Multinational enterprises (MNEs) can negate supplier-induced environmental, social and governance (ESG) controversies by setting up “small-world” networks, according to new research co-authored by Bayes Business School.
Globalizing supply chains has become a dominant strategy for MNEs. Benefits include lower costs of labor and distribution, and greater scope for innovation.
However, long-distance operations also carry associated risks.
“Global supply chains offer excellent access to international markets, local skills, resources, and in most cases, cost efficiencies. However, our research shows too much dispersion can reduce an MNE’s ability to monitor the ethical practices and conduct of suppliers,” says co-author Dr. Byung-Gak Son, reader in supply chain management at Bayes Business School. "Controlling behavior through traditional means, such as contracts and supplier audits, is expensive and time-consuming because today's global supply chains are vast and complicated. Small-world supply networks, on the other hand, are community governance mechanisms that often emerge naturally through interactions among suppliers. Examples of how MNEs can implement small-world networks include encouraging direct relationships among suppliers, or selecting supply partners with existing ties to others in their network.”
Key takeaways:
· Contrasting ethical standards of suppliers in different areas of the world can lead to high-profile ESG issues and unwanted publicity from activists and the media. Incidents such as environmental pollution, corruption, child labor and unsatisfactory working conditions, although caused by suppliers, are often perceived by stakeholders as controversies of the MNEs themselves. This has the potential to harm both their own reputations and those of others in their network.
· The purpose of the study is to discover if global dispersion of supply chain networks increased the risk of ESG controversies for MNEs, and if so, how this could be mitigated.
· Research was carried out with academics from Warwick Business School, King’s Business School, and Aalto University.
· Findings indicated a clear and positive link between the geographical dispersion of an MNE’s supply network and its exposure to supplier-induced ESG controversies, suggesting the negative impact that spatial complexity has on information exchange and knowledge sharing.
· Results showed that the presence of small-world networks weakens the positive link between global dispersion of supply chains and supplier-induced ESG controversies. This suggests that MNEs can benefit from such network configurations to help them moderate ESG behaviours of their suppliers.
