Cao Ngọc Tuấn
Introduction
Within the world of business, the main “responsibility” for corporations has historically been to make money and increase shareholder value. In other words, corporate financial responsibility has been the “sole bottom line driving force” (Catalyst Consortium & United States Agency for International Development, 2002, p1). However, in the last decade, a movement defining broader corporate responsibilities for the environment, for local communities, for working conditions, and for ethical practices has gathered momentum and taken hold. This new driving force is known as corporate social responsibility (CSR) (Catalyst Consortium & United States Agency for International Development, 2002).
A lot of enquiries have been posed to the social responsibilities of firms according with (to) the corporate achievable profits. Do the firms have to sacrifice their benefits as well as losing their comparative advantages due to the diligence of corporate social responsibilities? A “yes” or a “no” answer for this question may be biased. Practically, multinational enterprises are involving in the CSR and the CSR is urging the multinational enterprises to implement it.
The purpose of this essay is to critically analyse the relationship between CSR and multinational enterprises. Through facts and perspectives of multinational enterprises’ businesses, this essay will prove that CSR currently is one of the most important governance tools for multinational enterprises. Technically, the analysis will endeavour to identify, review and contrast the CSR in the competitive advantages of multinational enterprises and then conclude with the importance of CSR in firms’ governance strategy.
The essay will initially seek to define the key terms, exploring the meanings of CSR and competitive advantages. Clearly explaining those terms in context will provide a background for the subsequent analysis. Then, the key issues will take into the consideration the advantages and disadvantages which substantially influence the decisions of multinational enterprises toward implementing or skipping their socially ethical behaviours. Following these key issues, the paper will roughly provide practical assignments and practices as the examples proving the increasing tendency of firms in implementing the CSR. After all the key issues, the conclusion will then attempt to bring these interrelations together and contribute a recommendation made for the future research.
Key terms
In considering the interrelations between the CSR and multinational enterprises’ comparative advantages, it is important to define the two key terms including “CSR” and “comparative advantages”.
CSR – An overview
A single globally accepted definition of CSR does not exist, as the concept is still evolving (Kercher, 2006). The World Business Council on Sustainable Development (2008) defines CSR as ‘the commitment of business to contribute to sustainable economic development, working with employees, their families, the local community and society at large to improve their quality of life’. Meanwhile, the Business for Social Responsibility (2005) attributes that CSR is the business operations which are in a manner that meets or exceeds the ethical, legal, commercial and public expectations that society has of businesses. Generally, CSR refers to virtuous business operations of firms that are based on ethical values, compliance with legal requirements, and respect for people and the environment. The considering CSR components are “people” and “environment”. People institute the multinational enterprises stakeholders who are the employees, governments, communities, investors, suppliers, customers and vendors. Put simply, CSR contends with issues such as the employees must be treated as well as they deserve; the children should be educated well but not abused working at the early age; consumers are protected by using the well-being products. Under CSR, all people related to the multinational enterprises have to be concerned with human rights including either the working standard rights or the living standard rights. Moreover, CSR also covers the firms’ responsibilities toward the environment which is the social and cultural forces that shape the life of a person or a population (Thesaurus, 2008). Following CSR, the firms have to obey all the rules of keeping the environment safe and balanced. For instance, the firms need to build the smoke filter system to prevent the dirty smoke pollution.
Comparative advantages of multinational enterprises – An overview
So far, much research has addressed the question of whether the multinational enterprises are willing to assign the CSR. This question leads to another central concept of the essay discussion, the “comparative advantage” because comparative advantage is one of the key factors influencing the firms’ operational and virtuous behaviours. The firms’ comparative advantage contends with a higher relative efficiency in the production of particular goods in one company as opposed to another (Encarta, 2008). Regarding to the view of multinational enterprises, comparative advantages are the mix of tangible and intangible values that make multinational firms competitive in their international operations. The tangible factors include the capital, labours, land, infrastructure and technology. The exceeding capacities of the multinational enterprises over the oppositions in any tangible factor are what constitute the firms’ competitiveness. For instance, the current tendency of multinational firms is merging or acquiring the other companies to become stronger in terms of capital and market share. Beside the tangible values, the intangible values are also basic factors of the comparative advantage. Namely, multinational firms’ intangible comparative advantages include the patents, credibility, relationships and experiences that the firms display in its operations. These intangible factors are the keys for firms to mobilize capital and gain market shares in target markets. The intangible and tangible comparative advantages interrelate and supplement to each other in the operations of multinational firms.
