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When cheap production leads to expensive image loss – in a DFG project, economists at the University of Passau are designing theoretical models that factor in the risk of international NGO campaigns and testing them with the aid of the latest data. The question of how enterprises deal with the risk of protest campaigns along their international value chains has hardly been investigated at all in economics
As a prominent example, Professor Sebastian Krautheim, holder of the Chair of International Economics at the University of Passau, cites the anti-sweatshop campaign against the sports equipment manufacturer Nike in 1998: "That was one of the first cases in which a major concern failed with its strategy of sweepingly disowning responsibility for the actions of independent suppliers in its international value chain." The international calls for a boycott by various non-government organisations (NGOs) against working conditions at Nike's Indonesian supply businesses led to major setbacks: Nike's stock market value dropped by 20 per cent, and its profit for the year by 49 per cent.
Multinational companies bear this risk when they shift their production to countries with a low level of government regulation. In the DFG project entitled 'Global Production and its Watchdogs: Firms and NGOs in a Regulatory Vacuum', a research team at the University of Passau led by Professor Krautheim has been developing theoretical models which, as well as trade flows, can also depict the campaigns of internationally active NGOs. The team tests the predictions made by the models with the aid of the latest data on international NGO activity.
"So far, the question of how enterprises deal with the risk of protest campaigns along their international value chains has hardly been investigated at all in economics", says Professor Krautheim. He says that research is done on this in neighbouring disciplines, for example political science or sociology, but not with the tools used or questions raised in economics, which employs formalised mathematical models and, based on those, the econometric analysis of large datasets.
Krautheim and his team aim to close this gap. Also involved in the project is a team from the Paris School of Economics which has access to a database of the private consultancy SIGWATCH. SIGWATCH analyses NGO activities and advises other enterprises on the risk of campaigns. At present, the database covers campaigns against 12,855 enterprises in 182 countries over a period of nine years.
Working with that database, the team led by Professor Krautheim is investigating the following questions:
• How do firms organise their international production when they can save costs by evading regulation on the one hand, but could, on the other, become the target of NGO campaigns?
• In which countries have there been NGO campaigns against decisions made by internationally active firms, and can geographical patterns be derived from that?
The economists are particularly interested in interactions between three countries in the equation: the country in which the enterprise has its headquarters, the country in which the NGO has its headquarters, and the country in which the event or circumstance that triggered the campaign came about.
"In our preliminary work, we have been able to show that the variables which influence the international flow of goods and services also determine the geographical patterns of NGO campaigns", says Professor Krautheim. "Our analysis starts from the hypothesis that by internationalising their value chains, firms also induce an internationalisation of NGO activities. We aim to gain a better understanding of how that happens and what consequences it has for trade flows and international value chains."
The German Research Foundation (DFG) is funding the project for a three-year period.
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