sip a csr final report

8/3/2019 Sip a Csr Final Report

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SCHOOL OF INTERNATIONAL AND PUBLIC AFFAIRSCOLUMBIA UNIVERSITY

CORPORATE SOCIAL RESPONSIBILITY

THROUGH THE SUPPLY CHAIN:

MNCs TO SMEs

ANUPAMA SINGH

SUDARSHANA KUNDU

WILLIAM FOSTER

MAY 11, 2005

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TABLE OF CONTENTS

EXECUTIVE SUMMARY ...........................................................................4

INTRODUCTION .........................................................................................7OBJECTIVE......................................................................................................................................................7WHATIS CSR? ...............................................................................................................................................7WHATARE SMES? ..........................................................................................................................................8WHY SMESAND MNCS? ..................................................................................................................... ...... ....8QUESTIONS RAISED..........................................................................................................................................8METHODOLOGY................................................................................................................................................ 9

REGIONAL ECONOMIC DEVELOPMENT COMPARISONS ..........10

CASE STUDIES ..........................................................................................12

ARACRUZ CELULOSE S.A.: BRAZIL.................................................................................................................. 12

Brazil: Key Socio-economic Indicators ......................................................................................... ...... .12SMEs in Brazil ............................................................................................................................... ...... .12

Company Profile ...................................................................................................................................13

CSR Practices ................................................................................................................................ ...... .13SME Benefits ........................................................................................................................................ .14

MNC Benefits ........................................................................................................................................15

Conclusion ............................................................................................................................................16

CEMEX: MEXICO............................................................................................................................................ 17Mexico: Key Socio-economic Indicators ............................................................................................. .17

Mexico is Latin Americas largest economy with USD 626.1 billion in real GDP in 2003. After

steady growth in the late 1990s, Mexicos economy has slowed due to the weakening of the U.S. and

global economy. In 2000, Vicente Fox was elected president, breaking 71 years of one-party rule bythe Institutional Revolutionary Party (PRI). Since his election, Fox has had difficulty passing reforms

through Mexican congress. Crime and human rights abuses continue to be major social problems inMexico, and despite attempts to raise tax revenues, the government is still heavily dependent on oil

revenues. These factors, paired with the Mexicos heavy reliance on the U.S. economy, create an

uncertain economic outlook for Mexico...............................................................................................17

SMEs in Mexico ................................................................................................................................... .17

CSR Practices ................................................................................................................................ ...... .18

SME Benefits ........................................................................................................................................ .19

MNC Benefits ........................................................................................................................................19

Conclusion ............................................................................................................................................20THE CONSTRURAMAPROGRAMISANEXAMPLEOFHOWLARGE MNCSCANCONTRIBUTETOTHEENTERPRISEAND CSRDEVELOPMENTOF SMESBYSTRENGTHENINGTHECAPACITIESOF SMESWITHINTHEIRDISTRIBUTIONNETWORK. WHILETHE CONSTRURAMAPROGRAMSPRIMARYGOALSARETOINCREASE CEMEXSPROFITSTHROUGHSTRENGTHENINGFRAGMENTEDDISTRIBUTIONNETWORK, THEPROGRAMSIMPLEMENTATIONRESULTSIN SME AND CSRDEVELOPMENTOFITSDISTRIBUTORS, MOSTOFWHICHARESMALLFAMILY-OWNEDENTERPRISES. THEPROGRAMINVESTSCAPITALANDRESOURCESINPARTNERSMES, WHICHDIRECTLYBENEFITSBOTHTHE SMESANDTHELOCALCOMMUNITIESTHATTHEYOPERATEIN. THEPROGRAMEXTENDS CEMEXSREACHTOTHERURALPOOR, TOOFFERALTERNATIVECONSTRUCTIONPROJECTFINANCINGANDBETTERPRODUCTSANDSERVICES. THENETRESULTOFTHEPROGRAMISIMPROVEDSOCIALWELFAREFORTHELOCALCOMMUNITIESINVOLVED. THEREFORE, THE CEMEXEXAMPLEILLUSTRATESTHATAN MNCSPURSUITOFPROFITCANDIRECTLYRESULTINSOCIALRESPONSIBILITY, SME DEVELOPMENTANDLOCALCOMMUNITYDEVELOPMENT................................................................................................................................................ 20DELTA CORPORATION: ZIMBABWE.................................................................................................................... 21

Zimbabwe: Key Socio-economic Indicators ........................................................................................ .21

Company Profile ...................................................................................................................................22

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CSR Practices ......................................................................................................................................22

SME Benefits ........................................................................................................................................ .22

MNC Benefits ........................................................................................................................................23

Conclusion ............................................................................................................................................23

UNILEVER: GHANA......................................................................................................................................... 24Ghana: Key Socio-economic Indicators ...............................................................................................24

Company Profile ...................................................................................................................................25CSR Practices ................................................................................................................................ ...... .25

SME Benefits ........................................................................................................................................ .25

MNC Benefits ........................................................................................................................................26

Conclusion ...........................................................................................................................................26UNIIEVER: VIETNAM......................................................................................................................................27

Vietnam: Key Socio-economic Indicators ............................................................................... ...... ...... .27

Company Profile ...................................................................................................................................27

SMEs in Vietnam ...................................................................................................................................28

CSR Practices ................................................................................................................................ ...... .28

SME Benefits ........................................................................................................................................ .29MNC Benefits ........................................................................................................................................29

Conclusion ............................................................................................................................................29GAP INC.: INDONESIA.................................................................................................................................. 30

Indonesia: Key Socio-economic Indicators ..........................................................................................30Company Profile ...................................................................................................................................30

SMEs in Indonesia ................................................................................................................................31

CSR Practices ................................................................................................................................ ...... .31

SME Benefits ........................................................................................................................................ .32MNC Benefits ........................................................................................................................................32

Conclusion ............................................................................................................................................32

ANALYSIS ...................................................................................................33

CONCLUSION ............................................................................................38

BIBLIOGRAPHY .......................................................................................39

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Executive Summary

This paper is an attempt to look at the benefits of adopting corporate social responsibility(CSR) activities for small and medium enterprises (SMEs) in developing countries. We

focus specifically on those SMEs that are part of the supply chain of large multinationalcorporations (MNCs) in developing countries. In this paper we study five MNCs(Aracruz Celulose, Cemex, Unilever, Delta Corporation and Gap Inc.) across sixdeveloping nations (Brazil, Mexico, Ghana, Zimbabwe, Indonesia and Vietnam) in threedifferent geographic regions of the world (Latin America, Africa and South East Asia).These cases clearly reveal that the adoption of CSR practices by SMEs can result inbetter market opportunities and economic growth.

In each case the multinationals partner with their SME counterparts and transfer CSRpractices to the SMEs who adopt them due to the mutual benefits collected by bothparties. This transfer and voluntary adoption of CSR practices is a powerful means ofpropagating CSR, because in many developing countries, CSR legislation is ineffective

due to weak law enforcement capabilities.

In addition, the role of the MNCs in these case studies is not restricted to passing onCSR knowledge; it includes developing the capacity of SME partners to prepare themto adopt and sustain CSR practices. During this capacity building process, SMEs gainaccess to the technology, financial capital and managerial knowledge of advanced nationsthat would otherwise be unavailable to them.

This report was prepared in partial fulfillment of the requirements for the Master in

International Affairs and Master in Public Affairs degree at the School of

International and Public Affairs at Columbia University. It was prepared at the

direction of Columbia University and of the World Bank Institute. The views expressed

herein are those of the authors and not necessarily those of the School of International

and Public Affairs, Columbia University as a whole, or the World Bank Institute.

