The extent to which state authorities can regulate the externalities and the behaviour of multinational corporations (MNCs) is limited. This is especially true when MNCs operate in or do business with fragile states that lack the willingness and/or resources to effectively and legitimately regulate businesses. However, MNCs often engage in private regulation to remedy some of the problems that unregulated business behaviour creates. In this article we examine what limits the effectiveness and legitimacy of the contributions made by MNCs to global governance. We explore the mechanisms that state authorities in functioning states can use to overcome these barriers as well as the boundary conditions of these mechanisms at both company and government levels. We provide a framework for governmental CSR policies and describe the ways in which functioning states engage in governance beyond the ‘shadow of hierarchy’ and directly or indirectly influence business conduct beyond the territory in which their legal regulations can be enforced.
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