Master’s Thesis
A Natural Resource Based Perspective on
Corporate Social Performance & Financial Performance:
Investigating Industry Lifecycle as a Contingency
Student: Kurt Kreulen
Student № 10172025
Supervisor: mw. dr. P. (Pushpika) Vishwanathan
Amsterdam Business School, University of Amsterdam July 1st 2016
Statement of Originality
This document is written by Student [Kurt Kreulen] 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.
TABLE OF CONTENTS
ABSTRACT 4
INTRODUCTION 5
THEORY & HYPOTHESES 10
BACKGROUND 10
THE NATURAL RESOURCE BASED VIEW 11
IN &OUTWARD CORPORATE SOCIAL PERFORMANCE 14
INDUSTRY LIFECYCLE 18
METHODOLOGY 26
IN &OUTWARD CORPORATE SOCIAL PERFORMANCE 27
CORPORATE FINANCIAL PERFORMANCE 29
INDUSTRY GROWTH 30
CONTROL VARIABLES 30
ANALYSIS 32
RESULTS 32
DISCUSSION & CONCLUSION 38
FINDINGS 38
THEORETICAL IMPLICATIONS 40
MANAGERIAL IMPLICATIONS 43
LIMITATIONS AND AVENUES FOR FUTURE RESEARCH 44
CONCLUSION 45
REFERENCES 47
ABSTRACT
Research has yet to find a conclusive answer to the question whether corporate social performance (CSP) leads to better or worse corporate financial performance (CFP). This study applies a contingency approach in order to specify under what conditions CSP and CFP are related and what the nature of this relationship is. By drawing on the Natural Resource Based View, this study links the in- and outward components of CSP to CFP across the different stages of the industry lifecycle. This study demonstrates that disaggregating CSP into its component parts provides a more precise understanding of how industry growth affects the CSP-CFP link. Findings show that only the inward dimension of CSP offers positive financial returns, provided that industry growth is low. This study underscores the importance of using decomposed measures of CSP and applying a contingency perspective when analyzing the CSP-CFP nexus.
“The decisions and actions of the businessman have a direct bearing on the quality of our lives and personalities. His decisions affect not only himself, his stockholders, his immediate workers, or his customers – they affect the lives and fortunes of us all”
~ Howard Bowen (1953) in the Social Responsibilities of the Businessman
INTRODUCTION
Ever since Howard Bowen’s (1953) publication of his seminal work on corporate
social responsibility (CSR), the topic has drawn wide attention of managers and academics
leading to an explosive growth of CSR related research and theory building (Carroll & Shabana, 2010). CSR is described as the concept whereby companies “integrate social and environmental concerns in their business operations and in their interaction with their stakeholders on a voluntary basis” (Commission of the European Communities, 2001; cited in Dahlsrud, 2008). The concept of CSR thus supposes that ‘corporations do not only hold economic and legal obligations, but also responsibilities to society that extend beyond these obligations’ (Joseph McGuire, 1963, p.144).
Humanity currently faces great environmental, social and economic challenges concerning climate change, global inequality and sustainable economic growth to name but a few (United Nations, 2016). It comes to no surprise that, in the light of the aforementioned challenges, corporations are more than ever expected to proactively engage in socially responsible activities (Melville, 2010). However, since the survival of firms depends primarily on their ability to generate profits, it is crucial to investigate whether corporations are able to be simultaneously social and profitable – can they do good by being good? Finding an answer to this question holds significant implications for the relationship between business and society – after all, a positive link between CSR and financial performance
would form a strong incentive for corporations to contribute to the well-being of society (Margolis, Elfenbein, & Walsh, 2007).
A substantial share of the management literature on CSR addresses this issue and focuses on the relationship between corporate social performance (CSP) and corporate
financial performance (CFP) (Orlitzky, Schmidt, & Rynes, 2003; van Beurden & Gössling,
2008; Carroll & Shabana, 2010). Investigating the CSP-CFP relationship helps us understand if and how firms are able to benefit financially from engaging in socially responsible activities. CSP is the construct that refers to a company’s concrete actions towards meeting its responsibilities to various stakeholders, such as employees, customers, and the society at large, in addition to its traditional responsibilities to shareholders (Turban & Greening, 1997).
In many cases, engaging in CSR related activities is found to increase financial performance through building favorable stakeholder relations (Jones, 1995), increasing consumer loyalty (Du, Bhattacharya, & Sen, 2007; Martinez & Rodríguez del Bosque, 2013), creating positive firm evaluations (Raithel & Schwaiger, 2015) and enhancing firm reputation (e.g. Brammer & Pavelin, 2006; Fombrun & Shanley, 1990; Turban & Greening, 1997), developing firm capabilities (Hart, 1995), enhancing firm innovativeness (Porter & van der Linde, 1995), reducing risk (Orlitzky & Benjamin, 2001), attracting a talented workforce (Greening & Turban, 2000) and increasing employee motivation and retention (Flammer & Luo, 2016). On the contrary, it is argued that firms trying to enhance CSP draw resources and management effort away from core areas of the business thereby hurting financial performance. (Margolis & Walsh, 2003). Managers generally believe that they must choose between acting in a socially responsible manner or in the best interest of investors, which implies that a firm cannot engage in socially responsible activities without losing its competitive edge (Klassen & Whybark, 1999). Moreover, it is said that the cost of engaging in CSR outweighs the benefits and reduces a firm’s stock value (Vance, 1975). Some even
argue that there is no relation between CSP and financial performance whatsoever (McWilliams & Siegel, 2001).
With regard to the struggles of making the business case for CSR, Barnett (2007) stresses the need to embrace a contingency perspective that focusses on clarifying what forms of CSR enhance firm performance under which types of conditions. Differently stated, research ought to identify the circumstances that dictate whether CSP is likely to have a positive, negative or neutral effect on CFP (Barnett, 2007). In order to specify under what conditions the financial merits of CSP are most pronounced, the current study seeks to investigate the role of industry lifecycle (ILC) as a contingency on the CSP-CFP nexus.
As an industry evolves it undergoes irrevocable transformations with respect to its structure, competitive dynamics, and organizational diversity (Utterback & Suarez, 1993; Agarwal, Sarkar, Echambadi, 2002). Before and after such a transformation (i.e. transition of an industry to another ILC-stage), firms often face radically different competitive environments (Agarwal et al., 2002). Since organizational performance is reliant upon a fit between the firm and its environment (Goll & Rasheed, 2004), it is rational to assume that the strategic value of engaging in socially responsible activities is likely to vary as an industry evolves. Findings of previous studies indicate that the industry lifecycle (ILC) may indeed play an important role as a contingency in the relationship between CSP and CFP (Russo & Fouts 1997; McWilliams & Siegel, 2001; Goll & Rasheed, 2004; Hull & Rothenberg, 2008).
Interestingly, the findings from previous empirical work on the contingent role of industry dynamics on the CSP-CFP relationship has brought about discrepant results. For instance, Russo & Fouts (1997) found that industry growth strengthens the relationship between a firm’s environmentally responsible practices and financial performance. On the other hand, Hull & Rothenberg (2008) found that a firm’s overall CSP, which includes socially and environmentally responsible behaviors, most strongly affects financial
performance in low-innovation firms and in industries with little differentiation, both characteristics of low-growth industries (see e.g. Peltoniemi, 2011). The current paper attempts to address these ostensibly incongruent findings by using an empirically validated (Sharfman, 1996) and widely used source of data on CSR: the MSCI database (formerly KLD & GMI) (e.g. Waddock & Graves, 1997; Hull & Rothenberg, 2008; Barnett & Salomon, 2012).
