Regional Economic Development Comparisons

Corporate Social Responsibility
Through the Supply Chain:
MNCs to SMEs
Anupama Singh
Sudarshana Kundu
Bill Foster
EXECUTIVE SUMMARY .......................................................................................................................... 3
INTRODUCTION ........................................................................................................................................ 4
MAIN PURPOSE ........................................................................................................................................... 4
WHAT IS CSR? ........................................................................................................................................... 4
WHAT ARE SMES? ..................................................................................................................................... 4
WHY SMES AND MNCS? ........................................................................................................................... 5
ISSUES ........................................................................................................................................................ 5
METHODOLOGY .......................................................................................................................................... 5
REGIONAL ECONOMIC DEVELOPMENT COMPARISONS ............................................................ 6
CASE STUDIES ........................................................................................................................................... 8
ARACRUZ CELULOSE S.A.: BRAZIL ............................................................................................................ 8
CEMEX: MEXICO .......................................................................................................................................12
BP: TANZANIA ..........................................................................................................................................15
DELTA CORPORATION: ZIMBABWE............................................................................................................17
UNILEVER: GHANA ....................................................................................................................................19
UNIIEVER : VIETNAM ................................................................................................................................21
GAP INC.: INDONESIA ..............................................................................................................................25
ANALYSIS ...................................................................................................................................................29
CONCLUSION ............................................................................................................................................35
BIBLIOGRAPHY .......................................................................................................................................36
Executive Summary
This paper is an attempt to look at the benefits of adopting corporate social responsibility activities
for SMEs. We focus specifically on those SMEs that are part of the supply chain of large multinational
companies in developing countries. In this paper we study six multinational companies (Aracruz Celulose,
Cemex, Unilever, Delta Corporation, British Petroleum, Gap Inc.) across six developing nations (Brazil,
Mexico, Ghana, Zimbabwe, Tanzania, Indonesia and Vietnam) in three different geographic regions of the
world (Latin America, Africa and South East Asia). We clearly see that for these SMEs adoption of
corporate social responsibility practices have resulted in better market opportunities and have contributed to
their economic growth.
In each case the multinationals partner with their SME counterparts and transfer CSR practices to
the SMEs who willingly adopt them as a result of the mutual benefits to both parties. In the absence of
weak law enforcement in most developing countries, CSR legislation is unlikely to work and this voluntary
adoption of CSR practices becomes a very potent tool for propagating CSR.
Also, we see that the role of the MNCs in each of these cases is not restricted only to passing on
CSR knowledge but more importantly in developing the capacity of the SMEs to adopt and sustain these
activities. In the process, SMEs get access to technology, financial capital and managerial knowledge of
advanced nations that would otherwise have not been available to them.
Main Purpose
The main purpose of this paper is to demonstrate that implementation of corporate social
responsibility (CSR) practices by SMEs that are within the supply chain of multinationals companies
(MNCs) operating in developing countries results in greater market opportunities for the SMEs.
What is CSR?
The World Bank Group’s CSR Practice has chosen to define corporate social responsibility (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, in ways
that are both good for business and good for development.”1
What are SMEs?
According to the International Finance Corporation2, an SME is any enterprise which falls into
these categories: micro enterprise-up to 10 employees, total assets of up to $100,000 and total annual sales
of up to $100,000; small enterprise-up to 50 employees, total assets of up to $3 million and total sales of up
to $3 million; medium enterprise-up to 300 employees, total assets of up to $15 million, and total annual
sales of up to $15 million. While these definitions are admittedly subjective and still under review, they are
broadly consistent with those used by most other international financial institutions. Still, it should be noted
that the numbers shown above depend heavily on choice of this (or any other) definition.
Strengthening Implementation of CSR in Global Supply Chains Oct 2003, World Bank Group.
Why SMEs and MNCs?
Three- fourths of all enterprises throughout the world are small and medium enterprises. These
enterprises generate employment for a fairly large percentage of the working population in every country
and thus play a major role in economic development.3 This is further accentuated in developing nations
where the proportion of SMEs to the total number of enterprises can be as high as 90 %. Developing world
SMEs are a large component of the supply chain of MNCs and therefore it is imperative to understand the
linkages between the two.
Does CSR actually benefit the SMEs?4
Traditional top-down strategies do not achieve sustainable CSR. What are alternative methods
that can be employed?
How important is the role of the MNCs in facilitating growth for the MNCs? Could the SMEs
have done it themselves?
What is the payoff to the MNCs? Are they doing it as a charity/ cover up or mutual benefit?
What are some of the key elements of a successful transfer of CSR practices to the SMEs by the
The paper will essentially be a cross-country analysis of different MNCs through case studies:
Aracruz Celulose
British Petroleum
Delta Corporation
Responsibility of SMEs for Development of People’s economy. Bangkok 1-3 Nov 2004 Third International Conference, Raste Arun
The argument is that MNCs typically exploit the SMEs and use CSR as a cover-up.
Regional Economic Development Comparisons
In order to understand the comparative economic and social conditions, we compared the GDP,
U.N. Human Development Index Ranking, and foreign direct investment for Latin American & Caribbean,
the South Asian and the Sub-Saharan African regions of the world.5 We have chosen to analyze GDP per
capita to reflect comparative economic development; FDI inflow as a percentage of GDP to represent
relative foreign investor and MNC confidence; and the U.N. Human Development Index rank to reflect
relative social development.