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Abbreviations and Acronyms

ADB Asian Development Bank ADR American Depositary receiptsAFTA ASEAN Free Trade Agreement

ARA Aracruz Celulose SAASEAN Association of Southeast Asian NationsAusAID Australian Agency for International Development (AusAID)BNDES Brazilian National Economic and Social Development BankBOVESPA Brazilian Stock ExchangeBSR Business for Social ResponsibilityCIEM Central Institute of Economic ManagementCMS Commercial Market StrategiesCSR Corporate Social ResponsibilityDFID Department for International DevelopmentEIU Economist Intelligence Unit

Empretec emprendedores (entrepreneurs) and tecnologa (technology)FDI Foreign Direct InvestmentGDP Gross Domestic ProductHDIIDB

Human Development IndexInter-American Development Bank

IDD Iodine DeficiencyIFC International Finance CorporationILO International Labor OrganizationMNC Multinational CorporationNGO Non-governmental OrganizationsNYSE New York Stock Exchange

PMRC Prime Minister's Research CommissionPPP Purchasing Power ParityPRI Institutional Revolutionary PartySIPA School of International and Public AffairsSME Small and Medium EnterpriseUNCTAD United Nations Conference on Trade and DevelopmentUNDP United Nations Development ProgramUNICE Union des Industries de la Communaut europenneUNIDO United Nations Industrial Development OrganizationUSAID US Agency for International DevelopmentUSD United States Dollars

VBC Vietnam Business CouncilVCCI Vietnam Chamber of Commerce and Industry

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WASME World Association for Small & Medium EnterprisesWB World Bank WBCSD World Business Council for Sustainable DevelopmentWBI World Bank InstituteWTO World Trade Organization

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Introduction

Objective

The purpose of this paper is to demonstrate that the adoption of corporate socialresponsibility (CSR) practices by developing country SMEs that operate within the

supply chains of multinational corporations (MNCs) results in greater marketopportunities for SMEs.

What is CSR?

There are several definitions of CSR that have been put forward. The World BusinessCouncil for Sustainable Development uses the following definition: Corporate SocialResponsibility is the continuing commitment by business to behave ethically andcontribute to economic development while improving the quality of life of the workforceand their families as well as of the local community and society at large. 1Alternatively,CSR is about how companies manage business processes to produce an overall positiveimpact on society.2 According to Business for Social Responsibility (BSR), CSR is

defined as achieving commercial success in ways that honor ethical values and respectpeople, communities, and the natural environment.3 Alternatively, CSR is an action by afirm, which the firm chooses to take, that substantially affects an identifiable socialstakeholders welfare.4 The stakeholder concept is reiterated in another definition, whichstates: CSR is concerned with treating the stakeholders of the firm ethically or in asocially responsible manner. Stakeholders exist both within a firm and outside. The aimof social responsibility is to create higher and higher standards of living, while preservingthe profitability of the corporation, for its stakeholders both within and outside thecorporation.5

It is important to remind ourselves that social and environmental concerns form only apart of CSR. An important component of CSR is profitability. Companies have to remain

competitive, albeit in a sustainable manner, to be able to generate employment andgenerate wealth. Generation of employment and wealth are especially important fordeveloping economies, which are trying to graduate from poverty.

The World Bank Groups CSR Practice has chosen to define CSR as The commitmentof 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, inways that are both good for business and good for development.6 In all of thesedefinitions, CSR is viewed as a comprehensive set of policies, practices and programsthat are integrated into business operations, supply chains and corporate decision-makingprocesses to improve stakeholders lives. All of our subsequent discussions on CSR are

based on this broad definition of CSR.

1Holme et al.2Corporate Social Responsibility: News and Resources, Mallenbaker.net3 Business for Social Responsibility4 Frooman p. 227 (1997)5Hopkins (2004)6 Strengthening Implementation of CSR in Global Supply Chains World Bank Group, Oct 2003

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What are SMEs?

According to the International Finance Corporation7, an SME is any enterprise that fallsinto one of the following categories:

NUMBER OFEMPLOYEES

TOTAL

ASSETS

TOTAL

ANNUAL SALES

Micro-enterprise 10 $100,000 $100,000

Small enterprise 11-50 $100,000 and

$3 million

$100,000 and

$3 million

Medium enterprise 51-300 $3 million and

$15 million

$3 million and

$15 million

While these definitions are admittedly subjective and still under review, they are broadlyconsistent with those used by most other international financial institutions.

Why SMEs and MNCs?

Three-fourths of all enterprises throughout the world are SMEs. These enterprisesgenerate employment for a significant percentage of the working population in everycountry and thus play a major role in economic development. 8 This is particularly true of

developing countries.9 Over the past twenty years, rapid globalization has led to greateroverseas market access and higher competition amongst firms. Multinational corporationshave had to look for new sourcing options that reduce costs without compromising product quality. As a result, MNCs are increasingly looking overseas to incorporatedeveloping world SMEs into their supply chains.

Questions Raised

1. Does CSR actually benefit SMEs?

This question explores the debate on the true nature of CSR when implemented. Some

argue that MNCs exploit SMEs and use CSR as a means to appear responsible.However, we argue that CSR offers significant returns to SME owners in the form ofmanagerial and technical skills and sustainable productivity methodologies.

7 International Finance Corporation: World Bank Group Small and Medium Enterprise Department8 UNIDO, SME Cluster and Networking Development9 Hamner and Rosario (1997)

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2. Traditional top-down strategies do not achieve sustainable CSR. What arealternative methods that can be employed?

Until recently, popular opinion assumed that for CSR to take hold and provide results,it must be developed and imposed by MNCs onto SMEs. However, by adopting a moreholistic approach to CSR, one can observe that capacity-building and worker

empowerment can lead to sustainable improvements.

3. How important is the role of MNCs in facilitating growth for SMEs? Could the

SMEs have done it themselves?

The greatest obstacles to SME growth are limited access to financial capital, technologyinefficiencies and human resources inefficiencies. We argue that it is infeasible forSMEs to access such resources without the direct assistance of MNCs.

4. What is the payoff to MNCs? Are they doing it as philanthropy / publicrelations or for mutual benefit?

Although CSR is often implemented through corporate philanthropy or as part of public

relations campaigns, it provides a strong business case for decreasing costs andimproving overall operations. The cases within this study provide evidence of CSRspotential business returns.

5. What are some of the key elements of a successful transfer of CSR practices to

SMEs by MNCs?

A careful understanding and analysis of local cultural features and economic and socialunderpinnings is crucial for MNCs to successfully navigate a host developing country.

6. What is the role of Government / Multilateral organizations?

Governments play a large part in initiating dialogue between MNCs and SMEs. Theycan demonstrate how CSR practices through the supply chain can help MNCs reachtheir bottom-line goals. Moreover, governments can encourage SMEs to adopt CSR practices and capacity-building methodologies. Meanwhile, multilateral organizationscan work on a macro-level to demonstrate the benefits of development and on a micro-level to assist governments and MNCs with their engagement with SMEs. Publicintervention can also supply needed capital, however, in many developing countries,the public sector has limited means of providing such resources. The public sectorshould instead act to reinforce the benefits SMEs gain from MNCs.

Methodology

This paper is a cross-country analysis of MNCs that are operating in the developingworld. We will examine the following MNCs through cases study format: Aracruz

Celulose in Brazil, Cemex in Mexico, Delta Corporation in Zimbabwe, Unilever inGhana and in Vietnam and Gap in Indonesia. Within each region we will examine theCSR practices and their effects on the SME and MNC. Each case study is segmented intothe following sections: Country Overview, Country SME Sector, Company Profile, CSRPractices, SME Benefits, MNC Benefits and Conclusion.

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Regional Economic Development Comparisons

In order to analyze comparative economic and social conditions, we analyze the GDP,foreign direct investment (FDI) and U.N. Human Development Index rankings for theLatin American & Caribbean, the Asian and the Sub-Saharan African regions of theworld.10,11 We have chosen to analyze GDP per capita to reflect comparative economic

development; cumulative FDI inflows to represent relative foreign investor and MNCconfidence; and the U.N. Human Development Index rank to reflect relative socialdevelopment.

The data reveals that Latin America & the Caribbean have greater economic and socialdevelopment than both Asia and Sub-Saharan Africa, while Asia is more developed thanSub-Saharan Africa. Meanwhile, Asia leads both Latin America & the Caribbean andSub-Saharan Africa in cumulative FDI inflows from 1992-2003, which illustrates MNCsgrowing attention to Asias economic growth potential and increasing marketopportunities. We believe that the industrial development of these regions directlyimpacts SMEs abilities to strengthen enterprise development capacities and CSRpractices, and that the relative development levels accurately depict the level of SME andCSR development initiatives currently underway in these regions of the world.

