FOREIGN TRADE UNIVERSITY

School of Economics and International Business

Advanced Program of International Business Economics
*****************************

CSR OF SMEs IN DEVELOPING COUNTRIES AND THEIR INTEGRATION

INTO GLOBAL SUPPLY CHAIN
Course: Business Economics
Instructor: Vinh T. H. Cao

MEMBERS:
1. Nguyen Thi Thai Ha - 1711140026
2. Hoang Hanh Hoa - 1711140032
3. Do Quang Trung - 1711140086
Contents
1. Introduction ................................................................................................................................................................... 3

2. Literature Review ........................................................................................................................................................ 3

2.1. Sustainable Supply Chain and Firm’s Performance .............................................................................. 3

2.2. Corporate social responsibility...................................................................................................................... 7

2.3. Corporate Social Responsibility in the supply chain of MNCs .......................................................... 7

2.4. Supply chain social sustainability in developing economies ............................................................ 9

3. Hypothesis development .......................................................................................................................................... 9

3.1. Sustainable supply chain and firm’s performance ................................................................................ 9

3.2. The practice of adopting corporate social responsibility and the supplier’s performance.
...........................................................................................................................................................................................10

3.3. Supply chain’s performance and performance of SMEs supplier..................................................12

3.4. Supplier’s social sustainability adoption practices and a buyer’s supply chain
performance.................................................................................................................................................................13

4. Conclusion ....................................................................................................................................................................14

References .........................................................................................................................................................................15

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1. Introduction

Sustainability is gaining attention in supply chain research, due to increased awareness among
stakeholders of corporate actions on the environment and society. More recently, Multinational
corporations (MNCs) are increasingly extending their supplier network, which is often made of
Small and Medium enterprises (SMEs,) based in developing economies because of cost
advantage. On the other hand, a supplier's performance plays a key role in the focal company's
long-term performance (Carter, 2005). As the firm extends its supplier base to the emerging
economies, the supplier's actions put the focal company's supply chain at greater risk (Klassen
& Vereecke, 2012). To reduce the risk, many MNCs are demanding their supplier to adopt
Corporate Social Responsibility (CSR) practices in production. By reviewing the previous
literature on the matter, this paper tries to find the relationship between CSR of SMEs supplier
and the performance of MNCs supply chain. From here, the writers hope to provide practical
measures for SMEs in developing countries to promote themselves to the linkages with MNCs
and be able integrate into the global supply chain.

2. Literature Review

2.1. Sustainable Supply Chain and Firm’s Performance

The writers first look at the literatures that explored the relationship between sustainable
supply chains and the firm’s performance, i.e. what sustainability entails in the point of view of a
firm. Since the subject of our research is supply chain, the “firms” here expand from businesses
that integrate supply chain into their model of production or contribution of products to
consumers.

We began the reviewing process by referring to the dictionary definitions of the word
“sustainability” and then review the literature on “sustainable supply chain” where the word
“sustainable” holds each of the meanings. We use the English Oxford Dictionary for the following
definitions.

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“Sustainability” as “the ability to continue or be continued for a long time”

Here, the writers view the sustainability supply as similar to supply chains that are “resilient,”
“adaptive.” In other words, the writers look at papers that explore the characteristics of supply
chains that are able to last for a long time, to be able to overcome adversity both from the
outside world (e.g. economic, social, financial changes) or from within the supply chain (e.g.
disorder within the network of suppliers due to inadequate management).

In general, the topic is raised as one of major concern due to increasing chance of disruptions as
firm’s supply chains extend further and further into the global settings, where the firm’s
performance is exposed to more and more risks. Here, the literature is around how the supply
chain is able to bounce back after adversity, how the supply chain remains competitive, and
effective risk management of the supply chain (SCRM).

Firstly, the writers look at the differences in how the papers view the pillars of sustainability
and resilience in supply chain. Specifically, these views include (Jüttner & Jüttner, 2011) view of
the four capabilities that make up sustainability of a supply chain (flexibility, velocity, visibility
and collaboration). Along the same line is (Scholten & Schilder, 2015)’s idea that how specific
collaborative activities even increase supply chain resilience via increased visibility, velocity and
flexibility (2011). The variety of the way researchers view sustainability in supply chain
continues with works such as of (Rungtusanatham, et al., 2003), where they investigate into the
sustainable competitive advantage of a firm based on what linkages in a supply chain can help
acquire, in other words, the linkages can be the tool for such competitive resources, or it itself
can be the competitive resource (2003).

