May 2019 – BOS

Global yet green? How governance influences upgrading opportunities

By Valentina De Marchi.

The fragmentation of production and integration of trade creates important opportunities for firms and territories, especially if located in emerging economies, to grow and learn. Yet not all the global relationships are conducive of economic, social or environmental upgrading.

Upgrading in Global Value Chains

As a result of globalization, value chains are increasingly fragmented and have spread worldwide – a new era of international competition that is reshaping global production and trade and changing the organization of industries has emerged. The Global Value Chain (GVC) framework is particularly useful in understanding global dynamics because it relates the nature of relationships between firms (governance) to the possibilities for firms to move toward higher value-added activities in order to increase the benefits of participations in GVCs (upgrading)[i]. Two main insights can be gained from the extensive literature that, taking especially the POV of emerging countries’ firms and regions, discussed on upgrading:

participating in GVCs represents an important learning opportunity, to acquire crucial knowledge about global markets, advanced processes and global standards;
this opportunity is not always taking place.

When does upgrading take place?

Two major reasons might explain why upgrading does not always occur – and indeed downgrading might even take place. First, learning from the global buyers and lead firms is an opportunity better gained by firms that have the capacity to absorb, master and adapt knowledge that global firms potentially can transfer to them, i.e. have invested in R&D and in the capabilities of their employees, and do interact with local industry associations, universities, research centers to improve innovation capabilities[ii]. Second, that specific path of upgrading and the extent firms can benefit (learn) from GVC participation is heavily influenced by the governance structure that characterize the GVC the firms belong too.

Governance and environmental, social and economic upgrading

A recent quantitative analysis[iii] provides empirical evidence to suggest that a ‘hands-on’ relationship with the key customers (i.e. a relational or captive governance) are conducive of economic upgrading opportunities, yet interesting differences exist if fine-graining to consider product, process or functional upgrading. As far as social upgrading is considered – i.e. the improvement of workers’ rights and work life quality – this is the case also if considering the supplier side of the global network. Interestingly enough, environmental upgrading, instead, is taking place just in the case of relational governance with customers – i.e. in power balanced relationships – and captive with suppliers – i.e. when companies are dependent of few suppliers.

Entering a GVC poses many challenges, but it does represent an opportunity to learn from lead firms and to upgrade. However, every country, community, or company should consider what influence the successful exploitation of the efforts towards economic, social and environmental upgrading has.

About the Author

Valentina De Marchi is Assistant Professor at the Department of Economics and Management ‘Marco Fanno’ at the University of Padova, Italy, and Governing Responsible Business Research Environment (GRB) research fellow at Copenhagen Business School. Interested in circular economy and industry 4.0s and environmental upgrading in GVCs. Valentina has a website and twitter presence.

By the same Author

Green – a special shade of innovation.

References

[i] Gereffi G, Fernandez-Stark K (2016) Global Value Chain analysis: a primer. https://gvcc.duke.edu/cggclisting/global-value-chain-analysis-a-primer-2nd-edition/

[ii] De Marchi V, Giuliani E, Rabellotti R (2017) Do Global Value Chains Offer Developing Countries Learning and Innovation Opportunities? Eur. J. Dev. Res. 1–19 https://www.researchgate.net/publication/321695039_Do_Global_Value_Chains_Offer_Developing_Countries_Learning_and_Innovation_Opportunities

[iii] Golini R, De Marchi V, Boffelli A, Kalchschmidt M (2018) Which governance structures drive economic, environmental, and social upgrading? A quantitative analysis in the assembly industries. Int J Prod Econ 203:13–23. https://doi.org/10.1016/j.ijpe.2018.05.021

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Photo by Andrew Buchanan on Unsplash.

Thinking outside the box on corporate tax practice

By Sara Jespersen.

Multinational corporate tax payments – a persistent conundrum.

Corporate tax practice of multinational corporations (MNC) have been the topic of intense debate in the media and among policy makers in recent years. Most recently the news broke that Amazon would pay zero tax on their more than 11 billion profit in 2018. The OECD have coordinated a large project on the topic and involved countries around the world in discussing attempted solutions to the issue of “base erosion and profit shifting” which is the technical term for states finding it challenging to tax the profits of MNCs.

