Corporate social responsibility and financial
performance A comparison between developed
and developing countries
International Financial Management (MSc.)
Supervisor: Dr. Gonenc
Second Assessor: Nassima Selmane
2 Abstract
This thesis analyzes whether Corporate Social Responsibility (CSR) measured by a firm’s commitment to environmental and social activities affects firm financial performance. Furthermore, this thesis examines if this effect is different between developed and developing
countries. Additionally, it aims to assess whether internationalization and the crisis of 2008 have a different effect on the relationship between CSR and firms’ financial performance in developing countries compared to developed countries. This thesis uses a sample of 25235 observations from 2003-2014. The results show a significant relationship between CSR and firm financial performance that is particular to developing countries. Additionally, they show
that internationalization has a moderate positive effect on this relationship only in developed countries. Finally, the financial crisis has led to firms from developed countries benefitting
more from CSR, but has not had that effect in developing countries.
3 1. Introduction
This thesis aims to analyze whether the relationship between Corporate Social Responsibility (CSR) and firm financial performance counts for all countries or if it is dependent on country development. Additionally, it attempts to analyze whether factors found in literature to be of significant effect for the relationship between CSR and firm financial performance also have such effects in developing countries. This is due to a large portion of the CSR literature focusing on developed countries (Idemudia, 2011). Existing research has found that there are indeed financial advantages from CSR that are dependent on firm-specific factors
(McWilliams & Siegel, 2001). However, others have argued that country-specific factors are also important (Idemudia, 2011). This is due to the main arguments for a positive relationship between CSR and firm financial performance being tied to conditions that are particular to developed countries (Mishra & Suar, 2010). Therefore, this thesis intends to analyze whether the effects of internationalization on the relationship between CSR and firm financial
performance are confirmed and whether they apply to all countries. Additionally, this thesis tests whether the financial crisis of 2008 altered the relationship between CSR and firm financial performance and whether it did so in developed and developing countries. This thesis further adds to current literature on the relationship between CSR and firm financial performance by providing quantitative comparisons between developed and developing countries.
The differences across countries regarding their economic performance have been the subject of debate in academia, economics and politics. While there does not appear to be a clear answer to what causes disparities among countries, literature has attempted to explain them with different approaches. Such have been historical analyses of country factors or the use of entrepreneurial models to explain why some markets work better than others. One of the widely accepted conclusions, is that the performance of a country’s private sector appears to be the main driver for economic growth (Brunetti, Kisunko & Weder, 1998). Thus, it appears appropriate to analyze what type of conditions and policies lead to better performance of companies.
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Regarding firm behavior and country-specific factors and how they are related to one another, researchers have attempted to provide different perspectives explaining why some firms perform better in certain environments. Some have focused on culture, others on political structure (Delios & Henisz, 2003) and others on historical factors (Akamatsu, 1962). These perspectives also have played a role when assessing the impact of Corporate Social Responsibility (CSR). CSR has been defined in different ways in literature and its definitions have changed since the 1950s (Carroll, 1999). While CSR certainly includes different areas of a business such as its stakeholder management (Freeman & McVea, 2001), CSR has for a long period been strongly tied to ethical arguments. On one hand, some argue that firms have a responsibility towards its stakeholders, such as its environment or employees. Others have argued that socially responsible policies make sense when they are in line with a firm’s economic objective, namely maximizing profits (Friedman, 2007). It is the latter argumentation that has, to some degree, motivated research to focus on the relationship between CSR and financial performance.
As a result, CSR has been opined on in a varied way, with some considering it a source of economical and moral benefit, while others view it as a cost (McWilliams & Siegel, 2001). For example, one of the advantages associated with CSR, is the reputation that comes with it. Companies are not only capable to charge more for products that are fair trade because they cost more to make, but also because many customers appear to perceive a higher value due to it. Moreover, firms may benefit from higher CSR standards due to its implicit quality proof. Some literature has found evidence in this regard, showcasing positive relationships between CSR and firms in developing countries (Mishra & Suar, 2010), with most of this research, however, focusing on either specific countries or on specific types of CSR, such as, for example, board composition (Bhagat & Black, 1999) or primary stakeholder influences (Mishra & Suar, 2010). As a result, a broader analysis of the impact CSR may have on the financial performance of firms in developing countries in comparison to developed countries seems to be lacking.
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(Khan & Atkinson, 1987; Krishna, 1992; Arora & Puranik, 2004; Sood & Arora, 2006). Tsang and Kwan (1999) for example, using a critical realist perspective, carry out an analysis on CSR and firm performance of Western countries. Mishra and Suar (2010) find that the inclusion of different types of measures and across different industries result in a higher validity of results. However, their paper focuses on India. This thesis, on the other hand, aims to find out if its findings apply to a vast array of different countries and across different industries.
It is, however, questionable whether the advantages of CSR apply to all companies in all countries and whether they are advantages at all. There may be a strong argument suggesting that companies from developing countries incur a high cost due to CSR but do not receive the aforementioned benefits. For example, one of the main measurements of CSR is whether companies pay their employees sufficiently high wages (Mishra & Suar, 2010) but companies in developing countries may not be able to afford them and therefore would have difficulties remaining competitive. This argumentation is one of the key components of modernization theory, which suggests that countries can only progress if they adopt certain standards in accordance with their current conditions. In contrast, dependency theory suggests that
developing countries and firms in them adopt certain policies, such as stronger environmental protection, due to external pressure, leading to only financially successful companies, which can afford such a behavior to adopt it. Such concepts have been put forward when analyzing the development of Asian countries (Amsden, 1979), suggesting that firms in these countries adopt higher CSR standards in accordance to their economic progress. Furthermore, the tensions between the different positions on why and how CSR may be related to firm
performance result in this thesis attempting to provide further insights into the different sides of that argument.
