Internationalization and Corporate Financial Performance: moderating role of CSR activities and board gender diversity
Jingyan Zhu
Student number: S3622959
MSc. International Financial Management Faculty of Economics and Business
Supervisor: Dr. Raymond Zaal Co-assessor: Dr. Halit Gonenc
Abstract
This paper aims to investigate the relationship between the degree of internationalization (DOI) and corporate financial performance (CFP) and the moderating effects of two dimensions of corporate social responsibility (CSR) and board gender diversity on this relationship. Using a sample of 3090 firms over the period 2007 to 2017, the results support that both environment and social dimensions of CSR have a positive moderating effect on the DOI and CFP relationship, while board gender diversity has no significant moderating effect. These findings enrich international business researches and suggest that firms should consider the positive moderating effect of CSR when expanding their business aboard.
Field Key Words: Internationalization, CSR, Environment CSR, Social CSR, Financial Performance, Board Gender Diversity
1. Introduction
With the degree of internationalization intensifies, more and more firms try to expand their business landscape to the world. At the same time, corporate social responsibility (CSR) and gender diversity have been hot topics in both the academic field and business field, receiving many attentions in recent decades. Gradually, the corporate social performance also becomes a part of what consumers and investors will be concerned about. Although many researches have devoted to researching the financial incentives brought about by internationalization, CSR, and board gender diversity, few researches incorporate the effects of CSR and board gender diversity in the effect of internationalization. The main aim of this paper is to investigate the moderating effects of CSR and board gender diversity on the relationship between corporate financial performance. Furthermore, two dimensions of CSR, the environment dimension, and social dimension, will be tested individually.
Internationalization has been generally regarded as a double-edged sword. On the positive side, multinational firms can obtain profit because of their competitive advantage (Denis et al., 2002). They can utilize their advanced knowledge and technology to seize market share when they expand business into a new market.
Thomas (2004) states that through internationalization, firms can transfer production to lower cost countries and divert assets quickly among different subunits. In contrast,
multinational firms may face more uncertainty and more complex business environment than domestic firms. The high degree of internationalization and geographic diversification can pose high monitoring cost and coordinational cost.
(Wright et al., 2002). Managers of foreign subsidiaries have to adapt to unfamiliar environments, build a new network, study regulations of host countries and making business decisions under different cultural context (Bausch, 2008).
Engaging in CSR also becomes very common in business practice in modern society.
There are many kinds of the definition of CSR. One of generally accepted one is supposed by Mcwilliams et al. (2006). They believe that CSR is an action that considers social and stakeholder’s interest beyond the legal obligation. Taking stakeholder theory (Freeman 1984) as a starting point, CSR is regarded as an effective methodology to mitigate the negative side of internationalization since engage in CSR can align the interests of stakeholders. In the light of stakeholder theory and institution theory, multinational firms involving CSR activities can enhance the reputation of the firm and show positive image to stakeholders. As a result, this positive image may attract more consumers and investors and therefore bring profits for multinational firms. Adding to this, Multinational firms may face more pressure and also more dilemmas to engage in CSR since the complex and changeable international environment (Bondy and Starkey, 2014). Coupled with the fierce commercial competition, it crucial to multinational firms to understand the role of CSR in the
internationalization context. Numerous studies focus on the impact of internationalization and investments in CSR activities, while only a few studies connected internationalization and CSR. Due to the intensification of internationalization and increasing attention to corporate social responsibility, it is necessary to investigate the relationship between internationalization, CSR and financial performance. Furthermore, this paper further researches the individual effect of two of components of CSR, the environment CSR and social CSR. This paper seeks to contribute to internationalization business research and provide further insights for executives of multinational firms when they adopt strategies during their internationalization progress.
In the past decades, male directors occupy most positions on the board. In recent years, people began to realize that it is beyond dispute to provide more opportunities for women directors because of the social and ethical considerations (Joecks et al., 2013).
Increasing importance has attached to the board gender diversity. More and more countries and organizations are committed to promoting the percentage of female directors on the board and pose regulation pressure. For example, Norway first requires listed companies have at least 40% of female directors on the board. After this action, many western European countries, such as Belgium and the Netherlands, have released similar request (The Economist, 2018). The complex and high level of dynamic business environment which brought about by a high degree of
internationalization requires excellent information-dealing abilities of multinational firms. Nielsen (2009) states that increasing board diversity can be a useful strategy to fulfill the high requirement of information-dealing ability. The effectiveness of the board is essential to corporate governance, and the members on the board are one of the decisive factors (Barroso et al., 2011). Many researches have focused on the direct effect of board gender diversity on corporate financial performance (Campbell and Mínguez-vera, 2007; Joecks et al., 2013; Chapple and Humphrey, 2013). However, little studies investigate the moderating effect of gender diversity on the relationship between internationalization and financial performance. As the increasing attention and regulation pressure, it is vital to test if the moderating effect of board gender diversity and provide a reference for multinational firms.
This paper studies the moderating effects of CSR and board gender diversity on the effect of internationalization on corporate financial performance. Collecting CSR rating scores and percentages of board gender diversity obtained from Asset4 database, this paper individually investigates the moderating effects of environment CSR, social CSR, and board gender diversity by controlling the firm fixed effect and time fixed effect. The findings of this paper enrich existing internationalization business research and fill the gaps of incorporating the moderating effect of CSR and board gender diversity when researching the relationship between internationalization and financial performance. Also, these findings provide the theoretical background for multinational firms to help them to adopt strategies better and generate more profit.
The outlines of the remaining paper are as followed. Section 2 summarizes some of the related prior studies and develop hypotheses, respectively. In Section 3, I report the data, methodology and variables definitions adopted in this paper. Section 4 outlines the descriptive statistics, correlation matrix, and regression results. Further interpretation of the regression results, conclusion, limitation of this paper and suggestion of future research are presented in section 5.
