corporate social responsibility and its effect on organizational

1

CORPORATE SOCIAL RESPONSIBILITY AND ITS EFFECT ON

ORGANIZATIONAL INNOVATION AND FIRM PERFORMANCE: AN EMPIRICAL

RESEARCH IN SMES

Isabel Martinez Conesa

University of Murcia, Spain

Department of Accounting, Faculty of Economics and Business

Pedro Soto-Acosta


Department of Management & Finance, Faculty of Economics and Business

Mercedes Palacios Manzano


Department of Accounting, Faculty of Economics and Business

Manuel Larrán Jorge

University of Cadiz, Spain

Department of Economics and Accountancy, Faculty of Economics and Business

Área temática : H) Responsabilidad Social Corporativa

Key words : Corporate Social Responsibility, firm performance, organizational

innovation, SMEs

142h

2

CORPORATE SOCIAL RESPONSIBILITY AND ITS EFFECT ON ORGANIZATIONAL

INNOVATION AND FIRM PERFORMANCE: AN EMPIRICAL RESEA RCH IN SMES

Abstract

Literature on Corporate Social Responsibility (CSR) has increased substantially over the past decade, but existing research usually focus on a single dimension of CSR. This paper extends previous studies on CSR by measuring different dimensions of CSR in a single integrative construct. In addition, although the link between CSR and business value have been investigated, a significant research gap remains when considering the relationship between CSR and innovation. That is, there is little work on whether and how CSR can support organizational innovation. To cover the above mentioned gaps in the literature, this paper focuses on the measurement of four main dimensions of CSR and, then, assesses its relationship with organizational innovation and firm performance in a single integrative model by using structural equation modelling on a data set of 552 Spanish firms. Results show that CRS is positively associated with organizational innovation and firm performance and that organizational innovation mediates the relationship between CSR on firm performance. These findings indicate that CSR is an important driver for firm performance mainly by enhancing organizational innovation.

3

1. INTRODUCTION There has been increased consensus that corporate social responsibility (CSR) is significant for the sustainable development of companies. A considerable stream of scholarly research has emerged in the literature suggesting that corporate social responsibility orientation is the key to stimulating long-term stability, growth and sustainable performance in a dynamic and changing environment (Luo and Homburg, 2007; Gyves and O’Higgins, 2008; Prado-Lorenzo et al., 2008). Companies became aware of the utility of good innovation management that can allow then strengthening their position in their market. By being innovative, business would be more suitable to meet the needs of new competitiveness. Having recognized the benefits of innovation for the business, it seems the innovation approach can be associated with that of corporate social responsibility. From a policy perspective, governments often support socially responsible behaviour through various policy instruments and subsidies with the intention of increasing international competitiveness and simultaneously supporting sustainable development (Porter, 1991; Porter and Van der Linde, 1995). This policy perspective is complemented by a firm perspective, in which scholars stress the need for a new mindset for corporate sustainability to stimulate innovation...” (Grayson, 2008). After large enterprises, SMEs became more aware of the impact their activities could have on sustainable development (CIDD, 2006; Spence et al., 2007). The paper analyzes the relationship between CSR and innovation from a firm strategic perspective. Despite all theoretical contributions (Perrine, 2012), no empirical test or cluster analyses describe the direct effect of CSR strategies on innovation in SMEs. With this research we attempt to address one of the main weaknesses of extant European CSR research and respond to the demand for a better theoretical and empirical understanding of the relationship between CSR and innovation. We adopt this perspective and attempt to address the research gap pertaining to the complex relationship between innovation and CSR. In this paper we also explore if CRS has a direct effect on financial performance. Literature has tried to identify an effect of CRS on financial performance but produced contradictory results (Orlizky et al, 2003). The relationship represents the most questioned area of CSR because the mechanisms through which financial performance is enhanced by CSR is not well understood (Jawahar and McLoughlin, 2001; Doh et al, 2009). This lack of consensus might reflect model specification problems, such as omissions of intangible resources. The relationship between CSR and firm performance can be an artefact of not controlling for the effect of R&D on CSR (McWilliams and Siegel, 2000). In this sense, Surroca et al. (2010) also demonstrate that intangible resources, including innovation, might be a missing link to explain relationships between CSR and financial performance. The literature review suggests there remains a lack of understanding about how CSR initiatives can be based on innovation processes by improving the performance of SMEs. Accordingly, the paper explores if CRS has a mediating effect on performance

