Strategic corporate social responsibility and economic performance. Does the organisational life cycle matter?

Strategic corporate social responsibility

and economic performance.

Does the organisational life cycle matter?

C.G. Wijenbergh s2254786

University of Groningen, Faculty of Economics and Business Thesis: Msc. International financial management.

Research question: Does a firm life cycle stage influence the economic performance on

Corporate Social Responsibility in multinational and domestic corporations?

Abstract:

This study investigates the moderating effect of organisational life cycle stages (OLC) on the relation between corporate social responsibility (CSR) and a firm’s economic performance measured by the Return on assets (ROA). Several studies explain the different strategic interest for corporations to invest in CSR. We expect that combining CSR with the life cycle model provides a broader insight into the strategic environment firms faces through its life. We obtained data from the ASSET4 ESG dataset for 1484 firms listed in the USA or Europe. We divided firms into multinational and domestic corporations. And classified firms into life cycle stages based on their cash flow pattern following the research of Dickinson (2011). We found that CSR scores are significantly different across the life cycle stages for multinational firms. Additionally, we found significantly different levels of contribution to the economic performance across the life cycles. Concluding that the organisational life cycle does matter for the profitability of CSR practices.

1. Introduction.

The world is changing its mind on corporate social responsibility (CSR). Social responsibility and sustainability have become an important debate in global politics and business strategies (Lee, 2008). Heightened corporate attention to CSR activities has not been entirely voluntary. Increased awareness, judgements and threat of bad publicity from stakeholders and the rise of global political developments such as the Paris UNFCCC Agreement in 2015 (Unfccc.2015) and the UN global impact initiative, the world’s biggest corporate sustainability initiative to align strategies and operations with ten universal principles on human rights, labor environment and anti-corruption (UN global impact.2017) awoke firms to respond to issues they had previously thought were not a part of their corporate responsibility. (Mohr, Webb, & Harris, 2001; Porter & Kramer, 2006) These pressures clearly demonstrate the extent to which external stakeholders are seeking to hold companies accountable for social issues. Highlighting the potentially large financial risks for any firm whose conduct is deemed unacceptable. (Porter & Kramer, 2006) This brings climate and sustainability-related issues to the top of company board agendas.

Most academics and business pundits have noticed how CSR has been transformed from an irrelevant and often frowned-upon idea to one of the most orthodox and widely accepted concepts in the business-world during the last twenty years or so. Even until the late 1970s, CSR was derided as a joke and a contradiction in terms by the investment and business community. (Lee, 2008) The globalisation of firms is encouraging the spread of CSR practices, and it is becoming increasingly clear that we need to understand the antecedents of such practices. (Gunther, 2005) Although most firms do recognise the need for the instalments of CSR practices and understand the potential financial risks of unacceptable conducts. They are less clear about what to do with it. (Porter & Kramer, 2006)

wellbeing. We question the use of real age as an estimator of firm maturity. Since simply using size and age is an implicit assumption that a firm’s strategic environment can only evolve in one direction. And that the interest for CSR is monotonically and only in one way. We expect that replacing firm age with the life cycle stages as a moderator will give a more accurate insight into the strategic reason why more mature companies have higher scores on CSR. Secondly, we measure the potential benefits of firms from participating in CSR across life cycle stages differentiating between multinational corporations and domestic corporations. We test for the implications from macroeconomic conditions or crisis periods by implementing a dummy that indicates for crisis periods as indicated by the National Bureau of Economic research where the crisis period spans from 2008-2011. For the indication of the life cycle stages we use the methodology of Dickinson, (2011) Which is the first model that uses a firm's cash flow pattern as indicator for the organizational life cycle and is the first model that allows firms to move upstream and downstream in the life cycle stages since it is not solely dependent on the age and size of the firm.

The research question is stated as follows: “To what extent does a firm life cycle stage influence the economic performance on Corporate Social Responsibility in multinational and domestic corporations?” to really understand the relation between the different lifecycle stages and Corporate Social Responsibility we will also discuss the following sub-questions in the paper:

1. Is the CSR performance significantly different between the life cycle stages for a multinational corporation?

2. Is the CSR performance significantly different between the life cycle stage for a domestic corporation?

3. In which life cycle stage do firms have the highest CSR performance? 4. Is CSR significantly contributing to the economic performance of the firms?

5. Is the contribution of CSR to the economic performance significantly different between the life cycle stages for a multinational corporation?

6. Is the contribution of CSR to the economic performance significantly different between the life cycle stages for a domestic company?

2. Theoretical foundation

2.1 Corporate social responsibility.

It is a common perception from various internal and external stakeholders that the success of a company is nowadays no longer judged solely in economic terms. (Sarkis, Gonzalez-Torre, & Adenso-Diaz, 2010) This has not always been the case. Corporate social responsibility has been discussed from many perspectives in the strategic literature some decades back, Friedman, (1962) argued that the social responsibility of a corporation is to make money for its shareholders, and he considered the term CSR as a ‘subversive doctrine’ threatening the very foundation of the free enterprise society. Others discussed corporate social responsibility in terms of philanthropic behavior and self-interest. (Keim, 1978)

The term Corporate Social Responsibility has been defined differently over the last several decades. From a definition of ethical, legal, economic and discretionary drivers of responsibility. (Carroll, 1979) To defining the phenomenon of CSR as good corporate

citizenship.(Hemphill, 2004) Others define CSR as a more intrinsic part of an organization, as the process by which managers within an organization think about and discuss relationships with stakeholders as well as their relation to the common good, along with their behavioral disposition with respect to the fulfillment and achievement of these roles. (Basu & Palazzo, 2008) The present dominant conception of CSR implies that firms voluntarily integrate social and environmental concerns in their operations and interactions with stakeholders. (Rekik, 2016a) The variety of the definitions also explains the evolution of CSR research.

Lee, (2008) describes in his CSR literature review the rationalization of the CSR research over the last three decades. This entails two broad shifts in the conceptualization of CSR. First, in terms of the level of analysis, researchers have gradually moved from the discussion of macro-social effects of CSR to organizational-level analysis of CSR's effect on financial performance and strategy. Secondly, in terms of theoretical orientation research has moved from explicitly normative and ethics orientated studies, to implicitly normative and

In the next sections, we will review the extensive research on the strategic interest and value of CSR-related activities.

