Protecting CSR ‐based reputation abroad: Intra‐firm trade as a governance mechanism

Abstract

Research Summary This study investigates how multinational enterprises' (MNEs') commitment to corporate social responsibility (CSR) affects intra‐firm trade in international subsidiaries. While CSR‐committed MNEs need to protect their reputation, intra‐firm trade can facilitate monitoring and coordinating the behavior of MNEs' international subsidiaries. Such governance functions help these MNEs mitigate challenges related to bounded rationality and reliability, ultimately reducing governance costs. Thus, we expect CSR‐committed MNEs to be more likely to engage in intra‐firm trade in their international subsidiaries. We further predict that the positive relationship is contingent upon host country corruption and MNE alliance experience, which may amplify or mitigate the levels of bounded rationality and reliability, respectively. We tested our theories using Korean MNE data during the 2006–2013 period and found empirical support. Managerial Summary While MNEs are increasingly embracing CSR, CSR's impact on MNE governance choices (particularly in international subsidiaries) is not fully understood. This study proposes that intra‐firm trade serves as both formal and informal governance mechanisms which protect the CSR‐built reputation of MNEs internationally. Our analysis of Korean MNE data shows that MNEs' CSR commitment increases intra‐firm trade in international subsidiaries. This effect is pronounced in corrupt host countries but is attenuated in MNEs with more alliance experience. Our findings suggest that MNEs' CSR‐built reputation should be protected by preventing irresponsible behavior in their international subsidiaries. Additionally, this study underscores that intra‐firm trade plays a pivotal role as a governance tool for MNEs.