The Impact of Internationalization on Firm Risk-Taking:
Mediating Role of Corporate Social Responsibility
Abstract:
This study aims to examine the direct and indirect effect of internationalization on the firm risk taking. Corporate social responsibility (CSR) is considered in determining the indirect effect with a point of view of whether the internationalization is a factor reducing the deviation from an optimum level of CSR. The sample is derived from the Asset4 database and covers 1419 firms from all around the world for the period 2006 until 2015. The findings show that the level internationalization, which is measured by the foreign sales ratio, has a negative and statistically significant relationship with the firm risk taking as consistent with the diversification argument. On the other hand, the indirect relationship between internationalization and risk-taking is positive and statistically significant. This positive relationship occurs when the level of internationalization decreases the deviation from optimum level of CSR, which in turn increases the firm risk taking. The interpretation of these findings is that multinational companies (MNCs) is benefiting from their international experience create adequate change in the relationship between the internationalization on the firm risk taking through involving CSR activities.
Student number: S3091767 Name: Arif Fadila Prasetia
2 Acknowledgement
First of all, I would like to say gratitude to the Mighty God that gives me the opportunity to finish my thesis. I am very grateful to have parents Azwardi Prasetia and Nenden Susanti and also my brother Albi Rahman Prasetia, who support me until now. I would like to express my gratitude to my supervisors, Dr. H. (Halit) Gonenc who guided me and became a great coach in the master thesis of international financial management. I also want to thank the Indonesia Endowment Fund for Education (Lembaga Pengelola Dana Pendidikan (LPDP)), Ministry of Finance Republic of Indonesia for providing me financial support or scholarship to have education in University of Groningen, The Netherland. I thank Anindya Tiara Widayanti and all of my friends who also accompany and support me in the difficult time of my thesis process.
Groningen, July 2017
3 Contents
1. Introduction ... 4
2. Literature review and hypotheses ... 6
2.1 Internationalization and firm risk taking ... 6
2.2 Internationalization and CSR ... 9
2.3 CSR and Firm Risk Taking ... 11
2.4 Internationalization, CSR and Firm Risk-Taking ... 12
2.5 Summary of Hypothesis ... 14
3. Methodology ... 14
3.1 Data & Variables... 14
3.1.1 Internationalization ... 15
3.1.2 Firm Risk Taking ... 15
3.1.3 CSR Score ... 15
3.1.4 Control Variables. ... 16
3.2 Empirical Models ... 16
4. Data Analysis ... 19
4.1 Descriptive statistics ... 19
4.2 Multivariate Regression Results ... 21
4.2.1 Internationalization impact on the firm risk-taking ... 21
4.2.2 The deviation from optimum CSR level of the firm estimation result ... 22
4.2.3 Internationalization impact to the deviation from optimum CSR level ... 24
4.2.4 Internationalization, CSR and firm risk-taking estimation result ... 25
4.3 Robustness Test... 27
4.4 Summary of Findings ... 31
4 1. Introduction
The advantage of technology, knowledge, and development of information are seen as wide opportunities for the firms around the world to expand their businesses and also to increase their potential capabilities for increasing the firm value, thus shareholder value. The internationalization recently has become the concern of the companies around the world to explore opportunities. The literature argues that internationalization can increase the firm risk taking because they are imposed by global factors more such as global liquidity relative to the pure domestic company (Bruno and Shin, 2014). On the other hand, internationalization would also affect firm risk taking imposed by institutional diversity such as creditor rights or investor protection that faced by companies operating across countries. Acharya et al. (2011) show that firm risk taking is lower in the countries with high creditor rights. John et al. (2008) similarly find that country environment such as investor protection has a positive relationship with the firm risk taking.
Recently, the companies try to implement socially responsible activities to increase the performance of corporate social responsibility (CSR) because of an increasing demand from the stakeholders. Attig et al. (2016) argue that the trend of globalization is followed by the trend of being socially responsible by companies around the world. It is believed that the performance of CSR may provide many benefits to the firms and their stakeholders, which are substantial in a recent business environment (Harjoto and Laksamana, 2016). Companies tend to increase CSR performance because of legitimacy benefits and support from their stakeholders (Lanis and Richardson, 2012). The act of supporting the stakeholders and positive initiatives to build good relationships with them is believed to create value. Harjoto and Laksamana (2016) argue that the trend of increasing in CSR performance could balance the firm optimal risk taking. Thus, in line with several discussions above, this study aims to take the opportunity to examine the mediating effect of the CSR in the relationship between the level of internationalization and firm risk taking since there are still discussions in term of those relationships.
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contradiction preferences between stakeholders and shareholders create a gap to fill in by this research because both strategies might have an impact on the company especially on the firm risk taking. The existence of literature has not yet shown the effect of CSR performance in the multinational company for their risk taking behavior. Therefore, this research would like to enlighten this recent discussion by answering the formulated research question below: What is the effect of the internationalization on the firm risk taking?
What is the mediating effect of CSR on the relationship of internationalization of firm and firm risk taking?
Our study utilizes the quantitative method in finding the direct relationship between firm’s internationalization and firm risk taking. This study also aims to examine the indirect effect of internationalization on firm risk taking through the CSR performance by path analysis or product coefficient method. From our analysis, we find an evidence supporting that there is a negative relationship between the internationalization and the firm risk taking. When firms have a higher internationalization level, they tend to reduce the risk taking. Moreover, we find there is a positive indirect effect of firm’s internationalization on the firm risk taking via deviation from the optimum CSR performance. This indirect effect indicates the firms with high internationalization would have a low deviation from the optimum CSR performance, thus firms can take risky decisions. Even though we find an indirect relationship between internationalization on the firm risk taking through the deviation from the optimum CSR performance, the size of indirect effect is small and has opposite effect relative to the direct effect of internationalization on the firm risk taking. Furthermore, we find institutional factors such as rule of law, investor protection, and cooperation employer–labor relationship as the important determinants of CSR performance.
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This research is structured as follows: the study begins with the past literature on the research topics, then continues by hypothesis formulation to be tested, and then the explanation of the used methodology. This research continued by data analysis, conclusion, further research and limitations.