2. Literature review and hypothesis development
2.1 The degree of internationalization and corporate financial performance.
Given the higher degree of globalization in recent decades, internationalization and diversification have been compelling strategies for firms. Compare with domestic firms, multinational firms are considered to have more competitive advantages and growth opportunities. According to Denis et al. (2002), firms can achieve competitive advantages through internationalization strategies. For instance, firms who have strong competency in domestic can explode to foreign markets, which can help them to obtain competitive advantages and expand their economic scale and scope through their advanced knowledge and skills. The learning theory states that internationalization can be viewed as a process of organizational learning (Johanson and Vahlne, 1977). In the light of learning theory, multinational firms can also obtain competitive advantages through learning international contexts and markets during their internationalization
process (Hsu and Pereira, 2008). Consequently, multinational firms can regard internationalization as an active channel to obtain transfer knowledge to increase competitiveness.
Moreover, internationalization can allow firms to reduce their operating cost and production cost since the different levels of development in different countries. For example, Jensen and Petersen (2011) conclude that diverse location can help multinational firms build up a global supply chain which can integrate local advantages.
Besides, a high degree of internationalization allows firms to adjust their tax framework and reduce their effective tax rate through adjust transfer price. They can transfer their profit from high income-tax rate countries to low income-tax rate countries under the premise of not violate the law (Mehafdi, 2000). Therefore, internationalization can help multinational firms save many tax expenses. Kim et al. (1989) also state that firms with a high level of internationalization have more stable profitability than those with a low degree of internationalization. Furthermore, Kafouros et al. (2007) indicate that the degree of internationalization can help firms to raise their abilities to improve their performance and reap fruits through innovation. In other words, firms with a higher degree of internationalization are easier to improve performance through innovation.
On the other hand, internationalization also means risk and resource investment. This can bring additional cost to multinational firms. One of commonly used theories in internationalization researches is agency theory, which means that there have interest
conflicts between principals and agents (Jensen and Meckling, 1976). The principals present shareholders and agents present the firm’s managers and executives. For example, the higher degree of firms' internationalization usually means that they have more foreign subsidiaries and face more complex context. The managers of foreign subsidiaries may not choose the strategies that maximize the parent company's overall interest and the shareholders' wealth. As a result, the agency problem between the subsidiaries managers and shareholders are more pronounced in multinational firms.
Wright et al. (2002) addressed that the multinational firms who face substantial foreign markets will have a higher monitoring cost than firms who face less foreign markets.
Hence, the higher-level internationalization firms may have severe agency problem.
According to Bausch (2008), the managers of foreign subsidiaries may face many challenges when they operate in a new environment, for example, they need to build a new business network and get familiar with the legitimacy environment of the host country as soon as possible. Besides, the different cultures may lead to different leadership style and management preferences (Jong and Houten, 2014). As a result, a higher degree of internationalization may increase the difficulty for managers to adapt to new environments.
At the same time, Bausch (2008) states that a higher degree of internationalization increases the heterogeneity of the operating market and therefore increases difficulties for managers. Besides, many prior internationalization studies have pointed out that
higher degree of internationalization may expose firms to some unexpected problems, such as exchange rate fluctuations may lead additional transaction cost, and the diversity of background and cultures of employees and managers may lead to communication problems and low efficiency. These additional costs to some extent may overweight the benefits of internationalization and therefore weaken the positive effect of internationalization on corporate financial performance.
In past decades, there has a large body of researches regarding the relationship between internationalization and corporate financial performance. Some of prior studies argue that internationalization have a negative impact on firm performance (e.g. Gedajlovic and Shapiro, 1998; Chen and Tan, 2012), while more researchers support that the benefits of internationalization outweigh the costs (i.e., Hymer, 1960; Vernon, 1971;
Grant et al., 1988; Tallman and Li, 1996; Hsu and Pereira 2008). Furthermore, Contractor et al. (2003) and Lu and Beamish (2001) conclude that the relationship between internationalization and financial performance is U-shaped. Hitt et al. (2006) propose that differences in measurements of variables can lead to different results about this relationship. Based on the above arguments on the benefits and costs of internationalization and as more researches address a positive impact of internationalization on performance, I infer that
Hypothesis 1: the degree of firms’ internationalization has a positive significant effect on corporate financial performance.
2.2 The moderating effect of CSR activities
The concept of corporate social responsibility has a long history since the 1950s. In the past several decades, the concept of corporate social responsibility undergone many evolutions, and there are various definitions of CSR. Following the “lexicographic view of social responsibility” suggested by Johnson (1971), firms who have intensive profit oriented may involve in socially responsible activities to achieve their goals. Besides, according to the definition released from Committee for economic development (CED) in 1971, CSR is "business functions by public consent and its basic purpose is to serve constructively the needs of society—to the satisfaction of society” (p11). In more recent years, the definition of CSR becomes more detail and have a broader range. Elhauge (2005) states that CSR is sacrifice financial interest to embrace social interest. CSR activities are environmentally friendly, employee friendly and respect the stakeholders.
Furthermore, the European Commission defines companies can be regarded as carrying out CSR if they “integrating social, environmental, ethical, consumer, and human rights concerns into their business strategy and operations”. Mcwilliams and Siegel (2006) proposed the CSR as “actions that appear to further some social good, beyond the interest of the firm and that which is required by the law”, which has been generally accepted.
Bondy et al. (2012) state that institutional theory can provide a basic theoretical framework to understand the CSR in multinational firms. The institutional theory refers
that firms make decisions under the social norms and the pressure of isomorphism and legitimacy (DiMaagio and Powell, 1983). Hence, multinational firms may have to adopt more CSR activities. Namely, the host countries of multinational firms’ subsidiaries may require them to take more CSR activities. Moreover, multinational firms are facing more pressure which stems from the more significant number of stakeholders.
