Can Sourcing Help Enforce Global Labor Standards? Evidence from the Gap Inc Supply Chain
41 Pages Posted: 18 Oct 2019
Date Written: October 9, 2019
Multinational firms with global supply chains manage the labor and environmental practices of their supplier firms. Does this "private regulation" cause social compliance to improve? How does the organization of these programs shape their efficacy? This study uses a regression discontinuity design to estimate the causal effects of private regulation on labor compliance, analyzing over one thousand factories supplying the multinational retailer Gap Inc. This retailer's 2016 change in management practices allows us to study private regulation when first decoupled from and later aligned with the activity of the sourcing department, which controls allocation of orders to factories. Before alignment we estimate precise, near-zero effects of failing audits on future social compliance. However, after the alignment of sourcing with supplier responsibility, failing an audit caused factory compliance to improve by 0.8 standard deviations and reduced the probability of future failure by 22 percentage points. Independent labor compliance data from the ILO/IFC Better Work program shows similarly large effects. Longer-term suppliers improved most, consistent with the hypothesis that committed commercial relationships enhance the credibility of demands to improve labor standards. Private regulation did cause improved labor compliance. Yet it only did so after aligning sourcing activity with the management of social responsibility.
Keywords: private regulation, decoupling, supply chain, social responsibility, social performance, labor standards, compliance
JEL Classification: J8, F16, F23, F66, D22
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