0

1,0002,000

3,000

4,0005,000

6,000

7,0008,000

PPP US$

GDP Per Capita

GDP Per Capita (PPP US$)

Latin America & the

Caribbean

East As ia and the

Pacific

Sub-Saharan Africa

Source: UNDP Human Development Reports, http://hdr.undp.org/statistics/

10 UNDP Human Development Report Statistics11 World Investment Report: Shift Towards Services, 2004

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0

200000

400000

600000

8000001000000

1200000

Millions of

U.S. Dollars

FDI Inflow

Cumulative FDI Inflows (1992-2003)

Latin America and

the Caribbean

South, East and

South-East Asia

Sub-Saharan

Africa

Source: UNCTAD 2004 World Investment Report,

http://w w w .unctad.org/en/docs/w ir2004annexes_en.pdf

0

0.1

0.2

0.3

0.40.5

0.6

0.7

0.8

HDI Rank

U.N. Human Development Index Ranking

Latin America & the

Caribbean

East Asia and the

Pacific

Sub-Saharan Africa

Source: UNDP Human Development Reports, http://hdr.undp.org/statistics/

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Case Studies

Aracruz Celulose S.A.: Brazil

Brazil: Key Socio-economic Indicators12

Indicator Unit Value

GDP (real growth rate) % 5.2

Nominal GDP (at PP US $) billion USD 1535

Nominal GDP (US $) billion USD 604

Population million 179.1

GDP per capita USD 3380

Net direct investment flows million USD 17070

Brazil has the second largest GDP and the largest national debt in Latin America. Afterthe devaluation of the realin January 1999, Brazil began to cut its national debt, whichwas over half of GDP, through emergency tax cuts and decreases in spending. In 2002,

left-wing Luiz Incio Lula da Silva was elected president and has since containedinflation and returned the country to strong growth through stringent fiscal and monetarypolicies. While GDP is expected to grow by 3.7% in 2005 and 3.3% in 2006, withconsumer prices rising by 5.9% in 2005 and by 4.5% in 2006, Brazil still faces economicand political uncertainty. Burdensome debt, poverty and high unemployment continue tobe major problems for Brazil.13

SMEs in Brazil

Small enterprises play a significant role in the Brazilian economy. In 2000, micro14 andsmall enterprises accounted for 20% of Brazilian national GDP, 96% of all enterprisesand 53% of the overall workforce.15 Of these micro and small enterprises, 11.5% were in

the agriculture and livestock sector, which represents 10.2% of GDP.16

Within theagricultural sector, the Brazilian forest and wood products industry is overwhelminglycomprised 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.

12 All Key Socio-Economic Indicators are from Economic Intelligence Unit, Country Data13 Economist Country Briefings: Brazil14 In Brazil, micro enterprises are defined as up to 19 employees. See May et al. (2003)15 Instituto Brasileiro de Geografia e Estatistica16 CIA World Factbook: Brazil

12
http://www.economist.com/research/backgrounders/displaystory.cfm?story_id=1365282http://www.economist.com/research/backgrounders/displaystory.cfm?story_id=1365282


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A major problem with forestry SMEs is their lack of sustainable forestry management practices compared to larger firms.17 This is primarily because of the historicallyuncompetitive nature of sustainable forest management operations as compared to otherland use alternatives, such as harvesting without management or the planting of othermore profitable crops. 18

Company Profile

Aracruz Celulose S.A. is the worlds largest producer of bleached eucalyptus kraft pulp, ahigh-quality variety of hardwood pulp used by paper manufacturers to produce premiumtissue, writing and printing, and specialty papers worldwide. The company is responsiblefor 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 employed2,281 of their own employees through Aracruz and its international subsidiaries, andemployed 7,546 permanently outsourced employees. Aracruz owns approximately405,700 hectares of forest and other land in the Brazilian states of Esprito Santo, Bahia,Minas Gerais and Rio Grande do Sul.19 The hardwood pulp and lumber supplied by thecompany is produced exclusively from planted eucalyptus forests. The lumber is sold tothe furniture and interior design industries in Brazil and abroad, under the brand nameLyptus. Aracruz is listed on the Sao Paulo Stock Exchange (BOVESPA), on the LatinAmerica Securities Market (Latibex), in Madrid - Spain and on the New York StockExchange (NYSE). 20

Aracruzs operations are designed for sustainable forestry management. The companyonly sources its wood from renewable eucalyptus plantations to ensure the long-termsustainability of the forest and invests heavily in forestry research and ecosystem preservation operations.21 Examples of such operations are its integrated pestmanagement practices, which rely on biological control of pests and diseases on itsplantations, and its electricity sourcing, of which over 90% is from biomass through the

burning of by-products of the pulp production process.22

CSR Practices

Many of the forests in which Aracruz operates are comprised of two productive sectors:eucalyptus plantation and harvesting and family-based agriculture. The local farmerswithin these regions raise cattle and grow a variety of crops, including coffee, citrus, andcorn. Of these farmers, many are from indigenous groups that have long-standing culturaland generational ties to the land they manage. While there have been strained relations between Aracruz and indigenous farmers over land ownership and environmentalmanagement issues in the past, Aracruz has made a significant strides towards improvingthese relationships through its Forestry Partners Program.23

17 Sustainable forestry management and operations refers to practices that supply goods and services froma forest ecosystem without a decline in the yield of goods and services over time and without thedegradation of site quality, See Pacific Forest Trust, Glossary

18 May et al. (2003)19 Aracruz20

ibid21 ibid22 Aracruz Celulose,PaxWorld Funds, June 200423 World Rainforest Movement

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The Forestry Partners Program was created in 1991 and involves approximately 71,000hectares contracted in partnership with more than 3,000 farmers in more than 100municipalities in the states of Esprito Santo, Bahia, and Minas Gerais. The programgives farmers the opportunity to integrate into the Aracruz supply chain by plantingseedlings of native tree species in their vacant land. The farmers are provided with

forestry resources and sustainable forestry management training during the growth stage,which takes an average of five to seven years.24 When the wood is harvested, the farmerssell their wood to Aracruz and are given the option of keeping 3% of the harvest forpersonal use, as well as the residues such as bark and branches, left over from the harvestwhich can be sold to local businesses as sources of energy. 25 This diversification of landuse by farmers mitigates risk and provides an alternative, often more profitable, revenuestream to a guaranteed market. In addition, Aracruz passes its sustainable forestrymanagement expertise on to the farmers, thereby promoting sustainable andenvironmentally responsible forestry operations.

SME Benefits

Local farmers have significant incentives to participate in this program. For many localfarmers, up to 90% of non-tree production is for self-consumption. In addition, theexpansion of conventional farming activities, such as rice, beans and fruit, is oftenunprofitable, because of the lack of investment capital and the absence of profitablemarkets for excess goods. Therefore, the program offers an opportunity to augmentcurrent income, diversify crop risks, make use of marginal areas, cooperate with fellowfarmers and utilize a new energy source for business and household operations. Thefarmers tree harvests generate sizeable returns, which can be reinvested in bettertechnology to increase the productivity of their food crops.26

Farmers who participate in the program receive supplies, advanced funding, a guaranteedrevenue stream, and technical assistance. As of 2003, farmers who join the program were

offered three plan options: seedling supply, preferential contract and purchase and salecontract. The seedling supply plan provides free eucalyptus seedlings and technicalassistance to participating farmers and Aracruz commits to purchasing the wood afterharvesting. The preferential contract plan provides the same benefits as the seedlingsupply plan, but also includes the supply of fertilizers and ant traps. The purchase andsale contract plan is the most comprehensive plan, in which farmers receive financing forsetting up the project in addition to those benefits provided by the preferential contractplan. The financing is provided in installments, which are released upon conclusion ofvarious forest plantation implementation stages. The debt to Aracruz is ultimately paid inwood, not cash, because the financial value of the loan is converted into wood when thefinancing is provided and paid after harvesting.27

In 1999, Aracruz entered a partnership with the Indigenous Associations representing theTupinikim and Guarani communities, which followed the resolution of conflictsregarding 2,500 hectares of land that had belonged to Aracruz but was incorporated into

24 Larson et al. (1994)25 Pax World Funds26 Larson et al.(1994)27

Aracruz Celulose, "Social and Environmental Report, 2003

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indigenous reservations in the municipality of Aracruz. 28Between 1999 and 2004, theForestry Partners Program generated US$4.1 million in revenues to these indigenouscommunities. 29 These revenues create jobs, higher tax revenues and additional forestryresources that are cycled back into the local economy to stimulate growth and enhancesocial welfare. In addition to these economic benefits, the indigenous communities are

also contributing to a more sustainable environment through the improved forestrymanagement skills that they obtain through the program.