International organizations such as NGO and ISO may also pose pressure for multinational firms to fulfill their social responsibilities. Bondy et al. (2012) indicate that coercive pressure from social and imitation pressure from competitors influence CSR in the business activities of multinational firms. Therefore, more and more multinational firms have recognized the importance of CSR when expanding their business into new markets and consider CSR when they make business strategies.
However, due to the complexity of diverse operation environment, multinational firms may have to pay extra cost to make policy to satisfy local requirements and embedded local culture (Bondy and Starkey, 2014).
For studies of internationalization, one of the most important concepts is the liability of foreignness. Zaheer (1995) indicates that multinational firms who operate business overseas may face extra cost such as coordinational cost which comes from the unfamiliar environment. Campbell et al. (2012) argue that multinational firms can mitigate the problem of the liability of foreignness by involving CSR activities. One of the most important theories in corporate social responsibility and financial performance
studies is the stakeholder theory (Freeman 1984). The stakeholder theory means that when firms are making business decisions, they also need to think about the interest of the stakeholders who have relationships with them except shareholders, such as employees, consumers, suppliers, and even governments. These stakeholders often have crucial resources that are essential to multinational firms. Increasing investment in CSR can help multinational firms reached the expectation of stakeholders and therefore bring some benefits to multinational firms, such as attract new investment, reduce the cost of capital and attract potential talent employees (Fernando and Lawrence, 2014).
Besides, scholars (e.g., Creyer,1997) have confirmed that consumers indeed care firms’
ethic behaviors, and this will influence their consumption decisions. Moreover, people more and more pay attention to firms’ CSR activities in nowadays. CSR activities, therefore, can be regarded as an effective way to marketing and advertising, especially when the multinational firms expand their market into an emerging market (Khan et al., 2015). The Multinational firms can develop their global image, build their brand, and introduce their advanced product in the different market through engaging in CSR activities. A good image can be essential to multinational firms, especially for who enter new markets. Maio (2003) also states that corporate social responsibility and sustainability have a significant impact on firms’ brand management under the global context. Through increase the CSR investment, multinational firms can enhance the
reputation of their foreign subunits and build a positive enterprise image, therefore offset the negative impact of liabilities of foreignness on the corporate financial performance. Consequently, during the progress of internationalization, investing in CSR activities may be a useful and practical mechanism to bring extra benefits for multinational firms.
At the same time, as mentioned before, one of the primary costs of internationalization is the agency cost. Akpinar et al. (2008) state that the corporate social responsibility activities have informative value which means that it can provide information for the quality management for stakeholders. As mentioned before, the agency cost is one of the main costs of internationalization. Hence, managers of foreign subsidiaries can use the CSR activities strategically to reducing the monitoring cost and alleviating the agency problem to some extent.
There are substantial prior studies investigate the relationship between CSR activities and corporate financial performance (e.g. Inoue and Lee, 2011; Lin et al., 2009), while little studies investigate that the role of CSR in the relationship between internationalization and financial performance. For example, Jung et al. (2016) conclude that internationalization and CSR have a negative synergy effect on corporate financial performance which is opposite with their hypothesis. However, they only focus on the American restaurant industry and only include one year. Hence, this result may be inconclusive.
This research tries to investigate the role of CSR in given the globalization background.
More specifically, few studies explore whether different CSR dimensions might have different degrees of influence. In recent studies, there are different ways to specify the dimensions of CSR. Many researchers divide the CSR dimensions by the dataset, such as Kinder, Lydenburg, Domini (KLD) database. According to the KLD dataset, CSR activities usually divide into five dimensions, employee relations, product quality, community relations, environmental issues and diversity issues (Inoue and Lee, 2010).
Thomson Routers (2019) divided the CSR into three dimensions, the environment dimension, social dimension and corporate governance dimension. Because there is a vast of body of studies explore the effect of corporate governance, in this paper, to investigate the impact of CSR further, I mainly investigate the impacts of the social dimension of CSR and the environmental dimension of CSR. Based on the above arguments, I hypothesize the following:
Hypothesis 2a: the environment dimension of CSR has a positive impact on the relationship between internationalization and corporate financial performance.
Hypothesis 2b: the social dimension of CSR has a positive impact on the relationship between internationalization and corporate financial performance.
2.3 The moderating effect of board gender diversity
The diversity issue, especially the board diversity issue is also an essential perspective for multinational firms with a high degree of internationalization. The high degree of internationalization represents that top managers of firms may face higher demand for more information-dealing process and more complex and dynamic international context.
Opportunities, changes, and challenges brought about by a highly international operating environment require top management team has an excellent ability to response them. Nielsen (2009) states that increasing board gender diversity can enhance multinational firms’ ability to process such a large amount of information.
According to Senbet and John (1998), board composition is a major factor affecting its monitoring capacity, and gender diversity is a significant consideration in board composition. Woman’s participation on board can improve the firms’ image and also have a positive influence on consumers behavior. In Brammer et al. (2009)'s research, they found that the reputation of the firm is positively related to board gender diversity as well. Those firms which have high percent of women directors are believed to perform better in ethic perspective. Like argued before, firms' reputation could be important when a company enters a new market and expand their territory globally. At the same time, unlike men’s competitive and aggressive, the characteristics of women directors often considered being related to kind, gentle, helpful sympathetic. In other words, women directors are more likely to consider other people’ s situation and
supporting others (Nielsen and Huse, 2010). Therefore, female directors may also help build a pleasant working environment and reduce conflicts between colleagues, and they are likely to bring new insights into significant strategic decisions, particularly those related to female customers, trading partners, and personnel (Daily et al., 1999).
