Racing to the Top?

Regulatory Competition Among Firms in Areas of Limited Statehood

Tanja A. Borzel, Adrienne Heritier, Nicole Kranz, and Christian Thauer

Conventional wisdom holds that economic internationalization leads to a regulatory race to the bottom among countries.1 Global competition induces firms to invest in countries that minimize regulations, taxes, and other issues affecting the costs of production. Likewise, firms will press governments of highly regulated countries to lower regulatory standards in order to avoid competitive disadvantages (Bhagwati and Hudec 1996; Murphy 2000; Lofdahl 2002). However, there are numerous instances in which we find corporate behavior revealing just the opposite: imposing strict self-regulatory standards and even pressing governments to issue stricter public regulations (Vogel and Kagan 2004; Flanagan 2006; Mol 2001). Why would firms operating in a similar market engage in regulatory race to the top and voluntarily subject themselves to costly regulatory requirements or demand governments to issue stricter regulations? The governance literature has identified the threat of state legislation as a key incentive for firms to engage in self-regulation (cf. Mayntz and Scharpf 1995; Scharpf 1997; Heritier and Lehmkuhl 2008). Yet, areas of limited statehood lack by definition the capacity to cast such a credible “shadow of hierarchy” because governments are not capable, and often not willing, to set legislation and to enforce it, respectively (Risse in this volume; cf. Borzel and Risse 2010).

In this chapter, we explore under which conditions firms seek higher rather than lower regulatory standards despite weak regulatory capacities of the state, either by engaging in self-regulation or by exerting pressure on governments to tighten regulation.

Drawing from insights of rational choice institutionalism and bargaining theory, we put forward a number of hypotheses specifying conditions under which we expect firms to seek higher levels of self-regulation or public regulation in countries with weak regulatory capacities. We argue that firms may engage in a regulatory race to the top (1) if the quality of the brand-name product they market benefits from observing strict regulatory provisions; (2) if they have an economic advantage by seeing strict regulatory conditions imposed on foreign competitors; (3) if they are under pressure from nongovernmental organizations’ campaigns that may damage their reputation; and finally, (4) if they are under regulatory pressure from their country of origin.

We conduct an empirical plausibility probe of our hypotheses by analyzing the behavior of firms in South Africa. More specifically, we will explore when and how firms in the automobile, food and beverage, and textile sectors engage in a regulatory race to the top in environmental regulation.

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