The impact of sustainable supply chain management practices on the financial performance of internationally operating organizations

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The impact of sustainable supply chain management

practices on the financial performance of internationally

operating organizations

MSc in Business Administration – Strategy Track – Master Thesis Amsterdam Business School, University of Amsterdam

2nd August 2015

Student name: Tamás Százdi Student number: 10829016

Supervisor: Dr. Sebastian Kortmann Version: Final version

Word count: 15 863

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Statement of originality

This document is written by Tamás Százdi 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.

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Abstract

Competition between companies has started shifting to competition between value chains because of the possibility of building inter-firm competitive advantage. Meanwhile the concept of sustainability has been gaining increasing attention in the past few decades. As a result of these trends, internationally operating organizations started building sustainability practices across their supply chains with a special focus on supplier selection. That is, they started embracing the idea of Sustainable Supply Chain Management (SSCM). The concept of SSCM is relatively new, which prior literature discussed on theoretical grounds. The intriguing question is whether it is worth building SSCM practices to attain better financial performance (FP). Prior studies lack of empirical evidence regarding the impact of SSCM performance on FP, this research, therefore, attempted to shed light on the relationship between SSCM practices and economic performance. Additionally, the study incorporates the dilemma of Integration-Responsiveness, investigating the role of the extent to which internationally operating organizations build their sustainability practices in a locally responsive manner. Companies that were constantly listed in S&P 500 from 2009 till 2013 constitute the sample of the longitudinal analysis. Hierarchical multiple regression was run to analyze the dataset. Findings reveal that SSCM practices concerning social issues do not affect FP, however environmental SSCM performance has a positive impact on economic performance. Furthermore, results show that the degree of the localization of sustainability initiatives enhances the impact of sustainability initiatives on FP, and positively strongly correlates with environmental SSCM performance.

Key words: sustainability, corporate social responsibility, sustainable supply chain management, integration-responsiveness, financial performance.

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1. Introduction

The concept of sustainability has been gaining attention increasingly in the past few decades. (Caroll, 1999) There are numerous definitions interpreting sustainability in many different ways, however, perhaps the definition of the United Nations is the most powerful and influential, according to which sustainability is meeting the current needs without compromising the ability of the next generations to meet their own needs. Organizations engage in sustainability by paying attention to the so-called “Triple bottom line”, that is, they not only consider economic but also environmental social aspects and consequences of their operations.

Organizations are starting to operate sustainably not only for the sake of “doing good” but they are also facing increasing pressure to satisfy their stakeholders. Stakeholders are individuals or groups of people who are affected by the objectives and operations of an organization or can affect those (Freeman, 1984). Larger organizations that are internationally operating are facing much more and greater demands by stakeholders as the number of their stakeholders are naturally higher. For investors – as a group of the company’s stakeholders – it is more and more important to take sustainability performance into account when it comes to investing in publicly traded companies. Therefore, most of those companies publish corporate social responsibility (CSR) reports to illustrate their current sustainability initiatives. CSR refers to the ability of organizations to take responsibility for their impact on the environment and social welfare (McWilliams and Siegel, 2001). Organizations strive to improve their corporate social performance (CSP) year by year in order to satisfy their stakeholder groups. CSP is often seen as a synonym for CSR, however CSP includes setting goals for the CSR initiatives, assisting in their implementation, and featuring the outcomes of the CSR actions (Artiach et al., 2010).

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Is it really worth for these organizations, however, to engage in CSR practices in terms of economic performance? Scholars have been studying the relationship between CSP and the financial performance (FP) extensively, to ascertain whether it really pays out for multinational organizations to operate in a socially appropriate manner while protecting the environment at the same time. However, the effect of CSP on the FP is still ambiguous. Positive as well as neutral relationships were found between CSP and FP in several studies (Waddock and Graves, 1997; Cormier and Magnan, 2007; and Orlitzky et al., 2003; McWilliams and Siegel, 2000; López et al., 2007; Becchetti et al., 2008).

On the other hand, current business trends not only include sustainability, but also inter-firm collaboration. The competition between organizations has been shifting to competition between supply chains, as it is possible to build inter-firm competitive advantage by closely collaborating with players across the supply chain. With that being said, multinational organizations choose wisely their partners within the supply chain with a greater focus on their suppliers. Because of the growing pressure from stakeholders, organizations shape their supply chain not only in terms of economic goals, but they also pay attention to environmental and social goals. Therefore, multinational organizations have recently started applying sustainability practices across their supply chain, to develop inter-firm competitive advantages and satisfy their stakeholders to a greater extent at the same time. These companies try to do the least harm to natural and social systems while still producing profit over an extended period of time, that is, they engage in sustainable supply chain management (SSCM) (Pagell et al., 2010).

Though it must be noted that the concept of SSCM is still relatively new to the academic literature, and it is only a segment of CSP, constrained to the scope of supply chain. As SSCM initiatives require significant capital investment – just as other CSR initiatives –,

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the question arises in the context of supply chain management as well: is it worth engaging in SSCM practices in order to maximize the economic performance of the organization?

Albeit, the existing literature has nicely developed the concept of SSCM, and Walker et al. (2012), and Carter and Rogers (2008) propose that SSCM enhance FP, they also admit that empirical analysis is needed for testing their conceptual frameworks and propositions, as no study has been conducted regarding the relationship between SSCM performance and FP. In addition, the factors affecting the extent to which organizations engage in sustainable procurement could be better understood, along with its effect on organizational performance (Walker et al. 2012). Though, studies have already been conducted to analyze the effect of green supply chain management practices on organizational performance (Zhu, Sarkis, 2004), sustainable development is often reduced to environmental improvements (Seuring and Müller, 2008). Consequently, social factors of the SSCM practices must be considered as well. Hence, my research attempts to answer the following research question by conducting a quantitative research taking social as well as environmental factors into consideration:

What is the relation between the sustainable supply chain management performance and the financial performance of an internationally operating organization?

1.1 Research Objective and Contributions

The objective of this thesis is to answer the aforementioned research question. To do so, my study will consider environmental, social and economic factors at the same time in terms of supplier integration in the supply chain. This way my thesis would contribute to the literature of sustainable supply chain management by providing an empirical evidence to justify the propositions of prior literature (Carter and Rogers, 2008, Walker et al., 2012),

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according to which it is worth engaging in SSCM practices for internationally operating organizations to attain better economic performance.

