an investment into their home country. These extra costs are called the Cost of Doing Business Abroad (Sethi & Judge, 2009). A component of the CDBA is the liability of foreignness (Zaheer, 1995). The liability of foreignness has to do with costs associated with operating in a foreign country relative to host-country competitors (Sethi & Judge, 2009). The higher the distance between two countries, the higher the possible liability of foreignness (shortened as LOF) for the company that wants to enter the foreign country. The CAGE model from Ghemawat (2001) discusses the distance between countries on
four different dimensions. The CAGE model stands for: cultural distance, administrative distance, geographical distance, and economical distance. For every dimension several attributes are used to help companies describe or calculate the distance between countries. For this paper the focus will be on the cultural and economical distance, both explained in the next section.
2.4.1 Cultural distance
A lot of different research has been conducted on culture in an international management setting (Shenkar, 2001; Leung et al., 2005). Since culture is part of the environment in which a company operates, culture impacts business decisions to a great extent (Shenkar, 2001; Hofstede, 1994). Especially companies operating in multiple countries have to deal with different cultures impacting their offices. Culture as a concept is hard to define. Nevertheless, many authors have tried to grasp the definition of culture for many years. One of these definitions is by Geert Hofstede (1994), he defines culture as: “the collective programming of the human mind that distinguishes the members of one human group from those of another. Culture in this sense is a system of collectively held values” (Hofstede, 1994). Geert Hofstede (1994) founded one of the most popular cultural frameworks of today. Hofstede (1994) described five different cultural dimensions after conducting research of IBM managers around the globe. His research has been used in numerous studies to identify culture as an influential factor in business decisions. For example Barkema and Vermeulen (1997) researched what the impact was of different cultural backgrounds in the success of international joint ventures by using Hofstede’s five cultural dimensions. They concluded that culture was a disruptive element in the success of an international joint venture. These five dimensions include: power distance, individualism/collectivism, masculinity/femininity, uncertainty avoidance, and time orientation. For this research project the individual
22 dimensions are not researched in depth, the dimensions are taken all together to come to a measure of distance between countries. The cultural distance will be calculated by the formula of Kogut and Singh (1988). Cultural distance could be defined as the difference in beliefs, traditions, norms and values (Ghemawat, 2001). The cultural distance by Ghemawat (2001) describes several attributes to culture, mainly: difference in language, ethnicity, religion, social norms, existence of social ties or relationships.
2.4.2 Economic distance
The economic state in a country is important to consider when making and FDI. The economic state says for example something about the quality of personnel available, or resources and quality available (Ghemawat, 2001). Economic distance plays a big part in researching trade patters (Ghemawat, 2001). The economic distance described by Ghemawat (2001) entails the economic situation in a given country. The consumer income, the human capital, and also access to information or knowledge are part of the economic distance. This is important to consider for a company when researching a new location due to the resources necessary to set up a foreign subsidiary. The success of a foreign subsidiary therefore depends for some part on the economic state of the country. For example, Tsang and Yip (2007) found that hazard rates for FDI in less developed countries in regard to the home country of the FDI, were higher than when the FDI would happen in a more developed country. Also looking at access to information and knowledge, FDI’s are more likely to happen in countries that have less information asymmetry (Portes and Rey, 2005).
3. Theoretical Framework
In this section the theoretical framework is discussed. First the cultural distance and human rights responses are looked at. Secondly the economic distance and its influence on human rights responses are discussed.
