The Effect of Institutional Distance on Human
Rights Violations by Multinational Enterprises
MSc Thesis International Management
Final Version
June 30, 2014
By: Mariëlle Plasmeijer
10664068
MSc Business Studies: International Management Track
University of Amsterdam
First Supervisor: Michelle Westermann-Behaylo
Second Supervisor: Lori DiVito
Table of Contents
Abstract ...................................................................................................................................... 2
Introduction ................................................................................................................................ 3
Literature Review ....................................................................................................................... 8
Business and Human Rights ................................................................................................... 8
Institutional Distance ............................................................................................................ 11
Labor Violations ................................................................................................................... 16
Environmental Violations ..................................................................................................... 20
Hypotheses............................................................................................................................ 22
Hypotheses and Research Model Labor Violations .......................................................... 24
Hypothesis and Research Model Environmental Violations ............................................ 25
Methodology ............................................................................................................................ 27
Data ....................................................................................................................................... 27
Human Rights Violations .................................................................................................. 27
Institutional Distance ........................................................................................................ 28
Dependent Variables ............................................................................................................. 29
Labor Human Rights Violations ....................................................................................... 29
Environmental Human Rights Violations ......................................................................... 31
Independent Variables .......................................................................................................... 32
Labor Institutional Distance .............................................................................................. 32
Environmental Institutional Distance................................................................................ 32
Control Variable ................................................................................................................... 32
Results ...................................................................................................................................... 33
Labor Results ........................................................................................................................ 33
Environment Results............................................................................................................. 35
Discussion ................................................................................................................................ 37
Conclusion ................................................................................................................................ 44
References ................................................................................................................................ 45
Appendices ............................................................................................................................... 53
1
Abstract
The protection of human rights is recently not only seen as a responsibility of states but also
of corporations. Due diligence is an important concept related to human rights violations by
multinational enterprises (MNEs) to asses and minimize the risks for companies to violate
human rights. Due diligence is especially relevant for MNEs and their foreign operations. In
this study the relationship between human rights violations and institutional distance is
investigated. Institutional enterprise. This concept can be used to explain the behavior of
MNEs. This study focuses on two types of human rights violations: labor and environmental.
The corporations and human rights database (CHRD) database was used to collect data
concerning human rights violations. This is a new database that collects data about this
difficult subject in a as systematic as possible way as far as this is possible given the
constraints inherent in doing any data collection regarding this subject. I am also helping to
further develop this database. The relationship between institutional distance and human
rights violations by MNEs is tested by using a logistic regression analysis. The results support
my hypothesis that labor unions institutional distance affects labor human rights violations by
MNEs. This study is a contribution to both the international management literature as well as
the business and human rights literature because it is the first time institutional distance is
linked to human rights violations by MNEs.
Key words: multinational enterprises, human rights violations, institutional distance, labor,
environment
2
Introduction
Privatization and globalization have given Multinational Enterprises (MNEs) unprecedented
access to new regions all over the world. Last decades the amount of MNEs increased
significantly (Huijstee, Ricco, & Ceresna-Chaturvedi, L, 2012). The societal impact of these
MNEs can be positive as well as negative. They can spread human rights, democracy, and
new technologies (Shah, 2002) and, they also contribute to economic development of
countries and increase employment opportunities (Huijstee et al, 2012). However, MNEs are
also involved in human rights violations too often (Aaronson & Higham, 2013; Huijstee et al.,
2012).
A lot of MNEs are developing codes of conduct incorporating human rights. Society at
large also pays more and more attention to human rights violations (Aaronson & Higham,
2013; Lim & Tsutsui, 2012). But MNEs are still involved in human rights violations way too
often (Aaronson & Higham, 2013; Huijstee et al., 2012; Lozano & Prandi, 2005; Ruggie,
2008; Ruggie, 2013). They drive indigenous people away from their lands, pollute the
environment where whole communities depend on, destroy ecosystems, contribute to poor
working conditions or operate in countries where governments do not respect human rights
(Aaronson & Higham, 2013; Huijstee et al., 2012; Lozano & Prandi, 2005).
The protection of human rights often implies higher costs for companies. This is why
many of them are induced in violating these rights. For example, worker’s wages and working
conditions are reduced because they are such a major part of a company’s costs (Shaw, 2002).
More and more people are asking attention for human rights violations because of the
growing amount of non-governmental organizations (NGOs) asking attention for it and the
spread of information via the internet (Shah, 2002). In July 2005 the United Nations declared
John Ruggie the Special Representative of the Secretary-General on the issue of human rights,
and transnational corporations and other business enterprises. In 2008 John Ruggie published
3
its ‘Protect, Respect, and Remedy’ framework (Ruggie, 2008). The framework stresses the
duties and responsibilities of states and multinational enterprises in the protection of human
rights. In 2011 Ruggie published the Guiding Principles which are a description of how the
framework could be implemented (Huijstee et al., 2012).
Important for MNEs is due diligence. This is defined as follows: “in order to identify,
prevent, mitigate and account for how they address their human rights impacts, business
enterprises should carry out human rights due diligence. The process should include assessing
actual and potential human rights impacts, integrating and acting upon the findings, tracking
responses, and communicating how impacts are addressed” (UNHRC, 2011, p. 16).
According to Ruggie (2008) business is important as a source for investment and for
job creations. Markets are important to allocate scarce resources. Business and markets are
able to reduce poverty, generate economic growth, increase demand for the rule of law, and
thereby they contribute ‘to the realization of a broad spectrum of human rights. But markets
work optimally only if they are embedded within rules, customs, and institutions’ (Ruggie,
2008).
Institutions play a central role within the international business (IB) field (Xu &
Shenkar, 2002). Ruggie (2008) also stated that institutions are important in relation to
business and human rights. Therefore institutional theory could offer an explanation for
human rights violations by MNEs.
An important concept within this theory is the concept of institutional distance.
Institutional distance is the distance caused by difference in institutions between two countries
(Kostova, 1996). Institutional distance can be used to explain some kinds of MNE behavior
(Xu & Shenkar, 2002). For human rights violations by MNEs is also a type of MNE behavior,
institutional distance can possibly be used to explain these violations.
4
Investigating human rights violations by MNEs could be an interesting topic for the IB
field since MNEs are too often involved in those violations (Ruggie, 2013). Moreover due
diligence asks for more understanding of the risk factors involved in human rights violations
by MNEs. This study expects that there is a relationship between human rights violations and
institutional distance because the concept of institutional distance is developed to explain
MNE behavior caused by cross-country differences between the host and the home countries
of MNEs (Xu & Shenkar, 2002). The question this study aims to answer is what is the
relationship between institutional distance and human rights violations by MNEs?
Even though, the attention for business and human rights increased significantly, little
empirical research has been conducted in the IB field related to corporate human rights
violations. Due to increased attention by society, governments and companies to this topic
that there is a need to use IB related theories to explain these human rights violations by
MNEs. The IB field has an important role to play because corporate human right violations
often take place in host countries where MNEs operate (Aaronson & Higham, 2013).
Institutional distance is regularly used in the IB field, however no previous study has
investigated the relationship between human rights violations by MNEs and institutional
distance. This study will make a contribution to the IB literature by investigating this
relationship.
There are different types of human rights. You have, for example labor,
environmental, and health human rights. The two other types of human rights relate to poverty
and development. This study focuses on labor and environmental human rights.
There are different stories out there about environment and labor violations. A few
years ago a lawsuit against Shell was started because of the environmental damage Shell
caused by their oil spills (Akinbobola, 2014). Oil spills can cause environmental devastation
and poverty (OilChange International, n.d.). A healthy, clean, safe, and sustainable
5
environment is important for human beings because only then they can fully enjoy human
rights such as the rights to life, health, food, water, and sanitation ( United Nations Human
Rights, n.d.).
Another story about a MNE violating human rights is about the work conditions
within clothing factories of companies such as H&M. Girls from poor, rural families were
told by recruiters that they would earn a good salary, instead they had to work for a salary
much lower than promised, moreover the conditions they had to work under were very bad
(Liebelson, 2014). Human rights related to labor as described in the International Bill of
Human Rights are the right of a fair wage, and safe and healthy working conditions.