4

through an increase on innovation capacity. The purpose of this contribution is to better understand the links that might exist between innovation and CSR practices in the context of SMEs and highlight the added value that can benefit business interaction. This paper contributes to the literature in a number of ways and differs from prior research on CSR in several aspects. Firstly, it has been noted that research on CSR in SMEs is quite scant and little is known empirically about the level of social responsibility in small firms. This research pays specific attention to the SME sector, thus contributes to the limited body of work in this area. Secondly, the objective of European Commission’s Response project (EC, 2007) is to persuade SMEs to implement corporate social responsibility in the enterprise through the use of innovation activities. SMEs are different in nature to large firms which may impact on the implementation of CSR. The relevant extant literature on the knowledge gap that exists in the CSR-SME relationship is still far from constructing a consolidated and generally accepted model to investigate such relationships as well as providing a responsible perspective on the management of SMEs (Russo and Perrini, 2010).

The remainder of the paper is organized as follows: section 2 contains our analytical framework related to CSR practices and their potential link with innovation and performance. Empirical evidence and research hypotheses are analyzed. Section 3 describes the research method (data collection and sample), and the variables and models to test the hypothesis are described. In section 4, the results of the empirical analysis are given. Section 5 summarizes the main findings and consequences and presents the conclusions.

2. LITERATURE REVIEW AND HYPOTHESIS It has been rather difficult to construct a truly representative measure of CSR due to the complexity of the theoretical construct itself and because measurements of a single dimension provide a rather limited perspective with regards to the firm’s performance in the relevant social and environmental domains (Wolfe, 2003). Prior studies have devised a wide variety of CSR measures (Waddock and Graves, 1997). Such measures include forced-choice survey instruments (Aupperle, 1991; Aupperle et al., 1985), the Fortune reputational and social responsibility index or Moskowitz' reputational scales (Bowman and Haire, 1975; McGuire et al., 1988; Preston O'Bannon, 1997), content analysis of corporate documents (Wolfe, 2003), behavioural and perceptual measures and case study methodologies (Clarkson, 1995). In recent years, corporate social responsibility data provided by KLD have been used broadly and in fact, have contributed greatly towards the high proliferation of CSR-related studies (Margolis et al., 2007). Increasingly, studies explore the link between innovation and CSR (CST, 2001; MacGregor et al., 2007) highlight the dual direction that innovation and corporate social responsibility can take. Two trajectories have thus been put forward (Perrine, 2012). First, in some firms a CSR, innovation trajectory, has been found which is explained by the fact that enterprises are driven primarily by values. These firms take into account the significant impact of their activities on the environment and the community. This does not mean, however, these companies lose sight of profit. On the other hand, the innovation

5

CSR trajectory is present in enterprises conducted mainly by the creation of value. It appears the relationship between CSR and innovation is most marked in enterprises where CSR is an integral part of the company`s strategy (Mendibil et al. 2007).

Some authors try to identify the type of CSR strategy that best favours innovation (Sharma and Vredenburg, 1998; Perrine, 2012). Using supply and demand theory as a framework, McWilliams and Siegel (2000) show that the adoption of environmental practices, going beyond legal requirements, may promote investments in research and development, which in turn can produce both process and product innovations. By using a case study methodology, MacGregor and Fontrodona (2008) analyze the CSR-innovation relationship for companies from Spain, Italy and the UK. They attempt to study this relationship in both directions, that is, whether CSR influences innovation and vice versa. Their findings underscore that CSR-driven innovation is aimed at products and services that have some sort of social purpose, while innovation-driven CSR may be more aligned with creating social processes and is driven by value. Therefore, we extend these studies to CSR to analyse if strategic CSR has a positive effect on its propensity to innovate. Thus, we hypothesis:

H1: There is a positive relationship between CSR an d organizational

innovation

The impact of CSR on economic performance has received considerable attention in the literature over the past three decades. There is generally expected to be a positive relationship between CSR and financial performance according to both stakeholder theory and agency theory. The instrumental stakeholder theory (Donaldson and Preston, 1995) argues that good management implies positive relationships with key stakeholders, which, in turn, improve financial performance (Freeman, 1984; Waddock and Graves, 1997). The basic assumption behind this theory is that CSR may be an organizational device that leads to more effective use of resources (Orlitzky et al., 2003), which then has a positive impact on corporate financial performance (CFP).