Therefore, this thesis aims to compare the relationship between CSR and firm financial performance in developing countries to those in developed countries basing its argumentation mainly on previous literature, such as the discussion between dependency theory and
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on the relationship between CSR and internationalization and the financial crisis of 2008. Internationalization and CSR have been frequently connected in research but generally applied to developed countries (Laudal, 2010). Furthermore, the financial crisis of 2008 has been thoroughly analyzed in research and also in the context of CSR (Karaibrahimoglu, 2010). Therefore, this thesis researches whether there is a difference in the effect of CSR on firm financial performance between firms in developed and developing countries.
Additionally, it analyses whether, the internationalization of a firm and the financial crisis of 2008 have had different effects on this relationship in developed and developing.
The data includes 25325 observations from 43 different countries for the period 2003-2014. 2757 of those are from developing countries. The findings show that there is a positive effect of CSR on firm financial performance, but this relationship seems to be particular to
developing countries. Additionally, internationalization appears to be largely insignificant, while the crisis has made the relationship between CSR and firm financial performance positive in developed countries but had no effect in developing countries.
2. Literature Review and Hypothesis Development
2.1.Corporate Social Responsibility
To analyze the effect of CSR, it is important to define it. Its operationalization will be addressed in the data and methodology section. Literature has apparently not been
straightforward in their definition of CSR (Wan-Jan, 2006). As a result, analyzing it may lead to different results in different papers, depending on the definition used. This is largely due to the interpretation of what socially responsible is. For example, McWilliams and Siegel (2010) find that
capital such as special equipment devoted to CSR, purchase of inputs from suppliers who are socially responsible and progressive human resource management are CSR attitudes.
That definition is going to be the anchor for the understanding of the meaning of CSR in this paper. While some literature has identified that social responsibility would be similar to ethical and philanthropic behavior of firms (Freeman, 1999) its general definition in research is broader. In a quasi-operational form, this paper is going to understand as CSR the
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& Suar, 2010; Idemudia, 2011). In this regard, some writers have focused on analyzing CSR as the degree to which companies are committed to stakeholders and on those areas, that do not directly enhance the performance of the company. This means that activities such as paying high wages, not engaging in acts of corruption and for example investing in the development of a country would be considered as CSR related activities. As a result, the more a company engages in such activities, the higher its CSR standards.
In the context of CSR policies, one of the ways to attempt to raise the CSR standards in a country is on an institutional level by applying pressure to other countries. There are a number of organizations that attempt to do so, such as USAID of the United States or the KfW and GIZ of Germany, which aim to support developing countries but also attempt to raise their standards. One of the larger problems with this is that developed countries tend to prioritize their concepts and therefore often are “insensitive to local priorities” (Idemudia, 2011). Idemudia (2011) also finds that “the failure to critically engage with the role of government, adopt a bottom-up approach to CSR analysis and avoid a piecemeal research focus” has led to an underperforming conceptualization of CSR and its development in developing countries.
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Notwithstanding, overall, previous literature has shown that there appear to be many benefits to be derived from CSR (McWilliams & Siegel, 2010), due to the associated levels of
commitment, signaling effects and responding to market demand that allows companies to position themselves and develop differentiation capabilities. However, most of the research into the benefits of CSR focuses on characteristics that are typical for developed countries
(Du, Bhattacharya, & Sen, 2007; Burke, & Logsdon, 1996), namely regulatory compliance, consumer trust, etc. It is however, a wide spread conclusion that especially in today’s world, the demand for CSR requires firms to adopt socially responsible behavior in order to be successful. Considering these conflicting findings, this thesis sets the following hypothesis as it has been most frequently backed by literature:
H1: CSR has a positive effect on the financial performance of firms.
Cochran and Wood (1984) find that the debate regarding this relationship is often due to differences in measurement and whether financial performance is addressed from the firm’s or the shareholder’s perspectives, which depending on their priorities may be different. Since their paper, findings have mainly led to a reiteration of the causality link established by Abbot and Monsen in 1979, namely that CSR appears to not be detrimental to firm
performance but rather the opposite. However, McWilliams and Siegel (2001) have argued in favor of the reinforcing cycle of firm financial performance and CSR where an increase in one leads to an increase in the other and so on, but Cochran and Wood’s (1984) findings would appear to dispute that symmetric relationship given their findings of less efficient asset use and the effect of asset age on the relationship between CSR and firm financial
performance and findings that would show that certain conditions affect this relationship. Therefore, this thesis has decided to opt for the direction of the relationship showed in hypothesis one.
