Can Bangladeshi suppliers progress and achieve economic upgrading when promised contracts, but never given?

By Samia Hoque, Noemi Sinkovics and Rudolf Sinkovics

Image by anankkml. FreeDigitalPhotos.net

In a recent article published in the European Journal of International Management, the authors explore the effects of international outsourcing without legally binding contracts on knowledge transfer and upgrading of suppliers.

This paper is written in the context of a special form of international outsourcing relationship in which suppliers in the Bangladeshi garment industry make recurrent discrete transactions with the same buyers over a long period of time without the existence of any original legally binding written agreement. In this study, we find that the suppliers firms only had access to buyers’ explicit knowledge that they needed to smoothly perform the production function such as, design instructions and published quality and labour standards. The absence of legal contract seems to have discouraged the buyers to share their core knowledge and thus reduce unintended spill-overs to a minimum level.

Nevertheless, the supplier firms had to develop relevant technological and marketing knowledge to maintain economic and other performance-oriented dimensions, which was a precursor to continue the relationship with the buyers and survive in the business. The suppliers had acquired a part of this knowledge from their firm-level experiences of managing buyers’ repetitive purchases. They had also used a range of external sources to acquire technological knowledge, such as, attending training by trade associations, hiring external consultants, recruiting experienced workers and following competitors. Social networks, personal overseas visits, existing buyers’ references, web sources and trade association meeting had been the major sources of information on new buyers. Nevertheless, with their limited resources, the suppliers could only access information-oriented or publicly available explicit knowledge, which only enabled them to improve technocratic or output-oriented dimensions of process upgrading rather than in labour/skill-oriented ones.

The paper highlights that the absence of a legally binding contract enhances the level of uncertainty in buyer-supplier relationship, which in turn limits the possibility of tacit knowledge transfer from buyers to their suppliers. This lack of access, thereof, restrains the likelihood of economic upgrading of higher level by the suppliers. This clearly reinforces the need for legal commitment from buyers’ end in order to stimulate supplier upgrading. The government of Bangladesh can play an important role in pressurising buyers to make legally enforceable contract in order to enhance the level of certainty in buyer-supplier relationship.

For the full paper, see:
Hoque, Samia Ferdous, Noemi Sinkovics, and Rudolf R. Sinkovics (2016), "Supplier strategies to compensate for knowledge asymmetries in buyer-supplier relationships: Implications for economic upgrading," European Journal of International Management, 10 (3), 254-283. (DOI: 10.1504/EJIM.2016.076292)

More details can be found on: Slideshare and Kudos

Rethinking How Business Contributes to Society

By Noemi Sinkovics, Rudolf R. Sinkovics, Samia Hoque and Laszlo Czaban

Image by Sujin Jetkasettakorn, FreeDigitalPhotos.net

In a recent article published in Critical perspectives on international business, 11 (3/4), the authors propose a reconceptualization of social value creation as social constraint alleviation.

Scholars from various disciplines have been pondering about how to grasp the impact of business on society. Most people would agree that it is desirable for business to contribute to wider society, but how should such a contribution be defined? Is it donating toys to a local kindergarten? Or are we talking about multinationals transferring technology to a developing country through foreign investment? Or about Nike and Levis auditing working conditions in their supply chain? To clarify the definition, we suggest that the extent to which companies help alleviating social constraints may be a useful way to think about business’ contribution to society.

Such a focus on addressing social constraints may help to clarify discussions across a number of disciplinary areas. Fields as diverse as international business, global value chains, social entrepreneurship, or corporate social responsibility all address the business-society relation from different angles. International business often looks at business’ social impact in terms of spill-over effects of foreign direct investment on the domestic economy, or in terms of corporate social responsibility initiatives helping acceptance of multinationals entering a country. Experts on global value chains describe how social upgrading can improve working conditions and income of workers. The social entrepreneurship literature discusses mutual value creation in bottom of the pyramid markets, enabling poor consumers and firms to benefit at the same time. Discussions on business and human rights ask whether corporate social responsibility initiatives go beyond improving a company’s image and can actually result in “doing well by doing good”. All would like to achieve a positive impact of business on society, but how exactly such social value creation can be defined stays unclear.

We argue that ideally a positive contribution of business to society consists of promoting social and economic human rights. This follows Todaro & Smith’s (2011) core values of development: sustenance, self-esteem and freedom from servitude. To see how such a contribution can be reached, it may be helpful to see society as a complex adaptive system, drawing on complexity science and systems theory. From such a perspective, a single constraint may keep the system from functioning and prevent it from reaching certain development outcomes we would like to see. Then, for businesses to contribute to the outcome of human rights, they need to address the social constraint(s) that are the root cause(s) holding back development in a specific community or society. Only addressing a symptom of the underlying social constraints will not really help because it will not change anything about how the system as a whole functions. For example, handing out free food to homeless people may help to alleviate hunger momentarily, but does nothing to address the underlying root cause or social constraint that makes these people live on the streets in the first place. Hence, such an action will not create lasting value for society.