However, no consensus has emerged so far. Social responsibility rather seems to have an ambiguous and complex impact on firm performance though no true causality has been proved yet. While a lot of research points in favor of a mild positive relationship (Aupperle et al., 1985; McGuire et al., 1988; Orlizky et al, 2003) this connection has not been fully established (Neville et al, 2005; Prado-Lorenzo et al, 2008; Park and Lee, 2009) and the mechanisms through which financial performance is enhanced by CSR is not well understood (Jawahar and McLaughlin, 2001; Mill, 2006). Qu (2009) argues that lack of coherence between the earlier and recent studies may be attributed to the fact that “business environments are in a state of flux and the current business environments are becoming more favourable towards businesses that place an emphasis on CSR”. The debate surrounding the financial impact of CSR continues (Prado-Lorenzo et al, 2008; Park and Lee, 2009). While it is clear that irresponsibility negatively impacts financial performance (Thorne et al, 1993; Davidson and Worrell, 1990), the financial impact of responsible behaviour remains unclear.

6

There have been few studies investigating the relationship between CSR and financial performance in SMEs. Wilson (1980) conducted a study consisting of in-depth interviews with 180 owner/managers of SMEs. A key finding was that the majority of respondents stated that social responsibility was necessary for the sake of profits, as it lead to an enhanced reputation and repeat business. Bessera and Miller (2001) also found a significant segment of small business managers believe in the tenet of the enlightened self interest model of business social responsibility, that is, that doing good is good business. Similar questions were used in a survey conducted by TNS Gallup (2005) which found that 36% of SMEs believe CSR has a positive impact on their financial performance while only 4% feel it has a negative impact. In Spain, a case study of four SMEs conducted by Murillo and Lozano (2006) found that all companies without exception and with great conviction defend a strong positive correlation between CSR and financial performance. Thus, we hypothesis:

H2: There is a positive relationship between CSR an d firm performance

Regarding the link between CSR and innovation, Devinney et al. (2008) considers it as an additional area within the relationship between CSR and corporate performance, which has been widely studied in the previous literature (e.g. Ingram and Frazier, 1980; Aupperle et al., 1985; Waddock and Graves, 1997; Preston and O’Bannon, 1997) without a global consensus having been reached. This lack of concurrence may be due to the existence of many variables that influence corporate performance, making it difficult to determine the impact of CSR practices effectively. As Surroca et al. (2010) demonstrate that intangible resources, including innovation, might be a missing link to explain relationships between CSR and financial performance. Despite recognition of the importance of CSR, Lockett et al. (2006) affirm that we remain in a “continuing state of emergence” as far as theoretical approaches and methods are concerned.

Innovation heralds the introduction of new products and processes that, if embraced by the market, will enhance firm’s performance. As firms work to recognize, manage, and reduce environmental impacts, they potentially reap competitive advantages (Hart, 1995; Porter and Van der Linde, 1995; Russo and Fouts, 1997), captured in the form of enhanced innovation. Nidumolu et al. (2009) even state explicitly that CSR and sustainability are ‘‘key drivers for innovation”. Other frameworks, such as those based on the RBV of the firm (Hart, 1995), take into account the multi-dimensional character of CSR. For example, Wagner (2010) uses panel data to test empirically the relationship between corporate social performance measured by the Kinder Lydenberg Domini Inc.1 index and innovation. That study reveals that CSR, conceptualized as a multi-dimensional appraisal of a firm’s responsible performance, leads to innovation and strong social benefits. Using a two-step estimation that corrects for endogeneity, Surroca et al. (2010) demonstrate that intangible resources (including innovation) mediate the bi-directional relationship between CSR and firms’ financial performance. This ‘‘virtuous circle’’ appears stronger in growth industries than in non-growth industries. Using a dynamic panel data model to control for unobservable heterogeneity, Gallego-Alvarez et al.

7

(2011) also analyze this bidirectional relationship but rely on the RBV and suggest a negative effect of CSR on innovation. In particular, we predict that CRS has a mediating effect on performance through an increase on innovation capacity.

H3: Organizational innovation mediates the relation ship between CRS and

firm performance

The set of relations is illustrated in Figure 1.

