The impact of multinational companies’ supply chain · PDF file · 2010-07-19CASE STUDY: THE BRAZILIAN STEEL ... Inward and outward FDI in Brazil ... Brazil, Russia, India and China

This paper was submitted as work in progress to the “oikos UNDP Young Scholars Development Academy

2010: Inclusive Partnerships for Sustainable Market Innovations “. Its content does not reflect the

positions of the oikos Foundation or the United Nations Development Programme.

oikos UNDP Young Scholars Development Academy 2010

Inclusive Partnerships for Sustainable Market Innovations

Flávia Alvim:

The impact of multinational companies’ supply chain

management on Brazilian small and medium enterprises:

What role for corporate social responsibility?

This is a work in progress. Please do not cite without permission of the author:

Flávia de Magalhães Alvim

Researcher, Fundação Dom Cabral

Av. Princesa Diana, 760, Alphaville, Lagoa dos Ingleses

34000-000, Nova Lima/MG, Brazil

[email protected]

Abstract

This paper analyses how supply chain management decisions of multinational companies

(MNCs) impact on small and medium enterprises (SMEs) in developing countries. The

combination of factors related to corporate social responsibility (CSR), collaborative supply

chain management and global value chain (GVC) reveals that a quite complex scenario prevails

in MNCs’ procurement decision-making. The study of the Brazilian steel industry underscores

that CSR has increasingly been incorporated in procurement activities, but it is focused mainly

on MNCs’ strategic suppliers. Other than that, MNCs have used bargaining strategies to

purchase from SMEs due to the competitive forces of their GVCs.




TABLE OF CONTENTS

LIST OF FIGURES AND ACRONYMS .................................................................................... 3

1. INTRODUCTION ........................................................................................................ 4

2. SUPPLY CHAIN MANAGEMENT: A MULTIFACETED ISSUE ............................................ 6

2.1. The CSR approach ...................................................................................................... 8

2.1.1. The impacts of CSR on SMEs ................................................................................. 8

i. MNC-SME linkages ........................................................................................................ 8

ii. Social responsibility in procurement ............................................................................. 9

2.1.2. Why do MNCs buy responsibly?............................................................................ 9

2.2. MNC-SME linkages in the business literature ......................................................... 10

2.2.1. The effects of MNCs’ business decisions on SMEs .............................................. 10

i. Business relationships based on competitiveness ...................................................... 10

ii. Collaborative supply chain management .................................................................... 11

2.2.2. International business trends .............................................................................. 11

i. Global production and value chains ............................................................................ 11

ii. The impact of global trends on SMEs .......................................................................... 12

2.3. Collaboration and compliance as public goods ....................................................... 13

3. CASE STUDY: THE BRAZILIAN STEEL INDUSTRY ......................................................... 15

3.1. Background .............................................................................................................. 15

3.1.1. The data ............................................................................................................... 16

3.2. The role of CSR in MNC-SME relationships ............................................................. 17

3.2.1. MNCs’ drives to CSR ............................................................................................ 18

3.2.2. SMEs’ compliance with CSR ................................................................................ 19

3.3. Establishing SME-MNC linkages .............................................................................. 20

3.3.1. MNCs’ initiatives .................................................................................................. 20




3.3.2. The business case for SMEs ................................................................................. 21

3.4. Competitive pressures and collaboration in supply chains ..................................... 22

3.4.1. Short-term criteria for supplier selection ........................................................... 22

3.4.2. Collaborative practices ........................................................................................ 22

i. Supplier evaluation ..................................................................................................... 22

ii. Supplier development ................................................................................................. 23

iii. Information sharing ..................................................................................................... 24

3.4.3. The influence of globalisation ............................................................................. 24

3.5. The road forward..................................................................................................... 24

4. CONCLUSIONS AND FINAL REMARKS ....................................................................... 26

REFERENCES .................................................................................................................. 28

LIST OF FIGURES AND ACRONYMS

Figures

Figure 1 - The impact of MNCs’ supply chain management decisions on local SMEs ................. 8

Figure 2 - Inward and outward FDI in Brazil .............................................................................. 17

Acronyms

BRIC - Brazil, Russia, India and China

CSR - Corporate Social Responsibility

FDI - Foreign Direct Investment

GVC - Global Value Chain

MNCs - Multinational Companies

SMEs - Small and Medium Enterprises

Flávia Alvim, 15 July 2010 Page 4 of 32




1. INTRODUCTION

The impact of multinational companies (MNCs) in developing countries has been assessed

from a very wide array of perspectives. Mainstream macroeconomics focus on the role played

by international trade liberalisation on aggregate economic growth, while microeconomic

approaches underscore the spill over productivity effects of foreign firms. Global value chain

analysis identifies the power structures of globalisation and highlights the threats and

opportunities created by intra-firm trade. The influence exercised by MNCs on supra-national

decision-making is scrutinised to describe their impact on global governance, whereas business

explanations for the spread of MNCs highlight the consequences for global players.

Under this broad scenario, the present paper concentrates on the impacts of supply chain

management policies of MNCs on small and medium enterprises (SMEs) in emerging countries.

Some of the macro discussions mentioned above are intermingled with this research question

and will be somewhat presented throughout the paper. However, the focus here is to

understand to what extent the linkages between MNCs and SMEs can promote a more

sustainable development in emerging economies.

The research question is based on the widespread belief that SMEs are important for

advancing both a “dynamic and flourishing private sector” and a “more equitable

development” in developing countries (Jeppersen 2005, 463). SMEs correspond on average to

90% of enterprises and to 50-60% of employment rates and are considered the greatest

contributors to the economy (Luetkenhorst 2004). Besides, it is estimated that there are

82,000 MNCs around the globe, with approximately 810,000 foreign affiliates, and 77 million

employees (UNCTAD 2009, xxi). Traditional MNCs from developed countries are increasingly

opening subsidiaries in developing economies, but many MNCs also have their origins in

countries as Brazil, India, Russia and China (BRICs), which are now home to emerging global

players as well (Guillén and García-Canal 2009, UNCTAD 2009).

For these and other reasons, donors and policymakers have emphasised the possibility of

enhancing the developmental impacts of MNCs through the integration of local SMEs into their

supply chains (Ashley 2009b, Nelson 2004, Jenkings et al. 2007, Luetkenhorst 2004, Maxwell

2008, UNCTAD 2007). The main debates on this matter are found in the corporate social

responsibility (CSR) literature, which has focused not only on the importance of MNCs

promoting business linkages with SMEs. The CSR approach has also noted the positive

externalities of holding MNCs responsible for their entire supply chain’s compliance with

environmental, social, and labour standards. Cases such as the worldwide repercussion of the

use of child labour in the supply chain of Nike have contributed to set this agenda (Wilenius

2004).

