Case study on CSR

This is a case study from Harvard Business Review , You guys may take a look at it and I have provided my presentation also . This case relates also to Social Responsibility role that a company could play in those regions where people are poor and suffer from political fraud and instability . 

The CEO of a watchband manufacturer considers opening up a factory within a "safe zone" in North Korea, but is it too risky? This fictional case study will appear in a forthcoming issue of Harvard Business Review, along with commentary from experts and readers. If you'd like your comment to be considered for publication, please be sure to include your email address.

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"You know, this isn't just business as usual..."

Park Jeehee, the CEO of the watchband manufacturer Timepiece, listened carefully as a guide talked her and her small executive team through the details of the Kaesong Industrial Complex (KIC), a South Korean manufacturing zone in North Korea.

"As you can see, this is a sophisticated operation," he boasted. Pointing to the blazer-clad workers exiting several factories, he added, "The KIC is a physical example of the prosperity Koreans can create when peacefully working together."

As a South Korean, Park was more than a little skeptical: She'd grown up fearing the government in the North. But she understood why Hyundai Asan, a division of the South Korean Hyundai Group, had in the early 2000s led efforts to develop the KIC. The complex, supported by both Korean governments, was intended to promote "coexistence and co-prosperity"; indeed, it represented the largest area of economic cooperation between the two nations. It had already attracted more than 100 companies, with tens of thousands of employees. South Koreans served predominantly as managers, and North Koreans provided most of the unskilled and semiskilled labor.

Park had not given much thought to doing business in the KIC until a fellow CEO, who had moved his manufacturing plant there in the past year, encouraged her to visit. Government officials looking to draw more companies to the complex had set up the trip. And now she and her team were north of the Demilitarized Zone in one of Korea's oldest cities, Kaesong — not even 70 kilometers from Seoul, although it felt a world away.

The previous day, despite constant chaperoning, the group had glimpsed some of the abject poverty of the North — sights that had heightened Park's doubts. But as she took in the sprawling complex, set against a traditional agrarian backdrop, she realized that it truly felt different from the North Korea she had always imagined. The workforce appeared to be organized and efficient. The manufacturing facilities, although basic, were well maintained and up-to-date. The gated complex even contained branches of a South Korean bank and a popular South Korean convenience store.

"This is impressive," Park whispered to her CFO, Kim Jaehyun, as they readied for the journey home.

Nodding in agreement, he said, "It certainly gives us something to think about."

But they would need to think fast: Park would be meeting with Timepiece's board the following week to make a recommendation.

Real Benefits, Real Risks
The next morning, back at the company's headquarters in downtown Seoul, Park sipped a cappuccino and looked across her desk at Kim. "Now that you've had a chance to sleep on it, what do you think?" she asked.

"Well," Kim began, "I phoned a few of the CFOs who have operations in the complex, and the labor savings and productivity estimates in the KIC literature seem real."

Park recalled reading a few years ago that the monthly wages of North Korean workers at the KIC averaged $57.50 — far less than those of similarly skilled workers in Qingdao ($100) and Ho Chi Minh City ($134). There would be no language barrier to contend with, and shipping between Seoul and Kaesong was substantially cheaper and easier than shipping to and from China or Vietnam.

"Capital risk also seems low," Kim continued, "because of the South Korean government's guarantee of up to 90% of our capital investment, along with privileged access to low-interest loans. For now the government appears committed to the KIC as a way of peacefully engaging the North. But there are other risks involved. On several occasions North Korea has threatened to send its workers out on strike. And just last year it unilaterally canceled all contracts and demanded huge wage increases. We could lose a lot of time and money if such incidents continue. And we have to consider how manufacturing in North Korea, given the international sanctions it's under, would affect customs and trade agreements. Exporting goods made in the KIC could be problematic."

"Of course," Park replied. "But the companies already doing business in the KIC don't appear to be suffering from the uncertainty. And global firms have always operated in politically volatile regions, often quite profitably — look at oil and mining in sub-Saharan Africa. Without risk, there's really no reward."

People First
"Honestly, Jeehee, I'm uneasy," said Mark Lee, Timepiece's vice president of human resources. He tugged anxiously at his watchband, twisting it around his wrist. "You're as aware of the potential problems as I am. After the shooting on Mount Kumgang and the detainment of that Hyundai employee, I'm hesitant to send our people in."