Figure 1. Research model

Corporate Social

Responsibility (CRS)

Org. InnovationFirm

Performance

H1(+)a

H2(+)b

c’

H3: Organizational innovat ion mediates the relationship between CRS and firm performance

3. RESEARCH METHODOLOGY 3.1 DATA COLLECTION AND SAMPLE

The target population of our study are SMEs from the Region of Murcia (Spain). Currently, SMEs represent around 99% of the total number in the country. Data collection was conducted following two phases. First, a pilot study was performed and, following that, a questionnaire was conducted. Five SMEs were randomly selected from a database to perform the pilot study. Based on these responses and subsequent interviews with participants in the pretest, minor modifications were made to the questionnaire for the next phase of data collection. Responses from these five pilot-study firms were not included in the final sample.

To ensure a minimum firm complexity in which corporate social responsibility practices may be relevant, only firms with more than 20 employees were considered for the questionnaire phase. Thus, the population considered consisted of all Spanish enterprises, with more than 20 employees, located in the southeast of the country which have their primary business activity in one of the following business activities: manufacturing, commercial, services and construction (see Table 1). A total of 2,558 were identified and contacted for participation. The survey was administered to the CEO of the companies via personal interview and the unit of analysis for this study was the

8

company. In total, 550 valid questionnaires were obtained, yielding a response rate of 21.50 percent. The dataset was examined for potential bias in terms of non-response by comparing the characteristics of early and late participants in the sample. These comparisons did not reveal significant differences in terms of general characteristics and model variables, suggesting that non-response did not cause any survey bias.

Table 1. Profi le of respondents (N= 550)

Profile of respondents Percentage

Industry

Manufacturing 32.10%

Commercial 25%

Services 19.40%

Construction 23.60%

Number of employees

10-49 71.81%

50-249 28.18%

3.2 MEASURES

Measurement items were introduced on the basis of a careful literature review. Constructs and associated indicators in the measurement model are listed in the Appendix and discussed below. To facilitate cumulative research, operationalizations tested by previous studies were used. Variables were operationalized as multi-item constructs. Items included CSR practices with four stakeholders (suppliers, customers, employees and the local community) and environmental responsibility. These constructs were adapted from Hamman et al. (2009) and Lindgreen et al. (2009). Organizational Innovation was measured following items in previous studies (Bocquet et al., 2012; Lee and Choi, 2003; Manu, 1992) and represents new technological knowledge and ideas in new products and processes. Firm performance was operationalized using items in previous research (Aragón-Correa et al., 2008; Judge and Douglas, 1998; Quinn and Rohrbaugh, 1983) through which respondents rated their organization’s performance relative to others in the industry. Perceptual measures of financial performance has been previously used in the literature analyzing SMEs because objective data on the financial performance of these firms are rarely available, largely because the owners are not legally required to publish these data (Lubatkin et al., 2006). In addition, this approach was followed because it is generally assumed that CEOs are knowledgeable informants, particularly with regard to their firms’ performance. Moreover, evidence suggests that CEO self-reports of performance significantly correlate with objective measures of firm performance (Chang

9

and Hughes, 2012; He and Wong, 2004). The formulation and criteria for answering the questionnaire is defined in the Appendix. 3.3 COMMON METHOD VARIANCE MEASURES

We used Structural Equation Modelling (SEM) for measurement validation and testing the structural model. SEM is particularly useful for testing complex models and when researchers need to incorporate latent variables. More specifically, we opted to use SEM based on Partial Least Squares (PLS) approach because the variance-based PLS method is preferable to the covariance-based for exploratory or early-stage theory testing models (Barroso et al., 2010; Petter et al., 2007). Since we collected both independent and dependent variables simultaneously from the same respondents, common method variance could be a concern in this study. The extent of common method bias was assessed by using four different methods. First, the Harman’s one-factor test was used by entering all the indicators into a principal components factor analysis (Podsakoff and Organ 1986). Evidence for common method bias exists when a general factor accounts for the majority of the covariance among all factors. With all indicators entered, 9 factors were extracted. The variance explained ranged from 9.50% to 5.17%), indicating no substantial common method bias. Second, a partial correlation method was used (Podsakoff and Organ 1986). The highest factor from the principal component factor analysis was added to the Partial Least Square (PLS) model as a control variable on all dependent variables. According to Podsakoff and Organ, this factor is assumed to “contain the best approximation of the common method variance if is a general factor on which all variables load” (Podsakoff and Organ 1986: 536). This factor did not produce a significant change in variance explained in any of the three dependent variables, again suggesting no substantial common method bias. Third, we used Lindell and Whitney’s (2001) method, which employs a theoretically unrelated construct (marker variable) to adjust the correlations among the principal constructs. E-business use was used as the marker variable (Soto-Acosta and Meroño-Cerdan, 2008). Any high correlation among any of the items of the study’s principal constructs and E-business use would be an indication of common method bias, as e-business use is weakly related to the study’s principal constructs. Since the average correlation among diversity and the principal constructs was r=0.09, this test showed no evidence of common method bias. Fourth, the correlation matrix (table 2) did not indicate any highly correlated variables, while evidence of common method bias usually results in extremely high correlations (r>0.90) (Bagozzi et al. 1991). In summary, these tests suggest that common method bias is not a serious threat in our study. Table 2 also provides an overview of the means, standard deviations and correlations of the constructs.

