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Labor, Risk and Uncertainty in Global Supply Networks –
Exploratory Insights
Jörg Sydow
Management Department
School of Business & Economics
Freie Universität Berlin
Boltzmannstr. 20, 14195 Berlin, Germany
joerg.sydow@fu-berlin.de
&
Stephen J. Frenkel
Australian School of Business,
University of New South Wales,
Sydney NSW 2052, Australia
s.frenkel@unsw.edu.au
March 13, 2013
Abstract
Arising from widespread outsourcing and, in particular, offshoring, goods and services are
increasingly provided by supply networks that rely on global logistic systems. While the risks and
uncertainties involved in this strategy have been widely acknowledged in the literature on inter-
organizational networks and supply chain management, labor conditions and labor relations – and
related human resource management issues – have thus far been neglected. Starting from a perspective
that takes into consideration that global supply networks are not only confronted with calculable risks
but also genuine uncertainties, we explore the conditions under which labor may constitute a source as
well as a means for dealing with risk and uncertainty. The study is based on a review of the relevant
inter-organizational network and supply chain management literature and is informed by an
investigation of International Framework Agreements (IFAs) in ten European corporations and their
supply networks. IFAs – in addition to unilateral codes of conduct – could be used to detect and cope
with labor-related risk and uncertainties. However, our findings reveal that this is not the case. This
leads to some tentative theoretical conclusions and implications for dealing with risk and uncertainty
in global supply networks.
Keywords: Interorganizational Networks; Global Production Networks; Supply Chains; Supply Chain
Risks Management; Employer-Employee Issues; Labor Relations; Risk; Uncertainty.
Forthcoming in: Journal of Business Logistics 34 (3) 2013.
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INTRODUCTION
There was no need to wait for the financial crisis or the problems that Foxconn/Apple and
Toyota faced in China in 2010 and the protests following the burning of apparel factories in
Bangladesh in 2012 to acknowledge the vulnerability of global production and supply
networks. A much earlier and often reported event in this respect was a strike at a company
supplying brakes to General Motors (GM) that idled workers at 26 of that company’s
assembly plants for 18 days in 1996 and caused a reduction of US $ 900 million in quarterly
earnings; and this although GM already then opted for a dual sourcing strategy that allowed
some buffering in supply chains for catastrophic supply disruption (Meena et al. 2011).
The abundant literature on risk and uncertainty in supply chains (e.g., Waters 2007) or, more
generally, inter-organizational networks (e.g., Beckman et al. 2004) has contributed
significantly to our understanding of this problem. For example, some studies have tried to
clarify how risk and uncertainty are perceived, interpreted and eventually managed and what
this may imply for a focal firm’s operating performance and shareholder value (cf. Zsidisin
and Wagner 2010). At the same time, sub-disciplines like “supply chain risk management”
(e.g., Paulsson 2004), more recently extended to “global supply chain risk management” (e.g.,
Manuj and Mentzer 2008a, b) have developed, focusing for understandable reasons more on
calculable risks than on fundamental uncertainty. This is also true for the first handbooks that
helped to assess and manage supply chain risks (e.g., Zsidisin and Ritchie 2008).
Nevertheless, this research provides not only important insights into potential sources of risk
and uncertainty but also some useful distinctions such as demand versus supply side risks,
operational versus catastrophic risks, and between cause- and effect-oriented approaches to
risk management (Wagner and Bode 2008).
A noteworthy feature of this literature is that it largely neglects the role of labor as a potential
source of risk and uncertainty or as a potential means to cope with them. This is surprising
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given that labor conditions and labor relations, at least for the more relational forms of global
production and supply networks (Golicic and Mentzer 2005; Rinehart et al. 2004; Nyaga and
Whipple 2011), are essential for smooth functioning of inter-organizational systems where
risk and uncertainty surrounding labor issues can neither be eliminated nor managed by
simply switching suppliers of goods or services in a market-like fashion. The neglect of labor
in the research on supply chain risks management (SCRM) or uncertainty in networked
constellations of organizations is particularly surprising because the availability of cheap
and/or qualified labor is an important driver of investment/divestment and
outsourcing/offshoring decisions (e.g. Cooke 2001; Lewin et al., 2006). Consequently, the
organization of production in global supply chains or networks makes such practices an
important (additional) source of risk and uncertainty and a relevant ‘object’ for monitoring
and control.
In this paper we aim to explore the dual role of labor as a source of risk and uncertainty and as
problems means of coping with associated in global supply chains/networks. As a first step,
we define global supply chains or networks as inter-organizational arrangements of
contractors and subcontractors that span several continents whose products and services
contribute to the final product or service of a focal firm. Starting from a perspective that
strictly differentiates between risk and uncertainty (Knight 1921), also with regard to such
arrangements, we argue for a view that regards these as endpoints of a continuum. We then
explore the conditions under which labor may constitute a major source of supply risk or
uncertainty and inquire into the extent to which labor and labor-related issues feature as major
supply problems for transnational corporations’ (TNCs). More precisely, our guiding research
question comprises two elements: First, under what conditions is labor considered a source of
risk or uncertainty? Second, how should firms organize global supply networks to deal with
labor issues?