At the same time, the writers also look at researches that look into the risks and risk
management in dealing with supply chains. Research done by Jüttner and Maklan in 2011,
makes clear the distinction between the following terms and their relationships supply chain
risks (SCR), supply chain risk management (SCRM), supply chain vulnerability (SCV), and supply
chain resilience (SCRES). Specifically, under its definition of SCRES (as “the containment of
disruptions and recovery from them”), the paper posits the positive relationship between SCR
effect and knowledge management and SCRES by improving the flexibility, visibility, velocity
and collaboration capabilities of the supply chain, thus decreasing the SCV in a disruptive risk
event. What is also noteworthy is the implication of the paper, as it argues for the proactive
work involved in SCR effect and management, and not for SCRM: to somehow account for all

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cases of disruptions for extreme events while maintaining the operational mindset that
gravitates towards routines and predetermined responsibilities.

Other papers deal with other kinds of risks. These include that of (Zhao, et al., 2013) the risks
against firm’s supply chain integration (SCI) and thus firm’s performance, which was based on
the High Performance Manufacturing (HPM) project database collected from 317 manufacturing
plants in ten countries and three representative industries (machinery, electronics and
transportation components). More on SCI, (Wiengarten, et al., 2016) Suggests that supplier
integration is also effective in weak rule of law (i.e., high risk) environments. Furthermore,
companies can complement and strengthen the performance impact of their supplier
integration practices through supply chain risk management (SCRM) practices in risky
environments.

“Sustainability” as “the use of natural products and energy in a way that does not harm the
environment”

For this definition, the writers look for the literature surrounding the supply chains that are
sustainable in terms of ecology. Specifically, the subject of “externalities” of the production
process is of concern, as well as problems of minimizing waste and developing sustainability
metrics. This definition can also be traced back to the definition of (Elkington, 1997) and his
“Triple bottom line principle” of profit, planet, and people.

The topic of supply chain and supply chain management in the world of research began with
issues such as the integration of processes across suppliers, cost accounting and opportunities
in cost productions (Andersen & Skjoett-Larsen, 2009). The readers can come across such topics
in the papers of the following authors: (R.Kannan & ChoonTan, 2004) on processes (LaLonde &
Pohlen, 1996) on supply chain costing. But with the emergence of the Global Supply Chain
involving suppliers network extending to developing countries and low-cost countries in
Central and Eastern Europe, research has been done in response to the resultant concern for
social and environmental consequences of production and consumption, namely on the issues of
green and sustainable supply chains.

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On sustainability measurement, (O’Rourke, 2014) and (Hassini, et al., 2012) discuss the failure
of science in developing a metrics on sustainability, thus hinder the measuring of sustainability
in the operations of corporations (2014). The paper also presents ways companies and supply
chains commit unsustainable practices due to this gap in sustainability control, such as
providing green-washed data.

On the adoption of firms and supply chains, O’Rourke also posits that regardless, companies
adopt policies to integrate sustainability practices into their operations (2014). However, the
extent of such integration depends on the ease with which the benefit is recognized to be direct
by the company, for instance cost savings (Dauvergne and Lister, 2011). In general, Dauvergne
and Lister also included four major reasons for integration of sustainable practices, three of
which are to gain competitive advantages (in terms of cost reductions and supply chain
innovations), to deal with pressures from the stakeholders (concerning brand reputations and
demands for greater transparency), and to handle risks from supply chain disruptions (brought
about by regional resource shortages and extreme weather events) (2011). Examining the state
of the art in applying sustainable supply chain, O’Rourke recognizes major amount of work to do
and thus opportunities in pushing the development of full sustainability in supply chains
(2014).

