Responsible Sourcing - Production Scale and Monitoring: Theory and Evidence
40 Pages Posted: 1 Aug 2017 Last revised: 3 Aug 2017
Date Written: July 31, 2017
Previous research has emphasized price incentives, certification, and monitoring as mechanisms to motivate suppliers to behave responsibly. We investigate another mechanism -- the scale of production -- and the tradeoff between scale and monitoring as mechanisms to induce responsible behavior. Our research encompasses both analytical modelling and empirical analysis. Theoretically, reducing the scale of production and monitoring are substitute mechanisms by which a brand can induce suppliers to behave responsibly. If monitoring is more costly, the brand should reduce both monitoring and production scale. To test the insights from the model, we collect and analyze data from Nike contract factories in China between 2013 and 2016. Consistent with the theory, workforce size (representing scale) is negatively correlated with distance from regional hubs averaged by number of factories (representing monitoring cost). Further, the negative relation between production scale and monitoring cost is positively moderated by the rule of law. The managerial implication is that scale matters in responsible sourcing -- to a degree that increases with monitoring cost, moderated by the rule of law. The implication for local government policy is that improving transportation attracts foreign export orders by reducing monitoring costs, and enhancing the rule of law helps to mitigate high monitoring costs.
Keywords: Production Scale, Social Responsibility, Supply Chain Incentives
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