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Country-level institutions, firm value, and the role of corporate social responsibility initiatives

Abstract

Drawing on transaction cost theories and the resource-based view of a firm, we posit that the value of corporate social responsibility (CSR) initiatives is greater in countries where an absence of market-supporting institutions increases transaction costs and limits access to resources. Using a large sample of 11,672 firm-year observations representing 2445 unique firms from 53 countries during 2003–2010 and controlling for firm-level unobservable heterogeneity, we find supportive evidence that CSR is more positively related to firm value in countries with weaker market institutions. We also provide evidence on the channels through which CSR initiatives reduce transaction costs. We find that CSR is associated with improved access to financing in countries with weaker equity and credit markets, greater investment and lower default risk in countries with more limited business freedom, and longer trade credit period and higher future sales growth in countries with weaker legal institutions. Our findings provide new insights on non-market mechanisms such as CSR through which firms can compensate for institutional voids.

Abstract

Prenant appui sur les théories des coûts de transaction et l'approche par les ressources d'une entreprise, nous postulons que la valeur des initiatives en matière de responsabilité sociale des entreprises (RSE) est plus élevée dans les pays où l'absence d'institutions de soutien au niveau du marché augmente les coûts de transaction et limite l'accès aux ressources. Utilisant un large échantillon de 11.672 observations entreprise-année représentant 2.445 entreprises uniques de 53 pays au cours de la période 2003-2010 et contrôlant l’hétérogénéité inobservable au niveau de la firme, nous trouvons des preuves que la RSE est plus positivement liée à la valeur des entreprises dans les pays à faibles institutions de marché. Nous fournissons également des données sur les canaux par lesquels les initiatives en matière de RSE réduisent les coûts de transaction. Nous constatons que la RSE est associée à un meilleur accès au financement dans les pays à faibles marchés d’actions et de crédit, à des investissements plus importants et à un risque de défaut plus faible dans les pays où la liberté d'entreprise est plus limitée, et à une période de crédit commercial plus longue et à une croissance des ventes futures plus élevée dans les pays avec des institutions juridiques plus faibles. Nos résultats fournissent de nouveaux éclairages sur les mécanismes non marchands, tels que la RSE, à travers lesquels les entreprises peuvent compenser les vides institutionnels.

Abstract

Partiendo de las teorías de costos de transacción y la teoría basada en recursos de la empresa, nosotros postulamos que el valor de las iniciativas de responsabilidad social empresarial (RSE) es mayor en países en donde la ausencia de instituciones de apoyo al mercado aumenta los costos de transacción y limita el acceso a recursos. Usando una amplia muestra de 11.672 observaciones empresa-año representando a 2445 empresas únicas de 53 países en el período 2003-2010 y controlando por heterogeneidad no observable a nivel de la empresa, encontramos evidencia para apoyar que la RSE está más relacionada positivamente al valor empresarial en países con instituciones de mercado más débiles. También damos evidencia sobre los canales mediante los cuales las iniciativas de RSE reducen los costos de transacción. Encontramos que la RSE está asociada con un mejor acceso a financiación en países con mercados de valores y de crédito más débiles, mayor inversión y un menor riesgo de incumplimiento en países con libertad empresarial más limitad, y el periodo de crédito comercial más extenso, y más crecimiento de ventas futuras en países con instituciones legales más débiles. Nuestros hallazgos dan nuevos entendimientos de los mecanismos de no mercado, como la RSE a través del cual las empresas pueden compensar los vacíos institucionales.

Abstract

Baseando-se em teorias de custos de transação e na visão baseada em recursos da firma, postulamos que o valor das iniciativas de responsabilidade social corporativa (CSR) é maior em países onde a ausência de instituições de apoio ao mercado aumenta os custos de transação e limita o acesso aos recursos. Usando uma grande amostra de 11.672 observações empresa-ano, representando 2445 empresas distintas de 53 países durante 2003-2010 e controlando a heterogeneidade não observável no âmbito da empresa, encontramos evidências confirmatórias que a CSR é mais positivamente relacionada com o valor da empresa em países com instituições de mercado mais fracas. Nós também fornecemos evidências sobre os canais através dos quais as iniciativas de CSR reduzem custos de transação. Nós concluímos que a CSR está associada com um melhor acesso a financiamento em países com mercados de ações e de crédito mais fracos, maior investimento e menor risco de solvência em países com liberdade comercial mais limitada, e período de crédito comercial mais longo e crescimento de vendas futuras superior em países com instituições legais mais fracas. Nossos resultados fornecem novas perspectivas sobre mecanismos não-mercadológicos tais como a CSR, através da qual as empresas podem compensar vazios institucionais.

