Amsterdam Business School
Sustainability Reporting as the Driver of Internationalization
An empirical study of the direction of the relationship between sustainability reporting and internationalization with a moderating effect of board diversity.
MSc Business Administration- International Management Track Faculty of Economics and Business, University of Amsterdam
Name: Charlotte Pauline Kraaijenbrink Student number: 10701796
Thesis supervisor: Dhr. dr. N. (Niccolò) Pisani Second Reader: Dr. Mashiho Mihalache
Date of Submission: June 11th, 2018 Master’s Thesis – Final Version
Statement of Originality
This document is written by student Lotte Kraaijenbrink who declares to take full responsibility for the contents of this document.
I declare that the text and the work presented in this document is original and that no sources other than those mentioned in the text and its references have been used in creating it.
The Faculty of Economics and Business is responsible solely for the supervision of completion of the work, not for the contents.
Abstract
The importance of the environment and the concerns around sustainability is gaining more support across the world. Stakeholders’ priorities have shifted to concerns about sustainability, with an increase in standards and regulations surrounding reporting on sustainability. This creates opportunities for firms to anticipate these reporting regulations and benefit from the positive effects created by increased sustainability reporting. Therefore this study focuses on the direction of the relationship between sustainability reporting and the effect on internationalization of MNE’s in scope and scale. Previous studies have focused on the effect internationalization has on sustainability. This study will also investigate the opposite direction of this relationship, namely the effect sustainability reporting has on the scope and scale of internationalization. The scope of internationalization measures the number of subsidiaries a MNE has around the world and the scale of internationalization will measure the dependence on international markets. Moreover, the moderating effect cultural board diversity has on this relationship will be analyzed. Using cross-sectional data from the Newsweek green rankings and the Fortune 500 for the years 2012-2014. The results find no significant relationship between internationalization and sustainability reporting. The results do provide evidence for the moderating effect cultural board diversity has on the relationship between sustainability reporting and its effect on the scope of internationalization. Analyzing both directions of the proposed relationship and the focus on sustainability reporting makes the contribution to the existing academic literature. The results will provide academic and practical relevance.
Keywords: Sustainability reporting; scale of internationalization; scope of internationalization;
List of Contents
1. Introduction ... 5
2.1 CSR & Sustainability Reporting ... 10
2.2 Internationalization ... 12
2.3 Relationship of Internationalization and CSR ... 15
2.4 Research Gap ... 17
3. Theoretical Framework ... 18
3.1 Sustainability reporting and Scale and Scope of Internationalization ... 18
3.2 The moderating effect of Cultural Diversity of the Board of Directors ... 25
3.3 Conceptual model ... 29
4. Methods ... 30
4.1 Sample and Data Collection ... 30
4.2 Variables and Measures... 31
4.2.1 Sustainability Reporting ... 31
4.2.2 Degree of internationalization ... 32
4.2.3 Moderating variable: Cultural Diversity ... 32
4.2.4 Control Variables ... 33
4.3 Statistical Analysis and Results ... 36
4.4 Summary results ... 46
5. Discussion ... 47
5.1 Academic Relevance ... 48
5.2 Practical Relevance ... 50
5.3 Limitations and Further Research ... 51
6. Conclusion ... 53
1. Introduction
“Creating a strong business and building a better world are not conflicting goals – they are both essential ingredients for long-term success"
- (William Clay Ford Jr. Executive Chairman, Ford Motor Company)
Since the second half of the 20th century corporate social responsibility (CSR)—generally defined as “context-specific organizational actions and policies which take into account stakeholders’ expectations and the triple bottom line of economic, social, and environmental performance” (Aguinis, 2011; Aguinis & Glavas, 2012, as cited in Pisani et al., 2017)--continues to grow in relevance. In the past years, CSR has become a popular research area and more importantly, it has become a growing concern for firms (KPMG, 2013). CSR covers concepts from stakeholder management, environmental concern, sustainability, human rights and corporate citizenship. Carrol (2000) describes CSR as the measurement and focal point of the sustainable business direction. CSR is becoming a strategic asset as it is conceived as having the ability to overcome legitimacy issues and the risk of litigation when expanding abroad (Attig et al., 2013). Therefore, CSR is a growing topic of expansion and interest for MNEs looking to internationalize; it can be a source of opportunity, innovation, and a competitive advantage (Porter & Kramer, 2006). The studies show that previous research has focused on the relation of internationalization on CSR reporting, but no research has been performed on the effect of CSR reporting on internationalization. A possible indication of a reverse relation originates from the fact that firms who have implemented a sustainability strategy could use their strategy as a competitive advantage to gain market share abroad and as an asset to overcome their liability of foreignness. This thesis will provide an unbiased methodology for evaluating multiple competing
hypotheses to focus on the direction of the relationship between reporting and internationalization.
Internationalization is known as the development by which a company broadens its activities of goods or services to countries and regions of the world other than their home country (Hitt et al., 2007). Many drivers of internationalization have been identified, i.e., Rugman and Verbeke (1998) state that internationalization happens because firms can profit from market imperfections and opportunities. Sharman et al. (2004) find that firms internationalize due to external pressures from stakeholders and institutions. It is also found that internationalization is a strategy for competitive advantage due to scale and scope (Kogut, 1985; Nachum & Zaheer, 2005). Furthermore, internationalization can give firms access to more resources and capabilities (Hitt et al., 2007).
MNEs CSR is influenced by internationalization due to the fact that the more internationalized and geographically dispersed the MNE is, the larger the stakeholder base, and the diversity of what stakeholders demand (Kostova & Zaheer, 1999). Marano et al. (2017) found that EM-MNEs use CSR as an effective strategy to overcome liabilities of foreignness when internationalizing. Kang (2013) and Attig et al. (2013) show the relation between corporate social performance (CSP) and internationalization. Recent research has not yet contributed to an understanding whether MNEs internationalize because of CSR reporting or vice versa. Hence, the direction of the relationship between these two topics has not been established. Previous research has solely focused on the influence of internationalization and thus has not analyzed alternative explanations. Therefore, this paper will investigate if increased sustainability reporting is a springboard to internationalize or if internationalization causes firms to increase their CSR reporting focusing on both the scale and scope of internationalization. Competing hypotheses are formulated to aid judgment on this important issue, attentively weighing alternative drivers of
internationalization and sustainability reporting. The following research question attempts to answer: What is the relationship between sustainability reporting and internationalization? Furthermore, an attempt is made to research the moderating effect of board diversity on this relationship. Whether a more culturally diverse board of directors will positively influence the relationship between sustainability reporting and internationalization. First of all, it is assumed that there is a relationship between internationalization and CSR (Attig et al., 2016). Secondly, it is expected that culturally diverse boards will positively moderate the relationship between sustainability reporting and internationalization. Board diversity is part of the social pillar of CSR to achieve equality, fairness and multicultural representation of people. Often, the board of directors directs internationalization; they perform the role of exercising control over management (Kose & Senbet, 1998). The board of directors also influences sustainability reporting. The benefits of board diversity are becoming more apparent through recent studies. One of these benefits originates from the potential influence on the decision-making in the board. Hambrick and Mason first pitched this idea in 1984: decision and organization outcomes are dependent on the background characteristics of the TMT, top management team. This theory is called the upper echelons theory. The theory explains that individuals have different experiences, personalities, and values, which influence their perspectives. When put together in a team or in a decision-making position; their personal background will influence their decision-making. It has been extensively researched by now and results have pointed in the direction that diverse boards pitch more ideas, more perspectives, are more creative and better in finding solutions (Amason, 1996). Moreover, Marimthu (2008) finds that culturally diverse boards have a positive effect on firm financial performance. While Harjoto et al. (2014) explains that board diversity is positively related to CSR performance. Board composition also affects the internationalization of an MNE (Rivas et al., 2009). Therefore the prediction is made that board diversity will moderate the effect
of sustainability on internationalization to the extent that an increase in board diversity will increase sustainability reporting, and at the same time will increase internationalization.
