Ensuring Corporate Social and Environmental Responsibility through Vertical Integration and Horizontal Sourcing

32 Pages Posted: 14 Jul 2015 Last revised: 5 Aug 2018

See all articles by Adem Orsdemir

Adem Orsdemir

University of California, Riverside (UCR) - UCR School of Business Administration (SoBA)

Bin Hu

University of Texas at Dallas - Department of Information Systems & Operations Management

Vinayak Deshpande

University of North Carolina (UNC) at Chapel Hill - Operations Area

Date Written: July 31, 2018

Abstract

Taylor Guitars purchased an ebony mill in Cameroon to ensure corporate social and environmental responsibility (CSER) in sourcing, and shared the responsibly-sourced supply of ebony with competitors through horizontal sourcing. Inspired by this case, we investigate vertical integration as an alternative strategy for CSER in sourcing in which a firm can vertically integrate with its supplier in order to ensure responsible practices in the supply chain. In a competitive setting, an exposed CSER violation in one supply chain may increase the competing supply chain’s demand (positive externalities) due to substitution, or decrease the competing supply chain’s demand (negative externalities) due to public’s suspicion about industry’s social and environmental practices. Furthermore, NGOs’ scrutiny and reporting policies may influence the chance of a violation exposure, as well as demand externalities between the competing supply chains. We examine horizontal sourcing as a potential strategy for mitigating the impact of a CSER externality caused by a competing supply chain. When horizontal sourcing is infeasible, we find that higher violation exposure externalities induces better CSER, but overly intensive violation scrutiny alongside strongly negative externalities may backfire and discourage CSER. By contrast, when horizontal sourcing is feasible, intensive violation scrutiny induces CSER, but strongly positive externalities may impair industry-wide CSER. These findings have instructive implications for firms interested in ensuring CSER in their supply chain, as well as for NGOs’ violation scrutiny and reporting policies.

Keywords: responsible sourcing, CSER, NGO, demand externalities

Suggested Citation

Orsdemir, Adem and Hu, Bin and Deshpande, Vinayak, Ensuring Corporate Social and Environmental Responsibility through Vertical Integration and Horizontal Sourcing (July 31, 2018). Available at SSRN: https://ssrn.com/abstract=2630733 or http://dx.doi.org/10.2139/ssrn.2630733

Adem Orsdemir

University of California, Riverside (UCR) - UCR School of Business Administration (SoBA) ( email )

900 University Ave.
Anderson Hall
Riverside, CA 92521
United States

Bin Hu (Contact Author)

University of Texas at Dallas - Department of Information Systems & Operations Management ( email )

P.O. Box 830688
Richardson, TX 75083-0688
United States

Vinayak Deshpande

University of North Carolina (UNC) at Chapel Hill - Operations Area ( email )

300 Kenan Center Drive
Chapel Hill, NC 27599
United States

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