Furthermore, the above-mentioned studies approached CSP using single overall measures which means that their analyses remained at a fairly high level of aggregation (Van der Laan, Van Ees, & Van Witteloostuijn, 2008). Criticism on the usage of such aggregated measures is that they do not account for the rich variety of underlying factors (Wood & Jones, 1995). In order to identify more precise mechanisms and generate findings that are of higher practical relevance for managers, the current study aims to investigate the CSP-CFP relationship at lower levels of aggregation. Decomposing CSP allows for a comparison of the individual effects of its components which enables a more fine-grained understanding of the determinants at play in the way CSP affects CFP. The current study chooses to disaggregate CSP into two components (i.e. inward and outward CSP) that are based on theoretical arguments brought forward by the Natural Resource Based View (NRBV; Hart, 1995; Hart & Milstein, 2003; Hart & Dowell, 2010). In doing so, the current study not only attempts to elucidate in a more explicit and elaborate way when and how firms reap financial benefits from allocating resources towards enhancing CSP, but also contributes to empirically verifying some of the theoretical concepts brought forward by the NRBV.
The current study aims to enhance our understanding of the CSP-CFP relationship by addressing the following question: does the relationship of the in- and outward components of corporate social performance with corporate financial performance differ across the stages of an industry’s lifecycle? This study contributes to CSR research in a number of ways. First,
it applies a contingency approach by investigating the influence of industry growth on the CSP-CFP link. In other words, the current study attempts to identify under what conditions a relationship between CSP and CFP is to be expected, and whether it is positive or negative (Rowley & Berman, 2000). By doing this, the current study moves beyond the linear, dichotomous approach that characterizes much of the studies looking into whether CSP does or does not lead to CFP (Barnett & Salomon, 2012), and moves into a world where there is a potentially infinite amount of variables that can influence the nature of the CSP-CFP relation (Rowley & Berman, 2000). Additionally, by decomposing CSP, the current study adds to previous work on the role of industry growth (e.g. Russo & Fouts, 1997) the possibility of analyzing and comparing the contingency effect on the relationship between the individual components of CSP and CFP. The current study demonstrates that breaking CSP down into its component parts provides a more precise understanding of how industry growth affects the CSP-CFP link. The results suggest that the effect of industry growth is most pronounced for the inward-dimension of CSP which is concerned with pro-environmental process innovation and employee engagement (Hart, 1995). The findings of this study contribute to the extant body of work on the CSP-CFP link by indicating that disaggregated measures of CSP have the potential to provide better insights into the cost-benefit ratio of CSR initiatives than composite measures of CSP have been able to do (Van der Laan et al., 2008). Lastly, the current paper contributes to enhancing the quality of the NRBV by empirically testing some of its theoretical predictions. The results point out that incorporating the role of contingencies into the NRBV’s theoretical framework can enhance its predictive quality.
This paper is structured as follows. The first section provides an overview of relevant theoretical work on which the definitions of the current paper’s key concepts are based. Next, the hypotheses and resulting theoretical framework are introduced. Subsequently, the methodology is described after which the empirical results of this research are presented.
Finally, in the concluding section, the paper discusses the theoretical and practical implications of the current findings and concludes with avenues for future research.
THEORY & HYPOTHESES
BackgroundMuch of the debate on the nature of the CSP-CFP relationship can be brought back to the classic views on CSR held by Friedman (1970) and by Freeman (1984). According to Friedman’s (1970) view the relationship between CSP and CFP is negative. Friedman (1970) argues that when firms engage in more socially responsible activities, they incur more costs and thus have lower CFP; he refers to this as the trade-off hypothesis. Besides incurring unnecessary costs, Friedman (1970) argues on the theoretical perspective of the agency theory (McWilliams, Siegel, & Wright, 2006) that CSR initiatives are indicative of self-serving behavior; that is, they are used by managers to further their own social, political or career goals at the expense of shareholders (McWilliams & Siegel, 2001). Friedman (1970) concludes that social issues should not be the concern of corporations and that the government should address these problems when the mechanism of the free market fails to do so (Carroll & Shabana, 2010). Short said, Friedman (1970) states that a firm’s sole responsibility is to maximize shareholder value.
Holding the opposing view is Freeman (1984) who states that the CSP-CFP relationship is positive. According to Freeman’s (1984) stakeholder theory perspective the success of a firm depends to a large extent on its capability of managing relationships with its key stakeholders, such as investors and shareholders, but also customer, employees, communities and whole societies (van Beurden & Gössling, 2008). It is through the successful management of a firm’s stakeholder relations that it will be able to improve its financial performance (Hillman & Keim, 2001). Further arguments in favor of CSR generally
hold that it is in a business’s long-term self-interest to be socially responsible (Jensen, 2002: Carroll & Shabana, 2010); intuitively this seems to be the case as the firms with the most sustainable business practices are the ones that are built to last.
The results of individual studies on the CSP-CFP link vary widely (Hart & Ahuja, 1996; Pava & Krausz, 1996; Griffin & Mahon, 1997; Roman, 1999; Mahon & Griffin, 1999; Ruf, Muralidhar, Brown, Janney, & Paul, 2001; Konar & Cohen, 2001; King & Lenox, 2001; Margolis & Walsh, 2003; Orlitzky et al., 2003; Salama, 2005; van Beurden and Gössling 2008; Callan & Thomas, 2009). The inconsistent findings across individual studies have been attributed to methodological differences (Griffin & Mahon, 1997; Waddock & Graves, 1997), interpretation biases (Mahon & Griffin, 1999), and the existence of mediating variables (Orlitzky et al., 2003) and situational contingencies (Carroll & Shabana, 2010; van Beurden & Gössling, 2008) that influence the CSP–CFP relationship (Carrol & Shabana, 2010). By means of a rigorous meta-analysis, Orlitzky et al. (2003) found that, after controlling for measurement and sampling error, the CSP-CFP relationship tends to remain positive.
It is argued, however, that lower level components of CSP, such as the ones used in the current study, are likely to have diverse effects on CFP (Brammer & Millington, 2008). It would therefore be too simplistic to expect both in- and outward CSP to be positively related to financial performance just because overall CSP is. The next sections attempts to illuminate what the nature of the relationship between the disaggregated components of CSP and CFP might be based on theoretical ideas postulated by the NRBV.
The Natural Resource Based View
The Resource-Based View (RBV) of competitive strategy is considered to be one of the most prominent theoretical perspectives within the field of strategic management (e.g. Barney, 1991; Peteraf, 1993). The RBV postulates that resources provide an opportunity for capturing
sustained competitive advantage when they are valuable, rare, inimitable, and non-substitutable (i.e. VRIN; Barney, 1991). Resources can be tangible such as financial and capital assets, or intangible such as reputation or brand, employees’ tacit knowledge and a firm’s idiosyncratic capabilities and competencies (Barney, 1991; Grant, 1996; Teece, Pisano & Shuen, 1997; Coff, 1999). Hart (1995) adds an interesting dimension to the RBV by considering the strategic interaction of a firm with its natural environment and integrating notions of sustainable economic activity into the RBV’s theoretical framework. Hart (1995) calls his extension of the RBV, the Natural Resource Based View. Hart’s (1995) theorizing is in line with Porter & Kramer’s (2006) notion of strategic CSR, which suggests that CSR activities can be a source of competitive advantage through exploiting entrepreneurial opportunities and stimulating innovation. Contemporary NRBV postulates four socially and environmentally responsible strategies through which firms can attain a sustainable competitive advantage, namely: “pollution prevention”, “product stewardship”, “clean
technology” and “base of the pyramid” (Hart & Dowell, 2010).