The data reveals that Latin America & the Caribbean have significantly greater economic and
social development than both South Asia and Sub-Saharan Africa, while South Asia is more developed
than Sub-Saharan Africa. We believe that the industrial development of these regions directly impacts
SMEs abilities to strengthen enterprise development capacities and CSR practices, and that the relative
development levels accurately depict the level of SME and CSR development initiatives currently
underway in these regions of the world.
Net FDI Inflow as % of 2002 GDP
Latin America & the
South Asia
% of GDP 1.5
Sub-Saharan Africa
Net FDI Inflow
Source: UNDP Human Development Reports,
GDP Per Capita (PPP US$)
PPP US$ 4,000
Latin America & the
South Asia
Sub-Saharan Africa
GDP Per Capita
Source: UNDP Human Development Reports,
U.N. Human Development Index Ranking
HDI Rank 0.4
Latin America & the
South Asia
Sub-Saharan Africa
Source: UNDP Human Development Reports,
Aracruz Celulose S.A.: Brazil
Brazil: Key Socio-economic Indicators6
POPULATION - 2003 (thousands)
EAP - 2000 (thousands)
GDP growth rate - 1999
Per capita GDP - 1999 (US$)
Unemployment rate - 2000
Illiteracy rate - 2000
Company Profile
Aracruz Celulose S.A. is the world’s largest producer of bleached eucalyptus kraft pulp, a highquality variety of hardwood pulp used by paper manufacturers to produce premium tissue, writing and
printing, and specialty papers worldwide. The company is responsible for approximately 31% of the
global supply and in the year ending December 31, 2003, they produced approximately 2,250,000 tons of
pulp. In 2003 the company employed 2,281 of their own employees through Aracruz and its international
subsidiaries, and employed 7,546 permanently outsourced employees. Aracruz owns approximately
405,700 hectares of forest and other land in the Brazilian states of Espírito Santo, Bahia, Minas Gerais and
Rio Grande do Sul.7 The hardwood pulp and lumber supplied by the company is produced exclusively
from planted eucalyptus forests. The lumber is sold to the furniture and interior design industries in Brazil
and abroad, under the brand name Lyptus. Aracruz is listed on the Sao Paulo Stock Exchange (BOVESPA),
on the Latin America Securities Market (Latibex), in Madrid - Spain, and on the New York Stock
Exchange (NYSE) under the ADR level III program (ticker symbol ARA). 8
SMEs in Brazil
Small enterprises play a significant role in the Brazilian economy. In the year 2000, micro and
small enterprises accounted for 20% of Brazilian national GDP, 96.04% of all enterprises and 52.8% of the
overall workforce. In particular, the Brazilian forest and wood products industry is overwhelmingly
comprised of SMEs with 98.2% of the total number of forest-harvesting operations, 98.9% of furniture
manufacturers and 98.9% of wood processing enterprises in 2000.
Despite their obvious importance to the national economy, SMEs in the forestry sector are at a
significant disadvantage compared to large enterprises. SME employees have lower average salary rates
and less stable incomes than large enterprise employees. While the 98.2% of firms with less than 100
workers employ approximately 50% or the sector’s workers, their employees receive approximately 40% of
total wages paid. This gap is indicative of the wage disparity between SMEs and large enterprises in
Brazil. In addition, unlike large enterprises that offer salaries to all employees, micro enterprises with less
than four employees only offered salaried position to approximately 20% of their workforce. Health and
safety concerns are also much more severe in SMEs.
Small and medium forest enterprises also lack sustainable forestry operations compared to larger
firms. This is primarily because of the historically uncompetitive nature of sustainable forest management
operations as compared to other land use alternatives, such as harvesting without management or the
planting of other more profitable crops. 9
CSR Practices
Aracruz runs a Forestry Partners Program that involves approximately 71,000 hectares contracted
in partnership with more than 3,000 farmers in more than 100 municipalities in the states of Espírito Santo,
Bahia, and Minas Gerais. The program allows farmers to make use of vacant land and provides an
alternative, often more profitable, revenue stream to a guaranteed market. As of the year end of 2003,
farmers who join the program were offered three plan options: seedling supply, preferential contract and
purchase and sale contract.
The seedling supply plan provides free eucalyptus seedlings and technical assistance to
participating farmers and Aracruz commits to purchasing the wood after harvesting. The preferential
contract plan provides the same benefits as the seedling supply plan, but also includes the supply of
fertilizers and ant traps. The purchase and sale contract plan is the most comprehensive plan, in which
farmers receive financing for setting up the project in addition to those benefits provided by the preferential
contract plan. The financing is provided in installments which are released upon conclusion of various
forest plantation implementation stages. The debt to Aracruz is ultimately paid in wood, not cash, because
the financial value of the loan is converted into wood when the financing is provided and paid after
harvesting. 10
MNC Benefits
Aracruz benefits from the Forestry Partners Program in several ways. First, it receives operational
and economic benefits from the establishment of a reliable alternative source of wood supply. Second, it
receives social benefits from the goodwill that it creates by increasing farmers’ incomes, creating new jobs
and helping reduce rural exodus. Finally, it receives political benefits through its contribution to the
Brazilian government’s goals increased tax collection and unemployment reduction.
The political benefits that Aracruz has gained are significant. For example, Veracel Celulose, a
bleached eucalyptus pulp manufacturing facility under construction in Eunápolis, Brazil, which is an
association of Aracruz Celulose (50%) and Stora Enso (50%), a Finnish-Swedish company, has received
financing and significant political support from the Brazilian government.