2.2 Corporate social responsibility and strategy development.

A company's competitiveness is a reflection of its long-term performance and relationship within the industry and with competitors. A competitive company is constantly aware of the changing conditions for value creation and a company must understand how to generate sustainable value through a strategy that meets the organizational goals. (Lloret, 2016)

Understanding strategic interest and intention are complex and cannot be explained through the use of a set of straightforward definitions and rules to be memorized and applied. De Wit & Meyer, (2010) provided a model to better understand the internal workings of an organization and help to distinguish between the three major elements of strategy. Namely, The strategic environment (context), The nature of strategy (content) and the organizational processes involved, the how and when does the strategy takes place? (process) (De Wit & Meyer, 2010) We define the strategic context as in accordance with Rekik, (2016) as the external pressure effect. Where strategy is considered to be emergent or defensive. CSR investments can also be incentively motivated. Where strategy is considered to be intrinsic or planned. At last, as indicated in the literature CSR investments are often not defensive or strategic but emerge from ethical consideration of the top management. We define this as philanthropic. This section is structured as follows: First we discuss the external pressure effect (context) of CSR investments, Secondly we discuss the intrinsic strategic motivation of CSR investments and the potential contribution of CSR to the economic performance of firms, In the third section we discuss the non strategic philanthropic motivations for CSR investments, The fourth section explains the expected difference of CSR behavior for

multinational firms, and in the last section, we discuss the how, where and when of economic performances and CSR participation.

2.3 The external context of CSR decisions.

Global regulations increasingly mandate for corporate social responsibility.

Besides the increased political uncertainty the increased awareness and judgment and treat of bad publicity from stakeholders will increase the risk within the corporate strategic

environment. (Porter & Kramer, 2006) This can also be found within the institutional based view. This theory from Peng, Sun, Pinkham, & Chen, (2009) proposes that the competitive environment stem from the institutional limits established externally to the company. Where institutions represent the precepts, laws, rules, codes, customs, and traditions that determine behavior. (Lloret, 2016)

Secondly, a sustainable competitive advantage also implies the recognition of restrictions imposed by the economic, social and environmental system. Such as scarcity of energy, water, and other natural resources. This can also be assessed from the resource-based view. The resource-based view observes the firm as a pool of resources and explains the difference in performance by the existence of not easily imitable firm-specific resources. (Branco & Rodrigues, 2006) These strategic resources are subject to the biophysical

limitations imposed by the environment itself. (Hart, 1995) Potential constraints such as the biophysical limits can also be a source of competitive advantage. Companies may acquire advantages by the early recognition of these constraints and develop new products and technologies. (Hart, 1995; Lloret, 2016) Companies that do not recognize these advantages in time may potentially be confronted with increased competition from new entrants or

improved technologies. While most businesses awakened to these risks, they are much less clear about what to do with it and practical implementation remains a black box. (Porter & Kramer, 2006; Rekik, 2016)

2.4 The intended reasons for CSR investments: CSR and the corporate economic performance

different CSR practices of firms. (McWilliams, Siegel, & Wright, 2006) One of the latest discussion in the literature relating to the explanation of CSR investment decisions is that of the potential financial gains from CSR activities through positive differentiation. Rekik, (2016) found that in the most competitive markets companies engage less in social actions, whereas on normal competitive rivalry intensity, companies commit especially in social actions. (Rekik, 2016b) This idea is supported by Bagnoli & Watts, (2003) in their research about corporate social responsibility factors through the resource-based view. They found that strong competition results in lower profit margins and a subsequently low capacity to provide on additional social attributes. A description of the important linkage between corporate social responsibility and economic performance can be found in the research of McWilliams et al., (2006). These authors argued that the best way to examine the reasons for engagement in CSR activities, which are expected to be beneficial for the firm, is through the lens of the resource-based view (RBV). Where CSR is considered to be a competitive advantage through positive differentiation. (Rekik, 2016) This can also be found in the model of Schuler & Cording, (2006), who explained the linkage between CSR and economic performance by measuring the consumer purchasing behaviour. Where Barnett, (2007) introduced a stakeholder influence capacity model to specify further mechanisms linking CSR and economic performance and to explain the firm heterogeneity in the financial returns. However, the interrelatedness and mechanisms of CSR and the economic performance is still not fully decided, every company seeks to make more profits through their commitment to CSR for the protection and enhancement of their reputation. (McWilliams et al., 2006) In a comprehensive study by Margolis & Walsh, (2003) who provide an overview of the empirical studies of the relation between CSR and the economic performance. Stating that interaction has been measured in 50 percent of the studies and no relationship has been found in 25 percent of the studies. 20 percent have shown negative results and the remaining 5 percent

showed mixed results.

support has even gained the wide support of institutional investors.(McWilliams et al., 2006) The argument is that proactive environmental management eliminates the unnecessary risks associated with potential regulatory and legal actions and improves competitive advantages for future business. (Vogel, 2005) Therefore the strategic exploitation of CSR activities is expected to be positively related to the economic firm performance since the motivation of strategic CSR activities is to increase profits through positive differentiation and the efficient exploitation of resources.

2.5 CSR from a philanthropic perspective.

Participation in CSR is not always explainable from a rational perspective or as Keim (1978) described with its enlightened self-interest model that CSR decisions require a value judgment and that collective effort is more favourable than individual efforts.

CSR decisions are likely to improve the broader environment or even a whole industry. Individual efforts could lead to the spill over of single firm resources to the disposal of competitors. (Friedman, 2007) Stated that the social responsibility of business is to increase its profits. He explained through the agency theory that managers are an agent of the owners and should act only according to the interest of the owners and therefore should not use business resources for personal beliefs. Managerial decisions regarding CSR can be partially explained by the institution theory as described by Jennings & Zandbergen, (1995) this theory can be used to evaluate the process of the formation of consensus on the importance of CSR decisions. Where the environment of the managers plays an important role in the development of the opinion on the importance of CSR. Increased awareness of the need for CSR is of course not necessarily a bad thing. We define philanthropic CSR as the irrational involvement and unprofitable spending of firm resources based on personal beliefs.

And therefore we expect the philanthropic exploitation of CSR activities to be negatively related to the economic firm performance since they would unnecessarily increase the costs of the firm.