The pollution prevention strategy aims at preventing waste and emissions and is associated with a reduction in cost through increased operational efficiency and resource productivity (Porter & van der Linde, 1995) and a diminution of firm risk through reducing exposure to potentially costly litigation and regulatory fines (Ambec & Lanoie, 2008). Pollution prevention is a ‘people intensive strategy’ which means it requires extensive employee involvement and empowerment in order to be successful (Hart, 1995).
Whereas the pollution prevention strategy focusses on a continuous improvement of a firm’s internal operations and work processes, the product stewardship strategy is oriented outwards as its strategic focus concerns a firm’s entire value chain and/or ‘product life-cycle’ (Hart & Milstein, 2003). The product stewardship strategy is characterized by engaging in a dialogue with external stakeholders (i.e. suppliers, customers, regulators, communities,
NGO’s, media) as to integrate their needs into product design and/or services (Hart & Dowell, 2010). It is argued that a successful product stewardship strategy increases a firm’s reputation and legitimacy through building credibility in the eyes of relevant external stakeholders (Barnett, 2007; Hart & Dowell, 2010). The enhanced brand-value resulting from product stewardship is said to boost a firm’s revenues by enabling it to charge premium prices for its output (Baron, 2001; McWilliams & Siegel, 2001).
What distinguishes the clean technology and bottom of the pyramid (BoP) from the pollution prevention and product stewardship strategies, is their term focus. This long-term focus translates into ways of doing business that can be maintained into the indefinite future (Hart & Dowell, 2010). The clean technology strategy aims at building new competencies, developing radically new (clean) technologies and at repositioning oneself for competitive advantage as industries evolve (Hart & Dowell, 2010). Hockerts & Wüstenhagen (2010) theorize that as industries evolve, incumbents are likely to be disrupted by new entrants pursuing sustainability-related opportunities. Such disruptive innovation can be of great threat to the long-term survival of industry incumbents (Christensen, 1997). Effectively reacting to the threats posed by such new entrants often means developing competencies and/or technologies that may eventually cannibalize parts of an incumbent’s existing core business (Hart & Dowell, 2010), a process referred to as self-disruption (Christensen, Wang, & van Bever, 2013). Incumbents’ financial performance can benefit from pursuing clean technology strategies as they form a buffer against disruptive forces, and because incumbents are able to exploit and capitalize on disruptive technologies much more efficiently than new entrants can do since they generally possess an extensive base of complementary assets and supporting structures (Tripsas, 1997).
Lastly, the BoP strategy aims at addressing the growing gap between rich and poor by meeting the unmet needs of those at the bottom of the economic pyramid (Hart &
Christensen, 2002; Prahalad & Hart, 2002; Hart & Dowell, 2010), which is a staggering two-thirds of the entire world’s population (Parahald & Hart, 2002). The investments of corporations at the BoP means lifting billions people out of severe poverty and consequently averting social decay, political instability and environmental degradation (Prahalad & Hart, 2002). Next to offering the firm a compelling trajectory for future growth by tapping into a huge previously unserved customer base (Hart & Milstein, 2003), a BoP strategy enables firms to engage with fringe stakeholders and become aware of new problems and potential solutions which stimulates the development of innovative products and/or services which in turn enhances financial performance (Hart & Sharma, 2004).
Whereas the clean technology strategy is largely focused on a firm’s inward processes (i.e. developing the internal capacities to protect and nurture disruptive clean technologies), the BoP strategy holds an outward orientation by looking at what opportunities exists with respect to tapping into previously unserved markets.
Figure 1 depicts the sustainable value framework by Hart & Milstein (2003) which gives a clear overview of the differences between the four NRBV strategies.
In & Outward Corporate Social Performance
As mentioned before, the current study does not measure CSP using an overall score, but attempts to uncover the mechanisms underlying the CSP-CFP relationship by disaggregating CSP into an inward and an outward measure.
The current paper defines inward CSP as the level of a firm’s internal activities geared towards creating economic, social and environmental value. The current paper considers internal activities to be those that to do not span outside the boundaries of a firm. Such activities are considered to be placed under the operations and human resource management dimensions of a firm’s value chain (Porter, 1991). More specifically, inward
CSP is concerned with reducing the negative externalities related to its internal operations such as emissions & waste, biodiversity & ecological impacts, energy & water usage, and usage of hazardous materials (Porter & Kramer, 2006). Additionally, inward CSP involves the social aspect of a firm’s internal practices such as employee education & job training, worker safety, gender and ethnic diversity, and compensation & layoff policies (Porter & Kramer, 2006). To summarize, inward CSR activities refer to a firm’s allocation of resources and efforts towards improving its internal operations, and developing the skills and competencies of its employees in order to foster the development of (clean) technologies that reposition the firm for future growth (Hart & Milstein, 2003). In the context of the NRBV, inward CSP is the degree to which a firm engages in pollution prevention and/or clean technology strategies (see Table 1 and Figure 1).
On the contrary, outward CSP refers to a firm’s level of engagement in externally oriented CSR-activities. Outward CSP concerns a firm’s socially responsible activities that extend beyond its operational boundaries to include the totality of the supply chain, product lifecycle, and the environment it operates in (Hart, 1995). More specifically, outward CSP indicates to what extent a firm puts effort into managing the social impact of its supply chain (e.g. the responsible sourcing of raw materials, fair treatment of suppliers), into reducing the negative externalities of its product(s) and/or service(s) throughout their lifecycles by ensuring product safety, implementing recycling programs, adhering to environmentally friendly product design principles (e.g. cradle-to-cradle: Braungart, McDonough, & Bollinger, 2006), and respecting customer privacy. Furthermore, outward CSP is concerned with a firm’s efforts towards increasing and/or ensuring the well-being of communities that are affected by a firm’s operations, respecting and promoting human rights, and seizing social opportunities by improving the access to nutrition, healthcare, finance, and communications
of the poor (Hart & Dowell, 2010). In the context of the NRBV, outward CSP is the degree to which a firm engages in product stewardship and/or BoP strategies (see Table 1).
Table 1.
In- & Outward CSP and Related NRBV Strategies
Inward CSP Outward CSP Pollution Prevention Clean Technology Product Stewardship Bottom of the Pyramid
Lower costs Future position Reputation Long-term growth
Hypotheses are drawn up on the basis of the above-mentioned NRBV strategies, the sustainable value framework and resulting conceptualization of in- and outward CSP (see Table 1). The current study expects both in- and outward CSP dimensions to, on the whole, have a positive effect on CFP, which leads to the first set of hypotheses.
Hypothesis 1a Inward corporate social performance positively affects corporate
financial performance.
Hypothesis 1b Outward corporate social performance positively affects corporate financial performance.
