The Firm as an Inspector: Private Ordering and Political Rules

Abstract

With increasing fragmentation of worldwide production chains and the corresponding contracting relations between companies, the “firm as an inspector” has become a frequent phenomenon. Buyer firms deploy supervising activities over their suppliers' products and production processes in order to ensure their compliance with regulatory standards, thereby taking on tasks commonly performed by public authorities. Why would a firm engage in such activities? In this article we will analyze the conditions under which firms play the role of an inspector vis-à-vis their sub-contractor firms to guarantee compliance with quality and environmental regulations. We develop a theoretical argument based on transaction cost economics and institutionalism to offer hypothetical answers to this question and provide an empirical assessment of our hypotheses.

Business and Governance in South Africa

“…They also voluntarily implement environmental protection standards, provide HIV/AIDS-related services and agree on using sustainable energy or policing local communities (Deitelhoff and Wolf 2010, Flohr et al 2010, Hönke 2013, Thauer 2010. In some instances, they regulate their supply chains (Héritier et al 2009) and seek to foster state regulation by pressing for stricter legislation and helping to strengthen the enforcement capacity of state actors (Flanagan 2006, Mol 2001, Vogel and Kagan 2004. How can we explain such contributions to governance by business in the absence of a credible 'shadow of hierarchy'?…”

“…Sixthly, MNCs in the automotive industry engage in extensive supply chain regulation in the field of the environment (Héritier et al 2009). Industry-wide, most OEMs require from their main direct suppliersthe so-called first tier suppliers -ISO 14001 environmental management system certification as well as ISO 9001 management system certification, which is quality oriented but also comprises many elements directly relevant for environmental protection.…”

“…The difference in the target market between the former and the latter is reflected in the fact that the firms aiming for the premium market sell their products at higher average prices than the one firm targeting the mass market (Héritier et al 2009, Kirmani et al 1999, Thauer 2010. Managers of the two high-end market firms also stated that they rely less on economies of scale than other automotive firms targeting lowend markets.…”

“…More specifically, investments in suppliers with a long duration before they pay off -such as in equipment, production facilities, personnel and know-how -are usually accompanied by high environmental standards and ISO 14001 management systems in order to mitigate the risks inherent in such close and mutually dependent buyer-supplier relationships (Héritier et al 2009). For example, in the relation between one MNC and a supplier, which makes break systems for the MNC, substantial investments were made by the MNC in order to set up the supplier's production of a specific braking system that the MNC intended for a new model.…”

“…A case in point in this respect concerns the provisions a producer of tire-components in South Africa has to meet. Given that its product does not require MNCs to invest in his production facilities before an order, the supplier does not face any specific demands from MNCs in regard to environmental standards (Héritier et al 2009). This explains the variation as concerns supply chain regulation in the automotive industry with respect to environmental standards.…”