Global Production and its Watchdogs: Firms and NGOs in the Regulatory Void

• Applicant: Professor Sebastian Krautheim, Ph.D.
• Subject Area: Economic Policy, Applied Economics
• Term: from 2019 to 2023
• Project identifier: Deutsche Forschungsgemeinschaft (DFG) - Project number 421074032

The last three decades have been characterized by an unprecedented internationalization of the production process. Its regulation (e.g. regarding labor or the environment), however, remained mainly on the national level. Locating production in different countries therefore allows firms to benefit from massive cross-country differences in regulation and enforcement capacity: the "regulatory void". This has set the stage for a novel, non-governmental player in the international economic policy arena which has previously received little attention in research on international trade: advocacy (or: watchdog) NGOs like Greenpeace, Rainforest Action Network or Amnesty International etc. These groups have adjusted their strategies to the internationalization of production and increasingly influence firms directly through (the threat of) campaigns and consumer boycotts, instead of targeting national regulation. The anti-sweatshop campaign against Nike (criticizing work conditions in Indonesian supplier factories) in 1998 illustrates that NGO campaigns can induce sizable damage on firms (profits: –49%; stock market valuation: –20%). The campaign led to substantial concessions to the NGO demands and had a causal impact on wages in supplier factories. We place this under-researched novel agent in the economic policy arena and its interaction with internationally active firms at center-stage of our analysis. The two key research questions which also structure this proposal are: 1. How do firms organize international production when the global regulatory void allows for substantial cost savings at the expense of workers and the environment, but when this may also induce consumer boycotts and advocacy NGO campaigns? We base our analysis on the established literature on the international organization of production initiated by Antràs (QJE, 2003). Based on our preliminary work in Herkenhoff & Krautheim we envision important contributions both on the theoretical and the empirical side. *** 2. Other preliminary work for this project (Hatte & Koenig, WBER, forthcoming) shows that the geography of international NGO campaigns is captured very well by triadic Gravity equations. This leads to the second research question: Do trade flows and production linkages across borders shape the geographical patterns of international advocacy NGO campaigns and how do they interact? I will cooperate with Thierry Verdier and Pamina Koenig (both: Paris School of Economics). Guided by the empirical results and building on our previous work in Krautheim and Krautheim & Verdier, we will design and analyze a model with heterogeneous firms and heterogeneous NGOs, trade, international production and NGO campaigns. Testable implications of the model will be analyzed using the same exclusive data set used in the preliminary work.

• DFG Programme: Research Grants
• International Connection: France
• Cooperation Partners: Professorin Dr. Pamina Koenig; Professor Dr. Thierry Verdier