This research will contribute to existing literature in several ways. The first literature gap this paper fills is an analysis of the direction of the relationship between an increase in sustainability reporting and the effect on internationalization, and how internationalization effects sustainability reporting. As mentioned previously, literature stated the positive effect of internationalization on CSR activities (Brammer et al., 2006; Kang, 2013), but no research focused on sustainability reporting. Secondly, previous research has focused on one side of the relation; the effects of internationalization on CSR, this paper will attempt to fill this gap by researching whether sustainability reporting influences internationalization. Stating competing hypotheses allows an analysis of all possible outcomes. Lastly, this paper adds to existing literature on the upper echelons theory through extending the role cultural diversity has in internationalization and sustainability reporting. By building on the debate of board diversity and the positive associations made in research, it is predicted that board diversity positively moderates the relationship between sustainability reporting and internationalization. Providing support for the positive effects cultural diversity has on teams. This is not previously discussed, and will fill an additional gap in the literature. This thesis does not find significant positive results for the hypotheses and the relation between sustainability reporting and the scope and scale of internationalization. This study does find empirical evidence for the positive moderating effect that board cultural diversity has on the relationship of sustainability reporting on the scope of internationalization. This is not the case for the scale of internationalization.
The remainder of the paper is organized as follows. In the second section, a literature review is written on CSR and sustainability reporting, internationalization, and board diversity. The relationship between these factors and how these factors influence MNEs are analyzed. Why
sustainability reporting is beneficial for firms and their reputation, and why this stimulates internationalization is discussed. Followed by an investigation of how board diversity influences sustainability reporting and how it might influence internationalization. This is followed by hypothesis development. In the fourth section, the research methodology is described. Followed by a description of the data chosen, descriptive statistics and the results. Finally, a conclusion is presented preceded by the limitations and suggestions for future research.
2. Literature review
This section consists of a literature review concerning three research areas which are associated with this paper, namely CSR and in particular, sustainability reporting internationalization and the diversity of the board of directors. The first part of the literature review consists of an assessment of recent research on CSR, and sustainability reporting and why MNEs are increasingly reporting on sustainability and investing time and money in CSR practices. In order to develop a relevant hypothesis it is necessary to have a basic understanding of what CSR is, and what CSR entails. Secondly, we will examine the research on internationalization and the relation with CSR practices and why sustainability reporting can add value to internationalization success of MNEs. Lastly, there is a review on why cultural diversity on the board of directors is important. What a culturally diverse board means and what influence the board of directors has on internationalization and sustainability reporting.
2.1 CSR & Sustainability Reporting
CSR has many definitions, and there is no consensus on what the term exactly entails. The definition most often used for academic literature and used for this report is the one of McWilliams and Siegel (2001) “CSR are actions that appear to further some social good, beyond the interest of the firm and that which is required by law”. The dimensions of CSR especially in MNEs have many forms, it is usually understood that CSR is concerned with activities of the firm that are outside its scope and are concerned with stakeholders’ welfare. Often CSR policies can be found throughout the firm, from top management decision making for sustainable investments, to volunteer activities to clean the local environment. CSR is concerned with ethics, investments, environment, communities and human rights among others. Drawing on the study performed by Attig et al. (2016) their view of CSR is that MNEs are expected to engage and implement CSR
activities arising from the additional compel stemming from cultural, political, institutional and economic stakeholders. The additional expectations from stakeholders are subject to the environment and context the MNE operates in (Aguinis, 2011). Stakeholders tend to follow more closely firms in countries where there is social injustice, inequalities in labor, environment, and ethics. CSR can be divided into three aspects: economic, social and environment. It is often understood that business and CSR are competing for strategies in firms but they are interdependent. A successful business is interrelated to a healthy society (Porter & Kramer, 2006). In light of this research, a focus will be on the sustainability practices of MNEs. Montiel (2008) concluded that CSR is associated with corporate sustainability and that the usage of these premises and the definitions are synonymous. CSR practices performed by a company can be communicated to stakeholders through non-financial reporting; often companies report their CSR practices through corporate sustainability reporting. Through sustainability reporting companies can communicate their undertaken efforts to sustain the environment and their social actions (Kraaijenbrink, 2017). According to the Dow Jones Index (2015) "Corporate sustainability is a business approach that creates long-term shareholder value by embracing opportunities and managing risks derived from economic, environmental and social developments".
The extent to which an MNE applies CSR activities deviates per industry, culture, size, demands of stakeholders, and the commitment level to CSR (Tsoutsoura, 2004). CSR practices are believed to be a key strategic asset and can affect both internal and external pressures and perceptions. Muller and Kolk (2009) describe extrinsic factors that affect CSR as stakeholder demands, regulation and media pressures. Intrinsic factors come from within the firm, for example the managerial and employee’s motivation for moral justice. CSR has many positive effects, firms that are perceived to be responsible actors increase their positive reputation, reduce the risk of litigation when expanding into foreign markets, and reduce possible violations of
society and regulation requirements (Attig et al., 2016). MNEs can reduce miscommunication and reduce the psychical distance by increasing CSR (Zahra et al., 2000). Moreover, CSR practices improve credit ratings and reduce financing cost (El Ghoul et al., 2011). Kostova and Zaheer (1999) find that expanding MNEs engaged in CSR decrease their legitimacy issues.
Country characteristics, institutions, and internal management influence CSR activities. Studies performed on this topic find that MNEs CSR activities are influenced by the context they operate in (Chapple & Moon, 2005). Aguilera et al. (2007) contributes by finding proof that social responsibility of firms is influenced by national systems in a study done across Anglo-Saxon and European countries. Subsequently, Jackson and Apostolakou (2010) find that institutional environment has a significant influence on CSR activities of MNEs.