Besides, in considering the multinational enterprises’ comparative advantages, the market concurrence should be taken into account. In other words, the comparative advantages must go along with the key success factors. It responds to the enquiry of how multinational firms apply their comparative advantages to be successful in their internationally operational arenas. As known, where there are comparative advantages, production of certain products would be specialized and then, from trade, each one would benefit from profit (Carbaugh, 2006). Some products will be successfully delivered in some certain countries due to the cultural, political or economic barriers. Therefore, multinational enterprises’ comparative advantages may be adaptive in some certain markets but not all markets and the acceptance of these certain markets will decide the comparative advantages of firms.
Why do multinational firms deny utilizing CSR?
Some concerns
According to Capaldi (2005), utilizing CSR means multinational enterprises are trying to implement two key missions which are adhering to the rules and maximizing the shareholders value. Adhering to the rules means the firms have to obey all regulations concerning the environmental upholding and human rights. Meanwhile, maximizing the shareholders value is gaining the biggest profits, which has been the most important objective of the shareholders. However, it is very complicated for firms to carry out the both missions simultaneously. This essay context will try to indicate the complication in multinational firms’ CSR implementation.
It is generally accepted that the substantial objective of multinational enterprises is global profit maximization in all supply chain components including suppliers, manufacturers, and distributors by reducing costs; eliminating operational risks and exploiting resources (Jones, 1996). Nevertheless, Neergaard & Pederson (2005) assert that, by somehow, the supply chain components are attempting to accomplish the maximum global benefit without virtuous responsibilities toward the environment and human. Neergaard & Pedersen (2005) have also drawn the figure which showed the supply chain and the components’ involvements to the CSR issues.
Figure 1: Examples of CSR in supply chains cited in Neergaard & Pedersen (2005, p.103).
As the Figure 1 showing, in all components of the value chain, the CSR issues can emerge in various types and levels. Undoubtedly, CSR involves in both environmental and human being issues such as pollution, child labour or discrimination. All the CSR issues above have seemly happened regularly in decades, particularly in 1980s – 1990s. The typical practical example of the firms’ irresponsible behaviour is the case of “child labour abuse in India”. According to India Embassy (2008), children under fourteen constituted around 3.6% of the total labour force in India in 2008. Of these children, nine out of every ten worked in their own rural family settings. Nearly 85% were engaged in traditional agricultural activities. Less than 9% worked in manufacturing, services and repairs.
An issue that should be explored is why multinational enterprises do not utilize CSR. Practically, the answers are CSR has its own costs and risks and the “fair deals” between the host countries and multinational enterprises.
CSR costs and risks
The costs of utilizing CSR are the immolation of firms’ capital, technology or infrastructures. These costs can be the one-time costs or continuous costs. Weber (2008) indicates that the one-time costs include the one-time donations, investment costs and other one-time CSR costs. Namely, the one-time donations are the firms’ money or material contributions to some global, regional or national dilemmas such as the donations in the 2008 Sichuan earthquake in China. Meanwhile, the investment costs are the costs that the firms must pay in their ethical operation duration. For instance, companies build waste water filters which are beyond the legal requirements. Weber (2008) also attributes the continuous CSR costs which include the continuous donations, long-term fees, personal costs and material costs. The continuous donations are the donations of firms in some certain periods such as the donations of firms to the UNICEF annually. Also, the firms must pay long-term fees like the fees for operational licenses or the personal and material costs such as the annually upgrading of the working conditions in their manufacturing plants.
Figure 2: drivers of CSR costs cited in Weber, 2008.
On the other hand, the risks involved are also minding the firms’ considerations that whether they should utilize CSR or not. These risks refer to the CSR risk-related benefits and CSR risk-related costs (Weber, 2008). The CSR risk-related costs constitute the revenue decrease and the cost increase which can cause the firms the losses of their profits. Accompanying the risk-related costs, there come the benefit-related risks, substantially based on the stakeholders’ opposed attitude. As generally known, the only objective of the stakeholders is the benefit. Nevertheless, utilizing CSR means the firms will relate to the benefit losses, therefore, the stakeholders may take their offensive acts such as withdrawing their shares in the company’s equity.
