A factory where institutions are weak: what do you owe beyond the law?

A mid-sized garment company in Dong Nai (hypothetical; I am not describing a real firm) has just won a large order from a European brand. It is invited to open a second plant in a neighbouring country with cheap land and tax breaks. That country's labour law sets limits on hours and has fire rules, but inspectors almost never reach the industrial zone. The managing director asks: if nobody enforces the law, what does compliance mean, and what else do we owe, and to whom?

What does Hsieh ask, and what can I say about it?

Hsieh asks a closely related question of multinational enterprises, in a 2009 article in Business Ethics Quarterly that draws on John Rawls's framework in The Law of Peoples. The abstract says four things: multinationals have a responsibility to promote well-ordered social and political institutions in host countries that lack them; the responsibility rests on a negative duty not to cause harm; the paper answers the objection that doing so is unjustified interference; and it offers guidance for managers operating in such countries. It concludes that corporate responsibility should be understood in relation to the specific institutional environment where a firm operates (Hsieh, 2009).

That is all I could read of the paper itself. The full text is behind a paywall and I found no open copy, so what each guideline means below is my inference.

Is complying with local law enough where institutions are weak?

No, because the word "compliance" changes meaning. Where institutions are strong it is a measure someone checks. Where inspectors do not come it can be a company's own statement. Vogel describes a related gap from the market side: "civil regulation", such as consumer boycotts and pressure from non-governmental organisations (Vogel, 2005, p. 3), arose to fill the governance gap between the law and the market, and it is a "soft" form of regulation that sets no legally enforceable standards (Vogel, 2005, p. 9).

Hsieh starts from a different place. According to the abstract, the responsibility rests on a negative duty not to cause harm (Hsieh, 2009). For the hypothetical plant the question becomes: what harm will our plant cause, and where will no institution stop it? If double shifts are the only way to meet the order and nobody checks working hours, our own order creates the pressure. This is my application, not something I can show Hsieh discusses.

What are the four guidelines, and how do they apply to a hypothetical plant?

The site's framework Four guidelines where institutions are weak lists four guidelines, with Hsieh (2009) and Vogel (2005) as its origin.

The two right-hand columns of the table are my reading of each step applied to the hypothetical plant. They are not Hsieh's words.

Two points deserve a closer look. First, guideline 3 says "aimed at the lowest earners", so the question is not how far above the minimum wage the plant pays but who gets the training. Second, in my reading guideline 1 comes first because Vogel notes that some firms undermined the welfare of poor families, and of poor children in particular, by attempting to prohibit child labour (Vogel, 2005, p. 5). My own takeaway: a good rule applied to an environment you have not understood can do harm.

Can voluntary CSR replace institutions?

Not entirely, according to Vogel. He defines CSR as practices that go beyond what companies are legally required to do (Vogel, 2005, p. 2), then says plainly that because it is voluntary and market-driven, firms will do it only to the extent it makes business sense. Unlike government regulation, it cannot force companies to make unprofitable but socially beneficial decisions, and in most cases it makes business sense only if the costs of more virtuous behaviour stay modest (Vogel, 2005, p. 4). It also struggles with opportunistic behaviour such as free riding, which undermines self-regulation (Vogel, 2005, p. 4).

He does not dismiss it. Civil regulation is a "second-best alternative" when public authority cannot be expanded (Vogel, 2005, p. 9). Where he outlines the plan of the book, he says that for civil regulation to have more impact public regulation must also be strengthened, and that the scope of CSR should include business's role in shaping public policy (Vogel, 2005, p. 15).

The example is Nike. He opens the book with Nike and other American and European firms monitoring working conditions in supplier factories in developing countries (Vogel, 2005, p. 1), and notes that the boycotts aimed at Nike and Shell in the 1990s had a precedent in the protests against Dow Chemical around 1970 (Vogel, 2005, p. 6). The site's Nike case entry says Vogel uses Nike to show how narrow the market for virtue is; I could not confirm that in the sample chapter. What I can confirm, on pages 14 and 15, is that the business case is strongest for firms that have made CSR part of their strategy and for highly visible global firms targeted by activists, and that most firms fall into neither group (Vogel, 2005, pp. 14-15).

For the hypothetical plant, that turns the problem round. Nike is watched closely and so has a reason to keep to its standard. A mid-sized firm in a remote industrial zone is noticed less, so its internal standard (guideline 2) has to hold when nobody is looking. That is my inference from Vogel, not something he writes. The post on cheap garment factories: keep or cut takes up the other side of the chain: when you are only the buyer and the workers say they want the jobs.

How cautious should you be about taking part in another country's institutions?

This is the guideline I understand least. The abstract says the paper answers the objection of unjustified interference (Hsieh, 2009), but I have not read the answer, and the framework offers only the word "cautiously". So I propose only limits I am confident I can defend:

• Help existing law get enforced: let inspectors in, file the reports, follow the permit procedure.
• Say publicly what you do, to workers, the industry association and the buying brand.
• Seek no exemption from a rule to undercut competitors, and pay no off-the-books "fee" to speed up paperwork.

These limits are mine; Hsieh may draw them wider or narrower. The two authors also do not ask the same question: Hsieh asks what responsibility a firm has, Vogel asks what voluntary CSR can and cannot do, even though the framework lists both as origin.

Does it apply to a small business?

It fits if you own or run the plant and people work there under your name: guidelines 1 and 2 apply at once. It fits only in part, or not at all, if you take a few per cent of a partner factory's capacity. You will struggle to ask that factory to train line managers or run classes for workers, and guidelines 3 and 4 go beyond what your orders can influence. In that case the keep-or-cut question in the earlier post is closer to your situation.

Both of those are my judgement: Hsieh's abstract concerns multinational enterprises, and I found no source on small firms specifically (Hsieh, 2009). The post also does not cover Vietnamese rules on investing abroad.

Going deeper: what did I read, and what did I not?

Hsieh (2009): I read only the abstract, taken from the article's Crossref record; there is no open full text. Every sentence about "what Hsieh says" rests on the abstract, and the content of the four guidelines is my application of the four headings, the question and the "pitfalls" note in the site's framework. I do not know how he defines "well-ordered", beyond the fact that he draws on Rawls, nor how he answers the interference objection.

Vogel (2005): I read chapter 1 (pages 1 to 15) in Brookings's public sample, not the later chapters. What I attribute to him on pages 14 and 15 is his own summary of the argument of later chapters, not an analysis I checked. Chapter 1 does not analyse Nike on its own.

I read the framework corporate-duty-to-just-institutions and the Nike case entry in the site's published versions. The garment firm, the host country, the application table and the list of limits are mine and only illustrate.