The Brazilian National Economic and Social Development Bank (BNDES) will invest R$ 1.5
billion in the Veracel project as part of its National Forest Program, a program designed to stabilize the
Amazon timber industry by avoiding the exhaustion of timber resources while simultaneously protecting
large tracts of forest through the establishment of a network of National Forests (Florestas Nacionais or
Flonas). Brazilian President Luis Inácio Lula da Silva intends to expand the financing lines for sustainable
forestry projects and to improve legislation regulating forest plantations. During a visit to the Veracel
construction site on January 21, 2005, the president stated that "The National Forest Program (PNF) is one
of the priorities of our government. With it, we are looking not only at today but also for maintaining
sustainable development for a long time." He also stated that "The Veracel pulp mill is one more
possibility for us to prove the need to make use of the multifunctionality of our land, and not think that
rural land is only good for raising cattle,"
The president also said that the major social significance of the Veracel pulp mill was the deciding
factor for the financing. President Lula highlighted initiatives such as Veracel's Forestry Partners Program,
as having a significant social impact. Under the program farmers’ income can reach R$ 485 per hectare per
year, whereas in cattle ranching, on average, annual income is R$ 200 per year. The Veracel Forestry
Partners Program has reached 10,000 hectares of eucalyptus plantations in the extreme south of Bahia, and
is expected to hit 23,000 hectares in three years. The eucalyptus produced in the region through the
partnership should represent 18% of the Veracel mill's requirements for wood. President Lula concluded
that "A project such as this one shows us that it is possible to invest in a responsible environmental
The Forestry Partners Program is an excellent example of how large MNCs can contribute to the
enterprise development and CSR practices of SMEs within their supply chain. The program creates stable
employment opportunities and additional revenue streams for farmers and provides access to business
development capital and resources that the farmers would otherwise not be able to afford. In addition, the
sustainable forestry and land management initiative that the farmers are participating in through Aracruz’s
guidance contributes to the long-term sustainability of the Amazon and Brazilian forestry industry and
increases the awareness of the importance of such practices in the SME community.
Cemex: Mexico
Mexico: Key Socio-economic Indicators12
POPULATION - 2003 (thousands)
EAP - 2000 (thousands)
GDP growth rate - 1999
Per capita GDP - 2000(US$)
Unemployment rate - 2002
Illiteracy rate - 2000
Company Profile
CEMEX, S.A. de C.V. is a Mexican holding company whose entities’ main activities are within
the construction industry through the production, distribution, marketing and sale of ready-mix concrete,
cement and clinker. Cemex is a global cement manufacturer with operations in North, South and Central
America, the Caribbean, Europe, Asia and Africa, and approximately 25,900 employees. Founded in
Mexico in 1906, Cemex has grown from a small regional player into one of the top international cement
companies with sales volume of 7.164 billion $US in 2003. At December 31, 2003, CEMEX had a
production capacity of over 80 million metric tons of cement per year. The company’s primary production
facilities are located in Mexico, Puerto Rico, the United States, Spain, Venezuela, Colombia, Egypt, the
Philippines, Thailand, Costa Rica, the Dominican Republic, Panama and Nicaragua. 13
SMEs in Mexico
SMEs are integral to Mexico’s economy. In 1994, they comprised 98.7% of all business
enterprises, 77.7% of total employment and 43.3% of total sales.
SMEs face many barriers to sustainable business development. They lack the technical and financial
resources to invest in market opportunities; they have difficulty accessing credit and face high costs of
capital; they do not have economies of scale; they lack marketing and management skills and the
understanding of general business best practices.14
CSR Practices
In 2001 Cemex launched a new marketing and product distribution initiative called Construrama.
The Construrama campaign is a Cemex-owned licensee system that offers Mexican cement distributors the
opportunity to participate in a nationwide retail network with strong brand recognition. Distributors gain
access to a variety of more cost-effective and readily available products through the Construrama brand.
The Construrama program benefits SME distributors on many levels. The program invests in
small construction stores by providing capital for new storefronts, inventory tracking software and
computers.15 Distributors are also offered management skills and training opportunities, which are
designed to help them grow their businesses. In addition, the publicity, merchandising and marketing
support that distributors receive, helps to enhance the participating stores’ image and marketing
capabilities. Through Construrama, stores have access to more than 500 different product and services
offerings at competitive prices. The Construrama brand offers customers a guaranteed product quality,
convenience and uniform client service, which helps SME storefronts increase sales and income. 16
Beyond the unique brand recognition of Construrama, the program benefits SMEs and the greater
community through Cemex’s sharing of best business practices. This helps enable participating SME
suppliers and distributors to build stronger, more competitive and sustainable businesses that generate
greater value and higher economic returns for themselves and their communities.
MNC Benefits
Cemex benefits from the establishment of strong brand loyalty, higher market penetration and
increased sales. Approximately 75% of the retail sales of cement in Mexico are through local distributors;
therefore Cemex will continue to collect economic and strategic benefits by integrating more distributors
into the Construrama program. In addition, by leveraging the existing SME local community relationships,
Cemex gains immediate access to local consumers and reduces the time needed to establish trust in its
Construrama brand. Construrama has strengthened Cemex’s existing sales network through the
standardization of information systems and storefronts, and has helped increase supply- chain operating
efficiencies and reduce costs.
The program has been extremely successful since its inception. Within the first six months the
program grew into the largest construction materials chain in Latin America, and as of December 31, 2003,
the program has reached 750 independent concessionaries with approximately 2,100 storefronts in more
than 700 towns across Mexico. Cemex is currently rolling out the program to its South and Central
American markets. 17
The Construrama program is an example of how large MNCs can contribute to the enterprise and
CSR development of SMEs by strengthening the capacities of SMEs within their distribution network. The
program creates greater market access and opportunity through strategic investment and resource
contributions to partner SMEs that directly benefit the SME and its stakeholders.
