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Research Highlight Why multinational firms may behave irresponsibly and sometimes get away with it
Reputational risk is supposed to keep multinational corporations from engaging in socially irresponsible behaviour. But Giulio Nardella and his co-authors’ new study sheds light on the dark side of international business by showing why, in certain circumstances, the risk of fallout from corporate misconduct is much lower.
News events spotlighting corporate wrongdoings can be PR disasters. But many high-profile firms involved sometimes seem to get away with it. The collapse of the Rana Plaza building in Bangladesh in 2013, which killed more than 1,000 garment workers, was retail's worst industrial accident. Despite the ensuing international outrage, multinational clothing companies that outsourced manufacturing there, such as Primark or H&M, hardly noticed a dent in their sales in the following years. Apple's Chinese suppliers regularly make headlines for employing Uighur forced labour or violating human rights in other ways, yet the Seattle firm never seems to budge from the list of most valuable brands in the world.
How come such revelations seem to have as much effect on brand reputation as water off a duck's back? The above examples fly in the face of theory, namely that corporate reputation is a fragile, critical (though intangible) resource, therefore multinational corporations take every care to burnish their image. And when they are indeed caught exploiting workers, dumping toxic waste in rivers or engaging in other types of misconduct, the stain on their reputation is such that stakeholders – consumers, suppliers, investors, etc. – turn away. But as the above examples show, reputations are sometimes more resilient than expected. Why is that?
Perhaps CSI (corporate social irresponsibility) does not present as consistent a risk as was assumed up to now, as a trio of researchers suggests: In a recent paper, Giulio Nardella, Irina Surdu and Stephen Brammer point out that CSI can be perceived subjectively and thus, corporate reputations can become influenced by various stakeholder biases.
The home market vs. international markets
Specifically, the researchers investigate biases in the form of location effects – where CSI events are located. Why this factor in particular? “Exploring the location effects of CSI remains important because decision-making can often be biased toward the home market (Bohas, Morley & Kinra, 2021; Michailova et al., 2017), which implies that internationally located CSI events may be penalized less severely than CSI events located at home, or not penalized at all,” write the researchers.
To examine the nature of the relationship between CSI location and multinationals' reputation, the researchers focused on the media disclosure of CSI. They tested their hypotheses on a sample of 2,401 CSI events involving 465 US-based MNEs (multinational enterprises) over 7 years in three geographical and cultural circles: the US market, the Western host market, and the non-Western international market.
They found a negative, statistically significant relationship between CSI and reputation for the home market, a significant but weaker effect for the Western market, and no significant effect for operations in a non-Western market.
In other terms, the answer to the question in the research article's title (“What happens abroad, stays abroad?”) is a yes – though strictly speaking the study is not exactly a case of “what happens in Vegas stays in Vegas” since the corporate wrongdoings are publicized in the media. Simply, their effects do not resonate as strongly from afar.
Ethnocentric biases: shared norms
But why do multinationals' wrongdoings on the other side of the planet hold less sway over stakeholders than those closer to home? The answer lies in the ethnocentric bias. When it comes to risk or harm, responses are often stronger when such risks are situated within people's immediate environment, in this case, the home market, than elsewhere, in international host markets. Simply put, people tend to give preference to their in-group(s), i.e. individuals with similar value systems, experiences, beliefs and goals.
Hence, stakeholders are more likely to respond very negatively to CSI behaviour when their own ‘nuclear in-group’ (who share the same values and set of institutional norms) is impacted, somewhat less negatively to CSI when an ‘extended in-group’ (who share similar values and norms) is affected, and seemingly not at all when an ‘out-group’ (located in a non-Western country with dissimilar values and norms) is harmed or wronged.
CSI associated with the global value chains of MNEs in many non-Western countries, including instances of use of discriminatory business practices, child labor and undermining of employees’ rights, are all relevant examples of CSI that repeatedly impacts ‘outgroups’ with potentially limited reputational consequences for MNEs.
Nor is the question simply one of (perceived) proximity. “Shared principles among the in-group also strengthen stakeholders' ability to assess the severity of CSI located in a home institutional environment,” write the researchers, adding that this amplifies the ethnocentric bias. Conversely, when located in a very foreign setting, without shared rules and values, “efficient judgement about the inappropriateness or illegitimacy MNE behaviour are reduced.”
Implications for managers and policymakers
These findings are particularly relevant for managers wishing to better understand the risks posed by corporate social irresponsibility: if practised in a distant host country location, the negative impact on reputation will be lesser. Yet, write the researchers, “divesting or disassociating the firm from CSI in host markets may (potentially) not always be the most appropriate strategic response” and even if CSI is likely to go unpenalized, firms would be well advised to consider self-regulation from a CSR perspective. “Extant research has shown the many benefits associated with foreign firms pursuing socially responsible actions in foreign locations to avoid the negative spillovers of their activities,” they emphasize.
Finally, from a policy perspective, the study clearly shows the limits of corporate reputation as a supposed “informal enforcement mechanism” to deter multinational enterprises from behaving irresponsibly. Instead, suggest the researchers, “more nuanced (home market) policies will help to deter MNEs from engaging in CSI where differences between institutional legitimacy expectations and (potentially) voids can minimize the downside risks for MNEs.”
Authors
Giulio Nardella Associate Professor of Sustainability & Global Strategy at ESCP Business School (London campus)
Irina Surdu Reader of International Business Strategy at Warwick Business School
Stephen Brammer Dean of the School of Management at the University of BathCampuses