2.2 Internationalization
Internationalization can be seen as a way of increasing competitive advantage (Attig et al., 2013). Where firms expand their value by adding activities in other countries than their home country. The fast globalizing world makes it more easy and profitable for firms to expand abroad (Faeth, 2009; Hitt et al., 2007). There are many substitutions for internationalization used in previous studies. Some studies refer to it as the level of internationalization, international diversification, geographic diversification and multinationality, but all point to the concept of expanding beyond the home country (Hitt et al., 2007; Papadopoulos & Martín, 2010). Expanding beyond the home country forces firms to make decisions on the degree of internationalization. The degree of internationalization is often expressed in scale and scope (Hitt et al., 2007). Scale and scope are important factors to understand the process of internationalization. As described by Koch (2017) in a relating study on the impact of internationalization, the scope of internationalization is focused on the extension to geographic operations. The scale points to the dependence on international markets, and the degree thereof.
Internationalization is a way for firms to capitalize on market opportunities and market imperfections in the countries MNEs expand to (Rugman, 1979). Additional theories are available of why firms internationalize; one of them is Buckley and Casson (1985) who studied that firms internationalize to achieve efficiencies and as means of internalizing transactions. Internalizing transactions can reduce cost by no longer requiring a third party or the negotiating and contracting cost associated with transactions. Moreover, it can be cheaper to produce in another location causing firms to expand. Another known phenomenon is moving to a location where intangible assets as knowledge are located and where a firm can benefit from the externalities embedded in the location (Cerrato, 2009). Other location benefits can weigh-in on the decision to internationalize as well as described by Dunning (1977). Dunning’s elected paradigm also known under the name OLI paradigm of ownership, location and internalization, indicate that location advantages include access to certain markets, tax havens and different competition. Some authors say that firms expand abroad through means of cost vs. profit as a way of increasing firm value (Shakrokh, 2002). Johanson and Vahlne (1997) developed the Uppsala Model, where firms internationalize through a path-dependent model, and incremental steps in the physic distance. Where MNEs first invest in firms relatively low in physic distance and through means of export. Later on they expand commitment through establishing subsidiaries and expand to countries that are higher in the physic distance. This will later prove to be of importance because the further the physic distance, the greater the difference in stakeholders and as institutions change so will stakeholder demands. Assumed positive effects associated with internationalization is increased performance and creating a competitive advantage. Hitt et al. (2007) describes internationalization as a value-creating process, it allows companies to capitalize on research and development, extended competencies and costs, economies of scale, room for growth, and an efficient use of capabilities. Nacheem and Zaheer (2005) studied the
internationalization of firms as a positive impact on a strategy to gain a competitive advantage, providing further growth benefits and additional diversification benefits. This theory is related to the resource-based view. The resource-based view implies that firms can create a sustainable competitive advantage by possessing capabilities, resources, and synergies that are Valuable, Rare, Inimitable, and Non-Substitutable. Other companies cannot generate these exact resources and capabilities, which leads to a unique combination and benefit for the MNE (Barney, 1991).
Some studies find that internationalization is not associated with increased performance. Lu and Beamish (2004) find that there is a S-curve that describes the relation of MNE performance and multi-nationality. There is first a negative relationship that eventually turns into a positive relationship. And after a certain point of internationalizing, it goes back to negative. The S-curve is also known as the 3-stage theory by Contractor, Kundu and Hsu (2003) the negative returns in the last stage or final part of the S-curve are caused by the complex coordination structures and the costs associated. In 2014, Almodóvar and Rugman introduced the M-curve, this curve adds to the S-curve by identifying that in the beginning there is a phase where firms occasionally sell abroad and think they can gain easy wins. It is following this phase, that firms realize that internationalization is a deep long-term investment with several problems. Hennart (2007) proves that internationalization is not necessarily associated with increased performance, but that a positive return can be mutually reinforced regardless of internationalization. The increased learning in different subsidiaries can easily be seen as a location bound FSA. Location bound FSA’s aren’t always easily transferred (Bromney, 1993). Another disadvantage of expanding internationally is the liability of foreignness, better known as LOF (Zaheer, 1995). These are the cost associated with operating in a foreign country, relating to the risk and uncertainty of doing so. Expanding internationally is not just complicated by the LOF; international companies experience increased stakeholder demands and possible hostile environments. This increased
number of stakeholders is coming from being present in more countries and therefore more people who are affected or could be affected by the decisions of the MNE. This requires the MNE to be more often responsive and one way to do this is through increased CSR activities (Brammer et al., 2008).
2.3 Relationship of Internationalization and CSR
The relationship between internationalization and CSR is studied in various ways. Internationalization influences CSR and is influenced by CSR. As MNEs expand their stakeholder base increases, with the stakeholder base increasing, the demands increase. Not only their stakeholder base increases but also by acting in multiple countries, MNEs will have to deal with more and different laws and regulations imposed upon them by national institutions. At the same time CSR can form a competitive advantage for a firm to internationalize. Examples of this are: Ben & Jerry’s, Patagonia, Newman’s own & The Body Shop (Porter & Kramer, 2006).
Corporate social performance, a measurement of CSR had been found to have a U-shaped relationship with internationalization. High levels of CSR abroad positively influence sales levels and MNEs that had average CSR activities experienced lower sales than MNEs that engaged in a high level of CSR activities (Bouquet & Deutsch, 2008). In addition, Attig et al. (2016) found a positive relation between MNEs level of internationalization and CSR scores. Kang (2013) found that an increase in internationalization was followed by a higher response to an increased stakeholder base. Simultaneously, by entering foreign countries litigation risks and chances of violating regulations are higher and therefore firms can reduce these perceived risks by increasing their reputation (Aguilera-Caracuel, 2017). Stakeholder demands are responded to more often in order to protect their reputation (Kacperczyk, 2009; Kang, 2013). Zahra et al. (2000) found that MNEs can decrease communication problems by increasing their CSR activities. An important article in this field of research is the review of 31 articles on international CSR research by
Pisani, Kourula, Kolk and Meijer (2017). Some of the key findings influencing the relationship between CSR and internationalization are discussed. First the larger the CAGE (cultural, administrative, geographic and economic) distance between home and host country the more likely the subsidiary will not engage in CSR in the specific host country (Campbell et al., 2012). This could indicate that CSR is not as much influenced by internationalization, especially when the distance increases. Second, institutions influence CSR activities, and therefore for MNE’s to internationalize they might want to expand their CSR activities, indicating a positive relationship (Barkemeyer et al., 2015; Christmann, 2004).