Figure 1.
Industry Lifecycle
As stated before, the current paper acknowledges the need for taking situational contingencies into account when investigating the CSP-CFP relationship and adds to the extant body of literature on the topic by explicating the role of industry growth as one such contingency. By doing this, the current study improves our understanding of the mechanisms that constitute the CSP-CFP relationship and clarifies the strategic potential of CSR with regard to creating and capturing economic value.
Just as products and firms evolve along lifecycles (Rink & Swan, 1979; Lester, Pamell, Carraher, 2003), so do industries. The need to better understand industry dynamics and consequent changes in industry structure has stimulated research aimed at identifying regularities in the aging patterns of industries. This has resulted in the development of the industry lifecycle (ILC) theory (Peltoniemi, 2011). Although industries are in constant flux and every one of them travels a unique evolutionary path, they all begin small, experience growth, mature and eventually decline after which they revive or die out (Dowdy & Nikolchev, 1986; Miles, Snow, & Sharfman, 1993; Beldona, Chaganti, Habib, & Inkpen, 1997). It is therefore argued that the same lifecycle concept that works so well for describing the evolution of a product or organization, also works best for approaching the evolution of an industry (Dowdy & Nikolchev, 1986; Miles et al., 1993). In line with previous research, the current study uses a measure of industry growth to determine the lifecycle stage of an industry. Emerging industries are classified as those which have a mean annual growth rate of 10% or more, mature industries as having an average annual gross output increase of 1% to 10% and decline industries are the ones that have an average annual gross output growth rate of below 1% (Miles et al., 1993; Beldona et al., 1997; Russo & Fouts, 1997).
Industries in emerging or high-growth lifecycle phases are characterized by a large inflow of firms and high innovative activity (Klepper, 1997; Zahra, 1993). Growth stage
industries are regarded as attractive for new entrants because they are able to achieve initial success much more easily without the intense competitive pressures facing firms in mature industries (Lumpkin & Dess, 2001; Peltoniemi, 2011). Firms in emerging industries are generally small, entrepreneurial and organically structured (Mintzberg, 1981; Covin & Slevin, 1990). During early ILC-stages, firms often have different backgrounds and expertise which lead them to pursue different types innovative product or service designs in order to obtain market share – this consequently results in considerable product diversity (Klepper, 1997). As the influx of firms continues, rivalry among them increases putting pressure on firms to produce higher quality products and/or sell them for lower prices, which boosts industry sales (Agarwal & Bayus, 2002). Emerging industries are characterized by high levels of uncertainty, dynamism and experimentation (Dowdy & Nikolchev, 1984; Lumpkin & Dess, 2001; Goll & Rasheed, 2004).
As time passes, industries move from the initial dynamic period to a more stable condition wherein firms have better knowledge of the product attributes that best fit the needs of the market (Dowdy & Nikolchev, 1984). Firms increasingly start to compete on the efficiency of their business operations and refinement of their production techniques (Dowdy & Nikolchev, 1984; Beldona et al., 1997; Klepper, 1997; Peltoniemi, 2011). Such modification and refinement of existing functions and practices is also referred to as incremental innovation (Koberg, Detienne, & Heppard, 2003). As sales do not grow forever, market shares are distributed amongst the most competent producers and other firms exit the industry (Peltoniemi, 2011), a process also referred to as an industry ‘shake-out’ (Klepper & Miller, 1995). Product diversity drops resulting from the shake-out and a shift takes place from product- to process-oriented innovation (Peltoniemi, 2011). Firms in mature industries are often much larger than the ones in embryonic industries as a result of organic growth and/or industry consolidation (i.e. mergers & acquisitions) (Owen & Yawson, 2010), and are
generally structured in a more mechanistic and hierarchical fashion (Mintzberg, 1981). It is important to note that the temporal course of an industry lifecycle is not unidirectional. This means that industries may move backward or forward through the stages of the ILC (Dowdy & Nikolchev, 1986).
Figure 2.
The Industry Lifecycle Model (Dowdy & Nikolchev, 1986)
Given that a firm’s external environment represent exerts a major influence on its operations (Hofer, 1975; Tosi & Slocum, 1984) and that there exist significant differences in the properties of the environment across ILC stages, it seems natural to assume that firms in different ILC stages benefit more from certain types of CSP initiatives than others. Hence, it is highly relevant for managers to know what type of CSP initiatives tend to do well in which ILC stages when considering the allocation of scarce resources (Baird, Geylani, & Robert, 2012).
Considering that the sources for competitive advantage in early industry stages lie in innovative product/service design, market research, and brand-building (Miles et al., 1993; Klepper, 1997), it seems that outward CSP might be of higher strategic value for firms in high-growth than in low-growth industries.
Conditions within high industry growth stages are known to be rapidly changing and from this environmental variability emerge numerous business opportunities (Lumpkin & Dess, 2001). It is argued, on the basis of the law of requisite variety (Ashby, 1956), that organizations are able to successfully recognize and exploit such emerging business opportunities in dynamic environments when they explore and experiment with new resource combinations (Lawrence & Lorsch, 1967; March, 1991; He & Wong, 2004). It is argued that the costs and risks associated with such experimenting behaviors are compensated by capturing new market niches (Lumpkin & Dess, 2001). Capturing new product-market niches helps to minimize the threat of obsolescence and stimulates growth, which is essential for a firm’s survival within dynamic environments (Miller & Friesen, 1983; Klepper & Thompson, 2006).
The initiatives classified as outward CSP are aimed at scanning and mapping external stakeholder demands, and integrating them into product and/or service design (Hart & Dowell, 2010). It might therefore be the case that firms with high levels of outward CSP have a better view on what the market needs and are able to respond accordingly by developing innovative products/services that match this demand. Moreover, outward CSP involves engaging with fringe stakeholders which can spur the generation of imaginative new business ideas (Hart & Sharma, 2004). This in turn enables firms to discover and seize opportunities relating to capturing new service, product and/or factor-market niches (Hart & Dowell, 2010). It is the explorative and externally oriented nature of outward CSP that prompts the current study to expect it to have a more pronounced positive impact on financial performance during periods of high industry growth. This expectation is further substantiated when considering that explorative tactics are generally inappropriate to pursue during periods of low industry growth where conditions are more stable and certain (Miller & Friesen, 1983; Lumpkin & Dess, 2001; He & Wong, 2004).
As noted earlier, emerging industries are generally populated by entrepreneurial and organically structured firms (Lawrence & Lorsch 1967; Mintzberg, 1981; Covin & Slevin, 1990; Russo & Fouts, 1997). He & Wong (2004) support this notion by arguing that firm exploration and experimentation are associated with organic organizational structures, loosely coupled systems, path-breaking and improvising behavior, and emerging markets and technologies. Hart (1995) argues that organically structured firms are better able to successfully adopt product stewardship strategies, since such firms are not hindered by having made any substantial pre-existing commitments towards manufacturing processes and support systems.
Low-growth industries are more likely to be populated by mature firms whose organizational structures are hierarchical, inflexible and formalized (Mintzberg, 1981). Such large mechanistic organizations are likely to experience great difficulty in implementing procedures associated with outward CSP as this calls for a drastic reorganization of operational processes which requires a loosening of organizational structures (Hart, 1995; Russo & Fouts, 1997; Hart & Dowell, 2010). Such loosening of organizational structures is likely to degrade financial performance during periods of low industry growth (Lawrence & Lorsch, 1967), which implies that outward CSP is likely to have higher pay-off during low-growth ILC stages.