3.1 Cultural Distance and human rights
One of the main relationships that will be researched in this paper is if cultural distance has an effect on MNE response after environmental pollution and/or developmental issues. Cultural distance is to be expected to have an effect on how the MNE headquarter responds to a human right allegation. Research on human rights and business responses is so far quite limited, nevertheless there are some links that could be made based upon other studies conducted. First of all, MNE’s that have to deal with a human right violation, will have to result to conflict resolution. Culture impacts conflict resolution in many different ways. The influence can be on the individual level of just single employees in the organization and also on a more general level where national culture plays a role. Culture impacts the perception of the conflict and therefore also the action that is taken afterwards (Worchel, 2005). On national culture level evidence is found that there is a difference in the way high versus low context cultures handle conflicts (Chau & Gudykunst, 1987). High context cultures do say directly what they mean, but there are clues in the context of what someone is saying (Croucher et al, 2012; Hall 1990). In low context cultures the context does not play a huge role and the message is explicit (Croucher et al., 2012; Hall, 1990). Also individualistic cultures tend to deal with conflict by force compared to collectivistic cultures. Collectivistic cultures deal with conflicts by compromising and withdrawal (Holt & DeVore, 2005). Therefore the national culture of the country where the MNE is located will impact the perception of the conflict in
24 the form of a human right allegation. With this in mind, making it evident that this perception of the conflict by the headquarter will have an effect on the relationship between the MNE headquarter and the subsidiary in the host country. Some subsidiaries have closer ties to the headquarters than others, based on the specific role a subsidiary plays for the multinational (Rugman and Verbeke, 2001). There can be perception gaps from the managers in control of the different subsidiaries in contrast to the managers in control at the MNE headquarter (Birkinshaw et al, 2000). Managers cope with problems out of their own point of view, which is formed by culture to a certain extent (Sharma, 2000; Hofstede 1994). The information taken back to the MNE headquarter is therefore biased. This influences the strategic choice of how a company responds to environmental and developmental issues (Sharma, 2000; Cordano & Frieze, 2000).
Cultural distance also has an effect on the different stakeholders to which a company has to answer. In the host country in which the company operates is culturally completely different than from the home country culture, it might create a barrier of communication. In which people do not understand each other. Relating this back to the cost of doing business abroad, it might be that companies that operate in a culturally distant country are not prone to respond to human right allegation mainly because they did not understand the information reported back from the subsidiary. Also the cost of controlling, understanding, and communicating with the host country are high with a culturally distant partner (Linders et al., 2005), making it a costly approach to respond to allegations.
This makes the following hypothesis:
H1: Cultural distance has an effect on how the MNE will respond to a human right violation.
3.2 Economic Distance
The second relationship that will be researched is regarding economic distance. Markets and economic stability only thrives in the presence of stable institutions and legislation that can be enforced by governmental bodies. If these parts are lacking in a country, a multinational has opportunity to set its own rules and is therefore more vulnerable to committing a human right violation. Since most of the MNE headquarters are located in developed countries, the economic gap between the manufacturing country and the headquarter country is large. So is there evidence that economic and financial development in the BRIC countries show a decrease in environmental degradation (Tamazian, et al., 2009). Showing that the more a country is developed the more it will enable a stop to environmental degradation. So the less a country is developed the less likely it is that it will impose strict environmental legislation on the operating corporations. Meaning that the further away a certain country is in regard of economic distance, the less likely it is that the company is legally obliged to respond to human rights allegations. The response of an MNE is therefore mostly voluntary of nature. Until now it shows that the voluntary action taken by MNE’s is quite scarce. However, there are for example other factors that might force the MNE to respond to certain allegations. So seem pressures from stakeholders as well as MNE characteristics to matter in the way environmental policy is handled within the multinational (Christmann, 2004).
Therefore it is expected that:
H2: Economic distance has an effect on how the MNE will respond to a human right violation.
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The following diagram can be drawn in order to research the possible relationship between the variables.
Figure 1: theoretical construct
Cultural Distance MNE Response Economic Distance
4. Methodology
Research in human rights and multinationals is quite limited, only the past five to ten years there has been a focus on this particular topic (Bernhagen & Mitchell, 2010). Therefore studies that test certain aspects of human rights and businesses have been few, making this topic quite interesting for a Master thesis. Experimental research is highly necessary to come to a better understanding about MNE behavior in human rights violations. One project that was started to enable more research on this topic is the CHRDatabase. This is a joint program from the University of Oxford and University of Denver. This database was started to make it possible to conduct systematic research to business and human rights violations. Since this database is not yet publically available and still under construction, groups of students are asked to help code a part of the database in order to get access. So for the period of one month I was asked to code twenty different human right violation cases in India. After this period access to the database was granted.
4.1 Sample selection and data collection
The sample that is selected for this research project is obtained from the CHRDatabase. In this database there are over 800 companies coded. Per definition the companies that have been adopted in this database have allegedly committed some sort of human right violation. The data has been obtained from the Business and Human Rights Resource Center from articles published from the year 2000 till now. Furthermore from these 800 companies, at least ⅔ exists out of companies operating in more than one country. The other part is made up out of local companies. For this research only companies that operate in more than one country will be taken into consideration, therefore all the local companies are left out.