2.2.CSR and Country Development
In order to discuss CSR and country development it is important to understand what makes a country developed. Some have focused on the political aspects of country development, mainly the democratic strength of a country (Cheibub, et. al., 1996). However, that approach clearly falls short of any economic scrutiny. Moreover, the use of the human development index, while giving an indication, uses a weighted score with a logarithmic score
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qualitative to explain the differences between countries. Additionally, literature has used cultural components to showcase what makes a country developed. Findings have shown that more individualistic, higher power-distance cultures with innovativeness and central locus of control are typical for developed countries (Mueller & Thomas, 2001). However, it appears that the most accurate description of what makes a country developed is in line with the CIA Factbook method, which is a combination of GDP per capita (in excess of US$ 15,000), governmental strength and industrial development (Demirgüç-Kunt & Detragiache, 1998; CIA Factbook 1991).
The central theory used in literature when assessing the effect of CSR in developing countries is the dependency theory (Amsden, 1979; Ahiakpor, 1985). This does refer less to
dependency theory’s core-periphery argument and more to the dependency of developing countries on the standards, capital and requirements of developed ones. However, the core-periphery argument in dependency theory is the reasoning behind most of the arguments presented in favor of disparities between countries. This argument states that developing countries aim to sell their products to developed countries, while the latter dictate the terms of that relationship due to their stronger position. This may happen on an institutional or market level. Therefore, the main argument is that for firms from developing countries to progress, they are required to act in accordance with international expectations and in a way, to assimilate. Furthermore, dependency theory argues that not doing so and to merely rely on periphery investments from developed countries leads to underdevelopment (Amsden, 1979). It has, however, often been found that it does take international institutions to introduce higher CSR standard in developing countries (Idemudia, 2011) in addition to the market mechanism (Mishra & Suar, 2010). The degree to which institutional components play a role remains doubtful, mainly whether it would appear reasonable for developing countries to adopt higher CSR standards in accordance with dependency theory. Dependency theory states that countries and their performance, especially of developing countries, are largely
dependent on developed countries (Ahiakpor, 1985). This concept would state that due to the dependence of developing countries on developed countries, meeting standards of developed countries would be beneficial for developing countries. As a result, it is assumed that those firms that have higher CSR standards in developing countries perform better because of their similarity to developed countries.
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economic level, that countries are to progress based on their specific characteristics and can do so by themselves. Additionally, literature has found that interventions from developed countries and the lifting of CSR standards in developing countries is rather harmful (Amsden, 1979; Ahiakpor, 1985; Idemudia, 2011). While dependency theory finds that the
core-periphery system is harmful to developing countries, the only way for them to overcome this system is by assimilation to developed countries. On an ethical level, arguments have been put forward regarding countries advancing their CSR standards as companies respond to demand (Friedman, 2007).
As previously explained, the benefits of higher CSR standards are often related to characteristics that are typical of developed countries (Idemudia, 2011). One of those characteristics is the ability of the population to afford the costs of CSR. For example, if a European coffee company intends to sell coffee that only comes from areas that meet certain conditions, the prices of the coffee tend to be higher. These costs increase when there are more CSR characteristics for a firm to introduce (McWilliams & Siegel, 2001). As a result, companies tend to charge customers for these costs. This, however, appears to only work when the population that buys these products has the means to afford them. That would mean that developing countries would first have to reach a certain level of economic development, before CSR standards like those in developed countries are to be achieved. Additionally, the fact that there is a debate surrounding a link between CSR performance is discouraging (British Council et al., 2002). Despite that, there is an apparent increasing demand for
stronger CSR in countries such as India (Kumar et al., 2001). As a result, CSR has become a larger part of developing countries.
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Additionally, Friedman (2007) finds that CSR is a result of an agency problem and that managers tend to engage in such activities for their personal goals. This theory, however, has been challenged and Preston (1979) and Carroll (1978) outline a corporate social
responsibility framework (CSP) (McWilliams & Siegel, 2001). The investment in CSR has often been supported by assessing its benefits, namely responding to customer demand, using CSR as a differentiation strategy, advertising and reputation building which is a key
component of strategy development (Fombrun & Shanley, 1990; Weigelt & Camerer, 1988). This clearly shows that there appear to be clear and apparent benefits associated with CSR. McWilliams & Siegel (2001) have shown that size, level of diversification, research and development, advertising, government sales, consumer income, labor market conditions and storage in the industry life cycle play a role on the firm’s level of CSR. However, it appears clearly that a common criticism of such studies is apparent, namely that they focus on characteristics that are typical of western countries. Moreover, CSR concepts have been criticized for standardizing characteristics that are not applicable to developing countries (Newell, 2005). Fox (2004) found that not differentiating and treating CSR in a standardized way is problematic. For example, Mexico’s attempts to shift the costs for environmentally responsible actions to the public sector are not accounted for in general CSR models and are often not applicable to developing countries. Due to that, and despite the rising demand for more CSR in developing countries, studies find that, for example, India is last when it comes to CSR (Environics International, 2001) and while those findings were almost two decades ago, there are no findings that would showcase that the gap has significantly closed. It would be assumed, therefore that the characteristics of developed countries may lead to CSR having a stronger positive effect in developed countries than in developing ones.