2. Literature review and hypotheses
Internationalization is a process when companies try to establish their business involvement beyond their domicile country to grasp more benefit (Melin, 1992; Dunning, 1980). The internationalization is posited as one of the firm strategies which has several benefits such as increasing revenue and profit by utilizing opportunity from growing market, lowering cost, circumvent institutional restrictions, and gaining technological advantages and knowledge (Rugman et al., 2006). Past research had hypothesized that internationalization also has diversification benefit, since the company would have diversified cash flow, separate business entity and operate in imperfectly related markets (Hughes et al., 1975; Rugman, 1976). While other research shows that internationalization has an impact on increasing risk through political risk exposure, foreign exchange volatility, and agency cost (Kwok and Reeb, 2000). In this literature review and hypotheses section, we will overview the past research and present hypothesis development of this study.
2.1 Internationalization and firm risk taking
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trade and shift their resource internally. Dunning’s (1980) eclectic paradigm is a theory that used in this study to explain the origin of benefit from internationalization, which furthermore can influence firm risk taking. Moreover, the internationalization initiative is theoretically determined by the condition in the home country where conditions may not be favorable to support the growth of the company. The fact of internationalization has purposed to circumvent inhibit factors of growth, such as illiquid market, institutional restriction, and also higher the cost capital in home country (Gozzi et al., 2008).
Some researchers believe that internationalization can lower firm risk. Important theory of the international diversification, which posits that internationalization, can lower the firm risk. Several past studies found a mixed conclusion. Hughes et al. (1975) and Rugman (1976) show that internationalization diversification benefits exist to lower firm risk because of the diversified cash flow and operations around the world. Reeb et al. (1998) suggest that multinational firm will have a higher risk than a domestic company because variety risk, such as an agency cost, political risk, and asymmetric information which offset diversification benefit. The choice to expand business with global diversification also affects the structure, behavior and also people involved in the company including stakeholders. The condition of the company becomes more complex that make the changes in the firm since the operation is spread around the world and bigger than before.
After looking for the literature review related to the internationalization of firms, this study would expand the previous studies examining firm risk taking. The behavioral theory of the firm suggests that firm might shape their risk taking preferences based on their aspiration level inform historical or social aspiration (Cyert and March, 1992). Historical aspiration is known to be a historical condition of the firm. While social aspiration is company competitor benchmark condition. This theory suggests that the firm will take a risky decision when the company is falling behind their competitor or past performance and lower the risk taking when the company surpasses their aspiration levels. Empirical evidence from O'Brien and David (2014) support this theory, firm performing below the aspiration level will engage R&D to gain solution of the problem.
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system is linked around the world which induces global liquidity. The global liquidity is encouraging companies to take risks because of the companies can get liquidity with less expensive cost. Better corporate governance and stronger creditor rights possessed in the certain country would also influence the corporate risk taking (John et al., 2008; Acharya et al., 2011).
2.1.1 Positive expectation on the relationship between internationalization and firm risk taking
This study attains two ideas, which are internationalization benefit and diversification benefit to developing the first hypothesis about the internationalization and firm risk taking. MNCs imposed more by the global factor such as the global liquidity that makes MNCs have lower lending rates than domestic companies, thus making them can apply lower discount rate and furthermore increase firm risk taking (Bruno and Shin, 2014). The global liquidity is a global factor benefit which acquired by MNC because more internationalized. Another benefit from internationalization is that the firms could place their foreign investment in the country where they prefer which trigger firm risk taking because of new opportunity can appear. Moreover, the benefit of the internationalization such as gaining new technology and knowledge may encourage the firms to become innovative to take more risk because they possessed by ownership advantage according to the eclectic paradigm (Dunning, 1980). Because of those arguments about internationalization benefit, MNCs might take riskier decisions.
2.1.2 Negative expectation on the relationship between internationalization and firm risk taking
Internationalized firms have a diversification benefit which decreased the firm risk because of diversified cash flow and operations across the world relative to the domestic firms (Hughes et al., 1975; Rugman, 1976). The firms possessed by international diversification benefit reduces shareholder risk since the firm risk decreased (Fatemi, 1984). The decrease of shareholder risk results in lower investor's required rate of return. Furthermore, Novy-Marx (2013) suggests the international firms would possess by higher return than domestic firms, thus they would not need to take a risky decision to fulfill the investor required return. Therefore, the internationally diversified firms tend to have low firm risk taking than domestic firms.
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(regulation, culture, social condition, and economic), political instability, and foreign exchange exposure of the firm (Burgman, 1996; Shapiro, 1985). Internationalization also posits firms in foreignness liability where they influenced by varying institutions around the world such as creditor rights and investor protection. Moreover, the increasing complexity in a coordinating MNC that followed by increasing the chance of the agency problem and asymmetric information about managing internationalization company would have added the pressure for the company, thus resulting in lower firm risk-taking behavior. Furthermore, MNC will take a less risk decision compared than domestic firm because they already outperform domestic company, according to the behavioral theory of the firm (Cyert and March, 1992).
From the past research observed, they neglected internationalization factor in previous research about the firm-risk taking. Therefore, to fill in the missing dot, this study proposed formulated first hypothesis which has shown by line A in figure 1:
H1: Internationalization has a significant impact on the firm risk-taking 2.2 Internationalization and CSR
The more internationalized company, the larger stakeholders of the company would be because the operations take a place across borders. MNCs may develop their CSR performance since the stakeholders become larger that make higher scrutiny of foreign and local institutions, and pressure from political, economic and cultural factors (Attig et al., 2016). Because of this reason, this study argues that recently MNCs also try to increase their CSR performance.
The rise of the responsible act nowadays can be seen by firms that disclose their CSR activity to gain legitimacy. Gray et al. (1995) suggest that legitimacy theory is the action of the company to gain acceptance from their stakeholders by performing good attitude to make sure of their business existence. Lanis and Richardson (2012) support the legitimacy theory by providing empirical evidence that companies engaging tax aggressiveness to reduce their tax payment would do more CSR to gain legitimacy from stakeholders.
