The Roles of Strategic Corporate Social Responsibility in Multinational Companies - Term Paper Example

The Roles of Strategic Corporate Social Responsibility in Multinational Companies Keith Davis when in 1960 suggested that social responsibility is the name given to corporations’ decisions and actions (Agmon & Hekman, 1989, p. 4) which are taken for reasons at least partially beyond the firm’s direct economic or technical interest, multinational companies (MNCs) were unaware of it. Later the Committee for Economic Development (CED) used a ‘three concentric circles’ approach to explain the significance CSR can uphold in a MNC. Out of three circles, the inner circle is dedicated for economic functions, the intermediate circle suggests that the economic functions must be exercised with a sensitive awareness of changing social values and priorities and the outer circle outlines newly emerging and still vague responsibilities that corporations should assume to become more actively involved in improving the social environment in which they operate (Shalhoub, 1999, p. 13). Theorists have identified four broad areas of strategic corporate responsibility that a MNC adopts, economic, legal, moral, and social. The main premise of the four areas is found in the basic nature of the corporation, which is a privately based, economic entity whose members are expected to make decisions that possesses a significant impact on a number of constituents (Brummer, 1991). Later MNCs realize that a corporation has not always all four responsibilities. The adoption of SCSR by MNCs When it came to the adoption of SCSR, global MNCs failed to respond effectively to the significant issues of their countries (Logsdon & Wood, 2005). It would not be wrong to say that multinational companies (MNCs) while responding to concerns like downsizing and environmental degradation took initiatives to demonstrate their social responsibility (Edwards et al, Feb 2007). This way the MNCs actually adopted SCSR to reduce their workforce through either voluntary or involuntary means or a combination of both. In other words, MNCs in order to defend themselves tend to adopt SCSR but with some concerns of which the most significant is the corporate downsizing in privately and publicly owned firms in recent years. The notion that MNCs have failed to adopt SCSR is depicted from some well-known examples. MNCs failure could be analysed by those protests and consumer boycotts that Nestle has experienced recently in selling its various products in Africa (Husted & Allen, 2006). Same is the case Nike has experienced as a result of child labour abuse in outsourcing in Asia. The global MNCs are unable to consider the cause of their failure which refers to those corporate strategies which are adopted in their local market units in situations where they have limited functions with small staffs and then find themselves unable to monitor and respond successfully to CSR issues. Why MNCs fail to implement SCSR? While adopting SCSR an organization’s ethical duty to suppliers arises out of the market relationship that exists between them, as they are both partners and adversaries. MNCs must understand the relation that they are partners in the sense that the quality of suppliers’ parts affects the quality of a company’s product and in the sense that their businesses are connected. On the contrary MNCs must realize that they are adversaries in the sense that the supplier wants the highest price and profit it can get while the buyer wants a cheaper price, better quality, and speedier service. Therefore an organization confronts several ethical issues in its supplier relationships. There is a need for the MNCs to analyse that is it ethical to purchase goods from foreign suppliers who employ child labour, pay substandard wages, or have sweatshop working conditions in their facilities? There is a need for the MNCs to assess that is it ethical to threaten to cease doing business with a supplier unless the supplier agrees not to do business with key competitors? In order to implement strategies, MNCs must consider issues that arise from ethical, economic or moral considerations (Windsor, 2006). As the above examples elucidate that MNCs do not always manage CSR strategically and the failure to manage CSR strategically can have serious economic consequences for the firm. The other side of implementing an effective strategic management of CSR can not only reduce risk but also may bring significant benefits to the firm (Hillman and Keim, 2001). This is helpful in reputation-building to the development of valuable organizational capabilities (Sharma and Vredenburg, 1998). Significance of Ethic Programs in adopting SCSR MNCs ethical programs identify preferred values and ensure that organizational behaviours are aligned with those values. This effort to identify MNCs own preferred values include recording the values, developing policies and procedures to align behaviours with preferred values, and then training all personnel about the policies and procedures. MNCs this way shapes the overall effort which is useful for several other programs in the workplace that require behaviours to be aligned with values, including quality management, strategic planning, and diversity management. For