Law‐abiding organizational climates in developing countries: The role of institutional factors and socially responsible organizational practices

Date01 October 2019
DOIhttp://doi.org/10.1111/beer.12228
Published date01 October 2019
476
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wileyonlinelibrary.com/journal/beer Business Ethics: A Eur Rev. 2019;28:476–493.
© 2019 John Wiley & Sons Ltd
1 | INTRODUCTION
Unlawful fir m conduct is a per vasive proble m in developing coun‐
tries (Olken & Pan de, 2003) that sh ows no signs of improvem ent.
Recent decade s have witnessed an a cceleration of fi rms breaking
the law in developi ng countries (Zh eng & Chun, 2002) . The prev‐
alence of the prob lem in developing co untries is largel y attributed
to their institu tional context . Conventional wi sdom holds that in‐
stitutional c ontexts char acterized by res ource scarcit y tend to fos‐
ter unlawful con duct (Simpson , 1986; Staw & Szwajkowski, 1975).
However, this basic propo sition does not ex plain how firms so me‐
times behave in law ful ways despite su ch institutio nal conditions.
Given that firm b ehaviour is a product of both the n ature of the in‐
stitutional context and firm characteristics (Martin, Cullen, Johnson,
& Parboteeah, 2 010), we examine whet her organizational prac tices
can ensure fir ms' adherence to the law to combat in stitutional pres‐
sures that foster unlawfulness.
In this paper, we appea l to anomie theory an d ethical climate the ‐
ory to explain t he basic relationship bet ween aspects of the inst itu‐
tional context of d eveloping countries an d what we call “law‐abiding
ethical climat e”, as well as the moderati ng effects of o rganizational
practice in attenuating this relationship. We use the term law‐abid
ing climate to denote t he “law and code” ethical climate pos tulated
by ethical climat e theory. These cl imates are charac terized by the
Received: 25 Oc tober 2017 
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  Revised: 8 Januar y 2019 
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  Accepted: 19 Januar y 2019
DOI: 10 .1111/bee r.12228
ORIGINAL ARTICLE
Law‐abiding organizational climates in developing countries:
The role of institutional factors and socially responsible
organizational practices
Shoeb Mohammad1| Bryan W. Husted2
1Schulich School of Business, York
University, Toronto, Canada
2EGADE Busine ss School, Instit uto
Tecnológico y de Es tudios Superior es de
Monterrey, Monterrey, Mexico
Correspondence
Shoeb Moham mad, Schulich Sch ool of
Business, York University, Toronto, Canada.
Email: shoeb.mohammad88@gmail.com
Funding information
Mitacs, G rant/Award Number: I T05248
Abstract
The institutiona l environment of developing countries may lea d firms to engage in
unlawful firm con duct, which is a per vasive problem in t his context. Our pap er
examines the eff ectiveness of orga nizational practices for ensuring th at firms ad
here to the law in the light of pre ssures from the inst itutional environme nt to be
unlawful. Using the l ens of anomie theor y, we investigate: (a) the negative effe ct
of aspects of the ins titutional context—regulatory burd en and lack of industry mu
nificence—on a law‐abiding cli mate, a type of organizational climate re lated to un
lawful conduct , and (b) the role of socially r esponsible organi zational practi ces in
combating these neg ative effects. Survey data we re collected from 118 firms and
analysed using OLS moderated regression. Our results indicate that a manager's
perceptions of regulatory burden and lack of industry munificence are negatively
related to the extent to wh ich the firm has a law‐abiding climate. Furth ermore, our
findings shed light o n the ability of social ly responsible pra ctices to counterv ail
this effect. W hile the negative effect of perceive d regulatory burden on law‐abid
ing climate weakens when code s of ethics are used mor e extensively by a firm , it
strengthen s when firms hold a CSR certific ation. The latter finding may be due to
the lack of enforcement ass ociated with the speci fic certific ation considered in
our study.
    