Although these issues are indeed very relevant from a development point of view, it is argued

here that the CSR perspective is not enough for understanding the whole array of complex

questions involved in the supply chain management decisions of MNCs that impact SMEs. On





the one hand, potential conflicts arise between the CSR business case for large buyers and

small suppliers, which have imbalanced levels of bargaining power and face very different

challenges. On the other hand, many interlinked and sometimes conflicting drivers influence

how corporations design their procurement strategies, from CSR concerns to the major need

to sustain competitive advantages in the international market. Therefore, this paper

complements the CSR analysis with collaborative supply chain management considerations

from a business standpoint as well as with some global value chain (GVC) insights to outline a

more critical appreciation of the research question.

The extent to which these contradictions interact in practice is further explored in a case study

on the Brazilian steel industry. In line with Yin (2003, 13), the case study approach was

adopted because it is considered the most appropriate social research method when “a ‘how’

or ‘why’ question is being asked about a contemporary set of events, over which the

investigator has no control”. The Brazilian steel industry has offered the possibility of

comparing how traditional and emerging MNCs have interacted with manufacturing SMEs

which would have the potential of integrating into the global economy, as predicted by the

GVC literature. Furthermore, the social and environmental concerns of steel production have

underscored how CSR-related issues are taken into consideration in a natural-resource-based

supply chain. The analysis was substantiated by secondary data and thirteen in-depth semi-

structured interviews conducted in the state of Minas Gerais, where major Brazilian and

foreign MNCs have active mills and thus share SME suppliers.

The case study indicates that establishing linkages with MNCs indeed allows SMEs to have

access to high-quality markets; however, the fierce competition in the bottom of supply chain

limits the potential benefits of SMEs’ integration. These challenges are amplified by

inadequate levels of collaboration in the supply chain management of foreign as well as

domestic MNCs, and the economic downturn has worsened this situation. Moreover, the

business case for CSR concerns is more present amongst SMEs than expected, but MNCs fall

short in giving SMEs more incentives for enhancing their CSR policies. Although the research

does not have the scope for generalisation, its observations are suggestive of the need to

promote more adequate incentives and accountability mechanisms that help MNCs and SMEs

overcome collective action problems. Strengthening stakeholder’s power and promoting

public-private partnerships intermediated by business associations can be effective ways of

increasing the adoption of CSR and of collaborative practices in supply chain management.

This paper is divided in four sections. Section 2 builds the theoretical argument based on the

literature on CSR, supply chain management and GVC. Section 3 analyses the Brazilian steel

industry and underpins the findings of the study. Section 4 concludes and highlights areas for

future research.





2. SUPPLY CHAIN MANAGEMENT: A MULTIFACETED ISSUE

The potential impacts of supply chain management decisions of MNCs on SMEs can be

analysed from different viewpoints. The combination of issues related to CSR, collaborative

supply chain management, and GVC show that the analysis of MNCs-SMEs is not

straightforward. Figure 1 summarises some of the main trends identified in the literature and

highlights the interrelatedness of underlying factors, which are drawn together with the aim of

answering the present research question.

Each of these factors is addressed separately in the next sections of this chapter and some final

theoretical remarks are made before the proposed model is applied to the Brazilian steel

industry case study in the next chapter.


This paper was submitted as work in progress to the “oikos UNDP Young Scholars Development Academy 2010: Inclusive Partnerships for Sustainable Market Innovations “.

Its content does not reflect the positions of the oikos Foundation or the United Nations Development Programme.

Figure 1 - The impact of MNCs’ supply chain management decisions on local SMEs

Source: Elaborated by the author based on the available literature.





2.1. The CSR approach

In a review of the literature on what CSR means, Carter and Jennings (2004, 149) have

summarised it as “meeting the economic, legal, ethical, and discretionary responsibilities

expected by society”. Even though there is not such a thing as a consensual definition of CSR,

for the purposes of this paper it is enough to observe that the expectations of society have

considerably changed over the past number of years (WBCSD 2004, Nelson 2004, Maxwell

2008). Companies were used only to donate resources via philanthropy, but now CSR also

encompasses “not only what companies do with their profits, but also how they make them”

(Nelson 2004, 4). And this core business approach to CSR may influence the supply chain

management decisions of MNCs in several ways, as society becomes interested in the

relationships of companies “in the workplace, the marketplace, and along the supply chain”

(Nelson 2005, 8).

2.1.1. The impacts of CSR on SMEs

i. MNC-SME linkages

Business linkages between MNCs and SMEs may be formed as a result of a discretionary

intention of MNCs under their CSR policies. Buying from local suppliers is considered one way

of increasing the development impact of MNCs, as it can expand the opportunities for the poor

and contribute to creating wealth and sustainable livelihood in developing countries (Nelson

2004, UNDP 2008, WBCSD 2004). Moreover, it gives SMEs the possibility of enhancing their

skills, diversifying their market structures, and accessing new markets (Jenkings et al. 2007,

UNCTAD 2007). However, the initiative of buying from SMEs is usually very mixed with others

decisions made by MNCs. It is not easy to disentangle if MNCs buy from an SME due to a clear

CSR policy directed towards it, because they want to develop the surrounding community or

simply based on competitive issues.

MNCs are usually called to engage in links with local SMEs to improve their reputation,

minimise risk, and reinforce their social licence to operate (Ashley 2009a, Jenkings et al. 2007,

Maxwell 2008, UNDP 2008). MNCs can also have more tangible benefits such as gaining bids by

“demonstrating their value to governments” (Ashley 2009b, 4), buying products at a lower

cost, or increasing their market due to the economic development of the region where they

are located (Jenkings et al. 2007, UNDP 2008, WBCSD 2004). Therefore, the drivers and

challenges of MNC-SME business linkages presented by the literature usually focus on the

same issues of promoting CSR in general, or are purely sustained by business facts that would

happen anyways without a CSR strategy.

The merit of the CSR agenda is to spell out these factors, using them to enhance the likelihood

of the adoption of policies directed specifically to SMEs. But it is not hard to find companies





that do not change their policies and use numbers of local purchasing or of SME suppliers as a

way to obtain the reputation benefits of being socially responsible. Using Ashley et al.’s (2009,

7) terms, this would be the classical assessment of development impact with the aim of only

“proving”, not “improving” it. So it is rather dubious if this could be named CSR if MNCs do not

make any effort in this direction.

The extent to which SMEs are in fact included in the supply chain of MNCs depends thus on

the ability of both sides to overcome challenges which must not be underestimated. Some of

them are related to the implementation of CSR policies, and others are linked to more complex

issues that refer to business incentives that will be discussed later in this chapter.

ii. Social responsibility in procurement

The core business approach to CSR involves demanding the compliance of suppliers with the

same standards followed by MNCs. Labels as “ethical trade” (Heeks and Duncombe 2003, 1),

“purchasing social responsibility” (Carter and Jennings 2004, 146), and “socially-responsible

buying” (Maignan et al., 641) have emerged, and recurrent themes in this agenda are diversity

and discrimination, ethics and anti-bribery, environmental protection, and

human/children/labour rights (Carter and Jennings 2004, Paine et al. 2005, Pedersen and

Andersen 2006).