In addition, the research incorporates the dilemma of integration-responsiveness (IR), as the focus of the study is on the multinational organizations. That is, not only the research question is answered in the following sections, but as a supplementary proxy, this research includes the IR scores of the organizations to find out the extent to which it is worth tailoring sustainability practices to meet the local demands of each subsidiary in order for the organization to maximize profits.

The study will also entail serious evidence for top and middle managers of internationally operating organizations for answering the dilemma whether engaging in ecological, social and economic goals at the same time within the supply chain is remunerative in terms of profitability.

All in all, my proposed research topic would not only fill in a gap in the literature and provide empirical evidence for a missing link, but would also entail deliberate implications for managers of internationally operating firms that are striving to achieve inter-firm competitive advantage and preserve it in a sustainable manner.

1.2 Structure of the Paper

The remainder of the paper is structured as follows. First, the research starts with the section of literature review and hypotheses development, concerning the concepts of CSR, “Triple bottom line” and the relation between CSP and FP. Then the attention is paid to the advantages of inter-firm collaboration, and sustainability in terms of supply chain management. The association between SSCM performance and FP and the concept of IR-framework is discussed consequently. Hypotheses are developed throughout the literature review at the appropriate sub-sections. The method section describes the outline of the

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quantitative research design, including the data collection procedure, ways of measuring CSP, description of variables, and the explanation of research model. The following section summarizes the results of the research, including descriptive statistics, the outcome of regression, moderation and mediation analyses. In the discussion section the results are discussed and the findings are related back to results of prior studies. The discussion section ends with managerial implications and suggestions for future research. Finally, the conclusion section summarizes the whole research.

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2. Literature Review and Hypotheses Development

The literature review summarizes the relevant researches and studies on the topic of CSR, sustainable supply chain management and their impacts on the economic performance of internationally operating organizations. First, the topic of corporate social responsibility, its different perspectives, and the dilemma of the “Triple bottom line” will be discussed. The next section will shed light on the relationship between CSR and economic performance. The summary of inter-firm competitive advantage will follow, indicating that the competition between firms has shifted to competition between supply chains. The upstream side of the supply chain will be especially emphasized. Then the fields of CSR and supply chain management will be linked together, introducing the topic of sustainable supply chain management. This section includes definitions of SSCM, descriptions of sustainability practices across the supply chain in terms of the “Triple bottom line”, and relevant studies regarding the relation of SSCM practices and economic performance. Finally as a complementary proxy of my study, Integration-Responsiveness framework will be discussed. It must be noted that hypotheses development is also part of the literature review, as it is an implicit part of the appropriate sections.

2.1 Corporate Social Responsibility

Managers and academic scholars have been increasingly discussing CSR, as stakeholders of multinational enterprises have put increasing emphasis on operating in a socially responsible way. McWilliams and Siegel (2001) define CSR as actions of a company that appear to further social good, beyond the interest of the firm and law requirements. However, this is only one definition of CSR out of many. Numerous interpretations of CSR exist that are sometimes not clear, moreover in the past 45 years scholars have tried to explain the phenomenon of CSR from several theoretical perspective (McWilliams et al.,

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2006). According to agency theory CSR reduces shareholder wealth, therefore CSR activities are part of a self-serving behavior on behalf of the managers of the firm (Friedman, 1970). Freeman (1984) argued that it is not enough to focus on activities representing solely the interest of the firm, the emphasis should be rather on satisfying the firm’s stakeholders such as community organizations, workers, suppliers and customers, as they have greater impact on the firm’s economic outcome. Stakeholders are individuals or group of people who are affected by the objectives and operations of a company or can affect those (Freeman, 1984). Donaldson and Preston (1995) extended the stakeholder theory of CSR by emphasizing the moral and ethical aspects of CSR. The stakeholder perspective is key to understand the drivers of CSR practices and it is extensively discussed in several papers (McWilliams and Siegel, 2001; Grey et al., 1995; Ullmann, 1985). According to Ullmann (1985) it is curcial to manage a firm’s stakeholders as ultimately they control the corporation’s access to scarce resources. That is, to satisfy stakeholders the corporation must engage in extensive CSR practices. Stakeholder theory help us understand the drivers of CSR, but also provides a fitting ground for empirical analysis regarding the extent to which firms apply CSR practices (Roberts, 1992).

Hart (1995) has investigated CSR from a resource-based-view (RBV) for the first time, arguing that in certain cases, environmental social responsibility can constitute a resource or a core capability, leading to sustainable competitive advantage. Building on the RBV perspective, McWilliams and Siegel (2001) proposed that adding a social attribute to a product or service could maximize profits as it is often more valued by consumers and other stakeholders. In addition, CSR activities should be considered as a form of strategic investments, and if political programs support these initiatives, CSR strategies can help create sustainable competitive advantage (McWilliams et al., 2002). It is clear, that by the evolution

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of the CSR’s interpretations, people started to view CSR practices as strategies that boost the profitability of a corporation.

2.2 Triple Bottom Line of Sustainability

Achieving sustainable competitive advantage on a global scale has always been a great challenge for multinational enterprises. First and foremost, internationally operating companies have to resolve the tradeoff between the so called “Triple bottom line”, which means they need to establish a balance between the ecological, social and economic goals of the firm. The Notion of the “Triple Bottom Line” has become increasingly popular in consulting, management, investing, and non-governmental organization (NGO) circles in the early 2000s (Norman and MacDonald, 2004). Also, during the last two decades, there has been a growing pressure on corporations to pay more attention to the environmental and resource consequences of the products and services that they offer and also the processes that they develop (Kleindorfer, Singhal, Wassenhove, 2011). In the meantime these firms should also focus on the social attributes of their operations, keeping organizational citizenship, values and ethics in mind (Carter and Rogers, 2008).

2.3 Relationship Between Corporate Social Responsibility and Financial Performance It is clear that the ambition of the companies to adopt green practices and act in a socially responsible way does not come without reason. Scholars have put great emphasis on researches a studies investigating whether it pays off to be green and to invest in social goals. These analyses were focusing on the relationship between Corporate Social Performance (CSP) and financial performance (FP). The terms corporate social performance, corporate social responsibility, and corporate citizenship are used in the CSR literature interchangeably to a high extent (Wood, 2010). Yet, there is a slight difference between CSP and CSR; CSP

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can be seen as a tool for setting goals for CSR initiatives, assisting in achieving them, and highlighting the results and outcomes of those CSR practices (Wood, 1991). That is, CSP measures the extent to which a company engages in CSR practices on economic, ecological and social levels (Artiach et al., 2010).