Abstract

借鉴公司的交易成本理论和资源基础观, 我们假定企业社会责任 (CSR) 活动的价值在市场支持制度缺乏致使交易成本增加和资源使用受限的国家更大。使用2003-2010年期间来自53个国家代表2445家独特公司的11,672个公司年观察数据大样本, 并控制公司层面不可观察的异质性, 我们发现了在较弱市场制度的国家中CSR与公司价值观之间更加正相关的支持性证据。我们还提供了CSR活动减少交易成本渠道的证据。我们发现CSR与改善的融资渠道在股票和信贷市场较弱的国家相关: 在商务自由更有限的国家, 投资越大, 违约风险越低; 在法律机制更弱的国家, 贸易信贷期越长, 未来销售额增长越高。我们的发现对像CSR这样的非市场机制提供了新的见解, 通过它公司可以弥补制度孔隙。

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Figure 1

Notes

  1. While prior literature tends to associate institutional voids with emerging markets, the quality of developed markets’ institutions also varies (e.g., Khanna & Palepu, 2010).

  2. Our theoretical framework is consistent with Khanna, Palepu, and Bullock (2010), who argue that “a prospective emerging giant can build confidence and social capital in consumer, supplier and investor circles, contributing to its competitive advantage.” The authors offer a few examples of firms that have employed CSR to fill institutional voids. For instance, Zain – a telecom provider – introduced One Network in sub-Saharan Africa, which effectively eliminated roaming charges in this market. This strategy was specifically designed to make telecommunications accessible to poor customers. Zain also invested heavily in Africa, creating direct and indirect employment and quickly becoming the largest taxpayer in many countries in which it operated. The positive image of “partner in progress” smoothed Zain’s government relations and helped it become the world’s fastest growing telecom provider by 2008.

  3. Jones and Hill (1988) suggest bounded rationality, opportunism, uncertainty and complexity, a low number of trading relationships, information asymmetry, and asset specificity as six main factors leading to transaction difficulties.

  4. Other studies report no relation (McWilliams & Siegel, 2000) or a negative relation (Wright & Ferris, 1997). Recent meta-analyses (e.g., Margolis, Elfenbein, & Walsh, 2007; Orlitzky, Schmidt, & Rynes, 2003) note that this line of research generally finds a positive relation between CSR and corporate financial performance, particularly in recent years. However, the direction of causality remains largely unresolved.

  5. Corporations engage in socially responsible activities for a variety of reasons; some are strategic and others are altruistic (Baron, 2001; Hillman & Keim, 2001). Young and Makhija (2014) provide a thorough discussion and integration of CSR theories. While firms may invest in CSR for altruistic reasons in countries with strong institutions, the strategic value of CSR in reducing transaction costs in emerging economies suggests that the strategic value of CSR is greater in countries with weaker market-supporting institutions than in countries with stronger institutions.

  6. In the international business context, Strike, Gao, and Bansal (2006) examine whether international diversification is related to CSR. Husted and Allen (2006) assess the relation between multinational enterprises’ global or country-specific CSR and their international organizational strategy. Luo (2006) examines the relation between CSR and the political strategy of multinational enterprises. Christmann and Taylor (2006) find that a firm shapes its CSR strategy in response to customer preference, monitoring, and expected sanctions, and Waldman, Siegel, and Javidan (2006) show that country-specific cultural factors and CEO leadership characteristics are associated with the values that top management team members attach to CSR.

  7. We obtain qualitatively similar results when we use CSR ratings from Governance Metrics International as an alternative proxy for CSR.

  8. To ensure our results are not driven by a few countries, we re-run our regressions after excluding countries with fewer than 10 observations (15 countries) and fewer than 100 observations (35 countries). We further estimate weighted regressions where weights are given by the inverse of the number of observations per country. Untabulated results are consistent with those reported, suggesting that our results are not driven by heterogeneity in the number of observations across countries.

  9. All of our inferences are qualitatively similar when we examine the environmental performance and social performance scores separately.

  10. For example, Khanna, Palepu, and Sinha (2005) examine institutional voids in terms of political and social systems, openness to foreign investment, and quality of product, labor, and capital markets. Meyer et al. (2009) and Gubbi, Aulakh, Ray, Sarkar, and Chittoor (2010) focus on the areas of business freedom, trade freedom, property rights, investment freedom, and financial freedom. Chakrabarty (2009) captures institutional voids along two dimensions: financial credit availability and agency contracting.

  11. These databases have the advantage of consistently providing a time series of relevant institutional variables for a large number of countries.

  12. With respect to legal institutions, Gwartney, Hall, and Lawson (2014: 5) argue that “perhaps more than any other area, this area is essential for the efficient allocation of resources. Countries with major deficiencies in this area are unlikely to prosper regardless of their policies in the other four areas.”

  13. We also check potential reverse causality between CSR and firm value through the Granger causality test. Specifically, we regress TOBQ and CSR_P on lagged TOBQ, lagged CSR_P, the vector of other controls (SIZE, ROA, LEV, R&D/S, SGR, and LOG_GDP), as well as year and firm fixed effects. In an alternative specification, we add an additional lag of TOBQ and CSR_P. Untabulated results show that TOBQ does not Granger-cause CSR_P, suggesting that reverse causality is not a significant concern in our study.