MNC Benefits

Aracruz benefits from the Forestry Partners Program in several ways. First, it receivesoperational and economic benefits from the establishment of a reliable alternative sourceof wood supply. The program reduces maintenance and transportation costs and mitigatespotential supply shocks through the diversification of wood supply.30 Second, it receivessocial benefits from the goodwill that it creates with local and indigenous communitiesby encouraging economic development in rural areas by increasing farmers incomes,creating new jobs and helping reduce rural exodus. Finally, it receives political benefitsthrough its contribution to the Brazilian governments goals of increased tax collectionand unemployment reduction.

The political benefits that Aracruz has gained are significant. For example, VeracelCelulose is a bleached eucalyptus pulp manufacturing facility under construction inEunpolis, located in the southern cone of the Brazilian state of Bahia. It is a jointlyowned by Aracruz Celulose (50%) and Stora Enso (50%), a Finnish-Swedish company.Veracel has received financing and significant political support from the Braziliangovernment because they believe that it will attract further investment in the region andhelp create more employment opportunities.31

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 timberresources while simultaneously protecting large tracts of forest through the establishmentof a network of National Forests (Florestas Nacionais or Flonas). Brazilian President LuisIncio Lula da Silva intends to expand the financing lines for sustainable forestry projectsand to improve legislation regulating forest plantations. During a visit to the Veracelconstruction site on January 21, 2005, the president stated that "The National ForestProgram is one of the priorities of our government. With it, we are looking not only attoday but also for maintaining sustainable development for a long time." He also statedthat "The Veracel pulp mill is one more possibility for us to prove the need to make useof the multifunctionality of our land, and not think that rural land is only good for raisingcattle."

The president also said that the major social significance of the Veracel pulp mill was thedeciding factor for the financing. President Lula highlighted initiatives such as Veracel'sForestry Partners Program, as having a significant social impact. Under the program

28 Boosting Income for Indian Communities, Aracruz Celulose29 IFC Projects, Aracruz Corp., Project Number: 2327130 Larson et al. (1994)31 Andersson and Orjan

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farmers income can reach R$ 485 per hectare per year, whereas in cattle ranching, onaverage, annual income is R$ 200 per year. The Forestry Partners Program has reached10,000 hectares of eucalyptus plantations in the extreme south of Bahia, and is expectedto hit 23,000 hectares in three years. The eucalyptus produced in the region through thepartnership should represent 18% of the Veracel mill's requirements for wood. President

Lula concluded, "A project such as this one shows us that it is possible to invest in aresponsible environmental fashion".32

To address NGO and local stakeholder concerns over the socio-economic impacts of theproject, Veracel signed an agreement with UNDP to have UNDP conduct an independentimpact assessment in the nine municipalities where the company operates: Belmonte,Canavieiras, Eunpolis, Guaratinga, Itabela, Itagimirim, Itapebi, Porto Seguro and SantaCruz Cabrlia. The assessment will take into account the Human Development Index(HDI), tax revenue receipts and presence of Veracel in the region to determine theprojects impact on each community.33,34

Conclusion

The Forestry Partners Program is an example of how large MNCs can contribute to SMEand CSR development by incorporating local stakeholders into the supply chain. Byproviding business development capital and resources that the farmers would otherwisenot be able to access, Aracruz enables farmers to raise crops and operate small forestryoperations at the same time. This creates an additional, stable revenue stream for farmersthrough land diversification. In addition, the sustainable forestry and land managementtechniques that Aracruz passes on to the farmers contributes to the long-termsustainability of the Brazilian forest and increases local awareness of modern forestrymanagement techniques within local and indigenous communities.

32Lula praises Veracels Forestry Partners Program and says the PNF is a government priority, VeracelPress Room, Jan 2005

33 An Independent View on Veracel, Stora Enso Sustainability, 200434 Veracel and UNDP sign agreement for review of the socio-economic impact of the plant, Veracel

Press Room, June 2004

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Cemex: Mexico

Mexico: Key Socio-economic Indicators





Population Million 105



Mexico is Latin Americas largest economy with USD 626.1 billion in real GDP in2003.35 After steady growth in the late 1990s, Mexicos economy has slowed dueto the weakening of the U.S. and global economy. In 2000, Vicente Fox waselected president, breaking 71 years of one-party rule by the InstitutionalRevolutionary Party (PRI). Since his election, Fox has had difficulty passingreforms through Mexican congress. Crime and human rights abuses continue to be

major social problems in Mexico, and despite attempts to raise tax revenues, thegovernment is still heavily dependent on oil revenues.36 These factors, paired withthe Mexicos heavy reliance on the U.S. economy, create an uncertain economicoutlook for Mexico.

SMEs in Mexico

SMEs are integral to Mexicos economy. In 1994, they comprised 98.7% of all businessenterprises, 77.7% of total employment and 43.3% of total sales. Like many otherdeveloping countries, Mexico has cement and building materials distribution chain that isdominated by local SMEs. There are approximately 40,000 separate cement storefrontsscattered throughout Mexico, the majority of which are small family-owned hardware

establishments with names like Lupitas Cement and Juanitos Materials.

37

85% ofthese sales are to local individuals who buy cement by the bag for small-scale do-it-yourself home improvement projects; many of these individuals are poor.38

35 Big Differences Between Individual Countries,Latin Business Chronicle36 The Economist, Country Briefings: Mexico37 Cemex expands retail venture in Mexico, abroad, Aggregate Research Industries, July 200438 Peter Fritsch (2002)

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Mexican cement and building materials distribution SMEs face many barriers tosustainable business development. They lack the technical and financial resources toinvest in market opportunities; they have difficulty accessing credit and face high costs ofcapital; they do not have economies of scale; they lack marketing and management skillsand the understanding of general business best practices.39

Company Profile

CEMEX, S.A. de C.V. is a Mexican holding company whose entities main activities arewithin the construction industry through the production, distribution, marketing and saleof ready-mix concrete, cement and clinker. Cemex is a global cement manufacturer withoperations in North, South and Central America, the Caribbean, Europe, Asia and Africa,and approximately 25,900 employees. Founded in Mexico in 1906, Cemex has grownfrom a small regional player into one of the top international cement companies withsales volume of USD 7.164 billion in 2003. On December 31, 2003, CEMEX had aproduction capacity of over 80 million metric tons of cement per year. The companysprimary production facilities are located in Mexico, Puerto Rico, the United States, Spain,Venezuela, Colombia, Egypt, the Philippines, Thailand, Costa Rica, the DominicanRepublic, Panama and Nicaragua.40

CSR Practices

In 2001 Cemex launched a new marketing and product distribution initiative calledConstrurama. The Construrama program is a Cemex-owned licensee system that offersMexican cement distributors the opportunity to participate in a nationwide retail networkwith strong brand recognition. Unlike typical franchise models in which distributors must pay money and surrender decision-making autonomy to participate, the Construramaprogram directly invests money and resources in its local distributors and does notrequire participants to sell only Cemex products. Distributors gain access to a variety ofmore cost-effective and readily available products through the Construrama brand in

addition to training and best practices education. This benefits both the local communityand the local distributors.