To measure the relationship between institutional distance and labor human rights
violations by MNEs a sample of 56 MNEs operating in the apparel, clothing, and textiles
industry is used. Labor unions and national laws and regulations are the institutions used to
determine institutional distance. The relationship between labor unions distance and labor
human rights violations by MNEs and the relationship between laws and regulations distance
is tested using a logistic regression analysis. The results showed that when the labor unions
distance between the host country and the home country is high the probability a MNE
violates labor human rights is bigger. Evidence in this study did not support a relationship
between national laws and regulations and human rights violations. However, this result only
applies to the data gathered for this study.
To measure the influence of institutional distance on environmental human rights a
sample of 54 MNEs operating in the Oil, Gas, and Coal industry is used. The Environmental
Performance Index (EPI) is used to compute environmental institutional distance. The
Environmental Performance Index is used because it includes a lot of environmental
institutions. Unfortunately the results did not show a relationship between environmental
distance and human rights violations. However, this result could be a consequence of EPI
6
being used to collect data regarding environmental institutional distance. If individual
institutions were used to compute institutional distance the results could have been different.
In the next section will describe the relevance of investigating institutional distance
related to corporate human right violations by integrating the literature concerning corporate
human right violations and institutional distance.
7
Literature Review
Business and Human Rights
The issue of business and human rights appeared on the global policy agenda in 1990. The
reason for its appearance was the huge expansion of the economic sector worldwide
(UNHRC, 2011). More and more high-profile public figures asked attention for the issue of
business and human rights in the years that followed. Mary Robinsson, the former United
Nations High Commissioner for Human Rights, was one of them. She recognized business’
responsibility in protecting human rights (Arkani & Theobald, 2005). ‘Business decisions can
profoundly affect the dignity and rights of individuals and communities’ (Robinson, 1998 in
Arkani & Theobald, 2005). Also NGOs are progressively profound to proof the responsibility
of business to respect human rights. Business itself is showing an increased interest for the
issue of human rights as well. (Arkani & Theobald, 2005).
A few years ago some principles were developed to integrate human rights in
corporate behavior. These Guiding Principles on Business and Human Rights were developed
by Professor John Ruggie, the UN Secretary-General’s Special Representative for Business
and Human Rights. They form an initiative to link states, businesses, NGOs and other
stakeholders to reach consensus on human rights and how they should be respected. The
Guiding Principles got approved in 2011 (UNHRC, 2011).
The Guiding Principles are based on the ‘Protect, Respect, and Remedy’ framework
developed by the same professor. The framework states the duties and responsibilities of both,
states and companies, in how to handle corporate human-right violations (Ruggie, 2008,
UNHRC, 2011). The Guiding Principles are more concrete and practical recommendations on
how to implement this framework (UNHRC, 2011). The ‘Protect, Respect, and Remedy’
framework can help states, companies and civil society in general to reduce human rights
violations (Ruggie, 2008).
8
The ‘Protect, Respect and Remedy’ framework is based on three pillars. The first pillar
describes the duty of national states to protect human rights by involving corporations and
other kinds of businesses. The second pillar describes the duty of corporations to respect all
human rights. The last pillar describes the access to judicial and non-judicial remedies for
victims of human rights violations (UNHRC, 2011).
Since the publication of the Guiding Principles more and more international actors
recognize that states have to ensure corporations respect human rights. The Guiding Principles
helped to link the international human rights obligations of governments to voluntary actions
by corporations. All members of the OECD and some other countries such as Argentina,
Brazil, Egypt and Morocco recommended the guidelines to corporations. The statement they
wanted to make by doing this is that all companies should respect human rights in every
country they operate. These initiatives from the different government are mainly voluntary
(Aaronson & Higham, 2013).
The responsibility to respect human rights is increasingly seen as a responsibility of
business and not solely as the responsibility of states (Lozano & Prandi, 2005; UNHRC,
2011). The Guiding Principles is one of the initiatives that establishes a obligation for
business to protect and respect human rights violations. The responsibility of MNEs to protect
human rights is often placed under the umbrella of corporate social responsibility (CSR)
(Lozano & Prani, 2005; Moir, 2001).
The responsibility of MNEs to respect human rights includes that MNEs try to avoid
causing or contributing to human rights violations with their own activities. If a MNE is still
involved in a human rights violation it should address this. The responsibility to respect
human rights applies to MNEs of all size, small- and medium-sized MNEs can be involved in
severe human rights violations as much as large MNEs (UNHRC, 2011).
9
The responsibility of MNEs to respect human rights applies to all internationally
recognized human rights. The International Bill of Human Rights lists internationally
recognized human rights. Some of these human rights may be more at risk than others in
particular environments and therefore require more attention of business (UNHRC, 2011).
An important concept that is related to the responsibility of MNEs to respect human
rights is that of due diligence. “In order to identify, prevent, mitigate and account for how
they address their human rights impacts, business enterprises should carry out human rights
due diligence. The process should include assessing actual and potential human rights
impacts, integrating and acting upon the findings, tracking responses, and communicating
how impacts are addressed” (UNHRC, 2011, p. 16). Due diligence is more than just an
assessment of risks for the MNE. Human rights due diligence can be included within broader
enterprise risk-management and should go further than just identifying managing material
risks for the company itself. A MNE should conduct due diligence across its entire supply
chain as well (UNHRC,2011). The concept of due diligence asks for more research to the risk
factors related to potential human rights factors.
The respect for human rights varies among countries and MNEs. For example,
Canadian and US firms feel responsible for a smaller range of human rights than European
firms. Aaronson and Higham (2013) also found significant variation in human rights policies
and compliance between MNEs from different countries. European MNEs are more likely to
have human rights policies than MNEs from other continents. These differences may be
caused by differences, among others, culture (Aaronson & Higham, 2013).
Countries differ in the degree in which they are concerned about human rights
violations. Countries such as India and China seems much less concerned with human rights
violations caused by Indian or Chinese MNEs in host countries. Countries such as Brazil,
South-Africa and China do not feel comfortable to intervene in affairs about human rights
10
violations that took place in other states (Aaronson & Higham, 2013). Sometimes countries,
especially developing countries, lack institutional capacity to enforce national laws and
regulations against MNEs. The home countries of MNEs may be reluctant to regulate
activities of MNEs outside their respective home countries. Home countries are concerned
that a MNE is going to move its headquarters to another country if they regulate overseas
activities (Ruggie, 2008).
The introduction of this study states the focus of this research will be institutions,
more specifically on institutional distance. The Guiding Principles showed the role of global
institutions, such as the United Nations (UN), on social responsible behavior of MNEs.
Ruggie stated the role of national institutions in his ‘Protect, Respect, and Remedy’
framework. The economic sector can only function optimally if it is ‘embedded by rules,
customs and institutions’ (Ruggie, 2008). Due to the role of institutions being regularly
stressed in literature on business and human rights, and also in the IB-field, this study expects
that institutional distance can offer an explanation for human rights violations by MNEs. In
the following section the concept of institutional distance will be described.
Institutional Distance
The UN is a good example of an international institution that tries to reduce human rights
violations by MNEs. However, protection of human rights is also needed at the national level.
The international institutional environment, where the UN is part of, increasingly recognizes
the importance of these national institutions (Reif, 2000).
This section provides an overview of the institutional theory and the concept of
institutional distance. North (1991) described institutions as “the humanly devised constraints
that structure political, economic and social interaction. These constraints consist of both
informal constraints (sanctions, taboos, customs, traditions, and codes of conduct), and formal
rules (constitutions, laws, property rights)” (North, 1991, p. 97).
11
As may be clear from the citation above North (1991) divides the institutional
environment in informal institutions and formal institutions. Different scholars have used the
distinction between formal and informal institutions in their research (Aguilera-Caracuel,
Hurtado-Torres, Aragón-Correa & Rugman, 2013; Majid & Preet, 2012; North, 1991). Formal
institutions are formal rules such as constitutions, property rights and laws (Majid & Preet,
2012; North, 1991). According to Majid & Preet (2012) formal institutions should “establish
the rules of exchange and regulate the behavior of business partners”(Majid & Preet, 2012, p.