example, successful team performance in a “Six Sigma” quality organization includes high priority on certain operating values such as trust among stakeholders, performance, reliability, measurement, and feedback (Sims, 2003, p. 19). Many MNCs use ethics tools in their quality programs to ensure integrity in their relationships with stakeholders. Ethical management techniques deployed by MNCs are also highly useful for managing strategic values, such as expanding market share or reducing overall costs. Theorists often believe that one of the reasons for inappropriate implementation of CSCR is the lack of organization ethics along with the motives of management which has never been able to attain a priority of MNCs. This goes in support of the findings taken from a limited number of interview studies which somehow refers to two main sources of motivation (Marginson, 2006). The first factor to motivation is ‘legitimation’, for the management may notice adequate benefits in reaching an agreed code in terms of the additional legitimacy for a policy that employee representatives’ consent can bring. This is the concern over legitimacy which can be achieved while linking the IFAs to multilateral instruments such as ILO Conventions, the principles of the UN’s Global Compact and the OECD’s Guidelines on MNCs (Hammer, 2005). The second motivation factor follows the capacity of trade unions and NGOs so as to bring international pressure to bear on management over company practices and those of its suppliers. Since ethics management programs are also helpful in creating strategies for managing diversity, such programs require recognizing and applying diverse values and perspectives which these activities are the basis of an organization committed to sound ethics. How MNCs adopt SCSR The main purpose of adopting a strategic CSR practically is the involvement of a business that after identifying its stakeholder groups incorporates their needs and values within the strategic and day-to-day decision-making process (University of Miami, 2007, p. 1). There is a strong bond between MNCs social cost and financial performance, for it matters how a MNC go for earning the highest level of cash flow for a particular risk (Murray et al, 1995). Such a view represent that investors select a well-diversified portfolio of securities to achieve this goal. Therefore there is a common assumption that investors are not easily willing to pay a premium for corporate behaviour that can be described as socially responsible. Under the traditional view, to the extent that corporations engage in costly behaviour to achieve socially responsible goals that cannot be translated into higher cash flow in the future, investors are expected to place a lower value on corporate securities. There are many other issues that MNCs might consider in classifying their decisions accordingly. These include unique laws and code of ethics in each country, taxes, price fixing and bribery, joint ventures as differentiated from full ownership of foreign operations, foreign nationals training, control of air, water, solid waste, radiation, noise, land, and chemical pollution, safety standards, health care, education, unemployment, inadequate transportation, product safety, packaging, quality and pricing (Jerry, 1989, p. 16). Of course MNCs must not ignore the issue of providing equal opportunity regardless of race, sex, age, handicap, religion, or creed. There are many examples before us in which MNCs had not implemented SCSR into their policies because if such strategies had been included there had never been the issue of the economic boycott of Israel. Many individual investors might eliminate a company from their portfolio if they were aware that the company had either a formal or informal policy of not doing business with Israel. This indicates a MNC is dependant upon its decision strategy which leads her to acquire competitive advantages which are firm-specific advantages that influence decisions on what activities and technologies a firm should concentrate, while comparative advantages are location-specific advantages influencing the decisions on where to source and market (Kogut, 1985). Critics put SCSR in a descriptive sense only and believe that scoring high along one of the above mentioned core issues is not always perceived as evidence of socially responsible behaviour. For example, companies in the drug industry have historically donated large amounts of money to hospitals as philanthropic contributions. Drug firms, which have traditionally been perceived as socially responsible, may now find themselves under more intense scrutiny and may have to explain more precisely the rationale for such giving, which one drug company labels as strategic. According to a New York Times article, for example, in a political climate in which an increasing percentage of gross domestic product is being allocated to health care costs, drug firms should consider curtailing charitable contributions in order to lower product costs. In the drug industry, concern for the consumer, and more general concern for the robustness of the economy as a whole, may trump charitable giving as socially responsible activities (Pava & Krausz, 1995, p. 14). When corporations adopt SCSR, it