28 As to human rights allegations, only environmental and developmental allegations are included in the dataset. These human right allegations are coded under the primary violation of each company in the CHRDatabase (more will be explained in the next paragraph).
The sample therefore exists out of companies that: (1) are operating in more than one country, (2) committed a violation in the area of development and/or environmental pollution.
For this sample more information needs to be obtained to conduct the analysis in the next chapter. For the two independent variables of economic- and cultural distance information cannot be found directly in the CHRDatabase. So to come to a distance measure, firstly headquarters of the violating company needs to be found. This information is obtained from the ORBIS database. If a company is a joint venture, the majority shareholder parent company is taken as the main headquarter, since the majority shareholder has more control and power over the joint venture (Geringer and Hebert, 1989). If the joint venture was equally distributed between the parent companies, the case was excluded from the sample on basis that it is not possible to determine the partner with most control over the joint venture. The location of the violation committed is included in the CHRD database and therefore can easily be obtained. The distance will be calculated from the headquarter country location and the violation committed by a subsidiary of that company in a host country.
4.2 Variables
4.2.1 MNE responses
All the MNE responses are taken from the CHRDatabase. These responses are put together from newspaper articles, press releases, or other documents found on the Internet. These
responses are coded under nine different categories2. The company response is then briefly summarized and coded under a category. If the category is ‘other’ than a brief description is written down. If the company does not respond to the allegation - meaning that there has not been found any document so far that could prove that the company responded to the allegation in any way - the ‘no response’ category is used.
4.2.2 Human Right Allegation
In the CHRDatabase there are five different categories to which a company case is categorized and coded. These are: 1. Labor, 2. Health, 3. Environment, 4, Development (& Poverty) and 5. Abuses. The database is built in such a way that every case involves one company, whom committed one human right violation from the above stated categories. So every case exists out of one violation together with the company(s) that allegedly violated the human right. This means that if a company violated more than one human right category – for example an oil spill had as consequence the destruction of a local economy – the company is given two separate cases to which it is coded; one under environmental and one under development (and poverty).
For this research project only the companies that violated a human right based on environmental allegations and developmental allegations are included. These first categories are called the primary violation. Then to come to a better understanding of what exactly the primary violation entails, there is a subset of categories given for each violation3.
4.2.3 Cultural Distance
Cultural distance is calculated by the formula of Kogut and Singh (1988). They built an index based on the cultural ranking of Geert Hofstede’s four cultural dimensions: power distance, masculinity, individualism and uncertainty avoidance. Kogut and Singh (1988) calculated the distance of countries
2A full list of the categories can be found in the appendix.
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in respect to the United States. This research project will also use the formula of Kogut and Singh (1988). However instead of the distance between the United States and countries, the distance between a headquarter country and the host country in which the human right violation is calculated. This makes for the following formula distinction:
I!"= index for the ith cultural dimension and the 𝑗th country
u = The 𝑗th headquarter country
V!= variance of the index of the 𝑖th dimension
CD!= Cultural distance of the 𝑗th country from the headquarter country
𝐶𝐷! = (𝐼!"− 𝐼!")!/𝑉! !
!!!
/ 4
The data obtained to calculate the Hofsede dimensions are taken from Geert Hofstede’s own website (The Hofstede Centre, Country Comparison).
4.2.4 Economic Distance
The study by Tsang and Yip (2007) measures economic distance between Singapore and host countries through GDP. However, for this research project the GDP per capita is taken to rule out the population size of a country that could create a distorted picture. The economic distance is then calculated between the GDP per capita of the headquarter country and the host country of the violation. The GDP per capita will be taken from the World Bank data.
4.3 Strengths and limitations of the research design
completed yet and data points are still being added. This means that there might be human rights violation cases that are not yet included, therefore showing a distorted picture. Nevertheless, it is still the only database that has this type of information available and therefore unique in its nature.
