Corporate Social Responsibility, Firm Financial
Performance and Country Competitiveness
Master Thesis
Satu Tähkänen, S2738279
MSc International Financial Management Faculty of Economics and Business
University of Groningen
Supervisor: Dr. H. Gonenc
June 2016
Abstract: This study investigates the impact of corporate social responsibility on corporate financial performance, especially focusing on how country competitiveness moderates this relationship. Using a sample of 21,330 firm-year observations representing 3,820 firms from 52 countries during 2007-2014, it is shown that in general corporate social responsibility has a positive impact on corporate financial performance and this relationship is stronger in high competitive countries. It is also found that corporate social responsibility has a slightly negative impact on performance in the least competitive countries. Moreover, country competitiveness may affect more multinationals than domestic firms.
2 1. Introduction
The importance of corporate social responsibility (CSR) has increased considerably in recent years. Even though, CSR has become a part of the corporate strategy, it is still questioned if it brings value to the firm. Many researchers have empirically examined the relationship between CSR and corporate financial performance (CFP) to determine whether CSR activities are profitable. Previous research has produced mixed results (Jiao, 2010; van Beurden and Gössling, 2008; Margolis and Walsh, 2003). Some researchers find a positive relationship and others a negative or no relationship. These conflicting results may reflect the wide variety of theoretical perspectives used in CSR-CFP research (El Ghoul, Guedhami, Kwok, and Mishra, 2011) or they could be due to methodological and definitional issues (Malik, 2015; Wang, Dou, and Jia, 2015; Orlitzky, Schmidt, and Rynes, 2003). However, some literature reviews and meta-analyses of the topic show that the overall effect is slightly positive (Wang, Dou, and Jia, 2015; van Beurden and Gössling, 2008; Orlitzky, Schmidt, and Rynes, 2003).
The extensive and ongoing research on CSR and CFP indicates that there is still no clear consensus on the relationship between these two variables and more research is needed. While trying to find the answer to this question, previous research has suggested several factors which may have an impact on the relationship. These are mainly firm-level factors that are used to explain why some firms can benefit more from their CSR activities than others (Hull and Rothenberg, 2008; Berman, Wicks, Kotha, and Jones, 1999). At the same time, there is not much research about the impact of country-level factors on CSR-CFP relation, even though at least country institutional characteristics are mentioned to be a key in understanding CSR (Ioannou and Serafeim, 2012; Campbell, 2007).
3 level of prosperity that the country can achieve.” This applies that country competitiveness is closely related to firm’s business environment and can affect its operations.
Researches have emphasized that contingency factors such as market development and institutional environment should be taken into account when examining the financial effects of CSR (Wang, Dou, and Jia, 2015). Mellahi, Frynas, Sun, and Siegel (2016) propose that macro-environmental and institutional factors would moderate the CSR-CFP relationship. Grewatsch and Kleindienst (2015) point out that the general business environment (i.e. macro-economic factors such as external norms, regulations, governmental subsidiaries, tax incentives, interest rates, research at universities) moderates the CSR-CFP relation. They also suggest that the market structure and the degree of competitiveness are possible moderators because they are likely to change over time and with geographic location. Research has shown that competitive market structure impacts on firm financial performance and as the market structure is not the same everywhere, it should moderate the CSR-CFP relationship. In addition, CSR is often strategic and a source of competitive advantage, thus competitive environment also stimulates the strategic use of CSR (Grewatsch and Kleindienst 2015).
As country competitiveness can include institutional and macro-political-economic factors affecting firms’ business activities (Thompson, 2004), it comprises many of the research suggestions made earlier and could be a possible moderator. Country competitiveness could also affect differently to multinational corporations (MNC) and domestic firms because home-country influence is represented in performance in the home country for domestic firms whereas multinationals spread the influence in performance across countries they are operating (McGahan and Victer, 2010). On the other hand, multinational firms may be able to take advantage of home country resources and have a competitive advantage internationally (Sethi and Elango, 1999).
4 country’s competitiveness and how it impacts on the relationship between corporate social responsibility and financial performance. Furthermore, it is also compared if the moderating effect of country competitiveness is different for multinational than domestic firms. In addition, as more studies on the basic CSR-CFP relationship focusing on several countries are demanded (Grewatch and Kleindienst, 2015; Campbell, 2007), this study also contributes to the existing research by examining a large number of firms in multiple countries.
The rest of the paper is organised as follows. Section 2 provides a brief overview of the existing literature. Hypotheses are developed in section 3. Section 4 provides the data and methodology applied. The results are presented in section 5. Finally, section 6 concludes the paper and provides possible limitations and directions for future research.