Nielsen and Huse (2010) conclude that women directors can perform strategic control better to increase the effectiveness of the board of directors since they can think over different parties’ benefits. Furthermore, women on the board usually are regarded as prudent and more intend to display risk-avoidance behavior than their male counterparts (Loukil & Yousfi, 2015). In the highly uncertain global operation context, combining suggestions of female directors may help multinational firms to make comprehensive analyses and consider carefully when they are making business decisions. Following that reasoning, one can expect the following:
Hypothesis 3: gender diversity in board composition has a positive impact on the relationship between the degree of internationalization and corporate financial performance.
3. Data and Methodology 3.1 Sample selection
All financial data come from Worldscope which can be accessed through Datastream.
Information of three moderating variables, environment CSR, social CSR and board gender diversity, is obtained from Asset4 database. In order include as much information of three moderating variables as possible, I utilize Asset4 database. Adding to this, the country-level control variables, GDP per capital, collected from WorldBank.
By matching the sample companies accessed from Asset4 database, the final dataset comprises 3090 firms from 61 countries ranges from 2007 to 2017. Moreover, I exclude financial sectors (SIC code from 6000 to 6999) to avoid regulation irregularities which may cause bias estimation. All the variables are winsorized at 1% at both tails to eliminate extreme outliers and the currency units in this paper all transfer to the United States Dollar
3.2 Variables
Main variables
According to Bausch and Krist (2007), the percentage of foreign sales to consolidated sales is the most often used measure of the degree of internationalization. The higher the percentage of foreign sales, the higher the degree of internationalization. Therefore,
for the independent variables, I follow Park et al. (2013) using the percentage of foreign sales to consolidated sales in order to measure the degree of internationalization.
The main dependent variable is corporate financial performance. This research adopts Tobin’s Q to measure it. Tobin’s Q is a widely known financial indicator, it can not only measure the market value of the firm but also can reflect the firms' future profitability potential (Lang and Stulz, 1994). I follow Jung et al. (2015) include Tobin’s Q ratio as the proxy of corporate financial performance and define Tobin’s Q as the market value of the firm, which equals the firm’s current market price times the common shares outstanding plus the total debt of firm and then divided by the book value of total assets. The calculation process is as the following equation:
!"#$%&' ) =+,-./0 1,23/ 45 06/ /73809:;40,2 </=0
=44. 1,23/ 45 040,2 ,>>/0> (1)
Moderating variables
I use the ESG pillar score from the ASSET 4 database as proxies for the environment dimension of CSR and social dimension of CSR respectively. The environmental score comprises three categories, the recourses use, emissions and innovations. The social pillar comprises four categories, the workforce, the human rights, the community, and the product responsibility. The pillar scores are calculated based on the category scores (Thomson Routers, 2019). The third moderator, board gender diversity, measured by the percentage of women directors on the board.
Control variables
First, according to substantial prior studies, size of firms can be an essential control variable in both CSR researches and board diversity researches. Larger companies are expected to have better resources and can reach bigger economic scale, and therefore perform better than small companies. (for example, Veltrop et al., 2015; Jung et al., 2016). I control the size effect and measure the size by the nature logarithm of the total assets of firms, as many prior studies do (i.e. Jung et al., 2006; Akpinar et al., 2008).
The R&D investment in firm-level should also be included as one of the control variables. As McWilliams and Sigel (2001), the R&D investment is positively correlated with CSR and attempts to partly explain the relationship between CSR and financial performance. Besides, the R&D investment is considered to be related to cash holding which has an impact on corporate financial performance as well (Pinkowitz et al., 2016). The rewards received by firms from the CSR activities are based on the stakeholder regarding the firm's corporate social responsibility is credible and continuing. Hence, the leverage level of the firm can be one of the key factors which influence the stakeholder's opinions for the firms' CSR commitment. A high level of leverage may reflect that firms do not have enough financial resources and financing ability to fulfill their commitment. Webb (2005) indicates that, under the agency problems, there may have a positive relationship between the level of leverage and the corporate social responsibility and it will accentuate the conflicts between the shareholders and bank loaners. In the country-level, follow many studies those who
research about the corporate financial performance (i.e., Terjesen et al., 2015), I control the GDP per capital since countries with higher GDP may develop better financial and provide a better environment for companies. Table 1 provide detail definitions for all of the variables.
Table 1: Variable definition
This table reports all the definitions of variables, including dependent variables, independent variables, moderating variables and control variables.
Variables: Definitions
Tobin’s Q The market value of firm plus total debt to total assets value of the firm
ROA Return on Assets
DOI Degree of internationalization, measured by
the percentage of foreign sales to total sales
ENVSCORE Pillar score of the environmental dimension
of CSR from ASSET 4 divided by 100
SOCSCORE Pillar score of the social dimension of CSR
from ASSET 4 divided by 100.
BGD The board gender diversity, defined by the
percentage of women directors on the board.
R&D All of expenses related to R&D investment
to total assets
Leverage level Total debt to total assets divided by 100
Size Nature logarithm of the total assets
lnGDPpercapital Nature logarithm of GDP per capital
3.3 Regression model
In order to test the first hypothesis in section 2, I adopt the equation (2) to investigate the main relationship which is the relationship between the degree of internationalization and corporate financial performance. The coefficient of DOI, ?@, presents this relationship. This regression control for R&D, Leverage, Size and GDP per capital. In order to overcome the endogeneity effect, the independent variable, DOI, and control variables all lag in one period. The subscript i and t indicate the firm and time index respectively. To further investigate the choice between fixed effect and random, I conduct the Hausman test. The Hausman test is used for testing which model is more suitable for regression analysis. The results of the Hausman test are reported in Table A.1 in the Appendix. Results for four equations (p<0.00) are all indicates that reject the null hypothesis. Hence, I adopt both firm and time fixed effect in all regression models.