10

Table 2. Descriptives statisticts and discriminant validity

Constructs Av. SD Correlation matrix

(1) (2) (3) (4) (5) (6) (7) (8) (9) 1. CSR employees 3.90 0.77 0.78

2. CSR customers 4.41 0.58 0.41*** 0.78

3. CSR suppliers 3.16 0.88 0.25*** 0.30*** 0.80

4. CSR local community

2.96 1.01 0.33*** 0.13*** 0.19*** 0.77

5. Environmental Resposibility

3.34 0.99 0.26*** 0.26*** 0.21*** 0.33*** 0.75

6. Organ. Innovat. 3.17 0.94 0.32*** 0.21*** 0.13*** 0.31*** 0.39*** 0.82

7. Firm Perf. 1 3.10 0.88 0.24*** 0.18*** 0.07* 0.19*** 0.15*** 0.33*** 0.96

8. Firm Perf. 2 3.91 0.83 0.35*** 0.31*** 0.19*** 0.15*** 0.34*** 0.30*** 0.22*** 0.88

9. Firm Perf. 3 3.63 0.85 0.40*** 0.32*** 0.21*** 0.17*** 0.33** 0.25*** 0.22*** 0.54*** 0.85

Significance levels: p<0.10*;p<0.05**; p<0.01***; Diagonal values in bold represent the square root of the AVE.

3.4 INSTRUMENT VALIDATION The measures from the dataset were refined by assessing their unidimensionality and reliability. First, an initial exploration of unidimensionality was made using principal component factor analyses. In each analysis, eigenvalues were greater than 1, lending preliminary support to a claim of unidimensionality in the constructs. Next, the reliability and validity of the measurement model were verified (Barclay et al. 1995). Convergent validity of the scales is contingent on the fulfillment of three criteria (Fornell and Larker 1981; Hair et al. 1998): (1) all indicator loadings should exceed 0.65 (2) Composite Reliabilities (CR) should exceed 0.8; and (3) the average variance extracted (AVE) for each construct should exceed 0.5. As table 3 shows, all the indicator loadings are above the recommended threshold, the CR values range from 0.84 to 0.96, and the AVE ranges from 0.56 to 0.93. All three conditions for convergent validity thus hold.

To evaluate discriminant validity, Fornell and Larker (1981) suggest that the square root of the AVE of a latent variable should be greater that the correlations between the rest of the latent variables. As table2 shows, discriminant validity holds for the model, as the square root of the AVE for each construct is greater than the squared correlations between pairs of constructs. Furthermore, the Cronbach’s alpha values of all indicators should exceed the recommended value of 0.6 (Nunnally, 1967) and all our measurement items noted in table 3 exceed 0.6. Thus, overall measurement items have adequate item reliability.

