The international organization of production in the regulatory void

Abstract

In recent decades, many leading firms in a diverse set of industries have faced consumer boycotts and NGO campaigns based on allegations of ‘unethical’ practices along their international value chains. The large number of campaigns triggered by actions of independent suppliers points at a link between (un)ethical practices and the organization of production. We construct a measure of potential cost savings of unethical production at the industry-country level and show that it indeed correlates positively with international outsourcing rather than integration. To rationalize our finding and to investigate the issue further, we introduce a cost-saving ‘unethical’ technology and consumer boycotts into a standard property-rights model of the international organization of production. In equilibrium, the supplier's (un)ethical technology choice interacts with the headquarter's novel unethical outsourcing incentive. In line with our empirical findings, we show that the headquarter tends to keep an unethical supplier at arm's length.