!"#$%)8,0 = ?B+ ?@D%EFG%HE$"%HI$JHE$"%(LMD)8,0O@+ ?PQ&L8,0O@+
?STFUFGHVF8,0O@+ ?WX$JF8,0O@+ ?YI%ZL[\FG]H\$EHI8,0O@+ ^8,0 (2)
The main research question in this paper is about the moderating effect of the environmental CSR, social CSR and gender diversity. According to Baron and Kenny (1986), the interaction terms significant or not presents whether there have the
moderating effects. To test the remaining hypotheses, I build up three interaction terms and include them in the following equations respectively. The significant level of the interaction term and all of the coefficients of the ?S present if there have moderating effects on the relationship of degree of internationalization and corporate financial performance. These regressions also control for R&D, Leverage, Size and GDP per capital. In order to overcome the endogeneity effect, the independent variable, DOI, and control variables all lag in one period. The subscript i and t indicate the firm and time index respectively. Moreover, I adopt both firm and time fixed effect in this regression model.
!"#$%)8,0 = ?B+ ?@D%EFG%HE$"%HI$JHE$"%(LMD)8,0O@+ ?P_`aXbMQ_8,0O@+
?SD%EFG%HE$"%HI$JHE$"%8,0O@∗ _`aXbMQ_8,0O@+ ?WQ&L8,0O@+
?YTFUFGHVF8,0O@+ ?dX$JF8,0O@+ ?eI%ZL[\FG]H\$EHI8,0O@+ ^8,0 (3)
!"#$%)8,0 = ?B+ ?@D%EFG%HE$"%HI$JHE$"%(LMD)8,0O@+ ?PXMbXbMQ_8,0O@+
?SD%EFG%HE$"%HI$JHE$"%8,0O@∗ XMbXbMQ_8,0O@+ ?WQ&L8,0O@+
?YTFUFGHVF8,0O@+ ?dX$JF8,0O@+ ?eI%ZL[\FG]H\$EHI8,0O@+ ^8,0 (4)
!"#$%)8,0 = ?B+ ?@D%EFG%HE$"%HI$JHE$"%(LMD)8,0O@+ ?PZF%L$U8,0O@+
?SD%EFG%HE$"%HI$JHE$"%(LMD)8,0O@∗ ZF%L$U8,0O@+ ?WQ&L8,0O@+
?YTFUFGHVF8,0O@+ ?dX$JF8,0O@+ ?eI%ZL[\FG]H\$EHI8,0O@+ ^f,g (5)
4. Results
4.1 Descriptive statistics
Table 2 is the summary of the descriptive statistics of all of variables in this research.
To avoid extreme outliers, all dependent variables and independent variables are winsorized at 1% level of both tails. For the dependent variable, Tobin’s Q, ranges from 0.05 to 7.23. The mean value of the Tobin’s Q in this sample is 1.28 with a standard deviation of 1.26. For the dependent variables, the average value of DOI, which is the degree of internationalization, is 0.35 with a standard deviation of 0.34. The descriptive statistic of the pillar score of ENVSCORE and SOSSCORE are very close to each other.
The mean and median value of ENVSCORE and SOSSCORE are both around 0.51 and 0.55 respectively. The percentage of women directors on boards has a maximum value of 0.45 or 45% and mean value of 0.13 or 13%.
4.2 Correlation matrix
Table 3 reports the correlation relationships between the dependent variables and lagged independent variables and control variables. Most of the coefficients are under the threshold of 0.7 except the correlation between SOCSCORE and ENVSCORE.
However, the ENVSCORE and SOCSCORE both are moderator and exclusively included as an interaction term in the regression model to test whether there have
moderating effects. Therefore, there is no reason to concern about the multicollinearity problem of these two CSR pillar scores. According to the correlation matrix, the degree of internationalization (DOI) is negative related to Tobin’s Q. Furthermore, the CSR moderating variables are negatively related with the firm financial performance (Tobin’s Q), while the other moderating variable, board gender diversity, is positive correlated with the Tobin’s Q.
Table 2: Descriptive statistics
This table reports all of the variables included in the regression models. The Tobin’s Q measures the corporate financial performance, defined as the total market value of equity plus the total debt divided by the book value of total assets. The DOI measures the degree of firm’s internationalization level, defined as the foreign sales to total sales. The ENVSCORE and SOCSCORE are two pillar score for CSR and measure the environmental dimension of CSR and social dimension of CSR respectively. BGD means board gender diversity which measured by the percentage of women directors on the board. LEV represents firms’ leverage level and R&D represents the related R&D expenses to total assets. I measure the size by the nature logarithm of total assets and lnGDPpercapital is the nature logarithm of GDP per capital. Details about the definitions of all variables are available in Table 1.
Variables N Mean Median. Minimum Maximum Std. Dev.
ROA 33,229 0.06 0.06 -0.16 0.20 0.08
Tobin’s Q 31567 1.28 0.88 0.05 7.23 1.26
DOI 30526 0.35 0.28 0.00 1.00 0.34
ENVSCORE 22897 0.52 0.56 0.06 0.97 0.31
SOSSCORE 22897 0.51 0.55 0.02 0.97 0.30
BGD 22841 0.13 0.11 0.00 0.45 0.12
LEV 33920 0.25 0.23 0.00 0.85 0.19
R&D 28374 0.03 0.00 0.00 0.45 0.07
Size 34006 14.81 14.87 9.77 18.88 1.84
LnGDP per capital 34281 10.42 10.78 7.29 11.39 0.85
Table 3 Correlation matrix
This table presents the correlation between all of variables which included in regression models. The * denotes the statistically significant level at 0.05 level.
