# **_Social Standards_**

While product and labor standards have become codified, as governmental regulations in many markets and across most GVCs, suppliers had to adapt to the increasing importance of voluntary standards. In many instances, voluntary standards have become de facto mandatory obligations and a commercial imperative (Swann 2010). Their emergence reflects social concerns “unleashed by globalization” over inadequate government regulation of the social and environmental impacts of international trade (Mayer and Gereffi 2010). The governance of GVCs is increasingly determined by what the buyer requires, and not merely what a supplier can offer.

Higher _social standards_ could increase the demand for goods and services from reputation-conscious foreign investors or international buyers, but also increase labor costs (for example, due to higher contributions to unemployment, pension, or health insurance), while not necessarily improving the quality of those inputs. This could have a positive or negative effect on a country’s attractiveness. Higher labor costs, in turn, can trigger local firms to save costs, for example, via increased offshoring, or to raise their productivity levels. The extent of generated spillovers via GVC integration is therefore not clear.

However, a growing number of studies now show that profits, productivity, and firm survival are all positively associated with improvements in working conditions (World Bank Group 2015). Several papers have taken various approaches to try to identify the relationship between firm performance and working conditions. A discrete-time survival analysis model of 595 Cambodian garment factories by Jetha and Linsen (2015) found that increased compliance with social protection standards is associated with reduced odds of factory closure. A survey of management and laborers in the Lao People’s Democratic Republic’s garment sector finds that failure to increase worker well-being has led to dissatisfaction, high labor turnover, low productivity, and impaired firms’ opportunities to strengthen participation in garment GVCs (World Bank 2012).

# **_Environmental Standards_**

Finally, higher _environmental standards_ may lead to growing demand for inputs from foreign investors or international buyers whose reputation among their final clients depends on standards compliance of their suppliers. But, while higher environmental standards compliance can raise unit costs forcing local firms to save costs elsewhere or, alternatively, to raise their productivity levels, it also improves the quality of products (for example, due to reduced pesticide usage or organic production). In this regard, the expected mediating effect of environmental standards on GVC spillovers is more similar to that of product standards.

To test this hypothesis, Prakash and Potoski (2006) employed a panel of 108 countries over seven years to investigate whether international trade encourages firms to adopt ISO 14001—the most widely adopted voluntary environmental standard. For importing countries whose own firms had high levels of adoption of ISO 14001, exporting firms from other markets showed a significantly increased rate of adoption of ISO 14001, even after controlling for firms' compliance and pollution histories, as well as addressing potential endogeneity issues. These findings point to the increasing importance of lead firms influencing organizational practices in GVCs.

Most studies in this area focused on environmental standards and their impacts in agribusiness GVCs. In 2009, the International Institute for Sustainable Development explored impacts of sustainability standards on the distribution of economic benefits along GVCs (Sexsmith and Potts 2009). The authors found standards compliance and certification often lead to producer-level price premiums for agricultural products, but less frequently for certified fisheries and forest markets. Much like product standards, the costs of certification and indirect compliance costs act as a barrier to small and resource-poor groups.

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