In terms of comparative advantage, Hassini et al recognize the sustainable or green supply chain
way of management as a challenge for the firm and its leader, as they “strive to
satisfy multiple, possibly conflicting, objectives,” namely maximizing of profit or reducing
operations costs while minimizing the environmental impacts and maximizing the social well-
being requires additional operational costs, at least at the very beginning stages (2012). A
review of literature has been done by Hassini et al (2012) over papers that examine the
adoption of sustainability into supply chains by firms over various sectors. The paper includes
researches that look at the costs and advantages faced by both Small and Medium Enterprises
(SMEs) and the multinational firms that are the heads of global supply chains. Recognizing the
long-term necessity of adopting sustainability for the whole supply chain, and that large firms
benefit more than SMEs due to ability to handle additional operational costs, the paper
concludes that more in-depth research is needed into the relationship between firm sizes (SMEs
or multinational firms) and sustainability.

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2.2. Corporate social responsibility

Corporate social responsibility (CSR) is a broad concept and not limited to supply chains, but to
the companies’ overall policies to the society and environment. However, the focus in this paper
is on CSR in global supply chains of MNCs.

Although CSR is a widely used term, researchers have not sought common ground on the
meaning of CSR in practice (Carroll & Buchholtz, 2000); (Joyner & Payne, 2002); (Roberts,
2003); (Ougaard, 2004). According to (Hill, et al., 2003), it is hard to define the CSR accurately
because of beliefs and attitudes about the nature of the relationship between business and
society change with the related issues nowadays. Moreover, (Carroll & Buchholtz, 2000) argue
that the difficulties with arriving at a definition of CSR partly have to do with the problem of
determining operationally the managerial implications of such a definition. This is a major
problem considering companies’ differences in size, products, profitability, resources, societal
impacts, etc. Another factor contributing to the confusion about the nature of CSR is the large
number of concepts used to describe largely the same phenomenon. Academics, consultants and
corporate executives have provided various definitions to business’s engagement in ethical
issues.

Among the concepts that have been used – apart from CSR – are sustainable development,
corporate citizenship, sustainable entrepreneurship, the triple bottom line, and business ethics
(Marrewijk, 2003). Generally speaking, the practice of CSR as we know it today has two main
points. Firstly, it describes the relationship between business and the larger society. Secondly, it
refers to a company’s voluntary activities in the area of environmental and social issues (Carroll
& Buchholtz, 2000); (McWilliams & Siegel, 2001); (Hill, et al., 2003); (Marrewijk & Werre,
2003).

2.3. Corporate Social Responsibility in the supply chain of MNCs

As the trend of many business relations is changing from companies producing goods within the
components in national operations to companies engaging in supply chains and supplier-based
manufacturing across national borders, the concept of CSR is also transforming. CSR is no longer
the individual company’s region; increasingly, it includes the entire supply chain. In other
words, multinational companies are not only expected to behave socially responsibly within
their own juridical standards. They are also responsible for environmental and labor practices

7
of their global trading partners such as suppliers, logistics providers, and intermediaries over
which they have no ownership (Jenkins, 2001); (Maloni & Brown, 2006); (Pedersen &
Neergaard, 2004); (Jørgensen & Nielsen, 2001); (Roberts, 2003).

To clarify the demand for CSR in global supply chains, we should consider the fact that a large
part of global trade is conducted through systems of governance, which link firms together in
various sourcing and contracting arrangements (Gereffi, 1994); (Sobczak, 2006). The term
“governance” implies that some key agents in the supply chain – often large multinational
corporations – take responsibility for the inter-firm division of labor and specific participants’
capacities to upgrade their activities (Gereffi, 2001). Thus, they are able to manage the
production over long distances without being the owner (Jenkins, 2001). The influence of these
corporations derives from their market power and control over key resources needed in the
supply chains of which they belong to. Given their power, these agents contribute an important
role in deciding what should be produced, how and by whom (Gereffi, 1994).