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Since this is a first attempt that we are aware of to address the issue of labor-related risks and
uncertainties in global supply, it is not possible to build on prior theoretical or empirical
research. Nevertheless, by referring to a unique data set on the conclusion and implementation
of International Framework Agreements (IFAs), we are able to explore some practices that
may have been developed by management, perhaps with unions and other organizations, to
detect and cope with labor-related risk and uncertainty problems. Such agreements are
negotiated and signed by TNCs and global union federations’ (GUFs) in order to afford
mutual recognition and to secure minimum labor standards (cf. Hammer 2005; Fichter et al.
2011). Involving management and labor, these bilateral agreements are potentially more
effective than unilateral codes of conduct because they are based on a collaborative, problem-
solving approach that may be uniquely placed to manage risk and uncertainty across global
supply chains. Our investigation of IFAs, especially TNC managements’ and GUFs’ motives
in concluding such agreements, indicates their potential to control, or at least mitigate risks
associated with quality and on-time delivery of inputs into final goods and services. These
agreements could potentially represent an approach to deal with labor-related related risk and
uncertainty, especially when the tool is embedded in a bundle of suitable human resource
management (HRM) and corporate social responsibility (CSR) practices comprising a
commitment HRM system. However, thus far labor-related SCRM has ignored the potential
of this instrument. We discuss possible reasons for this and conclude with implications for
management practice and research. Towards this end we formulate three propositions. The
first addresses the potential of IFAs to deal with labor-related risk and uncertainty in global
supply networks, while the second concerns the present over-reliance on market rather than
relational control, exchanging labor-related risks for additional selection uncertainty. The
third proposition claims a general lack of reflexivity regarding these issues, on the part of
management and labor. But before proceeding we take a closer look at risk and uncertainty in
global supply networks.
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RISK AND UNCERTAINTY IN GLOBAL SUPPLY NETWORKS
Stimulated by the 9/11 catastrophe, risk and uncertainty have received considerable attention
in the two academic discourses relevant to our research question. The management literature
on inter-organizational networks focuses in more or less abstract categories on risk and
uncertainty in such inter-organizational arrangements (e.g., Beckman et al. 2004; Gereffi et al.
2005; Sydow et al. 2013); while under the label of SCRM supply chain operations analysts
(e.g., Brindley 2004; Waters 2007; Narasimhan and Talluri 2009) adopt a more managerial
and increasingly global perspective to address practical problems. This growing interest in
both streams of research mirrors the development of complex webs of supply arrangements –
where competitor firms may sometimes use the same suppliers and indeed the same parts –
leading to competitive and collaborative overlapping inter-dependencies among firms in the
network.
However, as shown below, much of this research fails to address genuine uncertainty in these
arrangements and is silent on the sources of these uncertainties, especially regarding labor
both as a source of risk or uncertainty and as a remedial ‘instrument’. This also applies to the
literature on inter-organizational networks (Sydow et al., 2013). Before summarizing the
insights from these two streams of research, we elaborate further on the meaning of global
supply networks and demonstrate the neglect of labor conditions and labor relations in this
literature.
Global Supply Networks and the Neglect of Labor
The notion of networks is widely used in the management literature and increasingly also in
research on supply chains and logistics management. It represents an analytical perspective or
is conceptualized as a governance structure of economic activities (Grabher and Powell 2004).
In the latter case, a network is typically viewed as a social system in which the activities of at
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least three formally independent organizations, such as contractors and subcontractors, are
coordinated repeatedly in time-space. In other words, there is a reflexively agreed-upon inter-
organizational division of labor and cooperation among the organizations that comprise the
network (Sydow and Windeler 1998; Provan and Kenis 2008). More often than not this is
under the guidance of a lead firm like Apple or H&M (e.g. Jarillo 1988; Müller-Seitz 2012).
Usually network organizations are connected to one another, or at least to the lead firm, with
the help of bi- or multilateral contracts and informal contacts (Berends et al. 2011). Thus,
from a governance perspective, global supply networks comprise organizations from different
countries that seek economic advantage from the international division of labor (in particular
by means of offshoring) and, because of cultural and/or institutional differences, require
additional coordination efforts (e.g., Ernst and Kim 2002; Henderson et al. 2002; Bair 2008).
Research on global supply networks rarely refers to labor issues. This is not only true for the
discourse on SC(R)M that at least from time to time mentions labor and labor-related issues as
“drivers” of risk or uncertainty (e.g., Jüttner 2005 and below) but also for research on inter-
organizational networks more generally (see Borgatti and Foster 2003 or Provan et al. 2007
for recent reviews). This is surprising because labor conditions and labor relations including
pay, training and opportunities for participation in decision-making, are strongly affected by
this organizational form where negative feedback may endanger its functioning (see,
Marchington et al. 2005 and Flecker and Meil 2010). The related discourse on “global
production networks” (mainly among economic geographers, sociologists and political
scientists) at least pays some attention to labor, though mainly either as victims of
globalization or as sources of value creation and/or resistance (e.g., Frenkel 2001; Coe et al.