For example, Cemexs efforts to better cater to the needs of the rural communities wheremany of its Consturama distributors reside have resulted in enhanced communitydevelopment through the development of alternative construction project financingoptions. After conducting a year-long study in an extremely poor neighborhood inGuadalajara, Cemex discovered that poor Mexicans often raise capital for constructionprojects through lotteries, where each participant donates funds to a pool dedicated tofinancing construction. These funds would often be used for purposes other than building,therefore Cemex worked with local community leaders to develop pools where winners

received cement and building materials instead of cash. In addition, Cemex providedconstruction advice and blueprints to improve building quality. Cemexs cooperationwith such poor communities has resulted in improved community building anddevelopment through the creation of new and better homes for the poor. The program has

39 APEC Center for Technology Exchange and Training for SME, SME Profile: Mexico40 CEMEX website

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helped tens of thousands of families finance construction projects and Cemex plans toextend it to 800,000 families in the next five years.41

SME Benefits

The Construrama program benefits SME distributors on many levels. Most distributors

are family owned hardware stores, whose owners want to build sustainable businessesthat can be passed on to their children. But, when it comes time to value or sell theirbusinesses, owners often find that they are not worth more than their inventory.42 TheConstrurama program helps small business owners add value to their business and theircommunity through the donation of capital resources and business training.

Participants receive capital for new storefronts, inventory tracking software andcomputers.43 In addition, distributors receive management and business consulting adviceand training to help build the business skills they need to grow their local businesses. The publicity, merchandising, customer service and marketing support that distributorsreceive, also helps to enhance the participating stores image and marketing capabilities.Through Construrama, distributors have access to more than 500 different product and

services offerings at competitive prices, which allow them to offer consumers moreoptions to cater to individual needs. All these factors contribute to the SMEs ability toincrease sales and income.44

Beyond the unique brand recognition of Construrama, the program benefits SMEs andthe greater community through Cemexs sharing of best business practices. This helpsenable participating SME suppliers and distributors to build stronger, more competitiveand sustainable businesses that generate greater value and higher economic returns forthemselves and their communities. Improved business practices lead to improvedefficiency and competitiveness, which leads to stronger growth and revenues, which inturn leads to higher employment and greater tax revenues. Therefore by investing in itsdistributors, Cemex is passing capital and best practice knowledge down the supply chain

to local SMEs, who in turn help contribute to the improvement of local communitywelfare and development in the towns that they operate, many of which are rural andpoor.

Finally, by strengthening local cement and building distributors businesses, Cemex iscontributing to the sustainability and competitiveness of small family-owned businesses.Local hardware merchants are facing increased competition from larger hardware storeslike Home Depot, who recently entered the Mexican market and plans to expand.Therefore, the Construrama program will help local SMEs retain their competitiveadvantage.45

MNC Benefits

Cemex benefits from its Construrama program through increased competitive advantage;the establishment of strong brand loyalty, higher market penetration and increased sales

41 The Art of Innovating on a Shoestring, Financial Times, September 24, 200442 Why Mexicans mix cement with football, Aggregate Research Industries, July 200443 Young, slide 24 (April 2004)44 Construrama45 Why Mexicans mix cement with football, Aggregate Research Industries, July 2004

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through its consolidation of Mexicos fragmented distribution channel. Mexicos cementdistribution network is highly fragmented. More than 20,000 outlets, approximately 75%of the retail cement sales in Mexico are through local distributors, many of which aresmall mom-and-pop businesses.46 Cemexs consolidation of this fragmented distributionnetwork will continue to collect economic and strategic benefits for the company through

the integration of more distributors into the Construrama network. In addition, byleveraging the existing SME local community relationships, Cemex gains immediateaccess to local consumers and reduces the time needed to establish trust in itsConstrurama brand. Construrama has strengthened Cemexs existing sales networkthrough the standardization of information systems and storefronts, and has helpedincrease supply- chain operating efficiencies and reduce costs.

The program has been extremely successful since its inception. Within the first sixmonths the program grew into the largest construction materials chain in Latin America,and as of December 31, 2003, the program has reached 750 independent concessionarieswith approximately 2,100 storefronts in more than 700 towns across Mexico. Cemex iscurrently deploying the program to its South and Central American markets. 47

Conclusion

The Construrama program is an example of how large MNCs can contribute to theenterprise and CSR development of SMEs by strengthening the capacities of SMEswithin their distribution network. While the Construrama programs primary goalsare to increase Cemexs profits through strengthening fragmented distributionnetwork, the programs implementation results in SME and CSR development ofits distributors, most of which are small family-owned enterprises. The programinvests capital and resources in partner SMEs, which directly benefits both theSMEs and the local communities that they operate in. The program extendsCemexs reach to the rural poor, to offer alternative construction project financing

and better products and services. The net result of the program is improved socialwelfare for the local communities involved. Therefore, the Cemex exampleillustrates that an MNCs pursuit of profit can directly result in socialresponsibility, SME development and local community development

46 Lukac (March 2004)47 Overview, Cemex Website

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Delta Corporation: Zimbabwe

Zimbabwe: Key Socio-economic Indicators


GDP (real growth rate) % -8.2






Due to expansionary macroeconomic polices and a break down of law and orderZimbabwes economy has deteriorated sharply since 1997. By 2001 real per capita GDPhad declined by over 20 percent relative to 1997, inflation reached triple digits, and realinterest rates were negative. The Reserve Bank of Zimbabwe has been successful incombating inflation, decreasing it from 600% in January 2004 to 132.7% as of December2004. 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 ofmeasures are designed to attract investments in the economy from the Zimbabweandiaspora. Nevertheless, it is expected that Zimbabwes economic growth will decline as itsettles into a new equilibrium. Many firms have scaled back operations to adjust to lowerincome levels; however, new difficulties will arise from economic instability andgrowing health concerns regarding HIV/AIDS. It is estimated that real GDP hascontracted by 8.2% in 2004 (compared with a recent government estimate of 2.5%) and itis forecast to contract by 3.1% in 2005 and 0.5% in 2006.48

SMEs in Zimbabwe

Approximately 15.2% of Zimbabwes employment can be attributed to SMEs. InZimbabwe a small enterprise is defined as a business employing not more than 50 peoplewith assets of less than Z$3.0 million.. Medium enterprises for manufacturing are thoseemploying up to 100 people and with an asset base of Z$12 million. For other sectors,medium enterprises employ up to 75 people, with an asset base of Z$7 million.49

48 Ibid.49 Ngwenya, et al.p 12 (April 2003)

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Zimbabwe is now making concerted efforts to provide access to financial services forSMEs and to assist with the utilization of the same for productive purposes.

Company Profile

Delta Corporation, listed on the Zimbabwe Stock Exchange, is a conglomerate in food

and leisure sectors. It is a holding company that has invested in and taken managementresponsibilities for a portfolio of business which operates in Zimbabwe. The companywas first registered in 1946 as Rhodesian Breweries Limited. Group activities areprincipally in the beverage, retail, hotel and agro-industrial sectors. It has cross-borderinvestments within Mozambique. In 2004, Delta Corp had sale proceeds of $1,064,543. Itcurrently has plans to expand production in various divisions of the group by $350Billion.50The group accounts for 10% of the countrys GDP. Major brands include CastleLager, Golden Pilsner, Lion Lager, Carling Black Label, Zambezi Export Lager, ZambeziLite Lager, Zambezi Dry Lager, Bohlinger's Lager, Chibuku, Rufaro, Coca-cola, DietCoke, Fanta, Sparletta, Sprite and Schweppes. It operates throughout Zimbabwe.51

CSR Practices

In conjunction with Empretec, a UNDP supported training agency, Delta Corporationinitiated a program entitled Stand Up and Go that is aimed at promoting SMEs inZimbabwe. The program encouraged senior management to work with the procurementdepartment to identify outsourcing opportunities. When successful applicants wereidentified, they were encouraged to attend a two-week entrepreneurial developmentcourse run by Empretec.52 Delta Corporation paid all training costs. The intensive trainingprogram combined behavioral aspects of entrepreneurship and practical exercises, whichbuild the skills needed to plan and operate SMEs. After the course, Empretec selects themost competent of the applicants for final interviews and selection by Delta Corporation,conducted at the head office. The successful applicant would receive funds in accordancewith their project proposals, with amounts ranging from $10,000 to $250,000. The

amount was determined by evaluating the amount needed for the purchase of capitalequipment, stock purchase, working capital, and operating expenses. The funds weredistributed as a loan with a one-year grace period, 1% annual interest rate and loanpayable over a five-year period. All amounts repaid where then invested in a revolvingfund of $1 million to provide seed capital to new enterprises. Delta Corporation requiredthe applicants to submit weekly financial reports to monitor progress of their enterprises.Delta also provided support when needed.