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performance in the coal industry creates financial benefit. The financial benefit is in the form of lower financial risk (business risk and beta).
CSR is believed to be a beneficial voluntary activity. From the perspective of resource based view, companies could gain competitive advantage from their specific-resource (Branco and Rodrigues, 2006). The CSR is believed to have substantial contribution to the firm’s performance because it can help companies in term of resource acquisition, benefit of cost leadership, increase the engagement of employee and stakeholder that would support the financial performance of the firm (Lloret, 2016). Moreover, empirical evidence shows that CSR matters for company employees that can become specific-resources of competitive advantage (Albinger and Freeman, 2000).
2.2.1 Positive expectation on the relationship between internationalization and the deviation from optimum CSR performance
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While the high deviation from the optimum CSR performance indicates that company implements CSR far from their optimum level.
2.2.2 Negative expectation on the relationship between internationalization of the firm and the deviation from optimum CSR performance
Attig et al. (2016) argue that the multinational firms tend to have more CSR performance since they have possessed by larger scrutiny of their stakeholders. MNCs need to balance the preference of their stakeholder such as investor, creditor, government, employees and social community in a broader set (Detomasi, 2007). Another reason is MNCs have more CSR performance because they want to gain legitimization from the stakeholder according to legitimacy theory. Legitimacy theory suggests that firms try to ensure that they operate inside of boundary of societies to be seen appropriate by stakeholders (Deegan, 2002; Suchman, 1995). From that point of view, the international firms will optimize their CSR performance to accommodate their larger stakeholder compare with the domestic company. From the contradicting point of view, we can construct following second hypothesis which shown by line B in figure 1:
H2: The internationalization has a significant impact on the deviation from the optimum CSR performance.
2.3 CSR and Firm Risk Taking
2.3.1 Positive expectation on the relationship between the deviation from optimum CSR performance on the firm risk taking
12 2.3.2 Negative expectation on the relationship between the deviation from optimum CSR performance on the firm risk taking
The deviation from optimum CSR and firm risk taking can be seen to have a negative relationship. When the company is possessed by low deviation from optimum CSR performance, the company would have a better engagement with their stakeholders which make them can acquire the resource easier, conducive environment which increases the productivity, and also gain a competitive advantage on the market. Thus, the company can take more risk since the universe is supporting them to grow better because of their CSR performance. Previous researchers found that CSR is balancing the optimal risk-taking of the firm (Harjoto and Laksamana, 2016). From these arguments, this study can derive the third hypothesis which shown by line C in figure 1:
H3: The deviation from the optimum CSR performance has a significant impact on the firm risk-taking.
2.4 Internationalization, CSR and Firm Risk-Taking
2.4.1 Positive expectation on the indirect relationship between internationalization levels on the firm risk taking via the deviation from the optimum CSR performance
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process which trigger them to take a risky project like R&D. Furthermore, highly internationalized firms will have a low deviation from the optimum CSR performance, which makes them take a risky decision because of several reasons above. Overall, we can see that there is a positive indirect effect from the internationalization to the firm risk taking trough the deviation from the optimum CSR performance.
2.4.2 Negative expectation on the indirect relationship between internationalization levels on the firm risk taking via the deviation from the optimum CSR performance
Another view of the CSR and firm risk taking is that CSR could serve as a control mechanism of the firm. This condition happens since the CSR activities can be a vehicle of marketing of company in purpose to developed responsible reputation (Jahdi and Acikdilli, 2009). This condition could make the international firms that engage optimum CSR performance would possess by lower firm risk-taking since their firms are under the scrutiny of their stakeholder closers. Moreover, the company that engages CSR performance optimally induced higher capital expenditure in term of investment in new sustainable facilities, energy efficiency equipment investment, properties, and regulation compliance (Harjoto and Laksamana, 2016). This burden would reduce firm risk taking. Thus, from conflicting argument above, this study could derive the following hypothesis:
H4: The deviation from CSR performance mediates the relationship between internationalization of the firm and firm risk-taking.
14 2.5 Summary of Hypothesis
We present the summary of hypothesis with the positive and the negative expectation view of each hypothesis which supported by the argument about the expectation.
Table 1: Hypotheses summary
Hypothesis Positive expectation Negative expectation
H1: Internationalization has a significant impact on the firm risk-taking
Global liquidity argument (Bruno and Shin, 2014).
Diversification benefit (Hughes et al., 1975; Rugman, 1976
Ownership advantage from
the eclectic paradigm (Dunning, 1980).
Foreignness liability (Burgman, 1996; Shapiro, 1985).
H2: The internationalization has a significant impact on the deviation from optimum CSR performance
Short term profit
maximization. (Kang, 2013)
Stakeholders scrutiny argument. (Attig et al., 2016)
Evidence of pollution haven
hypothesis. (Dam and Scholtens, 2008)
Legitimacy theory
(Deegan, 2002; Suchman, 1995).
H3: The deviation from the optimum CSR performance has a significant impact on the firm risk-taking
Limited resources argument. (Wang et al., 2016)
Empirical evidence of CSR and firm risk taking
relationship. (Harjoto and Laksamana, 2016) H4: The deviation from the
optimum CSR performance mediates the relationship between internationalization of the firm and firm risk-taking.
The argument of the ease access to capital market, an ownership advantage, and smoothness of the
procurement process from stakeholders (El Ghoul et al., 2016; Frooman, 1999; Berman et al., 1999; Dunning, 1980). CSR induced closer monitoring of the company's activity argument (Jahdi and Acikdilli, 2009)
3. Methodology 3.1 Data & Variables
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observe the implication of CSR and internationalization in the last decade. This study utilizes winsorizing method to overcome the presence of outlier data contained from the source of data which can affect the result of the study.
3.1.1 Internationalization
This study implies the proxy of the ratio foreign sales to total sales (FS/TS) since it widely used proxy for the internationalization (Attig et al., 2016; Li et al., 2011). The ratio foreign asset to total asset (FA/TA) also applied for comparison to another proxy of internationalization (Sanders and Carpenter, 1998).