2008; Bair 2008; Levy 2008; Rainnie et al. 2011; Selwyn 2012; Coe and Hess 2013). .
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Risk and Uncertainty in Inter-organizational Networks and Supply Chain Management
Unlike the subject of labor, both research streams mentioned above take risk and uncertainty
seriously although they do not distinguish between these concepts. This is a weakness
because, as we explain below, risk and uncertainty may require different management
approaches. Uncertainty is the inability of an (individual or collective) actor to predict or
anticipate the future. Following Knight (1921), uncertainty is unfathomable and unpredictable
and is therefore not insurable (cf. Froud 2003: 572). In the extreme, dealing with uncertainty
includes managing the unexpected (Weick and Sutcliffe 2007). By contrast, risk is concerned
with the expected (the “known unknown”) and often associated with potential losses. Risk, in
stark contrast to uncertainty – the “unknown unknown” – is assumed to be calculable in terms
of probabilities and as such is often incorporated into cost benefit or net present value
calculations. In this respect, some, but not all uncertainty, can effectively become “organized”
(Power 2007) and thereby translated by management into ‘risks’. As such, it is assumed,
rightly or wrongly, to be manageable. Rather than viewing risk and uncertainty as distinct
concepts, each can be regarded as endpoints on a continuum of calculability, especially
because the literatures on interorganizational networks and SCRM treat the notion of risk in a
broader sense to include some uncertainty (see below and, more generally, Renn 2008).
There is considerable research on risk and uncertainty in inter-organizational networks (Das
and Teng 1996, 2001; Beckman et al. 2004; Huxham and Vangen 2000; cf. Sydow et al. 2013
for a recent review). Useful distinctions introduced by this literature include those between
(external) general market uncertainty and (intra-network) partner uncertainty (Mitsuhashi
(2002) and between the broadening or deepening of existing network relations in order to deal
with uncertainty (Beckman et al. 2004). In a related vein, alliance research (a section of inter-
organizational analysis) distinguishes between performance and relational risks (Das and
Teng 1996, 2001). From a managerial perspective on alliances/networks Mitsuhashi (2002)
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investigated what he called ‘selection uncertainty’ – defined “as ambiguity prior to alliance
formation about which partner will serve a firm’s interests best” (p. 114) and concerning three
sources of uncertainty: (1) technological competence of the prospective partners, (2) their
expected behavior and (3) potential commercial success of the new arrangements. While other
authors have also studied the role of risk and uncertainty for partner selection (e.g., Podolny
1994; Gulati and Gargiulo 1999) and even the general uncertainties surrounding network
membership (Huxham and Vangen 2000), the conceptual distinction between risk and
uncertainty is rarely made, and as in Mitsuhashi’s study, labor as a source of risk or
uncertainty goes unmentioned.
A similar point can be made regarding research on supply chain (risk) management (SCRM)
(e.g., Brindley 2004; Peck 2005, 2007; Waters 2007; Ritchie and Brindley 2007; Zsidisin and
Ritchie 2008; Narasimhan and Talluri 2009). Starting with Harland (1996), this more applied
research stream has moved from a linear, static and dyadic understanding of supply chains to
a more complex and dynamic conception of supply networks. At about the same time,
research on SC(R)M overcame its rather narrow focus on modeling and simulating calculable
risks (which more or less paralleled statistical process control) and instead incorporated some
uncertainty into its analyses (see Paulsson 2004 as well as Manuj and Mentzer 2008a for
recent reviews). Nevertheless, the assumption that uncertainty can be “organized” and
translated into risks (e.g. with the help of probability estimates based upon simulations)
remains central to the SCRM practice (e.g., Paulsson 2004; Jüttner 2005; Kleindorfer and
Saad 2005; Trkman and McCormack 2009). However, real uncertainty (at the end of the
calculability continuum) remains leaving individual and organizational actors in supply chains
vulnerable to significant losses.
SCRM usefully distinguishes between a cause-oriented practice aiming at risk avoidance and
an effect-oriented practice aimed at mitigating the effects of supply chain disruption (Wagner
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and Bode 2008). Surprisingly, labor is again hardly mentioned in the SCRM literature as a
source of risk or uncertainty. Only from time to time does this literature refer to examples like
disruptions following strikes or accidents, work-to-rule campaigns, high turnover and
absenteeism, or lack of skill, motivation and/or commitment (with resulting supply shortages,
quality problems or low productivity) either in supplier firms or logistics providers or in the
process of inter-organizational collaboration (e.g., Peck 2005; Chopra and Sodhi 2004; Sheffi
and Rice 2005; Sawhney 2006; Waters 2007: 13-14; Ryu et al. 2009). A major reason for
neglecting this potential source of risk and uncertainty may be a concentration by supply
chain researchers on demand rather than supply or process risks/uncertainties (cf. Peidro et al.