480).
Informal institutions on the other hand are constraints such as traditions, sanctions and
codes of conduct (North, 1991). Some scholars mention cultural institutions when they refer
to informal institutions (Salomon & Wu, 2012 in Aguilera-Caracuel et al., 2013). According
to North (1991) informal institutions come into play when formal institutions fail.
Scott (1995), took it a little bit further, he argued the institutional environment can be
divided into three pillars: the regulatory pillar, the cognitive pillar and the normative pillar.
The regulatory pillar exist of the rules and regulations of a country (Scott, 1995). The
institutions belonging to this pillar ensures stability and order in states. MNEs have to comply
with the rules and regulations of a country to gain legitimacy. When a MNE is operating in a
country for a longer period it has the power to influence the rules and regulations (Kostova &
Zaheer, 1999)
The cognitive pillar represents the cognitive structures in a country, this are the
informal constraints that are taken for granted by the citizens of a country (Scott, 1995). The
cognitive institutions represent the way in which citizens notice, categorize, and interpret the
different stimuli coming from their environment (Kostova, 1999; Scott, 1995).
12
The normative part of the institutional environment goes beyond the regulatory and
cognitive part of this environment. It represents the norms and values held by the citizens of a
country (Kostova, 1999; Kostova & Zaheer, 1999; Scott, 1995).
Besides the distinction of institutions into regulative, cognitive, and normative or in
formal and informal institutions one can find many other types of institutions in the literature,
for example, economic institutions (Du, Lu & Tao, 2011), and labor-market institutions
(Appelbaum & Schmitt, 2009).
Economic institutions are institutions that “ensure the smooth operation of a market
economy such as contract enforcement, property rights protection government efficiency and
government intervention in business operations" (Du et al., 2011 p. 2010), while labor market
institutions influence how companies deal with employment choices and how they make
decisions regarding the organization of production (Appelbaum & Schmitt, 2009 p. 1910).
Examples of national institutions that are important in the protection of human rights
are strong national laws and regulations, a strong national army that is able to protect human
rights, and NGOs that are working for the respect of human rights (Reif, 2000). For labor
human rights violations laws and regulations seem to be important (Akorsu&Cooke, 2011;
Arat, 2002; Björkman et al, 2007; Black, 1999). Another example of an important institution
at the national level are labor unions. Labor unions could be important in the protection of
labor human rights.
For the protection of environmental human rights the environmental institutions are
important. The Environmental Performance Index (EPI) is a good index, it measures the
environmental institutional profile of a country(Aguilera-Caracuel et al., 2013). In the
method section this index will be described further.
Because countries develop their own kind of institutions MNEs have to deal with
different institutions in every country they operate in (Kostova & Zaheer, 1999). This is why,
13
the concept of institutional distance is developed by Kostova (1996). Institutional distance is
an important aspect of institutional theory. It is the difference between the institutions of the
home and the host country (Kostova, 1996). Institutional distance can provide an explanation
of MNE behavior (Xu & Shenkar, 2002).
MNEs face multiple country institutional environments, by using the concept of
institutional distance it is possible to capture the cross-country differences between the
institutional environments in which an MNE operates (Kostova & Zaheer, 1999; Xu &
Shenkar, 2002). Countries have different institutional environments (Kostova, 1996; Kostova
and Zaheer, 1999; Xu & Shenkar, 2002) because institutions are affected by the social cultural
environments in which they were developed and used (Kostova and Zaheer, 1999). The social
cultural environment can be characterized by its country institutional profile (CIP) as defined
by Kostova (1996). CIP is a three-dimensional construct existing of regulatory, cognitive, and
normative institutions (Kostova, 1996). For example laws and regulations are country specific
because they are formed by national governments and so are the outcome of political
processes. Other types of institutions are formed through the educational system and through
social interaction within national borders (Kostova and Zaheer, 1999).
In earlier literature the ‘Kogut and Singh’ formula on cultural distance based on
Hofstede’s dimensions of culture, was widely used to capture the cross-country differences
(Xu & Shenkar, 2002). Hofstede divides culture into five dimensions. Power distance,
individualism versus collectivism, masculinity versus feminity, uncertainty avoidance, and
long term versus short term orientation (Hofstede, 1995). An extensive description of the five
dimensions is out of the scope of this study.
According to Xu and Shenkar (2002) the ‘Kogut and Singh’ formula ignores the role
of institutions and therefore does not capture the complexity of cross-country differences.
That is why they chose to use the concept of institutional distance in relation to MNE strategy.
14
They specifically focused on host country selection and foreign entry strategy. They stated
that cultural distance and institutional distance are concepts that complement each other.
Neither of the two concepts captures the full set of differences between countries (Xu &
Shenkar, 2002).
Earlier literature, used the concept of institutional distance to explain legitimacy of a
MNE in its host country (Kostova and Zaheer, 1999) and to explain the transfer of
organizational practices from the parent company to the foreign subsidiary (Kostova, 1999).
Following the studies mentioned above institutional distance was regularly used as a
research variable in the IB field. For example, Aguilera-Caracuel et al. (2013) use the concept
of institutional distance to see what the impact is on different strategies of MNEs. They
conclude that the similarity or dissimilarity of the institutional environments of a host and a
home country influences the strategic decisions of a MNE (Aguilera-Caracuel et al., 2013).
There are different studies that link institutions and institutional distance to foreign
direct investment (FDI) (Aleksynska & Havrylchik, 2012; Bénassy-Quéré, Coupet & Mayer,
2007; Dang, 2013; Du et al., 2012;). A few studies show that MNEs are tended to enter
countries with similar institutions. So a MNE from a country with strong institutions does
prefer to enter a country with strong institutions as well. The same applies the other way
around, so MNEs from countries with weak institutions invest in countries with weak
institutions (Aleksynska & Havrylchik, 2012; Bénassy-Quére et al., 2007).
Bénassy-Quére et al. (2007) use a regression analysis to measure the impact of
institutional distance on FDI. Their results show that institutional distance always has a
negative impact on FDI. This result indicates that institutional distance is more important than
the quality of institutions. (Bénassy-Quére et al., 2007). However, Aleksyhnska &
Havrylchyk (2012) show by using a gravity equation that institutional distance can actually be
a driving force of FDI. Especially MNEs from countries with weak institutions do prefer high
15
institutional distance. Because for those MNEs it can be of great advantage to invest in
countries with strong institutions.
Other studies in the IB-field investigated the relationship between institutions or
institutional distance and the mode of entry (Ando, 2012; Lu, 2002; Xu, Pan & Beamish,
2004). When institutional distance between the home and host country of a MNE is high nonequity entry-modes are preferred. One explanation for the existence of this relationship is that
high institutional distance increases uncertainty (Ando, 2012; Xu et al., 2004). Ando (2012)
found that international experience of the MNE moderates the relationship between
institutional distance and the choice of entry-mode. MNEs with more international experience
do more often choose an equity entry-mode.
Dhams (2014) investigated the effect of formal and informal institutional distance on
how integrated a subsidiary is in the transactional network of a MNE. They found that
subsidiaries that are located in countries at a greater institutional distance are less integrated
into the transaction network of the MNE.
Greater institutional distance influences the mode-of-entry choice of MNEs. The
greater the distance the more likely a MNE is to choose a non-equity mode of entry (Xu &
Shenkar, 2002). Yiu & Makino (2002) found that the greater the institutional distance the
more likely it is that a MNE chooses a joint venture over a wholly owned subsidiary. In
another study Aguilera-Caracuel et al. (2013) found that greater institutional distance leads to
lower environmental performance standardization within the MNE.
Labor Violations
MNE activities are regularly associated with negative social and environmental spillovers
especially in developing countries. Some of these negative spillovers are labor violations
such as child labor, exploitation of workers, extensive working hours, poor health and safety
working conditions. An example of a negative environmental spillover by MNE activities is
16
environmental pollution (Akorsu & Cooke, 2011). In the next section the focus will be on
these environmental violations by MNEs, in this section the focus will be on the labor
violations.
