Does international donor funding promote collective action in SMEs?

Does international donor funding promote collective action in SMEs?

Since buyers in international markets are quite sensitive to the conditions in which a product is manufactured, they avoid buying those products whose production chain reeks of labor or environmental exploitation. This adversely affects the international companies that outsource their manufacturing to Small and Medium Enterprise (SMEs) businesses in developing countries. The SMEs and the exports of the country in which they operate also stand to suffer as a result.

To avoid this, international donors fund Corporate Social Responsibility (CSR) initiatives in developing countries. And it makes intuitive sense to fund SMEs that operate in clusters—clusters being SME businesses in the same geographical areas manufacturing similar products. This apparently allows the CSR initiatives to have the greatest impact. But, in reality, does that really happen?

Anjum Fayyaz, Peter Lund-Thomsen, and Adam Lindgreen, in an article published in the Journal of Business Ethics, investigate the influence of international aid on the collective action of SMEs around CSR, especially when those SMEs are working together in clusters. These clusters provide SMEs with the chance to act collectively and cooperate with each other to acquire raw materials, design marketing strategies, and find solutions to common problems that are faced by all members of the cluster.

Using data from their research on the football-manufacturing industrial cluster in Sialkot, the authors find that the internationally-funded CSR initiatives are more likely to succeed in promoting collective action in SMEs when there are four conditions in place.

First, the CSR programs must be socially and environmentally relevant to the SMEs. Second, the international donors must transfer technical knowledge to the SMEs. Third, the execution of the program must be for a sufficient period of time for the initiatives to make actual impact. And fourth, the donors must play a concrete role in linking SME clusters to international markets, so that the SMEs have, among other things, a financial stake in the success of the CSR initiatives.

Conversely, there are four scenarios in which funding by international donors is likely to hinder collective action in SMEs. First, when there is no clear financial benefit for the SMEs to derive out of the CSR initiatives. Second, when the initiatives are executed without sufficient input from the SMEs. Third, when the CSR initiatives are seen as a form of economic or cultural imperialism. And four, when the funding provided for such initiatives is for such a short period of time that no meaningful impact can be expected as a result.



Fayyaz, Anjum, Lund-Thomsen, Peter, & Lindgreen, Adam (2015). Industrial Clusters and CSR in Developing Countries: The Role of International Donor Funding. Journal of Business Ethics.


About the Author

Anjum Fayyaz is Assistant Professor at the Suleman Dawood School of Business, LUMS. He teaches courses in strategic business management, business strategy, entrepreneurship and innovation, monitoring and evaluation and business communication. He also teaches in the Executive Certificate in Agribusiness Management program at the Rausing Executive Development Centre. His research interests include institutional theory, private sector development, strategy, corporate social responsibility, development aid intervention, family businesses, SME clusters and networks development. His research has been published in the Journal of Business Ethics.