There have been number of such studies conducted, yet the results are still ambiguous. Waddock and Graves (1997), Cormier and Magnan (2007), and Orlitzky et al. (2003) have found positive relationship between CSP and FP, whereas McWilliams and Siegel (2000), López et al. (2007) and Becchetti et al. (2008) have concluded with a neutral relation between CSP and FP.

In addition, the effect of CSP practices on the FP have been analyzed also separately, in terms of each dimension of the “Triple Bottom Line’. Porter and van der Linder (1995) argued that if a company increases its environmental performance, its economic or financial performance could increase as a consequence. The adopted green practices and routines can lead to increased performance by higher revenues as well as cost reduction (Stefan and Paul, 2008). However, CSP practices are generally – and mistakenly – reduced to environmental practices. One must consider social aspects and practices as well when analyzing the relationship between CSR and FP. This issue is discussed in section 2.7.

Nevertheless, regarding the effect of social engagement of the firm Barnett and Salomon (2012) have found that improved CSP also improves the firm’s stakeholder influence capacity, which can transfer social responsibility into profits. McWilliams and Siegel (2001) also argue that corporations care about the social aspects of the organization’s operations because they want to please their stakeholders, so the number of conflicts with stakeholders will be reduced substantially. Furthermore, firms can boost their reputations by acting in a socially responsible way. Less conflicts and increased reputation indeed can indirectly lead to increased FP in the long run. Thus, despite the ambiguous results, a trend

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seems to be outlined indicating that CSP might correlate with FP positively. Hence, my study attempts to justify that seeming trend by building the base of the research on the relationship between CSP and FP. That is, the initial hypothesis of this research – in consistence with prior studies (McWilliams and Siegel, 2001; Orlitzky et al. 2003; Cormier and Magnan, 2007; and Barnett and Salomon, 2012) – is the following.

Hypothesis 1: Better corporate social performance of an internationally operating organization will have a positive impact on the firm’s financial performance.

Testing this hypothesis is essential for my research, as it represents the starting point of the study. Hereafter the further hypotheses will be narrowed down to CSP in the context of supply chains.

2.4 Inter-firm Competitive Advantage

Achieving competitive advantage does not only depend on the corporation’s business strategy but also on the implementation of the strategy. Kleindorfer, Singhal and Wassenhove (2011) argue that operations management plays a central role in executing a company’s strategy. These corporations must understand that they are part of a network constituted by several stakeholders, thus supply chain management – as a crucial part of operations management – is essential for a firm’s success. When we talk about competitive advantage of a firm, now it is not enough to search for its underlying reasons by only focusing on the firm, but we also need to consider complete supply chains that they are part of. The focus of competitions between companies has started to shift to competitions between value chains, including customer and suppliers. Dyer and Singh (1998) started to look at the competition between firms from a relational view, arguing that critical resources of a firm may be

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embedded in inter-firm routines and processes, crossing the boundaries of the firm. The relational perspective suggests that inter-organizational capabilities can be developed by combining the resources and routines that exist in different companies across the supply chain (Takeishi, 2001). Therefore, companies can develop such relationships with their partners across their supply chain, which can result in sustainable competitive advantage (Dyer, Singh, 1998). For this reason, companies increasingly involve their partners in the supply chain to develop those inter-firm resources and routines (Dyer, Singh, 1998; Lavie, 2006), which can constitute competitive advantage, as they are difficult to imitate by the competitors (Barney, 1991). The foundation of the relational view is based on the argument, according to which collaborating organizations are able to generate relational rents through relation-specific assets, knowledge sharing routines, complementary resources and capabilities, and effective governance (Dyer and Singh, 1998).

Furthermore, the relational view of competitive advantage states that relationships between organizations are increasingly important to consider when explaining supernormal profit returns. Casual ambiguity, interconnected inter-organizational asset stock, partner scarcity, resource indivisibility, and institutional environment are all factors that are functioning as mechanisms that preserve supernormal profits (Dyer and Singh, 1998). Finally, in contrast to RBV – where the owner of rent generating processes and resources is the individual firm – the relational view of competitive advantage implies that the control of those processes is shared across the supply chain (Dyer and Singh, 1998).

2.5 Upstream Performance Within the Supply Chain

Numerous innovative and successful corporations admit that their supply chain management practices are they key to their success, that is, supply chain management is their business model (Kleindorfer et al., 2011). To secure inter-organizational competitive

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advantage, supply chain integration is essential. Prior research has provided empirical evidence that greater the extent to which a firm integrates across its supply chain, the higher the level of organizational performance (Frohlich and Westbrook, 2008). A firm can start its integration across the supply chain in two ways; downstream, focusing on customers and upstream, focusing on suppliers. The upstream integration is mostly associated with process-based performance, while downstream integration enhances product-process-based performance (Vachon and Klassen, 2008). Integrations in both directions have been analyzed empirically and it was found that the benefits of collaborating with the supplier are the broadest (Vachon and Klassen, 2008), especially when the firm sells its products or services directly to its consumers. Additionally, process based supply chain integration with suppliers is beneficial for other reasons as well, as it accelerates the products’ time-to-market (Perols, Zimmermann, Kortmann, 2013).

Supplier partner-focused strategic alliances within the supply chain can result in such practices that constitute the companies’ core competences, therefore such strategic collaboration is fundamental source of the inter-organizational competitive advantage (Gold, Seuring, Beske, 2009). Hence, the elements of the operations management of firms and different types of supplier integration have gained great attention in prior research.

2.6 Sustainable Supply Chain Management

Combining the two fields of supply chain management and the “Triple bottom line”, however, is still in a very initial phase, and the related academic literature is immature. Therefore, the topic of sustainable supply chain management constitutes the core of my research.

