Jimmy Tanaya

Corporate Social Responsibility as a Poverty Alleviating Tool:

Conceptual Analysis and a Case Study of the Oil Palm Plantation Industry
Proposed by: Jimmy Tanaya

1. Title
Corporate Social Responsibility as a Poverty Alleviating Tool: Conceptual Analysis and a Case
Study of the Oil Palm Plantation Industry.

2. Introduction
This research falls into environmental economics and poverty alleviation. It studies the
relationship between poverty alleviation, property rights, corporate social responsibility
(CSR), corporate behaviours and strategies, and the role of government. It takes the problem
of palm oil plantation in Indonesia as a case study. In practical view, it aims to bridge the
commercialisation of forest for Oil palm plantation, nature conservation, and poverty
alleviation for local communities.

3. Literature Review
The study takes the Indonesian case of oil palm plantation which has become significantly
problematic since before the government announced regulations regarding energy policy.1
With the policies there is obvious indication that the government sees commercialisation of
forest through establishment of firms (e.g. plantations) and massive projects as the
locomotives of economic development.
Poverty alleviation and conservation of nature are intertwined and thus need to be tackled
altogether (Adams et al., 2004). Indeed poverty alleviation may often be met if natural
resources (e.g. forest) is jointly extracted by firms and communities (Engel and Lpez, 2006,
Wunder, 2001). The discourses on poverty today have outlined three broad explanations for
the persistence of poverty, which are critical thresholds, institutions, and neighbourhood
effects (Bowles et al., 2004).2 De Soto (2000) further explains that ill-defined property rights
hinder poor people to fully utilize their assets and bring improvement to their wealth. Under
these arguments, it is certain to some degrees, that any efforts in solving the problem of
poverty cannot be detached from effort in correcting property rights regime.
Firms are perceived to be endowed with better abilities in natural resources extraction, so that
it produces efficient outcomes (Engel and Lpez, 2006, Pejovich, 1990) and efficient outcomes
under neoclassical view- create optimal wealth to the society. However, many have argued
that there are flaws on the perspective of optimality of firms production. First, optimal
according to the firm may not be optimal according to government and people. Second,
Studies have proven that there are neglected costs (i.e. externalities) in firms cost function,
which mislead firms optimal production (Perman et al., 1996).3 Third, profit maximization
motive has been unable to mitigate the social problems (Hopkins, 2007). Last, Companies
seldom internalize externalities under circumstances where property rights are ill-defined and
the presence of weak institutions. It is thus leaving social damages to the society and it leads
to market failure4.

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However, assessing property rights are costly and therefore never fully delineated (Barzel,
1997). Property rights can be appropriated by state, firms, or communities (Burton, 2004,
Dasgupta, 2001, Goeschl and Igliori, 2006). I would suggest that state has all the legal rights to
define property rights through regulation however, state should not be the only actor5. It is
very likely that involvement of other actors would be beneficial in the property rights regime
given the recent challenge in modern economic and problem of environmental degradation.
Firms and local communities can be encouraged to be involved in the property rights regime
while state is still being given role as regulator (Engel et al., 2006). The problem is how to
efficiently assign the property rights and which mechanism offers the most efficient way to
appropriate property rights. The efficient allocation may be reached through synergizing state
legal authority, indigenous knowledge, and market mechanism. This research examines
whether and how CSR may become a solution in this matter as CSR is loosely defined as a
scheme where company voluntarily internalizes its externalities according to their best way of
so doing6.
This study argues that property rights can be a basis for CSR schemes. By doing so, it gives
clearer direction for CSR concept and to some extent provides the possibility of generalisation
of CSR concepts. By coupling CSR with property rights, the research examines whether CSR
could be used to combat poverty and at the same time answer the problem of optimality of
wealth creation and distribution of wealth7.

4. Adding to Existing Knowledge

The research aims to bring theoretical insights in the field of poverty alleviation through CSR
implementation, the concept of CSR based on property rights, indigenous concepts on
property rights, dynamics and policies of CSR.

5. Research Methodology
Questions
The research aims to seek for answers to the following research questions:
a. What are property rights involved in the natural resource extraction business,
particularly oil palm plantation? How are these understood by different stakeholders in
the area? What are the practical consequences of the different understanding, if any, to
the plantation policies and practices?
b. What factors contribute to poverty problems in plantation area? How do these factors
interrelate and under which conditions do they worsen poverty problems? To what
degree have property rights been acknowledged to be potentially problematic in the
plantation issues?
c. To what extent does CSR appropriately address the notion of property rights? In
plantation, how could CSR potentially contribute to the poverty reduction initiative?
Under what condition and scenario does this potential can be realised?

Research Sites and Data Collection Approach

Research is proposed to be undertaken in Indonesia, mainly in West Kalimantan (Kalimantan
Barat), Indonesia8.

