Is there a liability of foreignness or foreign privilege in developing nation compliance monitoring?

Abstract

PurposeDrawing on the international business and game theory literature, this study assesses foreign firm treatment in the early stages of regulatory enforcement.Design/methodology/approachTreating regulation intensity as an exposure variable, negative binomial regression models were applied to firm-level data from 32 emerging markets (n = 15,331) to identify the determinants of inspection interactions. Robustness checks also were performed via variable substitutions for several predictors and an alternative form of statistical testing (i.e. Tobit regression, since it arguably better addresses dependent variables with corner solution responses).FindingsControlling for multiple organizational, regulatory and national characteristics, the findings are consistent with a foreign privilege, manifesting in reduced vulnerability to multiple encounters with labor inspection officials. Moreover, inward FDI stock was negatively related to the general probability of repeat interactions regardless of locus of ownership, an effect that was not moderated by stage of development or the regulatory influence of host interest groups. This collectively suggests that foreign firms not only are favored in compliance monitoring but also work post-entry to influence agencies to generally benefit business.Research limitations/implicationsMore comprehensive assessments were precluded given the lack of information on reasons for contact, citations and fines, and inspectorate reactions to company responses. Second, enforcement-risk management was measured indirectly since investors' internal dealings and actions toward officials are unavailable in secondary sources.Practical implicationsThese findings have important implications for social responsibility, suggesting CSR stakeholders need to track enforcement more closely and exert pressure where needed so rights are not sacrificed for economic development.Originality/valueThis study provides the most rigorous assessment to date of the role that firm, government and economic factors play in national inspection targeting. It also examined whether foreign owners pool and leverage their political influence to impact general inspection activity, a previously untested prospect.