2009). A second reason is the – often implicit, little relational – assumption that most labor
issues can be relatively easily addressed by either close monitoring and rectification
strategies, or ultimately by terminating and renegotiating supplier contracts, and if necessary,
switching suppliers.
A rare exception is Jiang et al. (2009) who highlight the severe adverse consequences to
global supply networks of job dissatisfaction and turnover among Chinese migrant workers.
Productivity, product quality, supply delays and shortages constitute operational risks,
particularly in a just-in-time environment while reputational risks arise when firms receive
media attention for alleged violation of labor standards. For reasons advanced below, there is
need for more SCRM research on labor as a source of risk and/or uncertainty in global supply
networks.
LABOR AS A SOURCE OF RISK AND UNCERTAINTY IN
GLOBAL SUPPLY NETWORKS
In a fundamental way labor has been and continues to be a major source of risk and
uncertainty in the production or value creation process (March and Simon 1958; Braverman
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1974; Crozier and Friedberg 1980). This is so for four main reasons. First, because product
markets are usually competitive, extant employment, pay and conditions cannot be
guaranteed. Failure to maintain, let alone improve employment contracts will be challenged
by workers on grounds of contractual violation. In response, workers may withdraw effort,
challenge management authority or quit. These responses will adversely affect firm
performance. A second reason concerns distributive justice: the distribution of net revenues is
a matter of continual contestation between employees and management. Third, management’s
treatment of workers in terms of procedures and/or social relationships may be perceived
negatively giving rise to grievances concerning procedural and interactional justice. A fourth
reason, which may lead to uncertainty rather than risk, is a change in the external environment
such as a major technological change (e.g. from hot letterpress printing to cold computer
production), the sudden unavailability of critical raw materials (e.g. rare earths), or political
change (e.g. the collapse of communism in East Germany in 1989 and the Arab Spring of
2012). The chief means of mitigating risk arising from labor is through sophisticated HRM
systems that may assume forms ranging from relatively coercive high compliance to high
commitment systems (see Khatri et al. 2006). Employer groups also lobby governments for
favorable policy outcomes intended to provide a more predictable political-economic
environment.
Labor, Risk, Uncertainty and Governance
Because inter-organizational global networks typically comprise firms in different sub-sectors
across different countries labor-related risk and uncertainty are magnified and at the same
time not subject to control by senior management fiat. On the other hand, HR systems at the
firm level are complemented by ‘network control’ based on relatively stable and cooperative
inter-organizational relationships that provide normative and ultimately coercive pressure on
firms to meet their contractual obligations. This provides firms in the network with a strong
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incentive to ensure stable labor relations. Although an individual firm may fail to meet market
tests (Farmer, 1989) and so be threatened with elimination from the network, overall
collaboration continues through support from the lead firm (Frenkel and Scott, 2002) or
reselection of suppliers based on past experience (see Sako and Helper 1998; Rinehardt et al.
2004). This “relationship magnitude” (Golicic and Mentzer 2005) on a strategic level is
sometimes complemented on an operational level by “interorganizational citizenship
behavior” (Autry et al. 2008), where extra efforts are made by boundary spanning employees
of one firm in support of another. Such contributions maintain organizational ties, improve
individual firm performance and promote the effective functioning of the network. However,
they cannot be relied upon to guarantee orderly, cooperative labor relations in all firms
throughout the network.
Finally, two points are worth noting regarding labor and its implications for analyzing risk
and uncertainty across global supply networks. First, there is the distinction between direct
and indirect labor action. And second, there is the possibility of that position on the
continuum of risk and uncertainty changes over time according to contextual changes.
Regarding the first point, it is useful to distinguish between the possibility of disruption to
product supply and/or quality arising from direct labor relations, i.e. relations between
management and employees within firms, and disruption arising from indirect labor relations.
This refers to the role played by workers’ formal organizations e.g. trade unions or informal
workplace groups. These organizations may develop strategies to mobilize their constituents.
Such strategies may either serve to create greater risk (e.g. via strikes) or less risk (e.g.
through collective agreements). Regarding the second point, labor in particular countries that
provide inputs to a product or service may by relatively strike-free, making it possible to
estimate risk of production losses arising from this source across the network. However, if
links between unions develop across nations via global unions or GUFs and this leads to
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demands and strike threats, or if transnational NGOs campaign in some of the source
countries and industries for improved labor standards the probability of operational losses and
reputational damage becomes much more difficult to estimate.
One way to reduce this tendency towards uncertainty is to develop an International
Framework Agreement (IFA) with the GUF representing various relevant national unions.