2.6 CSR in multinational firms.

developing countries where they operate in. (Adler, 2008) This and the increased visibility of multinational firms has led to intense pressure and expectations on the adoption of CSR activities in multinational firms. (Eweje, 2006; Mohan, 2006) The geographical spread of multinational firms makes that MNCs do not face singular pressure for the adoption of CSR practices. MNCs are rather confronted with different push and pull factors based on the different social expectations and cultural values of the countries they operate in. (Jamali, 2010) On the other hand, MNCs have comprehensive opportunities to evade calls for

accountability in the transnational space. (Waddock, 2008) While some researchers argue that internationalized firms have higher systematic risk due to the complexity of their organisation and based on the additional risk that comes from downstream investments.(Kwok & Reeb, 2000; Michel & Shaked, 1986) In addition to domestic firms who respond either

operationally, cosmetically, or philanthropically on CSR as indicated in the previous section. MNCs also do have the ability to respond either globally or locally. (Jamali, 2010)

Exploitation of this relative transnational discretion can also trigger a pitfall. Asgary & Li, (2016) used the bullwhip effect theory to describe the amplification of risk and economic loss due to minor unethical issues on the end of the supply chain. Adopting unethical operations in the supply chain might be beneficial in the short run. But with the increased consumer

awareness and visibility of international firms, minor disruption from unethical operations could lead to escalating reputation costs and squeezed economic performance. (Asgary & Li, 2016) Since MNCs are more exposed we expect MNCs to have score higher on the CSR performance. Furthermore, we expect that CSR activities in MNCs contribute more to long-term economic performance.

2.7 The strategic process of CSR decisions

Since CSR is increasingly in the strategic interest of corporations the question arises how and when firms decide to participate in CSR activities and why? When do firms intend strategic CSR implementation and when are these strategic decisions nonvoluntary or emergent? Secondly in which stage do corporations benefit the most from CSR activities?

mature and grow, firms attract more attention from external constituents and need to respond more openly to stakeholder demands (Burke et al., 1986). Previous studies have estimated firm maturity in several ways. The most simplistic way used by many studies, that have estimated firm maturity, is by identifying the age from the earliest year each a firm appears in the Centre for Research in Security Prices database(Withisuphakorn & Jiraporn, 2016). (Miller & Friesen, 1984; Withisuphakorn & Jiraporn, 2016) added sales growth and a degree of bureaucracy to the age as an estimator of firm maturity. (Withisuphakorn & Jiraporn, 2016) added financial data such as total assets, return on assets, debt-equity ratios to the age as an estimator.

Firm maturity in terms of age in years and firm size based on the natural logarithm of the total assets is in our opinion a very poor estimator of the true maturity and the strategic challenges a firm face. Therefore, the underlying reason for mature companies to CSR involvement remains unanswered. For that reason, the use of life cycle theories can be very useful as they capture the prototypical strategic changes generally occurring over the lives of organizations (Gray & Ariss, 1985). Anthony & Ramesh, (1992) were the first that used the life cycle model to rank firms for their research on stock prices, resulting in a multivariate analysis with three life cycle stages growth mature and stagnant. They used the four classification variables dividends, sales growth, capital expenditure and firm age to rank each firm in a cycle stage.

In the following sections, we will briefly discuss the theoretical foundation for life cycle stages as an estimator for firm maturity and strategic decisions.

2.8 The Organizational life cycle stage model.

be predicted. The five different stages can be described as following: Birth, Growth, Maturity, Revival, Decline Miller & Friesen, (1982). Other research defines the organizational life cycle as a four stage model (Drazin & Kazanjian, 1990). Drazin and Kazanjan (1990) reanalysed the life cycle progression hypothesis by using the data of Miller and Friesen (1984) and also found support.

It is also shown that the different life cycle stages are not connected to each other, meaning they do not have to be follow-ups in the same order for every company (Miller & Friesen, 1984). In other words, the decline stage may follow revival, and the maturity stage may even be previous to growth. According to this research, on average, each stage lasts six years, with 18 months as a minimum and the longest around 20 years. In our research, we will identify the different life cycle stages a company finds itself in over the years so we can truly see the performance of a firm on CSR in each stage.

From the beginning, stages are introduced to the life cycle model (Chandler, 1962). Chandler (1962) stated that as a firm changed their stage, so did its strategy and structure. In each of the different stages, organizations and top level management come across different priorities. Priorities of top management varied within organizations’ life cycle stages (K. G. Smith, Mitchell, & Summer, 1985). It is possible that in a given organizational life cycle stage, certain stakeholders, because of their potential to satisfy critical organizational needs, will be more important than others; specific stakeholders are likely to become more or less important as an organization evolves to another stage; specific stakeholders will be dealt with differently according to the strategy of an organization (Jawahar & McLaughlin, 2001a). All these factors are examples, based on the stakeholder theory, which an organization has to consider when making a choice on CSR.

3. Formulation of the life cycle stages.

In this section, we try to conceptualize our expectations of the characteristics of CSR activities to the corporate economic performances in both domestic and multinational firms. We use the life cycle definitions of Gort & Klepper, (1982). In accordance with the research of Dickinson, (2011). We formulate the expected cash flow patterns on the Net operational cash flow, from operational activities. (CFO), Net cash flow from financing activities debt or equity (CFA), and the Net cash flow from investment activities (CFI) as indicated by

3.1 The Introduction stage (OLC-1)

The introduction stage is a period in which a firm is focussing on its business plan, taking care of the finances and entering a marketplace as they try to become a viable entity. Introduction stage firms often have an informal structure and are mostly dominated by the owner-manager. (Miller & Friesen, 1984) There is a focus on product-market innovation which means that firms take a lot of risks and are more proactive than competitors (which have been in the same business for a longer time), which is mainly because of the intuitive and solo decision-making process. (Morrow, Sirmon, Hitt, & Holcomb, 2007) Managers will use this proactive strategy towards their stockholders, creditors, and customers and they will use the strategy of accommodation to deal with employees and suppliers, as these are critical for the survival of a firm in the startup stage (Jawahar & McLaughlin, 2001b)