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The debate on this issue certainly makes it one that is highly interesting and certainly relevant for the understanding of CSR and whether it affects firm performance in developing countries as it supposedly does in developed ones or whether the relationship goes in the other
direction. Moreover, the understanding of CSR and the environment in which it is to be analyzed has also been debated on a firm level, namely considering it as a strategic resource (Ghoul, Guedhami & Kim, 2016). One of the explanations for this is that CSR plays an important role in the reduction of transaction costs. Transaction costs refer to the negotiating, monitoring and enforcement costs during an exchange (Jones & Hill, 1988). Complications with these arise, when there are no sufficient institutions to successfully mediate between parties (Ghoul, Guedhami & Kim, 2016). As a result, it would be expected that countries with different institutional strengths benefit differently from CSR, namely that those countries, where institutions are weak, are capable of using CSR the most as a reducer of transaction costs and are more capable of doing so when they are financially capable and are required to do so more, if they are more international. In their paper, Ghoul, Guedhami and Kim(2016), show that CSR reduces transaction costs, improves access to resources and as a result increases firm value when the aforementioned conditions of poor institutional strength are met. Research has provided evidence in favor of CSR being less useful in developing countries due to specific conditions that make CSR useful not being present (Idemudia, 2011), and in favor of the opposite, due to CSR being a strategic asset that reduced
transaction costs and therefore is a strategic resource in accordance with the resource based view of the firm (Ghoul Guedhami & Kim, 2016). However, dependency theory attempts to settle that debate, showing that firms in developing countries only adopt higher CSR policies due to external pressure and in accordance with their financial performance. Therefore, when considering the conflicting views and findings in literature (McWilliams & Siegel, 2011; Mishra & Suar, 2008; Idemudia, 2011), finding that the demand conditions and regulations in developed countries act as a main driver for the benefits of CSR and therefore, CSR’s
advantages are particular to developed countries and would be less if at all in developing ones and that being contradicted by arguments from dependency theory, stating that firms in
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As a result, the second hypothesis states that a difference in the effect of CSR on firm financial performance between developed and developing countries is expected.
H2: The effect of CSR on firm financial performance is moderated by whether the
country is developed or not.
2.3.Internationalization
Given that the pressures of internationalization tend to lead to higher CSR (Kacpercyzk, 2009), it is to be assumed that higher CSR increases firm responsiveness to international requirements and pressures. As a result, it is to be expected that the more international a firm is, the more it benefits from CSR as it would be assumed to be more dependent on standards abroad and public scrutiny. Additionally, there appears to be a clear relationship between internationalization and the effects of CSR as firms are confronted with larger pressures due to an expanded and more culturally, politically, institutionally and economically diverse stakeholder environment (Attig, Boubakri & Guedhami, 2016). Furthermore,
internationalization leads to many aspects that make CSR more of an issue for firms. For example, the increasing importance of management retention and the resulting openness to negotiation (Kacpercyzk, 2009) and the signaling effect of engaging in activities that are viewed as being long term commitments (Neubaum, Donald & Zahra, 2006). However, it may also be argued that the more a company from a developing country competes
internationally, especially in developed countries, the less it can use CSR to differentiate itself from other companies. Therefore, it could also be that domestic firms, or exporting firms would benefit from CSR policies rather than international firms. Both arguments, while conflicting with one another, are based on a similar assumption but develop upon it using strategic management in the case of the latter and financial premiums in the case of the former as mentioned by Aybar and Ficici (2009).
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Vahlne, 1977) between countries that would occur when firms from developing countries adopt higher CSR standards, it would be expected for them to benefit from it. Moreover, internationalization tends to lead to more public attention and as a result, firms from developing countries are capable of positioning themselves in the international market and still benefit from differentiation and may even be required to do so. This, however, is a characteristic that is largely prevalent in firms from developed countries. As such, the scandals of clothing companies such as Nike or Primark producing their products in developing countries under highly questionable conditions have led to public outrage in developed countries. As a result, companies from developed countries have a high pressure for CSR due to legitimacy purposes (Matten & Moon, 2008), one that would be stronger if the company is international and weaker if from a developing country due to lower
expectations. This would allow firms from developed countries to benefit from signaling effects which would be amplified by internationalization (Levine & Schmuckler, 2006). It would appear that assuming that the arguments for internationalization as an amplifier for the relationship between CSR and firm performance are supported. This is due to the assumption that the combination of signaling effects, increased public attention and higher associated value perception as described by research (Mishra & Suar, 2010) would mean that firms from developed countries require CSR more when being international. Therefore, the third and fourth hypotheses are:
H3: The relationship between CSR and the financial performance is positively
moderated by the degree of the firm’s internationalization.
H4: The moderation effect of internationalization on the relationship between
CSR and firm financial performance is different between developed and developing countries.
2.4.Financial Crisis
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capitalism, with movements such as Occupy Wall Street having large support, it would appear clear that companies are pushed towards improving their image and insuring the public that they do not form part of “crony capitalism”. The best way companies have to strengthen their Public Relations image of being committed to popular causes is by boosting their CSR. As a result, it would be expected that those companies that have stronger CSR would be better off during financial crises due to increased attention to corporate behavior. Additionally, the financial crisis has led to new legislation and pressures on companies. Companies with strong CSR would be required to adapt less and therefore have an advantage. Given, however that the financial crisis of 2008 was mainly an issue of developed countries (Naudé, 2009), it would appear that most of the pressure would be applied there. Therefore, the sixth and seventh hypotheses are as follows:
H5: The relationship between CSR and firm financial performance is
positively moderated by the financial crisis of 2008.
H6: The moderation effect of the financial crisis on the relationship between
CSR and firm financial performance is different between developed and developing countries.