Such an agreement provides a basis for negotiating changes to employment contracts and
limiting strikes across the network. Alternatively, in the case of an NGO campaign, firms in
the network may invite examination and certification by an international NGO specializing in
labor standard evaluation.1 Ultimately it is the relationship between management and labor
within the network firms that determines the level of risk or uncertainty. That this is
conditioned by national legislation and political-economic conditions is widely recognized
when speaking about “country risks”, although as we have already noted, political change can
be comprise a fundamental uncertainty. Thus, with regard to the countries included in our
study of IFAs (see below), service providers like Business Monitor International have usually
deemed Turkey and the United States to be much higher risk than Brazil and India.
INTERNATIONAL FRAMEWORK AGREEMENTS AS AN INSTRUMENT
FOR DEALING WITH RISK AND UNCERTAINTY
IN GLOBAL SUPPLY NETWORKS?
By the end of 2012 85 TNCs had signed an IFA with a GUF. Although there are now
corporations on all continents that have concluded an agreement, by far most of them are
headquartered in Europe. As a joint statement of commitment, an IFA is intended to secure
and transfer organizational practices which ensure compliance with basic labor standards, in
1 In response to the publicity of its labor-related problems with Foxconn, Apple joint the Fair Labor Association which offers
corporations, including lead firms of global supply networks, independent audits of labor conditions at supplier sites (Fair
Labor Association 2012).
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particular with the core labour standards established by the ILO's (1998) Declaration on
Fundamental Principles and Rights at Work.2 Towards this end, most IFAs do not only cite
these standards but also contain a formal conflict resolution mechanism; however, only few
include terms and conditions that exceed minimum labor standards. Importantly, and very
much in contrast to unilateral CSR strategies, no matter whether they are based on comparable
standards like the Global Compact or ISO 26000 or whether or not they are considered as
formal (legally enforceable) contracts or non-legally binding agreements by both parties,
these are binding outcomes of bilateral negotiations. Are these agreements, like some CSR
instruments (e.g., Frenkel 2001; Waddock 2008) tools for coping with risk or even uncertainty
in global production networks?
Data Collection and Analysis
Our analysis of the motives behind and, to some extent, implementation of IFAs draws on
both primary and secondary sources. A sample of 73 agreements (out of the now 85) together
with interviews with management and union representatives enabled us to address the above-
mentioned questions. In a comprehensive content analysis of these agreements we identified
125 substantive and procedural IFA characteristics which were divided into four general
categories: actors identified by signatures; substance distinguished by ILO standards and
itemized topics; procedures defined by monitoring bodies and implementation measures; and
scope which referred to the participating subsidiaries and suppliers. Value statements in the
agreement preambles were also reviewed.
Between November 2008 and March 2011 we conducted semi-structured interviews with key
actors from TNCs (HR management, works councils) and from unions (GUFs, home-country
trade unions) at the HQ level, i.e. with actors directly involved in initiating and negotiating an
2 The core labor standards refer to the prohibition of child labor (ILO co. 138 and 182) and forced labor (ILO co. 29 and 105),
to non-discrimination and equal pay (ILO co. 100 and 111), and to freedom of association and collective bargaining (ILO co.
87 and 98).
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IFA. In addition we conducted interviews in our four host countries, again including local
actors from both sides. The average duration of these interviews, which contained questions
on the motivation as well as the implementation of IFAs, was 45 minutes. With few
exceptions, the interviews were recorded and transcribed verbatim. Furthermore, we
completed some two dozen background interviews of similar length with representatives from
civil society organizations, employer associations, and academic experts on national industrial
relations systems, all of whom are indirectly engaged in and familiar with IFA-related
processes.
In order to better understand whether organizational and institutional environments facilitated
or deterred implementation of IFAs and especially conflict resolution as formally specified in
these agreements, we collected and reviewed basic data on TNCs and their operations
(including CSR reports) and on GUFs. These data included the institutional environments of
home and host countries. Finally, members of the research team participated in several
workshops, discussions, and meetings in which union and employee representatives, and
managers, either engaged in IFA-related activities or reflected on their approach to IFAs.
Based on 45 and 57 of these interviews in the home and four selected host countries
respectively (see Table 1 for details), we conducted a comparative study of ten cases with the
aim of understanding such agreements including difficulties of transferring associated
practices from headquarters to subsidiaries and, possibly, even suppliers (Fichter et al. 2011).
The case studies, summarized in Table 1, were sampled from the 85 corporations that had
signed an IFA by the end of 2012. In order to control for broad institutional effects, we
focused exclusively on TNCs headquartered in Europe that comprise 85 percent of the firms
with an IFA. In addition, two further criteria for inclusion were that corporations should have
signed an agreement with one of the four dominant GUFs: the International Metalworkers’
Federation (IMF: 19 agreements); the International Federation of Chemical, Energy, Mine and
15
General Workers’ Unions (ICEM: 13); the Building and Wood Workers' International (BWI:
15); and Union Network International (UNI: 28); and the corporations should have
subsidiaries in all four countries mentioned earlier. The rationale for the latter criterion is that
these are significant economies with either problematic labor conditions (Brazil, India and
Turkey) and/or contested labor relations regimes (e.g. India and the US). In all ten cases we
were able to interview management and labor representatives; in almost all cases also in the
four countries under scrutiny.