3.1.2 Firm Risk Taking
This study measures the firm risk taking by measure the earnings volatility in form return on asset standard deviation with industry adjustment (Acharya et al., 2011). The standard deviation of return on asset can be calculated by this formula (John et al., 2008):
√ ∑ ∑
FRTit is the risk taking of company i, at time t. The T is referring to the time period that standard deviation calculated with data for the last three years starting from the period of observation from 2006 until 2015. EBITDAit is the earnings before interest, tax, depreciation, and amortization of the company i at time t. Assetit indicate the total asset of the company i at time t. While, Nity is the number of companies in the industry, which company observed at time t. EBITDAity is referring to the earning before interest, tax, depreciation, and amortization of company from only the industry of the company come. Assetity indicates the total asset of company from the same industry of company that examined the risk taking at time t. The determination of industry would have applied the SIC code classification code.
3.1.3 CSR Performance
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of two economic score measure of environmental and social of the firm. The source of data would be from Datastream database.
3.1.4 Control Variables.
This study employs several control variables that might affect the firm risk taking in the model such as GDP per capita, total asset, market to book value, sales growth, debt ratio, total risk (Acharya et al., 2011; Bruno and Shin, 2014; Harjoto and Laksamana, 2016). Economic development condition also the factor which influences the risk taking of the firm because the additional risk of instability can deter corporate decision (Shapiro, 1985). Therefore, we also include GDP per capita in our model to draw this condition. GDP per capita and total asset is measured in US dollar and calculated with natural logarithm (Acharya et al., 2011). Total asset measures the size of the firm. Market to book value is measured by the ratio of the market value of a company with the book value of it and calculated with natural logarithm (Hertzel and Li, 2010; Harjoto and Laksamana, 2016). Sales growth measures the growth of sales of the company (Harjoto and Laksamana, 2016). The debt ratio is measured amount of debt to total asset and calculated with natural logarithm (Booth et al., 2002; Harjoto and Laksamana, 2016). Total risk is measured by the standard deviation of the monthly firm stock returns (Kwok and Reeb, 2000). Data of the control variables is derived from Datastream database. This study is employed same control variable with every model that have control variable words in the models below except equation 2.
3.2 Empirical Models
To test our first hypothesis about the internationalization effect only on the firm risk taking, we apply the OLS regression with the control variables stated in the previous part. The model is represented by the arrow of A in figure 1 without CSR in the model. The structural model can be seen below (Equation 1):
(1)
Where indicates the firm risk taking of corresponding firm i, at time t. Then,
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up from nothing. CSR can be influenced by the internal and external factor of the company. Campbell (2007) proposes an institutional theory which explains institution condition can impact on company responsible action. The legal environment such as rule of law in the country also determines the implementation of CSR from outside of the company. The company located in the home country that has high legal enforcement would have slightly tendency to do CSR (Campbell, 2007). Investor protection in the form of shareholder rights also involved as the determinant of the CSR. Moreover, quality of business education and labor-employer relation within a company environment also impacts as a determinant of CSR in the company, according to institutional theory of Campbell (2007). Therefore, we also include the quality of management school and cooperation of the labor-employer level in our model of CSR determinant. Chih et al. (2010) found that in the country with high shareholder rights would induce lower CSR activities. The shareholder in the high investor protection would choose another activity that benefits them more directly rather than taking CSR seriously. Firm size is also one of the determinants of CSR because larger firms would have more under scrutiny of stakeholders who impose implementing CSR (Fombrun and Shanley, 1990).
This study examines the deviation from optimum CSR score starting with regressing CSR against several determinants, which are the rule of law, investor protection, inflation rate, quality of management schools, cooperation of labor-employer in the country of the corresponding company (Fombrun and Shanley, 1990; Campbell, 2007; Chih et al., 2010; Harjoto and Laksamana, 2016). The firm-level control variables used in the model of CSR are the firm size proxied by the natural logarithm of total asset and debt ratio. Data of investor protection is derived from doing business indicator provided by the World Bank. Rule of law data is one of the world governance indices that also provided by the World Bank. Inflation rate data are derived from the World Bank databases. Furthermore, quality of management schools and cooperation labor-employer index is derived from the global competitiveness indices. Financial information data are derived from the Datastream. The model to determine the deviation from optimum CSR score is stated below (Equation 2):
(2) In the above model, the is CSR score of firm i at time t. is rule of law of
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Quality of management school index in country j of sample firm at time t. is
cooperation of employer-labor index in country j of sample firm at time t.
After we estimate above model, we calculate the absolute value of the residual value which is the error term of the model. It actually measures the deviation from the optimum CSR score which means how far the distance between CSR performances of the company is relative to their optimum level. To test our second hypothesis related to the effect of the internationalization to the deviation from optimum CSR score, which has shown in figure one as arrow B; we apply the model below (Equation 3):
̂ (3)
̂ indicates the deviation from optimum CSR performance of corresponding company i, at time t. Furthermore, is indicate the internationalization
level of the firm of company i at time t.
Notes: Line “A” represent the direct effect of the internationalization on the firm risk taking. Line “B” indicate the direct effect of the internationalization on the CSR. Line “B C” is an indirect effect of the internationalization on the firm risk taking.
The conceptual model of the study can be seen from figure 1, which is a summary of the hypotheses used in this study. Arrow A is indicating the direct relationship of the internationalization to the firm risk taking. Arrow B is showing the effect of the internationalization on the deviation from optimum CSR score. Whereas arrow C indicates the impact of the deviation from optimum CSR score to the firm risk taking. The indirect effect is calculated by multiplying the standardized coefficient of the slope of model B and C. Moreover, we estimate (H3) the effect of the deviation from optimum CSR performance to the firm risk taking and indirect effect (H4) of the relationship between the internationalization of the firm and firm risk taking via the CSR the deviation from optimum. To test our third hypothesis presented by the arrow C and fourth hypothesis as we discussed earlier, we will implement the model below (Equation 4):
̂ (4) Internationalization CSR Firm Risk Taking
A
B
C
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To test the H3, we use the estimated coeffcient and its p-value. The indirect effect for the
H4 would be calculated by multiplied in equation 3 with in equation 4. While the
measure the direct effect of the internationalization on the firm risk taking.