3. Data and Methodology
3.1.Sample
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3.2.Main Variables
For the above to be more understandable, the variables and how they are measured will be explained. Table 3 shows an overview of the variables used in this thesis. To do so, it is important to explain the measurements of the return variable that is to represent the financial performance of firms. Literature frequently opts for the widely popular return on equity (accounting based) and stock return. The reasoning behind using the accounting based return is largely based on literature finding that market based returns are not always respondent to performance and may be so in situational manner, when speculations are either exceeded or underachieved. Literature has suggested over 50 ways to measure firm performance
(McWilliams & Siegel, 2001) but most of literature has focused on return on assets and return on equity when assessing accounting based returns (McWilliams & Siegel, 2001).
Furthermore, however, Tobin’s Q, measured as the market value of a firm divided by its asset replacement value, has gained popularity due to the comparison of accounting and market performance (Lang & Stulz, 1994). Therefore, this paper will use Tobin’s Q as its
18 Table 3: Variable Descriptions
Variable Measurement
Tobin's Q (Firm Performance)
(Market Value of Equity + Book Value of Total Debt)/Total Assets
CSR Average of Environmental and Social Performance
Internationalization Foreign Assets/Total Assets
Crisis Dummy Variable with 0=Before Crisis, 1=After Crisis
Size Natural Logarithm of Total Assets in US Dollar
Leverage Total Debt/Total Assets R&D R&D/Total Assets
Asset Growth (Assetst – Assetst-1)/Assetst-1
LNGDP Natural Logarithm of GDP Individualism Hofstede Score for Individualism
Uncertainty Avoidance Hofstede Score for Uncertainty Avoidance
The CSR variable has been measured in various ways throughout research (Mishra & Suar, 2010) and while a standardized measurement would be disputable, when using CSR in quantitative research, it is important to have aggregated measurements to allow for
quantitative analysis that is comparable to previous research. As previously mentioned, CSR is a combination of a company’s commitment to socially responsible behavior. Some papers have argued that using CSR disclosure is the most appropriate way of measuring a firm’s CSR level (Lanis & Richardson, 2012). However, in those papers, it becomes apparent that CSR disclosure is not the same as CSR activities as companies may use CSR to counter negative reputation and report it more heavily in line with legitimacy theory. Additional standards have been set in literature, for example, by Kinder et al. (2005), GRI, SA 8000 and ISO standards. However, literature has opted for a combination of environmental, social and governance activities by companies (Gillan, Hartzell, Koch, & Starks, 2010). The reasoning behind this is the requirement for an aggregate approach to corporate social responsibility. Governance, however, has often been excluded as a measure of CSR in financial literature (Atuguba & Dowuona-Hammond, 2008) and in order to remain consistent with previous literature, so will this thesis. Therefore, the CSR variable in this thesis which is based on the ESG variable and measures the average of two components (environmental and social) has become an appropriate measure for CSR and is going to be used in this thesis.
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respective regressions on each sample separately and comparing the results. Additionally, for the second hypothesis, a dichotomous variable where 0 is a developing and 1 a developed country is computed. The foreign assets as a percentage of total assets is often used to measure the degree of internationalization. However, this measurement is somewhat problematic when assessing the degree in which performance is dependent on international activities. Literature has also suggested using foreign sales as percentage of total sales (Bodnar & Weintrop, 1997) as it is a clearer sign of international activities. Therefore, this thesis uses the measurement of foreign sales as a percentage of total sales. Finally, a
dichotomous dummy variable is computed where 0 is for the values before the financial crisis and 1 for the values after the financial crisis. In order to test the effects of the crisis and internationalization on the relationship between CSR and firm financial performance, interaction variables are computed.
3.3.Control Variables
Additionally, this thesis does not intend to build a model of CSR disaggregation, such as has been done in other papers (Mishra & Suar, 2010). It attempts, however, to address its role in the expansion of general financial models. As a result, the modelling and choice of control variables is largely going to be based on suggestions from literature. These control variables are to include both country and firm-specific variables.
Size
First, the firm-specific variable size has been largely related not only to CSR (McWilliams & Siegel, 2001) but also to performance (Smith, Guthrie, & Chen, 1989) and both (Stanwick & Stanwick, 1998). Because of its prevalent apparent impact on firm performance, such as that larger firms have more capital available to them and therefore may have opportunities to use more leverage and achieve higher results. Whereas its effect on returns may be disputed when using returns as a percentage due to smaller firms often being riskier and entrepreneurial (Davidsson, 1989). Its persistent prominence in literature and the theoretical arguments behind it certainly suggest that it would be a usable control variable. Size is represented by the firm’s total assets rather than its number of employees. Despite some literature using employees (McWilliams & Siegel, 2001), most research has used assets as an indicator for firm size (Moeller, Schlingemann, & Stulz, 2004).
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Secondly, the firm-specific variable leverage has found its place in financial modelling (Fama & French, 1993) since its relevance for a company’s risk was established. Frequently, the higher the financial leverage, the higher the influence of stakeholders other than shareholders. Given that these lenders tend to be risk averse (Binswanger & Sillers, 1983), they may lead the company to engage in less risky behavior and therefore in worse performance. Therefore and because of its high presence in literature, it would appear appropriate to use leverage as a control variable. The leverage of the company is calculated by dividing debt by total assets, which is the formula for financial leverage.