An example of a MNE that is accused of violating labor human rights is Topshop. Sri
Lankan, Indian, and Bangladeshi workers were recruited in their home-countries by selfemployed agents for a job in Mauritius. They had to pay the recruiters 725Britisch pounds to
get the job. Once they arrived in Mauritius they had to work up to 12 hours a day for 6 days a
week. They received a salary between 20 and 40 pounds, which is 40% below the local
minimum (Newell & Winnett, 2007).
Another case that involves labor violations by MNEs concerns a group of over 100
companies , among them many MNEs such as Adidas, le Coq Sportif and FILA, that are
hiring workshops in Argentina to produce clothes that keep their workers in bonded
conditions. Bonded labor means the workers have to work long hours, often 7 days a week
for little or no pay. Most of the workers are from Bolivian origin. Many very similar stories
can be found on the internet and in news papers regarding labor rights violations by MNEs
(Adital, 2007).
It has been argued that host countries, especially developing countries, are
experiencing different advantages of the activities of MNEs since they create jobs, capital
and technology. Also in the international human resource management (IHRM) literature it
has been argued that MNEs influence good human resource practices despite institutional and
cultural challenges. However, Due to intensified competition caused by globalization MNEs
try to reduce labour costs with as a consequence that workers are getting paid way below the
minimum level and often have to work under unsafe conditions (Akorsu & Cooke, 2011;
Appelbaum & Schmitt, 2009).
17
Examples of labor human rights are freedom of association, right to a safe work
environment, right to family life, abolition of slavery and forced labor, and the right to equal
pay for equal work (Ruggie, 2008). The case on the Sri Lankan, Indian, and Bangladesh
workers mentioned before is an example of a violation of the right to equal pay for equal
work since their wages were way below the wage that a Mauritian worker would have
received for the same work.
There are different articles written about who is mainly responsible to prevent labor
violations. There are different authors that argue that both state and private institutions such as
MNEs and labor unions are responsible for the protection of labor rights (Amengual, 2010;
Doorey, 2010; Ruggie; 2008). MNEs are responsible for the protection of human rights even
if the government of a host country fails to protect labor human rights (Ruggie, 2008;
UNHRC, 2011).
An example of private initiatives to protect labor rights are MNEs that created codes
of conduct which include the respect for a certain level of labor rights. Codes of conduct are
voluntary set standards by MNEs or other kind of businesses (Amengual, 2010). Despite those
private initiatives of MNEs there are still a lot of labor violations going on (Aaronson &
Higham, 2013; Huijstee et al, 2012).
Labor institutions vary across countries (Freeman, 2007). There are, among others,
differences in laws and regulation, the education- and training systems and the existence of
labor unions between countries (Chowdbury & Mahmood, 2012; Freeman, 2007). Differences
in institutions between countries influence the labor practices of MNEs in host countries
(Björkman, Fey & Park, 2007; Chowbury & Mahmood, 2012; Edwards & Kuruvila, 2005). In
the literature it is common to use the term human resource management (HRM) practices to
refer to labor practices.
18
National labor laws and regulations are seen as a component of the labor institutions
system by several studies (Akorsu & Cooke, 2011; Arat, 2002; Björkman et al, 2007; Black,
1999). Akorsu & Cooke (2011) investigated national labor laws and international labor
standards in relation to labor standards adopted by MNEs. In another study on child labor a
lack in enforcement of national labor law is seen as one of the causes that child labor exists
(Arat, 2002). National labor laws are part of the general national law system and regulations
of a country. Within North’s (1991) analysis of the institutional environment laws and
regulations are part of the formal dimension.
Another important component of a labor institution system is the labor unions. Labor
unions or trade unions are organizations that work for the common interest of a group of
workers related by the same field of work or industry. Labor unions help their members with
issues concerning good working conditions and fairness of pay (Labour Behind the Label,
n.d.; The Economic Times, n.d.). MNEs might view labor unions as something negative
because of the “monopoly face” of labor unions, since labor unions do have the power to raise
wages above competitive levels (Bennet & Kaufman, 2007).
Many studies use labor unions in their research (Black, 1999; Doorey, 2010; Freeman,
2007; Ioannu & Serafeim, 2012; Whitley, 1999). Whitley (1999) was one of the first authors
to use labor unions as part of the institutional system of a country. “Historically unions have
been the major organization representing workers, and collective bargaining has been the
main mechanism by which they raise wages” (Freeman, 2007).
According to Amnesty International labor unions are at the forefront of the defense of
human rights (Amnesty International UK, 2013). The right to form and join labor unions is a
human right on itself. Freedom of association gives workers the right to form a labor union.
Collective bargaining gives workers the right to join a labor unions (Labour Behind the Label,
n.d.).
19
To measure the effect of institutional distance on human rights violations by MNEs
two types of labor institutions are used. The first type is laws and regulations. The World
Justice Index is used to measure the quality of laws and regulations in a country. A more
detailed explanation of this index, which consists of labor laws and labor unions, will be given
in the methods section.
Environmental Violations
MNE activities can be very harmful for the environment. Especially the activities of MNEs
that operate in high-polluting industries, for example the extractive industry. Those activities
can pollute air, water, and other ground resources. A lot of times those can have a great
impact on the health and safety of a country’s citizens as well (Esty &Porter, 2001; Sethi,
Lowry, Veral, Shapero, Emelianova, 2011; Wu, 2009).
In the CHRD database used to collect data about human rights violations in this study
a distinction is made between different types of environmental human rights violations: water
contamination, air contamination, land contamination, land erosion/impossibility to harvest,
deforestation, destruction of natural resources, destruction of wildlife and unsustainable use of
natural resources (Olsen, 2014).
Nigeria is one of the countries which is regularly the victim of oil spills caused by
pipelines and oil wells belonging to big MNEs. A recent oil spill took place on 19 June 2013
at the Trans Niger Pipeline owned by a subsidiary of Shell caused a fire. The environment
around it is polluted and this affects daily life of local communities (Rebmann, 2013). Oil
spills brings a safe, clean, healthy, and sustainable environment at risk while this is very
important for people to fully enjoy human rights such as the rights to life, health, food, water,
and sanitation. A clean environment helps protecting human rights and at the same time
protecting human rights helps to protect the environment (United Nations Human Rights,
n.d.).
20
The oil spill that took place in 2013 is just one of the human right violations that Shell is
accused of. Other allegations made relate to air- and water contamination and also to putting
the lives and heath of local communities at risk (Global Exchange, 2013).
British Petroleum (BP), another well-known MNE operating in the oil, gas & coal
industry, was accused of polluting the environment with its oil refineries located in Durban,
South-Africa. Local communities are struggling with health problems because of the high
emissions caused by the oil refineries (Clark, 2004).
There are many stories out there similar to the stories above of Shell and BP about
MNEs violating environmental human rights. The violations range from polluting the
environment to putting people’s health at risk. The question is why do MNEs engage in
environmental human rights violations?
Standard economic theory can provide an explanation for environmental violations
according to Wu (2009). A MNE chooses to violate environmental regulations if the costs of
compliance are higher than the costs of violating regulation. Wu (2009) found that
competitive pressure, cost reductions, retain quality employees and create product or process
innovations influence MNEs to comply to environmental regulations. Costs and risks related
to the adoption of environmentally friendly practices influence the likelihood of
environmental rights violations by MNEs (Wu, 2009).
Another study investigated the effects of FDI stemming from MNEs from developing
countries. MNEs from developing countries seemed to be more constrained by reputational
and financial considerations forcing them to prevent the violation of environmental rights.
Moreover, it was found that these types of MNEs are able to create competitive pressure that
presses other MNEs to improve environmental practices (Zeng & Eastin, 2012).
In the literature a few types of environmental institutions are found that try to prevent
environmental violations by MNEs. First there are the national environmental laws and
21
regulations (Etsy & Porter, 2001; Stretesky & Lynch, 2011; Wu, 2009). Most environmental
regulations are developed at the national level (Rugman & Verbeke, 1998).
