Globalization, Credence Goods and International Civil Society

The process of globalization is characterized by an impressive growth in global value chains, as well as the proliferation of non-governmental organizations (NGOs) interacting with production and sourcing decisions of multinational firms. In this paper, we present a simple North-South model of international trade allowing for the joint emergence of firm offshoring to South and NGO activism financed by donations from the civil society. In our model northern consumers care about unobservable “credence” characteristics of goods such as the environmental and social impact of production. The analysis highlights a complementarity between the growth of global value chains and the emergence of NGOs: for a range of trade costs potential NGO emergence allows firms to capture gains from globalization, which would otherwise be unattainable. We show that, somewhat paradoxically, when offshoring triggers NGO emergence, this can be at the expense of the consumers, who for a range of trade costs, would be better-off in a world without NGOs. In an extension we show that NGOs may also crowd out investment in regulatory capacities in low cost countries, as consumers in North have a willingness to fund NGOs providing a substitute for regulation in South.