4. Data Analysis
4.1 Descriptive statistics Table 2: Descriptive statistics
Variable N Mean SD Max Min
Firm risk taking 13762 0.0827 0.0705 0.3997 0.008
Foreign sales / total sales 13762 0.4146 0.3313 1 0
CSR score 13762 0.6297 0.2780 0.9532 0.07725
Total asset 13762 15.8765 1.3232 19.2174 12.8973
Sales growth 13762 0.0649 0.1653 0.8191 -0.3633
Debt to asset 13762 2.7974 1.2308 4.2772 -2.0402
GDP per capita 13762 10.7211 0.2059 11.3851 10.0460
Market to book value 13762 0.6952 0.7485 2.9497 -1.0498
Total risk 13762 0.0927 0.0470 0.2807 0.0300
Inflation rate 13762 0.0159 0.0143 0.0449 -0.0135
Investor protection 13762 70.8244 13.1515 93 30
Rule of law 13762 1.5703 0.2673 2.0224 0.3514
Quality of management school index 13762 5.2599 0.6976 6.1615 3.8285
Cooperation labor-employer index 13762 5.1096 0.6255 6.2113 3.3369
The detail explanation about each variable can be seen the variable definition table in the Appendix
Table 2 presents the descriptive statistics of variables used in empirical analysis. The mean of the firm risk taking measured by standard deviation of the ratio of return on asset is 8%. The foreign sales to total sales as our proxy of internationalization has a mean value of 41%. So, we can see that our sample consists of MNCs with almost, on average, half of foreign sales from their total sales. The sample firms have average CSR score 0.629 of 1 points.
21 4.2 Multivariate Regression Results
4.2.1 The impact of internationalization on the firm risk-taking
To test our first hypothesis, we conduct multivariate regression where the dependent variable is the firm risk taking and the main independent variable of firm’s internationalization along with several proxies of firm risk taking. Table 4 shows the result of the OLS regressions with the robust standard errors. We use the industry dummies derived by the two digits SIC codes. We observe the internationalization of the company has significant negative impact on the firm risk taking proxied by the standard deviation of return on asset. Based on the estimated coefficient obtained with the model presented in column 2, we can say that one percent increase in internationalization level will decrease the firm risk taking by 0.0044%.
Table 4: The impact of internationalization to the firm risk taking
Variables FRT FRT FRT 5 FRT 7
Foreign sales / total sales -0.0049** -0.0044** -0.0063*** -0.0069*** [0.0024] [0.0021] [0.0019] [0.0018] Total asset -0.0111*** -0.0104*** -0.0107*** -0.0107*** [0.0006] [0.0005] [0.0005] [0.0005] Sales growth -0.0216*** -0.0186*** -0.0028 0.0058 [0.0047] [0.0047] [0.0046] [0.0044] Debt to asset -0.0058*** -0.0049*** -0.0041*** -0.0040*** [0.0006] [0.0006] [0.0005] [0.0005] GDP per capita 0.0212*** 0.0232*** 0.0263*** [0.0031] [0.0028] [0.0027] Market to book value 0.0111*** 0.0140*** 0.0131*** 0.0134***
[0.0012] [0.0011] [0.0010] [0.0009] Total risk -0.0226* -0.0211 -0.0293** -0.0322*** [0.0130] [0.0130] [0.0117] [0.0114] Constant 0.2009*** -0.0045 -0.0124 -0.0391 [0.0116] [0.0342] [0.0313] [0.0297] Adjusted R-squared 0.1513 0.1298 0.1386 0.1504 Observations 13772 13762 13762 13762
Year Dummies Yes Yes Yes Yes
Industry Dummies Yes Yes Yes Yes
Country Dummies Yes No No No
Number of Firms 1419 1419 1419 1419
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The economic implication of findings in Table 4 is approximately 2% relative to mean of the firm risk taking. The economic implication is derived from the relationship coefficient between foreign sales to total sales ratio and firm risk taking in Table 4 divided by the mean of the firm risk taking in Table 2 and then multiply to the standard deviation of the foreign sales to total sales in Table 2. Even though the result is relatively small from the perspective of the percentages, but the real changes of those percentages is might be meaningful. This result supports the first hypothesis from the perspective of the standard deviation return on asset. In Table 4, we run our regressions with and without GDP per capita among control variables to see whether the condition of the economy of the corresponding company would change the result related to the relationship between the internationalization of the firm with the firm risk taking. The estimations provide the same results with and without GDP per capita in the model. We still find a support of our first hypothesis. We also conduct additional regression model with the dependent variable of firm risk taking using the standard deviation of return on asset with five-year (FRT5) and seven-year observation (FRT7). The result is consistent with the regression model of internationalization and firm risk taking measured by three-year observations.
According to the result in Table 4, we find a significant negative impact of internationalization on the firm risk taking. The overall firm risk taking is decreased when the company has a high degree of internationalization. We found evidence that supports the diversification benefit gained through the internationalization movement as Hughes et al. (1975) and Rugman (1976) hypothesized. The diversification benefit implies less shareholder risk and gives a better return relative to the domestic firms (Fatemi, 1984; Novy-Marx (2013). The internationally diversified benefit is reduced the shareholder risk, thus lower the required return. Therefore, internationalized firms would not engage further risky decision in order to gain a better return. When firms increase its internationalization level, it will face the foreignness liability and larger burden, thus reduce the firm’s risk taking (Burgman, 1996; Shapiro, 1985). We also find a support of behavioral theory from Cyert and March (1992) who suggest that firm will lower their risk taking when they already outperform their aspiration level.
4.2.2 Determining the optimum level of CSR performance
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and labor are significant determinants of CSR performance. From this regression, we estimate the absolute value of the error term of the model. The absolute value of the residual is actually being the deviation from the optimum CSR performance of the firm. Table 5 indicates that there is a significant negative relationship between investor protections with the CSR score. This result is in line with the Chih et al. (2010) who suggest the shareholder in high investor protection would have tended to allocate the resource for more beneficial project than CSR. We found that cooperation of labor-employer has a negative impact to take up of CSR which is inconsistent with the institutional theory proposed by Campbell (2007). This result occurs might be because the environment of cooperation between employer and labor is not engaged well which make company conducts CSR to gain the cooperation with the labor, thus gain legitimacy from broader stakeholders. We find a significant positive relationship between the size of the company and the CSR score. This result indicates a larger firm will have more CSR because of wider scrutiny from the shareholder.