R&D, Asset Growth and Return on Assets
Furthermore, this paper uses the variables R&D, Asset Growth and Return on Assets (ROA) due to its clear findings in relation to firm financial performance and use in literature dealing with CSR (Ghoul, Guedhami & Kim, 2016). In the case of R&D, expectations may be varied as it may be interpreted as a cost or an investment often depending on the company’s position towards risk and overall performance. Additionally, asset growth is directly related to asset replacement value and has often been found to affect market value.
Country-specific Variables
For the country-specific variables, the most common variables used in literature tend to be regarding country-specific development, such as institutional strength and economic
development (Mishra & Suar, 2010). For example, given the logic behind the private sector being a key driver of economic progress and countries with a higher GDP generally having higher expectations for their companies (Mishra & Suar, 2010) when accounting for development, and this being specifically linked to growth, the control variable GDP. The GDP variable is going to be normalized by applying the natural logarithm.
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lead to higher performance, for example after an acquisition (Morisini et al., 1998). As a result, individualism would be an appropriate control variable.
Uncertainty Avoidance shows the extent to which people attempt to avoid ambiguity. Uncertainty Avoidance affects the preferences for stability and uniformity, and therefore risk aversion. Rieger et al. (2014) found that attitudes towards risk attitudes are influenced by economic conditions and cultural dimensions such as Individualism and Uncertainty Avoidance. Li and Zahra (2012) show that managers who have a low level of Uncertainty Avoidance are more comfortable about the uncertainty and ambiguity regarding innovative projects. These findings would point towards a higher uncertainty avoidance leading to worse performance due to the missing of opportunities.
3.4.Method
Given that the dependent and independent variables are interval data, a multivariate OLS regression analysis for panel data is to be built. In order to test the first hypothesis, namely whether there is an effect of CSR on firm financial performance, the following formula(1) is to be used.
Tobin’sQi,t = 𝛼 + β1×𝐶𝑆𝑅i,t-1 + β2×Leveragei,t-1 + β3×Uncertainty Avoidancej +
β4×Individualismj + β5×LNGDPj,t-1 + β6×ROAi,t-1 + β7×Sizei,t-1 + β8×R&Di,t-1 +
β9×Asset Growthi,t-1 + εi,t
In order to test the second hypothesis, namely whether the relationship in hypothesis 1 is different for developed and developing countries, the dichotomous variable for country development is used and so is an interaction effect between it and CSR. This is shown in formula 2.
Tobin’sQi,t = 𝛼 + β1×𝐶𝑆𝑅i,t-1 + β2×DummyDevelopmentj + β3×CSR i,t-1×DummyDevelopmentj + β4×Leveragei,t-1 + β5×Uncertainty Avoidancej +
β6×Individualismj + β7×LNGDPj,t-1 + β8×ROAi,t-1 + β9×Sizei,t-1 + β10×R&Di,t-1 +
β11×Asset Growthi,t-1 + εi,t
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To test the third hypothesis, an interaction effect with CSR and internationalization is calculated and the following formula(3) is used. To test the fourth hypothesis, the same formula is applied to each sample, namely of developed and developing countries, separately.
Tobin’sQi,t = 𝛼 + β1×𝐶𝑆𝑅i,t-1 + β2×Internationalizationi,t-1 + β3×CSR i,t-1×Internationalizationi,t-1 + β4×Leveragei,t-1 + β5×Uncertainty Avoidancej +
β6×Individualismj + β7×LNGDPj,t-1 + β8×ROAi,t-1 + β9×Sizei,t-1 + β10×R&Di,t-1 +
β11×Asset Growthi,t-1 + εi,t
To test the sixth hypothesis, an interaction effect with crisis and CSR is calculated and the following formula(4) is used. To test the seventh hypothesis, the same formula is applied to each sample, namely of developed and developing countries, separately.
Tobin’sQi,t = 𝛼 + β1×𝐶𝑆𝑅i,t-1 + β2×DummyCrisis + β3×CSRi,t-1×DummyCrisis +
β4×Leveragei,t-1 + β5×Uncertainty Avoidancej + β6×Individualismj +
β7×LNGDPj,t-1 + β8×ROAi,t-1 + β9×Sizei,t-1 + β10×R&Di,t-1 + β11×Asset Growth i,t-1 + εi,t
In order to deal with directionality and endogeneity, the independent and control variables are going to be lagged with one lag. This means that for 2003, the independent and control
variables will use the values of 2002 and so on.
4. Results
4.1.Descriptive Statistics
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There is a significant negative correlation between asset growth and individualism. However, all correlations have an absolute value lower than 0.7 and therefore are unproblematic.
Additionally, in order to make the data usable, the variable GDP was modified using the natural logarithm. Furthermore, to account for outliers the data was Winsorized at 1% levels at the top and bottom. Furthermore, a lag of one period was used for the independent
variables. The findings of the descriptive statistics show a close resemblance between the means and medians for all samples including the comparisons. Given these findings, it would appear that the sample is usable for multivariate regression analysis as suggested by this thesis.