From the point of view of SMEs, this trend can have very different impacts. If MNCs decide to

purchase responsibly, only suppliers that comply with standards will be selected, no matter

the company size. These incentives for CSR can thus have very positive externalities and

authors as Luetkenhorst (2004, 158) believe that “CSR will only prevail and remain an

important force if SMEs can be effectively engaged”. However, it has also been shown that

MNCs impose standards without sharing the compliance costs or implementing policies to

assist local producers (Ashley 2009b, Collinson 2002, Harilal et al. 2006, Heeks and Duncombe

2003, Ward et al. 2007). SMEs are known to have very limited resources and access to credit,

and the imposition of standards have become barriers to entry in many industries, displacing

those that are not able to bear the costs, while also keeping many in the informality.

Finally, it should be mentioned that a study from the World Bank has found that some

suppliers remain unconvinced about the benefits of CSR because of inconsistent buyer

commitment to CSR (Jorgensen et al. 2003). If SMEs believe that MNCs do not really embrace

the CSR agenda, this may be a reason for SMEs not adopting it either.

2.1.2. Why do MNCs buy responsibly?

Carter and Jennings (2004) have conducted what is probably the most comprehensive

empirical study on incorporating CSR in purchasing. They found a significant correlation around

activities surrounding the themes of environment, diversity, human rights, safety, and

philanthropy. However, other authors have highlighted that the intentions of buying





responsibly are not always found in practice (Harwood and Humbry 2008, Heeks and

Duncombe 2003). A few explanations for this incongruence can be derived from Maignan et

al.’s (2002, 643) argument that businesses adopt strategies of buying responsibly according to

a continuum “reactive-defensive-accommodative-proactive”. The authors highlight that MNCs’

behaviour depends on three issues: a) the perceived business case for doing it, b) the

organizational values of the MNC, and c) the extent to which their stakeholders can exercise

power over them. The influence of each factor varies a lot in practice, and the literature lacks

hard empirical evidence on this matter.

Anecdotal evidence suggests that businesses that hold a pivotal position in their network of

stakeholders are expected to be less influenced and more likely to perform reactively

(Maignan et al. 2002). Conversely, firms may be more proactive in issues over which

stakeholders exercise more power, such as those vulnerable to customer pressure (Roberts

2003). This point is extremely important for the analysis of MNCs’ supply chains in developing

countries. If MNCs do not feel pressured enough to include CSR in their purchasing activities,

they probably will not do so. Especially because the business benefits associated with PSR,

such as reputation, are less evident and perceived sometimes only in the long-run, so the

extent to which companies adopt it depends on how they assess its associated costs and

benefits.

2.2. MNC-SME linkages in the business literature

2.2.1. The effects of MNCs’ business decisions on SMEs

i. Business relationships based on competitiveness

Harwood and Humbry (2008, 166) highlight that “procurement decision-making” is usually

based on factors that have “historically been regarded as contributing directly to profitability”,

such as “price, cost, and quality performance”. Furthermore, reward mechanisms of

procurement are based on these competitive factors, while purchasing professionals are

measured on financial savings and process efficiency (Harwood and Humbry 2008, 166). Thus,

it is important to bear in mind that supply decisions of MNCs are embedded in highly

competitive markets, and that MNCs are constantly seeking comparative advantages. Low cost

is usually considered the main goal of procurement, but issues as quality, delivery time, and

product availability can also play major roles (Boechat 2005).

Local SMEs offer benefits than can help the establishment of links due to business reasons,

such as lower logistics costs, better delivery performance, and better access to local context,

knowledge and needs (Handfield 1994, Resende 2005). Furthermore, studies focused

specifically on SMEs also highlight that they can be more flexible, loyal, creative, and able to

customise solutions for their big clients (Boechat 2006, Freitas 2009, Jenkings et al. 2007).





Nevertheless, the business scenario is usually not favourable to SMEs. Although selling to

MNCs creates concrete business opportunities for SMEs, linkages are not easy to establish and

especially to sustain. SMEs can become dependent on MNCs (Luetkenhorst 2004), while MNCs

may only take competitive issues into account in their relationship with SMEs.

ii. Collaborative supply chain management

Supply chain members may cooperate amongst themselves without any CSR reasons for doing

it. Such efforts of collaborative supply chain management are mainly driven by long-term

objectives of improving “profitability, competitive advantage, and customer value/satisfaction”

(Mentzer et al. 2001, 15). Many companies have realised that it makes more business sense to

“transform the traditional relationship with emphasis on low cost to a more cooperative and

long-term strategic relationship with a focus on optimizing performance” (Resende 2006, 6).

This collaborative approach has thus led companies to reduce their supplier base and create

partnerships with key global and local suppliers (Resende 2005).

All these logistic and strategic issues point to a clear business case for the inclusion of local

SMEs into the MNCs’ supply chains and even for giving support to their development as a

means of establishing collaborative relationships with MNCs. The business benefits of local

SMEs mentioned above are all relevant criteria for supplier selection from a business point of

view, and when MNCs adopt a long-term sight, they can be more open to foster MNCs-SMEs

linkages.

Studies have also shown, however, that collaborative supply chains are not easy to take place,

as many companies still focus on short-term cost reduction and do not prioritise the

development of partnerships with suppliers, even though it could add more value in the long-

run. Difficulties to collaboration may also occur specifically because of limitations found in

developing countries. As Resende (2007) highlights, factors as the high cost of IT solutions, the

unavailability of qualified suppliers and skilled labour force, lack of infrastructure, and the

political context have all been pointed in the literature as relevant barriers. And the lack of

collaboration can be especially harmful for SMEs, because they might find it hard to survive

when bargaining practices prevail, since their businesses usually have restricted access to

markets and credit, lower productivity, and small scale production (Boechat 2006).

2.2.2. International business trends

i. Global production and value chains

The analysis made so far has adopted a static rather than a dynamic approach, without taking

into account that MNCs and SMEs are part of a bigger picture that has structural logics, causes

and consequences at the global level. Recent transformations in the global economy have

given rise to a complex scenario that determines to a large extent how MNCs interact with

local SMEs. One major change has been the concentration of companies in their core





competences and a consequent increase in their levels of outsourcing (Fleury and Fleury 2009,

Gereffi et al. 2005, Guillén and García-Canal 2009, Kaplinsky 2000). Many traditional MNCs

that had vertically expanded their operations abroad motivated by transaction costs

minimisation have decided to outsource several of their non-core activities, leading to a highly

fragmented global production network.

The effects of these tendencies in developing countries are multifaceted, but a few remarks

are important. For instance, developing countries MNCs are believed to have emerged as a

means of surviving in these highly competitive markets (Fleury and Fleury 2009, Guillén and

García-Canal 2009 Ricupero and Barreto 2007). On the other hand, the increasing competition

from emerging MNCs has also led traditional MNCs to “become much less reliant on traditional

product-differentiation strategies and vertically integrated structures” (Guillén and García-

Canal 2009, 33). Efforts to explain such movements have thus encouraged the development of

a very useful analytical framework named GVC.