Table 5: CSR determinant regression
Variables CSR Rule of law 0.1444*** [0.0107] Investor protection -0.0031*** [0.0002] Inflation rate 0.2745 [0.2054] QMS index 0.0010 [0.0045] CLER index -0.0535*** [0.0041] Size 0.0913*** [0.0014] Debt to asset 0.0009 [0.0017] Constant -0.6918*** [0.0477] Adjusted R-squared 0.3367 Observations 14134
Year Dummies Yes
Industry Dummies Yes Country Dummies No Number of Firms 1419
24 4.2.3 The impact of internationalization on the deviation from optimum CSR level
Table 6 presents the estimation of relationship between internationalization and the deviation from optimum CSR level. We observe a significant negative relationship between internationalization and the deviation from optimum CSR level. One percent increase in internationalization level will decrease the deviation of CSR performance of 0.0503 points. The result supports the second hypothesis about the internationalization relationship with the deviation from the optimum CSR performance. The more firms internationalized, they will engage CSR performance closer to an optimum level of companies CSR (low deviation). Table 6: The impact of internationalization to the deviation from optimum CSR
Deviation of optimum CSR
Foreign sales / total sales -0.0503***
[0.0037] Size -0.0196*** [0.0008] Sales growth 0.0304*** [0.0080] Debt to asset 0.0018* [0.0009] GDP per capita -0.0149*** [0.0057]
Market to book value -0.0055***
[0.0017] Total risk -0.0051 [0.0264] Constant 0.6316*** [0.0651] Adjusted R-squared 0.0688 Observations 13762
Year Dummies Yes
Industry Dummies Yes
Country Dummies No
Number of Firms 1419
25
The negative significant relationship between internationalization and the deviation from optimum CSR level is similar to the finding of Attig et al. (2016). They found a company that moves across the border from their home country will be scrutinized more because its stakeholders base is larger. This condition triggers the company to engage a better relationship with the stakeholder through optimized their CSR performance. Our finding in Table 6 also supports the legitimacy theory which suggests that companies’ try search legitimacy by operating inside the boundary. The international company will implement CSR when they enter the new foreign environment to gain legitimacy (Deegan, 2002; Suchman, 1995).
4.2.4 Internationalization, CSR and firm risk-taking
In order to test our third hypothesis about the relationship between the deviation from optimum CSR level on the firm risk taking, we executed equation 4. Table 7 represents the regression results for equation 4 with alternative proxies for the firm risk taking. The result in column 1 with risk taking measured by the standard deviation of earnings in the past three years suggests that the deviation from the optimum CSR performance has significant negative impact on the firm risk taking. Therefore, we can support the third hypothesis that the deviation from optimum CSR level is having a significant relationship with the firm risk taking. The coefficient of the relationship between the deviation from optimum CSR and firm risk taking is -0.0088. When the firms decrease the deviation from optimum CSR performance by 1%, their firm risk taking is increasing 0.0088%. The negative relationship between the deviation from optimum CSR level with the firm risk taking means when the company has a low deviation from optimum CSR level, the company will take higher risk decision. This finding happens because the company that utilizes CSR near to the optimal level will get the support from their stakeholder in conduct a business such as easier resource acquisition, a conducive environment which improve the productivity, and gain a competitive advantage on the market, therefore the company could take risky decisions. Moreover, our finding is in line with the result from Harjoto and Laksamana (2016).
26
approximately 2% to the mean of the firm risk taking proxies by the standard deviation of return on asset. The economic implication is calculated by multiplying the coefficient beta of the relationship between internationalization and firm risk taking in Table 7 to the standard deviation of the internationalization in Table 2, and the result is divided by the mean of the firm risk taking in Table 2. This result is almost similar with the result shown in Table 4. The additional variable the deviation from the optimum CSR level increase small point in the direct effect between the internationalization to the firm risk taking.
Table 7: Estimation results of internationalization, deviation from CSR optimum level and firm risk taking
Variables FRT FRT5 FRT7
Foreign sales / total sales -0.0048** -0.0064*** -0.0067*** [0.0021] [0.0019] [0.0018] Deviation of optimum CSR -0.0088* -0.0024 0.0035 [0.0048] [0.0044] [0.0042] Total asset -0.0105*** -0.0107*** -0.0106*** [0.0006] [0.0005] [0.0005] Sales growth -0.0184*** -0.0027 0.0057 [0.0047] [0.0046] [0.0044] Debt to asset -0.0049*** -0.0041*** -0.0040*** [0.0006] [0.0005] [0.0005] GDP per capita 0.0211*** 0.0231*** 0.0263*** [0.0031] [0.0028] [0.0027] Market to book value 0.0139*** 0.0131*** 0.0135***
[0.0011] [0.0010] [0.0009] Total risk -0.0211 -0.0293** -0.0322*** [0.0130] [0.0117] [0.0114] Constant 0.001 -0.0109 -0.0413 [0.0346] [0.0317] [0.0300] Adjusted R-squared 0.13 0.1385 0.1503 Observations 13762 13762 13762
Year Dummies Yes Yes Yes
Industry Dummies Yes Yes Yes
Country Dummies No No No
Number of Firms 1419 1419 1419
27 Table 8: Path indirect and direct impact of the internationalization to the firm risk taking through the CSR optimal level
Arrow A Arrow B x C
FRT FRT5 FRT7 FRT FRT5 FRT7
Direct Indirect effect
effect via CSR optimal level
FSTS -0.0048** -0.0064*** -0.0067*** 0.00044264* 0.00012072 0.00017605
***, **, and * suggest statistical significance at 1 %, 5 %, and 10 % respectively. The detail explanation about each variable can be seen the variable definition table in the Appendix. The direct effect is derived from the coefficient of internationalization in table 7 (direct effect represented by arrow A in figure 1). We calculate the indirect effect by multiplying the coefficient of the deviation from optimum CSR in table 7 (represented by arrow C in the figure 1) with the coefficient internationalization (Foreign sales / total sales) in the table 6 (represented by arrow B in the figure 1). We also present the standard error of each variable in the bracket.
