BRAND AS INFORMATION INTERMEDIARY.

Author:Parella, Kishanthi
Position::Corporations on Trial: International Criminal and Civil Liability for Corporations for Human Rights Violations
 
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INTRODUCTION

An information intermediary is a party who informs one group of actors (Group A) of the characteristics, capacities, and other relevant information of another group of actors (Group B). Information intermediaries matter because in a market characterized by asymmetries of information, Group A may not exchange with Group B but for the information that intermediaries supply.

In this essay, I suggest that in many global supply chains the function of a transnational corporation is best conceived of as an information intermediary. Many corporations have outsourced several functions to one or more third party suppliers: manufacturing, research and development, marketing, sales, and customer support. (1) We may not purchase the products from a third-party supplier because we are unfamiliar with it and cannot verify the quality of the product before purchase; these suppliers do not have a brand that we trust. Therefore, we rely on the information conveyed by the transnational corporation through its brand when we make our purchasing decisions. The transnational corporation acts as an intermediary that facilitates market exchanges by providing information through its brand that persuades Group A (buyers) to exchange with Group B (third party suppliers). (2)

Recognizing the information intermediary role of corporations has at least two important implications. First, brand corporations may need to disclose their intermediary role to consumers in order to prevent these consumers from suffering "identity harms" that result from risks in the supply chain. (3) Second, not all disclosure strategies are equal. The intermediary role played by brand corporations can potentially hurt more than just consumers. Practices that persist in supply chains also harm workers in overseas sites. (4) The way corporations disclose information can incentivize them to deter wrongdoing in the supply chain. (5) Their willingness to do so depends on the incentives created in the regulation that applies to them. While different disclosure strategies may prove effective at shining a light on conditions in supply chains, some strategies might prove better at incentivizing intermediary cooperation than others. Therefore, viewing corporations as information intermediaries provides us with a useful lens to evaluate competing strategies for information regulation concerning the supply chain.

  1. UNDERSTANDING THE INFORMATION ROLE OF TRANSNATIONAL BRAND CORPORATIONS: THE MAGHRIBI TRADERS RE-VISITED

    Many American household names do not make the goods we associate with them. Instead, they outsource a variety of traditional business functions to third-party suppliers, including manufacturing, customer service, marketing, sales, design, and research and development. (6) The corporation may outsource these functions to one or, more likely, several vendors both here in the United States and abroad. (7)

    For example, while Nike sells tens of millions of athletic shoes in the United States every year, "all of the firm's manufacturing operations are conducted overseas." (8) Additionally, Nike "never relocated domestic production abroad, ... because the firm actually originated by importing shoes from Japan. It has subcontracted nearly all of its production' overseas ever since." (9) The result is that "[i]n the United States, Nike has developed essentially as a design, distribution, and marketing enterprise." (10) As one of Nike's vice-presidents aptly stated, '"We are marketers and designers'"--"'[w]e don't know the first thing about manufacturing.'" (11)

    For these reasons, we usually think about the functions overseas suppliers provide to transnational corporations as opposed to exploring the functions that transnational corporations provide to overseas suppliers. It is also important, however, to understand the benefits that flow from the brand corporation to the overseas supplier (besides payment).

    Consider a hypothetical involving Acme, a US-based corporation, that outsources all of the functions necessary to support its primary product, Widget, to a third party, Overseas Supplier. In an extreme example of outsourcing, assume that the latter organization designs Widget (including improvements), invests in R&D concerning Widget's technology, manufactures, markets, and sells Widget in the United States.

    Overseas Supplier may not be able to sell in the US market without Acme due to information asymmetries or "the lemons problem." George Akerlof explained that information asymmetries often characterize market exchanges because a potential buyer knows less about the product than the product's seller. (12) These asymmetries increase the risk that the seller may exploit the buyer by selling her a product she would not want if she had known the truth before the sale. (13) These asymmetries also occur in the sale of goods in the global marketplace: A buyer in one country may refuse to purchase a good from a seller in another country because the former cannot evaluate the quality of the good prior to sale. (14) In these situations, transnational corporations serve as critical information intermediaries by addressing information asymmetry problems in cross-border sales information problems that would prevent sales in the absence of the information intermediary functions performed by transnational corporations.

    In order to appreciate the significance, consider how information asymmetries determine the likelihood of sales in two hypotheticals. In Hypothetical 1, a transnational corporation based in the United States, Acme, sells Widget. Buyer is excited to purchase this new product, but wary because she cannot verify its properties prior to sale (even a cursory examination at a store will not reveal all potential hidden defects). Buyer runs the risk that Acme may sell her an inferior product; however, Buyer has access to other resources that give her greater confidence in the transaction because she (a) purchased from Acme previously (prior dealings), (b) trusts Acme based on available information (reputation), or (c) feels confident in post-sale assurances that reduce the risk of opportunism, such as return policies, warranties, dispute resolution procedures, and consumer protection laws. For these reasons, she decides to go ahead with the purchase of Widget from Acme.

    Now consider how the information problem grows if Buyer does not purchase a Widget from Acme, but instead purchases it directly from Overseas Supplier. In Hypothetical 2, Buyer is not familiar with Overseas Supplier, having never purchased from it. Buyer can find very little information about Overseas Supplier online and there are very few customer reviews of Widget. Overseas Supplier sells directly from another country and its website states that any disputes arising from product sales will be arbitrated in that country as the exclusive forum. Unsurprisingly, Buyer feels less willing to enter into an exchange with Overseas Supplier because she lacks the information that an exchange with Acme would make available. (15) She does not have any previous dealings with Overseas Supplier and is unaware of its reputation. Additionally, Overseas Supplier's return policy requires returns to its overseas location and disputes are subject to mandatory arbitration before a foreign tribunal. She therefore foregoes the exchange (despite how badly she wants a Widget!!).

    This illustrates the challenge information asymmetries in cross-border sales presents. A buyer in one country knows very little about the goods offered for sale in another or about the merchants offering it. The enforcement sanctions for opportunism are also weak or insufficient to assuage the buyer, who may need to incur high costs to verify product quality or protect his interests after the parties complete the sale.

    These problems are not new. Avner Greif famously studied information problems encountered by Maghribi traders in long-distance trade in the 11th century. (16) These traders sold...

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