1 2 3 4 5 6 7 8 9
1.Tobin’s Q 1.00
2.DOI -0.0341* 1.0000
3.ENVSCORE -0.1294* 0.2609* 1.0000
4.SOSSCORE -0.0765* 0.2307* 0.8263* 1.0000
5.BGD 0.0556* 0.0462* 0.1623* 0.2219* 1.0000
6.Leverage level -0.3034* -0.0483* 0.0289* 0.0417* 0.0565* 1.0000
7.R&D 0.3520* 0.0179* -0.0461* -0.0716* -0.0026 -0.1757* 1.0000
8.Size -0.3657* 0.2098* 0.4675* 0.4155* 0.0782* 0.2679* -0.3722* 1.0000
9.lnGDPpercapital -0.0249* 0.1314* -0.0416* -0.0954* 0.1602* -0.0161* 0.1725* -0.0687* 1.0000
Table 4
DOI---CFP. This table reports the results of regression for hypothesis 1. The data comprise 20770 firm-year observations from 3033 firms over the period of 2007 to 2017. The dependent variable in this table is Tobin’s Q which measures the corporate financial performance. All independent variables and control variables are lagged in one period to mitigate multilinearity problem. All dependent, independent variables and control variables are winsorized at 1% level in both tails. I provide the clustered standard errors in brackets below the coefficients. Lastly, the ***, ** and * denotes the p<0.01, p<0.05 and p<0.1 respectively.
M1 M2
Constant 3.725*** 3.190***
(0.778) (0.809)
Control variables:
R&D -0.593 -1.300*
(0.682) (0.714)
Leverage -1.292*** -1.434***
(0.122) (0.119)
Size -0.0553 -0.0366
(0.0370) (0.0375)
lnGDP -0.101 -0.0666
(0.0744) (0.0769)
Independent variables
DOI -0.117*
(0.0647)
Firm FE Yes Yes
Year FE Yes Yes
Observations 22,858 20,770
Number of id 3090 3033
R-squared 0.100 0.102
Adj. R-squared 0.090 0.102
∆ Adj. R-squared 0.000 0.012
F-statistic 104.88*** 90.37***
4.3 Regression results
The main relationship between DOI and CFP
Table 4 displays the results for regressing the degree of internationalization on the corporate financial performance which is measured by Tobin’s Q based on equation (2).
The controlling variables and independent variables are successively adding to the regression analysis, from model 1 to model 2. The negative and significant coefficient of the lagged DOI reveals that the degree of internationalization has a negative impact on corporate financial performance. This is contrary to hypothesis 1. The negative and significant coefficient (p value < 0.01) of the leverage level indicated that leverage level has a negative relationship with firms’ corporate financial performance. This is in line with the prior studies about internationalization and financial performance (i.e.
Gedajlovic and Shapiro, 1998; Geringer et al., 2000). Besides, the other three control variables, R&D, size and GDP per capital all have negative but insignificant signs.
The moderating effect of environmental and social CSR activities
Table 5 presents the regression analysis for investing the moderating effect of CSR based on the equation (3) and (4). Panel A and panel B correspond to environment CSR and social CSR respectively. The positive and significant (p<0.1) coefficient (0.324) of the interaction term in panel A supporting the hypothesis 2a, which predicts that environment CSR activities have a positive impact on the relationship between the degree of internationalization and corporate financial performance. The explanatory
Table 5
This table reports the results for hypothesis 2a and 2b. The dependent variable in this table is Tobin’s Q which measures the corporate financial performance.Panel A and panel B show the regression results for investing moderating effects of environment CSR and social CSR respectively. The ENVSCORE and SOCSCORE are two pillar score of CSR divided by 100. All independent variables are lagged in one period to mitigate multilinearity problem. All dependent, independent variables and control variables are winsorized at 1% level in both tails. Besides, the interaction term takes mean center to avoid multilinearity problems as well. I provide the clustered standard errors in brackets below each coefficient. The detail definitions of variables are available in table 1. Lastly, the ***, ** and * denotes the p<0.01, p<0.05 and p<0.1 respectively.
Panel A Panel B
M1 M2 M3 M1 M2 M3
Constant 3.725*** 5.069*** 5.002*** Constant 3.725*** 5.129*** 5.089***
(0.778) (0.849) (0.850) (0.778) (0.846) (0.848)
Control variables Control variables
R&D -0.593 -0.139 -0.145 R&D -0.593 -0.142 -0.158
(0.682) (1.254) (1.231) (0.682) (1.250) (1.237)
Leverage -1.292*** -1.196*** -1.192*** Leverage -1.292*** -1.180*** -1.176***
(0.122) (0.134) (0.133) (0.122) (0.134) (0.133)
Size -0.0553 -0.141*** -0.140*** Size -0.0553 -0.145*** -0.145***
(0.0370) (0.0429) (0.0428) (0.0370) (0.0428) (0.0427)
lnGDP -0.101 -0.114 -0.102 lnGDP -0.101 -0.115 -0.105
(0.0744) (0.0823) (0.0817) (0.0744) (0.0818) (0.0817)
Independent variables Independent variables
DOI -0.105 -0.280** DOI -0.110 -0.280**
(0.0731) (0.1242) (0.0733) (0.109)
ENVSCORE 0.298*** 0.158* SOCSCORE 0.341*** 0.198**
(0.0651) (0.0870) (0.0611) (0.0888)
Moderators Moderators
DOIxENV 0.324* DOIxSOC 0.325**
(0.165) (0.162)
Firm FE Yes Yes Yes Firm FE Yes Yes Yes
Year FE Yes Yes Yes Year FE Yes Yes Yes
Observations 22,858 14,813 14,813 Observations 22,858 14,813 14,813 Number of id 3,090 2,645 2,645 Number of id 3,090 2,645 2,645
R-suqared 0.100 0.101 0.102 R-squared 0.100 0.102 0.103
Adj. R-
squared 0.090 0.100 0.101 Adj. R-
squared 0.090 0.101 0.102
∆ R-squared 0.000 0.010 0.001 ∆ R-squared 0.000 0.011 0.001 F-value 104.88*** 60.81*** 57.40*** F-value 104.88*** 60.01*** 56.60***
power increase around 0.1 after including the moderator variables and interaction term.