A second type is international environmental institutions. Those institutions influence
countries as well as companies to respect environmental human rights (Bernauer, 1995).
The third type of environmental institutions found in the literature is NGOs. NGOs
play a central role in environmental protection. Even the UN recognizes NGOs as key players
within the field. The term NGO applies to many different types of environmental actors such
as labour unions, trade-associations, scientific committees, small coalitions of pollution
victims, and big nonprofit organizations like Greenpeace (Jasanoff, 1997).
Aguilera-Caracuel, Hurtado-Torres, Aragón-Correa & Rugman (2012) used the
environmental sustainability index (ESI) developed in 2005 to measure a country’s
environmental institutional profile and to calculate institutional distance. In 2006 the
environmental performance index (EPI) was developed as a follow up of the ESI (Esty,
Srebotnjak, Kim, Levy, de Serbinin, & Anderson, 2006). Since the EPI provides the full
picture of a country’s environmental institutional profile it will be used to define institutional
distance.
Hypotheses
Many MNEs are violating human rights (Aaronson & Higham, 2013, Huijstee et al., 2012;
Lozano & Prandi, 2005; Ruggie, 2008; Ruggie, 2013). According to Global Exchange, an
international human rights organization, it is difficult to hold MNEs accountable for human
rights violations because of the growing global economy and free trade market. However, as
stated in the Guiding Principles it is necessary for MNEs “to identify, prevent, mitigate and
account for how they address their human rights impacts” (UNHRC, 2011, p. 16). It is the
responsibility of MNEs and also other types of companies to carry out human rights due
22
diligence (UNHRC, 2011). It is because of due diligence that more research is needed tot the
risk factors influencing human rights violations by MNEs.
A possible explanation for human rights violations by MNEs can be high institutional
distance. As mentioned before institutional distance is used to explain the effects of crosscountry differences in institutions on MNEs behavior and performance in the IB literature
(Ando, 2012; North, 1991; Xu & Shenkar, 2002). Different studies already tested the
relationship between high institutional distance and different types of MNE behavior; entrymodes, environmental performance standardization, subsidiary integration in the transactional
network of the MNE and so on.
According to Ruggie (2008) institutions play an important role in the protection of
human rights. However, institutions differ between countries (Kostova, 1996; Kostova and
Zaheer, 1999; Xu & Shenkar, 2002). It are these differences in institutions between countries,
defined as institutional distance, that cause different types of MNE behavior (Xu & Shenkar,
2002).
This study expects that institutional distance influences human rights violations by
MNEs. The respect for human rights varies across countries and also among MNEs. There are
differences between North-American and European MNEs in the protection of human rights.
European firms are protecting a much wider range of human rights than North-American
companies (Aaronson et al., 2013). A possible reason is that MNEs may feel less responsible
to respect human rights in a host country with a very dissimilar institutional environment then
the home country of the MNE. A similar explanation was used in the study of Campbell,
Eden, and Miller (2012). They stated that cultural distance influences the level of feelings of
empathy towards the host country. When cultural distance is high MNEs empathies less with
the host country and that’s why they may feel less obliged to engage in CSR activities. A
23
reason could be that MNEs are less familiar with the institutional environment of the host
country so they are less able to comply to the rules of the country (Campbell et al., 2012).
Countries also differ in the degree to which they protect human rights. Asian, African,
and South-American countries are much less concerned about human rights violations than
for example European countries (Aaronson & Higham, 2013).
The differences between countries and also the differences between the origin of
MNEs are influencing the degree to which MNEs protect or violate human rights. This is why
this study expects that institutional distance can offer an explanation for human rights
violations by MNEs.
Hypotheses and Research Model Labor Violations
Differences in institutions influence the labor practices of MNEs in host countries.
(Björkman, Fey & Park, 2007; Chowbury & Mahmood, 2012; Edwards & Kuruvila, 2005).
Examples of institutions that influence the labor practices are laws and regulations and labor
unions (Chowdbury & Mahmood, 2012; Freeman, 2007). The right to start or join a labor
union is even a labor human right itself (Ruggie, 2008).
Because differences in laws and regulations and differences in labor unions between
countries, therefore institutional distance, influence labor practices this study expects that it
influences labor human rights violations by MNEs. Differences in labor unions between the
host and the home country of a MNEs is labeled labor unions institutional distance.
Differences in the laws and regulations between the host and home country of a MNE is
labeled laws and regulations institutional distance. Generally speaking it is expected that high
institutional distance leads to labor human rights violations by MNEs.
The following hypotheses were developed:
H1: High labor unions institutional distance leads to labor human rights violations by MNEs.
24
H2: High laws and regulations institutional distance leads to labor human rights violations by
MNEs.
The research model belonging to these two hypotheses is shown below:
Figure 1
Hypothesis and Research Model Environmental Violations
Environmental practices of MNEs may be highly influenced by the institutional environments
of the different countries where they operate (Aguilera-Caracuel et al., 2012). AguileraCaracuel et al. (2012) even found that institutional distance influenced the level of
environmental performance of a MNEs. High institutional distance influenced MNEs to adopt
opportunistic behavior regarding the natural environment.
In a follow-up study Aguilera-Caracuel et al. (2013) investigated how environmental
institutional distance influences MNEs' decisions regarding environmental performance
standardization. The results showed that when formal environmental distance is high MNEs
are more tended to comply with environmental regulations to avoid penalties, sanctions, and
legal costs. However, in the case of high informal environmental distance MNEs did not seem
more tended to comply with environmental regulations (Aguilera-Caracuel et al., 2013).
The studies mentioned above concluded that environmental institutional distance
nfluences environmental performance of MNEs, this is why this study expects that high
25
environmental distance leads to more environmental human rights violations. The following
hypothesis was developed:
H3: High environmental institutional distance leads to environmental human rights violations
by MNEs.
The research model belonging to these hypothesis is shown below:
Figure 2
26
Methodology
Data
Human Rights Violations
The data that is collected for this research is derived from different databases. First, data
regarding the environmental and labor human right violations will be retrieved/is retrieved
from the database of the CHRD project. This database uses data available from the Business
& Human Rights Resource Centre (BHRRC). The BHRRC collects data regarding alleged
corporate human rights abuses (CAAs). “CAA is an instance in which some group and/or
individual accuses a company of a human rights abuse” (Olsen & Payne, 2013). In this article
corporate human rights violations or CAAs as called in the CHRD project is the dependent
variable. To measure these violations the CAAs that are part of the CHRD database are used.
In the sample MNEs that have a CAA are coded as 1, while the MNEs that have no CAA are
coded as 0.
The CHRD database is still under construction. At this moment the database only
provides data concerning human rights violations in Africa and South-America. Therefore the
sample used to test the hypotheses only consists of countries located in these two continents.
The CHRD database exists of 715 coded human rights violations by different types of
companies, so MNEs but also local companies, located in Africa or South-America.
The total dataset used in this study exists of MNEs that are accused of violating human
rights but also of MNEs that are not accused of violating human rights. This is why data was
needed of the total amount of MNEs that are operating in a country. This data was retrieved
from the Orbis database. Company specific information such as the home and host country of
the MNE and firm size is also retrieved from this database.
27
The countries that are part of the sample to test the hypotheses is based on the data that
was available from the CHRD database. The sample that is used to test the hypotheses
relating labor human rights violations consists of MNEs operating in the apparel, clothing,
and textiles industry in four different countries Argentina, South-Africa, Guatemala and the
Dominican Republic. In Argentina 32 MNEs are operating in the apparel, clothing and textiles
industry, in South-Africa 14 MNEs are operating in this industry, in Guatemala 8 MNEs, and
in the Dominican Republic 7 MNEs.
The sample that is used to test the hypothesis regarding the environmental human
rights violations by MNEs consists of MNEs operating in the oil, gas, and coal industry in
Nigeria and Ecuador. These two countries were selected because they seemed to have the best
coverage regarding environmental human rights violations in the CHRD database. A total of
43 MNEs are operating in the oil, gas, and coal industry in Nigeria, and a total of 8 MNEs are
operating in the same industry in Ecuador.
