How Does the Enforcement of Labor Law Affect Other Firms? Exploring the Spillover Effects on Competitors’ Responsible HRM Practices

How does the enforcement of labor regulations impact across a sector? This study questions whether penalizing one firm for labor violations induces competitors to improve or degrade their human resource (HR) standards. Prior work on inter-organizational spillover effects focuses on other business areas (e.g., knowledge and technology, each of which has its own specific features), is heterogeneous, and does not directly engage the above question. Labor is an active agent and an internal stakeholder; moreover, corporations make decisions that are distinct to individuals. Hence, unit theories designed to understand one aspect of the spillover phenomena are not readily transferable to the domains encompassed in this study. Adopting an abductive exploratory design, we report that fines lead competitors to “relax” their adoption of responsible HR practices. Exploring further the boundary conditions of this discovery, we found that industry competition, the magnitude of fines, productivity, and the presence of labor units moderate the above relationship. After that, we propose directions for future unit theorizing and the potential place of the latter within broader programmatic theorizing. At an applied level, the study helps HR managers better understand the likely consequences of a competitor being fined for breaching labor standards.