BP: Tanzania
Tanzania: Key Socio-economic Indicators
35.9 Million
9.4 Billion
GDP Growth Rate:
Inflation rate (2004):
FDI (2002):
240.4 Million
Company Profile
BP is one of the world’s largest petroleum and petrochemical companies. Based in Britain, its
main activities include the exploration and production of crude oil and natural gas. Operating in 100
countries, it has reserves of 18.4 billion barrels of oil equivalent, including large holdings in Alaska. It is
also a top refiner with a capacity of 3.4 million barrels of crude oil a day. It sells an equivalent of 6.7
million barrels of refined products each day. In 2003, BP had sales of $232,571 million. It employees
approximately 110,000 people worldwide. BP is listed on the New York Stock Exchange (NYSE) under
ticker BP. The company was formed in 1998 from the merger of British Petroleum and Amoco. Later it
grew by acquiring Atlantic Richfield Company (ARCO).
BP has continued to build partnerships with local enterprises in several of their operating
countries. Currently, BP has developed various forms of SME development programs in Azerbaijan, South
Africa, Trinidad, Indonesia, and Tanzania.
CSR Practices
BP has partnered with seven Tanzanian corporations and SBP (Small Business Project), an
independent specialist support and research organization based in South Africa, to establish the Private
Sector Initiative (PSI) a $1.2 million program which enables Tanzania SMEs to acquire resources, skills
and business. The program has helped to develop opportunities to build and strengthen business links
between corporations and SMEs, helping to build up the local SME presence and to develop the local
The development of the program first required a careful analysis of the supply chain activities and
supplier development strategies within each participating corporation. BP worked with the corporations to
map baseline SME expenditures and develop an SME supplier database, including profiles of SMEs in the
database. Corporations worked closely with suppliers to develop their capacity and proactively identified
opportunities to outsource to local SMEs.
Furthermore, the corporations regularly host forums to share experiences from participating with
local SMEs. CEOs meet for quarterly steering committee meetings and procurement managers meet for
monthly working group meetings.
For the first three years, the program gained financial support from the British government’s Department
for International Development through the Business Linkages Challenge Fund (BLCF). It is also facilitated
by SBP with the intention that after three years, the corporations will continue the program without further
support. A similar initiative is being facilitated by SBP in South Africa.
SME Benefits
The sharing of positive experience amongst corporate partners has created opportunities and
economies of scale for SME suppliers and enabled them to build relationships with one or more corporate
MNC Benefits
By enhancing capacity for SMEs, they are able to provide goods to corporations at a reduced cost,
decreasing corporations’ costs and enhancing efficiency.
It is necessary for a facilitator such as SBP to drive the initiative, build trust and provide an
unbiased intermediary to handle sensitive information to allow for corporations to work collaboratively.
Furthermore, bringing procurement managers together for regular meetings is an effective way to build
confidence to engage with SMEs
Delta Corporation: Zimbabwe
Zimbabwe: Key Socio-economic Indicators
13 Million
8.3 Billion
GDP Growth Rate:
Inflation rate (2004):
FDI (2002):
25.9 Million
Due to expansionary macroeconomic polices and a break down of law and order Zimbabwe’s
economy has deteriorated sharply since 1997. By 2001 real per capita GDP had declined by over 20
percent relative to 1997, inflation reached triple digits, and real interest rates were negative. The June 2004
Government Monetary Statement and Fiscal Policy Review indicates positive developments in, for
example, tax policy, public finance management, corporate governance, and financial sector guidelines.
Additionally, a number of measures are designed to attract investments in the economy from the
Zimbabwean diaspora.
Company Profile
Delta Corporation is a conglomerate in food and leisure sectors. It is a holding company that has
invested in and taken management responsibilities for a portfolio of business which operate in Zimbabwe.
In 2004, Delta Corp had sale proceeds of $1,064,543. The company is listed on the Zimbabwe Stock
CSR Practices
In conjunction with Empretec, a UNDP supported training agency, Delta Corporation initiated a
program to help entrepreneurs establish their businesses. The program, entitled “Stand Up and Go”, helped
support the SME industry in Zimbabwe. The program encouraged senior management to work with the
procurement department to identify SME outsourcing opportunities. When SME partners were identified,
they were encouraged to attend a two week entrepreneurial development course run by Empretec. Delta
Corporation also established a revolving fund of $1 million to provide seed capital to new enterprises.
SME Benefits
By 1997, a total of 250 jobs had been created by the “Stand Up and Go” program. Today, Delta
Corporation continues to do business with 26 entrepreneurs who participated in the program. SMEs have
gained access to wider corporate markets, leading to higher turnover and continued contracts with Delta
MNC Benefits
Due to deteriorating economic conditions in Zimbabwe, the Delta Corporation needed to find
ways to reduce its cost base, focus resources on its core business and increase outsourcing to SMEs. In
some cases former employees were able to establish SMEs that supplied Delta.
Furthermore, Delta’s relationship with the government improved as a result of the enterprise development
support, as did the company’s reputation.