Another important finding is that when stakeholders demand more responsible practices, MNE’s tend to move their irresponsible practices to foreign countries (Surroca et al., 2013). Indicating that adherence to sustainability demands in one country might influence internationalization. But most important is that the CSR agenda is influenced by stakeholder demands, especially those of society, institutions and financial markets (Muthuri & Gilbert, 2011; Park & Ghauri, 2015). Internationalizing can increase your stakeholders, and therefore requires companies to more carefully develop sustainable practices. Another finding is that the type of industry, and the firm’s commitment to the environment are indicators of how transparent a firm is, and how much they will internationally role out their CSR practices. This indicates that CSR could be a strategic resource (Porter & Kramer, 2006). Porter and Kramer (2011) introduced this concept of creating shared value, where a business fully adopts all social and environmental practices, but at the same time, this leads to economic results. Enhancing the value for the company but also for society, creating shared value for both society and the firm. All of this leads to the assumption that CSR could influence internationalization and vice versa. If CSR is a strategic resource this could be exploited abroad. Additional findings show that companies use CSR strategically in emerging and developing countries, but this has so far not led to results in
contract and license winning situations (Mijatovic & Stokic, 2010). Moreover, Xun (2013) found that centrality, visibility and voluntarism of CSR matter in the extent that it affects the firm’s value creation.
2.4 Research Gap
Previous studies focus on corporate social performance, which is measured by the relationships of business with stakeholders and the actions taken to satisfy these stakeholders needs (Kang, 2013). Where Attig et al. (2016) focused on CSR score, which measures the activities undertaken in these areas. No previous research has focused on measuring the relationship between sustainability reporting and internationalization. Therefore, this paper adds to the current literature by examining the relationship between internationalization and sustainability reporting. Moreover, previous research has examined the influence of internationalization on CSR; no previous literature investigates the influence of CSR/ sustainability reporting on internationalization, and to what extent this is used as a strategic resource. The direction of the relationship between sustainability reporting and internationalization has not yet been established.
Therefore, this paper will investigate whether an increase in sustainability reporting leads to internationalization or whether internationalization leads to increases in sustainability reporting. The following research question is formulated: What is the relationship between sustainability reporting and internationalization.
3. Theoretical Framework
The model, which is introduced in this chapter, contains two competing hypotheses to analyze the effect of sustainability reporting (CSR) on the scale and scope of internationalization and vice versa. Previous studies have not taken into account the possibility that sustainability reporting is the driver of internationalization. Next to this, the effect of the moderating factor of ‘cultural board diversity’ is tested on this new possible driver of internationalization. First, sustainability reporting and the influence on the scope and scale of internationalization are discussed, followed by the reverse. Second, the hypotheses of the moderating factor of cultural board diversity on sustainability reporting and the internationalization of scope and scale are formulated. The conceptual model will try to graphically illustrate the hypothesized relationships.
3.1 Sustainability reporting and Scale and Scope of Internationalization
The starting prediction is that internationalization influences sustainability reporting and sustainability reporting influences internationalization. With literature only supporting the relationship between internationalization and its influence on CSR activities, it is easy to overlook the competing hypothesis of sustainability reporting impacting internationalization. It is important other relations are examined as well. Research might have overlooked other reasons driving internationalization. Internationalization is not only a driver of CSR, and the achievement of a sustained competitive advantage. Internationalization is also implicated by a number of problems and strategic hurdles. The main hurdle is often identified as distance and the challenges associated with distance. Ghemawhat (2001) identified the factors affecting the distance between one country to the next are geographic, political, economic and administrative. To overcome distance MNE’s need firm-specific advantages (FSA), and especially non-location bound FSA’s. These advantages allow for an increased scale and scope in firms undertaking. Sustainability reporting allows firms to build a competitive advantage through sustainable capabilities,
transparency and assets appreciated by stakeholders. The scope of internationalization can be defined as the extent of geographic dispersion of a firm. The scope of internationalization is measured by the number of countries in which the firm is present and the degree of spatial concentration of the firms’ undertakings (Lin, 2012). Elaborative sustainability reporting allows for companies to meet and exceed increased stakeholder demands when moving into new markets. Furthermore the more sustainability reporting is increased the easier it will be for companies to comply with laws and regulations specific to the host country. Every country has a different culture, norms, values and legal environment; this puts pressure on the MNE to do business in a certain way. Extended sustainability reporting lowers the barriers to enter another country, as Bouquet and Deutsch (2008) explored that good CSR reporting can lead to moral capital and enhanced reputation. A good reputation of the firm will make the move and the acceptance of the firm abroad easier, experiencing less friction with the host country, and fewer costs which can be related to expanding (Kotha et al., 2001). This can be seen as a firm-specific advantage. This enhanced reputation, the competitive advantage, and the so-called moral capital allows the firm to conduct business in an array of different countries and thus stimulating its internationalization scope. In addition the enhanced reputation can be seen as an intangible asset. Cerrato (2009) found intangible assets to be a driver of internationalization. A good reputation is a resource of the firm that can lead to a sustained competitive advantage, indicating that this is, according to Barney (1991), Valuable, Rare, Inimitable and Non-substitutable. The resource-based view of the firm states that sustainability can be seen as a competitive strategy and asset. This can drive firms to exploit FSA’s abroad (Barney, 1991). This FSA can be referred to the natural-resource-based view. The natural-resource-based view is the environmentally friendly resources and capabilities of a firm that can be seen as a competitive advantage (Hart, 1995). De Marchi (2012) confirms this he finds that innovative resources and capabilities can be seen as
tools to enhance the firm’s competitive position in the market and the degree to which it can reply to the increasing demands of stakeholders on the sustainability of firms. Additionally the strategic resources and capabilities of a firm in sustainability can allow firms to enter regions with high environmental regulation. It further allows the firm to enter those ‘higher-standard’ countries and exploit the location advantages embedded there. This gives additional stimuli for MNEs to exploit opportunities abroad. These reasons for exploiting FSAs and the degree of responsiveness can motivate a firm to increase the scope of their internationalization through sustainability reporting. The scope of internationalization refers to geographic spread across countries and therefore these reasons allow for more entries into different countries. By trying to maximize exploitation of FSA’s in as many countries as possible and by being responsive. Therefore it is expected that increased sustainability reporting causes a higher level of a firm’s scope of internationalization.