2. Literature review
Theory and empirical research on CSR, financial performance, country competitiveness and relationships between them are reviewed in the following sections.
2.1. Corporate Social Responsibility (CSR)
Although the concept of CSR has already appeared in the 1930s and it has evolved over the decades (Carroll 1979, 1999), it is still been a challenge for researchers to define the precise concept (Barnett, 2007; McWilliams, Siegel, and Wright, 2006; Wood, 1991). There are mainly two theoretical definitions of CSR. One approach defines CSR as a multidimensional construct, including economic, legal, ethical, and discretionary responsibilities of a firm (Carroll 1979, 1999). Second approach is more stakeholder oriented. It defines CSR as a function of how a firm treats its stakeholders (Campbell, 2007; Clarkson, 1995).
5 Renneboog, ter Horst, and Zhang (2008) argue that there are several reasons why firms are engaging in CSR. One of the main reasons is the reduction of competition in product markets which leads to higher firm valuation. CSR can also be used to signal product quality, improve firm reputation and attract motivated employees. Wu and Shen (2013) provide similar reasons and also add the environmental improvement and reduction in social inequality. Next to the benefits, CSR has disadvantages as well. Wang and Bansal (2012) point out that these disadvantages arise from additional costs, distracted managers and possible agency problems. If a firm is investing in CSR activities, it has less resources available for its core activities. This may weaken its economic returns. Managers are responsible for core business activities and may be distracted if they need to solve CSR related issues. Lastly, agency problems may arise if managers pursue CSR activities for their private benefit. Pursuing CSR can improve managers’ public reputation, but at the same time the overinvestment can weaken shareholder wealth. Thus, adopting CSR can create value to both shareholders and stakeholders when the financial benefits are greater than the costs (Wu and Shen, 2013).
As CSR has become more important in business, the number of studies published has grown as well. CSR studies are mostly published in the management and business ethics literature, but recently the amount of studies in the fields of economic and finance has been growing (Fatemi, Fooladi, and Tehranian, 2015; Malik, 2015). Research on CSR has mainly divided between two views: the impact of CSR on financial performance and the determinants of CSR (Kim, Li, and Li, 2013; Surroca, Tribó, and Waddock, 2010). In addition, besides financial performance, studies have recently started to examine the impact of CSR on broader dimensions of firm actions and outcomes, for example, firm risk (e.g. Stellner, Klein, and Zwergel, 2015; Lee and Faff, 2009), cost of capital (e.g. Ng and Rezaee, 2015; El Ghoul, Guedhami, Kwok, and Mishra, 2011; Goss and Roberts, 2011), and cash holdings (Cheung, 2016).
2.2. Corporate Financial Performance (CFP)
6 There is a wide variety of measures of CFP which have been used in previous research, namely accounting-based, market-based and perceptual measures (Orlitzky, Schmidt, and Rynes, 2003). Accounting-based measures include, for example, return on assets (ROA) and return on equity (ROE), market-based measures include Tobin’s Q and stock returns, and perceptual measures are based on survey respondents’ view of firm’s financial situation (Grewatch and Kleindienst, 2015; Orlitzky, Schmidt, and Rynes, 2003). Accounting-based measures typically reflect firm’s short-term financial performance, internal efficiency and managerial performance, whereas market-based measures reflect long-term performance and the fact that shareholders are the most important stakeholder group to be satisfied, since stock price determines a firm’s market value (Orlitzky, Schmidt, and Rynes, 2003; Hoskisson, Johnson, and Moesel, 1994).
2.3. Relationship between CSR and CFP
Several theories (mainly supply and demand, neoclassical, and stakeholder theory) provide a base for neutral, negative and positive relationship between CSP and CFP (Baird, Geylani, and Roberts, 2012). Supply and demand theory predicts that there is no relationship between CSR and CFP, neoclassical theory predicts that CSR negatively impacts on CFP and stakeholder theory predicts that CSR positively impacts on CFP. Theories and predicted relationships are explained further in the following sections.
Based on the supply and demand theory, McWilliams and Siegel (2001) argue that there is no significant relationship. Managers’ task is to maximize shareholder wealth, so they choose the level of attributes that maximizes firm performance while taking into account the demand and costs of supply. Therefore, CSR is like any other firm’s attribute, and in equilibrium there is no relationship. On the other hand, it is argued that the relationship between CSR and CFP is complex and there are many variables influencing the relation, so it is unlikely that the relationship exists at all (Ullmann, 1985).
