On Socially Responsible GVC Governance Structures: Outsourcing or Internalization?

To minimize costs, the traditional approach used by multinational corporations (MNCs) to optimize price and quality in the production and delivery of goods and services has been achieved through hierarchical and arm’s length contractual means. This approach combines with the factors that propel economic globalization, yielding complex global value chains (GVCs). However, an emerging challenge facing lead MNCs is that they are unable to control the social and environmental implications of the activities throughout their GVCs. The traditional approach to deal with these issues has been that of “cascading contracts” where responsibility is handed along the GVC sequence of firms. Yet, consumers, civil society, and regulators are increasingly holding lead MNCs morally and financially responsible for social and environmental problems even when these issues do not arise within the MNC’s hierarchical or contractual boundaries. To provide new insights into the organization of MNCs, we develop a formal analytical model that combines cascading responsibilities with the value-adding and value diminishing factors that have begun to arch from the “first mile” of the GVC directly to the lead MNC.