Second of all, there has been a lot of critique on the way Geert Hofstede conducted and obtained his data. According to Schwartz (1994) it is not valid to define culture in only 5 mutually exclusive dimensions. But despite all the criticism, Hofstede’s work remains popular and is still used in many studies. This is also the conclusion drawn by Drogendijk & Slangen (2006) who find that the difference between Schwartz’s work and Hofstede’s framework is not large enough to conclude that one is better than the other. In the next section the statistical analysis is conducted.
Furthermore the way the economic distance is calculated might also does not form an overall picture for the economic conditions of a given country. There are many other factors that need to be taken into account, such as natural resources, technological advancements and available personnel (Narula & Dunning 2010).
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5. Data Analysis
In total there are 185 cases that qualify to be taken into account. These are companies that have their headquarter located in a different country then where the violation took place and only companies that violated the two human rights violations on environment or development. In the appendix the frequency tables for the headquarter- and violation countries can be found. Of the 185 cases, 20 cases have missing values due to no data available by Geert Hofstede or the Worldbank. SPSS excludes these cases automatically from the analysis.
The dependent variable – MNE response – has to be classified as a nominal variable, since the categories cannot be ranked. So the order of the dependent variable is not taken into account.
For this research project two simple regressions will be used, for each independent variable a regression analysis will be conducted. But before a statistical test can be preformed, several assumptions need to be checked. First of all the independence Chi-Square test tells something about the correlation of the data at hand. When performing a crosstab on the dependent variable with all nine categories, this shows that there are 8 cells that have a count less than 5, which is 57,1% according to the Chi-Square test4. This has a big consequence for the statistical analysis, since more than 20% of the cells have a count below 5 might mean that there is no statistical test available for the analysis. The next step would be to either exclude some of the categories or to put categories together. Since the dataset only entails 185 cases, which is already quite limited it would be better if some categories can be put together. From the crosstab it can be seen that the total count for ‘Justification’ and ‘Apology’ are only 4 cases each. Also the category of ‘Other’ has a limited amount of cases in total, with in two rows a cell count of less than 5. These categories thus form a problem. After going back to the
4
raw dataset and looking at these cases independently, it can be concluded that they can be merged together with different categories. The ‘Justification’ cases can be merged with ‘Acknowledgement’ and ‘Apology’ can be merged together with ‘Plan for change’. The category of ‘Other’ will also be merged with ‘Acknowledgement’, since for all these 7 cases there was some sort of acknowledgement of the allegation by the company.
The new crosstab5 with only four categories gives a better outcome with a minimum cell count of 5,97 and thus no cells with a cell count lower than 5. These categories will be used for the analysis and are coded from 1 to 46. Below a bar chart is presented showing the case count for the different categories and the difference in the two violations in the sample: development (poverty) and environment.
Descriptive statistics show the normal distribution of the dataset. In order to conduct a simple regression analysis the dataset has to be normally distributed. Both the Skewness and Kurtosis
5 Find the crosstab in the appendix.
34 are within proper limits, with Skewness not higher/lower than 1 and Kurtosis within the range of 3 and -3. From this the conclusion can be drawn that the dataset is normally distributed and therefore a simple regression is possible to run.
Table 1: Descriptive Statistics
To conduct a simple regression analysis in SPSS with a nominal dependent variable, the optimal scaling measure needs to be used (Meulman, 1998). Optimal scaling is used when variables cannot be used in other statistical tests due to fact that they cannot be quantified easily. Since the dependent variable of this project - the MNE response - is qualitative and cannot be ranked easily, optimal scaling can provide the solution to quantify the variable. In the optimal scaling measure the dependent variable can be measured as a nominal variable, so no ranking of the variable is necessary.
Looking at the tables after optimal scaling conclusions can be made about the statistical outcomes for the relationships. Below the model summary table can be found for both cultural distance and economic distance. The ANOVA test shows the fit of the statistical test for the dataset. Looking at the ANOVA tables it can be concluded that the dataset fits the test well, with for economic distance a p= 0,01 < 0,05 and cultural distance a p=0,004 < 0,05. The coefficients table says something about the relationship with the dependent variable. Both economic- and cultural distance have a significant relationship with the MNE response. Economic distance with a p=0,005 < 0,05 and cultural distance with a p=0,047 < 0,05.