4.2.CSR in developed and developing countries
In the following section, the results of the analyses are to be reported. The discussion of these will follow in the discussion section. The results of the test of the first hypotheses (1 and 2) are presented in table 6. To test the relationship between CSR and firm performance (H1), a multivariate regression analysis was performed. For the first model(H1.1 in table 6), using only CSR and firm-specific control variables for the entire sample, a significant positive relationship between CSR(0.132) and firm financial performance at the 1% level is found, therefore confirming the first hypothesis. Additionally, ROA(4.682), R&D(6.710) and asset growth(0.311) have positive effects on the Tobin’s Q of a firm, significant at the 1% level. Furthermore, size(-0.210) and leverage(-0.956) have negative and statistically significant effects at the 1% level. When expanding the model to include country-specific control variables (H1.2 in table 6), the first hypothesis remains confirmed, however at the 5% significance level with a coefficient for CSR of 0.053. The remaining variables remain similar, with the natural logarithm of GDP(0.050) having a positive effect on the Tobin’s Q significant at the 1% level and individualism (-0.005) and uncertainty avoidance(-0.003) and Uncertainty Avoidance(-0.001) having negative significant effects at the 1% level.
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therefore confirming hypothesis 2. This is seen in model H2, the third column of table 6, where the interaction effect between the DummyDeveloped variable and CSR has a negative effect. Therefore, there is a statistically significant difference in the effect of CSR on firm financial performance between developed and developing countries.
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confirmed. To test the robustness of these findings and whether the effect is not only stronger in but also particular to developing countries, the sample is split into two subsamples running the test of hypothesis 1 on each sample separately. The findings are shown in table 7.
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4.3.Internationalization and CSR
In order to test the third and fourth hypotheses, namely whether a firm’s degree of
internationalization affects the relationship between CSR and firm financial performance and whether this effect is different in developed and developing countries, a multivariate OLS regression model is built. The findings are presented in table 7. To test the third hypothesis, the total sample of firms, including developed and developing countries is used. The findings show that while CSR (0.054) still has a significant effect on firm financial performance, its strength and significance (5% level) have decreased when including internationalization and disappeared when including the interaction effect. Furthermore, neither internationalization nor the interaction effect are significant at the 10%, 5% or 1% level. Therefore, the third hypothesis is not confirmed. The control variables, however, remain largely unchanged compared to the model in hypothesis 1.
To test hypothesis 4, the sample is split into two subsamples and both regressions of hypothesis 3 are run separately on each sample. The findings show that for developed countries, internationalization is insignificant at the 10%, 5% and 1% level for both models but the interaction effect (0.139) is positively significant at the 10% level, meaning that internationalization moderately strengthens the relationship between CSR and the financial performance of firms. Additionally, the effect of CSR on the financial performance of firms is negative and only significant at the 5% level when including both, internationalization and the interaction effect. Therefore, the interpretation of the results would indicate that firm financial performance in developed countries benefits more from CSR when the firm is more international. For developing countries, internationalization(0.137) has a positive effect significant at the 10% level, only when not including the interaction effect. When including the interaction effect, both, the internationalization and the interaction effect are insignificant at the 10%, 5% and 1% level. The effect of CSR on firm financial performance is significant at the 1% level in both cases. Therefore, the findings in this thesis partially contradict
previous literature, finding that internationalization is largely insignificant and only partially so for developed countries. Additionally, the explanatory strength of the models remains almost the same for developed countries but increases noticeably when including
In order to test the 5th and 6th hypotheses, namely whether the financial crisis of 2008 had an
effect on the relationship between CSR and firm financial performance and whether this effect is different between developed and developing countries, an OLS multivariate regression model is built. The findings are shown in table 8. To test the 5th hypothesis, the
entire sample is used. The findings show that the effect of CSR (0.053) on firm financial performance is significant at the 5% level when including the crisis variable but is
insignificant when including both, the crisis variable and the interaction effect. Furthermore, the crisis variable(-0.373) is negative and significant at the 1% level, indicating that the crisis has had a negative effect on the Tobin’s Q of firms. The findings show that the interaction effect(0.174) is positive and significant at the 1% level. This indicates that the crisis has led to a positive effect of CSR on firm financial performance in developed countries, showcasing that firms with higher CSR standards have been able wo whether the crisis better. Therefore, the 5th hypothesis is confirmed.
To test the 6th hypothesis, the sample is split into two subsamples as when testing hypotheses
2 and 4. For developed countries, the findings show that CSR is only significant at the 5% level when including both, the crisis variable and the interaction effect and is so negatively. Furthermore, the crisis variable is negative for the model not including the interaction variable (-0.379) and also for the model including the interaction variable (-0.479) and in both cases, is significant at the 1% level, indicating that the financial performance of firms in developed countries was negatively impacted by the crisis. Additionally, the interaction effect(0.192) is positive and significant at the 1% level, indicating that the crisis has led to the financial performance of firms in developed countries benefitting more from CSR. For developing countries, the effect of CSR on firm financial performance is positive and
significant for both models, while R&D and asset growth are insignificant and LN(GDP) has a significant effect on firm financial performance at the 10% level. The crisis variable is negative but insignificant at the 10%,5% and 1% level for both models and the interaction effect(-0.11) is negative but insignificant at the 10%, 5% and 1% level. Therefore, the 6th
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4.5.Summary of the findings
The findings show that hypothesis 1 is confirmed. CSR has a significant positive impact on firm financial performance. Additionally, hypothesis 2 is confirmed. The significant effect of CSR on firm financial performance is particular to developing countries and in fact is
negative for developed countries when including the variables internationalization and crisis. Hypothesis 3 is not confirmed. There does not appear to be a significant effect of
internationalization on the relationship between CSR and firm financial performance.
