Small-world networks can mitigate ESG controversies for multinationals, suggests new study

(Press-News.org) 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.

Globalising supply chains has become a dominant strategy for MNEs. Benefits include lower costs of labour and distribution, and greater scope for innovation.

However, long-distance operations also carry associated risks. 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 labour 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 research, co-authored by Dr Byung-Gak Son, Reader in Supply Chain Management at Bayes, sought 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. It was carried out with academics from Warwick Business School, King’s Business School, and Aalto University.

Using FactSet Supply Chain Relationships (FactSet), Refinitiv ESG, Refinitiv Eikon, and RepRisk, data were collected from 417 Fortune 500 companies with 3,033 firm-year observations across ESG, financial data and network information. The researchers used information on the severity, reach and novelty to calculate average scores for ESG crises between 2010 and 2019. These were measured against corresponding geographical distributions of suppliers.

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.

Despite this, the benefits of global supply chains are often difficult to relinquish. The researchers therefore examined if small-world supply networks – characterised by highly interconnected suppliers with easy global reach to other MNEs – could mitigate the risk.

The effects of small-worldness were calculated using local clustering coefficients and corresponding supply chain path lengths.

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.

Taken together, the studies have implications for global businesses and how they manage behaviours of suppliers in complex and fragmented global supply chains.

Dr Son said:

“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.

"Controlling behaviour 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.

“Our study has strategic implications for MNE supply chain leaders, who must consider compatibility of prospective suppliers with their existing networks. The research also advances our understanding of global supply chain dynamics and sustainability challenges in an increasingly interconnected world.”

‘Small worlds within global supply chains: implications for multinational enterprises’ environmental, social, and governance controversies’ by Dr Sangho Chae, Professor Igor Filatotchev, Dr Seongtae Kim and Dr Byung-Gak Son is published in the Journal of International Business Studies.

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