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 higherturnover and continued contracts with Delta Corporation. In addition to the successfuldevelopment of SMEs, this program helped to establish many cases of successfuloutsourcing such as cleaning, catering and laundry services that were outsourced

50 The Herald, November 26th, 200451 Thomson ONE Banker52 Chambers of Industry in Zimbabwe

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throughout the company as well as housekeeping and food and beverages which wereoutsourced by the hotel division.

MNC Benefits

Due to deteriorating economic conditions in Zimbabwe, the Delta Corporation needed to

find ways to reduce costs, focus resources on its core business and increase outsourcingto SMEs. In some cases former employees were able to establish SMEs that suppliedDelta. Furthermore, Deltas relationship with the government improved as a result of theenterprise development support, as did the companys reputation.

Conclusion

This case study demonstrates the positive impact managerial and entrepreneurial trainingcan have on SMEs and MNCs alike. In the light of hyperinflation and political unrest,Delta Corporation was still able to find a means to decrease costs and transfer knowledgeto local SMEs. Moreover, this program helped to alleviate the difficulty SMEs have inacquiring financial capital. The positive spillover into the local economy, although notquantified, has generated greater social and economic progress.

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Unilever: Ghana

Ghana: Key Socio-economic Indicators





Population Million 21.4



Ghana is an independent republic with a democratic government, which lies on the Gulfof Guinea and forms part of the West African Region. The country has a relatively well-educated population, a capable bureaucracy and abundant natural resources. Ghana hasone of the strongest economies in West Africa, yet the countrys economic base continuesto be agriculture and the people remain poor. Gold mining, the production of cacao andtourism are the main sources of revenue.

SMEs in Ghana

Currently, Ghanas SME sector is comprised of 51.61% of formal sector employment.This sectors contribution to real GDP per capita is $377.18.53 Various SME developmentschemes are currently in place in Ghana including the Private Sector DevelopmentFund contributed by Italy to provide 10 million Euro credit to eligible SMEs. SMEs inGhana have faces several constraints to growth. Specifically, SMEs have cited the highcost of obtaining local raw materials, most likely resulting from poor cash flows.54

Furthermore, like many SMEs across the world, Ghanas SMEs suffer from a lack offinancial capital. This stems from the fact that SMEs have limited access to capitalmarkets, both locally and internationally, due to the perception of higher risk,informational barriers and the higher costs of intermediation for smaller firms. As aresult, SMEs often cannot obtain long-term financing in the form of debt and equity.

SMEs also have difficulties in gaining access to appropriate technologies and informationon available techniques.55Other constraints on capital and labor, as well as uncertaintysurrounding new technologies, restrict incentives to innovation.

53 Ayyagari, et al. (2003)54 Kayanula and Quartey (2000)55 Ibid

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Company Profile

Unilever, a Dutch company specializing in food, home and personal care products, hasoperations in 100 countries in Asia Pacific, Latin America, Africa and the Middle East,Europe and the United States. In 2003, it employed 52,000 people in Africa and theMiddle East, with 234,000 worldwide. Unilever has been in Ghana since 1963. Their

factory in Ghana employs 800 people and their plantations employ 1,700 people for atotal of 2,500 people directly employed by Unilever. Unilever retains services from thirdparty companies for transportation, security, canteen and housekeeping, harvesting andfor selected manufacturing and distribution services. Indirectly, the company affects thelives of 42,000 families.56 They had sales of 27,238.60 GSB and net income of 1253.13GSB in 2004.

CSR Practices

Unilever, in conjunction with the Ministry of Health and UNICEF, recognized thegrowing problem of iodine deficiency and formulated a business plan to supply iodizedsalt more cheaply. Iodine Deficiency (IDD) is the worlds most prevalent yet easily

preventable cause of brain damage. It affects over 740 million people, 13% of the worldpopulation. The best way to prevent IDD is to add iodine to cooking salt. However,iodized salt is more expensive than raw non-iodized salt, therefore people with lowincomes do not pay the additional cost.

Unilever in India had experience with a low-cost iodized salt called Annapurna. ThePopular Foods team in Africa decided to re-engineer its business systems to provideAnnapurna to low-income families in Ghana. They utilized product and processdevelopment principles and re-engineered the supply chain. More specifically, theyworked backwards to determine product costs, maintaining that price is determined bythe market. They also used raw materials and low cost technology to increase quality andyield of raw materials as well as to eliminate storage and distribution waste. To keep

capital costs low, Unilever outsourced production of iodized salt to third party salt producers. They developed partnerships with local manufacturers, investing time,resources and training to help them raise quality standards. The spillover from suchlinkages was the increase in capacity through the transfer of production methods,technical know-how and human resources management. Unilever also saved on branddevelopment costs by drawing upon the experience of Annapurna in India. This includedrunning a series of road shows to raise awareness of Annapurna and aligning the brandshealth messages with those of Ghanas Health Service, in order to build consumerconfidence. To reach remote villages, Unilever and UNICEF teamed up with a local bankto provide micro-credit facilities to enable village women to buy Annapurna and otherproducts for future sale. Now over 400 women are involved, providing them with a useful

source of income and helping to decrease iodine deficiency in remote parts of Ghana.

SME Benefits

As stated earlier, many SMEs in Ghana suffer from high costs of raw materials and a lackof technical knowledge. Unilever was able to assist SMEs in utilizing local resourcesmore efficiently, through the transfer of business know-how and quality standards,

56 World Investment News, Interview with Ishmael Yamson, April 2001

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resulting in profitable use of raw materials.57 Overall, Unilevers iodized salt programcreated over 200 jobs and partnerships with over 60 suppliers within Ghana. 58

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 approximately 50% in 2002. In just twoyears it captured 35% of the market. After 18 months the product became profitable forUnilever.59 Now Unilever plans to introduce new enriched products to other parts ofAfrica through similar supply chain methods. This case study demonstrates the bottom-line benefits MNCs can obtain while benefiting SMEs and increasing nutritional healthwithin a country. Owing to the success of Annapurna in Ghana, Unilever Ghana launchedKrrunchy Biscuits, fortified with vitamin A.

ConclusionThis program illustrates that supply chain linkages can be used to successfully transferCSR practices. The transfer of enhanced production methods and technologicalknowledge assisted SMEs in capacity building and business expansion. This case alsodemonstrates how various subcontractors can be involved in the early stages ofproduction. Moreover, due to the dire effects of iodine deficiency on labor productivityand human capital, the greater social benefits of this case are significant.

57 Helen Lo, Business Case of CSR: A Unilever Perspective58 Ibid59 Ghana: Fortified Foods Improve Health (2004),

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UniIever: Vietnam

Vietnam: Key Socio-economic Indicators








Vietnam is currently seeing huge spurts of growth post the doi moi reforms 60 and isbeing 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 povertyreduction. The country is increasingly attracting more FDI. At the same time the youngpopulation is demanding a better standard of living.

Company Profile

The Unilever Group was created in 1930 when the British soap-maker Lever Brothersmerged its businesses with those of the Dutch margarine producer, Margarine Unie. It hassince then grown to become one of the largest fast-moving consumer products companiesin the world with some of the top brands like Dove, Knorr, Lipton, Close-Up, Ponds,Vaseline etc. Its CSR practices are well known and documented. Unilever has operationsin around 100 countries and its products are on sale in 50 more countries.61

Unilever started its operations in Vietnam in 1995. Since then it has witnessed hugegrowths and its turnover has increases from USD 7.95 million in 1995 to USD 223million in 2002. It contributes approximately USD 21 million to the state budget.62

60 The Vietnam government launched a reform program in 1986 called doi moi to revitalize a muchdepleted economy. The process was characterized by a move away from centralized planning, marketreforms, macro-economic stabilization and a gradual opening up of trade. The reforms have beenextremely successful and Vietnam is now put forward as a model for reforms in transition economies. Asa result of the reform poverty levels have decreased from70% o of the population in the mid-1980s toabout 37% in 1998 and approximately 30 % now.

