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Firm Internationalization and Corporate Social Responsibility

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Abstract

Using a large sample of 3,040 U.S. firms and 16,606 firm-year observations over the 1991–2010 period, we find strong evidence that firm internationalization is positively related to the firm’s corporate social responsibility (CSR) rating. This finding persists when we use alternative estimation methods, samples, and proxies for internationalization and when we address endogeneity concerns. We also provide evidence that the positive relation between internationalization and CSR rating holds for a large sample of firms from 44 countries. Finally, we offer novel evidence that firms with extensive foreign subsidiaries in countries with well-functioning political and legal institutions have better CSR ratings. Our findings shed light on the role of internationalization in influencing multinational firms’ CSR activities in the U.S. and around the world.

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Notes

  1. See Kang (2013) and the references therein. In addition, Waddock (2003, p. 369) notes that the use of KLD data in measuring CSR activity is “the de facto research standard at the moment”.

  2. Thus, weakness on one dimension may be offset by strength in another dimension (Janney and Gove 2011).

  3. Research that investigates the extent to which firms locate their business activities in countries or regions with lax corporate social standards, and in particular environmental standards, finds support for the pollution haven hypothesis, suggesting that firms tend to transfer their “dirty operations to countries with weak environmental regulation” (Dam and Scholtens 2008, p. 55).

  4. A higher degree of internationalization exposes the firm to a proportionally wider range of demands/constraints stemming from a diversified pool of stakeholders that includes foreign customers (interested in products and services’ characteristics), governments and regulators (via taxation and regulatory compliance), foreign suppliers, employees (concerned about work ethics, work conditions, recognition and retention), environmentalists, communities, etc.

  5. Consistent with lower perceived risk, El Ghoul et al. (2011) and Attig et al. (2013b) find, respectively, that high CSR firms enjoy lower financing costs and improved credit ratings. CSR can also reduce the risk of costly sanctions by stakeholders.

  6. Using survey data from 172 ISO-certified firms in China, Christmann and Taylor (2001) show that the implementation of environmental standards by foreign firms depends not only on the degree of internationalization, but also on customer monitoring and sanctions (e.g., termination of the relationship).

  7. Psychic distance refers to the uncertainty associated with factors such as “differences in language, culture, political systems, level of education, or level of industrial development” that adversely affect the flow of information between a firm and the market (Johanson and Vahlne 1977, p. 24).

  8. As Kim et al. (2012, p. 784) state, “a firm with five strengths and five concerns is surely different from a firm with one strength and one concern”.

  9. An advantage of the U.S. setting relative to the international setting is the availability of sophisticated measures of international diversification such as the Herfindahl and entropy indexes. Using these variables as alternatives to our primary measure of firm internationalization, the foreign sales ratio, allows us to verify the robustness of our finding on the link between CSR and internationalization. Notwithstanding, we complement our results based on a U.S. sample with the first multinational evidence on the relation between international diversification and CSR using a large panel of non-U.S. firms from 43 different countries. Using non-U.S. firms thus provides out-of-sample evidence on the impact of international diversification on CSR around the world.

  10. Similar to Kim et al. (2014) and Krüger (2014), among others, we view corporate governance as a different construct than CSR. For instance, a well-governed firm could have a bad CSR record by maximizing shareholders’ wealth at the expense of its stakeholders (e.g., employees, environment, community) in the sense of Friedman (1970). Nonetheless, in unreported tests we find similar results irrespective of whether corporate governance is included in or excluded from our CSR score.

  11. To assess the impact of the increased sample coverage, we identify 20 firms that were in the sample for the entire period. In untabulated results, we find that the CSR score for these firms did not change dramatically after 2003. Indeed, the average CSR_S went from 1.7 in 2003 to 1.6 in 2003 and steadily increased thereafter.

  12. The Herfindahl index equals one and the entropy index equals zero for purely domestic (i.e., single-segment) firms.

  13. This ratio is set to zero when research and development expenses are missing. In a robustness test, we find that excluding firms with missing research and development expenses does not affect our core inferences.

  14. This ratio is set to zero when advertising expenses are missing. Our main results are robust to excluding firms with missing information on advertising expenses.

  15. From Model 2 in Table 3, we obtain (∂CSR_S)/∂(FS/S) = −3.567 + 0.626 × SIZE. Therefore, the marginal impact of internationalization on CSR is increasing with firm size. Nonetheless, this expression also suggests that the marginal impact of internationalization on CSR is negative for some firms. The size threshold below which this is the case is 3.567/0.626 ≈ 5.7, which is lower than the first quartile (5.89 from Table 2). To be more precise, 5.7 corresponds to the 22nd percentile of SIZE. As such, for firms in the bottom 22 % (top 78 %) of the distribution of SIZE, the marginal impact of internationalization on CSR is negative (positive). We thank an anonymous reviewer for this insight.

  16. We report descriptive statistics for the alternative CSR proxies in Appendix 3.

  17. In this paper we employ the log of sales as our proxy for firm size. Other commonly used proxies for firm size include the log of assets and the log of market capitalization. We find that the three proxies are highly correlated (for instance, the correlation between the log of assets and the log of sales is 0.9). When we replace the log of sales with the log of assets or the log of market capitalization in our baseline model, we find that our evidence is not sensitive to the choice of proxy for size.