PLEASE INSERT TABLE 1 ABOUT HERE
In this particular study we were mainly interested in the motivation of TNC management and
GUF representatives to negotiate and sign an IFA. Semi-structured interviews followed a
guideline that started with gathering some background data and then turned to motivation and
implementation issues. No attempt was made to explicitly encourage responses regarding any
particular motive, including SCRM or dealing with uncertainty with regard to labor and labor
relations more generally. The reconstruction of the motives (and sequences of events or
actions in the process) allows insights into the process unattainable by a detailed review of
IFA documents alone. In particular, interviews with management and labor representatives in
the ten cases enabled us to capture the possibly different perspectives of the actors involved.
Multiple sources of information, including earlier studies of IFAs (e.g., Hammer 2005; Davies
et al. 2011; Papadakis 2011a; Niforou 2012), also allowed data analysis triangulation (Jick
1979). Moreover, we received valuable feedback on the results of our case study research
from representatives of management and unions in workshops organized in the four afore-
mentioned countries.
Complex Motives, Difficult Implementation
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Two motives dominate unions’ desire to sign IFAs: (1) securing minimum pay and acceptable
working conditions for employees, in particular union members, and (2) institutionalizing a
formal conflict resolution process as a means to obtaining union recognition, in particular by
GUFs. By contrast, the TNCs’ management motives are more complex. These have been
recently categorized as coercive, anticipative and consequential (reflecting societal pressure)
(Papadakis 2011b). This three-fold classification of motives proved useful in analyzing our
interview data: (1) Coercive motives concern regulatory obligations (like the EU directive on
European Works Councils that in several cases have cosigned IFAs) as well as cultural
expectations, notably in the home country of the TNC (internal to the company as well as the
wider industrial relations culture in the country). With regard to the latter, the role of the lead
firm in a buyer- vs. producer-driven supply chains (cf. Gereffi et al. 2005) seems to matter
more. In the former case, the pressure to comply appears to be stronger, not least because of
the danger of losing reputation and brand value. TNCs’ management motive, then, is to
comply with these demands and, thereby gain, retain or defend organizational legitimacy. For
instance, several manager interviewees emphasized that they wanted to demonstrate that their
companies were responsible and attractive employers. (2) Anticipatory motives refer to
ensuring enterprise stability and profitability and minimizing social risks that may even
become a source of competitive advantage. The central argument is that in societies where
corporations are increasingly aware of reputational damage caused by association with goods
or services produced under exploitative conditions, it makes sense for such firms to develop a
risk avoidance capability with the added advantage of attracting and retaining highly
motivated and appropriately qualified employees (Greening and Turban 2000). (3)
Consequential civil society motives comprise reactive, counter responses by management to
information and mobilization campaigns by trade unions and NGOs. Examples of the latter
are the recent UNI organizing campaigns which targeted providers of global cleaning and
security services.
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Two cases, OfficeCorp and FurnCorp, both family-owned and from the jurisdiction of the
BWI, do not seem to fit in either of the three categories. Their signing of an IFA seems rather
to be motivated by a long corporate tradition of caring for employees; a policy that is, in face
of globalization, extended to subsidiaries in foreign countries and even suppliers and is
institutionally supported by putting quality control (rather than HR) in charge of these issues
within the HQ.
All the cases of ‘anticipatory motives’ may be oriented toward dealing with uncertainty or to
practicing SCRM, comprising measures to identify risk sources, estimate potential
consequences, and reduce or mitigate risk in the supply network. However, we found little
evidence from the IFAs and interviews that managing risk and uncertainty was a prime
motive. Only some risk management motivation was evident related to the idea of organizing
global supply chains/networks with the help of standards (Brunsson and Jacobsson 2000). In
these cases, however, more often than not management envisaged something other than labor
standards (e.g., standards regarding product quality and safety or HRM practices). For
illustrative purposes we refer to those cases, in which the theme of managing risk and
uncertainty along the supply chain is addressed more or less explicitly, in some detail:3
A senior manager of RubberCorp, a diversified company in the chemical industry,
referred repeatedly to the IFA signed with ICEM as a “license to operate”. This meant that
the decentralized way operations and work are organized by this firm around the globe
requires acceptance by the relevant “communities”, including local and global consumers,
NGOs, national and global unions and state and supra-state agencies. An IFA legitimizes
the organization in the eyes of key stakeholder groups and reduces reputational risks. The
same manager, however, emphasized that the agreement itself does not provide any new
social or labor standards for this family-owned enterprise with a long history of
3 It should be noted that under different circumstances (e.g., ongoing disputes) labor is more likely to be mentioned in the
cases.
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CSR/HRM.4 In sharp contrast to this issue of legitimation, the rationale of developing and
maintaining strong and stable relationships with employees was not mentioned.