Not only policy makers and media have taken an interest in the topic. NGOs have played a large part in agenda setting and mobilizing citizens’ concern in the topic of MNCs tax payments. Last year an interesting book was published on the topic of “The “new” politics of Tax Justice” edited by Richard Eccleston and Ainsley Elbra.

However, the issue is far from resolved. A few weeks ago, at a seminar here at Copenhagen Business School renowned tax law scholar Rita De la Feria confirmed that when it comes to MNCs and the creation of economic value – we simply do not know where it actually takes place geographically. Which under the current rules and norms for international taxation makes it very difficult to ensure an appropriate taxation of MNCs corporate profit as this is closely linked to economic value creation. At the same time, research tells us that MNCs are increasing responsible for the global profits (see table F3 in the Appendix tables here). This is a challenge for policy makers, but highlights the relevance and importance of tax research.

Still much to gain from rethinking corporate tax as a social and institutional practice

Maybe we can learn something from rethinking the boundaries of the topic? Move it beyond a technical/legal debate about the formulas and boundaries of corporate accounting practices to identify economic value on paper. Lynne Oats already reconceived “tax as a social and institutional practice” building on the work done in the related field of accounting challenging its mere technical nature. Further interesting work in this vein can be mentioned the book “the new fiscal sociology” edited by Isaac William Martin highlighting the importance of context for the tax phenomenon. Much more is to be learned about notably the role of corporate taxation in relation to business in society, the fiscal contract between business and the state, and the institutions and social structures that embed the economic activities of MNCs. For example how the notion of corporate social responsibility relates to corporate tax practice.

A recent integrative review by Whait, Christ, Ortas and Burritt (2018) of the literature on CSR and tax aggressiveness find that little research approach the topic from a historical, theoretical or qualitative approach. Further very little research exist on the MNCs that do not consider themselves particularly “aggressive” in their tax affairs, but rather would perceive themselves as responsible. Fortunately, there appear to be developments in practice that indicate that we also have more material available to engage in this type of research.

Developments in practice

Just in the past year, three interesting developments are worth mentioning that express how corporations, the media and policy makers approach the topic of corporate tax practice from different angles:

In 2018 a grouping of MNCs developed and endorsed the B-team’s “Principles for responsible tax”. The B-team is “is a not-for-profit initiative formed by a global group of business leaders to catalyse a better way of doing business, for the wellbeing of people and the planet”. The founding and endorsing companies count just over ten at the moment, but with a call for further business to join the conversation and sign up to the principles. This appears as an example of multinational corporations expressing their willingness to appear more responsible and linking their tax practices to issue of ensuring stable and sustainable societies.

In Denmark, a survey of Danish top 100 companies’ performance on tax governance published for the second year released this month . Findings show only relatively small progress in the picture overall and more than half score zero points on the rating that this journal has developed for the purpose. The fact that the survey publishes the second year in a row is interesting in itself. It appears as a part of the increasing interest from a variety of stakeholders in the topic of corporate tax governance. It indicates a more mainstream interest in the topic from a corporate governance perspective. Corporate tax is traditionally viewed as a cost to be minimized. However, this survey and the demonstration that there is movement in the practice related to tax governance gives relevance to conceiving corporate tax as a social and institutional practice. Group Tax Directors are experiencing increased interest in their work and area of responsibility and this translates into new practices and ways of communicating corporate tax policy.

On the international front, the OECD public consultation on the topic of tax morale closed this month. What was particularly interesting from the OECD’s presentation of the topic at a conference in January this year is that they find that we know very little about business tax morale. How important it is in what situations. We know more about individuals’ tax morale. For example, that it appears to be higher in countries that tax more. Findings from OECD’s consultation will be interesting to follow. I for one will be looking out for how the OECD, as primarily a forum for policy makers, will make use of this input.