  14. Servaes and Tamayo (2013) argue that mixed findings in the literature on the link between CSR and firm value are due in part to model misspecification arising from the omission of controls for time-invariant unobservable firm characteristics. A Hausman test rejects firm random effects in favor of firm fixed effects. The fixed effects design is a generalization of the difference-in-differences approach (Imai & Kim, 2014).

  15. If firm CSR policies are sticky, that is, change little over time, the relation between CSR and firm value is driven by cross-sectional rather than time series variation in CSR. Zhou (2001) shows that in such a case, firm fixed effects may absorb the effect of CSR on firm value, leaving CSR with no significant explanatory power in firm value regressions. In other words, we might fail to detect a relation between CSR and firm value even if one truly exists. To explore this issue, we calculate between (cross-sectional) and within (time-series) variation in CSR. For the between variation, we calculate the standard deviation of CSR by year across firms. The average of these standard deviations is 0.28. For the within variation, we calculate standard deviation of CSR by firm across years. The average of these standard deviations is 0.11. Although between variation in CSR is larger than within variation, there is still relatively enough within variation in CSR to detect the effect of CSR on firm value in the presence of firm fixed effects.

  16. We also estimate the model in equation (1) using an overall measure of the strength of market-supporting institutions, calculated by aggregating the stock market efficiency, credit market efficiency, the extent of business freedom, and legal system efficiency indices. The untabulated results are consistent with those in Table 3. That is, the coefficient on CSR is positive and statistically significant at the 1% level, and the coefficient on the interaction between CSR and the overall strength of market-supporting institutions is negative and statistically significant at the 1% level.

  17. We match with replacement. That is, a firm in the control group could be used as a match more than once.

  18. We also implement instrumental variables estimation using the industry-year average CSR score excluding the focal firm (El Ghoul et al., 2011; Kim, Li, & Li, 2014). The results, which are available in the online appendix, are qualitatively the same as those in Table 3.

  19. Our results are consistent with the economics-based profit-maximization view of CSR, coined as profit-maximizing ethics (Windsor, 2001) or strategic CSR (Baron, 2001) in the literature. That is, socially responsible actions can have a positive impact on a firm’s cash flows, which is in line with the instrumental stakeholder theory in Jones (1995).

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Acknowledgements

The authors thank two anonymous reviewers, Jonathan Doh (Editor), Nargess Kayhani, Tammy Madsen, Niki den Nieuwenboer, Carrie Pan, Sanjay Patnaik, and participants at the 2015 Harvard Business School (HBS)/Journal of International Business Studies workshop on “International Business Responses to Institutional Voids”, 2015 SSFII Social and Sustainable Finance and Impact Investing conference at the Said Business School, University of Oxford, 2015 FMA European Conference, and at the 2014 Academy of International Business Meeting for constructive comments. The authors appreciate the generous financial support of the Social Sciences and Humanities Research Council of Canada.

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Correspondence to Yongtae Kim.

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Accepted by Jonathan Doh, Guest Editor, 23 December 2015. This article has been with the authors for three revisions.

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Appendices

APPENDIX A

Table A1

Table A1 Variable definitions and data sources

APPENDIX B

Table B1

Table B1 Market-supporting institutions by country

APPENDIX C

APPENDIX C Economic Significance of Market-Supporting Institutions by Country

We clarify how we obtain the economic significance of the impact of CSR on firm value in Table 3. Recall that our regression is as follows:

To evaluate the marginal impact of CSR_P on TOBQ, we calculate the derivative of TOBQ with respect to CSR_P, which is given by:

We evaluate this derivative at the first quartile of Institution: α 1 +α 3 × Q1(Institution) and the third quartile of Institution: α 1 3 × Q3(Institution)

Then we obtain the effect of one-standard-deviation increase in CSR_P (0.29) on TOBQ evaluated at the first quartile of Institution: [α 1 3 × Q1(Institution)] × 0.29 and the third quartile of Institution: [α 1 3 × Q3(Institution)] × 0.29

Finally, the difference: ([α 1 3 × Q1(Institution)]-[α 1 3 × Q3(Institution)]) × 0.29 measures our economic significance of a one-standard-deviation increase in CSR_P (0.29) on TOBQ after an institutional change from the first to the third quartile.

Our calculations are summarized in the table below.

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Ghoul, S., Guedhami, O. & Kim, Y. Country-level institutions, firm value, and the role of corporate social responsibility initiatives. J Int Bus Stud 48, 360–385 (2017). https://doi.org/10.1057/jibs.2016.4

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Keywords

  • institutions and international business
  • institutional void
  • corporate social responsibility
  • transaction costs
  • firm value