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Internalization strikes back? Global value chains, and the rising costs of effective cascading compliance

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  • Ari Van Assche

    (HEC Montréal)

  • Rajneesh Narula

    (University of Reading)

Abstract

Strategies that make quasi-internalization feasible such as cascading compliance provide a means for lead firms to control the social and environmental conditions among their suppliers and sub-suppliers in ways other than through equity ownership. We take an internalization theory lens to reflect on the effectiveness of cascading compliance as a governance mechanism to promote sustainability along global value chains. While cascading compliance provides significant economic benefits to the lead firm, there are disincentives for suppliers to invest the required resources to meet the sustainability conditions, leading to periodic social and environmental violations. Enhanced cascading compliance (‘cascading compliance plus’) that adds trust-inducing mechanisms to engage suppliers in joint problem-solving and information-sharing has the promise to improve sustainability. But the added transaction costs that this generates has the potential to crowd-out suppliers, and possibly even make full internalization attractive again.

Suggested Citation

  • Ari Van Assche & Rajneesh Narula, 2023. "Internalization strikes back? Global value chains, and the rising costs of effective cascading compliance," Economia e Politica Industriale: Journal of Industrial and Business Economics, Springer;Associazione Amici di Economia e Politica Industriale, vol. 50(1), pages 161-173, March.
    • Handle: RePEc:spr:epolin:v:50:y:2023:i:1:d:10.1007_s40812-022-00237-x
    DOI: 10.1007/s40812-022-00237-x
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    More about this item

    Keywords

    GVCs; Compliance; Internalization; MNEs; Suppliers; Outsourcing;
    All these keywords.

    JEL classification:

    • F23 - International Economics - - International Factor Movements and International Business - - - Multinational Firms; International Business
    • F63 - International Economics - - Economic Impacts of Globalization - - - Economic Development
    • D8 - Microeconomics - - Information, Knowledge, and Uncertainty

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