61www.unilever.com62UN Global Compact Workshop New York, Jan. 15-16 th, 2004

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SMEs are involved in supplying raw materials, packaging, finished products (contractors)and finished goods distribution within Unilevers supply chain. The company has 130suppliers of raw materials and packaging materials, 330 distributors and 9 keymanufacturing contractors.

SMEs in Vietnam

The CSR agenda is relatively new in Vietnam, although safeguards for worker's rightsand working conditions are well articulated in national legislation. 63 SMEs contributesignificantly to the national economy, as they constitute 65% of the GDP, 85% of theindustrial labor force and 20 % of the exports64. International economic integration forVietnam takes an important step forward with the implementation of the bilateral tradeagreement with the United States; application for WTO accession, and; the ASEAN FreeTrade Agreement (AFTA), which requires the reduction of tariffs and import barriersamong all ASEAN member nations by 2006. This means that all firms have to conform toglobal norms with respect to environment, work environment etc and at the same time beeconomically efficient in the face of fierce competition. There is a growing fear thatmany SMEs may have to shut down their operations if they fail to meet internationalstandards. Hence growth of social responsibility norms with concurrent growth of SMEsis critical for this country.

CSR Practices

When Unilever started its operations in Vietnam most local raw material andmanufacturing suppliers did not have sufficient knowledge regarding cost-efficientsupply chain management systems, technology, quality control, safety and environmentalstandards These SMEs also had very little access to capital and lacked managerial inputsregarding strategy and policies for their development. Unilever aimed at bridging thesegaps for those SMEs, which were willing to work with them through contractspecifications 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 haslow returns and more focus from the government.

Unilever defined quality, safety, and environmental standards for its partners andprovided the technological inputs necessary for the SMEs to meet those standards.Extensive training programs on quality standards, warehousing specifications, safety andenvironment standards etc. were undertaken. These standards were defined andmonitored by Unilever. Additionally the company defined labor standards in its contractspecifications, which included legal minimum working age of 18 in conformance toVietnamese law. The wage rates for supplier employees were also set in this contract andthis 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 ofbest 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 inwhich Unilever did direct transfer of knowledge to its manufacturers was by stationing a

63 Corporate Social Responsibility (CSR) in Vietnam - New Phenomenon and New Trends Dao QuangVinh, Deputy Director, Institute of Labor science and Social Affairs Ministry of labor - Invalids andSocial Affairs, Vietnam ,December, 2003

64 UNECE Expert Meeting for Good Governance for SMEs, by Arun Agrawal, Geneva, Switzerland, April1-2nd, 2004

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Unilever official at the site of the manufacturer. At the same time they provided financialsupport as required to ensure financial viability of the SMEs and secure their long-termgrowth.

SME Benefits

The SMEs that collaborated with Unilever gained from the transfer of new technologiesand capabilities. At the same time they grew over time as steady business relationshipjustified expansion plans for them including diversification for some.

Local suppliers now form 55 % of all raw materials required by Unilever. 65 Unilever, onthe other hand, guarantees a business of $34 billion of business to its suppliers. Thegrowths of these SMEs have been phenomenal. Third party volumes increased from3,705 tons in 1995 to 91,024 tons in 2002. Of this, approximately 7,692 tons wereexported. E.g. Bicico Chemical Cosmetic Enterprise, one of Unilevers detergentmanufacturers, grew in volume from 3,000 tons in 1996 to 23,000 tons in 2000, itsturnover grew from $1,800 to $285,000 and number of employees increased from 12 to250.66 Similarly, Duy Tan is one of Unilever Vietnams leading suppliers of packaging

material. Its total turnover increased from $900,000 in 1996 with 160 workers to $6.60million and 664 workers in 1992.67 It is estimated that for every person who is directlyemployed by Unilever, there are approximately 3 persons who, in a dedicated way,cooperate with Unilever. The environmental, quality, safety and productivity standards inpartner SMEs have improved significantly.68

MNC Benefits

Unilever gained through creating additional production capacity without incurring thecost 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 packingmaterial and increase their distribution reach, while mitigating risk by reducing their

reliance on imports. Ultimately, these changes resulted in the reduction of lead times andlower working capital including warehousing requirements. In the process, Unilevermanaged to substantially reduce overall supply chain costs and has become the marketleader in five out of its six product categories.69

Conclusion

Unilever attributes its success to several factors.70 It cites respect among potentialpartners as a precondition. Unilever also emphasizes that the partnership is symbiotic andthat partners have to adopt a long-term reference frame in which each partner contributesand understands the others needs. It is especially important for the large MNC tounderstand local cultural nuances. Most importantly they stress understanding theconstraints of local SMEs and tailoring goals and expectations accordingly.71

65 www.unilever.com66 UN Global Compact Workshop New York, Jan. 15-16 th, 200467 ibid, note: of the USD 6.60 million only USD 3.18 million is for Unilever68 Helen Lo, Unilever UK69 ibid70 Heemstra Principles for TNC- SME cooperation: the experience of Unilever71 Also see, Unilever: Building Business Linkages with SMEs in Vietnam, www.unilever.com

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GAP INC.: Indonesia

Indonesia: Key Socio-economic Indicators








Indonesia is the worlds largest archipelago. It is part of the countries that formed theEast Asian miracle countries. However, it has seen mixed fortunes since the East Asiancrisis. Its growth rate of 4.9 %72 is modest by current Asian standards. It has become aconflict-prone area owing to the East Timor crisis and is politically unstable. FDI has alsobeen decreasing as a result73.

Company Profile

GAP Inc is one of the largest apparel companies in the world with a turnover of $15.9billion and 150,000 employees.74 The company sources its products from third partymanufacturers using approximately 3,000 garment factories across 50 countries.

It has been the subject of high profile campaigns to improve the working conditions of itsthird-party manufacturers. However, GAP is taking strong strides to rid itself of thisimage. It is one of the first companies worldwide to adopt a vendor code of conductwhich covers issue such child labor, wage rates of employees, harassment etc. Eachfactory under all garment manufacturers has to undergo this vendor code of conductevaluation before it is approved for production. GAP employs more than 90 full-timeemployees 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 thedeadline GAP withdraws its partnership. It has withdrawn roughly 130 factoriesworldwide in 2003 because they failed to meet GAPs strict vendor code of conductevaluation. It came out with a very transparent social responsibility report in 2003 which

72 World Bank73 Asian Development Bank74 Gap Inc, Social Responsibility

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was bold enough to admit that few factories, if any, in the United States or anywhereelse are in total compliance all of the time.75

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 theother.76Value added by small and micro-enterprises account for 9% of totalmanufacturing while employment in these enterprises constituted 59% of the totalmanufacturing labor force in 1999.77 Despite its importance, few of the institutions,government or non-government, including foreign assistance institutions were involvedin the promotion of SMEs until 1993 when the Indonesian government established theMinistry of Cooperatives and Small Enterprises to coordinate the efforts of the SMEs'promotion.78 Indonesia needs considerable development in its SME sector to recoverfrom 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 1.5million 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 valueof textile and garment sector (excluding knitting) amounted to almost $2.6 billion 79 in2003 and was 15% of all exports (excluding oil and gas).80 Hence, SME developmentbecomes even more critical in the textile sector.

CSR Practices

GAP and Indonesian manufacturers have had a tumultuous past relationship. In July1997, 700 workers from its third party manufacturers went on protesting miserable wagesand 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 GlobalAlliance.

Under the aegis of the Global Alliance initiative The Center for Societal DevelopmentStudies at Atma Jaya University in Jakarta conducted interviews in 2001 with eightgarment manufacturers from which GAP sourced their products. The study focused onasking workers about their needs and hopes for the future. As a result of workersconcerns about sexual harassment, workplace morale, and their supervisors lack ofeffective communication skills came to the fore. One of the key findings in Indonesia wasthat relations between factory managers and workers needed to improve. As a result,GAP Inc conducted supervisory skills training seminars with more than 450 managers inthese eight factories, impacting more than 10,000 workers. The training focused onpositive communication skills, stress management, problem solving, teamwork andleadership. This was in addition to GAPs efforts of improving working conditions in

these factories and raising wages.