3.1.1 Formulation of the cash flow pattern introduction stage.

As a consequence of lacking established customers, unexploited economies of scale, and a deficit of knowledge about costs and revenues introduction firms are likely to suffer from negative results on net operating cash flows. (Jovanovic, 1982) Managerial optimism and early investments to exploit growth opportunities likely to drive investments. Leading to negative investment cash flows. (Jovanovic, 1982; Spence, 1977) Given that introduction based firms do not possess sufficient capital to continuously finance outflows from operations and investments pecking theory states that they are likely to rely on external financing before equity financing so the net financing cash flow will be positive. (Dickinson, 2011; Jensen, 1986; Myers, 1984)

3.2 The Growth stage (OLC-2)

3.2.1 Formulation of the cash flow pattern growth stage.

In contrast to the introduction stage firms, growth stage firms will maximize profit margins by optimization of the investment activities and increased economies of scale and operational efficiency(Spence, 1977; Wernerfelt, 1985). Therefore net cash flow from operating activities is positive. Investing cash flows are expected to remain negative since firms make early investments for re-entry. (Spence, 1977) Although positive cash flows from operating activities is likely to contribute more to the required investments. Demand for additional investments remains high and in accordance with the pecking order, this demand is likely to be fulfilled with external financing. (Myers, 1984; Spence, 1977) Therefore cash flow from financing activities is expected to be negative. (Dickinson, 2011)

3.3 The Maturity stage (OLC-3)

Over time, the growth of a firm normally levels, as sales stabilize and the level of innovation decreases. Firms begin to mature in the strategies used and operating process applied, as they have a clear overview and idea of their internal and external environment (Sirmon, Hitt, Ireland, & Gilbert, 2011). This stage has a sales growth less than 15% and more bureaucracy is implemented at this stage as the main goal is to become an efficient business (Miller & Friesen, 1984). Managers in a mature stage are responsible for the morals of their employees and for the (external) commitment to the organization (Smith et al., 1985) To succeed in this, managers need to have a participatory approach inside the organization and a proactive approach towards their external stakeholders (Jawahar & McLaughlin, 2001). Next, there is a difference between larger and smaller firms, as larger firms have to deal with more external attraction and need to be more open in response to the demands of their stakeholders (Burke et al., 1986). We can suppose that all firms in this stage need to balance the demands of (almost) all of their stakeholders evenly to succeed.

3.3.1 Formulation of the cash flow pattern maturity stage.

likely decrease. Considering the financial surplus from operating activities firms will start to service debt and/or distribute cash to shareholders.(Barclay & Smith, 2005; Jensen, 1986) Therefore the net financing cash flow will be negative.

3.4 The Shake-out stage (OLC-4)

This stage follows the maturity stage and is typically considered to have a lot of diversification and expansion of the product-market scope (Miller & Friesen, 1984). Some other implementations are executed because of the complex and heterogeneous markets, like a diversification of product lines, divisionalised structures and the use of sophisticated controls and planning systems (Miller & Friesen, 1984). Firms in the shake-out stage are faced with declining or negative growth rates and need to respond accordingly. Weak firms are likely to fall. Declining growth rates and the complex markets causes firms to rethink their strategy. (Gort & Klepper, 1982) The definition of Miller & Friesen, (1984) indicates this stage as the revive stage where firms use a divisional structure for the first time in order to cope with the increased risk and complex environment.

3.4.1 Formulation of the cash flow pattern shake-out / revive stage.

3.5 The Decline stage (OLC-5)

This stage is completely different compared to the previous four as markets dry up further and more firms will collapse (Miller & Friesen, 1984). There is a lack of innovation and external challenges make it hard for the firm to be a profitable business. In this homogeneous and competitive environment firms become risk averse and very conservative (Miller & Friesen, 1984). It is important, but hard for the manager to bend this competitive disadvantage and not give in on resource disinvestments (Morrow et al., 2007).

3.5.1 Formulation of the cash flow pattern decline stage.

Declining firms are suffering from a decreasing market size and high levels of price cutting. (Miller & Friesen, 1984) This in combination with high bureaucracy costs (Wernerfelt, 1985) and increased levels of financial distress costs will cause negative operating cash flows. In contrast, declining firms are expected to have positive investment cash flows since they will liquidate assets to support operating activities or debt obligations. (Miller & Friesen, 1984). Declining firms will have either positive or negative cash flows from financing activities depending on the focus on debt repayment or the renegotiation of terms. (Dickinson, 2011)

3.5.2 Expectation influence of CSR on Return on assets.

in the degree of CSR participation where moderate-sized firms have a relatively low visibility and therefore are the least willing to participate in CSR. Large firms have high visibility and participate in CSR under scrutiny from the stakeholders. (Udayasankar, 2008)

Chan, Chou, & Lo, (2017) investigated the effect of financial constraints on CSR performances and found that the presence of financial constraints has a significant negative influence on CSR performance. Firms with constraints are most likely not undertaking CSR activities at all.

2.8 Conclusion on the theory.

From the theory it is clear that firms may have different reasons for the implementation of CSR activities some are emergent from external pressure, some are strategically intended for positive differentiation or for the management of scarce resources, and some are idealistic intended without any strategic rational reasoning. Implementation can be cosmetically with media campaigns and or fully operational. It is clear that firms face different strategic issues throughout their life and that CSR activities are possible of strategic value. Therefore we expect firms to benefit and act differently across stages.

4. Hypotheses.

5. Methodology.

To test for the significance of the mean variance of the equally weighted CSR scores across the life cycle stages we used a two-way ANOVA F-test.

Secondly, to test the moderating effect of the organizational life cycle and firm multinationalism on the relation of CSR and the organizational economic performance. We performed an ordinary least square (OLS) random effects panel data regression model. Panel data is used to mix the two characteristics of cross-sectional and time analysis since it measures both across firms and over time. (Hsiao, 1985) We used diagonal white standard error adjustments to deal with heteroscedasticity. As indicated in the research of Miller & Friesen, (1982) life cycle stages could last up to twenty years., and CSR practices are not expected to be implemented and beneficial overnight. Therefore and due to the data availability constraints from the ASSET4 database, we choose a ten year sample period from 1 January 2005 until 1 January 2016.