Compare model 3 to model 2 in panel A in the Table 5, the coefficient of DOI turns significant and the coefficient of ENVSCORE becomes relatively smaller.
Panel B in the Table 5 reports the results for the moderating effect of the social CSR.
The coefficient of the interaction term in panel B is very similar to that of interaction term reported in panel A. The positive and significant (p<0.05) coefficient (0.325) of the interaction term, DOIxSOC, support the hypothesis 2b which predicts the social activities has a positive impact on the relationship between the degree of internationalization and corporate financial performance. The explanatory power increase from 0.90 to 0.102 after including the interaction term.
In addition, the size has a negative and significant (p<0.01) coefficient after including the independent variables and moderating variables in both panels, suggesting that the firms with smaller size perform better than firms with bigger size. The negative and significant (p<0.01) coefficient of leverage level indicates that leverage level has a negative impact on corporate financial performance.
The moderating effect of board gender diversity
Looking the model 3 in the Table 6, there is a positive while insignificant coefficient on the interaction term of degree of internationalization and board gender diversity.
Therefore, it fails to provide further evidence to support hypothesis 3.
Table 6
This table reports results for hypothesis 3. The dependent variable in this table is Tobin’s Q which measures the corporate financial performance. The BGD is the board gender diversity which defines by the percentage of women directors on the board.
All independent variables are lagged in one period to mitigate multilinearity problem.
All dependent, independent variables and control variables are winsorized at 1% level in both tails. Besides, the interaction term takes mean center to avoid multilinearity problems as well. I provide the clustered standard errors in brackets below each coefficient. The detail definitions of variables are available in table 1. Lastly, the ***,
** and * denotes the p<0.01, p<0.05 and p<0.1 respectively.
M1 M2 M3
Constant 3.725*** 4.763*** 4.740***
(0.778) (0.843) (0.845)
Control variables
R&D -0.593 -0.0773 -0.0782
(0.682) (1.252) (1.251)
Leverage -1.292*** -1.194*** -1.1962***
(0.122) (0.135) (0.135)
size -0.0553 -0.132*** -0.132***
(0.0370) (0.0429) (0.0426)
lnGDP -0.101 -0.0866 -0.0821
(0.0744) (0.0819) (0.0816)
Independent variables
DOI -0.113 -0.143*
(0.0732) (0.0838)
BGD 0.164 -0.025
(0.131) (0.226)
DOIxBGD 0.270
(0.319)
Firm FE Yes Yes Yes
Year FE Yes Yes Yes
Observations 22,858 14,792 14,792
Number of id 3,090 2,643 2,643
R-squared 0.091 0.097 0.098
Adj. R-squared 0.090 0.096 0.097
∆ R-squared 0.000 0.005 0.001
F-value 104.88*** 59.25*** 55.61***
Moreover, the coefficient of DOI becomes significant from model 2 to model 3 in the Table 6. The coefficients of leverage level and size are very close with results in prior models. The R&D and GDP per capital does not have significant impact on the corporate financial performance (Tobin’s Q) through model 1 to model 3 in the Table 6.
In conclusion, according to above results of regression analysis, I accepted hypothesis 2a and 2b. Nevertheless, there is no convincing evidence to support hypothesis 3 which predicts that the board gender diversity has a positive impact on the relationship between internationalization and financial performance. Hence, I rejected hypothesis 3.
4.4 Robustness check
Alternative measure of corporate financial performance
Different from Tobin’s Q, ROA (return on assets) measures the history value of the firms based on the accounting basis and generally accepted as one of the key proxies of performance (Verbeke and Brugman, 2009). Many previous studies adopt ROA as another proxy of corporate financial performance as well. Hence, I repeat regressions based on the equation (3) to (5) while use return on assets as dependent variables as robustness check of this study.
As reporting on the Table B.1in the Appendix, the individual coefficients of environmental pillar score and social pillar score are remaining significant. While the moderating effects of environmental activities and social activities remain positive but not significant now. One of possible reasons is the difference between Tobin’s Q and return on assets. As mentioned before, Tobin’s Q can not only measure the market value of the firm but also can reflect the firms' future profitability potential and growth opportunities (Lang and Stulz, 1994). The CSR activities usually are considered to have long-term benefits on corporate financial performance. Hence, ROA may not reflect the financial benefits of CSR. Besides, the explanatory power drops to 0.062 from 0.101.
The coefficients of leverage become insignificant after adding independent variables and interaction terms in both two panels. Overall, one can infer that is including Tobin’s Q as dependent variables in this research may more appropriate than including ROA.
At the same time, the coefficient of the interaction term of degree of internationalization and board gender diversity turns negative and remains insignificant. There still have no sufficient evidence to support the moderating effect of board gender diversity on the relationship between internationalization and corporate financial performance.
Overall, there is no sufficient evidence to conclude that environmental CSR activities and social CSR activities have a moderating effect on the firms’ return on assets since the CSR activities have a long-term effect on corporate financial performance. These results of environment CSR and social CSR should read with caution.
Excluding data from the United States
As mentioned before, the sample dataset comes from 61 countries, while there have 36.66% of companies come from the United States. The proportion of firms come from the United States is much higher than firms come from other countries. Therefore, I exclude the data from the United States and repeat regression analysis based on the equation (3) to (5) to test if such high percentage of American companies will lead to bias on former results.