Institutional Distance
The data to measure institutional distance is derived from different databases. Data regarding
labor unions was retrieved from the ILOSTAT database, this is a database that belongs to the
International Labour Organization (ILO). It collects different types of labour statistics;
employment and unemployment rates per country, about the labor population, and also about
labor unions. Labor unions are measured as a percentage of all employees that work in a
country.
Data regarding the rule of law in different countries is derived from the website of the
World Justice Project. This project produced the WJP Rule of Law Index. This index
measures how the rule of law is experienced in 99 countries from all over the world. It uses 47
indicators to compute the index. The 47 indicators are organized around eight themes:
constraints on government powers, absence of corruption, open government, fundamental
28
rights, order and security, regulatory enforcement, civil justice, and criminal justice. Labor
human rights belong to the theme about fundamental rights. Included are the right to
collective bargaining, the prohibition of forced and child labor, and the elimination of
discrimination (World Justice Project, 2014. The WJP Rule of Law Index is used to measure
the rule of law distance between countries in this study since it is the most comprehensive
index so far.
Data regarding the environmental institutions in all countries was gathered by using
the Environmental Performance Index (EPI). The EPI “ranks how well countries perform on
high-priority environmental issues in two broad policy areas: protection of human health from
environmental harm and protection of ecosystems” (Hsu, Emerson, Levy, de Sherbinin,
Johnson, Malik, Schwartz, and Jaiteh, 2014). It ranks a total of 178 countries. EPI is
calculated based on 20 indicators divided into 9 categories reflecting national-level
environmental data. The 9 categories are: health impacts, climate and energy, biodiversity and
habitat, air quality, fisheries, forests, agriculture, water resources, and water and sanitation.
The EPI was created by Yale Center for Environmental Law and Policy (YCELP) and the
center for International Earth Science Information Network (CIESIN) at Columbia University
in collaboration with The Samual Family Foundation and the World Economic Forum (Hsu et
al, 2014). Aguilera-Caracuel et al. (2012) also used EPI to calculate environmental
institutional distance, but their research used an older version of EPI.
Dependent Variables
Labor Human Rights Violations
The hypotheses regarding labor human rights violations are tested by using a sample of MNEs
operating in Argentina, South-Africa, Guatemala and the Dominican Republic. These
countries were selected based on the data available in the CHRD database. These countries
seem to have the best coverage of labor human rights violations.
29
All MNEs in the sample are operating in the apparel, clothing, and textiles industry.
The apparel, clothing and textile industry was selected because a lot of labor human rights
violations are taking place in this industry. In Argentina a total of 79 human rights violations
are coded for the apparel, clothing, and textiles industry, 69 of those human rights violations
are labor human rights violations. This implicates that 87.3% of all human rights violations
are labor human rights violations in this country according to the CHRD database. In SouthAfrica five cases of human rights violations in the apparel, clothing, and textiles industry are
included in the CHRD database, all 5 are labor human rights violations, 100%. In Guatemala
there are 21 cases of human rights violations, of which 12 cases are labor human rights
violations, so 57,1%. In the Dominican Republic five cases of human rights violations in the
apparel, clothing, and textiles industry are included in the CHRD database, four of them are
labor human rights violations, so 80%.
Data regarding MNEs operating in the different countries is gathered in Orbis and in
the CHRD database. 32 Argentinean MNEs were selected for the initial sample. Three MNEs
were deleted from the sample because in Orbis they were characterized as a MNE however
further investigation showed that they are not MNEs. Therefore the sample used for the data
analysis consists of 29 MNEs operating in Argentina.
In South-Africa 14 MNEs are operating in the Apparel, clothing and textiles industry
according to Orbis. Four MNEs were deleted from the sample for the same reason as
mentioned above. After deleting these ‘MNEs’ the total sample used for the data analysis
consisted of 10 MNEs operating in South Africa.
No MNEs were deleted from the samples of Guatemala and the Dominican Republic.
The total sample of Guatemala consists of 8 MNEs operating in the apparel, clothing and
textiles industry and the total sample of the Dominican Republic consists of 7 MNEs.
30
The total sample used to measure the hypotheses regarding labor human rights
violations consists of 54 MNEs operating in one of the four countries mentioned above. No
data is missing for any of the 54 MNEs. The distribution of the home countries of the MNEs
are as follows: 1 from Belgium, 2 from Brazil, 1 from Canada, 1 from Denmark, 7 from
France, 6 from Germany, 1 from Greece, 1 from India, 4 from Italy, 1 from Mexico, 1 from
the Netherlands, 3 from South-Korea, 2 from Spain, 1 from Sweden, 1 from Turkey, 1 from
the United Kingdom, 19 from the United States and 1 from Uruguay. Of the 54 MNEs in the
sample 35 MNEs, 64,8% did not violate any human rights (Appendix 1).
Environmental Human Rights Violations
The hypothesis regarding environmental human rights violations is tested by using a sample
of MNEs operating in Nigeria and Ecuador. As mentioned before these countries were
selected for having the best coverage of environmental human rights violations. All MNEs in
the sample are operating in the oil, gas and coal industry. The oil, gas and coal industry was
selected because a lot of environmental human right violations are taking place in this
industry.
In Nigeria there are 32 cases of human rights violations, of which 21 cases are
environmental human rights violations, so 65,7% as reported in the CHRD database. In
Ecuador a total of 26 cases of human rights violations took place in the oil, gas, and coal
industry, 9 of them are environmental human rights violations, so 34,6% as reported in the
CHRD database.
A total of 42 MNEs operating in Nigeria are part of the sample. No cases were deleted.
The same applies for the Ecuadorian MNEs, a total of 11 MNEs are part of the sample. The
total sample consists of 53 MNEs operating in Nigeria and Ecuador in the Oil, Gas and Coal
industry. No data was missing. The distribution of the home countries of the MNEs are as
follows: 6 headquarters are based in the United Kingdom, 11 headquarters in the United
31
states, 1 in Norway, 4 in the Netherlands, 5 in France, 2 in Japan, 3 in Germany, 5 in Italy, 2
in Canada, 2 in South Korea, 3 in Switzerland, 3 in Spain, 2 in Brazil, 1 in Curaçao, 2 in India
and 1 in Singapore. Of the 53 MNEs in the sample 40 MNEs, 75,5% did not violate any
human rights. appendix 3).
Independent Variables
Labor Institutional Distance
To calculate labor unions distance and rule of law distance absolute differences were
computed. The mean labor unions distance is -12,97%. The biggest labor unions difference is
46,60% and the smallest labor unions difference is -30,3%. The WJP Rule of Law Index does
not work with percentages but with scores. the mean rule of law difference is 0,21. The
biggest rule of law difference is 0,35, while the smallest difference is -0,07 (Appendix 2).
Environmental Institutional Distance
Environmental institutional distance is measured by calculating the absolute differences
between the EPI scores of the host and the home countries This method was also used by
Aguilera-Caracuel et al. (2012) and Aguilera-Caracuel et al (2013). The mean EPI distance
measured is 28,73. The lowest distance is -7,97 while the highest EPI distance is 48,47
(Appendix 4).
Control Variable
Firm size is used as a control variable because it is an important determinant of environmental
behavior by companies (Aguilera-Carauel et al., 2012). Firm size seem to have an impact on
corporate social responsibility (Udayasankar, 2007). Human Rights are part of corporate
social responsibility (Moir, 2001) therefore firm size is an appropriate control variable.
32
Results
A binomial logistic regression analysis was used to measure the hypotheses. This method is
used because the independent variable (institutional distance) in the hypotheses does not
predict a linear relationship, it rather predicts the probability of a human rights violation by a
MNE (1) or no human rights violation by a MNE (0)
The only assumption that needs to be checked to perform a binomial logistic
regression analysis is to check for outliers within the independent variables. For the labor
unions institutional distance one outlier is detected. The outlier has a Z-score of 3,87. The
case is not deleted from the sample but its value is decreased to a value of 34,50, the Z-score
is 3,28. For the rule of law institutional distance no outliers are detected, all Z-scores are
between -3,29 and 3,29.