5.1 Sample selection.

5.2 Dependent variable.

We follow the research of Belu & Manescu, (2013) as the most appropriate indicator of the relation of CSR and economic performance and take both Return on assets and Tobin’s Q as an indicator for the economic performance. Return on assets (ROA) is a commonly used measure of firm performance (Belu & Manescu, 2013)

5.3 Independent variable.

military, nuclear, tobacco, and corporate governance. MSCI gathers this information by using surveys,

Another way of measuring CSR was found in the study of (Rekik, 2016). He determines CSR involvement with defining CSR into two measures of CSR activity. First the level of commitment (Philanthropic CSR, Integrative CSR, and Innovative CSR), second the level of CSR intensity (Perception, Respondents profile, stakeholders integration, the level of competition, stage of the product lifecycle, firm size, firm age, and industry). Their research data came from questionnaires and was analyzed with the use of a PROBIT OLS analysis. A limitation to this method might be the applicability for research with a larger sample.

Another widely used database we found in the theory is the ASSET 4 EG from Thomson Reuters, a large journalistic and data research company. The ASSET4 includes 6222 publicly traded companies, 278 key performance indicators, and 750 individual data points. The key performance indicators are then combined in eighteen categories which receive a binary score. Figure 1 gives an overview of the key categories in the ASSET4.

Figure 1: ASSET 4 ESG OVERVIEW (Reuters 2010)

The ASSET4 is one of the most widely available databases and not solely dependent on surveys. Using the ASSET4 in combination with the Worldscope database is also relatively easy. Therefore, we choose the ASSET4 integrated rating as the most appropriate indicator for CSR activities.

5.4 Moderating variable: Organizational life cycle stages.

Ramesh, 1992) and (Miller & Friesen, 1982) both methods indicate organizational life cycles with quartiles and compulsory scoring techniques based on sales growth, dividend pay out, capital expenditure and age as indicators. One major limitation using one of these models is that the organizations are indicated based on the relative position in the sample and not on individual objective performance indicators. Another major drawback of the Anthony & Ramesh (1992) and Miller & Friesen (1982) models is the use of age as an indicator for the life cycles. Age is a variable that moves only in one direction and therefore prevents firms to move freely across the different stages. Since CSR is commonly used as a differentiation strategy we consider free stage movement as an important condition. Therefore we choose the relatively new method as indicated by (Dickinson, 2011). This model uses cash flow patterns as an indicator for the life cycle proxy as indicated in the literature review. Following the cash flow expectations from Dickinson (2011) results in the possibility of 8 possible combinations as indicated in Table 3

The eight patterns are then collapsed into the five stages as defined by Gort and Klepper, (1982). A limitation of this model is the use of single-year cash flow patterns as an indicator. This creates the opportunity for single-year effect disturbances. Therefore we extend the model by using the three-year moving average to prevent for single-year effects. (Drobetz et al., 2015)

5.5 The indication of multinationals.

In order to research the performance and CSR characteristics of multinational firms, we

(1) (2) (3) (4) (5) (6) (7) (8)

Intro Growth Maturity Shake-out Shake-out Shake-out Decline Decline

Operating CF - + + - + + -

-Investing CF - - - - + + + +

Financing CF + + - - + - +

-This table presents the cash flow pattern-based classification scheme of life cycle stages based on the cash flow patterns of the Net operating cash flow ( Operating CF), the Net investment cash flow (Investing CF), and the Net financing cash flow (Financing CF) as indicated in the research of Dickinson (2011). Following the life cycle definition of Gort and Klepper (1982) Positive/Negative cash flows are indicated by +/- respectively. We measured the life cycle based on a three year average to avoid single year effects as indicated by the research of Drobetz, et.al. (2015) This also reduced the possibility that one cash flow pattern signals zero value.

(FAR) is widely used in the literature. Kwok & Reeb, (2000) indicate in their research that the use of the foreign sales ratio may mix up foreign export sales and sales from foreign subsidiaries.

Another widely used indicator is the foreign investment to total investment ratio (FIR). This method indicates the amount of noticeable investments or participations in foreign countries. Again there is the possibility for mixed up results from other types of investments. Therefore and since this indicator is widely available we use the foreign assets ratio as the indicator for the degree of multinationalism.

5.6 Control variables.

5.7 Descriptive statistics.

Table 4: Descriptive statistics.

N Mean Median Max Min Std. Dev.

ROA 1462 6.607 6.870 53.580 -55.980 8.665 CSR 1467 47.586 42.270 98.040 3.220 26.979 SIZE 1467 6.736 6.655 10.181 6.001 0.532 LEV 1464 27.954 26.270 197.320 0.000 21.014 EXPEN 1460 7.807 4.555 97.030 0.000 10.548 AGE 685 59.888 40.000 311.000 0.000 52.037

Sum Mean Median Max Min Std. Dev.

INTRO 88 0.061 0.000 1.000 0.000 0.239

GROWTH 149 0.103 0.000 1.000 0.000 0.304

MATURE 133 0.092 0.000 1.000 0.000 0.289

SHAKE_OUT 860 0.595 1.000 1.000 0.000 0.491

DECLINE 215 0.149 0.000 1.000 0.000 0.356

N Mean Median Max Min St.dev

ROA 7964 7.427 7.080 106.820 -88.080 8.415 CSR 7998 65.419 73.785 98.450 3.180 27.152 SIZE 7998 6.853 6.765 9.809 6.001 0.540 LEV 7981 24.078 22.460 198.850 0.000 16.418 EXPEN 7958 5.269 3.655 90.750 0.000 5.820 AGE 4523 76.793 67.000 305.000 0.000 54.256

Sum Mean Median Max Min Std. Dev.

INTRO 481 0.061 0.000 1.000 0.000 0.239 GROWTH 871 0.110 0.000 1.000 0.000 0.313 MATURE 999 0.126 0.000 1.000 0.000 0.332 SHAKE_OUT 4450 0.562 1.000 1.000 0.000 0.496 DECLINE 1108 0.140 0.000 1.000 0.000 0.347 Domestic firms Multinational firms

6 Empirical methodology and results.

First, we conducted a descriptive test (Table 2 and Table 4) for all variables to check for outliers. Secondly, we performed a correlation analysis (Table 5) to check for multicollinearity. As the table indicates multiple variables seem to be significant at the 1%, 5% or 10% level. We found no variables that showed high correlation ±> 0.600. Therefore no variables are dropped.

6.1 CSR performances across the life cycle stages.

We divided the sample into a subsample for multinational firms and a subsample for domestic firms based on the foreign asset ratio (FAR).