Although it is not the scope of this paper to give details of the GVC framework, it is sufficient

to mention that it identifies the distribution of power in global production networks and uses

governance structures to clarify why some industries have performed differently than others.

The “complexity of transactions, the ability to codify transactions and the capabilities in the

supply-base” (Gereffi et al. 2005, 98) determine the role played by members of the chain.

There has been a change from vertically integrated hierarchical structures driven by producers,

towards structures where buyers exercise greater power, sometimes shared to some extent

with first-tier suppliers.

ii. The impact of global trends on SMEs

UNCTAD (2007) has highlighted that the impact of GVC governance structures on developing

countries’ SMEs has not been comprehensively examined. Beyond the benefits accrued from

the establishment of SMEs-MNCs, Figure 1 highlights that these global trends have both direct

and indirect effects on SMEs. First-tier suppliers from developing countries, for instance, have

had the chance to increase in scale and become MNCs themselves, and this has created more

possibilities for SME linkages (UNCTAD 2007). However, as Humphrey (1999) has shown in the

case of the automotive industry in Brazil and India, assemblers and first-tier suppliers that used

to source locally are increasingly engaging in parallel global networks. Furthermore, lead firms’

behaviour can also emphasise the competitive pressures on SMEs, and being unable to take

part in GVCs can exclude SMEs from a large share in economic opportunities (Luetkenhorst

2004).

From a CSR point of view, NGOs have called attention to the fact that the competitive

pressures at the end of the supply chain can also contribute to the violation of the rights of

workers (Oxfam 2004). Cases such as the flower industry in Kenya (Collinson 2002) and the

cashew nut industry in India (Harilal et al. 2006) are used to illustrate how the power

imbalance between MNCs and local producers place severe costs on SMEs. But buyer-driven

GVCs can also increase demands for the implementation for codes of conduct in purchasing, as





some industries have become more susceptible to pressure from stakeholders (Blowfield

2001).

One last point to be mentioned is that global sourcing and production has increased

competition based on performance, lead time, and stock reduction, and thus a more strategic

importance has been given to collaborative supply chain management (Jenkings et al. 2007,

Resende 2005). Besides the benefits of such arrangements mentioned earlier, collaboration

can also contribute to overcoming the main obstacles identified by UNCTAD (2007) for local

SMEs’ integration into GVC, namely: need to upgrade technology, lack of finance and human

capital, lack of capability to meet quality standards, need to manage intellectual assets,

difficulties due to large contractors’ bargaining position, and need for diversification to reduce

dependence. But the extent to which members of GVC indeed engage in collaborative

practices is industry-specific and not easy to predict.

2.3. Collaboration and compliance as public goods

Despite the extensive literature on MNC-SME linkages and the publication of MNCs’

sustainability reports that highlight their commitment to include local SMEs in their supply

chains in sustainable ways, the real impact of their procurement decisions is far from being

clear. The previous sections have shown that there are relevant drives for the establishment of

sustainable linkages, but there are also several challenges which are not easy to overcome.

The first and foremost conflict that comes out of the points mentioned thus far is the potential

incongruence amongst the competitive pressures faced by MNCs and SMEs alike and the call

for CSR concerns. Those that do not believe in CSR have argued that “profit-maximising

motives are often incompatible with good development practice” (Frynas 2005, 598).

However, there has been considerable evidence to support that it is possible and even

strategic to invest in CSR in ways that create social and business value (Porter and Kramer 2002

and 2006, Weber 2007). Thus, a likely reason for the lack of adoption of CSR may be that its

economic dimension has been the least explored amongst the “triple bottom line” (economic,

environmental, and social) of corporate performance, sometimes both for MNCs and SMEs

(Luetkenhorst 2004, 165). In other words, the business case for CSR might not be clear enough.

Another interpretation is that the lack of importance given to CSR might also be a problem

with the available mechanisms of incentives and accountability. Even when the business case

for SMEs and MNCs is clear, the high degree of competition in their markets may put CSR in a

second place, as there are further more incentives to invest in actions that have more tangible

returns for profitability (Harwood and Humbry 2008). Codes of conduct, for instance, do not

have sanctions for non-compliance (Blowfield and Frynas 2005) and these observations

provide the basis for considering CSR issues as public goods for SMEs and MNCs. As Picioto

(1995) has highlighted, voluntary engagement is indeed necessary for delivering public goods,

but so is hierarchy. So in line with Heeks and Duncombe (2003, 29), it must be acknowledged





that state regulation is also an important part of this agenda, given that “the state is a key

actor amongst the many stakeholders involved”.

Although it might seem contradictory to advocate for state regulation in a theme such as CSR

that is intrinsically characterised by voluntary engagement, the important point here is to

highlight that the involvement of state does not have to be only through legal mechanisms or

punishments. States can create positive incentives and help overcoming collective action

problems that are very typical in CSR issues. And the same rationale is appropriate for the case

of promoting MNC-SME linkages as well, both from CSR and collaborative supply chain

management perspectives. The lack of importance given to them may be a result of not having

clearer incentives, or because of free-riding concerns, as defined by Olson (1982). An MNC

might not contribute to its suppliers’ development, for instance, because it may think that it

should not bear all the costs alone, since the benefits can be shared by other MNCs that buy

from that supplier too. When this is put in perspective with all the competitive pressures,

collaboration might be left behind.

Agencies as UNCTAD (2007) draw attention to the fact that SMEs integration into GVC is

hindered by market failures problems that are strictly related to state intervention, such as

enabling business environment, laws and regulations. But it is also affected by other issues

related to SMEs’ capacity that would fit into the public goods problem, such as the lack of

skills, the need for technological upgrading, and the difficulties in achieving quality standards.

Luetkenhorst (2004) also highlights other challenges that call for the intervention of an

intermediary, such as insufficient information, and lack of awareness of standards.

Given all the potential conflicts related to CSR demands and competitive pressures, which are

even more complex due to their public goods nature, more empirical evidence is needed to

find out how these contradictions interact in practice and which of these impacts are most

important for SMEs. The next chapter will thus present a case study on the Brazilian steel

industry as an attempt to shed some light in the hypotheses put together in Figure 1.





3. CASE STUDY: THE BRAZILIAN STEEL INDUSTRY

3.1. Background

Brazil has recently been acknowledged by the international community as a successful case of

steady economic growth and stable democratic government, as well as a promising country in

terms of integration into the global economy. On the other hand, Brazil also has considerable

levels of income inequality and social exclusion: while its GDP places the country in the 8th

position in the world (World Bank 2009), its Human Development Index (HDI) is the 70th

(UNDP

2009). Analysing the impact of MNCs on Brazilian SMEs is thus of utmost relevance, as it may

be one way of promoting income distribution.

The steel industry was chosen for the case study because it is believed to be a key component

of any economy, since it produces inputs for infra-structure and for industries which are a

thermometer of economic performance, such as civil construction, capital goods, electro-

electronics and automotive. The industry is therefore an important first-tier supplier of major

GVCs and the analysis of this sector is very adequate for the purposes of the present research.