For environmental institutional distance no outliers are detected as well. All cases had
a Z-value between -3,29 and 3,29. So the sample does not include any outliers.
Labor Results
The next step, after the dataset was checked for outliers, is testing the model. The Omnibus
Tests of Model Coefficients gives an indication of how well the model performs. If the value
of the test is significant this means that there is a good model fit. The full model containing all
predictors is statistically significant, χ2 (5, N = 54) = 32,86, p < 0.05, indicating that the model
is able to distinguish between MNEs who violated labor human rights and MNEs who did not
violate labor human rights (appendix 5). A more reliable test is the Hosmer-Lemeshow
Goodness of Fit Test. For this test poor fit is indicated if the p-value is smaller than 0,05. For
the research model the test computed a p-value of 0,880, the full model containing all
predictors is statistically significant, χ2 (8, N = 54) = 3.74, p > 0.05. So again the model is
tested as being able to distinguish between MNEs who violated labor human rights and MNEs
33
who did not violate labor human rights. There is a good fit of the research model (Appendix
6).
The Cox & Snell R Square and the Nagelkerke R Square values indicate the amount of
variation in the dependent variable explained by the model. Between 45.6% (Cox & Snell R
Square) and 62.7% (Nagelkerke R Square) of the variability in labor human rights violations
is explained by the model (Appendix 7).
Table 1 shows the individual effects of labor unions distance, rule of law distance and
firm size. It can be concluded that unions distance and firm size have individual effects. The
odds that a MNE violates labor human rights is 1,14 times bigger if the unions distance is
high. Two dummy variables of firm size showed individual significant effects. The
probability that a MNE violates a labor human right is 166.67 times bigger for a medium
sized MNE and 71.43 times bigger for a large MNE than for a small MNE.
Hypothesis 1 is supported, this indicates that when the labor unions institutional
distance between the host country and the home country grows the chance of a MNE violating
labor human rights is bigger. No significant relationship between national laws and
regulations institutional distance and human rights violations by MNEs is found, therefore
hypothesis 2 is not supported.
34
Table 1: Variables in the Equation
B
Step 1
a
S.E.
Wald
df
Sig.
Exp(B)
Unions_Dist
-,132
,052
6,514
1
,011
,876
Law_Dist
3,669
5,932
,383
1
,536
39,223
14,058
3
,003
Firm_Size
Firm_Size(1)
-,784
1,289
,370
1
,543
,457
Firm_Size(2)
-5,185
1,676
9,564
1
,002
,006
Firm_Size(3)
-4,265
1,494
8,151
1
,004
,014
Constant
-1,011
1,828
,306
1
,580
,364
a. Variable(s) entered on step 1: Unions_Dist, Law_Dist, Firm_Size.
Environment Results
In this section the results for the environmental human rights violations will be presented. The
Omnibus Tests of Model Coefficients gives an indication of how well the model performs. If
the value of the test is significant this means that there is a good model fit. However for this
research model the p-value computed is 0,158 (Appendix 8). The full model containing all
predictors is statistically not significant, χ2 ( 4, N = 53 ) = 6.62, p > 0.05, indicating that the
model is not able to distinguish between MNEs that violated environmental human rights and
MNEs who did not violate environmental human rights.
However a more reliable test is the Hosmer-Lemeshow Goodness of Fit Test. For this
test poor fit is indicated if the p-value is smaller than 0,05. For the research model the test
computed a p-value of 0,169. (Appendix 9). The full model containing all predictors is
statistically significant, χ2 ( 8, N =53 ) = 11.61, p > 0.05, indicating that the model is able to
distinguish between MNEs that violated environmental human rights and MNEs who did not
violate environmental human rights.
The Cox & Snell R Square and the Nagelkerke R Square values indicate the amount of
variation in the dependent variable explained by the model. Between 11,7% (Cox & Snell R
35
Square) and 17,5% (Nagelkerke R Square) of the variability in environmental human rights
violations is explained by the model (Appendix 10). Table 2 shows the individual effects of
environmental institutional distance and firm size. No significant individual effects are
identified.
The environmental institutional distance does not seem to have a significant effect on
human rights violations by MNEs, therefore hypothesis 3 is not supported.
Table 2: Variables in the Equation
B
Step 1
a
S.E.
Wald
Firm_Size
df
Sig.
1,305
3
,728
Exp(B)
Firm_Size(1)
-,922
,819
1,270
1
,260
,398
Firm_Size(2)
-20,872
14145,203
,000
1
,999
,000
Firm_Size(3)
-,468
1,103
,180
1
,671
,626
Env_Dist
-,021
,025
,730
1
,393
,979
Constant
,324
1,070
,092
1
,762
1,382
a. Variable(s) entered on step 1: Env_Dist.
36
Discussion
The UN Guiding Principles recognize the role of companies in the protection of human rights.
It is no longer the responsibility of just states but also of other actors like MNEs. The Guiding
Principles are the first that have become widely affirmed and endorsed by the UN, OECD and
other inter-governmental, governmental, and nongovernmental stakeholders (Aaronson &
Higham, 2013).They are based on the ‘Protect, Respect, and Remedy’ framework developed
by John Ruggie. Those principles are practical guidelines on how to implement the ‘Protect,
Respect, and Remedy’ framework (UNHRC, 2011).
Still too often MNEs are involved in human rights violations (Aaronson & Higham,
2013; Huijstee et al., 2012; Lozano & Prandi, 2005). This is one of the reasons why this study
investigated the relationship between institutional distance and human rights violations by
MNEs. Moreover the concept of due diligence ask for more understanding about the risk
factors involved in human rights violations by MNEs. This study is the first to test the
relationship between institutional distance and human rights violations by MNEs.
Institutional distance is an important concept within the IB literature. It is defined as
the distance between the host and the home country of a MNE caused by the differences
between institutions (Kostova, 1999). Institutions are defined as “the humanly devised
constraints that structure political, economic and social interaction. They consist of both
informal constraints (sanctions, taboos, customs, traditions, and codes of conduct), and formal
rules (constitutions, laws, property rights)” (North, 1991, p. 97).
MNE behavior is often influenced by institutional distance (Xu & Shenkar, 2002).
Human rights violations can be seen as a type of MNE behavior. The goal of this study was to
investigate if institutional distance is a factor that causes human rights violations to occur.
37
No prior research exists that links institutional distance with human rights violations.
Therefore this study makes a contribution by extending the field of IB research by linking the
human rights violations by MNEs with institutional distance.
The results showed that there is a significant relationship between labor unions
distance and human rights violations by MNEs. This implies that when there is a big
difference between the labor unions of the host and the home country of a MNE the amount
of human rights violations increases.
This study does not investigate the direction of the unions distance so no conclusions
can be made if human rights violations by MNEs increase when labor unions in the host
country are weak and strong in the home country or the other way around. Or when the labor
unions are both weak in the home and the host country, or both strong in the home and the
host country, so low institutional distance. Figure 3 depicts the four directions of institutional
distance.
Figure 3
38
Arguments can be made for both directions in the case of high institutional distance.
On one hand one might expect that human rights violations by MNEs increase when labor
unions in the host country are weak., since there is a lack of defense of the rights of workers
which makes it easier to violate human rights without being held responsible for it.
On the other hand one can expect that there occur more human rights violations by
MNEs in countries where strong labor unions exists because there are many human rights
violations by MNEs and local companies.
This study investigated if there is a relationship between high institutional distance and
human rights violations by the MNE, but as mentioned before it did not investigate the
direction. Future research could investigate in which case human rights violations by MNEs
are more common. Are they more common when labor unions are weak in the host country
and strong in the home country or the other way around? It could also be interesting to
investigate low institutional distance if institutions in the home and the host country are weak
or if they are strong in both countries.
Hypothesis 2 proposed the relationship between high laws and regulations distance
between the host and the home country and human rights violations by MNEs. This study has
found no support for hypothesis 2, there did not seem to be a significant relationship between
high laws and regulations institutional distance and human rights violations by MNEs. This
could be due to the data used.