75 Beyond The Label: GAP Inc.s Commitment to Ethical Sourcing.76 Program for Eastern Indonesia SME Assistance, IFC77 Industri Logam Mesin Elektro Dan Aneka78 ACTETSME, SME Policies: Indonesia79 Toemion, Theo F., Chairman, Indonesia Textile & Apparel Global Partnership Forum, Feb 18th, 200480 Mekong Private Sector Development Facility, IFC

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SME Benefits

Independent evaluations of the program in Indonesia indicate that it did manage toimprove the interaction between supervisors and subordinates in the eight target factories.Positive additional effects included reduced absenteeism, improved problem solving,fewer rejects and defects and lower employee turnover.81 Consequently it boosted the

volume and the quality of the products. Overall the SMEs benefited by having betterworking conditions and by being able to grow through the better productivity and largervolumes.

MNC Benefits

The main motive would have been to clean its tarnished image. In a sector like brandedapparel, reputation and corporate image is critical for the success of the company. GAPsales had fallen substantially post the lawsuits that had been leveled against it for thealleged Saipan sweatshops and the campaigns, which followed these lawsuits. In the longrun, GAP also benefits from a more robust supply chain with lower production costs dueto lower defect rates and higher productivity in its contract manufacturers.

Conclusion

GAP proclaims that it is important to partner with its third party manufacturers andunderstand that they face problems. Being the larger player, it has to help the SMEs toidentify solutions and help them implement them. It has also learnt that a larger numberof the problems lie in local cultural attitudes and business practices rather than simpleeconomic factors. MNCs need to understand these cultural nuances and tailor theirsolutions and working relationships accordingly.

81 China `The Winner' as U.S., Europe Lose Textile Quota, EFU, Aug. 2004

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Analysis

We now revisit the questions that were put forth at the beginning of this paper andanalyze each with regard to the case studies that were previously discussed.

1. Does CSR actually benefit SMEs?

There is a popular argument that CSR is only meant for large multinationals. SMEslack the power to influence governments and dictate standards; hence the standardsused are not in their best interests. Moreover, most SMEs are struggling to establishthemselves and lack the resources or the know-how to implement CSR practices. It isalso argued that MNCs typically exploit SMEs and use CSR solely to improve publicrelations. Thus, is there really a case for CSR for SMEs?

From the evidence of our case studies we argue that there is a strong business case forSMEs to adopt CSR practices. Some of the main reasons are as follows:

- Productivity: gathering innovation for products and efficiencies

-

Expanding business: expanding the reach of business through access tonew markets and increasing customer base

- Improved working environment: increased motivation, less staff turnoverand the ability to attract better quality staff

- Reputation: enhancing the reputation of the firm brand building forglobal companies

2. Traditional top-down strategies do not achieve sustainable CSR. What arealternative methods that can be employed?

Traditional top-down strategies, described as the development and imposition of CSRpractices by MNCs onto SMEs, were thought to be the most effective means for

instilling responsible business practices within SMEs. However, it is evident thatpartnerships with MNCs that encourage capacity-building and worker empowermentare effective means for SMEs to gain knowledge of CSR practices and methods ofCSR implementation. SMEs under this model carry out CSR activities because theyclearly link the benefits of CSR to their own growth.

3. How important is the role of MNCs in facilitating growth of SMEs? Could the SMEs

have done it themselves?

SMEs lack the managerial and technical skills to implement CSR practices. MNCscan transfer these skills to SMEs through training and the sharing of best practices. Atthe same time, most SMEs in developing economies lack access to financial capital.

This lack of resources for economic growth inhibits the potential adoption of CSRpractices. MNCs can play a significant role in SME development and CSR adoptionby investing the financial capital that is required for SME business growth andcapacity building. Therefore MNCs can be major contributors to SME growththrough the transfer of business skills and the provision of financial capital to partnerSMEs.

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4. What is the payoff to MNCs? Are they doing it as philanthropy / public relations orfor mutual benefit?

Some of the existing literature on CSR suggests that MNCs choose to practice CSR intheir supply chains for a number of compelling reasons other than philanthropy.Business for Social Responsibility (1998) points out that public demands for

enforcement of regulations and for increased disclosure by investors, regulators andpublic interest groups have played a strong role in increasing corporations' sensitivityto their social responsibilities. Others note that public and shareholder expectations ofcorporations to deal with complex social and economic issues in the communitieswhere they operate have also risen dramatically over the past decade.82 Manycorporations have learned that consumers and business customers often seek to alignthemselves with firms that have a reputation for social responsibility. Some haveindicated that in order to stay competitive in global markets MNCs have developedstrong supply chains through which they can transfer standards to their suppliers aswell as on their own divisions and subsidiaries. Moreover, many corporations nowrealize that the benefits of CSR also include greater access to capital, reduced

operating costs, improved financial performance and enhanced brand image.83

The cases reviewed in this paper corroborate this literature. There is a clear businesscase for the MNCs to carry out CSR initiatives. None of the MNCs in our case studieshave implemented CSR as philanthropy, even though many do have a large charitycontribution arm as well. Our review indicates that many MNCs obtain immediateand direct business benefits from CSR in the form of lower costs, less risks andliabilities, more efficient operations and better quality products. MNCs also perceivelonger-term returns from CSR by promoting sustainable development, includingstronger competitive advantage, preservation of crucial resources and raw materials, afavorable corporate image and opportunities for new product development.

5. What are some of the key elements of a successful transfer of CSR practices to SMEsby MNCs?

SME development through supply chain linkages requires MNCs to carefullyresearch and analyze their operational and environmental conditions. A basicunderstanding of the SMEs cultural mindset and business etiquette is the first step toclearly identifying how MNCs can develop their supply chain activities. Traininghigh-level managers on cultural sensitivity and the importance many cultures place onrespect and societal positions can facilitate communication and discussions with localSMEs.

With regard to direct supply chain and SME development, it is necessary for the

MNC to understand the local economic and environmental limitations that mayinhibit SMEs from engaging in further capacity-building activities. Such constraintsinclude limited managerial capabilities and limited access to financial capital forincreasing operational capacity.

Building confidence and trust between MNC managers and SME suppliers is a keystep towards the successful transfer of CSR practices. Establishing confidence and

82 Berry and Rondinelli (1998)83 ibid

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trust strengthens business partnerships and provides a foundation for CSR transfer. Inaddition, procurement managers should be encouraged to actively pursue newpartnerships with CSR friendly local suppliers and maintain a database of supplierswith corresponding profiles and capabilities. A ranking system, based on performanceand compliance with specified standards may facilitate the active participation from

procurement manages to engage local SMEs. Required annual reviews of the databasemay help facilitate such activities.

Partnerships between MNCs and SMEs should focus on building capacity of SMEs toimplement CSR practices on their own through direct information exchange. This canbe accomplished by holding structured and informal meetings in various settings toencourage suppliers to freely discuss challenges and achievements. Training for SMEmanagers on managerial, operational and technical improvements can also increasestandards within and partnerships between SMEs. In addition, providing incentives tothose suppliers who are performing well may encourage other suppliers to participatein MNC training activities and increase overall standards.

6. What is the role of different agencies: Government / Multilateral organizations?

Role of Government

Without a balanced and enabling framework that supports local business, the toolshighlighted above will be of limited value. Governments have a significant role toplay in engaging SMEs and MNCs in dialogue on creating an enabling environmentin which CSR practices can be adopted more easily and on establishing mechanismsthat help SMEs build capacity to grow and sustain their CSR initiatives. Governmentsmust also focus on attracting investors who will bring additional developmentalbenefits besides tax revenues, such as employment, new skills and technologies. Inaddition, governments can contribute to CSR development by designingcomprehensive frameworks and systemic approaches that will bring together the

existing work on standards and codes of different companies at the country level. Bydoing so, governments will promote and enable a fuller CSR implementation acrossindustry sectors.

Governments in developing countries are beginning to take on such roles. Indonesiahas established a Ministry of Cooperatives and Small Enterprises84 to coordinatevarious efforts of SME promotion.85 Vietnam issued a decree in 2001 for the supportof small and medium sized enterprises to help ensure orderly growth of SMEs inthe country. Some of the initiatives underway include

sip a csr final report

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