Competent suppliers as a missing link: A supplier-centered view on cascading private labor governance in global value chains

Abstract

How does a multinational enterprise (MNE) monitor and regulate the working conditions of a multi-tiered global value chain? Literature based on internalization theory focuses on the role of an MNE as the sole regulator, assuming the passivity of suppliers within the chain. We challenge this approach as it is not feasible for a single firm to monitor and regulate hundreds of independent suppliers. We expand on this literature, particularly the cascading governance thesis, by considering suppliers as regulatory intermediaries and addressing the issue of regulatory quality. Through a case study of two Korean multinational first-tier suppliers in the apparel and electronics industries, we find that an MNE, as a lead firm, engages in a more prudent form of cascading governance than originally theorized, maintaining direct audits of sub-suppliers. First-tier suppliers exercised intermediary competence in facilitating the lead firm's cascading governance. However, faced with inconsistent lead firm demands and challenging host country environments, these suppliers had to compromise on regulatory quality and settle on “good-enough” compliance—a level of compliance that poses minimal risk to the firm while allowing them to prioritize production goals—over perfect compliance.