Figure 3: drivers of CSR risks cited in Weber, 2008.
The “fair deals” between countries and multinational enterprises
One more reason for the firms’ operations without CSR is the “fair deals” between the multinational enterprises and the host countries. Undoubtedly, multinational enterprises have extended the host countries huge benefits during their operating time. These benefits are the jobs, technology, experience, infrastructure bases and capital. Obviously, these benefits are the keys for many countries, particularly the developing countries, in creating more profits for their societies. Therefore, the countries’ governments somehow “ignore” the social responsibilities of multinational firms. The practices have empirically proved this “ignorance” which also means a fair deal for countries within the world business. China case 2001 will be given as a pragmatic example. In 2001, China faced a tough economic situation. According to BBC (2001), subsidy from the Chinese government that once went to pay for schools and hospitals had dried up, and many had simply closed. The severe corruption situation in all administrative levels caused the national budget deficit and led Chinese economy to a predicted downturn. Dissolving this severe situation, the Chinese government started to openly mobilize foreign investments by creating more preferential incentives to multinational enterprises.
Figure 4: FDI inflows and global share cited in Bank of China, 2003.
Referring to the figure 4, the FDI inflows in China had been soared in 2001-2002. Particularly, in 2002, FDI inflows in this country had risen by almost 12 billions of dollars compared to 2000 and 41 billions of dollars compared to the period of 1985-1995. Following the aggressive performance of multinational firms, the human right issues have become a controversial task in China. The China labour bulletin (2005, p1) asserts that “in failing to honour its obligation under international and Chinese law to prevent the use of torture to extract confessions, the Chinese government violates the rights of its citizens and undermines its professed commitment to the rule-of-law”. Beyond the legendary development of China, there are still a lot of people living in slums as well as working in very poor conditions. However, it seems to be fair since China successfully exploiting the advantages including jobs, technology or infrastructures given by the multinational enterprises. Alternatively, it is a fair deal with Chinese people as they were having jobs instead of being unemployed.
New momentum and the importance of CSR in firm’s governance strategy and the interrelations between CSR and comparative advantages
New momentum
It is generally accepted that CSR has been profoundly concerned in some last years by people and corporations. One milestone of the CSR utilization is the 1998 Kyoto Protocol. Following the Kyoto Protocol, countries have reduced global greenhouse gas emissions. Particularly, developed countries have met national targets for greenhouse gas emissions. Currently, the number of 187 countries ratifying the Kyoto Protocol (Australian Department of Climate Change, 2008) has showed the sound willingness of nations in implementing CSR. Besides, a large number of multinational companies have introduced Codes of Conduct. Generally, the Codes of Conduct is a set of written principles, guidelines or standards, which are intended to improve the company’s social and environmental performance. For example, in (at) the end of 1990s, IKEA recognized that it needed to relate actively to develop the Codes of Conduct aimed at all its suppliers worldwide (Pedersen & Andersen, 2006). Therefore, in 2000, IKEA decided to develop a Code of Conduct labelled “The IKEA Way on Purchasing Home Furnishing Products” in day-to-day operations. After IKEA, many firms started to build the Codes of Conduct such as Nike or Colgate.
Reasons for the increase of utilizing CSR and the interrelations between CSR and comparative advantages
The substantial reason for the implementation of CSR is CSR utilization gives the firms comparative advantages. It is undeniable that CSR and comparative advantages connect together with supplementary interrelations. Availing CSR means the firms will achieve more capital, credibility, sustainability and particularly, the customers’ expectations. Also, CSR enhances firms’ abilities to meet not only the customer’s needs but also the various needs of employees, non-governmental organizations, the local community representatives and other interest groups (Pedersen & Andersen, 2006). With a same point of view, Weber (2008) attributes that the basic motivation of firms’ CSR utilization is the competitiveness which will lead the firms to economic successes. (See figure 5 below)
Figure 5: business benefits from CSR cited in Weber, 2008.
As seen in figure 5, the CSR utilization gives multinational enterprises the qualitative and quantitative benefits and then, the comparative advantages.