Lastly, high-growth industries are much more likely to experience entry by new players than low-growth industries (Klepper, 1997) which means that methods and rules of competition (i.e. “the rules of the game”) are yet to be defined (Dowdy & Nikolchev, 1986; Lumpkin & Dess, 2001). Firms might be able to benefit from the turbulent dynamics that characterize high-growth industries by engaging in outward CSP in order to establish rules, regulations, and/or standards that are uniquely tailored to the firm's capabilities (Hart, 1995).
Based on the theoretical reasoning stated above, the current study hypothesizes the following:
Hypothesis 2 The level of an industry's growth will moderate the relationship between outward corporate social performance and corporate financial performance. The greater the industry growth, the greater the positive impact of outward corporate social performance on corporate financial performance.
As industry growth stagnates and maturity kicks in, a notable shift takes place in the nature of firms’ innovative activities. More specifically, research points out that the transition of an emerging into a mature industry is characterized by a shift from product- to process-oriented innovation (Peltoniemi, 2011). It is argued that this shift takes place due to industry dynamics (i.e. a drop in firm numbers, decreasing product diversity) and consequent changes in an industry’s competitive structure. More specifically, as industries evolve towards maturity, cost control, operational efficiency and process-oriented incremental innovations (Dowdy & Nikolchev, 1984; Banbury & Mitchell, 1995; Cohen & Klepper 1996a; Klepper 1996; He & Wong, 2004) all serve to enhance a firm’s competitiveness. It seems then that allocating resources towards enhancing inward CSP, which is aimed at increasing operational efficiency and developing innovative technologies and capabilities (Hart & Dowell, 2010), is a wise decision to make during times of low industry growth.
It is argued, however, that the costs for developing and deploying cutting-edge clean technologies and/or pollution prevention processes can be significant (Russo & Fouts, 1997). Firms in emerging industries are generally smaller than their counterparts in established
industries (Peltoniemi, 2011) which suggests that the costs of engaging in pollution prevention strategies have a relatively larger impact on the financial performance of firms in high-growth industries. This reasoning seems legit considering that large firms are often able to benefit from significant size advantages in undertaking process-related innovations (Cohen & Klepper, 1996b). Firms with sizeable production capacities are able to spread the costs of engaging in pollution prevention activities over a larger number of units, ultimately resulting in lower average costs for increasing inward CSP (McWilliams & Siegel, 2001). Cohen & Klepper (1996a) note that this cost-spreading advantage is most pronounced for process-innovation, as compared to product-process-innovation, due to a stronger dependence on ex-ante firm size.
Mature industries tend to be characterized by relatively less volatile and turbulent competitive environments (Dowdy & Nikolchev, 1986; Anderson & Tushman, 1990; Peltoniemi, 2011). It is argued that under such conditions, a firm is better off exploiting and strengthening its existing resource base than exploring and experimenting with new resource combinations (March, 1991; Lumpkin & Dess, 2001; He & Wong, 2004). Exploitation is characterized by incremental innovations focused on the refinement, improvement and reinforcement of existing business processes as to increase operating efficiency and reduce costs (Anderson & Tushman, 1990; March, 1991). The concept of exploitation shows striking similarities to the pollution prevention strategy of the NRBV, as both concepts underscore the importance of continuous improvement of a firm’s current operations in order to attain a competitive advantage (March, 1991; He & Wong, 2004). Previous empirical work has found that the exploitation-performance link is most pronounced in low-growth industries (Lumpkin & Dess, 2001). Inward CSP is therefore expected to have a stronger positive impact on financial performance during periods of low industry growth.
The ILC theory postulates that mature industries eventually fall into decline and shrink due to obsolescence or ‘de-mature’ due to radical technological innovation (Dowdy & Nikolchev, 1986; Miles et al., 1993). Radical or disruptive innovations open up new linkages to markets and users and bring about forces that can lead to an industry’s revival (Abernathy & Clark, 1984; Dowdy & Nikolchev, 1986; Koberg, Detienne, Heppard, 2003; Peltoniemi, 2011). Such re-emergence of an industry often happens via a process referred to as ‘creative destruction’ (Schumpeter, 1942). The concept of creative destruction describes how radical innovations transform industries by destroying established competencies and replacing existing technologies (Abernathy & Clark, 1984). Hart & Milstein (2003) argue that firms pursuing clean technology strategies are able to effectively reposition themselves when confronted with an industry disruption, since they have been able to develop the capabilities to develop and exploit such new-generation technologies. Incumbents with such capabilities likely possess the ability to break away from entrenched corporate mindsets (i.e. dominant logics: Prahalad & Bettis, 1986), and recognize and exploit new business opportunities during declining industry growth (Dowdy & Nikolchev, 1984; Hart & Milstein, 2003). It seems then that firms pursuing clean technology strategies are likely to benefit most from this during periods of industry decline, when the need to react to disruption and exploit new-generation technologies is an important prerequisite for a firm’s survival (Hart & Milstein, 2003). Since the activities related to the NRBV’s clean technology strategy fall under the current paper’s conceptualization of inward CSP, it is expected that the positive effect of inward CSP on CFP is more pronounced during periods of lower industry growth.
Based on the argumentation above, the current paper proposes the following:
Hypothesis 3 The level of an industry's growth will moderate the relationship between inward corporate social performance and corporate financial
performance. The lower the industry growth, the greater the positive impact of inward corporate social performance on corporate financial performance.
Figure 3. Hypothesized Model
METHODOLOGY
In order to test the current paper’s hypotheses, secondary data is gathered on in- and outward corporate social performance, corporate financial performance, industry growth, firm size, debt, capital intensity and industry type. The data is gathered using objective, third-party databases (i.e. MSCI & COMPUSTAT). The initial sample was drawn from the MSCI dataset which comprised 2489 observations for the year 2011. A remaining 305 observations constitute the final sample after matching the MSCI data with the COMPUSTAT data and removing double entries and observations with missing data on any of the current paper’s variables of interest.
In & Outward Corporate Social Performance
Data on CSP is gathered using the MSCI database. The MSCI database has passed several tests of construct validity (Sharfman, 1996) and is therefore chosen as the source for data on CSP by the current study. Data is gathered for the year 2011 because it falls precisely in the middle of the period used to calculate industry growth rates which runs from 2009 up to 2013. In line with previous research, the CSP data is subsequently linked to a COMPUSTAT dataset with financial and other business figures that is used to construct the dependent and control variables (e.g. Waddock & Graves, 1997; Hull & Rothenberg, 2008; Barnett & Salomon, 2012).
The MSCI database consists of qualitative ESG performance indicators and of a set of exclusionary indicators that assess whether a firm is involved in controversial lines of business (e.g. firearms, gambling, tobacco). However, only the ESG performance indicators are useful for computing a firm’s in- and outward CSP scores. The ESG indicators are categorized across seven distinct dimensions: community, diversity, employee relations, environment, human rights, customers (‘products’ in MSCI terminology), and corporate governance. Each dimension consists of a number of criteria on which firms are assessed using a simple binary scoring model. If a firm meets an assessment criteria established for a performance indicator, then this is signified with a “1”. If the firm does not meet the criteria, then this is signified with a “0”. The criteria either measure strengths or concerns with respect to CSP in the context of that specific dimension.