To test for differences in CSR performance across the life cycle stages we conducted a two way ANOVA F-test for both multinational and domestic firms including all the key variables.

corr ROA TOBINQ CSR SIZE LEV EXPEN AGE INTRO GROWTH MATURE SHAKE OUT DECLINE

ROA 1.000 TOBINQ 0.453*** 1.000 CSR 0.081***-0.063*** 1.000 SIZE -0.003 -0.194***0.351*** 1.000 LEV -0.112***-0.242***-0.079***0.027*** 1.000 EXPEN 0.048*** 0.064***-0.098*** 0.022** 0.019** 1.000 AGE -0.001 -0.127***0.240*** 0.116*** 0.058***-0.077*** 1.000 INTRO -0.078***-0.072*** 0.006 -0.008 0.027***-0.058*** 0.026** 1.000 GROWTH 0.058*** 0.057*** 0.044*** -0.003 -0.065***-0.069*** 0.011 -0.088*** 1.000 MATURE -0.029***-0.030*** 0.001 0.000 0.006 -0.048*** 0.022** -0.094*** -0.131*** 1.000 SHAKE OUT0.087*** 0.092*** -0.017* 0.019** -0.009 0.123***-0.051***-0.287*** -0.402*** -0.429*** 1.000 DECLIN -0.096***-0.106*** -0.020** -0.020** 0.050***-0.028*** 0.025** -0.101*** -0.141*** -0.151*** -0.464*** 1.000 Table 5: Correlation matrix

Table 6 represent the results for the ANOVA test we use this test for our first and second hypotheses. The first hypothesis is stated as: Hypothesis 1: CSR scores are significantly different between life cycle stages for domestic firms. The second hypothesis is stated as: Hypothesis 2: CSR scores are significantly different between life cycle stages for multinational firms. Based on the results we found evidence for the second hypothesis. Despite the low p-value we found no significant results for the first hypothesis. Considering the relatively high standard deviations for domestic firms an explanation might be that the number of observations is too small for the observation of significant results. However we did not find significant results for the first hypothesis and therefore we conclude that there is no significant difference in the mean value of CSR scores across the life cycle stages for domestic firms. With reference to hypotheses 1a: the highest CSR scores for domestic firms are expected in the mature stage, and 2a: the highest CSR scores for multinational firms are expected in the growth stage. We conclude the following: we do observe the highest scores on CSR for domestic firms in the mature stage. But based on our conclusion for the first hypothesis we cannot conclude that the score is significantly different than the other scores. Therefore we do not find support for hypothesis 1a. For multinational firms we do observe the highest score in the growth phase. And since we observed that the mean values are significantly different we will support hypothesis 2a. Concluding that multinational firms do invest in CSR in earlier stages and that CSR performance does not significantly differ across the life cycle stages for domestic firms.

subsidiary is considered to be in the decline stage skewing the parents economic performance with negative net income. Moreover we observe that the introduction and growth stage show the highest level of variance followed by the growth stage and the shake-out stage. The mean values of the control variables Size, Leverage, and Capital expenditure are consistent with the organizational life cycle theory. (Anthony & Ramesh, 1992a; Dickinson, 2011) We included age in this test to show that firms in earlier stages are not necessarily younger than firms in more mature stages as proposed in the model of Dickinson, (2011)

6.2 The contribution of CSR activities to the economic performance.

For our second test we first performed a Hausman test to measure the consistency of the explanatory variables. We found no evidence for inconsistency of the parameter estimator, therefore we expect the parameter estimator to be unbiased so we prefer the random effects model in our regression analysis. To test the interaction of the independent variables we first performed a multiple regression analysis. (1) without any interactions, (2) Including the introduction stage interaction (OLC-1), (3) Including the growth stage interaction (OLC-2), (4) Including the mature stage interaction (OLC-3), (5) Including the shake-out stage interaction (OLC-4), (6) Including the decline stage interaction (OLC-5), and (7) including all interactions. The regression equation for the measurement of economic performance for multinationals are as followed:

Table 7 shows the results for the interaction analysis for the sample of multinational firms. The first regression is without any interactions (1). We use this test for the assessment

Table 7: Regression results model 1 MNC Variable: (1) (2) (3) (4) (5) (6) (7) Constant 5.402*** 5.546*** 5.409*** 5.535*** 5.658*** 5.603*** 5.543*** (1.204) (1.208) (1.206) (1.210) (1.210) (1.206) (1.206) CSR 0.024*** 0.025*** 0.022*** 0.024*** 0.021*** 0.027*** 0.041*** (0.004) (0.004) (0.004) (0.004) (0.004) (0.004) (0.007) CSR x OLC-1 -0.014** -0.031*** (0.006) (0.008) CSR x OLC-2 0.017*** -0.002 (0.003) (0.006) CSR x OLC-3 0.000 -0.017*** (0.003) (0.006) CSR x OLC-4 0.007*** -0.014*** (0.002) (0.005) CSR x OLC-5 -0.022*** -0.036*** (0.003) (0.006) Lag ROA 0.472*** 0.470*** 0.470*** 0.472*** 0.470*** 0.467*** 0.464*** (0.026) (0.026) (0.026) (0.026) (0.026) (0.026) (0.026) SIZE -0.562*** -0.581*** -0.562*** -0.583*** -0.595*** -0.583*** -0.568*** (0.171) (0.172) (0.172) (0.172) (0.172) (0.172) (0.172) LEV -0.062*** -0.062*** -0.061*** -0.062*** -0.062*** -0.061*** -0.059*** (-0.062) (0.010) (0.010) (0.010) (0.010) (0.010) (0.010) EXPEND 0.083*** 0.082*** 0.087*** 0.083*** 0.0795*** 0.082*** 0.082*** (0.018) (0.019) (0.019) (0.019) (0.019) (0.019) (0.019) CRISIS -0.239 -0.280 -0.272 -0.263 -0.261 -0.296* -0.317* (0.177) (0.179) (0.178) (0.179) (0.179) (0.179) (0.180) SIC 2 2.076*** 2.0379*** 2.012*** 2.046*** 2.042*** 2.008*** 1.973*** (0.420) (0.423) (0.423) (0.423) (0.423) (0.422) (0.422) SIC 3 1.546*** 1.514*** 1.543*** 1.526*** 1.509*** 1.540*** 1.535*** (0.399) (0.400) (0.400) (0.423) (0.400) (0.400) (0.398) SIC 5 1.663*** 1.658*** 1.637*** 1.651*** 1.649*** 1.651*** 1.645*** (0.403) (0.403) (0.403) (0.404) (0.403) (0.402) (0.401) SIC 7 2.092*** 2.058*** 2.060*** 2.085*** 2.077*** 2.054*** 2.005*** (0.459) (0.461) (0.462) (0.462) (0.461) (0.462) (0.461) SIC 8 1.403* 1.392* 1.355* 1.388* 1.369* 1.327* 1.303* (0.745) (0.745) (0.742) (0.746) (0.746) (0.746) (0.743) REGION 0.421** 0.432** 0.412** 0.422** 0.415** 0.374** 0.379** (0.183) (0.185) (0.184) (0.184) (0.183) (0.183) (0.184) R-squared 0.269 0.270 0.271 0.269 0.270 0.273 0.276 F-value 227.894*** 209.295*** 210.483*** 208.450*** 209.334*** 212.607*** 164.395*** Observations 7432 7367 7367 7367 7367 7367 7367 Models