The quantitative values include the customer attractions, firms’ reputation, risk reductions or revenues increase. Doh, Luthans & Hodgetts (2004) has given the “Colgate – Palmolive Company and Darkie toothpaste case” as an empirical example for the quantitative benefits of CSR. In 1985, Colgate - Palmolive had acquired a 50 percent interest in Hawley & Hazel Chemical Company. Meanwhile, Hawley and Hazel Chemical Company had marketed a product called Darkie Black and White Toothpaste which used an informal black man image on the packaging. In 1986, the Interfaith Centre on Corporate Responsibility, a coalition of Protestant and Roman Catholic groups, demanded that Colgate change what it deemed to be the product's racially offensive name and packaging. Colgate – Palmolive then acknowledged the criticism and agreed to make the necessary changes. Following the changes, Colgate – Palmolive had to compensate all the losses for Hawley and Hazel Company. However, Colgate has been seen as one of the first multinational enterprises which follow the human rights in America. Then, the new brand name of “Darkie” tooth paste has been successfully sold in the global market. Alternatively, after solving the troubles, Colgate then could avoid the racism in the global market, create a higher credibility for its patents and particularly satisfy customer expectations.
The qualitative values of CSR include the easy access to capital and a secured licence for operating. This context may be clearly explained due to the quantitative values of CSR. Namely, when multinational firms achieve the shareholders concerns and the credibility in operating, the firms may easily mobilize the capital and the allowance of operating in all economic arenas.
Another view of CSR and comparative advantages in countries
In the international business arena, CSR utilization is not a clear cut criterion in all countries; therefore multinational firms have to base on the “requirement levels” of the governments in the process of utilizing CSR.
Following the globalization process, developed countries have been taken “serious” consideration of implementing CSR. This can be seen in some developed countries such as Switzerland, Sweden, England or the United States while these countries have established channels controlling the CSR utilization in corporations. However, developing countries may not require the same high level of CSR utilization as developed countries’. However, in responding (response) to the protests of people and environment dangers, developing countries’ governments are increasingly considering CSR as an important tactic. One example is the sub-Saharan countries signatories in United Nations Global Compact. As seen in figure 6, the number of companies participated in Global Compact Company which is the world’s largest corporate responsibility initiative with 2,900 participants and stakeholders from 90 countries (United Nations Global Compact, 2006) had dramatically increased from 2005-2007.
Figure 6: Development of Global Compact company participants in selected countries in sub-Saharan in 2005-2007 cited in United Nations Global Compact
Therefore, multinational firms’ CSR utilization should be focused in developing countries currently even there may be a higher level in developed countries than developing ones.
The adaptation of CSR in both developing and developed countries leads to the multinational firms’ consideration of taking CSR as the competitiveness. Undoubtedly, governments will be much more hospital with the firms which apply the CSR than which do not. So, CSR in the view of international arena is a comparative advantage of multinational corporations.
Should multinational firms see CSR as an important governance tool?
Yes. Multinational firms should consider CSR as an important governance tool. As generally acknowledged, governance tool refers to all the processes, systems, and controls that are used to safeguard and grow assets (Effective Governance, 2006). Regarding to the objectives of governance, CSR definitely is one of the most important tools of corporations because of its benefits of proactive legal, social, environmental, risk management, organizational effectiveness, relationship with stakeholders and social license to operate within communities. All of the benefits of CSR have been thoroughly discussed through the context of this essay. Briefly, following the process of globalization, the development of media, press, and internet as well as the higher concerns of people all over the world about human rights and environmental upholding, multination enterprises should always consider CSR as an important governance tool.
Conclusion
As evidenced by the practices, doing the right thing in business is no longer just a matter of making profits; the ethics of business activities are becoming increasingly important. In the process of implementing these ethical activities, multinational enterprises have been considering and balancing the opportunity costs that the firms must endure. The opportunity cost is the factor relating to the multinational firms’ comparative advantage and the price they must pay to utilize the CSR. Not all companies have the same requirements and implementation methods for implementing CSR. However, one similar issue between firms is that almost firms have considered CSR as an important governance tool in their development process. To explain these matters, the essay has initially sought to define the key terms including CSR and comparative advantage, providing a basis for the subsequent analysis. Then, the essay has tried to find out the interrelations between CSR and firms’ comparative advantage. Subsequently, the essay has discussed the reasons why the firms do not utilize the CSR. Moreover, the essay has roughly gone through the actual examples which show the main trends of the CSR implementation in the current business world and then wrap up all things by the conclusion that CSR is becoming an important governance tool of multinational firms.
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