How does international trade shape social institutions in the developing world? The research literature is conflicted: importing firms may demand their trading partners adhere to higher labor and environmental standards, or they may penalize higher standards that raise costs.

This study offers the first large-scale analysis of how firm-level trade responds to information about social standards. Contrary to the “race to the bottom” hypothesis, it finds that importers reward exporters for complying with labor and environmental standards. In difference-in-differences estimates from over two thousand manufacturing establishments in 36 countries, achieving compliance is associated a 4% [1%, 7%] average increase in annual purchasing. The effect is robust to controlling for manufacturing performance and reflects both rewards for reaching compliance and penalties for falling out of compliance.

The results suggest that activist campaigns and transnational private regulation have created economic incentives for higher social standards in certain trade relationships.

By: Greg Distelhorst, Massachusetts Institute of Technology (MIT) – Sloan School of Management, and Richard M. Locke, Brown University; Massachusetts Institute of Technology (MIT) – Department of Political Science

Read the full SSRN article here

or at MIT Political Science Department Research Paper No. 2017-1