N Skewness Std.+Error Kurtosis Std.+Error
Cultural'Distance 165 10,288 0,189 10,146 0,376
Economic'Distance 180 0,939 0,181 10,951 0,36
MNE'Response 185 10,087 0,179 11,822 0,355
Table 2: Coefficients table Beta Bootstrap)(1000)) Estimate)of)Std.) Error Economic)Distance !0,193 0,067 1 8,217 0,005 Cultural)Distance !0,222 0,111 1 4,005 0,047 Coefficients Standardized)Coefficients df F Sig.
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6. Discussion
Not much has changed yet over the years since the first outcry for sustainable development of multinational firms. As can be observed that from this dataset companies predominantly rather deny allegations or do not dare to give a response at all. It is still remarkable that so few companies act on human right violations. So far the CSR practices of companies in the natural resource industry are not always aligned in the best interest of the host country (Frynas, 2005). It seems that companies do not know how to respond to allegations, that there are no policies yet in place on how to deal with human rights issues.
Both the independent variables are found to significantly impact this relationship of MNE responses. Cultural distance was not found highly significant, but a significant relationship does exist. The relationship might be moderately significant due to the fact that culture in the respective industry of natural resources might be arbitrary. Companies operating in the natural resources industry in general send out managers to set up the foreign subsidiary. Their culture should not be so different from the headquarters’ culture, therefore cultural distance would not necessarily impact the MNE response decision in regard to the manager’s perception of the violation. At the same time it is hard for a company to find a sufficient way to handle all the different stakeholder pressures. The human right violation issues are global, however operations are local. Making it difficult for a company to choose between local responsive-ness and global convergence to the human rights issues, especially in environmental policy (Levy & Kolk, 2002). This makes that there has not been a collective change in the industry, due to different perceptions of sustainable development (Escobar & Vredenburg, 2011). Moreover most headquarters are located in the Western world, where societies might be more individualistic than collectivistic (Earley, 1993). Taking care of others is not a value that is taken into account, so taking care of the host country’s society would be against the corporate
culture of the MNE. However, also in the West there are very different cultures to be found. So have American oil firms actively lobbied against the stricter environmental legislation than their European counterparts (Levy & Kolk, 2002). Further research to this difference has to be conducted in the future.
Economic distance has a highly significant influence on MNE response to human right violations. Economic sophistication, or lack there of, drives multinationals to deny allegations or to ignore allegations at all. One of the possible reasons could be that it is difficult for victims to hold violators accountable due to lack of stable and reliable institutions. Lack of resources to investigate the violations might also be of issue here. The local society does not have the necessary resources and knowledge to fight the company. Unions or other groups are not easily formed and may even be forbidden in the host country. Making it even harder for groups of victims to reunite and fight the allegation together. Furthermore in some cases the natural resources are in the hands of a highly corrupt government or in some cases even rebel groups, especially in Africa. Natural resources that are in hands of a corrupt government or rebel groups do not have any benefit for suing the multinational for violating human rights (Le Billon, 2001). The monopoly of power that most natural resource corporations have over governments makes it difficult for the local communities to force the company to react and remedy in a given situation.
6.1 Future research
First of all, since the amount of cases used was quite limited for the research conducted, future research could test the relationship with more cases. The CHRDatabase is still under construction, so in a few years it would be possible to test this with more cases and industries. An important future research question could be to look at the difference before the UN
38 Framework of ‘Respect, Protect and Remedy’ was adopted and after it became effective. It would be important to see if companies have changed their responses since the framework became effective. As in dataset it could be seen that most companies choose to deny the allegation or simply do not respond at all. From the perspective of this framework, those two response categories would likely diminish when the framework became effective. Unfortunately there is still not enough data gathered to research this.
7. Conclusion
The paper looks at economic and cultural distance as an influence to MNE responses after a human right violation. In the recent years the topic of human rights and businesses became important, espeically for MNE’s operating in underdeveloped countries. In regard to environmental and developmental problems, many different guidelines were written directed at ethical and just business practices. The most recent framework of John Ruggie (2008) ‘Respect, Protect and Remedy’ created an operational framework to which businesses could follow when conducting a due diligence process.
Both economic- and cultural distance were found significant. Economic distance was highly significant, whereas cultural distance was found moderately significant. However future research is necessary to built further upon this relationship. Data from the CHRD database will be built in the coming years, which will make further research possible.
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