The current paper uses the sustainable value framework by Hart & Milstein (2003) and related description of the NRBV strategies (NRBV; Hart & Dowell, 2010) as a point of reference during the selection of MSCI performance indicators that constitute the in-and outward CSP scores.
The descriptions of the “pollution prevention” and “clean technology” strategies (Hart, 1995; Hart & Milstein, 2003; Hart & Dowell, 2010) are used as guidance-tools for determining the criteria believed to be indicative of a firm’s inward CSP. For the inward CSP scores, performance criteria are used that indicate strengths and concerns with respect to a firm’s internal activities (i.e. operations and human resource practices). This has resulted in a composite measure of inward CSP consisting of 12 criteria; seven related to strengths and five to concerns. The strength-criteria assess strengths regarding firms’ employee relations and diversity, development of environmental technologies and competencies, efforts aimed at waste management & pollution prevention, and environmental management systems. The criteria of firm weaknesses focus on concerns regarding employee relations & diversity, and green-house gas & toxic emissions as a result of wasteful operational processes. Because of a lack of objective weights underlying the MSCI indicators, the current paper considers all indicators equally important for determining CSP (Van der Laan et al., 2008). Following prior research, the current paper subtracts the concerns from the strengths to arrive at a single
net inward CSP score (Waddock & Graves, 1997; Ruf, Muralidhar, Brown, Janney, & Paul,
2001; Hull & Rothenberg, 2008; Chatterji, Levine, & Toffel, 2009; Barnett & Salomon, 2012).
Roughly the same procedure is followed for computing the outward CSP scores. For the outward CSP scores, descriptions of the “product stewardship” and “bottom of the pyramid” strategies (Hart & Dowell, 2010) are used as a guidance for criteria-selection. This has resulted in a measure of outward CSP consisting of 16 criteria: eight concerned with strengths, and eight with concerns. The outward strength-criteria assess a firm’s strengths with respect to community engagement, corporate governance, human rights, customer relations, and the proactive efforts of firms aimed at reducing the environmental impact of their product design, at establishing take-back and recycling programs, and at managing risks
of brand value damage due to sub-standard treatment of workers in the firm’s supply chain. The scores on strengths and concerns are also combined to form a net outward CSP score for each firm.
The following criteria were dropped from the analysis due to a complete lack of data: Natural Resource Use - Water Stress (Env-str-H), Natural Resource Use – Biodiversity & Land Use (Env-str-I), Natural Resource Use – Raw Material Sourcing (Env-str-J), Child Labor (Emp-con-G), and Supply Chain Management (ENV-con-J). A detailed description of the MSCI rating criteria used in the current study can be found in Table 3 (see appendix).
Corporate Financial Performance
Following prior research, CFP is operationalized by a firm’s Return on Assets in the year 2011 (ROA; ratio of net income to total assets) which is derived from the COMPUSTAT tapes (Barnett & Salomon, 2012; Hull & Rothenberg, 2008; Russo & Fouts, 1997; Van der Laan et al., 2008; Waddock & Graves, 1997). COMPUSTAT is an extensive database of firm-level operational and performance data on over 30,000 publicly traded companies (Barnett & Salomon, 2012). The current paper chooses to operationalize CFP using an accounting measure instead of a market-based measure, because it is said that accounting-based measures give a better indication of a firm’s internal efficiency, decision-making capabilities and managerial performance (Orlitzky et al., 2003). Since the current paper is concerned with clarifying the role of strategic CSR, ROA seems to be the most appropriate accounting-based measure to use for financial performance as it reflects how well a firm is able to strategically allocate its resources towards enhancing profitability (Hull & Rothenberg, 2008; Kostopoulos, Papalexandris, Papachroni, Ioannou, 2010).
Industry Growth
Industry growth is determined by gathering data from the Bureau of Economic Analysis (BEA, 2016) on annual gross output by industry in the whole of North America during the years 2009-2013. The period 2009-2013 is chosen because it enables full availability of data from the MSCI and COMPUSTAT tapes, covers both recessionary (i.e. the aftermath of the economic crisis) and growth years (i.e. the post-crisis economic revival), and 5 years is long enough to adequately cover industry lifecycle trends (Miles, Snow, & Sharfman, 1993). Gross output is a measure of an industry’s sales or revenues and is considered a useful measure of an industry's output (BEA, 2016). The mean annual growth rate of an industry’s gross output is determined by using the compound annual growth rate (CAGR) formula which reads:
CAGR = [ending value ÷ beginning value] [1 ÷ #years] – 1. Control Variables
Following previous empirical work, the current study includes as control variables firm size, debt, capital intensity and industry. Firm size is measured with the natural logarithm of the number of employees in order to avoid non-normality (Van der Laan et al., 2008). Firm debt is operationalized as a firm’s long term debt divided by the total amount of assets (Waddock & Graves, 1997; Barnett & Salomon, 2012). Capital intensity is measured using a ratio of sales to assets (Russo & Fouts, 1997) and industry is operationalized as a firm’s 3-digit North American Industry Classification Code (NAICS) code in 2011 (Chatterji et al., 2009).
Firm size is included because larger companies are likely to have more resources to invest in CSR-related activities, and they are more visible to external stakeholders who demand higher CSP (Ullmann, 1985; Waddock & Graves, 1997).
Furthermore, it is argued that the relative amount of debt in a firm’s capital structure impacts its financial performance. Debt is said to positively impact financial performance
through imposing discipline upon managers to act in the best interest of shareholders. However, it is also argued that the degree to which a firm is in debt can have a negative impact on profits through limiting the firm’s ability to take the necessary risks to innovate and explore new businesses (Barnett & Salomon, 2012).
Moreover, a measure of capital intensity is included because it is said to play an influential role in a firm’s operations and profitability (Capon, Farley, & Hoenig, 1990; Russo & Fouts, 1997; Lee, Koh, & Kang, 2011). It is said that capital intensity can improve financial performance through reducing the level of operating costs by committing a greater portion of expenditures to fixed assets. On the other hand, it is argued that capital intensity can worsen performance when demand levels show strong fluctuations since fixed expenses do not vary with sales levels, consequently putting firms under cost pressures (Lee, Koh, & Kang, 2011).
Lastly, industry type is controlled for because previous empirical work has pointed out that the nature of the CSP-CFP relationship is variable across industry types (Baird et al., 2012). Hull & Rothenberg (2008) theorize that this is because CSP and financial performance are likely to affected by the profitability and visibility of the firm’s industry. This notion is supported by Chiu & Sharfman’s (2011) finding that the relationship between CSR initiatives and financial outcomes was stronger in industries that were more visible to stakeholders. As can be seen in Table 2 (see appendix), the current sample consists of 43 industries and 135 sub-industries. In line with previous research, the current paper controls for industry differences by including the three-digit NAICS codes in the regression analyses (Chatterji et
al., 2009).
Previous research on the CSP-CFP link also acknowledges the importance of including measures of research and development (R&D) and advertising intensity as control variables into the analysis (e.g. McWilliams & Siegel, 2000; Hull & Rothenberg, 2008;
Barnett & Salomon, 2012). This is because empirical work has pointed out that distinctive technological and marketing capabilities can impact firm profitability (Mahoney & Pandian, 1992). However, the current research chooses not to include measures of R&D and advertisement intensity because of limited data availability, and because the variables were consistently insignificant in trial regressions.