The term sustainable supply chain management (SSCM) has been deﬁned by Mentzer et al. (2001) as “the systemic, strategic coordination of the traditional business functions and

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the tactics across these business functions within a particular company and across businesses within the supply chain, for the purposes of improving the long-term performance of the individual companies and the supply chain as a whole”. Pagell, et al. (2010) argue that sustainable supply chain would at worst do no net harm to natural or social systems while still producing proﬁt over an extended period of time, meaning that a truly sustainable supply chain could continue to do business forever. Carter and Rogers (2008) also introduced the concept of sustainability to the ﬁeld of supply chain management and demonstrate the relationships among environmental, social, and economic performance within a supply chain management context.

As a result of linking the fields of supplier integration and sustainable operations, the escalated inter-organizational competitive advantage can be even higher if the collaboration with the suppliers is based not only on economic goals but also on common social and environmental objectives (Gold, et al., 2009). Also, it has been found that there is a positive relationship between supplier integration and green supply chain practices (Vachon and Klassen, 2006), meaning that firms which integrate with their suppliers are likely to set ecological standards as well. Carter and Rogers (2008) continue that supply chains, which integrate social and environmental resources and knowledge, may be more difﬁcult to imitate, which leads to economic sustainability and to competitive advantage as well according to Barney’s (1991) VRIN criteria.

Although, the main reasons of applying SSCM practices are the aspiration of satisfying stakeholders, building competitive advantage, enhancing the economic performance of the organization and just purely acting in a socially good way, there are other factors that influence an organization’s engagement in sustainable procurement (Walker and Brammer 2009). First of all, sustainable procurement arises because of pressures on the company to undertake it. As discussed above, these pressures generally originate from the

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stakeholders of the firms, and engaging in SSCM is a way of satisfying those demands. Secondly, the financial viability of sustainable procurement implementation also plays a crucial role in shaping the extent to which an organization applies SSCM practices. The third factor that shapes the degree of sustainable procurement engagement is the organizational culture. The organization must be supportive and have positive attitude towards sustainability initiatives. Finally the implementation of sustainable procurement also depends on the supply side of the procurement, as the availability of supplier firms is essential, which meet the sustainability performance criteria outlined by the organization (Walker and Brammer 2009).

Furthermore, Seuring and Müller (2008) identified the triggers of being involved in SSCM, which are placed on focal companies by governing agencies, customers and stakeholders. Additionally, based on these triggers they also identified two types of strategies labeled as ‘supplier management for risks and performance’ and ‘supply chain management for sustainable products’. Out of the two strategies the latter seems to involve sustainability standards, though sustainability only refers to the product, not for the whole supply chain. Thus, the concept of sustainable supply chain needs to be addressed.

Walker et al. (2012) have described the trends in the SSCM literature and proposed a sustainable procurement framework to facilitate future research across the supply chain. They defined dimensions of sustainability in the context of procurement by illustrating the environmental, social and economic in terms of the level of focus, which can be individual, organizational, buyer-supplier dyad, supply chain/network and market/society/stakeholders/NGOs. The level of focus and analysis of my research will be the supply chain and network of organizations. I will put a special emphasis on the social and environmental dimensions of the supply chain management practices. According to Walker et al. (2012) in terms of the environmental dimension of supply chain practices, one must consider pollution in sub-tier suppliers and carbon dioxide effects across the whole supply

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chain. In terms of the social dimension of supply chain practices one must deal with child labor, underpaid employees in sub-tier suppliers and it is necessary to manage and create balance in the supplier portfolio. Furthermore, additional environmental aspects connected to SSCM practices could be waste disposal, reuse of materials, material substitution, recycling, repair, remanufacturing, product returns and source reduction (Svensson, 2007). My research attempts to reflect upon these issues in the context of the internationally operating organizations.

2.7 Relationship Between Sustainable Supply Chain Management Practices and Financial Performance

There has been plenty of studies conducted testing the relationship the CSP and FP of the organizations, however testing the relationship between the engagement in SSCM and the FP is still in a very initial, as the concept of SSCM is relatively new. Researchers have investigated if firms that engage in SSCM practices attain higher economic performance than ﬁrms that concentrate solely on economic performance. As a conclusion of their findings (Carter and Rogers, 2008), they propose that firms strategically undertaking SSCM practices will achieve higher economic performance than ﬁrms that pursue only one or two of the three components of the “Triple bottom line”. However, it is just solely a proposition, based on logical argumentation, thus, however, further empirical evidence is needed to prove those hypotheses and test the conceptual framework of Carter and Rogers (2008).

As other studies too lack empirical analysis (Seuring and Müller, 2008), the effects of SSCM practices on the firms’ economic performance are still unclear and unconfirmed. Therefore, as a corner stone of my analysis, the effect of the SSCM practices on the FP will be tested empirically. That is, this research attempts to justify the aforementioned

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propositions built on theoretical reasoning by Carter and Rogers (2008) with the investigation of the following hypothesis.

Hypothesis 2: Engaging in sustainable supply chain management practices has a positive impact on the organization’s financial performance.

This hypothesis constitutes the core of my research. Rejecting the hypothesis will imply that there is no association between the application of SSCM practices and the financial performance of an organization, whereas accepting it will justify the propositions of prior literature (Carter and Rogers, 2008), that engagement in SSCM practices enhances FP.

However, another issue exists regarding the literature about the relationship between the “Triple bottom line” elements and FP. In prior literature regarding the analysis of SSCM practices some scholars (Vachon and Klassen, 2006; Vachon and Klassen, 2008) tend to investigate SSCM by solely focusing on the effects of green supply chain management practices. That is, they reduce the phenomenon of sustainable development only to the environmental dimension of the “Triple bottom line”, ignoring the social factors of sustainability (Seuring and Müller, 2008). Moreover, the social elements of SSCM practices – to my current knowledge – have not been analyzed yet in terms of their effect on the economic performance of an organization. Hence, this research decomposes the SSCM performance to environmental SSCM performance and social SSCM performance to be able to investigate the impact of SSCM in terms of the “Triple bottom line’s” separate element. Therefore, the following sub-hypotheses have been constructed.

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Hypothesis 2a: Engaging in sustainable supply chain management practices focusing solely on social issues will have a positive impact on the organization’s financial performance.

Hypothesis 2b: Engaging in sustainable supply chain management practices focusing solely on environmental issues will have a positive impact on the organization’s performance.