BuildCorp, a service-focused construction company that acquired similar companies and
organized its activities in a network around the globe, resembles RubberCorp regarding its
heterarchical (Hedlund 1986) structure. This firm has signed an IFA and the Global
Compact arguing in a similar vein to RubberCorp that a proactive CSR policy already
implies socially responsible monitoring of operations in ‘problematic’ countries. The
signing of the IFA – initiated, by the way, by the national building workers’ union, not the
BWI – makes little difference to this risk-oriented approach that is guided by the auditing
department. In fact, measures to implement the agreement organization-wide (e.g.,
management training, inclusion of sub-contractors, and the creation of a CSR council)
have only been undertaken quite recently, i.e. eight years after the conclusion of the IFA.
The most important motives in signing the agreement were the company’s intentions to
continue co-operative industrial relations relationships at HQ level and to avoid
reputational damage by keeping alleged violations of labor standards from external (i.e.
government and mass media) scrutiny. That the agreement is taken seriously by the lead
firm and the supplier network is illustrated by two examples. One is from the United
States where collective bargaining rights of workers at a supplier to the local subsidiary
had been violated. In this case, the contract with the sub-contractor was terminated. A
similar case was reported in Germany where a supplier illegally employed workers from
Eastern Europe without paying the obligatory minimum wage. Again, the contract with
the supplier was terminated.
The management of MetalCorp, a leading European car manufacturer, is well aware of the
fact that labor conditions and labor relations are a potential threat to the smooth operation
of the supply chain and to the company’s reputation. According to management
interviewees this problem does not exist at the level of first-tier suppliers but rather at the
periphery of global supply networks. At the same time, management acknowledges that it
is not easy to regulate companies that are the most likely sources of labor-related risks and
uncertainties. The same argument is advanced by a European car manufacturer that signed
an IFA a few years after MetalCorp. Interestingly, the potential of IFAs as a risk
management practice is also explicitly acknowledged in a statement by the management
4 The same point is emphasized by the management of a chemical corporation that has not signed an IFA whose management
argued that pursuing a proactive CSR/HRM policy means there is no need to sign an IFA.
19
of a European bank that refuses to sign an IFA. Management’s argument is that a global
labor standard does not fit the decentralized corporate approach which permits
subsidiaries to adapt their labor policies to the specific circumstances of the local
institutional environment.
According to the communication manager of OfficeCorp, risk management considerations
played a role when the firm signed the IFA. However, this was not a central issue because
of the firm’s long tradition of positive labor relations which includes employee
representation on the executive and supervisory boards although not legally required. The
head of the works council, who initiated the process at OfficeCorp, confirmed this view
and made no mention of the IFA having any relevance for dealing with labor-related risks
and uncertainties.
The final case is ServiceCorp, one of the world’s largest cleaning and security service
providers. Management emphasized repeatedly that, consistent with their image of a
caring global employer, they value a conflict resolution procedure organized by a global
union. This is intended to avert disruption by resolving disputes with employees. This
argument recognizes labor process risk mitigation in lieu of switching suppliers which, in
any case, may not be a viable strategy in this labor-intensive service business.
In sum, the cases studied (and a few cases without an IFA we looked at for comparison)
demonstrate that management, in obvious contrast to union representatives, does not see many
advantages in IFAs as a complement to corporate CSR/HRM policies. At best, IFAs are seen
by management as an additional tool to guarantee – substantively and/or symbolically –
global minimum working conditions and, less frequently, a formal means of resolving
conflict. More importantly in the specific context of this paper, IFAs are not viewed by
managers or labor representatives as a cause- or an effect-oriented tool for SCRM or for
limiting operational risk and uncertainty regarding labor-related issues. If IFAs matter at all in
this regard, their main role seems to be to mitigate reputational risk.
While the literature on SCRM seems to neglect labor-related risk and uncertainty because of
its concentration on demand rather than supply or process uncertainties (cf. Peidro et al.
20
2009), the initiation, termination and renegotiation of supplier contracts is in practice often
left to the purchasing department without any participation of a CSR/HR (or auditing) unit.
This organizational division of labor is likely to hinder a more wholistic or integrated
approach to CSR that enables participation of labor relations and HR experts. On the other
hand, these very experts may lack the competence for evaluating and framing unsatisfactory
working conditions and contested labor relations in terms of risks and uncertainties as they are
typically unfamiliar with this frame of reference and accompanying analysis.
DISCUSSION, CONCLUSION AND IMPLICATIONS
Like unilateral approaches, IFAs concluded between TNCs and GUFs seem first of all to fit
into the general reputational concerns of management, i.e. legitimating corporate behavior and
ensuring that expert institutional assessment bodies endorse corporate CSR-related practices
(cf. Doh et al. 2010). However, these agreements could be regarded by management and labor
representatives as a cause-oriented practice aimed at avoidance or reduction of risks and
uncertainties, as well as an effect-oriented practice seeking to mitigating risks and
uncertainties arising from labor-related supply network disruption (Wagner and Bode 2008).