and is therefore consistent with the literature of Belu et al., (2013) and Blacconiere & Northcut, (1997) and complements therefore our third hypothesis. Additionally all variables except the crisis dummy are significant. Another interesting result is the negative significant contribution of the firm size variable measured as the natural logarithm of total assets. Assessment in the literature of this phenomenon provides mixed results. From the research of Fama & French, (1995) and Kirca et al., (2011) we would expected a positive contribution. However the research of Belu, et.al. (2013) showed similar negative results.

The second model (2) includes the interaction dummy variable of the introduction stage. This model is performed to test for hypothesis 3a: CSR activities have a significant negative contribution to the economic performance for MNCs in the introduction stage. Model 2 showed minor changes in the industry variable SIC-2 and for the constant. The most interesting result is that the interaction of the introduction life cycle stage dummy (OLC-1) on CSR showed a significant negative contribution. Supporting our hypothesis that for firms in the introduction stage the participation in CSR activities has a negative result on the economic performance.

The third analysis includes the interaction for the growth stage (3). Again the results show only minor changes in the non-interaction variables. There are no new significant results and the R-squared increased slightly from 0.270 to 0.271. The interaction of the organizational life cycle dummy (OLC-2) on CSR changes from negative to significantly positive on the 1% level. Supporting our hypothesis (3b) that multinational firms in the growth stage benefit significantly from CSR activities. We know from the anova F-test in Table 6 that multinational firms do have the highest scores in the growth phase and are therefore expected to engage more in CSR practices in this stage. As indicated in the literature this could be an indication of premature adoption of CSR due to the increased visibility and increased external pressure.

The fourth model (4) includes the interaction dummy for the mature stage (OLC-3). There are no major changes in the non-interaction variables. The R-squared is decreasing slightly and the intercept increased. The interaction of the mature stage related to CSR activities changes from significantly positive to a very small 0.00024 insignificant result. Therefore we conclude that for multinational firms no significant interaction from mature stages can be found. Therefore we do not support our hypothesis 3c : CSR activities have a significant positive contribution to the economic performance for MNCs in the mature stage

models. The contribution of CSR activities for the shake-out stage firms is significantly positive but relatively smaller compared with the growth stage. From the literature we would expect a positive or negative result in this stage based on the strategic value of the CSR activities. Therefore we conclude that for this sample of multinational firms CSR activities have strategic value and do significantly contribute to the economic performance supporting hypothesis 3d.

The sixth model (6) includes the interaction for the decline stage firms (OLC-5) In this model the crisis dummy variable changes from insignificant to significant on the 10% level. The interaction for the decline stage with CSR changes to a negative significant result again.

The final model (7) shows the results for combined interactions. To test for the extent of influence from the organizational life cycle stages. We observe that the non-interaction variable for CSR has a value that is almost double compared to the previous models and that all interaction variables except the growth dummy is showing a significant negative effect. The results shows us that the presence of a life cycle decreases the contribution of CSR to the

economic performance.

In general we conclude that the control variables show results that are consistent with the literature. The results on CSR showed us that overall CSR activities have a positive significant contribution to the economic performance. The interaction effect of the life cycle is significant except for the mature stage. The contribution of the CSR related activities does change across the different life cycles and is negative for the first and last life cycle.

6.2.1 The contribution of CSR activities to the economic performance for domestic firms.

Our second interaction analysis will investigate domestic firms only. Based on the Hausman test we performed a random effects regression analysis.

Table 8 shows us the results of the interaction analysis for domestic firms. The first model shows us the results without any interactions (1). We use this test for the assessment of our fourth hypothesis. The fourth hypothesis is stated as: Hypothesis 4: CSR activities have a significant contribution to the economic performance for DMCs. We found no significant