According to IAB (2009), the Brazilian annual steel production in 2008 corresponds to 2.54% of

world output, placing the country as the 9th largest steel producer, and 5th largest net steel

exporter.

In general, Brazil is considered a relatively attractive destination for the establishment of

MNCs: the country is amongst the top 20 preferred location of foreign affiliates of the top 100

MNCs (UNCTAD 2008). In 2006, 340 out of the top 1,000 companies operating in Brazil were

MNCs, and their revenue corresponded to 40% of total annual revenue (Almeida et al. 2006).

As for outward FDI, 40 Brazilian companies are considered highly transnationalised (FDC 2009)

and 3 of them rank in the list of top 100 MNCs in the world (UNCTAD 2009). Figure 2 gives the

most recent available data on foreign direct investment (FDI).

As for SMEs, Bedê (2006) estimates that in 2004 there were 5.028 million micro and small

enterprises in the country, which corresponds to 98% of all firms. They were responsible for

67% of the economically active people1 in the country, 56% of formal jobs, 20% of GDP and

2.3% of exports.

1 Includes business owners, family members that help in the business, and informal employees. Studies

indicate that several SMEs are family-owned businesses (Alli and Sauaya 2004).





Figure 2 - Inward and outward FDI in Brazil

Source: FDC (2009)

3.1.1. The data

The present study was focused in the comparison of the impacts of the supply management

policies of one foreign MNC, one domestic MNC, and one large domestic company not yet

transnational but with significant exports, hereby also defined as MNC. These three companies

are all listed in the top 50 steel producers of the world and have major plants in the state of

Minas Gerais. They have relatively similar size, and although the Brazilian company is engaged

in a different value chain than the other ones, the nature of the services and parts delivered by

SMEs are not significantly different.

The main interviewees are seven SMEs located in the three cities where the steel companies’

main plants are located, and two SMEs situated in the city of the main mining activity of the

state of Minas Gerais. Eight SMEs are manufacturers from the metal-mechanic industry and

one is a retailer of parts and components, but it is not a direct supplier to the MNCs. Amongst

the eight manufacturers, one is a supplier of the major Brazilian mining company, but has not

made linkages with steel MNCs. The SMEs were selected based on their size, number of

employees, location, and main clients in order to help answering the research question.

The choice of prioritising the view of SMEs was based on the intention of assessing how MNCs

policies have been translated into practice. The procurement managers of the three

companies were also contacted, but two refused to take part in the research because the

procurement data and process are considered strategic. Therefore, beyond the interview

made with one senior procurement director, the research was complemented with two other

interviews as a way of perceiving the issues from the MNC standpoint as well: one former

employee of one MNC and the CSR manager in charge of a supplier development programme





of the other MNC. An additional interview was also conducted with the manager of an SME

supplier development programme which will be launched soon by the major Minas Gerais

business association in partnership with large foreign and domestic buyers located in the state,

not restricted to the steel industry.

Secondary data were obtained from the websites and annual reports of the three MNCs, from

the Brazilian steel industry sustainability report (IAB 2009), and from the results of three

empirical researches:

− Resende (2005): study on collaborative supply chains and the integration of local

suppliers in Brazil. The survey sampled 149 large companies operating in 19 industries

in Brazil: 53.4% domestic, and 46.6% foreign.

− Almeida et al (2006): research focused on business linkages between MNCs and SMEs

in Brazil. One survey was answered by 25 MNCs operating in Brazil (11 controlled by

Brazilian capital), and another survey was answered by 105 SMEs (52% of them had

already had business linkages with MNCs).

− Alli and Sauaya (2004): study on CSR in Brazil, conducted with large companies and

SMEs, with no specific focus on MNCs. Responses were received from 46 companies,

including large firms from 13 industries and small businesses from 12 industries.

3.2. The role of CSR in MNC-SME relationships

There is little evidence on the impact of MNCs’ supply chain management on SMEs’

compliance with CSR standards in Brazil. A few studies have analysed the extent to which SMEs

engage with CSR2, but it is not clear how much MNCs contribute to this process. Alli and

Sauaya (2004) found that only one third of large companies use CSR criteria to select and

evaluate their suppliers and that only 29% verify if their suppliers’ employees that work in their

plants are offered the same working conditions than their own employees. Furthermore, only

a few buyers reported to check their supplier’s compliance with taxes and labour rights.

The steel industry sustainability report indicates that there are some policies in this direction.

According to IAB (2009, 57), 43% of steel companies have human-rights-related clauses in their

contracts on critical investments, and suppliers’ compliance is periodically monitored. 47% of

companies also have clauses to assure the inexistence of child and forced labour in their supply

chains. Indeed, all these and many other CSR standards in issues as environment and labour

rights are found in the institutional information available in the websites and annual reports of

the three MNCs under analysis. However, none of these figures gives evidence on how these

standards are demanded in practice.

2 For studies on the states of São Paulo and Distrito Federal , see Bedê (2005) and Bernardes (2006).





The interviews with SMEs show that although MNCs suggest and encourage their compliance

with CSR, these issues are not formally assessed neither in the selection nor in the evaluation

process. The same was said by the SME that sells parts to MNCs’ sub-contractors. However,

the main exception to this is when SMEs deliver services inside the MNCs’ plants. According to

one interviewee, “MNCs believe that parts do not impact in their final product, so compliance

is a suppliers’ matter; but this is different in the case of service providers”.

Accordingly, if one digs deep in the MNCs point of view, it is possible to see that they are much

more rigorous with strategic suppliers and service providers. The purchasing conditions of the

foreign MNC (which are the same throughout its subsidiaries all over the world) are more

specific and rigid on services than products. The interviewed procurement director also said

that their comprehensive evaluation programme (which is also available on-line and demands

strict CSR standards) is directed only to key suppliers. And the CSR manager said that the

MNC’s CSR programme is given only to key suppliers, chosen in terms of scale and revenue,

with no priority given to SMEs whatsoever.

3.2.1. MNCs’ drives to CSR

The interviewed business association manager said that companies are very austere with

health and safety conditions of outsourced suppliers inside their plants because of the

negative effects that non-compliance may have in their reputation. The public opinion holds

large companies responsible for accidents, no matter who is the formal employer of the

injured worker, so most of them have “zero accident” goals. In his opinion, this is why

environmental and labour rights are usually scrutinised only to the extent demanded by law,

while health and safety go beyond legal requirements. These observations link back to the

literature on stakeholder pressures and the influence of reputation in the business case for

MNCs (Maignan et al. 2002, Roberts 2003), indicating that they are indeed key points in the

MNC response towards CSR in procurement.

Steel MNCs are very important actors in their network of stakeholders, especially because of

the high concentration level of the industry in Brazil due to a series of mergers and acquisitions

that took place after the privatisation and trade liberalisation process in the late 1980s and

early 1990s (Ferraz et al. 2003). They are all big suppliers to big buyers, and the GVC

governance structure of their industry certainly influences the relationship with their suppliers.

