Behavioral Dynamics and Regulation of Transnational Corporations

Abstract

Transnational corporations (TNCs) are actively involved in political and economic games in national and international arenas in order to sustain their competitiveness. Powerful States—be they from the western world, Asia or Latin America—participate in these games by supporting their TNCs through economic diplomacy mechanisms. When TNCs operate abroad in weak institutional environments, such as many African countries, there is a strong incentive to use their relatively larger political and economic powers to secure rents. Therefore, they are likely to develop predatory practices such as human rights violations or natural environment damage. Effective regulations against predation depend not only on their intrinsic quality but also on the institutional environment and the behavior of parties involved in their implementation. The development of a global code of conduct requires a sound understanding of TNCs’ behavioral dynamics in relation to their original countries. Drawing on North et al.’s (2009, 2013) taxonomy on social orders, and building on Greif and Tadelis’ (2010) concept of crypto-morality, I build an analytical framework to assess the risk of predation that arises in the interactions between a TNC and a host social order. TNCs adjust their behavior to adapt to their institutional environments, and they make a cost-benefit assessment to arbitrate between a responsible or a predatory behavior. I demonstrate that regulations that force TNCs and States to practice transparency and that impose dissuasive sanctions are most likely to promote ethical and responsible behavior.