The indirect effect from Table 8 is computed by multiplying the coefficient in the equation 3
( and equation 4 ( . We find a significant positive indirect effect of the
internationalization proxy by foreign sales to total sales on firm risk taking through the deviation from CSR optimum level. The coefficient of the indirect effect of internationalization on the firm risk taking via the deviation from optimum CSR performance is 0.0004. The magnitude of the coefficient indirect significant effect relative to the direct significant effect is only 9.22%. This result indicates that indirect impact is less important than direct impact because the size of the coefficient is small.
The firm possesses by high international level will have a low deviation from optimum level of CSR, thus induce the firm to take risky decisions. The international company with optimum CSR level will receive ease of access to capital markets, ownership advantage of the eclectic paradigm, and supportive condition regarding resource procurement from stakeholders (El Ghoul et al., 2016; Frooman, 1999; Berman et al., 1999; Dunning, 1980). Logically from the result, we can understand that the international benefit gained by the firm is supplemented by the good impact of doing CSR near to the optimum level which allows the company to take risky decisions. The more internationalized company is doing CSR because they need legitimacy and support from their new environment.
From this result, we find the support of our fourth hypothesis. Even though we find support of our hypothesis 4, indirect effect through the deviation from CSR optimum level seems to be small and opposite relative to the direct effect.
4.3 Robustness Test
28
robustness test of regression from equation 1. We show the result does not change in term of the relation between the internationalization and the firm risk taking. The coefficient of the relationship between internationalization and firm risk taking is -0.0137 which means every increase of 1% of the internationalization will decrease the firm risk taking of 0.0137% in term of standard deviation return on asset. The result indicates there is consistency regarding the relationship between the internationalization and firm risk taking. The coefficient of the relationship between internationalization proxy by the ratio of foreign asset to total asset and firm risk taking is larger relative to the coefficient in the relationship between internationalization proxy by foreign sales to total sales and firm risk taking.
Table 9: Robustness test hypothesis 1
Variables FRT FRT FRT5 FRT7
Foreign asset / total asset -0.0115*** -0.0137*** -0.0160*** -0.0164***
[0.0028] [0.0025] [0.0023] [0.0022] Total asset -0.0109*** -0.0098*** -0.0101*** -0.0103*** [0.0007] [0.0006] [0.0005] [0.0005] Sales growth -0.0202*** -0.0173*** -0.0024 0.0066 [0.0053] [0.0053] [0.0052] [0.0049] Debt to asset -0.0062*** -0.0053*** -0.0044*** -0.0039*** [0.0006] [0.0007] [0.0006] [0.0006] GDP per capita 0.0252*** 0.0258*** 0.0283*** [0.0034] [0.0031] [0.0029]
Market to book value 0.0107*** 0.0135*** 0.0125*** 0.0130***
[0.0013] [0.0012] [0.0011] [0.0010] Total risk -0.0243* -0.0209 -0.0297** -0.0368*** [0.0145] [0.0146] [0.0132] [0.0129] Constant 0.1964*** -0.0576 -0.055 -0.0790** [0.0127] [0.0374] [0.0340] [0.0323] Adjusted R-squared 0.1605 0.1372 0.1435 0.1538 Observations 11276 11266 11266 11266
Year Dummies Yes Yes Yes Yes
Industry Dummies Yes Yes Yes Yes
Country Dummies Yes No No No
Number of Firms 1419 1419 1419 1419
29
Secondly, we conduct robustness test for testing the second hypothesis. We use different proxy of the internationalization which is the ratio of foreign asset to total asset. The result of the robustness test in table 10 using variable internationalization (foreign asset/ total asset) with the firm risk taking seems significant and has negative direction. This result is consistent with the regression model of internationalization proxy by ratio of foreign sales to total sales shown in the table 6. The coefficient of the relationship between internationalization and the deviation from the optimum CSR performance is -0.0536 which indicates every increase of 1% of the internationalization will decrease the deviation from the optimum CSR performance by 0.0536%.
Table 10: Robustness test hypothesis 2
Deviation of optimum CSR
Foreign asset/ total asset -0.0536***
[0.0044] Size -0.0202*** [0.0009] Sales growth 0.0216** [0.0088] Debt to asset 0.0024** [0.0010] GDP per capita -0.0333*** [0.0064]
Market to book value -0.0048***
[0.0018] Total risk -0.0001 [0.0291] Constant 0.8309*** [0.0727] Adjusted R-squared 0.0687 Observations 11266
Year Dummies Yes
Industry Dummies Yes
Country Dummies No
Number of Firms 1419
30
Thirdly, we also re-examine the test of hypothesis three by using the different proxy of the level of internationalization which is the ratio of foreign asset to total asset. We observed there is consistency of negative significant relationship between the deviation from optimum CSR performance and firm risk taking. We observed that the relationship between ratio of foreign asset to total asset with the firm risk taking in Table 11 is similar in term significance and direction of the relationship with previous result in Table 7. We still find a significant negative effect of internationalization on the firm risk taking.