A promising research agenda:

Investigating the emerging relationship between corporate tax practice and CSR holds much potential for learning more about MNCs and their relation to society. It might not solve the conundrum of how to ensure their effective and fair taxation at first sight, but being open to conceiving corporate tax as a social and institutional practice might deliver valuable insights and move us towards a more sustainable relationship between business and society.

About the author

Sara Jespersen is a PhD fellow at Copenhagen Business School. Her research is on the emerging relationship between responsible business conduct and corporate tax planning of multinational enterprises. In a complex governance context there are now signs of corporations’ self-regulation and the emergence of voluntary standards. She is interested in what this means for our understanding of corporations as political actors and the notion of political CSR.

Articles by the same author

Investigating Emerging Responsible Corporate Tax Practice

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Photo by TJ Dragotta on Unsplash.

Who cares about sustainable fashion?

By Erin Leitheiser.

Can ever-higher rates of consumption ever truly be sustainable? Consideration of up-and-coming consumers will be key to making progress in the sustainability of the fashion industry.

Each year in May, Copenhagen hosts the Copenhagen Fashion Summit, which brings together fashion industry leaders to consider the environmental and social sustainability issues rife within the industry. While this year’s event promises discussions on important supply-side issues like materials and design, circularity, supply chains, wages, and the like, there seems to be precious little time dedicated to demand-side issues, principally the role of consumers. As such, this post offers a review of some key facts and trends that foreshadow the landscape of the future of (sustainable) fashion, and in particular, the role of consumers.

First, some key facts about the scale of the fashion industry and its impacts:

Greenhouse gas emissions from the textile industry account for 8% of all carbon emissions globally, more than those emitted by all international flights and maritime shipping combined (Quantis, 2018).
The top 20 companies in the clothing industry, mostly in the luxury segment, account for 97% of its economic profit (McKinsey, 2019).
Clothing sales have more than doubled in just the last 20 years (Ellen McCarther Foundation, 2017), and apparel consumption is projected to rise an additional 63% by 2020 (Global Fashion Agenda, 2017).
Despite growing efforts to collect and recycle old textiles, less than 1% of materials used in clothing is recycled (Ellen MacCarthur Foundation, 2017).
Companies – particularly luxury companies – often prioritize brand image over sustainability. For example, Burberry found itself embroiled in scandal after it chose to burn US$37 million in excess stock last year, rather than discount or donate it.

While many of these issues skew toward supply-side, consumers’ habits play a key role in the vast excesses of the fashion industry. Consumption rates seem to grow ever-higher.

Nearly half of young female consumers buy clothing at least monthly (Farsang et al, 2015).
An article of clothing in a woman’s closet is worn a mere 7 times on average before being discarded (Barnardo’s, 2015)
In the past year, a quarter of Australians (24%) have thrown away an item of clothing after wearing it only once, and 1 in 6 have binned 3 items or more after a single wear (YouGov, 2017).
A third of UK women consider a garment “old” after wearing it 3 times or less (Barnardo’s, 2015).
38% of Millennials have bought at least half of the clothes they own within the past year (YouGov, 2017).
In China, clothing utilization (that is, the number of time a garment is worn before being discarded) has fallen by over 70% in the last 15 years (Ellen MacCarthur Foundation, 2017). At the same time, Greater China is projected to overtake the U.S. in 2019 as the largest fashion market in the world (McKinsey 2019).

The consumer landscape is changing rapidly when it comes to “sustainable” fashion, so much so that fashion firm executives identified consumer behaviors that force industry to “self-disrupt” as the #1 trend for 2019 (McKinsey, 2019). Key consumer trends underscore the significance, scale and potential of consumers in the quest for (more) sustainable fashion. Younger consumers – Millennials (born 1980-2000) and Gen Zers (born 2000-now) – are largely responsible for pushing companies to become more sustainable.

94% of Gen Zers believe that companies should address social and environmental issues (Cone, 2017).
Gen Z alone will account for 40 percent of global consumers by 2020. (McKinsey, 2019)
90% of Millennials would boycott or otherwise refuse to buy from a company that is doing harm (Cone, 2017)
Consumers want to support brands that are doing good in the world, with 66 percent willing to pay more for sustainable goods (McKinsey, 2019).