7 In contrast, Freeman (1994) argued that firms have a responsibility to all stakeholders. This argument based on the stakeholder theory has provided a base for later research on CSR-CFP relationship and suggested there is a positive relationship between CSR and CFP. Stakeholder theory emphasizes the social role of the firm where CSR activities are an essential part of the firm strategy (Fatemi, Fooladi, and Tehranian, 2015). Shareholders’ interest is not the firm’s only concern, it also needs to meet the expectations and demands of its all stakeholders to be financially successful (Freeman, 1994). Therefore, firms only concerning the interest of stockholders will fail, whereas firms actively managing relationships with all key stakeholder groups will be successful (Baird, Geylani, and Roberts, 2012; van Beurden and Gössling, 2008). This implies that firms with a better CSR performance have better financial performance.
8 In addition to many different theoretical foundations on CSR-CFP relationship, another issue regularly mention in the literature is causality of the relationship (Preston and O’Bannon, 1997; Waddock and Graves, 1997). The issue of causality indicates that it is possible that CSR impacts on financial performance, or financial performance impacts on CSR. Even though most research on the relationship between CSR and CFP assumes that CSR impacts on financial performance, the issue of the direction of causality between CSR and CFP should not be ignored. There are three possible views on the direction of causality (Surroca, Tribó, and Waddock, 2010). The first view proposes that CSR influences CFP. Theories concerning this view were discussed in the previous paragraphs. The second view proposes that CFP influences CSR. This view is supported by slack resources theory (Waddock and Graves, 1997). Slack resources theory suggests that better financial performance leads to better availability of slack resources and therefore allows a firm to invest these resources in CSR which may lead to improved CSR. Some of the empirical evidence supports this view (McGuire, Schneeweis, and Branch, 1990; McGuire, Sundgren, and Schneeweis, 1988). The third view combines the previous two views and suggests that CSR and CFP are synergistic (Waddock and Graves, 1997). Basically this means that financially better firms are able to invest more in CSR, but CSR also improves their performance simultaneously (Surroca, Tribó, and Waddock, 2010). This view is supported by the meta-analysis of Orlitzky, Schmidt, and Rynes (2003).
Lately, the different theoretical perspectives have begun to converge indicating that it may be possible to maximize shareholder’s wealth and take into account the expectations and demands of other stakeholders at the same time (Fatemi, Fooladi, and Tehranian, 2015). Therefore, firms are investing in CSR when it creates value for a broader set of stakeholders. This suggests there is a positive relationship. Gregory, Tharyan, and Whittaker (2014) suggest that the causality issue has also become less relevant when CSR is seen from a stakeholder perspective and findings from recent studies support this (e.g. Wang and Choi, 2013; Barnett and Salomon, 2012; Godfrey, Merrill, and Hansen, 2009). Therefore, CSR is more likely to impact on CFP than to be the result of it.
2.4. Country competitiveness
9 factor conditions, demand conditions, related and supporting industries, and firm strategy, structure, and rivalry. These attributes shape the environment where firms compete and explain why firms in certain industries are more productive in one country than in another. He argued that country factors, i.e. country competitiveness, can influence firm performance. Differences in terms of economic, social and legal systems influence firm behaviour and strategies. The economic development, interest rates, exchange rates, tax policies and legal systems are different and therefore, affecting firm performance.
On the other hand, Krugman (1994) has argued that “competitiveness is a meaningless word when applied to national economies”. In his opinion, country competitiveness is not similar to competitiveness of firms or industries. However, two definitions of country competitiveness, a narrow and a broader, have been used in research. Economists relate it to factor costs determined by exchange rates, whereas business scholars include institutional and systemic factors of an economy (Thompson, 2004). Consequently, management literature has used this narrow definition when investing the impact of exchange rate and currency volatility on firm performance. The broader definition has been used a lot as well, even though it is harder to measure (Buckley, Pass and Prescott, 1988). In practice, country competitiveness is a mixture of these both definitions. Thompson (2004) points out that firms are interested in the factors affecting their business activity, such as, cost of doing business, legal infrastructure, governmental processes, and public policy.
Thompson (2004) also indicates that there are mainly two indices that assess the competitiveness of countries. One is the Global Competitiveness Report published by World Economic Forum. Other one is the World Competitiveness Yearbook (WCY) published by the International Institute for Management Development (IMD). The Global Competitiveness Report defines competitiveness as “the set of institutions, policies and factors that determine the level of productivity of an economy, which in turn sets the level of prosperity that the country can achieve.”