2.8 The Dilemma of Integration-Responsiveness

Finally, as a complementary section, the Integration-Responsiveness (IR) framework will be discussed briefly. Since the focus of this research is based on the internationally operating organizations, it is important to shed light on the international strategies of these companies. To execute corporate strategy on a global level, the multinational organization and its headquarters must assign different roles and delegate various tasks to each of its subsidiaries (Ghoshal and Bartlett, 1986; Ghoshal and Nohria, 1989). In addition, organizations also have to satisfy the demands of their stakeholders increasingly – being consistent with the stakeholder approach, while striving to reach the general economic objective (Reynolds, 2003). That is, besides making profit, organizations have to act in a socially responsible manner towards the non-owner stakeholders (Freeman, 1984). With that being said, internationally operating organizations have to cope with strategic an ethical concerns on a corporate-wide as well as a subsidiary level.

The IR framework is one of the most popular and dominant tools for analyzing international strategy of the multinational enterprises both on corporate and subsidiary levels (Lin and Hsieh, 2010; Jarillo and Martíanez, 1990). According to the framework,

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organizations have to deal with two types of pressures; pressure for global integration and pressure for local responsiveness (Prahalad, 1975; Prahalad and Doz, 1987).

The global integration refers to the centralized management of the wide variety of activities of the organization’s subsidiaries on an ongoing basis. As organizations strive to reduce their overall costs and optimize organizational operations, practices, and investments, the pressure arises to integrate tasks and practices on a global level (Reynolds, 2003). These organizations need to consolidate their tasks and operations in an effective manner, in order for them to enhance their profitability and cost reduction initiatives.

On the other hand, local responsiveness refers to the ability of an internationally operating company to meet the local demands of a subsidiary. The local circumstances place very specific demands on each subsidiary to meet the requirements of the local law regulations, and satisfy local communities, customer demands, and supplier needs. It is, therefore, crucial for these organizations to realize these local demands and arrange their activities accordingly (Reynolds, 2003).

However, the IR perspective can be also discussed in terms of sustainability practices. Prior literature have examined IR framework mostly in terms of the economic dimension of the “Triple bottom line”, however the IR framework is an appropriate tool also for analyzing the fulfillments of social and environmental goals and objectives of the local subsidiaries. One can investigate the extent to which a multinational organization tailors its sustainability initiatives to meet the local demands faced by the subsidiary, as well as the extent to which a the organization have standardized and general sustainability programs across all the subsidiaries.

First, in terms of social commitments of an organization on a local level, one might consider the issues of child labor across the supply chain, supplier diversity, and initiatives helping local communities by supporting their development and preferring local

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organizations as suppliers instead of multinational suppliers. Furthermore, collaborating with and supporting local NGOs also helps the organizations to satisfy the local stakeholder demands.

Second, the multinational enterprise can tailor its environment-preserving initiatives to satisfy local stakeholders by preferring local suppliers that are more environmental conscious, helping local communities to tackle environmental challenges and cope with environmental disasters, Moreover the organization might engage in water as well as waste management programs locally.

Organizations face constant dilemma between centralizing the activities and programs of subsidiaries on a global level and maintaining the ability to respond to the local circumstances of each and every subsidiary (Reynolds, 2003). The extent to which an organization can create balance between the pressures of global integration and local responsiveness provides the company with strategic competitive advantage (Prahalad and Doz, 1987).

This research investigates the extent to which internationally operating organizations localize their sustainability activities, especially focusing on the dimension of supply chain. As Prahalad and Doz (1987) argued that engagement in locally responsive activities and programs might lead to competitive advantage, it would be intriguing to find out whether engagement in such practices and programs lead to better financial performance as well. Therefore, my study attempts to shed light on the relationship between the IR rating and the financial performance of the organization, leading to the following hypothesis.

Hypothesis 3: A higher extent to which a firm has developed fully locally responsive sustainability practices will have a positive impact on the firm’s financial performance.

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Testing this hypothesis will reveal the extent to which the IR rating, as a proxy of my research, is essential to enhance the economic performance of an organization That is, the study will reveal how crucial it is for an organizations to tailor their sustainability practices according to local demands on order to maximize profits.

As the scope of this study is the internationally operating companies, the extent to which an organization localize or globally integrate its sustainability practices can play a significant role in profit maximizing because of the substantial amount of investment required for such localized initiatives (). Great amount of such investments can decrease the profitability of an organization, as well as improve it in the long run (). That is, the degree of integration cannot only impact FP of an organization directly, but it can possibly influence the impact of CSP and SSCM performance on the FP as well. Therefore, the following hypotheses are proposed to test whether the degree of integration of sustainability practices within an organization can moderate the impact of CSP and SSCM performance on the FP.

Hypothesis 4: A higher extent to which a firm has developed fully locally responsive sustainability practices will enhance the relationship between the firm’s corporate social performance and financial performance.

Hypothesis 5: A higher extent to which a firm has developed fully locally responsive sustainability practices will enhance the relationship between the firm’s financial performance and the social performance of sustainable supply chain management.

Hypothesis 6: A higher extent to which a firm has developed fully locally responsive sustainability practices will enhance the relationship between the firm’s financial

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performance and the environmental performance of sustainable supply chain management.

2.9 Conceptual framework

This research, therefore, investigates three main hypotheses; how CSP, SSCM performance and the IR rating relate to the FP of the internationally operating organizations. The starting point of this research is the analysis of the CSP’s effect on FP in the context of internationally operating organizations. Although there have been several studies conducted analyzing the relationship between CSP and FP of organizations (Waddock and Graves, 1997, López et al., 2007, McWilliams and Siegel, 2000), the results of those researches are twofold, thus including CSP as an initial proxy is necessary. In addition, SSCM literature lacks empirical evidence regarding the relationship between SSCM performance and FP, therefore the next and core component of this study is to test the relationship between SSCM performance and FP of multinational organizations. The research tests the impact of SSCM by dividing SSCM practices in terms of social and environmental issues. Next, the IR rating complements the research explaining if it is worth tailoring sustainability initiatives and programs to meet the local demands and regulations in order to reach better economic performance. However, the impact of the extent to which an organization localize its sustainability practices can be also seen as a key factor possibly influencing the relationships between FP and CSP, SSCM performance. Hence, this research incorporates the IR rating as a potential mediator influencing those relations.

Figure 1 presents the associations between the components of the research as well as the proposed hypotheses.