MNCs can also support their suppliers by providing technical solutions to enable them to
achieve the required performance. (Jenkins, 2001) argues that “the growth of ‘global value
chains’, through which Northern buyers control a web of suppliers in the South, has led to calls
for them to take responsibility not only for aspects such as quality and delivery dates, but also
for working conditions and environmental impacts”. The pressure on multinational companies
comes from both internal and external stakeholders such as customers, employees, unions,
shareholders, business partners, governments, NGOs and the media, who are paying more
attention to the environmental and social conditions at overseas production locations, mainly
in developing countries (Welford, 2000); (Maloni & Brown, 2006). This concern is raising due
to the expansion of multimedia communication technology, which makes it harder for
companies to conceal unethical practices at their suppliers such as violation of union rights, use
of child labor, harmful working conditions, race and gender discrimination, etc. Well known
examples from the media are Nike, Gap, H&M, Walmart, and Mattel (Frost & Burnett, 2007).

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2.4. Supply chain social sustainability in developing economies

In developing countries, labor practices of global companies (and their suppliers) have gained
much attention due to pressures from stakeholders (NGOs, media, and customers).

(Huq, et al., 2016) through their case study research in Bangladesh's apparel industry
discovered many social management capabilities and drivers for social sustainability adoption.
Their research identified SMEs suppliers social issues including health, safety (worker wellness,
working conditions, occupational diseases, fatalities and emergency preparedness), quality of
life for workers (stress, overtime, working hours, minimum wages, job satisfaction), worker
rights (forced labor, freedom of association, humane treatment, paid maternity and sick leave in
suppliers). Further their research found that in the absence of effective stakeholder's pressure
and ineffective regulatory mechanisms force buyers to replace themselves to act as regulators
for supplier's social issues.

Similar study conducted by (Gopalakrishnan, et al., 2012) found various other social issues such
as ethical code of conduct, inclusion and diversity, safety and environmental performance in
India's suppliers. By studying the Brazilian oil and gas industries, Silvestre points out the
institutional complexities that act as barriers to supply chain social sustainability adoption
(Silvestre, 2015). Of the studies discussed, the social issues vary from country to country, even
among emerging economies as the social norms differ considerably (Hoejmose & Brammer,
2013) and contextual, time-dependent, dynamic and emerging (Yawar & Seuring, 2015).

3. Hypothesis development

From the literature we have reviewed, hypotheses are developed and tested in later stages of the
paper.

3.1. Sustainable supply chain and firm’s performance

In the scope of this paper, the firm’s performance is viewed as a collection of all that can be
counted as advantageous to the firm. An overview of the researches mentioned above stems
differences in their focus, but they all link sustainability in supply chains and a variety of the
firm’s advantages. As (Rungtusanatham, et al., 2003) recognized supply chain as the resource of
competitive advantage, it is reasonable to assume that a supply chain with linkages that are

9
resilient in the face of adversity and disruptions brings about great competitive advantage to the
firm. We can also view supply chain risks and supply chain integration as the two chains in the
link between sustainable supply chain and firm’s performance. Indeed, researches have shown
how supply chain management against risks benefit supply chain resilience, and thus benefit the
firm’s performance (Rungtusanatham et al, 2003; Ju¨ttner, 2011; Zhao et al, 2013) . At the same
time, in the face of risks, supply chain integration continues to exert advantages to the firm,
accompanied and supported by supply chain risk management (Wiengarten et al, 2016).

Thus, the writers arrive at the following hypothesis,

H1: Sustainable Supply Chains positively affects the Firm’s performance.

3.2. The practice of adopting corporate social responsibility and the supplier’s
performance.

There is a number of researches published examining the relationship between the practice of
CSR of a firm and its level of competitiveness. Since the 1990s, more and more scholars have
paid attention to the relationship between CSR and corporate financial performance (Roman, et
al., 1999). In spite of the lack of sufficient empirical research with obvious results in the profit
and loss of a business, there is growing consensus about the correlation between CSR and
overall corporate competitiveness (Murillo and Lozano, 2006). The notion that being
responsible and friendly with the environmental and societal issues acts as a source of
competitive advantage was agreed in the Global Competitiveness Report 2005-2006 held by the
World Economic Forum.

The performance of a firm can be divided into three basic components. The first one to be
mentioned is the growth in reputation of the firm. Fombrun and Harris has developed a model
to prove that social responsibility is one of the six crucial elements to Reputation Quotient (RQ).
These sources of improvements coming from investors’ trust, new market opportunities and
positive reactions of capital markets as said by Fombrun et al (2000), Porter and van der Linde
(1995) and Spicer (1978). However, how big these returns will be in the future depends on the
number of times and the range of situations CSR is implemented (Dowling, 2001, p. 23). In
addition, there is empirical proof of a strong and a positive link between reputations and
financial performance (Roberts & Dowling, 2002), which means that inappropriate CSR
activities will detrimentally affect the companies' CSR image and financial returns.