But this potential risk management function of IFAs passes unmentioned in texts of the
respective agreements as well as in the interviews with managers and, even more surprisingly,
union representatives involved in negotiating and implementing IFAs. One of the main
reasons for this may be because TNCs, as lead firms of global supply networks, have been
able to choose institutional environments where the supply of labor is plentiful and quality
acceptable, in particular at the periphery of their networks. This has meant that labor-related
problems have so far, despite the examples given in the introduction of this paper, not been
significant compared to other issues like the disruption of energy supply or logistic systems.
This situation, however might change:
21
Proposition 1: IFAs are likely to address labor-related risks and uncertainties in global
supply networks when the supply of appropriately qualified labor ceases to
exceed demand and as a result workers begin to express dissatisfaction with
extant contractual terms and conditions.
Two other possible proximate causes of a neglect of IFAs as a risk and uncertainty tool are
first, a low degree of general “risk reflexivity” by management (Power 2007) in organizing
and managing global supply networks with regard to these issues, particularly because of the
strict division of respective responsibilities between purchasing departments, CSR/HR
managers and “uncertainty experts” (Arena et al. 2010) such as internal auditors, management
accountants or risk specialists in other functional areas. A recent inquiry into supervisory
boards of leading German firms in the automotive and machine-building industry in the
aftermath of the Tsunami/Fukushima catastrophe seems to confirm this view (Müller-Seitz
and Sydow 2012). Second, because of this orientation management tends to rely ultimately on
terminating supply contracts as a mechanism for dealing with labor-related problems in the
supply network. In this way labor-related risks are traded for additional “selection
uncertainty” (Mitsuhashi 2002). These considerations lead to the following proposition:
Proposition 2: In lieu of IFAs as a relational or commitment-oriented approach for dealing
with labor-related risks and uncertainties in global supply networks,
management continues to rely on market rather than relational control
(through IFAs), trading labor-related risks for additional selection
uncertainty.
Although a market-based approach that includes terminating or renegotiating supply contracts
under competitive conditions to deal with labor-related problems has thus far been sufficiently
successful to avoid serious practical challenges, the weakness of this system will be revealed
22
where labor is able to exert some bargaining strength either through unions or by high labor
turnover. Under these conditions the probability of a labor-related network disruption will be
higher than where an IFA is able to facilitate worker representation, collective bargaining,
monitoring of labor conditions, and/or conflict resolution in order to ensure stable labor
relations for an agreed period. Hence the following propositions:
Proposition 3a: Where a stronger labor market facilitates workers’ improved bargaining
power, IFAs will be re-negotiated or re-interpreted to assist in adjusting
employment contracts to the emerging circumstances; and
Proposition 3b: IFAs will be more frequently used as instruments to limit labor-related risks
and uncertainties and to address problems arising from such disruption.
On an even more optimistic note, we would like to conclude with some observations
concerning how IFAs could act as an important tool in building a high commitment approach
to labor in contrast to the traditional compliance-based model (Locke et al. 2009). These
advantages include the following, particularly where unions have developed adequate training
facilities to ensure representational and administrative effectiveness:
working with unions enables (inter-) organizational change and attendant risks and even
uncertainties to be handled more effectively as there is a partner to represent the often
divergent interests involved;
unions at the supra-national and national levels may provide useful information on
impending or actual changes in global, regional and national institutional environments
enabling management within the supply network to better plan and adjust their strategies;
at the local level unions may act to effectively monitor agreements on employee pay,
conditions, productivity and well-being whilst promoting employee skill development in
order to ensure that the workforce within the supply network is both protected and
efficient. This will depend on co-ordination by unions which can be assisted by
23
management providing reasonable facilities for union representatives to contact
colleagues.
An IFA-based approach may even foster inter-organizational citizenship behavior (Autry et
al. 2008) as employees in firms within the network build and maintain inter-firm relationships
through regular exchange of information, and engagement in joint training and innovation
projects. This would assist in developing relational forms of governance in supply networks
which would include labor as a stakeholder (Frenkel 2001; Locke et al. 2009). The relational
form appears to be growing and deepening (Ring and Van de Ven 1994; Rinhart et al. 2004;
Trkman and McCormack 2009) and in time may come to replace market-based or
transactional approaches as the prime means of reducing supply chain risks and addressing
consequential problems. Towards this end, research on SCRM nowadays recognizes the
importance of information-sharing within the supply network for managing demand
uncertainties (e.g., Ryu et al. 2009; Datta and Christopher 2011). And more generally, it
emphasizes cooperative approaches that foster engagement, loyalty and learning from other
members of the supply network (e.g., Ritchie and Brindley 2007; Manuj and Mentzer 2008b;
Nyaga and Whipple 2011). In sum, the ground has been prepared for a more relational
approach that would include labor through IFA or similar mechanisms.
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