However, since the researcher did not have access to MNCs’ clients, it is not clear though to

what extent MNCs do not demand compliance with CSR because of the governance of their

GVC. But it can undoubtedly be said that steel MNCs do not receive the same stakeholder

pressures than companies engaged in other GVCs, as authors have shown in the case of

clothing and footwear, for instance (Maignan et al. 2002, Roberts 2003)

Organizational culture and support of top leadership (Maignan et al. 2002, Carter and Jennings

2004) were also mentioned as an important driver by the manager of the CSR development

programme. The MNC has recently been acquired by a group less concerned with CSR than its





previous owners, so this has led to a substantial reduction of resources directed to the

programme. The economic downturn reduced even more the support for the programme: it

was once delivered for suppliers of the headquarters and five plants of the group, but now it is

active in only one plant. In fact, some suppliers that took part in the programme are now

questioning the extent to which the MNC really believes in CSR, as a few suppliers even went

out of business due to the lack of collaboration from the MNC after this culture change.

3.2.2. SMEs’ compliance with CSR

The interviews and secondary data on SMEs support the findings of Bedê (2005) and Bernardes

(2006) and go against the literature that argues that SMEs are not able to adopt CSR due to the

limitations of their size. Although MNCs are not actively engaged in requiring SMEs’

compliance with CSR, SMEs do show reasonable levels of CSR practices. Six out of nine

interviewed SMEs do have initiatives that go beyond compliance with legal standards, not

associated with the size of the company. On the other hand, three SMEs do not have an

environmental licence to operate, two had high levels of employee’s extra hours before the

economic downturn, and accidents still happen in their plants, so there is still a lot of room for

improvement.

In line with the literature, the weight of extra costs was cited by four interviewees as the major

barrier to enhancing or preventing their adoption of CSR practices. However, the business case

seems to be very clear for SMEs, as six interviewees highlighted the internal benefits of CSR,

mainly related to staff motivation and loyalty. Although CSR is not always seen as a

comparative advantage to sell to the steel MNCs, SMEs believe that it allows them to get

prepared for other industries that require it. But SMEs sometimes take CSR and quality of

process as synonyms. This can be a sign that SMEs have in fact internalised the business case

of CSR or that they are focused only on the quality discourse. In either way, though, SMEs are

alert for improving their business processes, not only the quality of their products, and this is

important for sustainability. All four manufacturing SMEs that do not have the ISO 9001

certification are seeking it and those that already have it are considering applying for the ISO

14001.

Another incentive mentioned by one interviewee is that although steel MNCs do not require

formal documentation on CSR-related issues from product providers, SMEs fear that they are

still evaluated on this issue in a non-disclosed way. The interviewed CSR manager also said that

the MNC tells suppliers that only those that comply with CSR requirements will remain part of

its chain in the future. Since MNCs are probably the most powerful stakeholder in the SMEs’

networks, SMEs might also see CSR as risk management tool. Furthermore, two SMEs

mentioned that other stakeholders as labour unions and government play important roles too.

For instance, one SME was required by the city hall to have an environmental licence so as to

be allowed to set its plant in the industrial district, and another one provided life insurance to

employees due to a demand from the labour union.





One important caveat should be underlined though. The interviewed SMEs are all in the metal-

mechanic sector. IAB (2009) and others have highlighted that other members of the supply

chain of the steel industry, such as coal extraction and scrap metal collectors, are known to

have serious human-rights related problems. In fact, the steel supply chain is very complex and

other sectors should be further researched. However, the adoption of CSR by metal-mechanic

SMEs is indeed relevant, as they are important suppliers of the chain, and have a potential to

upgrade in their GVC, as it will be discussed later on.

A last point to be mentioned is that the level of CSR compliance might be more scrutinised in

suppliers looking for getting into the database of MNCs for the first time. According to one

supplier of an MNC, new firms are registered without any compliance requirements, but a SME

trying to get into the database of this same MNC said they had to present a comprehensive

documentation which included ISO 9001 certification. And the same issue was pointed by two

other SMEs trying to find new clients. Hence, SMEs that are already suppliers might not be

asked to present documentation because they have already supplied to MNCs several times

before, but there might be CSR-related barriers to entry without their acknowledgement.

3.3. Establishing SME-MNC linkages

3.3.1. MNCs’ initiatives

Although some large companies surveyed by Alli and Sauaya (2004) have isolated initiatives

focused on SMEs, only 22% of them have articulated policies with this specific focus. In fact,

many companies do not even know the size and the number of employees of their suppliers.

The interviewed procurement director said the MNC does not have any SME policies, and 90%

of its purchasing is spent with large companies (70% of it with 10 big suppliers), although most

of their supplier base are medium companies. The other MNCs report in their websites that

they have programmes directed to SMEs, and both are offered in partnership with institutions

that promote SMEs or CSR. Only two interviewed SMEs had participated in programmes

focused on SMEs, and all interviwees said that they have not been treated differently because

of their companies’ size. The interviewed business association manager said the same.

On the other hand, there is more evidence of priority given to local suppliers, which is the case

of many SMEs. IAB (2009) reports that the steel companies aim at promoting local economic

development and give priority to local suppliers, provided that they have the same technical

level as others. Alli and Sauaya (2004) also found that there is a great concern of large

companies to keep good relationships with local SMEs, but many do not consider it as part of

their CSR policy. The three MNCs’ interviewees indeed pointed to the importance of local

development. Conversely, only 8% of respondents in Almeida et al.’s (2006) research

mentioned the promotion of local development as a benefit for MNCs to source from local

SMEs. This study found that the most important benefits of sourcing from local suppliers are

cost (68%) and flexibility (64%), while Resende (2005) finds cost (44.3%), readiness of





treatment (37.6%) and delivery time/quality (32.9%) as the main reasons for local sourcing. So

when competitiveness factors are also considered, they take precedence.

3.3.2. The business case for SMEs

Local companies are benefited from having the opportunity of selling to MNCs located in their

region and indeed several SMEs were created precisely because of that, many of them under

the outsourcing trend of late 1980s. All interviewed SMEs confirm the findings of the literature

(Jenkings et al. 2007, UNCTAD 2007) and empirical studies that being a supplier of MNCs offers

the great advantage of accessing new markets and leveraging their production scale (Almeida

et al. 2006). They also mentioned that MNCs always pay on-time and that steel is a solid

market. However, it is unanimous amongst interviewees that this is an extremely competitive

market, with competition from other SMEs and from large firms as well. For instance, the

procurement director of the MNC said that they encourage their large suppliers based on the

big centres to open subsidiaries close to their plants. This same MNC has also invested in

vertical integration, as it owns a producer of parts in the region that competes with

manufacturing SMEs.

