Role of Stakeholders in Socially Responsible Business Practices: A Review on Indian SME Clusters.

AuthorLaha, Arindam
PositionSmall and medium-sized enterprises


The concept of 'socially responsible business practices' has been sought to be explained by the economists as sacrificing profits in the social interest (Elhauge, 2005; Graff Ziven & Small, 2005; Portney, 2005; Reinhardt, 2005). This concept has originated from the issue of negative externality arising due to differences in social marginal cost and the private marginal cost. Consequently, the firms are supposed to take some responsibility beyond its legal constraints. This economic argument of CSR by business through sacrificing profits in the public interest is found to have been criticized by several researchers (Dodd, 1932; Berle, 1932) mainly on the basis of its legal justification. Friedman's (1970) position in this respect draws upon the Smithian proposition, which believes that the business eventually benefits the common good, i.e. it serves both its own interest and those of society at best (Lantos, 2011). Therefore, the concept of 'social responsibility of business' loses analytical rigor in the framework of Principal-Agent problem in shareholder primacy model. As per this model, allocation of resources and designing of activities to increase in profit has been perceived as the sole business responsibility of the firm. However, a departure from shareholder primacy model to team-production model, operational discretion model, and finally to stakeholders' model ('a progressive view') provides room for sacrificing profit for the social interest (Reinhardt & Stavins, 2010). Arrow (1973) also has tried to integrate CSR issues from the perspectives of management of negative externality, or market failure in a broad sense. Even before Arrow (1973), some economists have considered externality as a concept for understanding CSR (Arcelus & Schaefer, 1982; Baron, 1995; Crouch, 2006).

These arguments in favor of CSR seem to be not applicable in the case of SMEs which are mainly heterogeneous and informal in nature (Spence & Rutherfoord, 2003; Jenkins, 2004; Southwell, 2004). The absence of separation between ownership and management, probably has prompted the researchers to visualize an implied link to entrepreneurship and entrepreneurial activity (Fassin, 2008; Fisher, 2004) and consequently to suggest the term Entrepreneurial Social Responsibility (ESR) in place of Corporate Social Responsibility (Sachdeva & Panfil, 2008). The literature on business responsibility is skewed in favor of the large corporate sector because of the premise that 'SMEs lack resources to resort to socially relevant pursuits' (Nair & Sodhi, 2012).

In fact, SMEs together act as an important player in the supply chain of large organizations. Large organizations pass on the burden to the SMEs to hide information on their sustainability impacts. The general perception about the SMEs is that they are promoted by the large firms to avoid payment of taxes as well as to ensure exploitation of labor besides shrugging off the responsibilities of maintaining tolerable working conditions, creating pollution to the environment and applying production methods that jeopardize workers' health (Sachdeva & Panfil, 2008; Jain, 2014). Supply chain sustainability has been increasingly viewed as a key generator of business value for the large firms which depend largely upon various upstream and downstream supplies related to their operations. Essentially therefore, it has become imperative for the supply chain to create, protect and grow long term environmental, social and economic value for all stakeholders (BSR, 2010). It is no longer perceived as a cost center of the large corporate, instead it is found to have considerable impact on value creation through leveraging the pricing power, cost savings, market share and risk premium by managing the drivers of business value namely risk management, enhancement of efficiencies of the factor inputs, creation of sustainable products and development of a culture of responsibility (BSR, 2010).

Although, SMEs play a pivotal role in economic development by creating huge employment opportunities (de Kok et al, 2013), the quality of employment in SMEs is found to be poor especially in the context of European countries (Burchell et al, 2013). However, review of literature suggests that there is dearth of empirical evidence in this regard in the context of developing economies (ILO, 2015). Baig et al (2020), in the context of B2B textile companies of Pakistan have identified sectoral-economic, managerial, and supplier hindrance as barriers to the practice of sustainability by the members of the supply chain. Pereseina et al (2014) have focused on the challenges and conflicts in achieving supply chain sustainability in the context of heavy-automobile business of Sweden and China. According to their study two types of challenges, organizational and regulatory, appear to be the main impediments in achieving the targets of sustainability. In so far as the conflicts are concerned, the authors report its presence across stakeholders in general and between environmental and economic issues, in particular. The systematic literature review by Rebecca et al (2020) on the emerging economies covering 56 publications since 2010 brings out that most of the sample studies relate to India (16), Brazil (9), China (5) and Bangladesh (5). 50% of these studies have addressed all three dimensions -environmental, social and economic issues- simultaneously and the remaining 50% studies have addressed various combinations of these dimensions. However, evidence of social sustainability practices by the supply chain partners operating in these economies is very few.

