Globalization brings tremendous benefits to developed countries, but it also creates ethical dilemmas. For example, American firms can often reduce their production costs by purchasing inputs from foreign suppliers. Problematically, the comparative advantage of some foreign suppliers might be their ability to avoid the costs associated with protecting their workers from injuries and protecting the environment. This creates a moral dilemma: American firms often need to buy supplies from the developing world to remain competitive, but doing so might come at the cost of the exploitation of foreign workers and environmental damage.
In a new working paper, UC Hastings professor Jodi Short, along with Yanhua Z. Bird and Michael W. Toffel of Harvard Business School, study two strategies American firms deploy in response to this dilemma to promote human rights abroad: “legalization” and “worker participation.” Legalization involves using law-like rules and standards to improve working conditions, such as requiring suppliers to obtain certification from a non-governmental organization attesting to the adequacy of their labor practices. Some legalization strategies have become familiar to American consumers. For example, many coffee shops sell certified “fair trade” coffee where the certification indicates that the coffee was produced without, among other things, the use of child labor. Alternatively, worker-participation strategies aim to increase the voice of employees in the workplace. For example, Reebok requires its suppliers to inform workers of their legal rights and to establish formal communication channels and processes. Unionization is another common worker-participation strategy.
In their new study, Professor Short and her coauthors look for evidence about the efficacy of legalization and worker participation using a dataset from a social-auditing firm that includes all audits that the firm conducted from 2012 to 2015. The audited firms in the dataset are located all over the world, especially in China, and they are in the supply chains of a wide range of industries, ranging from old economy staples like furniture and clothing to new industries like electronics. On each audit, the auditor examines the firm’s operations and assigns it a score between 0 and 100 that is meant to capture the firm’s level of compliance with a code of conduct that addresses workplace standards, environmental factors and occupational health and safety practices. The study finds evidence that suppliers that utilized legalization and worker-participation strategies improved more over time than the firms that did not do so. However, as Professor Short and her coauthors note, the goals of improved working conditions and environmental standards are in tension with the economic goal of producing goods as cheaply as possible. This tension was reflected in the data: the use of incentive compensation that might incentivize employees to cheat to meet production goals appeared to reduce the positive impact of legalization and worker participation. The paper therefore offers lessons for the promotion of human rights abroad and for managing global supply chains.