Once SMEs try to become suppliers of other companies in different regions to diversify their

clientele, they face problems related to protectionism, so the market is even more competitive

for outsiders. Like the interviewee who is not a supplier of steel MNCs said: “if the company

has twelve suppliers registered in its database for one specific demand, and it is satisfied with

their service, why would it give companies from other regions a chance?”. On the other hand,

these challenges have become more complex to disentangle with the competitive pressures

faced by MNCs. The high number of mergers and acquisitions mentioned before and the

integration of the procurement procedures and database of subsidiaries has given more

supplying options to MNCs.

Some SMEs see this expansion of possible suppliers as a problem for their business due to a

further squeeze in their profit margins due to the imbalanced power of MNCs, but other SMEs

also see a great opportunity in these trends as a way of having access to other markets. The

net effect of these forces cannot be answered by a study with this scope, but it is not easy for

smaller companies to overcome the dependency on the MNCs of their regions for several

reasons. However, once they are able to do it, their business is leveraged and they can have

considerable productivity benefits, and this has happened to some interviewed SMEs. The

achievement of higher quality processes seems to be a necessary path.

Another point mentioned in the interviews is that when MNCs are located too close from big

centres, they have less incentive to invest in the development of the region and local SMEs

face higher barriers to entry. In the case of MNCs located in more remote places, it is in their

interest to develop the region. This is very easily observed in some cities in Minas Gerais which

were created to give support to the plants and now have high levels of human development

index, good infra-structure, and a very dynamic economy. Some of these companies were

state-owned enterprises, but others had domestic or foreign private capital since the





beginning. In either case, the role played by the state was very important. This is still

happening, as the interviewed business association manager said that the state has already

demanded the use of local suppliers as counterpart for giving the licence to operate for a steel

project under construction by a foreign MNC now. As Heeks and Duncombe (2003) have

argued, the role of state must not be forgotten, as it is a key stakeholder too.

3.4. Competitive pressures and collaboration in supply chains

3.4.1. Short-term criteria for supplier selection

The secondary data as well as the conducted interviews did not reveal any significant

differences amongst the supplier selection criteria of Brazilian and foreign companies. In line

with findings from Resende (2005), Almeida et al. (2006) and Alli and Sauaya (2004), cost,

quality and on-time delivery are by far the most important criteria. Most SMEs said that price

is the main one, but a few believe it is the quality requirement. The Brazilian MNC seems to be

the strictest with on-time delivery, while suppliers of the foreign MNC and the Brazilian

company complained more about a predatory competition on price due to top management

changes that took place in both of them. But this is probably not unique to the steel industry.

Many SMEs surveyed by Alli and Sauaya (2004) also feel subordinated to extremely demanding

and very disloyal large companies, who impose cost reduction on them and squeeze their

profit margins in ways that threaten their survival.

The interviewed CSR manager said that the MNC used to have 7,000 suppliers in its database

in 2003 and now has 21,000, which is a clear indication of bargaining procurement as opposed

to long-term relationship. The former employee of one MNC said that the economic downturn

has enhanced the bargaining attitude, but SMEs said that even before the financial turmoil

they were being pressured. MNCs still have the discourse of supplier base reduction and long-

term relationship with suppliers, but Resende (2005) found that there is not a consensus on

the strategic importance of collaboration in the MNC relationship with their suppliers in Brazil,

and the level of their adoption in practice did not achieve high averages. According to Resende

(2005), the most adopted collaborative practice in Brazil is evaluation of supplier performance,

and Almeida et al. (2006) find the same results in their research, followed by contract

execution and technology transfer.

3.4.2. Collaborative practices

i. Supplier evaluation

In Alli and Sauaya’s (2004) research, 70% of SMEs stated that large companies’ criteria for

supplier evaluation are disclosed in advance. The three MNCs under analysis have evaluation

schemes with on-line management systems that give a grade to suppliers. As it was mentioned





earlier, strategic suppliers and service providers have a more detailed follow-up, but all nine

interviewed SMEs knew the criteria of their evaluation to some extent. However, two suppliers

of the foreign MNC said that they haven’t been getting feedback lately and that the grade

given is not very well explained. The manager of the business association in fact said that

several SMEs (not necessarily suppliers of the steel industry) are not very aware of the

evaluation criteria. Sometimes SMEs make mistakes such as delivering the product before the

arranged time or being only a few hours late and they do not realise that these are serious

faults that can lead to very bad evaluation performance. Understanding these issues is thus of

utmost importance for the sustainability of linkages.

Another indicator of a lack of collaboration is that it is more common in Brazil only to suggest

corrective actions for the solution of problems in the supply chain than to actively engage with

suppliers to help them, according to Resende (2005). Indeed, suppliers of both Brazilian MNCs

under analysis here said that when their grades fall below a certain point, MNCs propose a

plan of action for their improvement. Suppliers of the foreign MNC did not mention this, as

they are not even having feedback on their performance. Interestingly though, three

interviewed SMEs are considered preferential suppliers by each of the three analysed MNCs

and this is a nice evidence of collaboration. In two of them, the quality of their products does

not need to be checked before they are implanted in the mill, while in the Brazilian MNC the

supplier is allowed to offer a price up to 15% more expensive than the competitors and still be

selected.

ii. Supplier development

As for supplier development, Resende (2006) and Almeida et al. (2006) found that foreign

companies are more likely to develop their local suppliers than Brazilian MNCs. SMEs that had

received training from MNCs accounted for 51% of the SMEs surveyed by Almeida et al. (2006)

that already had linkages. However, the assistance offered by MNC is seen by 65.3% of

respondents as a way to support the accomplishment of the business deal objectives, as they

were mainly focused on control of product quality (55.2%) and technical workshops (51.7%).

The interviews support most of these findings, as all SMEs had experienced some kind of

training, mainly directed towards quality. But all SMEs also reported that these initiatives were

becoming less frequent than they used to be, especially in the Brazilian company.

The reduction of supplier development programmes goes against the need for promoting

sustainable linkages. Almeida et al.’s (2006) research revealed that MNCs believe that the main

SMEs limitations are their service level (70%), technological level (70%), and quality (65%). On

the other hand, from the SMEs point of view, they think it is their lack of management

capabilities (41.4%) and access to financing (41.4%) that limits the expansion of linkages:

quality was mentioned by only 13.8% of respondents. These figures show that most of the

problems perceived by MNCs could be overcome with technical assistance and also that there

is a lack of information sharing, another key aspect of collaborative supply chains, since SMEs

believe their quality is good enough, while MNCs do not.





iii. Information sharing

Only 15% of companies by surveyed Resende (2005) invited their suppliers to participate in the

formulation of follow-up criteria, and all MNCs and SMEs interviews endorse this, as none

reported such kind of collaboration. Five SMEs mentioned it would be good to have more

access to information on evaluation, projects under implementation, or MNCs’ organizational

culture. The Brazilian company, for instance, is going through a deep structural change, which

also aims at an international expansion, and their suppliers complained that they are not being

informed about the new priorities.