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Figure 1. Conceptual Framework Social aspects of SSCM CSP Environmental aspects of SSCM Financial Performance H1 H2a H3 IR rating H2b H2 IR rating H4 H5 H6

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3. Methodology

3.1 Measurement of CSP and SSCM performance

As the focus of this research is aimed to shed light on the relationship between CSP, SSCM performance, and economic performance, the measurability of CSP and SSCM practices must be discussed.

First and foremost, one must mention the Dow Jones Sustainability Indices (DJSI), which is arguably the most advanced sustainability benchmark in the world (Searcy and Elkhawas, 2012), evaluating the sustainability performance and CSP of the largest 2500 organizations listed on the Dow Jones Global Total Stock Market Index. The DJSI evaluates the organizations’ economic, social, and environmental performance, addressing issues such as supply chain standards, climate change mitigation, and labor practices. Based on the scores of each dimension, it is determined whether the organization is included in the DJSI in that particular year, or not. The assessment of DJSI is based on the internationally recognized Corporate Sustainability Assessment methodology developed by RobecoSAM (Sustainable Asset Management). The DJSI rating has been conducted every year since 1999, and being included in the index could be seen a major achievement for internationally operating organizations, as DJSI and its reports have become key and sometimes decisive factors for investors in sustainability investing. In addition, in 2014 DJSI was classified as the most relevant and recognized sustainability rating. On the other hand, DJSI has some weaknesses as well. As of 2011, the constituents of the Index are no longer available online on the DJSI’s website, but can only be obtained by an academic request. In addition, DJSI and RobecoSAM do not publish the individual sustainability scores of the companies; only the historical components of the Index can be retrieved. That is, one can only obtain the information whether a company is listed on DJSI or not, since RobecoSAM’s policy prohibits to enclose sustainability scores to third parties.

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Global 100 is another index ranking the world’s most sustainable organizations. It also considers companies with large market capitalization (above US$ 2 billion), and rates them according to their performance in different sustainability areas, such as water and waste productivity. The rating was created in Toronto, Canada by Corporate Knights, a media and investment advisory company.

KLD Research and Analytics, Inc. (KLD) provides a social rating database on social research for institutional investors. KLD has been providing research and information on organizations since 1988, and the number of covered companies today is approximately 3100, including all of the Standard and Poor’s 500 companies since 1991. KLD functions as an independent rating service focusing solely on the assessment of CSP, investigating a range of dimensions related to stakeholder demands and concerns (Waddock and Graves, 1997). Each organization is rated on multiple attributes related to CSP, and – in contrast to the DJSI – the scores are available for researchers. The most important attributes emphasize stakeholder relations such as community and employee relations, environmental performance across the supply chain, product features, and treatment of women and minorities (Waddock and Graves, 1997). KLD uses a variety of sources to evaluate organizations’ CSP, such as questionnaires, 10K forms, quarterly reports as well as CSR reports. However, the KLD social ratings database has some weaknesses as well. Despite of the fact that KLD covers for instance the Standard and Poor’s 500 universe for more than 20 years, some research instruments and measurements are inconsistent and have not been conducted in certain years. Therefore, it might be the case that missing values of these instruments make the sustainability and social studies more complicated and problematic.

This study uses DJSI and KLD ratings to measure CSP and SSCM performance. In particular, DJSI ratings will help to investigate Hypothesis 1, as it directly reveals whether an organization is strong in CSP, or not. Furthermore, KLD and its company scores of different

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dimensions related to CSP will help investigate SSCM performance relating to the SSCM practices described in the previous section. Therefore, KLD scores will be used to test

Hypotheses 2, 2a, and 2b.

3.2 Sample construction and data collection

The sample of the study consists of organizations listed in Standard & Poor’s 500 (S&P 500), which is an American stock market index, including the largest 500 corporations in terms of market capitalization, listed on the NYSE and NASDAQ stock exchanges. More precisely, the scope of the research is a five-year interval of 2009 till 2013, as López et al. (2007) argue one should analyze the effect of CSR practices in longer timeframe to determine whether such practices enhance the financial performance of the firms. Therefore, companies have been selected that have been constantly included in S&P 500 during the investigated period. That is, the largest companies of the 2009-2013 period incorporated in the United States constitute the sample of my research. In addition, the number of organizations that met the aforementioned criteria has been narrowed down also by industry classification. Standard and Poor’s and MSCI Barra developed the Global Industry Classification Standard (GICS) in 1999, to create a common tool to categorize organizations in terms of sectors and industries on a global level. As GICS has been maintained and adapted by S&P 500, my research uses GICS to filter companies. Because the topic of my research is sustainability, the focus is on organizations that produce and manufacture actual products, instead of organizations that are only service providers. The idea behind the selection is that organizations with real products and complete value and supply chains – including a number of suppliers especially – might have greater controversies with sustainability, and have to deal with environmental and social issue to a higher degree. Accordingly, companies that have been constantly included in S&P 500 from 2009 to 2013 have been narrowed down to organizations that belong to the sectors

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of Industrials, Consumer Discretionary, Consumer Staples, Healthcare, and Information Technology. Table 1 presents the distribution of the selected organization according the industry sectors. Moreover, within each sector industry groups have been identified to highlight the companies with relevant supply chains only. These industry groups are the following: Capital Goods, Automobiles and Components, Consumer Durables and Apparel, Food and Staples Retailing, Food, Beverage and Tobacco, Household and Personal Products, Healthcare Equipment and Services, Pharmaceuticals, Biotechnology and Life Sciences, Technology, Hardware and Equipment, Semiconductors and Semiconductor Equipment.

As a result, the final sample consists of 124 organizations that were constantly included in S&P 500 in the five-year interval and met the industry criteria at the same time. Because of the five-year time span, the dataset, therefore, consists of 620 observations. The selected population of companies is appropriate for more reasons. First, one must consider the feasibility of data collection, solely using secondary data. As discussed in the previous section, there are various ways to measure CSP, however, the availability of such data is the highest for S&P 500 companies. Second, the focus of the research is on internationally operating organizations, and the vast majority of the S&P 500 companies operate on a global level.

