What Corporate Social Responsibility Means in China

It is imperative for companies, both local and foreign, to take a cue from their battered counterparts at Foxconn and Honda, and take the necessary action to improve the salary and working conditions of their employees in China

Published: Dec 15, 2010

Defining social responsibility in terms of the role that businesses play in working to solve headline-grabbing problems, such as climate change, is too narrow an understanding of what CSR is.

It is much broader.

Dr. Bala Ramasamy, Professor of Economics at CEIBS
Dr. Bala Ramasamy, Professor of Economics at CEIBS
Paying decent wages to employees, for example, can be considered an important aspect of being socially responsible. Companies that fail to do so should be prepared to face the kind of actions taken by workers at Foxconn, Honda Motor Company and others. Once workers’ concerns reach the level of industrial action, increasing salary levels is no longer seen as a CSR activity, but merely a negotiating tactic.

It is imperative for companies, both local and foreign, to take a cue from their battered counterparts at Foxconn and Honda, and take the necessary action to improve the salary and working conditions of their employees in China.

This is not only the socially responsible thing to do, but it also means keeping their operations in line with the development and growth of the Chinese economy.

There are growing demands, from various stakeholders in China, for increased accountability. In fact, a survey of middle income consumers in Shanghai in 2006 showed a greater expectation of CSR among businesses from Chinese consumers compared to similar consumers in Europe and North America. It is also worth noting that, among young Chinese graduates, the ethical practices of businesses play an important factor in job choice decisions. In a survey of graduating students in Xi’an in 2008, the ethical policy of corporations was considered marginally more important than the starting salary.

As the levels of education and income increase, so too will the demands – from consumers and the workforce – for companies to be more socially responsible.

In January 2009, the Shanghai Municipal Local Standards on CSR was introduced to promote corporate social responsibility among companies in Shanghai. In 2005, China National Textile and Apparel Council (CNTAC) introduced a Code of Conduct (CSC9000T) for the garment industry in China. These are both steps in the right direction. Such efforts by government agencies further demonstrate the public sector’s involvement in the promotion of the cause.


Competitive Edge
Japan in the 1960s; Taiwan, Hong Kong, South Korea and Singapore in the 1970s; and Malaysia in the 1980s, all built their competitive advantage by promoting their low-cost labour. As these countries and territories developed, the structure of their respective economies had to be re-configured, as labour costs increased.

China will be no different.

With the rapid pace of development over the last two decades, the demands made on China’s resources are immense. Maintaining a low-cost advantage is neither possible nor advisable. It is not possible because there will always be another country that can offer a cheaper alternative. It is not advisable because it results in a larger disparity between income classes, which in most cases results in social instability.

Already, in the garment industry, coastal China is quickly losing its cheap labour competitiveness to countries like Indonesia and Bangladesh. With the strengthening of the yuan, low cost advantage is not an edge that China can rely on in the long term.

Like the tiger economies of the past, China too will need to restructure its industries so that competitive advantage will arise out of its higher-end manufacturing and services sectors, as well as improved managerial standards.

Increasing trust
The model that Chinese industries have been following in the past is one that relies on raising productivity by increasing the amount of capital per worker. The high rate of investments as a proportion of GDP (in excess of 40%) is evidence of this.

Unfortunately, physical capital is subject to diminishing returns. In other words, productivity increases cannot continue by increasing the number of machines per worker. Both the quality of the machines, and the worker, have to be improved to sustain the growth in productivity. While the quality of machines can be increased through better technology, improving the quality of the worker requires better and innovative management skills. In this regard, increasing the social capital of employees within a business unit is an effective strategy.

By raising the level of trust at various levels of the enterprise, long term productivity increases can be realized. There are some simple ways of increasing trust: treating employees with dignity is a good place to start.

Based on the history of economic development in other East Asian economies, the transformation of China’s economy will take place. Sensible enterprises will realize that a similar transformation needs to take place at the firm level, too. If not, they too will be swept away by the current of change.

Dealing with the demands of a new labour force, therefore, is not only a socially responsible act, but a business imperative.

Dr. Bala Ramasamy is Professor of Economics at the China Europe International Business School (CEIBS).

[Reprinted with permission from The China Europe International Business School.]

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