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Present and Planned Oil Palm Plantation Area

Source: (Colchester et al., 2006)

The research employs joint-methods, a combination of qualitative and quantitative research.
The qualitative part of the research is largely on property right analysis, while the quantitative
approach would be proposed for analysing scenarios generated for CSR undertakings, using
game theory.
The data collated for this study consists of:
Primary data (in-depth interview with stakeholders, case studies, and workshops or
focus group)
Secondary data (media, journals, company reports, and statistics).
Payoffs (estimated from firms profit function that is derived from its cost function
and revenue9).
Schedule
1st year : (a) expanding horizon of theories and methodologies, (b) finalizing research
proposal, (c) refining concepts and approaches, (d) constructing data collecting
instruments, (e) testing instruments, (f) building contacts in research area, (g)
acquiring permits needed for conducting research, and (h) preparing research
logistics (e.g. accommodation, translators, etc).
2nd year: (a) data collection, (b) data processing, (c) preliminary data analysis, (d) delineating
actors, (e) characterisation of strategies, (f) estimating payoffs, (g) laboratory
simulation of sequential game, and (h) identify game incentives.
3rd year : (a) data analysis, (b) writing papers for journal, (c), contributing to relevant
conferences, (d) writing-up PhD report, and (e) PhD defence.

6. Reasons for Research and Expertise

First, poverty is still the major social problems in the world and poverty alleviation is a
conceptually and empirically challenging issue. Second, the use of CSR in poverty alleviation
is not yet well-explored, if not none at all. The research thus may initiate discourses in this

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area and followed by further researches as well. In addition, CSR scheme is quite well-known
among firms and is increasingly adopted by firms. Lastly, CSR concepts itself vary among
countries, firms, organisations, scholars, and experts. Researchs results may provide basis for
generalisation of concepts and thus enhance the debates into next levels. CSR may as well
contribute in bridging the trade-offs between economic interests and environmental interests.
I have been trained in my master study about concepts discussed above (e.g. poverty
alleviation, property rights, game theory, and environmental economics) especially during my
thesis research. Furthermore, during my employment in Indonesia, I had written a book on
CSR and a chapter in Social Audit Standards series as well as several publications regarding
development issues. These trainings and research experiences have given me adequate basic
skills needed in PhD research.

Wageningen, March 2007

Jimmy Tanaya

End Notes
1

The Government of Indonesia (GoI) forms a national team for bio-energy development whose main
tasks are to formulate policies on cultivation of land, infrastructure, processing, marketing and funding
In the near future, the GoI will support 20 biofuel projects, worth five billions US$ in terms of total
investment. For full story, please see (Antara, 2006, Republika, 2006).

Several examples for these categories are low endowment of skills and knowledge (critical thresholds).
inequality and low protection of property rights (institutions), and conformity with peer group
(neighbourhood effects).

Optimal to the firm that is maximal profit- means that it produces at a given profit function derived
from revenue function and cost function where marginal revenues equal to marginal costs (Varian,
2003).

Moreover, optimality does not mention anything about distribution of wealth as also common in
neoclassical perspective. Without distribution of wealth, the policy may only benefit the rich and
leaving social problems such as poverty traps and income gaps untouched. Income inequality along
with poverty traps are indeed common symptoms of ill-defined property rights and weak institutions
(Dasgupta, 2001). Beside the ill-defined property rights, Dasgupta (2001:116-117) argues that
management of property rights does matter too.

There are five explanations offered here to support my view. First, under circumstance of rampant
corruption in developing countries, state is captured by firms (Kaufmann et al., 2000). Second, it
takes time to strengthen weak institutional environment (Williamson, 2000). Third, the fact of the
irreversibility of environmental degradation (Weikard, 2003), the lengthy process of strengthening
institutional arrangements may even harmful to environmental conditions. Fourth, state may not have
as much information on property rights as local communities and firms that operate directly in the area
have. Fifth, even if state could issue good laws on property rights, it still unable to fully define property
rights and protect it (Rapaczynski, 1996).

Despite dynamics in its academic conceptualisation, CSR has widely been known and developed since
1950s (Carroll, 1999) The concept itself is still unclear, complex, and controversial as results or various
CSR concepts, measurement, and approaches (Garriga and Mel, 2004) Some suggest to abandon CSR
concepts as corporates only responsibility is to maximize profits [sic] (Friedman, 1970), managers do
not have expertise in repairing societys ills (Freeman and Liedtka, 1991) among other reasons.
However, several studies show that CSR has a neutral impact on financial performance (McWilliams
and Siegel, 2000) and public participation required within the CSR scheme could complement the

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managers lack of expertise in mitigating societys ills. Moreover, CSR can be used to mitigate social
problems (e.g. poverty, health) (Dahlsrud, Forthcoming, Hopkins, 2007).
7

However, I am aware that one of the CSRs strengths, and at the same time a weakness, is its
voluntariness.7 Therefore it is also needed to analyse firms strategic behaviours, e.g. how firms react to
other firms strategy or action. The research proposes game theory as an analysis tool to study these
behaviours and interactions (Aumann and Hart, 1992, Aumann and Hart, 1994, Aumann and Hart,
2002).

The area is chosen as it contains rich biodiversity and is inhabited by local tribes. The palm oil
plantation project in the area is envisaged to bring about environmental impacts as they cause huge
environmental degradation. The plantations directly and indirectly affect socioeconomic conditions
especially poor people.

Loosely defined, cost is a function of capital, labour, material, technology, CSR. Meanwhile, revenue is
calculated from demand function.

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