10 to CSR activities (Grewatsch and Kleindienst, 2015). Moreover, firms often engage in CSR for strategic reasons. CSR can be seen as a competitive advantage by enabling product innovation and differentiation, which helps to achieve better financial performance (McWilliams, Siegel, and Wright, 2006; Porter and Kramer, 2006; McWilliams and Siegel, 2001). Competitive environment stimulates the strategic use of CSR (Grewatsch and Kleindienst, 2015). Therefore it could be expected that the higher competitiveness leads to an increased CSR and financial performance.
Udayasankar and Das (2007) study how competitiveness of the country effects on the relationship between corporate governance and firm performance. They propose that country competitiveness moderates the relationship. Based on agency and resource-dependence theories, they present that firms with high corporate governance standards benefit significantly in highly competitive environment compared to firms with lower standards. High corporate governance standards can reduce agency costs and so having positive impact on performance but this is dependent on the competitiveness of the country. Corporate governance can also be seen as a competitive advantage and it improves firm performance and survival in highly competitive environment. As corporate governance and CSR are related terms, it could be expected that country competitiveness positively moderates the CSR-CFP relationship.
Wang, Dou, and Jia (2015) propose that the environmental context moderates the CSR-CFP relationship. They show that the relationship is stronger for firms from advanced economies, i.e. economies with mature institutional system and efficient market mechanism. In developed markets, business information about firm’s CSR activities is available to stakeholders more efficiently through a variety of information channels and effective market supervision. Stakeholders can respond to CSR, which, in turn, will lead to better financial performance. Institutional environment may also moderate the relation, for example, if the local government promotes social responsibility. CSR engagement may lower firm’s costs and increase returns. This kind of government regulation is unlikely in less developed markets. El Ghoul, Guedhami, and Kin (2016) study how country-level institutions affect relationship between CSR and firm value. Contrary to Wang, Dou, and Jia (2015), they argue that CSR is valued more in countries with weak market institutions, because CSR improves firm’s competitive advantage by reducing transaction costs and making access to resources easier. Their results support the argument that CSR is more positively related to firm value in countries with weaker market institutions.
11 performance and those effects are more important to domestic than multinational firms. This is consistent with theory that home-country effect may change when firms become more internationalized. For domestic firms home-country influence is represented in performance in the home country, whereas multinationals spread the influence across countries they are operating. In addition, home-country policies may be designed to support domestic firms (Porter, 1990). This suggests that country competitiveness could impact more on domestic than multinational firms. On the other hand, country’s physical resources, human cultural traits and government’s economic policies can create a competitive advantage for MNCs in international trade and investments (Sethi and Elango, 1999). The extent of advantage depends on how well a firm can make use of these resources. Besides, profit opportunities unavailable for domestic firms may arise for multinational firms. For example, MNCs may be able to use home-country advantages to reallocate resources geographically in response to changes in country-level productivity (McGahan and Victor, 2010). Therefore, country competitiveness could also have a greater impact on multinational than domestic firms.
3. Hypotheses
Hypotheses are developed in this section based on the reviewed literature. The first hypothesis tests the impact of CSR on financial performance in general. Neoclassical theory predicts that the CSR-CFP relationship is negative because CSR costs are higher than revenues, whereas stakeholder theory predicts a positive relationship because a firm needs to meet the expectations and demands of its all stakeholders to be financially successful. Meta-analyses and literature reviews indicate that CSR has a positive, even though small, impact on CFP, when individual studies have shown mixed results. Therefore two alternative hypothesis are developed:
Hypothesis 1a: CSR has a positive impact on firm financial performance. Hypothesis 1b: CSR has a negative impact on firm financial performance.
CSR-12 CFP relation holds. However, in the case that there is a negative relationship, it could be assumed that country competitiveness still has a positive impact on the relationship, i.e. it diminishes the negative relationship. Two alternative hypotheses are developed here as well:
Hypothesis 2a: Country competitiveness moderates the positive relationship between CSR and financial performance, where a higher competitiveness strengthens the relationship.
Hypothesis 2b: Country competitiveness moderates the negative relationship between CSR and financial performance, where a higher competitiveness weakens the relationship.
It is expected that country competitiveness have different levels of influence on CSR-CFP relationship for multinational and domestic firms. For domestic firms home-country influence is represented in performance in the home country whereas multinationals spread the influence in performance across countries they are operating. Country policies may be designed to support domestic firms, but multinationals may have profit opportunities unavailable to domestic firms. Multinational firms may be able to take advantage of home country resources and have a competitive advantage internationally. This leads to the following hypothesis:
Hypothesis 3: The level of impact of country competitiveness on CSR-CFP relationship is different for multinational and domestic firms.
