This brief is part of the Insights @ Center for Emerging Markets, a publication focused on cutting-edge ideas and advice for global leaders about emerging markets.

By Christian Geisler Asmussen (Copenhagen Business School), Andrea Fosfuri (Bocconi University), Marcus Møller Larsen (Copenhagen Business School), Grazia D. Santangelo (Copenhagen Business School)

Imagine you are a Bangladeshi garment worker: enduring long hours, low pay, and hazardous conditions with no rights. One day, a fire erupts, trapping many, including you. Escape routes are locked or blocked. You scream for help, but no one comes. This is not a fictional scenario. The Rana Plaza factory collapse in 2013 killed more than 1,100 workers who were supplying garments to major Western fashion brands in unsafe conditions and for low wages. Brands such as H&M, Gap, and Walmart faced criticism for their lack of oversight. But how much control do multinationals truly have over suppliers, and how can they guarantee ethical standards?

Large, well-known multinationals are commonly believed to have a powerful influence over their emerging market suppliers. But recent research by Christian G. Asmussen and colleagues challenges this widespread belief, highlighting three shortcomings:

  • First, it underestimates the power dynamics of client-supplier relationships. For example, Foxconn—the major supplier to Apple and many other electronics companies—has capabilities of strategic importance to Apple, reducing Apple's bargaining power.
  • Second, many suppliers are less sensitive to responsible conduct, and their MNC customers are often the ones who suffer reputational damage from their misbehavior. When Bravo Tekstil, a Turkish supplier to Spanish retailer Zara, shuttered its factories and failed to pay workers, Zara's reputation suffered, while the supplier declared bankruptcy overnight with no liability whatsoever.
  • Third, suppliers in developing countries may prioritize efficiency over sustainability due to pressure from MNC clients to meet cost expectations.
Managing Risk

Suppliers in global value chains are required to follow the corporate social responsibility demands of their MNC customers. However, these suppliers may have different incentives, capabilities, and constraints that make compliance with MNC sustainability standards difficult to achieve. If they can engage in undetected unethical practices that reduce costs, they stand to win more contracts than competitors and improve profitability. If exposed, they can threaten to walk away from the relationship unless they are paid more to compensate for the extra cost, thereby shifting some costs of their behavior to the MNC, while keeping most of the benefits for themselves. This can leave MNCs with minimal negotiation leverage, while suppliers enjoy short-term savings.

MNCs can manage these risks by employing specific strategies. First, they can monitor their suppliers' actions and practices to detect and prevent irresponsible behavior. However, monitoring, by providing greater information to the MNC on a supplier's irresponsible conduct, can exacerbate the reputational damage for the MNC and can even incentivize suppliers towards more irresponsible action.

Second, MNCs can announce problems they discover to show transparency and accountability and reduce reputational damage, but doing so can also show vulnerability. Third, they can end ties with irresponsible suppliers as a zero-tolerance measure. Fourth, they can work with suppliers to correct these problems. However, doing so can increase costs and create reputational risks if the supplier fails to deliver on promised improvements.

The strategy multinational buyers choose will depend on the value of the relationship, the cost of correcting the problem, the probability of detection, and the potential for further reputational harm. By choosing the best combination of strategies that suits their situation and goals, they can create value for their company and stakeholders while inducing responsible behavior at the supplier sites.

Original Work

Asmussen, C. G., Fosfuri, A., Larsen, M. M., & Santangelo, G. D. (2023). Corporate social responsibility in the global value chain: A bargaining perspective. Journal of International Business Studies, 54, 1175-1192.

Contact

If you are interested in learning more about this work, contact Professor Christian Geisler Asmussen at: cga.si@cbs.dk