The Enhancing of Global Competitiveness in Chinese Small & Medium Enterprises(SME)

----From Corporate Social Responsibility

XU Jin, LIU Guoyan School of Business Administration, Zhejiang University of Technology, 310024 xujin@zjc.zjut.edu.cn Abstract: Under the situation of globalization, the main competitive advantage of Chinese small & medium enterprises (SME)----low cost competitive advantage will not exist. Corporate Social Responsibility (CSR) is becoming one of the important resources of global competitive advantage. This paper builds up a global competitivenesssocial responsibility model for SME. After the mutli-factor analysis, this paper argues that CSR will be one competitive advantage for SME in globalization. In short run, CSR activities conflict with enterprises global competitiveness, but in the long run, SME that undertake social responsibilities are beneficial to improve their operation, improve their image, and in the end, improve their global competitiveness. Simultaneously, SME can do sustainable business. Keywords: SME, CSR, Global Competitiveness, Short Run, Long Run

1 Introduction
Since the reform and opening-up, China economy developed speedily, and the volume of export increased sharply in these years. According to Chinese Customs statistics, in 2008, China realized 2.5616 trillion U.S. dollars of total import and export value, in which a trade surplus of 295.5 billion U.S. dollars. At the same time we noticed that, for Chinese enterprises, especially small & medium private enterprises that exporting products to the US and Europe, demonstrating good social and environmental performance is no longer an optional extra. Stakeholder pressure on global brands will translate into stronger emphasis on nonfinancial issues in the supply chain, ranging from product safety to wages and dormitory conditions (SA8000, factory inspection, etc.). Simultaneously, the emergence of the shortage of migrant workers, the strain labor relationships, and the lack of protection of legitimate rights of workers also weakened the global competitiveness of enterprises. The issue of CSR in enterprises draws more and more attention. These issues reflect the importance of CSR to the competitiveness of enterprises and their sustainable development. Enterprises which undertaken CSR will increase the operation cost in the short run, but a good image of them in the global market can also be established. Enterprises can earn lasting economic benefits in the long run. Although there is no single definition of CSR, it is generally understood to refer to an enterprises commitment to operating in an economically, socially and environmentally sustainable manner whilst balancing the interests of diverse stakeholders (such as shareholders, employees, nongovernment organizations, the government, and others). To retain a competitive edge, this paper builds up a global competitivenesssocial responsibility model for SME. Based on a detail analysis, this paper proves that the undertaking of CSR and the enhancing of global competitiveness of SME is consistent. SME that want to hold a market place in the globalization should undertake more social responsibility.

2 The CSR Study

It has been more than one hundred years that CSR was concerned by academic. But the modern study of it goes back to 1950s. During the period of 50 years, CSR study has gone through three stages: the stage of corporate social responsibility and social response framework, the stage of corporate social performance framework, and the stage of stakeholder framework. 1950s to the later 1970s belongs to the first stage. In this stage, the center of research was corporate
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CSR

Perspective

social responsibility (CSR1) and corporate social response (CSR2). Main questions of CSR1 were what is CSR, whether enterprises should undertake CSR or not . This was starting point of CSR study. CSR2 studied how enterprises undertake social responsibility. Overall, in this stage, discussion of CSR was general sense, though it involved the conduct of the enterprises, but was abstract, making it difficult to take into practice. Later 1970s to middle 1990s is the second stage. The research framework was corporate social performance. It attempted to combine the original separated CSR1 and CSR2. With the hard works of Carroll, Wartick and Cochran, Wood and others, the interoperability of CSR increased strongly. However, the framework of corporate social performance was still on the macro level, mainly used to evaluate enterprises social performance from the external perspective. Today, CSR has developed to the stakeholder stage. Enterprises and their stakeholders form a principal--agent relationship. Any decisions made by enterprises have interest to stakeholders. Therefore, when enterprises make any decisions, the need of stakeholders should be taken into consideration, and the development of enterprises can not be separated from the support of their stakeholders.