How can a focus on underlying social constraints look like in practice? In our fieldwork in India we met a social entrepreneur who managed to address the root cause of poverty in a rural community. In this case, many young people in the community were living in poverty even though they had high levels of education. Social norms obliged graduates to return to their families in the village after finishing their studies in the city, even though there were no adequate jobs available for them at home. Recognising the social constraint of labour immobility among young people, the social entrepreneur founded a business process outsourcing company based in that rural area. The business model was based on providing services remotely via the internet, while drawing on the local pool of educated but immobile labour in the community. As a result, the underlying root cause of poverty, i.e. young people being unable to move, was addressed and the business contributed to realising subsistence and self-esteem needs in the community.

Summing up, we propose that seeing social value creation in terms of alleviating social constraints is a helpful starting point for comprehending how business can contribute to realising human rights in society. Further research will be needed to explore how such social constraints can best be operationalised, and how social and economic human rights can be broken down further for the purpose of this discussion.

For further details, see:

Sinkovics, Noemi, Rudolf R Sinkovics, Samia Hoque, and Laszlo Czaban (2015), "A reconceptualization of social value creation as social constraint alleviation," Critical Perspectives on International Business, 11 (3/4), 340-363. http://dx.doi.org/10.1108/cpoib-06-2014-0036

Creating social value in 'bottom of the pyramid' markets: What can multinationals learn from businesses in rural India?

image by africa/FreeDigitalPhotos.net

By Noemi Sinkovics, Rudolf Sinkovics and Mo Yamin

In a recent article published in International Business Review, 23(4), 692-707, Noemi Sinkovics, Rudolf Sinkovics and Mo Yamin explore the role of social value creation in business model formulation at the bottom of the pyramid and the implications for MNEs.

'Bottom of the pyramid' markets in Rising Powers
Within International Business, Rising Power countries such as China, India, Brazil and Indonesia are not only important as home countries of emerging multinational enterprises (MNEs), but their large populations also present huge markets for MNEs from other countries. However, despite growing middle classes in the Rising Power countries, significant parts of their populations still live on low incomes at the bottom of the economic pyramid. In fact, the majority of people belonging to the 'bottom of the pyramid' (BOP) worldwide can be found in emerging economies. Thus, understanding how BOP markets work can be an important advantage for MNEs to be successful in Rising Power markets.

Creating social value at the bottom of the pyramid
Discussions on MNE strategies in BOP markets often centre around the notion of creating social value, in addition to making profits for the business. Social value creation can be defined as contributing to sustenance, self-esteem and freedom of servitude (Todaro & Smith 2011)1, which ranges from basic necessities such as food and shelter to issues such as dignity and personal freedom to make choices in life.

To better understand the phenomenon of social value creation, this paper looks at how social value is created by entrepreneurs within the bottom of the pyramid, and what MNEs entering BOP markets can learn from these businesses.

Five examples of social value creation: businesses in rural India
For this purpose, we interviewed the owners of five businesses in rural India, who are not only targeting BOP markets but also themselves come from a low-income background. Two of these explicitly created their business to create social value, in order to overcome specific difficulties experienced in the local community: A company selling traditional paintings was founded to stop dependence of local artists on middlemen, who were selling their artwork at high margins. In a more modern sector, an IT entrepreneur founded a rural business process outsourcing firm in response to high unemployment among skilled workers in the area. Three other companies did not explicitly see community benefit as their mission, but nevertheless created social value through their operations in a variety of ways. Two companies producing bangles and incense sticks both have a positive impact on the community by providing education and employment opportunities to people from disadvantaged social groups, such as physically handicapped or slum-dwellers. Similarly another company that grows and processes amla (Indian gooseberry) and grew out of a women's self-help group has not only improved incomes for its members and employees. It has also acted as an example for other entrepreneurs to start similar businesses lifting them out of poverty.

On the whole, these case studies illustrate that social value can be created independently of whether this is a stated objective of the business or not. Further, for those businesses that do explicitly aim to create social value, this tends to be in response to a very specific 'trigger constraint', i.e. a local constraint that entrepreneurs experience and try to overcome.

On top of this, all five businesses show that in order to make a difference for communities, a business model at the bottom of the pyramid needs to be closely linked to specific needs and constraints experienced by members of this community. All business models studied addressed such needs as part of their core business, no matter whether they consciously aimed to create social value or not.

What can MNEs learn from this?
For MNEs, this means that in order to be successful in BOP markets connecting to local communities is key, but also that they will likely find it difficult to do this. In practice, it may be hard for MNEs to establish close links in social networks at the bottom of the pyramid to find out about the needs experienced locally. This puts them at a disadvantage over local companies. Further, long term engagement is important to understand the local situation - again, this is unlikely to happen for many MNEs. MNEs originating from Rising Power countries may nevertheless have an advantage in understanding of BOP markets over Western MNEs, based on cultural or spatial proximity.

The question of how MNEs can know about and respond to the needs of BOP customers is important to find ways of creating social value by responding to local constraints, as practised by businesses originating from the BOP.


For more details, please refer to: Sinkovics,N., Sinkovics,R.R. & M.Yamin (2014) The role of social value creation in business model formulation at the bottom of the pyramid – Implications for MNEs?, International Business Review, 23(4), 692-707.
http://dx.doi.org/10.1016/j.ibusrev.2013.12.004


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1 Todaro, M.P., & Smith, S.C.(2011). Economic development (11th ed.). Harlow: Pearson Education Limited.