4. Methodology
Sample, data collection, measurement of variables and regression models are presented in the following sections.
4.1. Sample
13 the main independent variables CSR and country competitiveness, as well as control variables, were removed from the sample. The final sample is unbalanced and consists of 21,330 firm-year observations for 3,820 different firms during the period 2007-2014.
4.2. Variables
Dependent variable: As mentioned in theory section, there are many ways to measure financial
performance. It is suggested that researchers should not only focus on accounting- or market-based measure (Gregory and Whittaker, 2013). Therefore, a combination of accounting and market measures is chosen. This study uses two different measures: ROE and Tobin’s Q, which have been widely used in other studies (Grewatch and Kleindienst, 2015; Garcia-Castro, Ariño, and Canela, 2010). Consistent with the previous studies, ROE is measured as net income divided by total equity and market-to-book value ratio is used as a proxy for Tobin’s Q (Wu and Shen, 2013; Garcia-Castro, Ariño, and Canela, 2010).
Independent variables: Previous studies have used many different types of measures for CSR. As
14 balances in order to generate long term shareholder value. These three pillars constitute an appropriate measure of CSR taking into account the stakeholder perspective (firm has a responsibility to its all stakeholders) used in this study. The rating is scaled between 0 and 100, where 100 represents the best ESG performance.
Country competitiveness: The Global Competitiveness Report published annually by World Economic Forum addresses the competitiveness of countries. The report 2015-2016 includes 140 countries. It is the most comprehensive assessment of national competitiveness worldwide. Competitiveness is measured by 12 pillars: Institutions, Infrastructure, Macroeconomic Environment, Health and Primary Education, Higher Education and Training, Goods Market Efficiency, Labour Market Efficiency, Financial Market Development, Technological Readiness, Market Size, Business Sophistication and Innovation. Based on all the data, competitiveness score is assigned to every country. The score is scaled between 1 and 7, where 7 represents the highest country competitiveness (World Economic Forum, 2015).
Control variables: Aside from the dependent and independent variables, previous research has
already detected other variables that are expected to have an impact on corporate social and/or financial performance. Several control variables were therefore implemented in this study to investigate the relative impact of CSR on firm financial performance. van Beurden and Gössling (2008) show that the most important control variables used when examining the CSR-CFP relationship are firm size, risk, R&D and industry. Other studies have also controlled for firm liquidity (Blanco, Guillamón-Saorín, and Guiral, 2013; Surroca, Tribó, and Waddock, 2010). Therefore these control variables are included in this study.
Size: Previous research has suggested that firm size can affect both financial performance and CSR (Hillman and Keim, 2001). Larger firms often have better CSR performance (Ioannou and Serafeim, 2012), and more resources to invest in CSR activities (Nelling and Webb, 2009) which allows them to achieve better financial performance and meet their social obligations. The size of the firm is measured as the natural logarithm of total assets and a positive relationship is expected between size and CFP.
15 divided by total assets. A negative relationship is expected between risk and CFP, as well as between leverage and CFP.
R&D: McWilliams and Siegel (2000) show that R&D should be included in the regression when examining CSR-CFP relationship. The variable R&D is measured as a ratio between R&D expenditures and total sales. It is assumed that firms do not report R&D expenditures if the values are non-existent or very small and therefore missing research and development expenses are set to zero. This is done to prevent the loss of a large number of observations. A positive relationship is expected between R&D and CFP.
Industry: It is important to control for industry because firms operating in different industries may experience different reasons for engaging in CSR activities (Hull and Rothenberg, 2008; Waddock and Graves, 1997). Moreover, industry-level factors have been shown to explain performance differences across industries (McWilliams and Siegel, 2000). Firm’s industry is determined by its primary standard industrial classification (SIC) code. Thereafter SIC codes are grouped into broader industry groups and represented in the model by dummy variables.
Liquidity: The availability of financial resources allows firms more easily to adopt CSR (Tang, Hull, and Rothenberg, 2012) and invest in new projects with a positive social and financial results (Surroca, Tribó, and Waddock, 2010), thus a positive relationship is expected between liquidity and CFP. Firm liquidity is measured as quick ratio.
In addition, year dummies are included in the regression specification and data on foreign sales to total sales was collected to determine the degree of multinationality of firms. All continuous variables are winsorised at the 1st and 99th percentile to minimise the influence of outliers
(Oikonomou, Brooks, and Pavelin, 2012).