Law and regulations form an central part of the institutional environment of a country.
Laws and regulations are part of the formal institutional environment within North’s theory
about institutions (North, 1991). Within the theory developed by Scott (1995) rules and
regulations are part of the regulative pillar. So rules and regulations take a central position
within the institutional theory.
39
A possible explanation that no significant relation was found is because the measure
used takes all laws and regulations in a country together in one index. However, the central
variable is labor human rights violations so possibly a single measure for labor laws and
regulations would give a significant relationship. Future research could investigate this.
The third hypothesis proposed the relationship between high environmental
institutional distance and environmental human rights violations by MNEs. The results did
not show a significant relationship. The EPI is a index that takes the whole environmental
context of a country together in one measure. So even though hypothesis 2 is not supported in
this study it would be interesting in future research to see if there is a significant relationship
between single environmental institutions and environmental human rights violations. For
example, the relationship between environmental laws and regulations, NGOs, and
international environmental institutions and environmental human rights violations.
Hypothesis 1 was the only hypothesis of the three hypotheses that was supported in
this study. This hypothesis took one individual institutions, labor unions, to compute
institutional distance between the host and the home country of an MNE. The other two
hypothesis used an index that took several aspects of the institutional environment together.
These two were not supported due to the relationship not being significant. However, future
research could investigate more different types of institutions in relationship with human
rights violations. Since this study provided proof that one single institution can be of great
influence on human rights violations by MNEs.
Next to the implications for future research stated before it could be interesting to
combine the concepts of cultural distance and institutional distance together in one study to
capture the full set of differences between countries. According to Xu & Shenkar (2002) these
two concepts complement each other rather than replace each other.
40
A practical implication of this study was to learn more about the causes and reasons
for human rights violations to occur. Because when we know more about the causes and
reasons of these violations we can do more to prevent them. Regarding environmental
violations by MNEs this study was not able to make a practical contribution. However,
regarding labor rights violations states and MNEs know now that labor unions can possibly
play a role in decreasing the amount of labor human rights violations by MNEs. MNEs might
view labor unions as something negative because of the “monopoly face” of labor unions,
since labor unions do have the power to raise wages above competitive levels (Bennet &
Kaufman, 2007). However MNEs could also see labor unions as institutions that can help
them in preventing human rights violations.
This study had a few limitations. The first limitation is that the data regarding human
rights violations by MNEs is somewhat subjective. This subjectivity is caused by the
difficulty to obtain data about human rights violations. Data is collected from sources such as
news papers and NGO reports. However the CHRD database collects data about this difficult
subject in a systematic as possible way as far as this is possible given the constraints inherent
in doing any data collection regarding this subject. Human rights violations by MNEs are a
difficult topic to collect data about because MNEs will not go around broadcasting that they
have violated human rights and still continue to do so.
Second, the focus on Nigeria and Ecuador for the environmental human rights
violations and Argentina, South-Africa, Guatemala and the Dominican Republic for the labor
human rights violations made the datasets somewhat limited. All these countries are located
in Africa and South-America, these represent only two continents out of the seven present in
the world. In these other continents human rights violations probably occur as well. An
interesting continent to investigate human rights violations by MNEs could be Asia, where the
apparel, clothing, and textiles industry has a great presence (Apparel, 2014). One might not
41
think North-America and Canada may be that interesting, but also in these countries human
rights violations by MNEs occur. For example one can think of the presence of the oil, gas,
and coal industry in Canada (OilChange International, n.d.).
The reason the sample used for this study is very limited is because of the availability
of countries in the CHRD database. This database is still under construction, and so far only
the cases of human rights violations by companies in South-America and Africa are coded.
The countries selected for this study seemed to have the best coverage of the relevant human
rights violations by MNEs.
Regarding the other continents, they still need to be coded. Once the cases of human
rights violations by companies on other continents are coded as well future research could use
bigger samples to test the relationship between human rights violations by MNEs and
institutional distance and other types of risk factors.
The third limitation of this study is that it just focuses on two types of human rights
violations. There are more types of human rights violations, in the CHRD database five types
are distinguished. The types not included in this study are development and poverty, health,
and abuses.
The fourth limitation of this study is that the hypotheses did not take the direction of
the distance into account. Therefore it is not known if the high distance is caused by weak
institutions in the home country and strong institutions in the host country or the other way
around. Moreover the hypotheses only tested large distance, small distance was not taken into
account.
Despite its limitations this study still managed to make a contribution to both the
international management literature and the business and human rights literature since it is a
first step in showing the existence of a direct relationship between institutional distance and
human rights violations by MNEs. It would be interesting for future research to explore the
42
relationship between institutional distance and human rights violations further. As mentioned
before future studies could explore how the four different directions of institutional distance
affects human rights violations by MNEs. They could also investigate more different types of
institutional distance in relation to human rights violations by MNEs, more different types of
human rights violations by MNEs in relation to institutional distance, and make use of bigger
samples to test the relationship.
43
Conclusion
This study tested the relationship between high institutional distance and human rights
violations by MNEs. For labor human rights two types of institutional distance were used:
labor unions distance and national laws and regulations distance. EPI was used to explain
environmental human rights violations by MNEs. This is an index that takes several
environmental institutions together into one measure (Hsu et al., 2014).
The results indicated no significant relationship between environmental institutional
distance and human rights violations. There was also no significant relationship found
between national laws and regulations distance and labor human rights violations. The reason
no significant relationship was found could be due to the specific and limited data available
for this study. However the results indicated a significant relationship between large labor
unions distance between the home and the host country of the MNE and labor human rights
violations. With this result the study contributes to the understanding of how institutional
distance leads to human rights violations. It is a first step investigating this relationship. In the
future more extensive research is needed to explore the relationship further. Future research
could for example investigate more types of institutional distance in relationship with
different types of human rights violations by MNEs.
This study is a contribution to the IB-literature since it is the first study that links
institutional distance to human rights violations.
44
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Appendices
Apendix 1: Labor_CAA
Cumulative
Frequency
Valid
Percent
Valid Percent
Percent
No Labor CAA
35
64,8
64,8
64,8
Labor CAA
19
35,2
35,2
100,0
Total
54
100,0
100,0
Appendix 2: Descriptive Statistics
N
Minimum
Maximum
Mean
Std. Deviation
Unions_Dist
54
-30,30
46,60
-12,9741
15,38212
Law_Dist
54
-,07
,35
,2130
,09150
Valid N (listwise)
54
53
Appendix 3: Environment_CAA
Cumulative
Frequency
Valid
Percent
Valid Percent
Percent
No CAA
40
75,5
75,5
75,5
CAA
13
24,5
24,5
100,0
Total
53
100,0
100,0
Appendix 4: Descriptive Statistics
N
Minimum
EPI_Dist
53
Valid N (listwise)
53
Maximum
-7,97
48,47
Mean
28,7330
Std. Deviation
13,29470
Appendix 5: Omnibus Tests of Model Coefficients
Chi-square
Step 1
df
Sig.
Step
32,859
5
,000
Block
32,859
5
,000
Model
32,859
5
,000
Appendix 6: Hosmer and Lemeshow Test
Step
1
Chi-square
3,737
df
Sig.
8
,880
54
Appendix 7: Model Summary
Step
Cox & Snell R
Nagelkerke R
Square
Square
-2 Log likelihood
1
37,188
a
,456
,627
a. Estimation terminated at iteration number 6 because
parameter estimates changed by less than ,001.
Appendix 8: Omnibus Tests of Model Coefficients
Chi-square
Step 1
df
Sig.
Step
,717
1
,397
Block
,717
1
,397
Model
6,616
4
,158
Appendix 9: Hosmer and Lemeshow Test
Step
1
Chi-square
df
11,614
Sig.
8
,169
Appendix 10: Model Summary
Step
1
-2 Log likelihood
52,436
a
Cox & Snell R
Nagelkerke R
Square
Square
,117
,175
a. Estimation terminated at iteration number 20 because
maximum iterations has been reached. Final solution cannot
be found.
55