Table 1. Distribution of selected firms according to industry sectors

Industry Sector Number of organizations

Industrials 28 Consumer Discretionary 13 Consumer Staples 25 Healthcare 37 Information Technology 21 Total 124

Data collection was implemented by using Wharton Research Data Services (WRDS), which provides access to a variety of different databases. As discussed earlier, first, the

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sustainability scores were obtained by using KLD database. Secondly, financial data was obtained. Standard and Poor’s Capital IQ’s Compustat North America is database providing Income Statements, Balance Sheets, Statements of Cash Flow on publicly held companies in the United States and Canada. Compustat was used to obtain the relevant measures of economic performance and control variables, which are described in the following section. Third, indicators for CSP of the selected organizations were obtained by sending an academic request to RobecoSAM regarding the DJSI rating and signing a nondisclosure agreement. Thus, the historical constituents for the North American could be accessed for the timespan of 2009-2013. Lastly, to obtain the IR rating of each of the selected companies, CSR reports of the selected companies were evaluated based on a certain criteria, described in the following section. The evaluation of the CSR reports was performed individually by me and two fellow students doing research on similar topics. After the individual assessments, each and every organization was discussed collectively and consensus has been made in every case. Also, it must be acknowledged that data collection regarding IR rating of an organization normally should be done via surveys, however as the IR rating is only a complementary proxy of this research and because of the lack of time, the data collection was implemented in such a way.

3.3 Measurement of research instruments, definition of variables

This section describes the variables used in the research. First, the economic performance as the dependent variable will be discussed. Second, the independent variables will be detailed, more precisely the instruments used for measuring CSP, performance of SSCM practices and the IR rating of the organizations. Lastly, control variables of the study will be explained.

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3.3.1 Dependent variable

My research considers the financial performance (FP) of the firms as the dependent variable, which basically equals the economic performance. There are several ways of measuring and tracking economic performance of organizations. Accounting indicators are widely used in prior literature to measure FP, such as Earing Before Interest and Taxes (EBIT), EBIT margin, Return on Assets (ROA), Return on Equity (ROE) and return on sales (Griffin and Mahon, 1997, López et al., 2007, Waddock and Graves, 1997). This research considers three of them; EBIT margin, ROA and ROE.

EBIT margin – also, often called profit margin – is calculated as the EBIT divided by the net revenue of an organization. This indicator is useful when it comes to comparing companies, as it clearly reveals how big portion of the company’s revenue turns into actual profit. EBIT margin is widely used also by investors to compare investment alternatives and evaluate the growth of companies over a certain timespan.

ROA is calculated as the net income divided by the assets of the organization. That is, ROA measure demonstrates how efficiently the assets of the firm are used to generate profit. The assets of an organization includes both the equity and debt, therefore ROA indicates the return in the invested capital.

ROE is calculated as the net income divided by the shareholders’ equity. As this indicator ignores the debt of the firm, it shows the amount of profit the company generates by using the invested money of shareholders.

All the aforementioned dependent variables were calculated for each company in each year, by obtaining the necessary financial data from Compustat. Running descriptive analysis of the three dependent variables tested their reliability. As a result, the ROE and ROA indicators were found to have extreme minimum and maximum values, as well as unusually

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high standard deviation, therefore EBIT margin has been selected as the final dependent variable of this research.

3.3.2 Independent variables

The independent variables of the research can be divided to three groups. First, the DJSI variables will be discussed which are aimed to test the overall CSP of the organizations. Second, description of variables regarding the SSCM performance follow, including separate indicators for social and environmental aspects and components of SSCM. Last, the variable regarding the IR rating will be detailed.

Membership in DJSI (DJSI)

The variable membership in DJSI is aimed to test the CSP of the organizations. As discussed earlier, DJSI is the most relevant sustainability benchmark analyzing social and environmental performance, supply chain standards and labor practices. In this research a firm’s membership in DJSI is presented as a dummy variable, with a value of “1” if the company is included in DJSI in that particular year, and a value of “0” otherwise. Being included in the DJSI is a major accomplishment because of the very strict criteria and the high reputation of the Index; therefore it is an appropriate tool to distinguish organizations with high CSP from organizations with low CSP.

Constant membership in DJSI throughout the analyzed time frame (DJSI5)

As an additional proxy, another variable was constructed regarding the DJSI to incorporate the longitudinal nature of the research, and highlight organizations with excellent and consistent CSP. That is, a dummy variable was created with a value of “1” if the

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organization has been included in DJSI every year within the analyzed time frame of 2009 – 2013.

Supply Chain Policies, Programs and Initiatives (SPPI)

This indicator measures a firm’s policy commitments and management systems designed to monitor the human and labor rights performance of its suppliers and contractors. Factors affecting this evaluation include, but are not limited to, the protection of supply chain workers’ rights, including freedom of association, freedom from forced labor and child labor and safe working environments. Additionally, the evaluation of this variable also includes other rights described by the International Labor Organization (ILO) Conventions and other applicable standards, as well as initiatives that are aimed to improve the labor conditions of the organization’s supply chain workforce. This variable displays if the organization engages in programs that improve the labor conditions and health of the supply chain workers, and if it participates in multi-stakeholder initiatives. This measure is also presented as a dummy variable, with a value of “1” if the company has such an initiative in place, and a value of “0” otherwise, and the indicator is aimed to measure the social performance of the organization in the SSCM.

Supplier Diversity Program (SDP)

This indicator measures whether an organization engages in supplier diversity program, which is a proactive business program encouraging the use of minority-owned, women-owned, and veteran-owned businesses as suppliers. The point of such programs is to realize that sourcing products or services from underutilized and unexploited suppliers helps the organization to sustain and improve its supply chain. Again, this measure is a dummy

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variable, with a value of “1” if the firm has such a program in place, and a value of “0” otherwise, and naturally it also refers to the social side of SSCM.

Supply Chain Controversies (SCC)

This indicator measures the severity of controversies related to a firm’s supply chain. Factors affecting this evaluation include a history of involvement in supply chain related legal cases, widespread or egregious instances of abuses of supply chain employee labor rights, such as forced labor resistance to improved practices, criticism by NGOs or any third party observer and supply chain employee safety. This measure is also presented as a dummy variable in the research, with a value of “1” if the company is involved with at least one of such controversies, and a value of “0” otherwise, and it is the last variable concerning the social aspect of the SSCM practices.

