In this paper, we examine the effect of nongovernmental organizations (NGOs) on the transaction costs multinational enterprises (MNEs) assume in their nonmarket social development strategies. We develop propositions to predict the effect of three important aspects of the institutional context on how NGOs affect MNE transaction costs: institutional development, institutional distance and institutional dynamism. We also propose how these relationships are moderated by the level of civil society development in the countries in which these entities interact. We conclude with suggestions for further research.
Multinational enterprises (MNEs) are under increasing pressure to ensure a high degree of social responsibility in their operations, throughout the value chain and across the globe. Nongovernmental organizations (NGOs), whose influence on international business has risen in recent years (Teegen, Doh, & Vachani, 2004), act as agents of civil society and pressure MNEs to respond to demands for socially responsible strategies by affecting their transaction costs and choice of governance mechanisms.
The evolving institutional context poses challenges for MNEs, inducing organizational transformation that includes changing the company's posture toward social issues. A relatively well-established research stream has examined firm strategies in the “nonmarket” environment (Bonardi and Keim, 2005, Bonardi et al., 2005, Baron, 1995 and Baron, 2000). Only recently, however, has this research extended to the realm of NGOs (Doh and Guay, 2004, Doh and Guay, 2006 and Teegen et al., 2004). It is especially important to understand the effect on transaction costs since they lie at the core of theoretical explanations for the existence of MNEs, and their strategic choices with regard to governance mechanisms (Buckley and Casson, 1976, Dunning, 1988, Hennart, 1982, Hymer, 1960 and Rugman, 1981).
In this paper, we apply the TCE framework to examine how NGOs’ actions affect MNEs’ transaction costs, which vary with level and posture of MNEs’ social development strategy and institutional context.
The following five sections are organized as follows. The first section summarizes the TCE framework; the second section discusses categories of MNEs’ social development strategies; the third section examines the impact of NGOs on transaction costs; the fourth section develops propositions regarding how NGOs’ effect of MNEs’ transaction costs varies with institutional development, distance and dynamism; and the fifth section provides concluding remarks and discusses theoretical implications.
Drawing from and extending the TCE framework, we have shown how NGOs affect the transaction costs associated with
MNEs’ social development strategies, especially in host-country institutional contexts that differ significantly from homecountry
contexts. NGOs can force companies to recognize their negative externalities and develop essential social
development strategies to attenuate them. In addition, NGOs can help firms design and implement enhanced social
development strategies, reducing their transaction costs. At the same time, however, NGOs can undermine MNE strategies
by increasing transaction costs, exposing inferior or symbolic gestures that lack substance, and by targeting those firms that
claim to adhere to high levels of social responsibility but fail to deliver.