Table B.1 and table B.2 in the Appendix represent the results of regression after dropping companies from the United States. Both results for the environmental CSR and social CSR remain positive and significant. Coefficients of interaction terms in both panel A and panel B reported in Table B.1 in the Appendix do not have much difference compare to those coefficients reported in Table 5. The significant level of environmental CSR stays at 10% level and the significant level of social CSR drops from 5% level to 10%. The coefficient of the interaction term of board gender diversity and degree of internationalization still positive and insignificant. Besides, for the control variables, the coefficients for size at both two panels become insignificant. In contrast, the coefficients of GDP per capital become significant (p<0.01) through all of the eight models. One may argue is that the highest percentage of countries is the United States and most American companies have large size. Therefore, after dropping the data
from United States, there have some changes on the coefficients of the control variables while no much change on the interaction terms.
In conclusion, the regression results after excluding the sample companies from the United States do not have obvious change compare to that include American companies.
The high percentage of American firms has limited implication on the model of investigating the moderating effect of CSR activities and board gender diversity.
5. Discussion and Conclusion
The main purpose of this paper is to investigate if CSR activities and board gender diversity have moderating effects on the relationship between internationalization and financial performance. Based on the stakeholder theory and institution theory, and arguing some benefits of female directors can bring to multinational firms, I predict the positive moderating effects of CSR activities and board gender diversity on this relationship. More specifically, I investigate the environmental dimension of CSR activities and the social dimension of CSR activities respectively.
To further test the moderating effects, I first test if there has a significant relationship between internationalization and corporate financial performance and find that higher degree of internationalization will lead lower level of Tobin’s Q. This result contrary to the Hypothesis 1 and indicates that costs of internationalization outweigh benefits of
it in this sample. As argued in section 2, one of the possible reasons for the different results is the different measurements of dependent variables and independent variables (Hitt et al., 2006). Different ways in sample selection may also be one of the reasons.
Besides, there is still not a clear conclusion about the relationship between internationalization and financial performance. This result is still in line with some of the former studies, for example, Gedajlovic and Shapiro (1998); Geringer et al. (2000).
Furthermore, the main subject of this paper is the moderating effects of CSR and board gender diversity. Hence, this opposite result is acceptable and may not affect the following investigating.
The positive and significant coefficients of the interaction terms in table 4 support hypothesis 2. This result shows that multinational firms invest more in environmental CSR activities during their internationalization process can result in a higher level of Tobin’s Q. Similarly, the social dimension of CSR can also have a positive impact on the relationship between internationalization and corporate financial performance. The similar size of the coefficients of the interaction term for environment CSR and social CSR indicates that these two dimensions of CSR almost have the same size of positive effect on financial performance when firms are highly internationalization. Adding to this, I find stronger support for the moderating effect of social CSR since its higher significant level than that of environmental CSR. This implies that CSR activities may be an effective methodology for multinational firms to reduce the negative impact of the internationalization. Another argument is that increasing the percentage of board
gender diversity can help multinational firms to response higher demand of information-dealing process. Some of the feminine characteristics can complement the male characteristics and therefore help the board of directors make rational decisions.
However, this paper does not find that the board gender diversity has a significant moderating impact on the effect of internationalization on financial performance.
The robustness check confirms that the high percentage of American companies in the data sample will not cause bias on those conclusions. By excluding American companies and repeating the regression analysis based on equation (3) to (5) again, the results basically remain the same. However, when including the alternative measure of corporate financial performance on equations, ROA, the moderating effects of CSR turn insignificant. Hence, the results should read in caution.
Theoretical implication
First, this paper inspired by the work of June et al. (2016) and investigates the specific dimension of CSR. To my knowledge, although there are many studies that investigate the effect and internationalization on firms’ financial performance respectively, rather scant studies further research the moderating effects of CSR and board gender diversity.
The findings of this paper enrich and complement existing CSR and internationalization research. Furthermore, the findings of the positive moderating effect of CSR support the stakeholder theory that multinational firms engaging in more CSR activities can help firms to consider the interest of stakeholders and therefore gain benefits from it.
Secondly, the insignificant moderating effect of the board gender diversity in this paper provides one possible direction for future research. While many scholars have stated the benefits of increasing board gender diversity, the result remains ambiguous and still need further research to verify it.
Practical implication
The findings of this paper also provide practical implications. As the increasing trend of the global economy and the growing attention on CSR, managers of multinational firms and foreign subsidiaries should pay attention to the positive impact of CSR. The findings of this paper suggest that executives should consider engaging in CSR activities when their firms plan to expand to a new foreign market. The importance of CSR is not negligible. Besides, executives should recognize that there is no significant difference between engaging in social CSR and environment CSR. These findings provide further insights for the direction for executives when they engage in CSR. It is also worthy to notice that increasing board gender diversity is unlikely to boost corporate financial performance during the process of internationalization
Limitation and future research
As many empirical researches, this paper also has several limitations. First, this paper only can include 2645 companies when investigating the moderating effects due to the data availability of CSR rating scores and board gender diversity. Including more
companies and expand the sample may be helpful to get accurate conclusions. Like Lin et al. (2008), another limitation of this paper is that this paper does not control the potential industry impact that may affect variables. The different industry with its unique characteristic may show a different level of moderating effect of CSR and board gender diversity. Hence, future research can look into if different industries will show different moderating effects of CSR and board gender diversity. Adding to this, In the past several decades, researchers not only have different views on the relationship between internationalization and corporate performance but also have different views on the shape of this relationship. Future research can further investigate the moderating effects of CSR and board gender diversity on the relationship between internationalization and financial performance incorporating the shape of this relationship. Another interesting direction for future research is to investigate the exact causes of these moderating effect and what is the exact mediator behind this.
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Appendix
Table A.1 Hausman test
Hausman Test: H*: differences in coefficients not systematic
Equation (2) Chi2(5) =667.76 Prob>Chi2 =0.00
Equation (3) Chi2(16) =135.23 Prob>Chi2 =0.00
Equation (4) Chi2(16) =113.08 Prob>Chi2 =0.00
Equation (5) Chi2(16) =152.88 Prob>Chi2 =0.00