This program helped to establish many cases of successful outsourcing such as:
* Cleaning, catering and laundry services have been outsourced throughout the company
* Housekeeping and food and beverages where outsourced by the hotel division
Unilever: Ghana
Ghana: Key Socio-economic Indicators
20.3 Million
GDP ($):
6.2 Billion
GDP Growth Rate:
FDI (2002):
50 Billion
Company Profile
Unilever, a Dutch company specializing in food, home and personal care products, has operations
in 100 countries in Asia Pacific, Latin America, Africa and Middle East, Europe and US. In 2003, it
employed 52,000 people in Africa and the Middle East, with 234,000 worldwide. Unilever has been in
Ghana since 1963, with brands like Sunlight, Omo, and Blue Band margarine.
Iodine Deficiency is the world’s most prevalent – yet easily preventable – cause of brain damage.
It affects over 740 million people, 13% of the world population. The best way to prevent IDD is to add
iodine to cooking salt. However, iodized salt is more expensive than raw non-iodized salt.
CSR Practices
Unilever, in conjunction with the Ministry of Health and UNICEF, recognized the growing
problem of iodine deficiency and formulated a business plan to supply iodized salt more cheaply19.
Unilever in India had experience with a low-cost iodized salt called Annapurna. The Popular Foods team
in Africa decided to rethink its business systems to provide Annapurna to low-income families in Ghana. It
keep capital costs down, they outsourced production of iodized salt, creating over 200 jobs and partnerships
with over 60 suppliers within Ghana. They developed partnerships with local manufacturers, investing
time, resources and training to help them raise the quality standards. They also saved on brand
development costs by drawing upon the experience of Annapurna in India. This included running a series
of road shows to raise awareness of Annapurna and aligning the brand’s health messages with those of
Ghana’s Health Service, in order to build consumer confidence. To reach remote villages, Unilever and
UNICEF have teamed up with a local bank to provide micro credit facilities to enable village women to
buy Annapurna and other products for onwards sale. Now over 400 women are involved, giving them a
useful source of income and helping to decrease iodine deficiency in remote parts of Ghana.
MNC Benefits
Since its 2000 launch, Annapurna has helped to nearly double the use of iodized salt in Ghana
from 28% of the population in 1998 to around 50% in 2002. In just two years it has captured 35% of the
market. After 18 months the product became profitable for Unilever. Now Unilever has plans to introduce
new enriched products to other parts of Africa through similar supply chain methods.
UniIever : Vietnam
Vietnam: Key Socio-economic Indicators20
82 million
US $ 38 billion
GDP growth rate
US 2, 2 billion
Vietnam is currently seeing huge spurts of growth post the “doi moi” reforms and is being touted
as the next Asian miracle economy. It has high literacy rates (above 90% %) and with sustained growth
rates of 7% has seen an impressive record of poverty reduction. The country is increasingly attracting more
FDI. At the same time the young population is demanding a better standard of living.
SMEs in Vietnam
The CSR agenda is relatively new in Vietnam, although safeguards for worker's rights and
working conditions are well articulated in national legislation. 21 SMEs contribute significantly to the
national economy as they constitute 65% of the GDP (value added output), 85% of the industrial labor
force and 20 % of the exports22. International economic integration for Vietnam takes an important step
forward with the implementation of the bilateral trade agreement with the United States; application for
WTO accession, and; the ASEAN Free Trade Agreement (AFTA), which requires the reduction of tariffs
and import barriers among all ASEAN member nations by 2006. This means that all firms have to conform
to global norms with respect to environment, work environment etc and at the same time be economically
efficient in the face of fierce competition. There is a growing fear that mane SMEs may have to shut down
their operations if they fail to meet international standards. Hence growth of social responsibility norms
with concurrent growth of SMEs is critical for this country.
All data relates to 2004,
Corporate Social Responsibility (CSR) in Vietnam - New Phenomenon and New Trends Dao Quang Vinh , Deputy Director,
Institute of Labor science and Social Affairs Ministry of labor - Invalids and Social Affairs, Vietnam ,December, 2003
Company Profile
The Unilever Group was created in 1930 when the British soap-maker Lever Brothers merged its
businesses with those of the Dutch margarine producer, Margarine Unie. It has since then grown to become
one of the largest fast-moving consumer products companies in the world with some of the top brands like
Dove, Knorr, Lipton, Close-Up, Pond’s, Vaseline etc. Its CSR practices are well known and documented.
Unilever has operations in around 100 countries and its products are on sale in 50 more countries.
Unilever started its operations in Vietnam in 1995. Since then it has witnessed huge growths and its
turnover has increases from USD 7.95 million in 1995 to USD 223 million in 2002. It contributes
approximately USD 21 million to the state budget. 24
SMEs in Unilever’s Supply Chain
SMEs are involved in supplying raw materials, packaging, finished products (contractors) and
finished goods distribution. Unilever has 130 suppliers of raw materials and packaging materials, 330
distributors and 9 key manufacturing contractors
CSR Practices
When Unilever started its operations in Vietnam most local raw material and manufacturing
suppliers did not have sufficient knowledge regarding cost-efficient supply chain management systems,
technology, quality control, safety and environmental standards These SMES also had very little access to
capital and lacked managerial inputs regarding strategy and policies for their development. Unilever aimed
at bridging these gaps for those SMEs, which were willing to work with them through contract
specifications and developing working relationships. It is also to be noted that the majority of SMEs in
Vietnam happen to be in the textile or footwear sector, which has low returns and more focus from the
Unilever defined quality, safety, and environmental standards for its partners and provided the
technological inputs necessary for the SMEs to meet those standards. Extensive training programs on
quality standards, warehousing specifications, safety and environment standards etc. were undertaken.