H1a: Increased sustainability reporting causes a higher level of a firm’s scope of internationalization
As indicated the expectation is that increased sustainability reporting will lead to a higher level of a firm’s scope of internationalization. Similar arguments indicate that increased sustainability reporting can lead to an expansion in the scale of internationalization. The scale of internationalization can be divided into two variables, one being the amount of revenue generated from the international markets and the second one being the number of different markets entered (Crick, 2009). As Bouquet and Deutsch (2008) found that increased CSR abroad increases sales. It can be suggested that sustainability reporting can be a driver of the scale of internationalization, to continue and to amplify the sales in foreign countries. Literature indicates that sustainability practices and investments can enable firms to generate advantages associated with lower cost, enhanced efficiency, and increased competitiveness. These sustainability practices and
innovations are associated with higher productivity and lower overall cost. Additionally, sustainability reporting and innovations simplify responsiveness to stakeholder demands and introduce a distinct strategy. To relate back to earlier mentioned positive effects of sustainability reporting, the enhanced reputation and the competitive advantage associated with being sustainable and the higher degree of responsiveness to stakeholders are all contributing factors influencing the scale of internationalization. Increased sustainability reporting and meeting stakeholder demands indicate that these firms also have to be more environmentally friendly, which in turn increases profits and decreases costs (Lanoie, 2008). Another reason that influences the cost of internationalization is driven by the reputation of the firm, which is greatly influenced by reporting. The reputation of the firm can lower cost of entry, by reducing the possible legitimation and litigation associated with having poor knowledge of the foreign market. Furthermore, extensive sustainability reporting decreases legitimacy problems lowering the cost and increasing revenue and can reduce the cost associated with environmental damages (Dowell, Hart & Yeung, 2000). Taken all together sustainability reporting causes positive returns across borders and allowing increases to the scale of internationalization. Leading to the following hypothesis: Sustainability reporting causes a higher level of a firm’s scale of internationalization.
H1b: Increased sustainability reporting causes a higher level of a firm’s scale of internationalization
In this study competing hypotheses are drafted to determine the direction of the relationship between internationalization and sustainability reporting. The following section will predict why internationalization positively affects CSR strengths including responses to stakeholder demands and the CSR score (Attig et al., 2016). The competing hypotheses will enhance the quality of the research, as theory-driven arguments were found supporting both sides of the relationship.
The literature search has found several results on the more common relation found, the one of internationalization driving CSR. Attig et al. (2016) found a positive relation between MNEs level of internationalization and CSR scores. Kang (2013) shows that an increase in internationalization was followed by a higher response to the increased stakeholder base. Increased performance is a benefit of internationalization, but performance provides only short-term information of the firm. Sustainability reporting can provide longer-short-term information on the firm and it can forecast viability (Kacperzcyk, 2009). Internationalization of the scope of the firm increases the stakeholder base and therefore increases the responses to stakeholder demands. This comes forth from the stakeholder theory of the firm as explained by Kang (2013). Stakeholders are groups and individuals who are affected by and affect the activities undertaken by the firm (Freeman, 1984). Expanding beyond the home regions forces firms to comply with different regulations, and social structures, these added complexities would alter the MNE’s reporting. Different countries can have higher or different standards for reporting, and especially for sustainability practices, forcing the MNE to increase sustainability reporting. Additionally, expanding beyond the home country forces firms to adhere to global ethical codes of conduct (Mazereeuw-van der Duijn Schouten et al., 2014). This indicates that increased scope of internationalization influences the level of sustainability reporting. Another indication, for an increase in sustainability reporting through internationalization, is found in the fact that larger and more dispersed firm’s experience more media consideration, analyst’s coverage and increased attention from NGO’s. The larger the geographic dispersion of a firm the more likely the firm is perceived as an object to set standards, and to change current practices and processes. This all leads to a more diverse group of stakeholders that, while increasing internationalization, forces firms to increase sustainability reporting to deal with these demands. Furthermore as pointed out by Kang (2013) internationalizing firms can leverage intangible assets across different countries
they operate in. The geographic extension of firms is positively associated with the range of different market activities and products in both markets and countries. Extending markets is also related to the increase in social issues important to the firm and the stakeholders involved. The research indicates the existence of a positive relationship between the scope of internationalization and CSR reporting. Therefore the following hypothesis is established: A firm’s scope of internationalization increases the likelihood of sustainability reporting.
H2a: A firm’s scope of internationalization increases the likelihood of sustainability reporting
The same factors from the previous paragraph can be considered to provisionally conclude there is a positive relationship between the scale of internationalization and sustainability reporting. Dispersion of markets and increased reliability of international markets will incentivize managers to invest in solutions of social issues to decrease both risk and the costs associated with these risks. Fatemi (1984) found that internationalization lowers employment risk experienced by managers due to the different sources of income that can be generated across countries. The best internationalizing firms rely strongly on managers with a lot of experience, creating high value in the employment of these managers. This allows these managers to pay more attention to demands and social issues and less worry about meeting returns because they are so valuable (Kang, 2013).
Being dependent on your international scale makes firms want to decrease cost, which can be accomplished by decreasing risks. Entering foreign countries and expanding activities in foreign countries increases litigation risks and chances of violating regulation; therefore firms can reduce these perceived risks by increasing their reputation (Aguilera-Caracuel, 2017). Improving their sustainability reporting can increase their reputation. Moreover, in order for the MNE to be successful, it has to adapt. Sander and Carpenter (1998, p. 158; Attig et al., 2016) state it more clearly: “as internationalization increases, firm survival increasingly depends on the ability to
cope with the high levels of complexity that derive from heterogeneous cultural, institutional, and competitive environments and the need to coordinate and integrate their geographically dispersed resources”. Attig et al. (2016) then explains in order to do this MNE’s have to deal with an expanding stakeholder base, with the increase in stakeholder base the demands will more likely differ. In order to avoid cost, controversies, litigation and gain acceptance MNE’s will increase their CSR activities. The firm perceives these controversies, litigation and other costs as risks (Feldman et al., 1997). Kang (2013) notes too that internationalization increases the risk aversion experienced by managers. Managers tend to go to great lengths to avoid any risk, and therefore internationalization makes the MNE more likely to adhere to increased stakeholder demands and increase CSR reporting. To decrease risk, responding to increased stakeholder demands, adaptability and the elevated attention are all factors contributing to an indication of a positive relationship of internationalization scale on sustainability reporting. A positive brand image associated with replying to social issues in one country can contribute to a positive brand image in another country. This allows the firm to spread both cost and benefits. Secondly, internationalizing firms might feel the pressure to increase reporting to overcome their liability of foreignness. Lastly, locating a subsidiary in a foreign market, firms could smoothen the process and commitment to the country and market by increasing their sustainability reporting. This can provide the country, the government, and other stakeholders with trust, which can help with possible cost and risks associated with communication problems and decrease the experienced physical distance (Zahra et al., 2000; Johanson & Vahlne, 1997). All research combined leads to the assumption that there is a positive relation. Therefore the following hypothesis is formed: A firm’s scale of internationalization increases the likelihood of sustainability reporting.