  18. We also isolate the financial crisis period (i.e., 2007–2008). Interestingly, we continue to find that internationalization exhibits a positive relationship with CSR over this period.

  19. We consider a balanced sample of 3,984 observations over the 2003–2010 period and find that the coefficient on FS/S is positive and significant.

  20. Note that CSR_A4 has a different scale compared to CSR_S, the dependent variable used in Table 3. In particular, CSR_A4 has a mean of 55.44 and ranges from 6.65 to 97.85, while CSR_S has a mean of −0.17 and ranges from −9 to 15. This explains why the coefficient on FS/S is higher in Table 6, where the dependent variable is CSR_A4, than in Table 3, where the dependent variable is CSR_S.

  21. Alternatively, we also isolate observations with positive CSR_S and negative CSR_S. In unreported regressions on these subsamples, we find that FS/S loads positively only in the subsample with positive CSR_S.

  22. One could expand on the pollution haven hypothesis (e.g., Dam and Scholtens 2008) to provide an interpretation of the negative link between internationalization and Human Rights score: firms may locate subsidiaries in countries or regions with lax standards on Human Rights. Providing direct evidence on this conjecture is beyond the scope of the current study.

  23. Weights are equal to the number of subsidiaries in each country. Data on subsidiaries come from Dyreng and Lindsey (2009).

  24. We also decompose the overall CSR score into strengths (CSR_STR_S) and concerns (CSR_CON_S) and re-run the regressions of Table 9. In unreported results, we find that the weighted average institutional ratings of countries in which the firm discloses subsidiaries are all significantly negatively related to CSR_CON_S. However, the weighted average of two institutional ratings out of seven is significantly positively related to CSR_STR_S. This suggests there is stronger evidence that international diversification to countries with better institutional environments is associated with fewer CSR concerns.

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Acknowledgments

We thank Sabri Boubaker, Ruiyuan Chen, Walid Saffar, Helen Wang, and especially Gary Monroe (Section Editor) and two anonymous referees for constructive comments. We appreciate the generous financial support from Canada’s Social Sciences and Humanities Research Council.

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Authors and Affiliations

  1. Saint Mary’s University, Halifax, NS, B3H 3C3, Canada

    Najah Attig

  2. American University of Sharjah, Sharjah, United Arab Emirates

    Narjess Boubakri

  3. University of Alberta, Edmonton, AB, T6C 4G9, Canada

    Sadok El Ghoul

  4. University of South Carolina, Columbia, SC, 29208, USA

    Omrane Guedhami

Authors
  1. Najah Attig
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Corresponding author

Correspondence to Sadok El Ghoul.

Appendices

Appendix 1

See Table 10.

Table 10 Qualitative issue area definitions
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Definitions of the Qualitative Issue Area Scores and the Overall CSR Score

CSR_COM_S = (Charitable Giving + Innovative Giving + Non-U.S. Charitable Giving + Support for Housing + Support for Education + Indigenous Peoples Relations + Volunteer Programs + Other Strength) − (Investment Controversies + Negative Economic Impact + Indigenous Peoples Relations + Tax Disputes + Other Concern).

CSR_DIV_S = (CEO + Promotion + Board of Directors + Work/Life Benefits + Women & Minority Contracting + Employment of the Disabled + Gay & Lesbian Policies + Other Strength) − (Controversies + Non-Representation + Other Concern).

CSR_EMP_S = (Union Relations + No-Layoff Policy + Cash Profit Sharing + Employee Involvement + Retirement Benefits Strength + Health and Safety Strength + Other Strength) − (Union Relations + Health and Safety Concern + Workforce Reductions + Retirement Benefits Concern + Other Concern).

CSR_ENV_S = (Beneficial Products and Services + Pollution Prevention + Recycling + Clean Energy + Communications + Property, Plant, and Equipment + Other Strength) − (Hazardous Waste + Regulatory Problems + Ozone Depleting Chemicals + Substantial Emissions + Agricultural Chemicals + Climate Change + Other Concern).

CSR_HUM_S = (Positive Record in South Africa + Indigenous Peoples Relations Strength + Labor Rights Strength + Other Strength) − (South Africa + Northern Ireland + Burma Concern + Mexico + Labor Rights Concern + Indigenous Peoples Relations Concern + Other Concern).

CSR_PRO_S = (Quality + R&D/Innovation + Benefits to Economically Disadvantaged + Other Strength) − (Product Safety + Marketing/Contracting Concern + Antitrust + Other Concern).

CSR_S = CSR_COM_S + CSR_DIV_S + CSR_EMP_S + CSR_ENV_S + CSR_HUM_S + CSR_PRO_S.

Appendix 2

See Table 11.

Table 11 Variable definitions and data sources
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Appendix 3

See Table 12.

Table 12 Descriptive statistics for the alternative CSR measures obtained from ASSET4 and GMI ratings
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Appendix 4

See Table 13.

Table 13 Country effects based on Panel B of Table 6
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Attig, N., Boubakri, N., El Ghoul, S. et al. Firm Internationalization and Corporate Social Responsibility. J Bus Ethics 134, 171–197 (2016). https://doi.org/10.1007/s10551-014-2410-6

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