24, UN Global compact workshop NY/15-16th Jan 04
These standards were defined and monitored by Unilever. Additionally the company defined labor
standards in its contract specifications, which included legal minimum working age of 18 in conformance
to Vietnamese law. The wage rates for supplier employees were also set in this contract and this meant that
that the workers in these SMEs got wages that were substantially higher than the minimum country wage
rates. Along with these Unilever imparted knowledge of best practices to its key contract manufacturers in
the areas of equipment and machinery, formulations and processing and repairs and maintenance. One of
the successful ways in which Unilever did direct transfer of knowledge to its manufacturers was by
stationing a Unilever official at the site of the manufacturer. At the same time they provided financial
support as required to ensure financial viability of the SMEs and secure their long-term growth.
SME Benefits
The SMEs that collaborated with Unilever gained from the transfer of new technologies and
capabilities. At the same time they grew over time as steady business relationship justified expansion plans
for them including diversification for some.
MNC Benefits
Unilever gained through creating additional production capacity without incurring the cost of
setting up a factory by entering into contracts with local manufacturers. Additionally, they were able to
develop a reliable supply of raw material and packing material and increase their distribution reach. They
now relied less on imports. This resulted in their being able to reduce lead times and lower working capital
including warehousing requirements. In the process Unilever managed to reduce the overall supply chain
costs substantially.
Local suppliers now form 55 % of all raw materials required by Unilever. 25 Unilever on the other
hand guarantees a business of $ 34 billion of business to its suppliers. The growths of these SMEs have
been phenomenal. Third party volumes increased from 3705 tons in 1995 to 91,024 tons in 2002. Of this
about 7692 tons were exported. E.g. Bicico Chemical Cosmetic Enterprise, one of Unilever’s detergent
manufacturers, grew in volume from 3000 tons in 1996 to 23000 tons in 2000, its turnover grew from $
1800 to $ 285000 and number of employees increased from 12 to 250 people 26. Similarly, Duy Tan is one
of Unilever Vietnam’s leading suppliers’ pf packaging material. Its total turnover increased from USD 0.9
million in 1996 with 160 workers to USD 6.60 million and 664 workers in 1992 27.It is estimated that for
every person who is directly employed by Unilever, there are approximately 3 persons who in a dedicated
way cooperate with Unilever. The environmental, quality, safety and productivity standards in partner
SMEs have improved significantly. 28 In the process Unilever has also become the market leader in five out
of its six product categories.29
Unilever attributes its success to several factors. 30 Firstly, it talks of respect among potential
partners as a precondition. Unilever also emphasizes that the partnership is symbiotic and there one has to
adopt a long-term reference frame in which each partner contributes and understands the others’ needs. It is
especially important for the large MNC to understand local cultural nuances. Most importantly they stress
on understanding the constraints of local SMEs and tailoring goals and expectations accordingly.31
UN Global compact workshop NY/15-16th Jan 04,,
ibid, note: of the USD 6.60 million only USD 3.18 million is for Unilever
Helen Lo, Unilever UK,
Principles for TNC- SME cooperation: the experience of Unilever, Andre R van Heemstra,
Also see, Unilever: Building Business Linkages with SMEs in Vietnam,
GAP INC.: Indonesia
Indonesia is the world’s largest archipelago. It is part of the countries, which formed the East
Asian miracle countries. However, post the East Asian crisis it has seen mixed fortunes. Its growth rate of
4.9 %32 is modest by current Asian standards. It has become a conflict-prone area owing to the East Timor
crisis and is politically unstable. FDIs have also been decreasing as a result 33.
SMEs in Indonesia
In Indonesia, a tiny number of large firms tend to dominate the private sector at one extreme, with
an abundance of informal micro enterprises and small firms at the other. 34Value added by small and micro
enterprises account for 9 % of total manufacturing while employment in these enterprises constituted 59%
of the total manufacturing labor force in 1999.35Despite its importance, few of the institutions, government
or non-government, including foreign assistance institutions were involved in the promotion of SMEs till
1993 when the Indonesian government established the Ministry of Cooperatives and Small Enterprises to
coordinate the efforts of the SMEs' promotion.36 Indonesia needs considerable development in its SME
sector to recover from the East Asian economic and the East Timor crises.
The role of the SMEs is more significant in the apparel sector. There are an about 1.5 million directly
employed directly in this industry and an estimated 4 million in supportive industries. In terms of its
contribution to Indonesian non-oil exports, the value of textile and garment sector (excluding knitting)
amounted to almost $2.6 billion37 in 2003 and was 15% of all exports (excluding oil and gas). 38 Hence,
SME development becomes even more critical in the textile sector.
Company Profile
GAP Inc is one of the largest apparel companies in the world with a turnover of $ 15.9 billion and
150, 000 employees39. The company sources its products from third party manufacturers using
approximately 3000 garment factories across 50 countries.
It has been the subject of high profile campaigns to improve the working conditions of its thirdparty manufacturers. However, GAP is taking strong strides to rid itself of this image. It is one of the first
companies worldwide to adopt a “vendor code of conduct” which covers issue such child labor, wage rates
of employees, harassment etc. Each factory under all garment manufacturers has to undergo this “vendor
code of conduct” evaluation before it is approved for production. GAP employs more than 90 full time
employees worldwide to improve factory conditions and meet the vendor code of conduct norms. Suppliers
are given time to comply with these norms and if they fail to meet the deadline GAP withdraws its
partnership. It has withdrawn roughly 130 factories worldwide in 2003 because they failed to meet GAP’s
strict vendor code of conduct evaluation. It came out with a very transparent social responsibility report I
2003 which was bold enough to admit that “few factories, if any, in the United States or anywhere else are
in total compliance all of the time”.40
GAP and SMEs in Indonesia
GAP and Indonesian manufacturers have had a tumultuous past relationship. In July 1997, 700
workers from its third party manufacturers went on protesting miserable wages and the factory
management's refusal to recognize their independent union. However, GAP made a fresh beginning in 2001
as part of a partnership initiative with the Global Alliance.