H2b: A firm’s scale of internationalization increases the likelihood of sustainability reporting
3.2 The moderating effect of Cultural Diversity of the Board of Directors
The predicted relationship between internationalization and sustainability reporting is expected to be positive. Board diversity seems to affect both variables and therefore if a culturally diverse board is present the relationship between the two variables might be affected and positively influenced. The board of directors plays an important role in influencing and controlling management of a MNE. The background of these individuals influences the decision-making and organizational outcome of the board and the MNE. The resource-based view even suggests that human resources and teams can result in the most sustained competitive advantages, and these capabilities are more complex strategies to copy (Kaczmarek, 2009). Rooted in the board diversity discussion is the upper-echelons theory of Hambrick and Mason (1984). The theory states that individuals, due to their background and personal experiences, perceive situations differently. “The central premise of upper echelons theory is that top executives view their situations – opportunities, threats, alternatives and likelihoods of various outcomes – through their own highly personalized lenses. This individualized construal of strategic situations arises because of executives’ experiences, values, personalities and other human factors. Thus, according to the theory, organizations become reflections of their top executives” (Hambrick, 1984 as cited in Augier & Teece, 2016). Concluding from the upper echelons theory is that the diversity of the board of directors will influence the decisions and outcomes. Therefore, having no diversity in gender or age will not achieve the same results as a board with diversity in different ages, genders, and ethnicities.
Diversity in the board of directors has a beneficial effect. For example, Feijoo et al. (2014) finds that with more women on the board of directors CSR activities increase. Rivas et al. (2009) find that directors that have a diverse background and who are younger of age have a positive effect on internationalization. Moreover, a diverse board can increase innovation and reputation
of firms (Miller & Triana, 2009). Research has found that diversity is needed to anticipate on today’s dynamic and more complex economy. The benefits of diverse boards in gender and in cultural background date back to 1996, when Amason found that added diversity would lead to a more extensive interpretation of possible solutions. Diversity will lead to more variety and thus a greater amount of information that can be used, ideas available and perspectives in the room. Heterogeneous groups were capable of making better decisions for more complex problems. Furthermore, Firoozi (2016) has found that: "diversity is seen as providing boards with access to a wider pool of competencies, experiences, and perspectives, which should be beneficial to board effectiveness". Zhang (2012) states that culturally diverse boards enhance strategic decision-making. Subsequently, previous research found that a more diverse board possesses an extended network, which has a positive effect on stakeholder relations and CSR (Beckman & Haunschild, 2002). Concluding from all this research it can be said that the benefits of diversity, and more culturally diverse boards are considerable.
The effects on CSR reporting of board diversity has been researched a handful of times. Bear et al. (2010) for example found a positive relationship between gender composition and CSR ratings. Research performed by Cook and Glass (2015), suggested that culturally diverse boards have more impact on diversity practices than a female CEO, or a minority CEO. Increasing the number of different backgrounds to the board has more impact than one diverse CEO; this is because more diverse directors have more experience with different backgrounds and programs to enhance cultural diversity within firms. This indicates that an increase in cultural board diversity can stimulate social practices within the firm. Harjoto et al. (2014) find that board diversity complements the comprehension of stakeholder demands, and therefore has increased capability of satisfying their demands. Adversely, Katmon et al. (2017) recently discovered that in Malaysia nationality diversity in board lowers the quality of CSR reporting. As this study was
performed in Malaysia they focused on emerging economies and indicate that the reason for this negative relation might come forth from poor management intervention, weak governance in the institution and the cost associated with appointing different nationalities to the board. Contrasting to this view is that boards, which are composed of different cultures, will more likely cater reliable reporting to stakeholders (Ammer & Ahmad-Zaluki, 2014). Sanders and Carpenter (1998) found earlier that the complex decision-making and the increased information-processing demands associated with internationalizing are affected by governance structure. Additionally, Rivas (2012) found a significant result of tenure, expertise, and age in the board of directors influencing internationalization. For cultural diversity also known as the demographic diversity of culture, the definition of Marimuthu (2008) will be used: “the representation of the ethnic diversity of various countries (Chinese, Latin, Indian and African)”.
Where previous literature has looked at the separated influence of board diversity on the two variables of internationalization and sustainability reporting. This present study will further examine the effect of board diversity on internationalization and sustainability reporting by researching the effects of a culturally diverse board of directors. This is to say, taking board diversity as a moderator of the relationship between sustainability reporting and the internationalization of scope and scale. Drawing from the literature and the effect of board diversity on the improved sustainability reporting due to innovation, network, experiences, competencies, strategic decision-making and increased social reporting. It is expected that the increases in the network makes it easier to respond to stakeholder demands and therefore allows for easier entry into different countries. Similarly, the experienced increased reputation with more reporting makes entering into foreign countries easier. Furthermore, the increased information and reporting achieved by a culturally diverse board allows for less risk and cost associated with exploiting opportunities abroad. This allows for increased internationalization of scope. In
addition, it is easier for firms to respond to problems experienced when improving their sustainability reporting. This drives down costs and enhances revenue for their global operations. Moreover, the improved strategic decision-making associated with culturally diverse board make firms opt for increased sustainability reporting to deal with possible legitimacy issues when expanding, allowing for easier generated revenue. As it is expected that culturally diverse boards will have a positive relationship with sustainability reporting and the scope and scale of internationalization and therefore will positively influence the relationship. In sum, it is expected that an increased cultural diversity on the board will have a positive effect on sustainability reporting and internationalization of scope and scale due to the extended abilities in decision-making, innovation, and the approach to complex situations. The involvement of a diverse board in cultures positively influences sustainability reporting and therefore the internationalization of scale and scope. If the relationship of sustainability reporting and internationalization of scope and scale is positively linear, the effect is expected to be stronger for firms with more cultural diverse boards as those firms significantly profit of their sustainability reporting. Moderating both variables leading to the following hypotheses:
H3a: Board of Directors’ cultural diversity positively moderates the relationship hypothesized in H1a.
H3b: Board of Directors’ cultural diversity positively moderates the relationship hypothesized in H1b.
3.3 Conceptual model
The hypotheses that are discussed above are presented in a conceptual model. This will provide a more concise overview of the hypothesized relationships. The visualization below shows the impact of Sustainability reporting on the scope and scale of internationalization and vice versa, and the moderating role of cultural diversity of the board of directors.
Figure 1. Conceptual Model
Scope of Internationalization Cultural Board Diversity Sustainability reporting Scale of Internationalization H1b+ H1a+ H2a+ H2b+ H3a+ H3b+
4. Methods
In this section of the research paper the data used and the sample selection is explained, together with the various sources that have been accessed to collect the data. In this research paper, an attempt is made to answer the following research question: what is the relationship between sustainability reporting and internationalization? An analysis will be performed to understand if the direction of the relationship; is sustainability reporting increased to be able to internationalize or is internationalization the reason for increased sustainability reporting. Additionally, an analysis will be performed to understand if a culturally diverse board moderates such a relationship. The method used is a quantitative statistical analysis based on publicly available databases. Several regression analyses will be performed to determine statistical significance.