Table 8: Regression results model 2 DMCs Variable: (1) (2) (3) (4) (5) (6) (7) Constant -0.538 -0.421 -0.395 -0.512 -0.259 0.179 0.223 (2.379) (2.389) (2.405) (2.411) (2.389) (2.491) (2.481) CSR 0.012 0.014* 0.012* 0.0135* 0.007 0.015** -0.031 (0.007) (0.007) (0.007) (0.007) (0.005) (0.007) (0.002) CSR x OLC-1 -0.014** 0.030 (0.015) (0.026) CSR x OLC-2 0.005 0.049** (0.009) (0.021) CSR x OLC-3 -0.004 0.040** (0.007) (0.019) CSR x OLC-4 0.011** 0.049*** (0.005) (0.019) CSR x OLC-5 -0.016* 0.030 (0.009) (0.020) Lag ROA 0.504*** 0.499*** 0.501*** 0.500*** 0.496*** 0.498*** 0.495*** (0.046) (0.046) (0.046) (0.046) (0.047) (0.046) (0.047) SIZE 0.365 0.351 0.343 0.359 0.335 0.277 0.279 (0.334) (0.338) (0.339) (0.340) (0.337) (0.345) (0.346) LEV -0.060*** -0.065*** -0.065*** -0.065*** -0.065*** -0.065*** -0.065*** (0.014) (0.014) (0.014) (0.014) (0.014) (0.014) (0.014) EXPEND 0.082*** 0.083*** 0.085*** 0.084*** 0.081*** 0.082*** 0.080*** (0.024) (0.024) (0.024) (0.024) (0.024) (0.024) (0.024) CRISIS -0.535 -0.576 -0.563 -0.553 -0.553 -0.572 -0.566 (0.415) (0.416) (0.418) (0.420) (0.418) (0.418) (0.419) SIC 2 2.675*** 2.717*** 2.709*** 2.717*** 2.682*** 2.642*** 2.634*** (0.824) (0.825) (0.826) (0.824) (0.825) (0.831) (0.833) SIC 3 2.862*** 2.888*** 2.912*** 2.910*** 2.883*** 2.890*** 2.891*** (0.718) (0.725) (0.722) (0.727) (0.724) (0.726) (0.721) SIC 5 2.491*** 2.504*** 2.491*** 2.503*** 2.495*** 2.452*** 2.446*** (0.536) (0.538) (0.542) (0.538) (0.538) (0.542) (0.546) SIC 7 2.973*** 2.931*** 2.933*** 2.964*** 2.998*** 2.947*** 2.919*** (0.789) (0.787) (0.799) (0.790) (0.793) (0.790) (0.799) SIC 8 2.931*** 2.958*** 2.985*** 2.986*** 2.918*** 2.901*** 2.897*** (0.869) (0.875) (0.871) (0.873) (0.873) (0.877) (0.885) REGION -0.157 -0.062 -0.061 -0.053 -0.094 -0.123 -0.157 (0.483) (0.477) (0.480) (0.480) (0.482) (0.491) (0.489) R-squared 0.367 0.370 0.369 0.369 0.371 0.371 0.372 F-value 66.340*** 61.574*** 61.480*** 61.471*** 61.765*** 61.769*** 47.307*** Observations 1388 1378 1378 1378 1378 1378 1378 Models

contribution of CSR activities to the economic performance. Hence we do not support our fourth hypothesis. Only the previous value of the return on assets (LagROA), the leverage ratio (LEV), the capital expenditure as a percentage of total assets (EXPEND), and the industry dummies (SIC-2,3,5,7,8) show significant results. The R-squared for this model is 0.367.

The second model (2) includes the interaction effect of the introduction stage firms. (OLC-1) We use this model to test for hypothesis 4a: CSR activities have a significant negative contribution to the economic performance for domestic firms in the introduction stage. In this model the non-interaction variable (CSR) changes to a higher positive and significant result on the 10% level. The interaction variable is consistent with the hypothesis and shows us a negative significant contribution to the economic performance for firms in the introduction stage on the 5% level. The fit of the model slightly increases from 0.367 to 0.370.

Our third model (3) includes the interaction effects for firms in the growth stage (OLC-2). The interaction variable for growth firms is positive but not significant. A explanation might be that the sample size for domestic firms is smaller than for multinational firms or that there is no actual effect on the contribution of CSR activities in the growth stage. Therefore we found no support for hypothesis 4b: CSR activities have a significant positive contribution to the economic performance for domestic firms in the growth stage.

The fourth model (4) includes the interaction effect of the mature stage firms (OLC-3). Again we found no significant influence from the mature stage dummy on the contribution of CSR to the economic performance. A interesting results is the contrary negative coefficient since we expected a positive relation from the literature. A explanation might be found in the research of Udayasankar, (2008) who found an U-shape relation between firm size and the benefits of CSR. Since the interaction effect is not significant we cannot support our hypothesis 4c: CSR activities have a significant positive contribution to the economic performance for domestic firms in the mature stage.

observe a positive significant relation we can support the hypothesis 4d: CSR activities have a significant positive or negative contribution to the economic performance for domestic firms in the shake-out stage. Therefore we conclude that for this sample of domestic firms CSR activities have strategic value and do significantly contribute to the economic performance. As indicated in Table 8 domestic firms benefit significantly the most in the shake-out phase. A possible explanation for this phenomenon can be found in the resource based view as indicated in the research of McWilliams et al., (2006) Where CSR practices are perceived as a unique asset and a competitive advantage through positive differentiation. Similar arguments can be found in the research of Boehe & Barin Cruz, (2010) who argue that adoption of specific CSR practices in declining markets could improve sales through product differentiation.

Model six (6) includes the interaction dummy for firms in the decline stage. In this model the contribution of CSR increases and becomes significant again at the 5% level. The interaction variable is significant and negative as expected from the literature. Therefore we support our hypothesis 4e : CSR activities have a significant negative contribution to the economic performance for DMCs in the decline stage.

The final model (7) includes all interactions combined. We use this model to test for the hypothesis of to what extend has the organizational life cycle stages influence on the contribution of CSR to the economic performance. We find significant results for stage OLC-2, OLC-3, and OlC-4 with larger coefficients than for the individual interaction analysis. Therefore we conclude that the life cycle stages appear to have significant effect across the life cycle stages except for the OLC-1 and OLC-5 introduction and decline stage respectively. All the control variables in this model are significant except the firm size (SIZE) and the regional effect dummy (REGION).

In the next section we will summarize and conclude the thesis and provide an answer to the research question and sub questions. Additionally we will discuss the limitations of this thesis and provide some suggestions for future research.

7. Summary and conclusions.

The world is changing its mind on corporate social responsibility (CSR). Social responsibility and sustainability have become an important debate in global politics and business strategies.(Lee, 2008) Heightened corporate attention and changing global politics brings sustainability related issues to the top of the company board agendas. Recent debates in papers such as the Harvard business review, The economist, and the financial times. Showed us heated debates on the strategic intends, potential benefits, and downsides of the adoption of CSR practices. In this paper we extend this debate by providing new insights on the behaviour of multinational and domestic firms beyond their strategic life cycle environment.

Connecting our results with the extensive research on strategic behavior in different life cycle stages could provide us with additional insight in the potential reasons for firms to adopt CSR practices. Our main findings are that firms in the introduction stage do substantially adopt unbeneficial CSR projects potentially as an early investment or as a philanthropic project from the discretion of concentrated ownership. While multinational firms probably adopt successfully CSR practices prematurely from a emergent strategy of increased corporate visibility. We do acknowledge that extensive research on individual reasons is might be interesting for future research to draw any hard conclusions on the reasons for firms to adopt CSR practices. However we showed that the use of life cycle techniques could be a

complementary tool in this area of research.

8. Limitations and future research.

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