CSR Practices
Under the aegis of the Global Alliance initiative The Center for Societal Development Studies at
Atma Jaya University in Jakarta conducted interviews in 2001 with 8 garment manufacturers from which
GAP sourced their products.
The study focused on asking workers about their needs and hopes for the future. As a result of
workers’ concerns about sexual harassment, workplace morale, and their supervisors’ lack of effective
communication skills came to the fore. One of the key findings in Indonesia was that relations between
factory managers and workers needed to improve. As a result, GAP Inc conducted supervisory skills
training seminars with more than 450 managers in these eight factories, impacting more than 10,000
workers. The training focused on positive communication skills, stress management, problem solving,
teamwork and leadership.
This was in addition to GAP’s efforts of improving working conditions in these factories and
raising wages.
SME Benefits
Independent evaluations of the program in Indonesia indicate that it did manage to improve the
interaction between supervisors and subordinates in the 8 target factories. Positive additional effects
included reduced absenteeism, improved problem solving, fewer rejects and defects and lower employee
turnover.41 Consequently it boosted the volume and the quality of the products. Overall the SMEs benefited
by having better working conditions and by being able to grow through the better productivity and larger
MNC Benefits
The main motive would have been to clean its tarnished image. In a sector like branded apparel,
reputation and corporate image is critical for the success of the company. GAP sales had fallen
substantially post the lawsuits that had been leveled against it for the alleged Saipan sweatshops and the
campaigns, which followed these lawsuits. In the long run, GAP also benefits from a more robust supply
chain with lower production costs due to lower defect rates and higher productivity in its contract
GAP proclaims that is important to partner with its third party manufacturers and understand that
they face problems. Being the larger player, it has to help the SMEs to identify solutions and help them
implement it. It has also learnt that a larger number of the problems lie in local cultural attitudes and
business practices rather than simple economic factors. MNCs need to understand these cultural nuances
and tailor their solutions and working relationships accordingly.
We now revisit some of the questions that we had put forward at the beginning of our paper and try
and infer answers to the same from the case studies enumerated above.
Does CSR actually benefit the SMEs?
There is a popular argument that CSR is only meant for large multinationals. SMEs lack the power to
influence governments and dictate standards and hence the standards used are not in their best interests.
Moreover, most SMEs are struggling to establish themselves and lack the resources or the know-how to
implement CSR practices. It is also argued that MNCs typically exploit the SMEs and use CSR as a coverup. Thus, is there really a case for CSR for SMES? From the evidence of our case studies we would like to
argue that there is in fact a very good business case for SMES to adopt CSR practices. The main reasons as
to why SMES should embrace CSR can be listed below:
- Productivity: gathering innovation for products and efficiencies
- Expanding business: expanding the reach of business through increasing customer base
- Improved work culture: increased motivation, less staff turnover and the ability because of
enhanced reputation to attract better quality staff.
- Reputation: enhancing the reputation of the firm – brand building for global companies.
Traditional top-down strategies do not achieve sustainable CSR. What are alternative methods that
can be employed?
Partnerships with MNCs seem to be an effective way for SMEs to imbibe knowledge regarding
CSR practices and implementing them. This is unlike the top –down approach imposed often on SMEs
by external institutions. SMEs under this model carry out CSR activities because they clearly link the
benefits of CSR to their own growths.
How important is the role of the MNCs in facilitating growth for the MNCs? Could the SMEs have
done it themselves?
SMEs clearly lack the know- how and the managerial competence to implement CSR practices. This is
where the MNCs step in with their superior knowledge base. At the same time, most SMEs in the
developing econ0mies lack access to financial capital, and in the absence of a sound economic growth
potential they are unable to implement CSR.
What is the payoff to the MNCs? Are they doing it as a charity/ cover up or mutual benefit?
There seems to be a clear business cases for the MNCs as well. None of the MNCs in our case studies
have implemented CSR as philanthropy, even though they do have a large charity contribution arm as well.
In each of these cases, the MNCs benefited by having a more reliable supply chain and better quality
What are some of the key elements of a successful transfer of CSR practice to the SMEs by the
SME development through supply chain linkages requires the multi-national company to carefully
research and analyze their operational and environmental conditions. A basic understanding of the cultural
mindset and business etiquette is the first step to clearly identifying how the MNC can develop their supply
chain activities. Training high-level managers on cultural sensitivity and the importance many cultures
place on respect and societal positions can facilitate communication and discussions.
With regards to direct supply chain and SME development, it is necessary for the MNC to
understand the local economic and environmental limitations that may inhibit surrounding SMEs from
engaging in further capacity-building activities. Examples include limited managerial capabilities or
limited access to financial capital for increasing operational capacity. In addition, building confidence and
trust between MNC managers and SME suppliers is a necessary step towards increasing partnerships.
Furthermore, procurement managers should be encouraged to actively pursue local suppliers and
maintain a database of suppliers with corresponding profiles and capabilities. A ranking system, based on
performance and compliance with specified standards may facilitate the active participation from
procurement manages to engage local SMEs. Moreover, required annual reviews of the database may
further facilitate such activities.