4.1 Sample and Data Collection
For the purpose of this study, a unique dataset is collected and developed by combining four secondary data sources: Orbis, The Global Fortune 500, Newsweek Green Rankings and Wharton Research Data Services (WRDS). Company information on financials and subsidiaries is collected from the Global Fortune 500 firms of 2012-2014 in Orbis; the Global Fortune 500 is ranked based on revenue. All data related to financials from the firms in scope were collected by hand, extracting the data from the annual reports. The majority of these companies are MNE’s; therefore, they serve as a sufficient sample to measure possible relationships (Rugman & Verbeke, 2004). Orbis is a database from Bureau van Dijk, which is often used in academic studies, as it holds comprehensive information on companies (De Jong & Van Houten, 2014). To measure sustainability reporting, the Newsweek Green Rankings will be used for
North-American firms, which ranks the 500 largest North-North-American companies on sustainability. Therefore the original sample consists of a little short of 200 companies per year due to the amount of North-American firms listed in the Global Fortune 500 and the Newsweek Green Rankings. As there is a time-delay in the Newsweek Green Rankings, the year 2014 represents the financial year 2012, the earliest ranking publication. Results from the 2012-2014 will be used. To collect data on the diversity of the board of directors, Wharton is used collecting the ethnical background of board members, divided into four different categories: Afro-American, Caucasian, Asian and Hispanic.
In the final sample, the selected North-American firms need to be ranked for three consecutive years in both the Newsweek Green Rankings and the Global Fortune 500. The use of several databases and the fact that data that was missing had to be hand collected by going through the financial statements of the specific company, the sample was reduced to 249 firms over 3 years. Having to collect more data for more firms would not have been viable in this time frame. 249 firms will be sufficient to give significant results and are enough to validate the research.
4.2 Variables and Measures
4.2.1 Sustainability Reporting
To measure reporting an emphasis is put on sustainability reporting, as sustainability is the term used to describe the environmental, economic and social value creation within firms. This kind of reporting is the way for firms to publicly display their efforts made for value creation in all 3 areas, this includes CSR reporting. Therefore to collect data for sustainability reporting the Newsweek Green Rankings will be used. This database ranks the largest 500 companies in North America on sustainability reporting. The Newsweek Green Rankings were chosen because it sufficiently ranks firms on a wide range of sustainability issues, from human rights to measures
taken to mitigate their impact on the environment. Furthermore, this source was chosen as it is a credible source, data is independently collected and is acknowledged by various institutes and organizations like the Governance & Accountability Institute (G&A Institute, 2012). The way the sustainability performance is ranked is based on eight indicators ranking to a total score between 0-1; the closer the firm is to 1, the better the sustainability reporting. In this study the variable is measured on the scale of 0-1 as well, representing the score (SUSREP).
4.2.2 Degree of internationalization
The data on internationalization entails the scope and scale of internationalization of MNE's. An often-used method is the foreign sales ratio as a proxy (Koch 2017; Kylaheiko et al., 2011). Based on previous empirical studies performed in this area and the complexity of measuring degree of internationalization, a distinction will be made between the scale and the scope of internationalization. Applying this distinction will provide more accurate information on the degree of internationalization. The number of foreign subsidiaries measures the scope of internationalization (Tallman & Li, 1996). This data is available through Orbis. The scale of internationalization is measured by foreign sales over total sales (Cerrato, 2009; Tallman & Li, 1996). Foreign sales are considered all sales outside of the home country. Since this research aims to find the direction of the relationship between sustainability performance and the degree of internationalization, these variables will serve as an independent variable and a dependent variable (DOI) respectively.
4.2.3 Moderating variable: Cultural Diversity
The data for cultural diversity serves as moderating variable to measure the effect on the relationship. The data collected is for the years 2012-2014, coming from the WRDS. The data retrieved on the sample comes from the ISS (Institutional Shareholder Service) on director data.
The data collected contains per MNE the board of directors and their ethnical background. To measure cultural diversity the IRRC cultural grouping is used: Caucasian, Asian, Afro-American and Hispanic (Miller, 2009). The ISS has six ethnicities: Caucasian, Afro-American, Hispanic, Asian, Middle-Eastern, and Indian. With Indian and Middle-eastern not being dominant ethnicities in the board of directors, and are often grouped under the ethnicities of Asian and Caucasian, therefore this study will do the same (USA TODAY, 2016). To measure diversity Blau’s (1977) index of diversity is used to calculate cultural diversity on the board of directors. {𝐻𝐻 = 1 − Σ𝑝𝑝𝑖𝑖2}, 𝐻𝐻 is the board diversity measure, 𝑝𝑝 serves as the proportion of board members per ethnicity and 𝑖𝑖 serves as the number of different diversities present in the company. This measure of calculating culturally board diversity is based on the method used by Miller (2009). Furthermore, the Blau index is a measure used by previous studies for the following reasons: it represents variations, complete homogeneity, it does not include negative values and it is not infinite (Harrison & Klein, 2007; Harrison & Sin, 2006). The board diversity score will range from 0 to 0.75, where 0.75 means all ethnicities are present in the board.
4.2.4 Control Variables
The research includes different control variables that possibly have an impact on the scale and scope of internationalization other than the independent and moderating variables. For the control variables data was used from two sources: WRDS and Orbis. Several control variables were identified for this study and, as both directions are studied, we first look at the control variables for the dependent variable of the degree of internationalization and then the variables needed for sustainability reporting.
The control variables selected are based on previous studies conducted, as previous studies (Koch, 2017; Denicolai et al., 2014; George et al., 2015) indicate there is a positive relationship between firm size and foreign sales. Large firms tend to sell more internationally; therefore the
size of the firm is included and is measured by the number of employees (SIZE). Secondly, previous studies found a positive relation between firm age and degree of internationalization (Kirca, Hult, Deligonul, Perryy, & Cavusgil, 2012). As firms mature, they gain more experience and knowledge and while they operate internationally, this will have a positive effect on sales. This variable is measured by the variable AGE and measures the operating years. Thirdly, profitability is included as profitable firms will more easily expand abroad, measured by the return on assets (ROA) (Nachum, 2004). Moreover, Delgado-Gomez et al. (2004) found a positive relationship between increased internationalization when a firm is endowed with intangible resources, therefore, using the control variable market-to-book ratio (MTB). Lastly, R&D intensity is controlled for, as firms that are R&D intense, are positively associated with increased internationalization (R&D/S) (Fiegbaum, Shaver & Yeung, 1997).