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MOHAMMAD An D HUSTED
belief among man agers that ethic al decisions sho uld be made on
the basis of exter nally imposed s ocietal rules , such as the law and
professional codes of conduct (Martin & Cullen, 2009). Accordingly,
a law‐abiding climate in o ur study act s as the moral com pass that
inhibits tra nsgressions of the l aw by firms, such th at firms devoid
of a law‐abiding climate are more likely to engage in unlawful con
duct. A nomie theory is well suited as the the oretical mechan ism to
explore how org anizational pr actices atte nuate the advers e impact
of institution al context on law‐abid ing climate due to it s ability to
conceptualize a context in which elements of the environment ren
der law‐abiding means to achieve desired ends unfeasible (Merton,
2012).
While the liter ature on ethical c limates has overloo ked the role
that organizat ional pract ices in general have in p roducing desir ed
ethical climates (Newman, Rou nd, Bhatt acharya, & Roy, 20 05), in
cluding law‐abiding ethical climates (Simha & Cullen, 2012), a partic
ularly relevan t omission is the examinati on of the efficacy of so cially
responsible or ganizational pract ices which are intended to fos ter an
ethical orientation within firms. The failure to study their efficacy
represents a s ignificant gap i n knowledge for t wo reasons. Firs tly,
socially resp onsible organizationa l practices, such as C SR (corporate
social respons ibility) cert ifications, a re often adopte d from devel‐
oped countries, which hinders their efficacy because of the idiosyn
crasies of develop ing countries (Jama li, Karam, Yin, & S oundararajan,
1997). Secondly, given the un ique institutiona l pressures of develop‐
ing countries, w hich firms cannot control , socially responsible org a‐
nizational pra ctices are a potential me ans by which they can act ively
promote adhere nce to the law.
We pose the following r esearch ques tion in our study : how can
the use of the organizat ional practices of C SR certificati on and codes
of ethics attenuate th e effects of regul atory burden and l ack of indus‐
try munifice nce, aspects of de veloping‐countr y contexts that preven t
companies from adhering to law‐abiding climates? It is important to
first under stand how the i nstitutional c ontext of developi ng coun‐
tries leads to th e unlawful cond uct of firms befo re examining how
organization al practices can c ombat this influence. I n uncovering the
determinants of the prevailing ethical climates of firms, the literature
has focused on inte rnal organizational fac tors centred around orga‐
nizational form (Li u, Fellow, & Ng, 2004; Ma lloy & A garwal, 1995)
and strategic a nd managerial orientations (M orris, 2006; Schminke,
Ambrose, & Neubaum, 2007). The influ ence of inst itutional con
text on ethica l climates, on the ot her hand, has be en understud ied
(O’Fallon & Butte rfield, 2005; Simh a & Cullen, 2012).
Accordingly, we take explicit consideration of two factors that
are characte ristic of the inst itutional conte xt of developing‐co un‐
tries and explain how they diminish a law‐abiding climate and lead
firms to engage in u nlawful conduct. The fi rst is regulatory burden ,
which refers to gover nment regulation that is con sidered by firms to
be inconsistent a nd lacking in tra nsparency (Ja lilian, Kirkp atrick, &
Parker, 2007), and th e second is lack of industr y munificence, which
is the extent to whi ch a firm's indust ry is unable to pr ovide it op‐
portuniti es for growth (Dess & Beard, 2 001). While the relationship
between envir onmental munificence an d unlawful firm conduc t has
been estab lished in prior re search, the st udy of the relation ship of
regulatory b urden to unlawful firm con duct is novel.
We define socially responsible practices as organizational prac‐
tices that are intended to foster ethical conduct within a firm. We
focus specifically on two socially responsible organizational practices:
CSR (corporate social responsibility) certification and code of ethics
use. Our approach allows us to examine CSR against the backdrop of
the idiosyncrasies of the institutional context in which it occurs, which
is required for ascertaining whether CSR initiatives are effective in
achieving their desired consequences in developing countries (Jamali
& Carroll, 2011; Jamali & Neville, 1997).
Our study contributes to the ethical climate literature by showing
that firms that face regulatory burden and lack of industry munificence
have weaker law‐abiding climates as well as shedding light on the
ability of socially responsible organizational practices to combat this
influence. Codes of ethics that are used more extensively are found
to weaken the negative effect of regulatory burden on law‐abiding
climate, while CSR certification is found to strengthen it. The latter,
somewhat surprising finding may be due to the lack of explicit sanc‐
tions of the certification system applicable to our study.
2 | THEORETICAL BACKGROUND AND
DEVELOPMENT OF HYPOTHESES
In this sectio n, we review the conce pt of law‐abiding climate . We
then explore how regulatory burden and industry munificence influ
ence law‐abiding clim ate. We then develop hypotheses tha t relates
two organizat ional practices, CS R certification and eth ics‐code use,
to the base relatio nship between t hese aspect s of the institutional
context and law‐abiding climate.
2.1 | Law‐abiding climate
Ethical climates a re conceptualized as nor ms and ethical decisi on cri‐
teria that underlie the decision‐making and subsequent behaviours
of firms in respo nse to ethical dile mmas (Vic tor & Cullen, 1988).
They determine the issues that are considered ethically pertinent
for a firm and the m oral criteria organization al members use to un‐
derstand , weigh and resolve such issues (C ullen, Victor, & Stephens,
2003). By exer ting signific ant influence on th e behaviour of mem‐
bers of an organization (Sch minke, Arnaud, & Kuenzi, 2005), eth ical
climates under lie the unlawful conduc t of firms.
While there are five possible ethical climates that each repre
sent normative s ystems that can exist w ithin an organizatio n (Martin
& Cullen, 200 9), we narrow our focus to law‐ab iding climate for
three reasons. First, a law‐abiding climate for firms indicates how
conducive a firm’s no rms regarding com pliance are to enga ging in
illegal and corrupt acts. Second, law‐abiding climates are considered
amongst the m ost desirable ethica l climates due to their positi ve as‐
sociation with e thical behavio ur (Fritzsche, 2 007) and negat ive as‐
sociation with u nethical behaviour ( Wimbush, Shepard , & Markham,
2000). Third, law‐abiding climates are also particularly likely to exist

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