Incentivizing emerging market suppliers for responsible international supply chain: Revenue-sharing and government subsidy

Many emerging market suppliers of multinational enterprises (MNEs) have been exposed to social responsibility controversies. These incidents significantly affect MNEs’ operations and emerging economies’ sustainable development. This paper considers a two-tier transnational supply chain model to explore the impact of different participants’ corporate social responsibility (CSR) engagements on their profits and social welfare. We consider two incentive schemes that could enhance emerging market suppliers’ CSR activities: revenue sharing from their buyers and subsidies from their governments. Using the supplier Stackelberg game, we find: 1) transnational operation costs hinder MNEs’ incentive to invest in CSR; 2) suppliers’ CSR activities have a larger impact on the demand for final products and emerging market welfare than MNEs’ activities; 3) suppliers will voluntarily engage in CSR activities, but only at an insufficient level, whereas MNEs revenue-sharing with suppliers and government subsidies to suppliers can improve suppliers’ CSR level; 4) government subsidy improves suppliers’ CSR activities to a larger extent than MNEs’ revenue-sharing. Our study fills the gap in CSR activities along the international supply chain. We also provide critical managerial implications to MNEs and their emerging market suppliers on reducing CSR risk, and policy implications to emerging market governments on realizing sustainable development.