4.3. Regression model
16 CFPit = β0 + β₁*CSRit-1 + β2*Sizeit-1 + β3*Riskit-1 + β4*Leverageit-1 + β5*Liquidityit-1 + β6*R&Dit-1 +
industry dummies + year dummies + εit, (1)
where CFP = financial performance (either ROE or Tobin’s Q), CSR = corporate social responsibility score, Size, Risk, Leverage, Liquidity, R&D = control variables, ε = error term, i = subscript for each individual firm and t = subscript for time.
Then the second regression was estimated to determine the effect of country competitiveness:
CFPit = β0 + β₁*CSRit-1 + β2*CCit-1 + β3* CSRit-1* CCit-1 + β4*Sizeit-1 + β5*Riskit-1 + β6*Leverageit-1
+ β7*Liquidityit-1 + β8*R&Dit-1 + industry dummies + year dummies + εit, (2)
where CC = country competitiveness, CSR*CC = interaction term and the rest as in previous regression. To test hypothesis 3, regression 2 was estimated separately for two subsamples: multinational and domestic firms. A firm is defined as multinational if 25% of its sales or more are abroad.
5. Results
Sample distribution, descriptive statistics and correlation matrix are first presented. The regression results are then presented and discussed in the following sections.
5.1. Descriptive statistics
Table 1 provides the sample distribution by country, industry and year. Panel A shows that there is wide variation in the number of firm-year observations across 52 different countries. United States is the most representative country with 5,932 firm-year observations, while Kazakhstan and Sri Lanka are the least representative countries with four firm-year observations each. Panel B shows that the sample is distributed across 9 different industries, with Manufacturing representing the most of sample observations (42.92%). Panel C shows that the number of firm-year observations increases over the sample period, from 1,696 in 2007 to 3,387 in 2014.
Table 1. Sample distribution
Panel A: By country
Country N % Country N % Country N %
Australia 1,359 6.37 Indonesia 104 0.49 Qatar 6 0.03
Austria 93 0.44 Ireland 84 0.39 Russia 169 0.79
Belgium 134 0.63 Israel 53 0.25 Saudi Arabia 31 0.15
Brazil 327 1.53 Italy 237 1.11 Singapore 268 1.26
Canada 1,466 6.87 Japan 2,749 12.89 South Africa 304 1.43
Chile 90 0.42 Kazakhstan 4 0.02 South Korea 402 1.88
17
Colombia 26 0.12 Luxembourg 35 0.16 Sri Lanka 4 0.02
Czech Republic 18 0.08 Malaysia 157 0.74 Sweden 296 1.39
Denmark 143 0.67 Mexico 114 0.53 Switzerland 353 1.65
Egypt 34 0.16 Morocco 7 0.03 Taiwan 487 2.28
Finland 186 0.87 Netherlands 199 0.93 Thailand 79 0.37
France 626 2.93 New Zealand 79 0.37 Turkey 86 0.40
Germany 536 2.51 Norway 155 0.73 United Arab Emirates 12 0.06
Greece 111 0.52 Peru 9 0.04 United Kingdom 1,985 9.31
Hong Kong 673 3.16 Philippines 67 0.31 United States 5,932 27.81
Hungary 15 0.07 Poland 72 0.34
India 300 1.41 Portugal 69 0.32 Total 21,330 100
Panel B: By industry Panel C: By year
Industry SIC code N % Year N %
Agriculture, Forestry, Fishing 0100-0999 104 0.49 2007 1,696 7.95
Mining 1000-1499 2386 11.19 2008 1,856 8.70
Construction 1500-1799 779 3.65 2009 2,253 10.56
Manufacturing 2000-3999 9,154 42.92 2010 2,603 12.20
Transportation & Public Utilities 4000-4999 3,639 17.06 2011 3,066 14.37
Wholesale Trade 5000-5199 637 2.99 2012 3,187 14.94
Retail Trade 5200-5999 1,605 7.52 2013 3,282 15.39
Finance, Insurance, Real Estate 6000-6799 477 2.24 2014 3,387 15.88
Services 7000-8999 2,549 11.95
Total 21,330 100 Total 21,330 100
18 Table 2. Descriptive statistics
Panel A: Whole sample
Variable N Mean Median Std. Dev. Min Max
ROE 21,338 0.107 0.111 0.307 -1.463 1.507 Tobin's Q 19,321 2.823 1.975 3.242 -4.407 22.153 CSR 21,330 52.042 52.513 24.296 6.150 93.117 CC 21,330 5.265 5.387 0.383 4.134 5.799 Size 21,330 15.409 15.370 1.410 11.882 18.920 Risk 21,330 1.094 1.030 0.525 0.100 2.891 Leverage 21,330 0.190 0.170 0.155 0.000 0.671 Liquidity 21,330 1.327 0.970 1.265 0.140 8.640 R&D 21,330 0.022 0.000 0.050 0.000 0.285
Panel B: By country competitiveness
Low High Difference (High-Low)
Variable Mean Median Mean Median Mean Median
ROE 0.097 0.103 0.116 0.120 0.019 0.017 Tobin’s Q 2.570 1.757 3.076 2.208 0.507 0.451 CSR 49.637 50.253 54.475 54.683 4.839 4.430 Size 15.223 15.231 15.592 15.485 0.369 0.254 Risk 1.063 1.010 1.125 1.051 0.062 0.041 Leverage 0.182 0.164 0.197 0.176 0.014 0.012 Liquidity 1.332 0.950 1.322 1.000 -0.011 0.050 R&D 0.013 0.000 0.031 0.002 0.018 0.002
Notes: CSR, CC and control variables refer to the lagged variables. Low country competitiveness when CC < 5.265 and
high when CC ≥ 5.265. Values used to calculate differences are with higher precision than shown.