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As a result, the second index to be taken into account is finance. One of the outstanding
initiatives to work on linking CSR and competitiveness is (Stonehouse & Snowdon, 2007), with
description of how companies can enhance their long-run financial status by implementing
social activities. The eventual result of better financial status derives from the economic
interests offered by CSR requirements, through better access to market, finance and business;
enhanced intangible assets and reduced risk from regulatory sanction. In the end, the firm is
able to enhance productivity and efficiency, which will compensate the initial costs and enables
its competitiveness sustainable (Gugler & Shi, 2008). This finding is also supported by other
research, such as that of (Soloman & Hansen, 1985), concluding that investments in CSR have a
big return in terms of image and overall, financial results: the related benefits, in fact, are bigger
than the related costs.

The last factor to be considered is the growth of the firm’s ability to innovate. According to
Jonathan Low from Cap Gemini Ernst & Young writings in his Creation Index model, a
company's capacity to innovate could be enhanced by CSR through the linkage between
reputation and sustainability particularly in higher-income market.

However, there are still skepticism about the effectiveness of firm’s CSR in which they argue
that engaging SCR is costly and consequently, the opportunity of improvements in firm’s
profitability seems not so obvious in the distant future (Henderson, 2002). A lot of skeptics, first
of all Friedman (1962), underline that also in the hypothesis of the relevance of CSR, it is
difficult for managers to determine what the social responsibility of their company is (Gugler &
Shi, 2008)Corporate Social Responsibility for Developing Country Multinational Corporations:
Lost War in Pertaining Global Competitiveness?. So, if the costs related to CSR are likely to
outweigh the correlated financial benefits, CSR seems to appear inconsistent with the principle
of shareholders’ value maximization.

Noticing the contradict findings, we would like to propose the following hypothesis:

H2. Adoption of social sustainability practices by the supplier positively relates to supplier's
performance.

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3.3. Supply chain’s performance and performance of SMEs supplier

Despite the fact that there are many different expressions of the impacts of a SME’s on the
overall supply chain, they share the same notion, which is the supply chain concept is theorized
from the formation of a value chain network consisting of individual functional entities
committed to providing resources and information to achieve the objectives of efficient
management of suppliers as well as the flow of parts (Lau & Lee, 2000). In the overall scheme,
the role each SME plays has impacts on the functions of the supply chain.
There are many research with empirical methods has been done to support the idea of a
positive link between the MNC’s overall supply chain and the supplying firms’ (herein called the
SMEs who provides the services into the overall supply chain) economic performance (e.g.
(Cousins, et al., 2006)), especially due to the significant economic benefits earned from effective
management of buyer–supplier relationships (Carter & Narasimhan, 1996). Similarly, a
company can only be as sustainable as its supply chain partners function well (Krause, et al.,
2007). Sharing the same ideas, other scholars have pointed out that co-ordination through co-
operative partnerships increasingly replaces co-ordination through markets and hierarchies
(Powell, 1990), which means the trend of MNCs to move their attention toward the relationship
with SMEs on the basis that co-operative relationships can increase performance for both the
buyer (MNCs) and the supplier (SMEs) under certain external market situations and certain
buyer and supplier characteristics (Dyer, 1997). It can be argued that the practices that promote
closer involvement with fewer selected suppliers by establishing long-term relationships,
information sharing systems and better coordination directly and positively affects the MNC’s
sustainability performance (Gualandris, et al., 2014).

The underlying reasons for this conclusion have been examined. For a MNC, partnerships with
SMEs have the potential benefit of eliminating redundant pools of inventory and duplicate
service operations while reducing costs (Chan & Kumar, 2007), which in turn affect the overall
supply chain of the MNC. The suppliers’ actions directly influence the supply chain performance
of buying organizations, which in turn impacts their strategic (reputation, image, and customer
satisfaction), financial (sales), and operational (operational efficiency) performance ( (Foerstl,
2010); (Gualandris, et al., 2014)). With the association between the reputation of buying and
supplying firms, (Krause, et al., 2001) found that improving the working conditions of suppliers’
employees helps achieve better quality products through enhanced employee motivation, which
is indirectly linked to the buyer’s operational performance.