For sustainability reporting, more control variables were identified. The variable AGE and SIZE are also included as control variable for sustainability reporting, as previous studies showed that older firms and larger firms tend to receive more attention from the public and have a larger stakeholder base forcing them to behave in a more socially responsible way (Attig et al., 2016; Brammer et al., 2006). Further, profitability measured by returns on assets (ROA), and leverage (LEV) the total debt over total assets. This is based on the study of Waddock and Graves (1997) who found that firms that have high resource availability, invest more in CSR (Attig et al., 2016). Finally as presented by the study of Kang (2013) intangible assets can influence CSR, and therefore market-to-book ratio is included (MTB). Fifthly, we control for R&D ratio, R&D expenses over total sales (R&D/S). This variable is included as McWillams and Siegel (2001) discovered that firms with a high level of differentiation invest more in CSR. They also discovered that advertising expense has a positive effect on CSR, therefore also including the variable as (ADV/S), advertising expense divided by the total sales. Further previous literature
found that the number of board meetings (BODM) and the number of independent directors on the board influences sustainability reporting (IND); including these variables will account for this effect (Laksmana, 2008; Kanagaretman et al., 2007; Arora & Dharwadkar, 2011; Frias-Aceituno, 2013; Zhang, 2012). The following table gives an overview of the variables used to test the hypotheses and a description of operationalization
Table 1- Variable Description
Variables Operationalization
Dependent and Independent variables
SUSREP Sustainability performance using the Newsweek Green Ranking score of 0-100%
DOISL Degree of Internationalization in scale of operations. Ratio of foreign sales to total sales
DOISC Degree of Internationalization in scope of operations. Ratio of foreign sales generated outside of the home country
Moderating Variables
BLAU Board cultural diversity is measured using
BLAU= Blau index of diversity [ ] where 𝑝𝑝𝑖𝑖 is the percentage of board members of culture 1
Control Variables
SIZE Total number of employees
AGE Years of existence from foundation year to the year 2012
MTB Market-to-book ratio
GDP Gross domestic product of country
ROA Return on assets
R&D R&D intensity
LEV Debt to total asset ratio ADV Advertising intensity
BODM Number of board meetings per year BODIND
Year 1 Dummy Year 2 Dummy
Independent directors proportion on the board of directors By dummy 1= company year 2013
By dummy 1= company year 2014
Error Term
4.3 Statistical Analysis and Results
In table 3 the descriptive statistics and the correlations are displayed, included are the variables of sustainability reporting and internationalization as well as the control variables. The descriptive statistics provide standard statistics about the sample. Possible outliers are removed, and missing values were dealt with by applying listwise deletion. This was done by generating Z scores and removing any values over |3|. Resulting in a final sample of 249 firms. The scale of internationalization has a mean of 0.267 implying that 26.7 % of firm sales stems from international operations. The scope of internationalization has a mean of 106.15, implying that the average amount of subsidiaries outside of the United States is 106. The mean of sustainability score is 42.6 %, this means that the average of firms included in the sample score below 50%. The control variables of size and age amount to an average of 161,032 employees and 59 years. For our moderating variable the score of diversity within the board the average is 0.265 out of 0.75, meaning that the diversity on boards is still very low. To test for possible issues regarding multicollinearity, all variables were tested to make sure that the correlation between the variables is not too high. Multicollinearity can cause false interpretation or misconception of the empirical results (Field, 2013, Yoo et al., 2014). Multicollinearity is tested with the Pearson correlation coefficient. The results from Pearson are between +1 and -1, +1 displays a positive linear
Table 2 – Observations included Description
Selected North-American firms of the Global Fortune 500, 2012-2014 -/- Not in the Newsweek Green rankings
Amount
576 156 -/- Not in the S&P 500 for board cultural diversity 54 -/- Not in the S&P 500 for 3 consecutive years
-/- Missing Data
81 36
relationship, -1 displays a negative linear relationship. Too high of a correlation is identified when the results are higher than 0.7 or lower than -0.7. The results are displayed in table 3. The correlation matrix shows that there are no variables that strongly correlate with each other indicating that there is no multicollinearity. The matrix does show some relations, for example the Market the Book ratio has a medium relation with Leverage, which is no surprise as both measures rely on assets. There is a medium relation between scope and age, which follows from the explanation that often firms as they grow older tend to internationalize to more countries and grow. R&D intensity is positively significant related to scale of internationalization indicating that firms that invest more in R&D activities rely more on foreign sales. The correlation matrix does not identify relations between scope and scale of internationalization with sustainability reporting and therefore this might be a small preliminary indication that there is no relation. To further analyze for multicollinearity the Variance Inflation Factor (VIF) is tested. VIF tests for the relation and the amount of relation between independent variables used. When a VIF score is higher than 5 it is expected that a variable will relate stronger to the other variables (O’brien, 2007). The test for multicollinearity with VIF showed that there are no independent variables significantly related to other variables. If a variable is related, the variable can be removed because the other variable already explains the difference. The highest VIF score is 1,847 and will not lead to suspicion to doubt our results. Since competing hypotheses are used we ran VIF analysis for the other circumstances as well, but this did not result in VIF score larger than 2.
The hypotheses proposed in this study are tested using the Ordinary Least Square (OLS) method. The scope and scale of internationalization will function as separate independent variables. The summary of results is presented in Table 4, 5 and 6. For each result, the standardized beta coefficients, standard errors and the level of significance are displayed. Additionally, general implications of results are given.
A hierarchical multiple regression is used to measure the effect of the independent variable, sustainability reporting, on the scope and scale of internationalization. The first step of the regression shows the ability of the control variables to explain the variance in the scope of internationalization, which is shown in Model 1 of table 4. The control variables used in this step explain 16.4 percent by all predictor variables (F=4.219, p=0.000). The control variables AGE, ROA, and BODMEET have a significant effect on the scope of internationalization. AGE (ß=0.228, t=3.356, p<0,01), has a positive significant effect on the scope of internationalization, which means that the older a firm is, the more foreign subsidiaries. This is in line with the previous literature. Return on assets (ROA) is (ß=-0.187, t=-2.579, p<0.05) negatively significant related to the scope of internationalization indicating that profitable firms do not necessarily have more subsidiaries. This is not in line with the previous literature. Lastly how often the board of directors meet in a year is positively significant related to the scope of internationalization (ß=0.156, t=2.234, p<0,05), indicating that the more the board of directors meet in a year the more subsidiaries there are.
The second step in the hierarchical regression, the independent variable sustainability reporting is introduced. This is shown in Model 2 of table 4. Adding sustainability-reporting leads to a variance of 16.4 percent (R Square Change=0.00, F=3.779, p=0.00). Meaning that sustainability reporting does not add an explanation of the effects. The relationship between sustainability reporting and scope of internationalization is negative and not statistically significant (ß = -0.007; t = -0.107; p= .915). Therefore the results suggest that the model is not valid, and reject hypothesis 1a.
In table 5, model 1, the ability of the control variables to explain the variance in the scale of internationalization is shown in model 1. The control variables used in this step explain 43.6 percent by all predictor variables (F=16.598 p=0.000). The control variables ROA, R&D, and