Analysis
The current hypotheses are tested by running six ordinary least squares (OLS) multivariate regression models, two of which test for moderation using the PROCESS plugin for SPSS by Hayes (2013). PROCESS allows the user to effectively test for moderation by automatically centering variable scores (transforming the means to zero), correcting for heteroscedasticity, and additionally performing the Johnson-Neyman technique. Models 1, 2 and 3 predict ROA for the inward CSP scores, whilst Models 4, 5 and 6 do so for the outward CSP observations. Following the methodological procedure used by Hull & Rothenberg (2008), Models 1 and 4 serve as base models and only include the control variables. Models 2 and 5 contain the independent and moderator variables, and Models 3 and 6 include the hypothesized interaction effects. The results are presented in the following section.
RESULTS
The following section reports the results of the current research. A total of 305 companies remained in the sample after the data was cleared of companies missing data on either CFP, CSP or any of the control variables. Table 4 presents the descriptive statistics and correlations for the variables that are used to test the current paper’s hypotheses. The average ROA for each of the firms in the current sample is about 26% per annum with an impressive maximum of 165% generated by the Whiting Petroleum Corporation, and a minimum value of -92% made by Dean Foods in 2011. Looking at the average scores on the independent variables of
interest, it seems that the firms in the current sample engaged more in activities related to inward CSR (0.13) than to outward CSR (0.02) during the year 2011. The average industry growth rate of the current sample is approximately 7% which is considered to be ‘mature’ (Miles et al., 1993; Beldona et al., 1997; Russo & Fouts, 1997).
Table 4.
Descriptive Statistics & Correlations
Variables 1 2 3 4 5 6 7 1. Return on Assets 2. Inward CSP 0.12 3. Outward CSP – 0.07 0.50** 4. Industry Growth (%) 0.14* – 0.02 – 0.15* 5. Firm Size – 0.07 0.27** 0.28** – 0.15* 6. Firm Debt 0.40** – 0.01 – 0.01 0.08 – 0.12* 7. Capital Intensity – 0.24** 0.09 0.02 – 0.19** – 0.17** – 0.31** Observations (N) 305 148 246 305 305 305 305 Mean 0.26 0.13 0.02 0.07 9.61 1.04 0.46 Standard Deviation 0.28 0.55 0.30 0.06 1.39 1.48 0.29 Minimum – 0.92 – 0.80 – 0.71 – 0.09 5.42 0.00 0.08 Maximum 1.65 2.10 1.17 0.26 13.05 8.63 2.89 + p < .10; ∗ p < .05; ∗∗ p < .01.
As can be seen from Table 4, most correlations are of modest magnitude. Inward CSP correlates positively with ROA (ρ = 0.12), and outward CSP does so negatively (ρ = – 0.07).
However, the correlations are fairly low and statistically insignificant which limits the possibility of drawing any meaningful inferences from them. Furthermore, there is a significant correlation between the independent measures of in- and outward CSP (ρ = 0.5, p < 0.01). However, their correlation is not high enough (ρ < 0.7) to raise any concerns for multicollinearity (Field, 2009). It is therefore safe to assume that in- and outward CSP indeed measure different aspects of corporate social performance. Moreover, it can be noted that large firms are engaging in activities related to in- (ρ = 0.27) and outward CSP (ρ = 0.28) more so than their smaller counterparts. This seems valid considering that large firms generally have better reasons to engage in CSR and more resources to allocate to such initiatives (Ullmann, 1985; McWilliams & Siegel, 2001). Outward CSP is negatively related to industry growth (ρ = – 0.15), which suggests that firms in high-growth industries generally engage less in externally oriented CSR activities than their counterparts in low-growth industries. Firm size is negatively related to industry growth (ρ = – 0.15) suggesting that, in line with previous research (e.g. Covin & Slevin, 1990), firms in high-growth industries tend to be smaller than firms in low-growth industries. To better understand the nature of the aforementioned relationships, it is interesting to look at the results of the regression analyses shown in Table 5. Table 5. Regression Results Inward CSP Outward CSP Variables Model 1 ROA Model 2 ROA Model 3 ROA Model 4 ROA Model 5 ROA Model 6 ROA
Constant 0.14 0.16+ 0.15 0.22** 0.12 0.17+ Firm Size – 0.00 – 0.01 – 0.01 – 0.02 – 0.02 – 0.02 Firm Debt 0.06** 0.06** 0.06* 0.06*** 0.06*** 0.06** Capital Intensity 0.00 – 0.02 – 0.01 – 0.16* – 0.13+ – 0.13* Industry Growth 0.08 0.07 0.70* 0.70* Inward CSP 0.04+ 0.03 Inward CSP*Growth – 1.03* Outward CSP – 0.02 – 0.02 Outward CSP*Growth – 0.04
3-digit NAICS Codes Included Included Included Included+ Included* Included+
F-value 2.52 2.22 1.91 14.00 10.26 4.13
R2 0.07* 0.09* 0.11+ 0.19*** 0.21*** 0.20***
+
p < .10; ∗ p < .05; ∗∗ p < .01; *** p < .001.
As shown in Table 5, Models 11, 22, 43, 54 and 65 all explain a significant amount of variance in the dependent variable (ROA). Model 36 only explains a marginally statistic amount of variance in ROA. Capital intensity significantly hurts performance in Models 4, 5 & 6 suggesting that the performance of capital intensive firms is likely suffering from high fixed expenses and/or financial distress resulting from fluctuations in demand (Lee, Koh, Kang, 2011). Firm debt is shown to be beneficial to financial performance in all models suggesting that debt is imposing discipline upon firms to act in the best interest of its
1 F(4, 143) = 2.52, p = .044 2 F(6, 141) = 2.22, p = .045 3 F(4, 241) = 14.00, p = .000 4 F(6, 239) = 10.26, p = .000 5
shareholders, which is maximizing profits (Barnett & Salomon, 2012). Moreover, it is striking that there is barely any effect of firm size on the dependent variable in any of the Models. This is most probably due to the fact that ROA is already scaled by a measure of size (i.e. total assets) (Van der Laan et al., 2008). Lastly, industry growth weighs in positively in Models 2 and 3, and significantly in Models 5 and 6 which is reasonable since industry growth has been found to enhance financial performance in a number of studies (Capon et al., 1990).
As can be seen in Model 2, 3, 5 and 6, the coefficients of inward CSP are in line with expectations but do not reach statistical significance which essentially means that inward CSP shows little sign of directly affecting financial performance. Furthermore, the coefficients of outward CSP are also statistically insignificant. The results therefore reject Hypothesis 1a and 1b, which propose that inward CSP and outward CSP are positively related to CFP.
Hypothesis 2 suggests that the greater industry growth, the greater the positive impact of outward CSP on ROA. As seen in Model 6, the coefficient of the interaction between outward CSP and industry growth is statistically insignificant, which means hypothesis 2 is not supported.