Two years earlier, North Korean soldiers had shot and killed a middle-aged woman on a South Korean-run tour of a resort in the North. More recently, North Korean authorities had arrested a Hyundai Asan employee in Kaesong for allegedly encouraging a local waitress to run away with him.

"Not to mention that our managers will have to stay in the complex for extended periods, with limited communication with their families," Lee added. "And we haven't even talked about the North Korean workers. Are we comfortable with how they may be treated?"

Lee was broaching a sensitive issue. Two days before her visit, Park had gotten a call from an old college friend who now worked for a human rights group in London. The picture he painted of Kaesong was grim. The wages earned by North Korean KIC workers were paid to the government, which supposedly distributed some of the money to them — but it was impossible to know how much. And there were unconfirmed rumors that North Koreans working in the KIC were considered "contaminated" by exposure to outside practices and were not allowed to return home.

"But wouldn't we be giving North Korean employees a better quality of life?" Park asked.

"That's possible," Lee conceded. "Our factory would provide a better work environment than what they're used to. But we would have no transparency and very little autonomy. The North Korean regime wouldn't allow us to make any substantial changes to our plant; we'd be bound by the agreements signed several years ago by the KIC's founders. Add that to the questions about our employees' safety and the broader human rights situation in the North, and I'm not sure
it's worth it."

"Everything you're saying is true," Park replied. "But does it mean we can't do business there? Furniture makers in places like Pakistan deal with the risk of human rights violations all the time. It just means they must set a higher standard for themselves. Couldn't we do the same?"

Hold the Politics
Later that day, at lunch with a friend who was a member of the South Korean parliament, Park pushed a small pile of noodles around her plate. Across the table, Keel Young-hoon provided a politician's perspective and a counter to Lee's apprehensions.

"How could you pass up an opportunity for patriotism and profit?" he asked.

Keel belonged to the liberal minority party — the second-largest political faction in South Korea and a strong supporter of the KIC.

"This isn't just a business decision, Jeehee," he contended. "Opening a factory in Kaesong would be an act of public service. The KIC was founded with reunification in mind, and look at all the good it's already doing. North and South Koreans are working side by side for the first time in decades! North Koreans are getting exposure to market economics. And it's a fantastic show of goodwill toward the North."

"I can definitely see that," Park said. "But there's a lot of uncertainty, not only for businesses but also for the future you envision. It's far from a slam-dunk proposition."

"You need to view it as a long-term investment," Keel told her. "Just as the West Germans' Ostpolitik was pivotal in unifying the two Germanys, the KIC will be a key factor in our reunification."

Park admired his optimism, but she remembered that only two decades earlier, providing resources to the North Koreans had been considered treason. She knew that attitude had not entirely disappeared. In fact, majority-party politicians had tried on numerous occasions to shut down the KIC. Park did see merit in the argument that the KIC might aid reunification — something that she, with distant relatives still in the North, would be thrilled to see. But the political aspects of the project worried her. For every person happy about a decision to open shop in the KIC, there would certainly
be another person opposed.

"I'm not sure I'm ready to be a politician yet," Park said, smiling at her friend. "I'll leave that to you. But it's hard not to want this to work."

Tick tock, Tick tock
Late that afternoon Park sat in her office, prototypes of two watchband designs resting atop the KIC documents on her desk. As she thought about the conversations she'd had throughout the day, she gazed at the Han River below. In a way, she envied the Han: Its waters flowed from two rivers, one originating in South Korea and the other in the North, merging easily with no concern for national boundaries.

Although those she'd spoken with had agreed that economic benefits could accrue from the proposed arrangement, her talks had also driven home the other concerns she had to weigh. She could think of lots of relevant case studies — textiles in Bangladesh, divestiture from apartheid South Africa, business engagement with East Germany. But every situation was different. Methodically, Park listed the pros and cons on the legal pad in front of her, using quick, precise strokes of her pen.

If Timepiece opened a Kaesong plant, it could improve the quality of life for many North Korean workers. But would the communist regime interfere with the company's good intentions, threatening the business as well as its employees? Were the potential economic benefits worth the human risks? And how should politics and national pride factor into the decision?

Park had to move carefully, but she knew that time was of the essence. The board meeting was coming up soon. She set her pen down on her pad, closed her eyes, and thought hard about whether to expand Timepiece's operations to North Korea.

Should Park set up shop in Kaesong or not? .


What do you suggest?

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