Corporate social responsibility (CSR) has been widely embraced. However many examples of corporate irresponsibility like the Volkswagen emissions scandal, the Rana Plaza factory collapse and the opioid crisis demonstrate that business misbehaviour remains widespread. Giulio Nardella, Irina Surdu and Stephen Brammer write that in certain circumstances, the reputational risk of fallout from corporate misconduct is much lower. More nuanced home market policies are needed to help deter multinational enterprises from behaving irresponsibly abroad.

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 the retail industry’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 multinationals’ reputations 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, and multinational corporations must 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 our research suggests. In our recent paper (open access), we point out that CSI can be perceived subjectively, and thus, corporate reputations can become influenced by various stakeholder biases.

At home versus abroad

Specifically, we 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, which implies that internationally-located CSI events may be penalised less severely than CSI events located at home, or not penalised at all.

To examine the nature of the relationship between CSI location and multinationals’ reputation, we focused on the media disclosure of CSI and tested our hypotheses on a sample of 2,401 CSI events involving 465 US-based MNEs (multinational enterprises) over seven years in three geographical and cultural circles: the US market, Western host markets, and non-Western, international markets.

We 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 irresponsibility in a non-Western market. CSI associated with the global value chains of MNEs in many non-Western countries, including instances of use of discriminatory business practices, child labour and undermining of employees’ rights, are all relevant examples of CSI that repeatedly impacts foreign markets with potentially limited reputational consequences for MNEs.

In other terms, the answer to the question in our 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 publicised in the media. Simply, their effects do not resonate as strongly from afar.

Ethnocentric biases and 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, rather than elsewhere in international host markets. Simply put, people tend to give preference to their in-group(s), individuals with similar value systems, experiences, beliefs and goals. That is why stakeholders are more likely to respond 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.

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, and this amplifies the ethnocentric bias. Conversely, when located in a very foreign setting, without shared rules and values, efficient judgments about the inappropriateness or illegitimacy of MNE behaviour are further reduced.

What managers and policymakers need to do

These findings are particularly relevant for managers wishing to better understand the risks posed by corporate social irresponsibility: if practiced in a distant host country location, the negative impact on reputation will be lesser. Yet, 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 unpenalised, 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 spillover of their activities. Although, such effects from CSI may be location-contingent.

Finally, from a policy perspective, our study clearly shows the limits of corporate reputation as a supposed informal enforcement mechanism to deter multinational enterprises from behaving irresponsibly. Relying on stakeholders of “the market” to police misconduct simply falls short. Instead, more nuanced (home market) policies will help to deter MNEs from engaging in CSI where differences between institutional legitimacy expectations and (potentially) voids can minimise the downside risks of CSI for MNEs.

• This blog post is based on “What happens abroad, stays abroad? Exploring how corporate social irresponsibility in domestic and international markets influences corporate reputation“, Journal of World Business.
• The post represents the views of its author(s), not the position of LSE Business Review or the London School of Economics.
• Featured image provided by Shutterstock
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