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The reality speaks the same voice with the findings. On the purpose of increasing the
sustainability of their supply base, MNCs has clearly show their tendency towards achieving two
main goals, firstly to choose only sustainable suppliers instead of those that do not meet certain
criteria ; or secondly, to co-operate with existing or new suppliers to achieve higher levels of
sustainability (Krause, et al., 2009)

Thus, to test the impact of SMEs supplier’s performance on performance of the whole supply
chain, our proposition is:

H3: In developing nations, supplier’s performance affects positively buyer’s supply chain
performance.

3.4. Supplier’s social sustainability adoption practices and a buyer’s supply chain
performance

In reviewing recent literature, we found a number of studies that also supports the direct
linkage between supplier social sustainability practices and buyer supply chain performance
(Gimenez, et al., 2012); (Klassen & Vereecke, 2012)). (Krause, et al., 2000) in their research on
socially sustainable supplier development practices, argue that the buying firm’s motivation to
implement CSR at supplier level has two aspects. Firstly, the adoption of CSR by SMEs suppliers
enhances their own performance and guarantee the MNCs supply chain needs. Secondly, an
undisturbed supply of goods also leads to better supply chain performance.

Similarly, (Klassen & Vereecke, 2012) found that supplier collaborative activities on social
issues between buyer and supplier help both parties achieve better economic results, in the
form of cost reduction and market expansion. Other researchers also argued that CSR practices
in the supply chain could lead to improved quality, cost, and delivery due to the buying firm’s
employees’ motivation. The more socially oriented that firms are, the more motivated are their
employees (Zukin & Szeltner, 2012); therefore, employees are more dedicated to the job and
productivity is increased, which also results in cost reduction. The increase in level of CSR
practices by SMEs suppliers help improve the MNCs supply chain performance ( (Andersen &
Skjoett-Larsen, 2009); (Carter & Jennings, 2004); (Mani, et al., 2016)) through increase in sale
revenue, because customers ,especially who care about the social issues, would prefer to buy
goods that are coming from socially sustainable manufacturing practices.

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Additionally, (Welford & Frost, 2006) argued that, in the digital age nowadays the relationship
with the social media is also an important issue for the large brand name companies. MNCs
want to minimize the bad publicity as possible and try to promote the positive image, because of
the fact that journalists have tendency to target well-known companies for their “stories.”
Experience has shown that once a company is in the media being criticized on one issue, then
journalists will go searching for other ‘bad news’ about that company and its problems in supply
chain management. Good CSR of suppliers can be part of a process to help avoid this.

On the other side, (Gallear, et al., 2012) and (Hollos, et al., 2012) found that there is no evidence
for relationship between social sustainability practices of suppliers and buying firm's’ supply
chain performance. As the literature suggests mixed results, and recent suppliers’ actions are in
developing countries, we attempt to explore further such relationships in developing national
perspective. Hence, we propose:

H4: There is a positive direct relationship between an SMEs supplier’s social sustainability
adoption practices and MNCs supply chain performance.

4. Conclusion

The paper concludes in the literature review and hypotheses development stage of a research.
So far, the writers have reviewed a moderate number of researches that look into Management
of supply chain, Sustainability in the Supply Chain, CSR, the performance of SMEs and of MNCs
and the relations among them. The hypotheses here are developed not only on the basis of past
researches, but mainly to provide insights into our question of “What can SMEs from developing
countries like Vietnam do to improve their chances of integrating into global supply chains?”
Here, the writers essentially try to investigate whether or not the answer is CSR, or whether
SMEs should focus on and invest in their CSR to be more attractive to MNCs looking for potential
suppliers. To produce a paper of great value, the writers hope to do further research based on
this literature review, probably a case study to test the proposed hypotheses above. For now,
the paper could serve as a collective source for the readers acquisitive about the themes of our
topic.

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