Hypothesis 3 proposes that the level of an industry's growth will moderate the relationship between inward CSP and ROA. The lower the industry growth, the greater the positive impact of outward CSP on firm performance. In Model 3 it can be seen that the interaction of inward CSP with industry growth has a significantly negative coefficient (b = – 1.03, t(140) = – 2.32, p = .02). This indicates that inward CSP indeed has a more positive impact on financial performance in industries with a relatively low growth rate, which supports hypothesis 3. Figure 4 clarifies this interaction effect by plotting ROA against low, average, and high levels of inward CSP under low, average, and high values of industry
growth. ‘Low’ values are defined as being one standard deviation below the mean which in this model is -0.42 for inward CSP, and 0.91 for industry growth. The ‘average’ values are the variables’ means and since they are centered this equals to zero. ‘High’ values are defined as being one standard deviation above the mean which for inward CSP is 0.68 and for industry growth is 11.31.
Figure 4.
The Interaction Effect of Industry Growth and Inward CSP on ROA
Table 6 shows the results from applying the Johnson-Neyman Technique on Model 3, which further specifies the nature of the interaction effect. It can be seen that when industry growth drops below 4,1% per annum, inward CSP and ROA are significantly related, t(140) = 1.98, p = 0.5, b = 0.05. As industry growth decreases below this threshold, the positive relationship between inward CSP and ROA strengthens.
Table 6.
Effect of Inward CSP on ROA (B) at Different Levels of Industry Growth
– 7,8% 0.17 .011 – 6,1% 0.16 .011 – 4,4% 0.14 .011 – 2,7% 0.12 .011 – 1,0% 0.10 .012 0,7% 0.09 .014 2,4% 0.07 .023 4,1% 0.05 .500
DISCUSSION & CONCLUSION
FindingsLiterature on the CSP-CFP relationship has yet to find a conclusive answer to the question whether corporate social responsible behavior leads to better or worse financial performance (e.g. Margolis & Walsh, 2003; Griffin & Mahon, 1997; Orlitzky et al., 2003). As a result, scholars are increasingly turning their efforts towards generating research questions based on a contingency approach in order to identify the variables that determine under what conditions CSP and CFP are related, and what the nature of that association might be (Rowley & Berman, 2000). In that vein, the current study set out to investigate whether and how industry lifecycle moderates the relationship between CSP and CFP. More specifically, the current study assessed whether industry growth impacts the nature and strength of relationship between in- and outward oriented CSP and CFP. The current study chose to
disaggregate CSP into two theoretically valid components in order to specify more precisely how and when CSP affects CFP. The current hypotheses were drawn up based on the idea that inward CSP positively impacts financial performance through process innovations, and that outward CSP does so via product innovations (Hart & Milstein, 2003; Hart & Dowell, 2010). Based on previous theoretical and empirical work on the industry lifecycle model (see e.g. Peltoniemi, 2011), the current study expected that outward CSP would have a bigger impact on financial performance during periods of high industry growth compared to low growth. The opposite was expected for the impact of inward CSP on CFP; which was hypothesized to be strongest in low-growth industries.
The results of the data analysis are partly consistent with the current paper’s hypotheses. Firstly, in- and outward CSP are not found to directly affect financial performance. Although unexpected, this result is consistent with the ambiguous findings concerning the CSP-CFP link discussed earlier (see e.g. Orlitzky et al., 2003). Secondly, the current study finds that inward CSP indeed has a higher impact on financial performance as industry growth declines. The current paper identifies a threshold under which the financial benefits of inward CSP begin outweighing the costs. This threshold lies at around a 4,1% growth rate of annual industry output, which represents a mature industry lifecycle stage (Miles et al., 1993). This finding supports the notion that pollution prevention and clean technology strategies enhance financial performance (Hart, 1995; Hart & Milstein, 2003; Hart & Dowell, 2010), though only under conditions of low industry growth. Lastly, the current results show that, contrary to what this paper theorized, industry growth does not influence the relationship between outward CSP and CFP. The current findings are incongruent with the NRBV’s statement that product stewardship and BoP strategies enhance financial performance (Hart, 1995; Hart & Milstein, 2003; Hart & Dowell, 2010).
Theoretical Implications
The current paper contributes to the extant body of academic research on CSR by empirically challenging the NRBV and investigating the CSP-CFP link using disaggregated measures of CSP whilst applying a contingency perspective. The evidence points out that research using single overall measures of CSP and not paying attention to contingencies is likely to end up with results that give a distorted view on the nature of the CSP-CFP link.
On the whole, the current study finds partial evidence for the application of the NRBV to issues concerning CSR. Evidence suggests that the NRBV strategies do not directly affect a firm’s financial performance but do so in interplay with contextual factors; in this case industry growth. More specifically, it is found that the pollution prevention and clean technology strategies enhance financial performance, but only in low-growth industries. The evidence suggests that integrating insights from work on the ILC theory (Peltoniemi, 2011) and applying a contingent perspective on competitive strategy would enhance the predictive power of the NRBV. In other words, the current findings encourage the NRBV to not only focus on explicating how a firm’s sustainable economic activities confer competitive advantage, but also elaborate on when this is most likely to happen.
The NRBV posits that the product stewardship and BoP strategies, which are categorized as outward CSP by the current study, serve a firm by means of product and/or service differentiation (Hart & Dowell, 2010). It is argued that such differentiation enhances financial performance because it enables a firm to create new demand or to command a premium price for its output (McWilliams & Siegel, 2001). Although the NRBV states that the corporate pay-off from inward NRBV strategies is predominantly cost control (Hart, 1995), it can be argued otherwise. Consider the fact that some consumers demand that the goods they purchase have certain CSR attributes (i.e. outward CSP), while others also value knowing that the goods they purchase are produced in a socially and/or environmentally
responsible manner (i.e. inward CSP) (McWilliams & Siegel, 2001). In this sense, inward CSP might also act as a differentiator. This becomes especially clear when considering that as industry growth declines, product standardization increases (Dowdy & Nikolchev, 1986) and consumer demand becomes more sophisticated (McWilliams & Siegel, 2001). As a result, inward CSP can become an effective way of simultaneously cutting costs and differentiating ones output from that of rival firms during periods of low industry growth. Future research could potentially focus on identifying the full chain of variables connecting inward CSP to financial performance. This way it would become clear to what degree inward CSP enhances CFP by cutting cost or boosting revenues.
Moreover, evidence points out that the benefits of product stewardship and BoP strategies do not exceed the costs of implementation. A possible explanation is given by Barnett & Salomon (2012) who show that stakeholder influence capacity (SIC), which refers to “the ability of a firm to identify, act on, and profit from opportunities to improve stakeholder relationships through CSR” (Barnett 2007, p. 803) is one of the important factors that determines whether CSP has a positive, negative or neutral effect on CFP (Carroll & Shabana, 2010). The concept of SIC implies that stakeholders view some firms as more socially credible than others and accordingly reward these firms for their CSR initiatives (Barnett & Salomon, 2007). It is argued that firms over time accrue a certain stock of SIC through consistently and reliably engaging in acts of CSR (Barnett & Salomon, 2007). The firms that have eventually accumulated sufficient stocks of SIC are then able to earn financial returns that exceed the costs of investing in CSP (Barnett, 2007; Barnett & Salomon, 2007). Interestingly, building an adequate stock of SIC takes time and investing in CSP is likely to initially offer negative returns (Barnett & Salomon, 2007). In the context of the current findings, it might be the case that the observed firms engaging in outward CSP have not yet accumulated sufficient SIC stock and are therefore unable to generate positive financial