Table 3 presents the correlation matrix. All correlation coefficients are small in absolute value (less than 0.5). The largest correlation among the independent variables is between Size and CSR (0.435). Low correlations between the independent variables indicate that there is no problem of multicollinearity.
Table 3. Correlation matrix
ROE Tobin's Q CSR CC Size Risk Leverage Liquidity R&D
19
5.2. Regression results
Table 4 reports the regression results. Panel A reports the results with whole sample, where models 1 and 4 are used to test hypothesis 1, country competitiveness is added in regression in models 2 and 5 and the interaction term CSR*CC in models 3 and 6 to test hypothesis 2. Panel B reports results for two subsamples: multinational and domestic, which are used to test hypothesis 3.
Two alternative hypotheses were created to test the overall effect of CSR on CFP. Hypothesis 1a stated that there is a positive relationship between CSR and financial performance whereas hypothesis 1b stated that there is a negative relationship between CSR and financial performance. CSR has a coefficient of 0.001 when ROE is dependent variable and 0.014 when Tobin’s Q is dependent variable. Therefore, hypothesis 1a is confirmed by the regression results since the coefficients are positive and statistically significant at the 1% level (models 1 and 4). This is consistent with the stakeholder theory and the results from meta-analyses and literature reviews which indicated that the overall effect of CSR is positive, but small (Wang, Dou, and Jia, 2015; van Beurden and Gössling, 2008; Orlitzky, Schmidt, and Rynes, 2003). It indicates that firms can benefit from their CSR activities. All control variables are significant at the 1% level but some has the sign opposite to expected. In model 1 Risk and Leverage have the expected signs, whereas Size, Liquidity and R&D have the signs opposite to expected. In model 4, Risk and R&D have the expected signs, whereas Size, Leverage and Liquidity have opposite signs as expected. In addition, industry and year dummies were included in all models. As expected, results (not reported) indicated that there are some differences in performance between industries and years.
20 moderator. When ROE is dependent variable, the effect of CSR is -0.005 + 0.001*CC and with Tobin’s Q -0.086 + 0.019*CC. The effect of CSR on CFP depending on country competitiveness can be observed using different values of the moderator. Table 5 shows the calculated effect using the following values of country competitiveness: the mean, the value one standard deviation above the mean, the value one standard deviation below the mean, the minimum value and the maximum value. Interestingly, CSR has a negative effect (-0.004 and -0.0071) on performance in the least competitive countries. When value of one standard deviation below mean is used for country competitiveness, relationship becomes positive. When the values are increased from this, relationship becomes more positive. This is in line with the hypothesis that higher competitiveness diminishes the negative effect of CSR but also strengthens the positive relationship. This suggests that firms in more competitive countries can benefit from CSR investment whereas firms in low competitive countries may incur losses. Control variables have the same signs and significances than in models 1 and 4.