Number of Environmental Strengths (NES)

This indicator measures a firm’s number of strengths in green practices within its supply chain. There are several factors affecting the evaluation of this variable, such as beneficial products or services, meaning that an organization’s supply chain provides products or services that help other organizations and individuals reduce energy and resource consumption, as well as chemical and waste production. Pollution prevention is also considered, investigating whether the organization and its suppliers engage in programs and initiatives towards reducing waste production, chemical usage, packaging materials and carbon dioxide emission. Recycling is also considered as an environmental strength across the supply chain, considering the extent to which the organization uses recycled materials in its products or services. Clean energy is another factor being considered as an environmental strength, showing if a company is concerned with climate change by reducing greenhouse gas

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emissions and taking initiatives to increase the use of renewable energy. Finally, environmental management systems are considered, featuring the establishment and monitoring of environmental performance targets and the presence of environmental trainings and programs for the employees. This research instrument reviews the organizations attitude towards the aforementioned initiatives and sums up the programs that the company is being involved in. Therefore, it is a measurement representing the number of the aforementioned environmental practices ranging from 0 to 5. Implicitly, this variable refers to the environmental components of the SSCM practices.

Integration-Responsiveness Rating (IR)

The IR Rating of a firm is a scale type of indicator (ranging from 1 to 7) that shows the extent to which a company has developed fully locally responsive (1) or globally integrated (7) sustainability practices. The definitions of the two extreme sides are as follows. An organization has fully locally responsive sustainability practices (1) if those are developed concerning the local circumstances, regulations, communities and minorities to the highest degree possible. An organization, on the other hand, has globally integrated sustainability practices (7) if the organization has developed standardized sustainability practices, which the firm applies in case of each subsidiary. The globally integrated initiatives do not pay attention to special stakeholder demands, and – besides meeting the local law regulations evidently – they ignore local pressures and demands.

As the scope of this research is the internationally operating organizations, this variable is a great proxy for shedding light on the extent to which these multinational firms should localize their sustainability initiatives according to subsidiaries on order to maximize their FP.

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3.3.3 Control variables

As for the control variables my research considers the size, industry financial risk of the organizations, based on the control variable selection of similar researches (López et al., 2007, Waddock and Graves, 1997), as these are the factors that affect both economic performance and CSP (Ullman, 1985).

Size of the firm (SIZE)

Scholars suggest that the size of the firm id relevant when it comes to analyzing its CSP as larger organizations seem to engage in socially responsive behavior to a higher degree (Artiach et al., 2010, Waddock and Graves, 1997). The underlying reason of that could be that larger firms attract more attention from external parties and stakeholders, therefore they need to address the stakeholder demands more extensively (Burke et al., 1986). Furthermore, size can also affect the FP of a firm via economies of scale as it has more resources to use for operation. In this research the size of the organization is measured by the size of its total assets.

Financial risk of the firm (RISK)

The management and financial risk of the organization has also been found to affect the engagement in CSR (Ullman, 1985, Waddock and Graves, 1997). Firms with higher risk were found to be avoiding to act in a socially responsible way, whereas companies with low management and financial risk are likely to have better CSP, as they can afford to engage in such practices (Cornell and Shapiro, 1987). Being consistent with similar studies (Waddock and Graves, 1997, López et al., 2007) this research also defines financial risk as the debt to assets ratio of an organization. That is, the more debt an organization has, the higher its

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financial risk, hence it is less likely that a firm has good CSP. Also, the financial risk of the firm is certainly associated with the FP.

Industry classification of the firms

Consistent with previous studies (Waddock and Graves, 1997, López et al., 2007) the industry classification has been also considered as a control variable of this research. Dummy variables have been created for each GICS sector used in this research, namely Industrials, Consumer Discretionary, Consumer Staples, Healthcare and Information Technology. Regression analysis was run including four of the five industry dummy variables, with Industrials as the omitted category.

Control for years

The longitudinal nature of the study must be also considered, as it focuses on a five-year time frame. Therefore, additional dummy variables have been created for each five-year from 2009 till 2013. Regression analysis was run including four of the five-year dummy variables, with year 2009 as the omitted category.

3.4 Analytical strategy and description of regression model

To test the hypotheses of this research, first a Pearson product-moment correlation analysis will be executed, and then a multiple linear regression will be run. For the regression analysis an appropriate model specification is necessary, therefore the following model has been constructed.

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𝐹𝑃 = 𝛼 + 𝛽_!𝐷𝐽𝑆𝐼 + 𝛽_!𝐷𝐽𝑆𝐼5 + 𝛽_!𝑆𝑃𝑃𝐼 + 𝛽_!𝑆𝐷𝑃 + 𝛽_!𝑆𝐶𝐶 + 𝛽_!𝑁𝐸𝑆 + 𝛽_!𝐼𝑅 + 𝛽_!𝑆𝐼𝑍𝐸 + 𝛽_!𝑅𝐼𝑆𝐾 + 𝛾_!𝐼𝑛𝑑𝑢𝑠𝑡𝑟𝑦 𝑐𝑜𝑛𝑡𝑟𝑜𝑙𝑠 ! !!! + 𝛿_!𝑌𝑒𝑎𝑟 𝑐𝑜𝑛𝑡𝑟𝑜𝑙𝑠 ! !!! + 𝜀 Where:

• FP is the financial performance of the organization, more precisely the EBIT margin in this research.

• 𝛼, β!, γ! and δ! are regression coefficients, and ε is the residual.

Variables related to CSP:

• DJSI is the dummy indicator for the annual membership of the organization in DJSI. • DJSI5 is the dummy variable indicating whether the organization has been included in

DJSI for 5 years in a row. Variables related to SSCM:

• SPPI is a dummy indicator for Supply Chain Policies, Programs and Initiatives variable.

• SDP is a dummy indicator for Supplier Diversity Program variable. • SCC is a dummy indicator for Supply Chain Controversies variable. • NES is an indicator for the Number of Environmental Strengths variable. Variable related to IR framework:

• IR is the indicator for the IR ratings of the organization. Control variables:

• SIZE is the size of the organization’s assets.

• RISK is the financial risk of the organization, in this research the debt to assets ratio. • Finally, the dummy variables for controlling the industry classification and the time

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The proposed regression model is consistent with previous studies that were investigating the relationship between CSP and FP (Waddock and Graves, 1997, López et al., 2007, McWilliams and Siegel, 2000), however this research includes additional variables to extend the scope of the research to SSCM practices and the IR rating.

The impact of sustainable supply chain management practices on the financial performance of internationally operating organizations