Working Paper: CEPR ID: DP9232
Authors: Sebastian Krautheim; Thierry Verdier
Abstract: The process of globalization is characterized by an impressive growth in global value chains, as well as the proliferation of non-governmental organizations (NGOs) interacting with production and sourcing decisions of multinational firms. In this paper, we present a simple North-South model of international trade allowing for the joint emergence of firm offshoring to South and NGO activism financed by donations from the civil society. In our model northern consumers care about unobservable ?credence? characteristics of goods such as the environmental and social impact of production. The analysis highlights a complementarity between the growth of global value chains and the emergence of NGOs: for a range of trade costs potential NGO emergence allows firms to capture gains from globalization, which would otherwise be unattainable. We show that, somewhat paradoxically, when offshoring triggers NGO emergence, this can be at the expense of the consumers, who for a range of trade costs, would be better-off in a world without NGOs. In an extension we show that NGOs may also crowd out investment in regulatory capacities in low cost countries, as consumers in North have a willingness to fund NGOs providing a substitute for regulation in South.
Keywords: globalization; multinationals; NGOs; regulation
JEL Codes: F23; F61; L31
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| globalization (F60) | NGO emergence (L31) |
| NGO emergence (L31) | probability of production technology revelation (D24) |
| probability of production technology revelation (D24) | firm adoption of cleaner production technologies (Q52) |
| NGO emergence (L31) | consumer welfare outcomes (D69) |
| NGO emergence (L31) | underinvestment in regulatory frameworks by Southern governments (O17) |
| NGO emergence (L31) | worse outcomes for consumers (D18) |