As younger generations increase their buying power – and couple it with ethical evaluations – companies will need to become even more responsive to and diligent about addressing sustainability issues. Yet, high consumption rates threaten to curtail gains made from sustainability advances, like textile recycling. In addition to more sustainable production practices – and subsequent ethical purchasing – consumption must decrease if the perils of the industry are to be addressed.

“Younger consumers are seriously concerned with social and environmental causes, which many regard as being the defining issues of our time. They increasingly back their beliefs with their shopping habits, favouring brands that are aligned with their values and avoiding those that don’t.”
McKinsey, 2019: p. 45

I am often asked what one can do as an individual to be more sustainable when it comes to fashion. My answer is in two main parts. First, buy fewer, better quality items and wear them for longer. Classic, good quality pieces will wear better and last longer. Even if they cost a bit more at purchase their extended life makes them a more affordable option in the long run. Second, re-think how you care for your clothes. Washing them less, at lower temperatures, and hanging them to dry will all result in gains for both your energy bill, as well as the environment, estimated at a 3% carbon reduction (WRAP, 2017). Some proponents even argue that you never need to wash your jeans! (though this might be a bit extreme for some)

There is no silver bullet to solving the unsustainability of the fashion industry. But one thing does seem clear: advances and changes must come from all sides if progress is to be made. As the Copenhagen Fashion Summit kicks off this week , please keep in mind the importance and role of everyone involved in the production, sale, and disuse of fashion, as well as the very premise that the industry is based on: consumption.

About the author

Erin Leitheiser is a postdoctoral researcher in Corporate Social Responsibility and Sustainability at Copenhagen Business School. Her research interests revolve around the changing role and expectations of business in society. Prior to pursuing her PhD, she worked as a CSR manager in a U.S. Fortune-50 company, as well as a public policy consultant with a focus on convening and facilitating of multi-stakeholder initiatives. She is supported by the Velux Foundation and is on Twitter as @erinleit.

References

Barnardo’s. (2015). One worn, thrice shy – British women’s wardrobe habits exposed!. Retrieved from https://www.barnardos.org.uk/news/Once-worn-thrice-shy-8211-British-women8217s-wardrobe-habits-exposed/press_releases.htm

Cone. (2017) “Gen Z CSR study: How to Speak Z”. http://www.conecomm. com/2017-cone-gen-z-csr-study-pdf

Ellen MaCarthur Foundation. (2017). A new textiles economy: redesigning fashion’s future. 1–150. Retrieved from https://www.ellenmacarthurfoundation.org/publications/a-new-textiles-economy-redesigning-fashions-future

Environmental Audit Committee, House of Commons. (2017). Fixing Fashion: clothing consumption and sustainability.

Farsang, A., Gwozdz, W., Mueller, T., Reisch, L. A., & Netter, S. (2015). Survey Results on Fashion Consumption and Sustainability Among Young Consumers in Germany, the Netherlands, Sweden, the UK and the US in 2014. Borås: Mistra Future Fashion.

Global Fashion Agenda. (2017). Pulse of the fashion Industry. Retrieved from https://www.copenhagenfashionsummit.com/wp-content/uploads/2017/05/Pulse-of-the-Fashion-Industry_2017.pdf

McKinsey & Company. (2019). The State of Fashion 2019.

Quantis. (2018). Measuring Fashion.

WRAP. (2017). Valuing Our Clothes: the cost of UK fashion. Retrieved from http://www.wrap.org.uk/sites/files/wrap/valuing-our-clothes-the-cost-of-uk-fashion_WRAP.pdf

By the same author

The Government of Business Responsibility

Role Reversal: When Business Safeguards the Public Good

Photo: Courtesy of Copenhagen Fashion Summit 2018.

Let Me Lend You a Hand: How Behavioural Economics Can Restore Trust in Science

By Noah Peters.

