Enhancing code of conduct compliance: Exploring SME possibilities of control among Chinese supplier. A case study of first factory supplier-relationship

Signe Nymann Eriksen & Kasper Zoffmann Jessen

Student thesis: Master thesis


This paper takes its point of departure in exploring the challenges of a Danish small and medium sized enterprise (SME) aiming to enhance compliance with its code of conduct among its suppliers in the Chinese textile and clothing industry. As production processes disperse globally and the pressure to take responsibility for the actions of suppliers in developing regions intensifies, it becomes increasingly important to provide insight into how SMEs can enhance their ability to perform governance functions towards their suppliers. This is investigated based the following problem statement: How can First Factory deploy safeguarding mechanisms to enhance Code of Conduct compliance from its Chinese suppliers, and thereby reduce agencyproblems in the buyer-supplier relationship? This research combines the distinct perspectives of principal agent (PAT) and network theory (NT) to establish a theoretical construct for examining non-compliance issues and discuss a buyer’s possibility of deploying safeguarding mechanisms towards its suppliers. When applying the theories to our research area we suggest a number of factors which has considerable influence on the level of compliance. In addition, two control forms of economic/contractual and relational control are developed to explain the available safeguarding mechanisms for a buyer. After conducting a buyer-supplier analysis and carrying out a discussion of the SME’s control implications, we find that First Factory faces various challenges for enhancing compliance among its suppliers. However, it is argued that the SME is able to compensate for its weak position of low bargaining power and limited economic resources through a deployment of safeguarding mechanisms under predominantly relational control but with important complementary aspects of economical/contractual control. It is argued that the empirical deviations from the theoretical prescription in PAT complicate First Factory’s situation. A notable finding is that of an agent who is less dependent and more risk willing than presumed in the theory. This implies ambiguous principal-agent roles in our empirical setting, which, in turn, limits the ability of the SME to properly incentivise its suppliers. Accordingly, this may therefore indicate that PAT fail to fully capture the specific challenges of an SME. Instead, NT is believed to have stronger explanatory power in characterising the shown dependence of First Factory on its suppliers as well as the possibility of utilising control.

EducationsMSc in International Business, (Graduate Programme) Final Thesis
Publication date2009
Number of pages279