However, hypothesis 4 is partially confirmed, as there does appear to be a moderate effect of internationalization on the relationship between CSR and firm financial performance in developed countries but not in developing countries. Hypothesis 5 is confirmed. The crisis of 2008 has had a positive effect on the relationship between CSR and firm financial
31
hypothesis 6. Additionally, the variables R&D, asset growth and LN(GDP) have a significant positive effect on firm financial performance but only do in developed countries, with
LN(GDP) having a weaker but significant effect in developing countries.
5. Conclusions
Analyzing the data of 25235 observations during the years 2003-2014, this thesis attempts to quantify the effect of CSR on firm financial performance and find differences between
developed and developing countries in regard to that relationship. It does so by building a factorial model and running a multivariate regression. The measurement of CSR was based on previous literature’s acceptance of CSR as the average between environmental and social scores.
The findings of the test of the first hypothesis clearly suggest that there is a significant relationship between CSR and firm financial performance. While this is consistent with previous literature, suggesting that the benefits of CSR can outweigh the costs (McWilliams & Siegel, 2001), it adds that these benefits also translate into better financial performance. It therefore would appear clear that firms are capable of taking advantage of higher CSR performance, expectably due to higher reputational value, sustainability and avoiding of financial punishment for example by complying with environmental regulat ions. This is an important finding for managers, as it suggests that CSR is not at odds with financial
performance and is rather to be seen as an activity that can be profitable to business, such as R&D, rather than merely a cost to comply with expectations.
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their products abroad. The results also indicate that this is more important for them than for companies from developed countries. This may be due to companies from developing countries being under more scrutiny when exporting products or being international as there are expectations that their CSR would be lower. An expectation that this thesis disproves as firms from developing countries, on average, have a higher CSR performance than firms from developed countries. These findings certainly are surprising but show managers from firms in developing countries that they benefit from CSR and indicates that further research may focus on explaining this qualitatively.
The findings of the third and fourth hypotheses contradict previous research in that it shows that internationalization does neither lead to better financial performance, nor does it affect the relationship between CSR and firm financial performance. It does, however, moderately in developed countries, indicating that the theory that firms that are more international may benefit more from CSR due to more public attention paid to them, may be partially
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This is further supported by the findings of the analysis of the sixth hypothesis. First, the findings show that the crisis did not, while still negatively, affect firm financial performance in developing countries negatively. Secondly, the effect of CSR on firm financial
performance was not significantly affected by the financial crisis and if at all was so
negatively. One may speculate why that is, for example that firms from developed countries may have used firms developing countries to continue unethical but profitable activities without coming under scrutiny at home, but due to the lack of significance of the moderation effect of the financial crisis in developing countries, it would be rather unnecessary.
However, the finding that the financial crisis strengthened the relationship between CSR and firm financial performance only in developed countries, supports the explanation for the findings of the fifth hypothesis, as the aforementioned changes were specific to developed countries. For managers from developed countries, these findings suggest that following the financial crisis, CSR has indeed become a more valuable tool to improve firm financial performance and as a result it is important to adapt. Furthermore, these findings are in contrast with dependency theory as they suggest that the dependence of developing countries on such changes in developed countries was discontinued after the financial crisis.
Finally, the results of the control variables are partially in line with expectations. However, the findings that larger firms and with more leverage perform worse financial ly is somewhat unexpected although the former may be explained by larger firms aiming for a sustainable return and the latter that risks firms take do not pay off on average. The cultural variables also have unexpected effects but show that there is a requirement for more understanding of the relationship between culture and firm financial performance. Furthermore, it is interesting that R&D and asset growth do not translate into better financial performance. In the case of the former, this may be due to firms from developing countries adopting foreign technologies rather than developing them themselves and therefore having a lower local competitive drive for innovation, and the latter indicating that there may be unnatural asset growth in firms in developing countries.
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countries are not represented by more than one firm, it is advisable to be cautious when generalizing the results. Finally, it could be argued that the variables used in this research may be problematic. Research has suggested the use of foreign income as a percentage of total income for the measurement of internationalization. It would be interesting to analyze whether or not that plays a role. Furthermore, other measures for firm performance, such as return on assets may be appropriate. Additionally, given that this research uses firm values over one year, it may be argued that the effects of CSR do not show until a while later.
While the present findings attempt to quantify the effects of CSR and the differences between developed and developing countries, it does not assess the specific types of CSR and policies. Previous research certainly has dealt with different types of CSR (Mishra & Suar, 2010), it would be advisable to assess whether the differences between these types apply to different countries. Furthermore, it is suggested in this thesis to explore alternative approaches to the popular dependency and modernization theories when attempting to describe CSR in developing countries. A way of doing so, would be to provide strategic motivations for the effects of CSR, instead of the assumptions that certain conditions in countries are what drives the success of CSR. Additionally, it would be advisable to further investigate the qualitative relationship between CSR and firm financial performance, as the findings of hypotheses, 2, 3 and 4 largely contradict expectations. Furthermore, it is advisable to develop standardized methods for CSR measurement that consider the priorities of certain countries. Finally, this thesis recommends the use of alternative measurements, to assess whether the findings in this thesis still hold.
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