3 The Global Competitiveness of Enterprises

In retrospect to 18th century, absolute cost advantage theory that was first put forward by Adam Smith and David Ricardians theory of comparative advantage, in fact, are the analysis of international competitiveness. Since the 20th century, some well-known foreign scholars, such as Schumpeter, Solow, Michael Porter, etc., began to explore the international competitiveness and obtained some influential theory. In World Economic Forum (WEF) the global competitiveness of enterprises is considered as the ability of the production of goods and services in domestic and foreign markets which is reflected through the price and quality of produced goods and services. Here to highlight that the quality and price is the key to impact on the enterprises global competitiveness, that means the ability a country or enterprise in the world market to produce more wealth than its competitor. Generally we can measure from the two sides of the enterprises global competitiveness of: the competitiveness of products and management. Among them, the former is the external performance of global competitiveness of enterprises, while the latter is inherent in the global competitiveness of the fundamental driving force. Enterprises manage their competitiveness through productivity, labor costs, corporate performance, management efficiency and enterprise culture, reflecting the business, corporate image and corporate innovation strength. China has consistently achieved a lower cost advantage of price competition, which is mainly due to the advantages of these enterprises mainly in labor-intensive, the price advantage of its products primarily through the payment of lower wages, extended working hours and poor access to the labor environment. But that edge has become increasingly obvious, and almost all other factors are at a disadvantage.

4 The Influence of CSR to the Global Competitiveness of SMEs

4.1 Model Construction 4.1.1 Hypothesis Authors research is based on three hypotheses. H1: SMEs conform to the hypothesis of economic man, that is to say that the purpose of enterprises is to maximize the pursuit of profit; H2: SMEs are all in a fully competitive market; H3: the undertaking of CSR will not affect the survival and development of SMEs. 4.1.2 The model SMEs that engage in social responsibility activities require a certain degree of human, material and financial resources, and which is different from other business activities, CSR expenditure does not directly generate economic benefits. In the short run, corporate resources are limited. The increase in expenditure on social responsibility will reduce those operating spending that directly generate profits. At the same time, in order to manage CSR activities better, enterprises should give extra investment. Therefore, the relationship between the global competitiveness of SMEs and the social responsibility expenditure is negative. To simplify the analysis,
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It is assumed that the relationship is linear, which shows in figure 1.

Fig 1 Short-run global competitiveness of SMECSR curve

A straight line AB is also known as the global competitiveness--CSR binding curve. Individual enterprise needs to tradeoff between the global competitiveness and CSR. Restrictions are, in such tradeoff, how much global competitiveness or CSR the enterprise is willing to give up. The curve I in the model is for different CSR--global competitiveness portfolio, different heights of the curves reflects the different levels of CSR--global competitiveness portfolio, and the farther away from the origin point, the more the enterprise engages CSR activities and the more the global competitiveness individual enterprise gain. Curve I has three characteristics: the curve slope is negative; the curve tilts lower to the right corner; the curve convex to the original point. For different combinations the shape of curves are also different. When curve I is tangent to AB, the enterprise wins the optimal portfolio of CSR--global competitiveness. In the model above, E is the best point of the combination. In the long run, with the development of enterprises, resources that enterprises can use increase gradually, and more resources can also be used by enterprises to enhance the global competitiveness and social responsibility performance. The global competitiveness--CSR binding curve moves right-up side from A1B1 to A2B2 , and then to A3B3, the optimal portfolio of CSR--global competitiveness moves from E1to E2, and then to E3. The trajectory form by E1, E2, E3...reflects the long run relationship between the global competitiveness of SME and CSR. It is so called the long run global competitiveness--social responsibility curve. See figure 2:

Fig.2 Long run global competitiveness--CSR curve

It has to be explained that under normal circumstances, the movement of the global competitiveness is