means they are concerned about the activities of domestic MNCs abroad through outward direct investment, and of foreign MNCs in the domestic economy through inward direct investment, this way they represent two ways in which the location-bound competitive advantages of particular economies may interact with each other (Jones & Munoz, 2002, p. 13). Such interaction between MNCs and investment may also occur through other forms of international commerce, e.g. non-equity strategic alliances, but because FDI shifts both resources and capabilities, and changes the ownership or control over the use of these resources, it is likely to exert a very specific impact (Narula, 1996, p. 17). In context with the eclectic paradigm, the pattern and extent of the outward investment of MNCs will therefore be based on their competitive advantages derived from their home country’s economic structure. Likewise, inward investment will be based on these advantages vis-a-vis those possessed by the home country of the investing MNCs. Irrespective of the fact that whether the motives for investment activity follows market seeking approach, resource seeking or strategic asset acquiring, firm specific technological capability grows, leading to the generation of new advantages which are transferred back to the parent firm in the home country (Narula, 1996, p. 21). Over time, and as the MNC becomes increasingly internationalised, this interactive process therefore results in the advantages of firms of a particular nationality becoming increasingly firm-specific, i.e. less a function of the economic structure of its home country and more a function of the economic structure of the various locations of its operations. Therefore, the significance of country-specific characteristics in determining the extent and pattern of FDI activity and its relation to the economic structure of a country becomes increasingly complex as the strategy of MNC towards internationalisation increases. Therefore, the non-explanatory power of the MNC with regard to the extent and pattern of FDI activity, and its relation to the economic structure of the country is due to firm-specific rather than country-specific factors (Gray, 1982). Despite so much criticism on part of the MNCs, today MNCs to some extent adopt SCSR for which at least they acquire initial advantages of foreign firms, as domestic firms compete directly with them in various sectors. Such a notion is supported by the growing base of created assets of the host country arising from increased expenditure on education and innovatory activities. These are usually replaced by new technological, managerial or marketing innovations in an attempt to compete with domestic firms. Many authors have mentioned that a combination of location advantages and agglomeration economies affect the choices made by foreign MNCs in financial and professional services, as this has happened in the United States in the 1990s (Nachum, 2000, p. 380). Though there are advantages which are based on the ownership of intangible knowledge but still the public-good nature of such assets mean that foreign firms increasingly prefer to exploit them through cross-border hierarchies. With such tremendous scope for growing advantages such as an enlarged market and improved domestic innovatory capacity make for economies of scale, the rising wage costs encourages more technology intensive manufacturing as well as higher value added locally. The motives which MNCs adopt regarding inward direct investment shift towards efficiency seeking production and away from import substituting production. Therefore in industries where domestic firms enjoy a share of competitive advantage, there may be some inward direct investment directed towards strategic asset acquiring activities. There are value added activities that MNCs inherit when they adopt SCSR and this is evident from the fact that firms and MNCs from the industrialised world are increasingly engaged in high value added activity services that are knowledge intensive and are of a public good nature which has led MNCs towards an increase in strategic asset acquiring FDI activity. Foreign-owned production suggests that there are four main motives behind MNCs activities. Two motives relate to supply orientation i.e., to source inputs for value added activity, and to gain access to created assets, third motive is demand oriented, to better serve existing, or penetrate new, markets whereas the fourth is efficiency oriented, to better organize the geographical spread of the activities of the investing firm, so as to benefit from the cross-border economies of scale, scope and integration (jones & Munoz, 2002, p. 55). Many MNCs today feel that in order to respond effectively and efficiently to the major social issues and demands of the day, corporate social policy must be integrated into corporate strategy. Corporate executives realize the need for including social policy guidelines as well as ethical values into the strategic plans from which the functional policies and operational plans will be derived; this would reduce the burden of implementing and achieving the corporate goals which in turn would help in successful implementations of MNCs. 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