Table 11: Robustness test hypothesis 3
Variables FRT FRT5 FRT7
Foreign asset / total asset -0.0142*** -0.0161*** -0.0161***
[0.0025] [0.0023] [0.0022] Deviation of optimum CSR -0.0090* -0.0023 0.0052 [0.0053] [0.0049] [0.0047] Total asset -0.0100*** -0.0102*** -0.0102*** [0.0006] [0.0006] [0.0005] Sales growth -0.0171*** -0.0024 0.0064 [0.0053] [0.0052] [0.0049] Debt to asset -0.0053*** -0.0044*** -0.0039*** [0.0007] [0.0006] [0.0006] GDP per capita 0.0249*** 0.0257*** 0.0285*** [0.0034] [0.0031] [0.0030]
Market to book value 0.0134*** 0.0124*** 0.0130***
[0.0012] [0.0011] [0.0010] Total risk -0.0209 -0.0297** -0.0368*** [0.0146] [0.0132] [0.0129] Constant -0.0501 -0.0531 -0.0833** [0.0379] [0.0346] [0.0329] Adjusted R-squared 0.1374 0.1435 0.1538 Observations 11266 11266 11266
Year Dummies Yes Yes Yes
Industry Dummies Yes Yes Yes
Country Dummies No No No
Number of Firms 1419 1419 1419
31
This consistency also showed by the indirect effect between the internationalization proxy by ratio of the foreign asset to total asset with the firm risk taking with the three-year observation through the deviation from the optimum CSR performance. The indirect effect is small relative to the direct effect. The coefficient of the indirect effect of internationalization on the firm risk taking via the deviation from the optimum CSR performance is 0.0005. The magnitude of the indirect significant effect is only 3.34% from the size of the direct significant effect. This result indicates the indirect effect is less important relative to the direct effect. The overall robustness test suggests that there is a consistency about the negative significant relationship between internationalization with the firm risk taking.
Table 12: Path indirect and direct impact of the internationalization to the firm risk taking through the CSR optimal level
Arrow A Arrow B x C
FRT FRT3 FRT7 FRT FRT3 FRT7
Direct Indirect effect
effect via CSR optimal level
FATA -0.0142*** -0.0161*** -0.0161*** 0.0004824* 0.00012328 -0.00027872
***, **, and * suggest statistical significance at 1 %, 5 %, and 10 % respectively. The detail explanation about each variable can be seen the variable definition table in the Appendix. The direct effect is derived from the coefficient of internationalization in table 7 (direct effect represented by arrow A in figure 1). We calculate the indirect effect by multiplying the coefficient of the deviation from optimum CSR in table 7 (represented by arrow C in the figure 1) with the coefficient internationalization (Foreign sales / total sales) in the table 6 (represented by arrow B in the figure 1). We also present the standard error of each variable in the bracket.
4.4 Summary of Findings
Our data analysis suggests several findings that related with our hypotheses. We present below table to summarize the findings of this study. We found all support of our hypotheses.
Table 13: Summary of findings
Hypothesis Positive
Relationship
Negative Relationship H1: Internationalization has a significant
impact on the firm risk-taking
Found (-) support expectation H2: The internationalization has a
significant impact on the deviation of optimum CSR performance
Found (-) support expectation H3: The deviation from the optimum CSR
performance has a significant impact on the firm risk-taking
Found (-) support expectation H4: The deviation from CSR performance
mediates the relationship between internationalization of the firm and firm risk-taking.
32 5. Conclusion
The objective of this paper is to study whether the internationalization has a significant impact on the firm risk taking. We argue that internationalization results benefit and the wider opportunities which then influence the firm risk taking. We also want to know whether the internationalization has an indirect effect on the firm’s risk taking through the mediator variable which is the deviation from optimum level of CSR performance of companies. When MNCs have optimal CSR performance because international scrutiny, the firms will have better engagement with their environment. This condition will enable the MNCs to take risky decisions because of the conducive environment and supports from their stakeholders.
From our data analysis, we find a significant and negative relationship between internationalization and the firm’s risk taking. The internationalized firms have lower firm’s risk taking relative to the domestic firms because possessed by a diversification benefit which proposed by Hughes et al. (1975) and Rugman (1976). The internationalized firms will have lower firm risk because of diversified operation in a less correlated market and separated cash flow around the world. The diversification benefit results lower shareholder risk and higher return for the international firms compared to domestic firms (Fatemi, 1984; Novy-Marx, 2013). The raised of diversification induces less shareholder risk, which lowers the required return. Therefore, the internationally diversified firms might not need to involve risky decision to earn high returns. Furthermore, the higher internationalization of firms will lower their risk taking because the firms might be having tradeoff and foreignness liability (Burgman, 1996; Shapiro, 1985). In addition to that, we also find the evidence that supports the behavioral theory of the firm which suggests that firms will lower their risk taking when they might already outperform their aspiration from competitors (domestic firm) and historical performance (Cyert and March, 1992).
33
We find a significant negative relationship between the deviations from the optimum CSR level and the firm risk taking. This condition indicates when the firms conduct CSR near with their optimum level (low deviation); the firms will take a high-risk decision. Our result is similar to the finding of Harjoto and Laksamana (2016) that suggest CSR may balance the firm’s risk taking to the optimal level.
Finally, we find significant indirect effect internationalization on the firm risk taking. The result showed the opposite direction relative to the direct effect. The indirect effect internationalization to the firm risk taking via the deviation from the optimum CSR performance is positive. This condition suggests that the highly internationalized firms would tend to have a lower deviation from the optimum CSR performance which allows firms to take risky decisions. The firms with a highly international profile and possessed by the optimum CSR level might have an easier access to the capital market, the ownership advantage, and the supportive business environment from stakeholders (El Ghoul et al., 2016; Frooman, 1999; Berman et al., 1999; Dunning, 1980). Unfortunately, we find the magnitude of the indirect effect relatively smaller to the direct effect of the internationalization on the firm risk taking.
In this research, we also conduct the CSR determinant test which involves the country level factors such as rule of law, investor protection, inflation rate, quality of management schools, and cooperation labor-employer relationship in the country of corresponding of each company. From this CSR determinant regression, we find the support of institutional background as CSR determinant. We find rule of law, investor protection and cooperation labor-employer relationship as important determinants of CSR. The robustness test shows consistent results regarding the main regression test. Our robustness test is using another internationalization proxy which is the foreign asset ratio.
34
be interested in the international firms to lower their portfolio risk since international firms possessed by lower firm risk taking. The managerial implication from the indirect effect of CSR in the relationship between internationalization and the firm risk taking is the manager of MNCs may have an option to change the internationalization effect to the firm risk taking. When MNCs need to take higher risk decision, they may optimize CSR. Therefore, the existence of CSR cannot be underestimated.
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