In Indian context, Mani et al (2016) have adopted an integrated approach to include various stakeholders concerning the manufacturing sector of the country. They have proposed a concept named supply chain social sustainability (SCSS) that seeks to address the social issues within the overall (upstream and downstream) supply chain. SCSS consists of six dimensions namely equity, safety, health and welfare, philanthropy, ethics and human rights which together cover twenty measures of social sustainability. Also in the same country context, a few studies regarding the nature of the human resource practices of the SMEs are available (Kumar & Reddy, 2019; Agarwal & Jha, 2015; Chaudhary & Singh, 2014; Saini & Budhwar, 2008), but literature is scanty in respect of the quality of employment (SDG-8) of the workers in the SMEs in industrial clusters. Whatever little evidence at individual enterprise level we have, it becomes apparent that ESR activities of these enterprises are driven mainly by the personal interests of promoters (Raynard & Forstater, 2002; Nair & Sodhi, 2012).

One important finding as has been reported by Silvestre (2015) is that as a consequence to the existence of highly turbulent business environments and institutional voids in the emerging economies, supply chain sustainability program faces additional barriers which, in turn, add high degree of complexity and uncertainty to fulfil the targets of sustainable development goals. In this context the role of collaboration seems to be very much effective. In spite of contrary (presence of risk of corruption) evidence (Silvestre et al, 2018), collaboration in supply chain seems to be very effective in achieving targets of sustainability (de Vargas Mores et al, 2018). In this context, the role of SME clusters may be examined in order to identify the benefits in terms of its contribution towards the fulfilment of the targets of SDGs.

SME Clusters & the SDGs

In a changing role of business in society, SMEs need to prove their due diligence towards society, environment and economy while maintaining their commercial aspect (SDG,12; SDG,13). A cursory view of such dimensions and indicators of business responsibility are enumerated in Table 1.

Unlike the corporate sector, studies on the approach of SMEs in shouldering business responsibility are relatively scanty in the existing literature, especially in the context of developing countries (Murali & Banerjee, 2011; Nair & Sodhi, 2012; Lund-Thomsen, 2016). Alternatively, SMEs in a specific geographical cluster can pool their resources to create a sizable fund for undertaking collaborative business practices in a responsible way. The potential contribution of clusters to promoting business social responsibility in general, and fostering economically, socially, and environmentally responsible business practices, in particular, remains relatively unexplored.

Addressing common socio-economic and environmental concerns may be duly accomplished by the SME clusters. Collective action can reduce the cost of action through economies of scale, overcome growth constraints, and compete in distant markets (Nadvi, 1999; Schmitz & Nadvi, 1999; Nair & Sodhi, 2012; Lund-Thomsen & Pillay, 2012). Some other advantages of cluster approach in business social responsibility are presented in Table 2, which can integrate economic, social or environmental concerns in the business operations.

In the existing literature, available systematic reviews (specifically meta-analysis) rest on the relationship between CSR and corporate firm performance (Allouche & Laroche, 2005; Wang et al, 2015; Jose & Patrice, NA; Orlitzky et al, 2003; Gallardo-Vazquez et al, 2019; Silva et al, 2018). However, some studies identified the factors that are taken importantly by the respective units in maintaining socio-economic-ecological responsibilities (Hopkins, 1999; Sachdeva, 2006; Vives, 2006). These respective units are known as stakeholders 'who can affect or are affected...

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