Partnership between MNCs and SMEs should focus on building capacity of SMEs to implement
CSR practices on their own through direct information exchange. This can be accomplished by holding
structured and informal meetings in various settings to encourage suppliers to freely discuss challenges and
achievements. Training for SME managers on managerial, operational and technical improvements can
also increase standards within and partnerships between SMEs.
Furthermore, incentives to those suppliers performing well may encourage other suppliers to
participate in MNC training activities and increase standards, providing MNCs with greater effectiveness in
conducting supply chain activities.
What is the role of different agencies: Govt. / Multilateral organizations?
Role of Government
Without a balanced, enabling framework which supports local business, the tools highlighted
above will be of limited value. The government has a large role to play in engaging in dialogue with SMEs
and MNCs in creating an environment in which CSR practices can be adopted more easily by both parties
as well as putting in place mechanisms which helps the SMEs to build their capacities to grow and sustain
their CSR initiatives. Governments must also focus on attracting investors who would bring additional
developmental benefits besides tax revenues, e.g. employment, new skills and technologies. Government
can also help by developing comprehensive frameworks and systemic approaches, to bring together
existing work on standards and codes at different companies at a country level and to support fuller
implementation across whole sectors.
Governments in developing countries are realizing the same. Indonesia has established a Ministry,
by the name of Ministry of Cooperatives and Small Enterprises 42 to coordinate various efforts of the SMEs'
promotion. 43 Vietnam issued a decree in 2001 for support of small – and medium – sized enterprises to
help ensure orderly growth of SMEs in the country. Some of the initiatives underway post this order are :
creating a favorable legal environment to ensure all the business activities do well; providing favorite and
promotion policies for SMEs in specific sectors such as textile and clothing, shoe and leather, consumer
goods and export production, parts and spare parts manufacturing, food and foodstuff processing, electrical
and electronics and information technology; receiving and implementing technical assistance projects of
international organizations and countries to develop SMEs; establishing centers for consulting and
supporting SMEs in sectors, cities and provinces; and expanding internal and external markets for SMEs. 44
Role of Multilateral Organizations
Multilateral agencies like the World Bank, the UNDP, , the Asian Development Bank, the InterAmerican Development Bank as well as bilateral aid programs (AusAid, USAID, DFID among others)
and other CSR and SME organizations (WASME, WBCSD )have critical roles to play in terms facilitating
activities that would create CSR capacity and institution building policies and projects. Given that they
have a helicopter view of the world, these organizations can create supporting networks to facilitate
dialogue that joins up different players (SMEs, MNCs, Governments) and leverage the strengths knowledge
across players, regions and sectors. They need to raise awareness and help governments to establish ways
of working together. Some of the activities they can undertake in order to be able to do the above are:
dissemination of ‘best practices’ through workshops and publications, training and research, forming
intermediary organizations which provide SMEs with capital to build capacity and pursue CSR activity.
Some of the current CSR initiatives undertaken by multilaterals and other organizations are
U.N. Global Compact
The Global Compact an initiative created by the U.N. that brings multinational companies together
with UN agencies, labor and civil society, to support ten principles in the areas of labor, human
rights, the environment, and anti-corruption. As of March 1, 2005, the Global Compact had 1947
company participants.45
The Inter-American Development Bank: The Multilateral Investment Fund
Project Name: Implementing CSR Measures in SMEs in the Supply Chain
Project Objective: To improve the competitiveness and market opportunities for SMEs. The
program’s goal is to support the implementation of CSR practices among SMEs that are in the
value chain of larger enterprises. 46
Project Name: Adoption of Corporate Social Responsibilities in SMEs
Country: Chile
Project Objective: To improve the competitiveness of Chilean SMEs. The program’s goal is to
incorporate CSR into business strategies as a SME management system to maximize social and
private benefits.47
Project Name:
Program to Institute CSR Practices to SMEs
Country: Columbia
Project Objective: To improve the competitiveness and sustainability of Colombian enterprises.
The program’s goal is to instill CSR practices in Colombian businesses, primarily SMEs, to help
improve their market access, economic performance and finance avenues. 48
Vietnam Business Council (VBC)
VBC is a consultative and deliberative forum comprising representatives from business,
government, and civil society. 49 The VBC meets regularly over time to address issues related to the
development of economic, social, business policies and laws. The Vietnam Business Council was created
under the leadership of four key organizations: (1) Vietnam Chamber of Commerce and Industry (VCCI),
a national organization which assembles and represents business enterprises and associations from all
economic sectors across the country, (2) Prime Minister's Research Commission (PMRC), the think-tank of
the Prime Minister on economic, social and administrative reforms, which provides advice and proposals
to the Prime Minister and leaders of the Vietnamese Government, (3) Central Institute of Economic
49 support_files/AsiaOverview.pdf
Management (CIEM), the research institute which helps the Vietnamese government work out economic
laws and policies, and (4) Association of Small Entrepreneurs in Hanoi.
Commercial Market Strategies (CMS)
CMS works in US-Aid funded projects in Africa/Asia/Caribbean/Latin America and near East and
help private sector with their CSR activities. For example, they assisted Unilever in Ghana with their
iodine salt project.
As revealed through this paper, the implementation of CSR practices by SMEs throughout the
developing world can only be accomplished with the active participation of local MNCs. These
corporations must carefully examine the local economic and social conditions and the business
environment that exists in the respective developing nation. By utilizing the supply chain linkages, MNCs
can greatly enhance the business practices and efficiency of SMEs and concurrently enhance their own
profitability and social responsibility.
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