Table 4. Regression results
Panel A: Whole sample
Variable ROE Tobin's Q
1 2 3 4 5 6 CSR 0.001*** 0.001*** -0.005*** 0.014*** 0.014*** -0.086*** [0.000] [0.000] [0.001] [0.001] [0.001] [0.013] CC -0.018*** -0.078*** -0.164** -1.144*** [0.006] [0.013] [0.065] [0.144] CSR*CC 0.001*** 0.019*** [0.000] [0.002] Size -0.007*** -0.007*** -0.008*** -0.513*** -0.513*** -0.518*** [0.002] [0.002] [0.002] [0.019] [0.019] [0.019] Risk -0.067*** -0.066*** -0.066*** -0.605*** -0.595*** -0.606*** [0.004] [0.004] [0.004] [0.045] [0.045] [0.045] Leverage -0.066*** -0.063*** -0.061*** 1.527*** 1.549*** 1.580*** [0.015] [0.015] [0.015] [0.161] [0.161] [0.161] Liquidity -0.008*** -0.008*** -0.007*** -0.084*** -0.083*** -0.080*** [0.002] [0.002] [0.002] [0.020] [0.020] [0.020] R&D -0.434*** -0.412*** -0.417*** 5.293*** 5.475*** 5.402*** [0.046] [0.047] [0.047] [0.510] [0.515] [0.515] Constant 0.346*** 0.442*** 0.756*** 11.166*** 12.046*** 17.247*** [0.028] [0.041] [0.072] [0.298] [0.459] [0.821]
Industry dummies yes yes yes yes yes yes
Year dummies yes yes yes yes yes yes
Observations 21,328 21,328 21,328 19,321 19,321 19,321
R2 0.040 0.040 0.041 0.088 0.088 0.091
21 Panel B: Subsamples Multinational and Domestic
Variable ROE Tobin's Q
MNC Domestic MNC Domestic CSR -0.005*** -0.001 -0.094*** -0.054** [0.112] [0.002] [0.019] [0.023] CC -0.042** -0.057*** -0.840*** -1.033*** [0.002] [0.019] [0.223] [0.231] CSR*CC 0.001*** 0.000 0.020*** 0.013*** [0.000] [0.000] [0.004] [0.004] Size 0.001 -0.023*** -0.416*** -0.683*** [0.002] [0.003] [0.024] [0.036] Risk -0.057*** -0.074*** -0.482*** -0.805*** [0.005] [0.007] [0.056] [0.084] Leverage -0.047** -0.046* 2.425*** 1.429*** [0.020] [0.024] [0.215] [0.280] Liquidity 0.002 -0.016*** -0.046*** -0.099*** [0.003] [0.003] [0.027] [0.037] R&D -0.418*** -0.461*** 5.636*** 2.708** [0.053] [0.108] [0.555] [1.294] Constant 0.425*** 0.902*** 13.777*** 19.674*** [0.112] [0.113] [1.246] [1.351]
Industry dummies yes yes yes yes
Year dummies yes yes yes yes
Observations 11,532 7,912 10,555 7,135
R2 0.037 0.058 0.097 0.102
Adjusted R2 0.035 0.056 0.095 0.099
Notes: *, ** and *** indicate significance at 10%, 5% and 1% level, respectively. Standard errors are reported in brackets.
22 domestic firms. This supports hypothesis 3 that the magnitude of moderating effect of country competitiveness on CSR-CFP relationship is different for multinational and domestic firms. It also indicates that MNCs are able to benefit from home country competitiveness and make use of it when operating internationally (McGahan and Victor, 2010; Sethi and Elango, 1999). Control variables have some differences in signs and significances between multinational and domestic firms.
Table 5. The effect of CSR on CFP with different values of moderator
ROE Tobin's Q
Value CC All MNC Domestic All MNC Domestic
4.134 (min) -0.0004 -0.0004 - -0.0071 -0.0102 -0.0006
4.882 (low) 0.0005 0.0004 - 0.0071 0.0048 0.0090
5.265 (mean) 0.0009 0.0008 - 0.0145 0.0126 0.0140
5.648 (high) 0.0014 0.0013 - 0.0218 0.0203 0.0189
5.799 (max) 0.0016 0.0014 - 0.0246 0.0233 0.0208
Notes: Values used to calculate effects are with higher precision than shown.
6. Conclusion
23 This study makes several contributions to the existing research. First, the impact of country-level factors on CSR-CFP relation has not been studied widely (Ioannou and Serafeim, 2012; Campbell, 2007). This paper contributes to the existing research by looking at the degree of country’s competitiveness and how it impacts on the relationship between corporate social responsibility and financial performance. Second, this study adds to the literature by comparing if the moderating effect of country competitiveness is different for multinational than domestic firms. Third, most of the studies examining the CSR-CFP relationship are single-country studies, whereas more studies focusing on several countries are demanded (Grewatch and Kleindienst, 2015; Campbell, 2007). This study uses a large number of firms in multiple countries and therefore adds to the literature.
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