3.4.3. The influence of globalisation

In Almeida et al.’s (2006) research, 77.3% of the MNCs said that they imported materials

because they are not produced locally, with any significant difference amongst Brazilian and

foreign MNCs in this matter. Resende (2005) also found that foreign companies are not more

likely to select suppliers from their countries of origin. It would be interesting to analyse what

exactly MNCs supply locally, if the products are low or high-value added, and if there are there

any differences in foreign and domestic companies. However, the present research did not

have access to these kinds of data, as there are not available secondary sources on this and the

MNCs under analyses considered this information too strategic for disclosure. The

procurement director interviewee said though that the origin of materials is decided based on

a cost-benefit analysis. For instance, all the coal used in the mills is imported, and this

represents 20% of their supply spending. Brazil is one of the major world suppliers of iron ore,

but it is well-known that several parts and machinery used in the steel industry are indeed

imported, and this was confirmed by the interviewed former employee.

The effect of trade liberalisation on SMEs needs further assessment. Opportunities to upgrade

in the GVC indeed exist, but none of the interviewed SMEs export and it seems that they have

not taken advantage of such benefit. One interviewee said that once the SME had one

opportunity to export, but the MNC entered in the transaction and operated as a trading. The

MNC helped the SME, but by doing this way the SME did not learn the process. The lack of

investment in SMEs’ development is thus one important cause for the lack of upgrading: 85%

of SME respondents of Almeida et al.’s (2006) research said that the technical support they

received was not directed to technology upgrade or production capabilities. But MNCs could

also try to leverage opportunities for local SMEs, as one interviewee reported that the MNC

imported from Argentina some high-value-added parts that local SMEs could have developed.

3.5. The road forward

The literature has called attention to the role of states in overcoming collective action

problems to create SME-MNC linkages, but the interviewed SMEs did not mention this as the





major role for states. Almost all SMEs said that the state could help by lowering down the high

level of taxes and giving easier access to credit, especially for floating capital. Accordingly, the

cost of finance has also been identified by researchers as the main comparative disadvantage

of Brazilian MNCs in the world steel market (Ferraz et al. 2003). Furthermore, Resende (2005)

found that there is not a consensus amongst MNCs on whether states can facilitate

collaborative practices in supply chains, and most of the companies expect states to invest in

issues related to labour force qualification, legislation and infra-structure.

Nevertheless, Resende has interpreted the lack of consensus as an indication that the role of

states is not clear amongst companies. Almeida et al. (2006) analysed the challenges for the

expansion of SME-MNC linkages in Brazil and found a significant absence of public support in

this direction. Since collaboration has a public goods nature, the efforts needed to enhance

sustainable linkages might not be provided voluntarily by MNCs as well. MNCs that do not see

linkages as a component of their CSR policy or as a long-term investment in the improvement

of their supply chain performance will most likely not contribute. Increasing the pressure of

stakeholders as the media, NGOs and civil society institutions might help to highlight the

business case for MNCs, but this study has provided further evidence that MNCs are powerful

actors that might need more adequate mechanisms of incentive and accountability.

It seems that business associations can offer the most relevant mechanisms to improve

linkages. The three most important policies identified by Almeida et al. (2006) are provided by

Sebrae. Interviewees also mentioned that business associations that congregate all companies

at the state-level also have an important role to play, as they might promote information

sharing between MNCs and SMEs. Alli and Sauaya’s (2004) also mentioned that some supplier

development programmes offered by large companies were delivered through their business

associations, and in fact almost all programmes in which interviewed SMEs took part were a

result of some kind of such partnerships. Moreover, two SMEs said that their trade union is

deeply engaged in promoting a metal-mechanic cluster in the state of Minas Gerais to help

SMEs overcome the problems of predatory competition and difficulties in upgrading.





4. CONCLUSIONS AND FINAL REMARKS

This paper has analysed how supply management policies of MNCs are impacting SMEs in

developing countries. The combination of factors related to CSR, collaborative supply chain

management and GVC reveals that a rather complex scenario prevails in procurement

decision-making in MNCs. On the one hand, MNCs are expected both to include local SMEs in

their supply chains and hold responsibility for their suppliers’ compliance with labour,

environmental and social standards. On the other hand, MNCs face fierce competition in the

global market, which is highly determined by the role they play in the GVCs they belong to.

These competitive demands give rise to collaborative practices of supply management, but the

adoption of such arrangements depend on the perception of long-term benefits by the chain

members. Based on available discourse, it would be expected that MNCs would be committed

to integrating and developing their local SME suppliers. However, the case study on the

Brazilian steel industry gives support to a more sceptical view, since the adoption of CSR

criteria for supplier selection has been undermined by the competitive drives of price, quality

and delivery time.

A few findings of the Brazilian study underscore important mechanisms through which MCNs

have affected SMEs with their procurement decisions. First of all, the assessment of SME’s

level of compliance to CSR standards is determined by the strategic importance of the SME as

a supplier, with no significant differences between foreign and domestic MNCs. However, even

in cases where MNCs do not require proof of compliance, SMEs are engaged in achieving

quality standards based on the perspective of moving to more demanding industries, and this

brings CSR-related themes along. The business case for linkages from an MNC standpoint is

more related to supporting local development than to promoting SMEs per se, due to

reputational and indirect benefits. Moreover, some MNCs buy from SMEs not as part of their

CSR policy, but because they offer logistics and competitive benefits. The preference given to

local suppliers, though, creates barriers to outsiders, while the expansion of companies

through mergers and acquisitions has given SMEs access to other markets. Finally, the degree

of collaboration as well as the support for SMEs’ upgrade in GVC has been rather limited.

MNCs have mainly used their power to purchase via bargaining processes, and this has

considerable negative impacts on SMEs’ businesses. These findings give support for the

interpretation of collaboration as a public good, which requires the intervention of

intermediaries such as business associations to facilitate the solution of collective action

problems.

As it has been argued elsewhere (UNCTAD 2007), findings of studies as this paper are industry-

specific and cannot be generalised. The in-depth analysis of the Brazilian steel industry has

proven to be very helpful though to disentangle concomitant forces that are found in the

literature on supply chain from the viewpoint of CSR, management and GVC. A few limitations

of the research must be underlined though. First of all, the research does not assess the

aggregate distributional effects of SMEs’ integration into MNCs’ supply chain, nor does it





provide evidence to MNCs’ broader developmental impact, points severely highlighted by

authors as Wade (2004) and Kaplinsky (2000). Future research could also deepen the analysis

presented here to evaluate the value chain more thoroughly, taking into consideration the

viewpoint of actors different than the direct suppliers and steel MNCs. Important insights can

probably be found with SMEs that have not been able to sell to MNCs, or with companies that

used to be local SMEs and have grown, so as to better understand the barriers and

opportunities of the chain. Other industries must also be scrutinised as a way to uncover more

subtle contradictions found in practice which are not addressed in the literature. Furthermore,

it is important to gather more empirical hard data for an improved assessment of impact in

order to better substantiate policy design of MNCs as well as of public agencies. In general, it is

important to advance the debate on the impacts of business in society, as companies’ activities

and decisions can have great positive as well as negative externalities that are of utmost

significance for development, especially in developing countries.





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