Society’s declining trust in science in general and economics in particular is a much debated topic. Martin Wolf’s recent commentary for the Institute of New Economic Thinking (INET) is only one way of addressing the conundrum. This blog post draws on two prominent contentions underpinning the obscure notion of distrust in economics. Firstly, economists (allegedly) live in their ivory towers surrounded by mathematical formulas no outsider would even vaguely understand. Secondly, they are accused of not being able to adequately forecast crises, let alone fend them off.

One increasingly influential sub-discipline in economics tries to overhaul these stereotypes. Stemming from psychology, behavioural economics shows that humans are multi-faceted, empathetic and guided by values and social surroundings. For readers not familiar with economics, this finding might not be a major surprise. But it goes against the grain of long-standing economic traditions emphasising people’s pursuit of profit maximisation. Acknowledging people’s genuine driving forces and behavioural patterns counteracts the first contention I presented earlier: economists’ penchant for technical abstractions of human action.

Moreover, behavioural economics and behaviourally informed policy interventions address everyday problems – retirement savings, administrative procedures or identifying the healthiest product on a supermarket shelf. Behavioural policy interventions aim at improving the lives of ordinary people. Economic and financial crises unequivocally affect the lives of everyone, from investment bankers to bakers. But loosening people’s daily constraints is as important and contributes to the bigger picture. This is what behavioural policy does.

Consequently, those interventions and their economic foundations are relatable. I argue that this relatedness to the real world is pivotal in regaining societal trust and convincing citizens of the value that economic theory can add.

While this demand is not new and maybe trivial, it is worth stressing over and over again. And especially behavioural economics got the message. Unsurprisingly, key topics for policy-makers are sustainability and public health. Behavioural interventions address these challenges from an individual-level, demand-side perspective. By inquiring how people really judge and decide (using experiments and investigating people’s motivations), the overarching challenges of the 21st century can be traced to the consumer level. This way, we can elucidate how every single person can make a difference. Today’s urgencies become vivid and tangible.

A couple of examples in the domain of food choice shall underpin this connection of behavioural economic theory and everyday applications. A supermarket, for example, constitutes the perfect playground for behavioural scientists. Traffic-light labels indicating how healthy a certain product is draw on the plain fact that simplifications can enhance people’s decisions. Likewise, plate size can affect how much people eat. Restaurant menu design could steer which option customers choose. One additional strategy are default options, e.g. vegetarian snacks automatically ordered for meetings if not otherwise changed for non-vegetarian alternatives. This feature is informed by the fact that people prefer the status-quo and are sometimes too lazy to make simple changes.

This list is not exhaustive, and the interventions presented above are widely discussed in academia and rather trivial. Thus, every serious scholar would automatically defend the originality of her ideas. Others would go even further and completely demonise any form of real-world application.

I contend, however, that the frivolous essence of many behavioural interventions explains their efficacy and acclaim. Psychological underpinnings inform policy interventions in a way that relates to people’s everyday lives thereby addressing the questions of our time.

But it’s not entirely rosy for behavioural economics either. Critics contend that consumers – citizens (!) – are manipulated and deprived of their own capacity to judge. There are compelling reasons why this notion is short-sighted, though. Thus, behavioural scientists must establish guidelines ensuring their legitimate intentions and communicate their toolbox transparently. And of course: mathematics and technical tools are invaluable instruments for the empirical sciences; they are the very departure point to extrapolate the world we live in.

The combination of scientific rigour, tangible applications, and sincere motivations can help restore societal trust. Scientists who are successful in applying and communicating this trinity, can evade the curse of post-truth sentiments and latent hostility to experts.

About the Author

Noah is a visiting research assistant to the Department of Management, Society and Communication (MSC). He studies sociology, politics and economics at Zeppelin University, Germany. In his research he focuses on behavioural economics and policy applications, as well as economic and urban sociology. Partaking in an exchange programme between Copenhagen Business School and Zeppelin University, Noah supports current research at MSC’s Consumer and Behavioral Insights Group (CBIG). Connect on LinkedIn or ResearchGate if you are so inclined.

Photo by Neil Thomas on Unsplash