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greater than that of the social responsibility, thats why the curve becomes steeper. As figure 2 shows, SMEs that undertake CSR will be helpful to strengthen their global competitiveness. Empirical studies abroad show this positive correlation. 4.2 Model Explanation 4.2.1 The short run negative effect of CSR to global competitiveness of SMEs (1) Increasing operating costs. The competitiveness in the global market mainly comes from low-cost competitive advantage, and low-cost is supported by cheap labor, imperfect working environment and a wealth of resources. From figure 1 we see that the undertaking of CSR means the increasing cost of safety, occupational health, environmental protection, charity, etc., thus total cost of production will increase. If the product price does not change in the global market, the profit of the enterprise will reduce, thus will affect enterprises development and weaken the competitiveness of it. If the enterprise increase products sales price, the global competitiveness of it harms directly. (2) Affecting the developing pace. Some experts point out that Chinas economic development process is still in the primitive accumulation stage of developed countries like United States, Germany. Since there was no CSR during the start point of the developed countries, it is unfair for SMEs to undertake social responsibility, because it will surely affect the pace of capital accumulation and weaken their global competitiveness. (3) Losing developing direction with overemphasizing CSR. Enterprises are essentially economic organizations. The main commitment is the financial responsibility, not social responsibility. If social responsibility is too much emphasized and enterprises put the pursuit of profits to the secondary position, they will lose their economic nature. The loss of Control Data Corporation in the 1980s could be a good example of excessive attention to social problems. 4.2.2 The long run positive effect of CSR to global competitiveness of SMEs From the former analyze of the global competitiveness of enterprises, author separate the long run effect of CSR to global competitiveness of SMEs into three levels, which are the product competitiveness, the system competitiveness, the core competitiveness. (1) The positive effect of CSR to product competitiveness of SME. At the product level, the competitiveness of enterprises includes the production and quality control, business services, cost control, marketing and R&D capability. Responsibility SMEs will consider carefully on the whole product chain. The core of SMEs is the efficient and recycling use of resources. The purpose of them is reduction, re-use of resources. The basic characteristic of them is low consumption, low emission, and high efficiency. With these responsible activities SMEs will get a sustainable global competition. One the other side, consumers are more and more willing to buy a product to meet certain specific requirements. Products with social responsibility labels meet consumers needs of chasing health, safety and environmental protection beside the regular functions. Thus makes them have differentiated advantages. (2) The positive effect of CSR to the system competitiveness of SMEs. The system competitiveness of SMEs includes systems of management platform, internal and external enterprise environment, voluntary relations, enterprise operational mechanism, firm size, brand, enterprise property rights. The following two aspects will undoubtedly make a social responsible SME more competitive than other. to execute internal producing codes. SMEs can meet the requirements of international conventions on social security, treatment of workers, labor rights, labor standards provisions. to implement CSR certifications such as basic code of ethical trade, SA8000 and so on. This series of CSR certifications should become the basic export permits. (3) The positive effect of CSR to the core competitiveness of SMEs. The core competitiveness of SMEs includes the business culture based on enterprise philosophy and enterprise values, consistent enterprise image, enterprise innovation capability, the differentiation of enterprise, the sound financing, and the long run, global development goals. CSR will impetus the global competitiveness of SME. SMEs undertaking CSR is helpful to harmonious labor relations, and to attract talents. The

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competence in the future is the competence of human resources. Safe working environment and a reasonable treatment of employees provided by SMEs make the strategic goal easier to be realized. SMEs undertaking CSR is helpful to foster the enterprise image. Every enterprise is only a ring of the whole value chain; those who consider their own profits will not achieve long run sustainable development. Undertaking CSR can establish the long run reputation of the enterprises, and increase their profits and image, eventually increase the long run global competitiveness.

5 Short Conclusion
Enterprises are economic organizations that both independent of the community but also close to it. Under the economic globalization, SMEs must enhance their global competitiveness in order to get a sustainable development. Figure 2 shows that in the long run, those SMEs that undertake CSR actively will get a more competitive position in the global market. Because of this, SMEs should aware the long run positive relationship between CSR and the global competitiveness. When they formulate enterprise strategies, the interests of shareholders should be taken into consideration. At the same time, a people-oriented management culture should be established in SMEs. On the other side, government should be actively involved in the formulation of CSR international standards, as well as to create a favorable policy, market, legal, administrative environment for SMEs to undertake CSR. Besides, it is necessary for media, trade unions and other social groups to take part into the supervision of CSR-undertaking.

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