11

Table 3. Reliability and convergent validity

Construct Item

loadinga t-statistic Cronbach's

Alpha CR &AVE

CRS with employees RE1 RE2 RE3 RE4 RE5

0.78 0.83 0.79 0.74 0.75

35.91 51.97 36.60 28.30 29.05

0.84

CR = 0.88 AVE = 0.61

CRS with customers RC1 RC2 RC3 RC4

0.76 0.78 0.82 0.80

31.87 25.21 45.64 41.88

0.78

CR = 0.86 AVE = 0.60

CRS with suppliers RS1 RS2 RS3

0.83 0.87 0.69

37.95 54.03 18.35

0.72

CR = 0.84 AVE = 0.64

CRS with local community

RLC1 RLC2 RLC3 RLC4 RLC5

0.78 0.73 0.74 0.84 0.72

48.45 28.05 26.96 58.99 26.18

0.82

CR = 0.87

AVE = 0.59

Environmental Resp. ER1 ER2 ER3 ER4 ER5 ER6

0.77 0.70 0.76 0.77 0.75 0.74

34.13 22.86 36.34 33.40 33.03 34.53

0.84 CR = 0.88

AVE = 0.56

Organiz. innovation OI1 OI2 OI3 OI4 OI5

0.84 0.83 0.81 0.81 0.80

51.54 51.99 50.05 36.17 39.70

0.87 CR = 0.91 AVE = 0.67

Firm Perf. 1 FP1 FP2

0.96 0.97

189.98 185.96

0.92 CR = 0.96 AVE = 0.93

Firm Perf. 2 FP3 FP4 FP5

0.91 0.94 0.81

111.99 171.58 39.44

0.86 CR = 0.91

AVE = 0.78


0.91 0.87 0.78

114.55 66.92 32.64

0.82 CR = 0.89 AVE = 0.73

a All item loadings are significant at p<0.01; CR: Composite reliability; AVE: Average variance extracted.

This study measures corporate social responsibility as a single construct made up of five dimensions: CSR with suppliers, CSR with customers, CSR with employees, CSR with the local community and Environmental responsibility. As presented in table 4, the four dimensions reflect the higher-order construct. Similarly, firm performance was operationalized as a second-order construct consisting of three dimensions (see table

12

5): financial performance, customer relations performance and human relations performance (Quinn and Rohrbaugh, 1983).

Table 4. Second-order construct of Corporate Social Responsibility

First-order

construct Fist-order Second-order

Indicator Loading t-value Loading t-value

CRS with employees

RE1 RE2 RE3 RE4 RE5

0.78 0.83 0.79 0.74 0.75

35.91 51.97 36.60 28.30 29.05

0.744 31.25

CRS Customers

RC1 RC2 RC3 RC4

0.76 0.78 0.82 0.80

31.87 25.21 45.64 41.88

0.639 18.05

CSR with suppliers

RS1 RS2 RS3

0.83 0.87 0.69

37.95 54.03 18.35

0.493 10.73

CSR with local community


0.78 0.73 0.74 0.84 0.72

48.45 28.05 26.96 58.99 26.18

0.634 17.07

Environmental Resp.

ER1 ER2 ER3 ER4 ER5 ER6

0.77 0.70 0.76 0.77 0.75 0.74

34.13 22.86 36.34 33.40 33.03 34.53

0.696 22.70

All item loadings are significant at p<0.01.

Table 5. Second-order construct of Firm Performance

First-order

construct Fist-order Second-order

Indicator Loading t-value Loading t-value


0.96 0.97

189.98 185.96 0.493 8.86


0.91 0.94 0.81

111.99 171.58 39.44

0.857 57.54

Firm Perf. 3 FP6 0.91 114.55 0.842 51.61

13

FP7 FP8

0.87 0.78

66.92 32.64

All item loadings are significant at p<0.01. 4. RESULTS Prior to the hypotheses testing, cross validation (CV)-communality and -redundancy indices assess the quality of the structural model. The mean of the CV-communality indices confirms the global quality of the structural model if the indices are positive for all the blocks, taking into account the measurement model as a whole. In addition, the CV-redundancy index offers a metric to evaluate the quality of each structural equation. This index should be positive for all endogenous constructs (Tenenhaus et al. 2008). For this study, since all the latent variables had positive values for cross validation (CV)-redundancy and -communality indexes, the model demonstrated adequate predictive validity and fit. After analyzing the quality of the structural equation, the next step is to test the relations between all constructs. Consistent with Chin (1998), bootstrapping (500 subsamples) generates standard errors and t-values. Figure 2 displays the results of hypotheses H1 (0.45, p<0.01) and H2 (0.18, p<0.01), showing the path coefficients along with their significance levels. The results of the statistical model offer support for both hypotheses.

Figure 2. Empirical results

Corporate Social

Responsibility (CRS)

Org. InnovationFirm

Performance

R2 = 0.21 R2 = 0.31

*** p<0.01; ** p<0.05; * p<0.10

0.453*** 0.182***

0.451***

Regarding hypothesis H3, a variable may be considered a mediator to the extent to which it carries the influence of a given independent variable to a given dependent variable. We conducted three tests to examine the mediating effect of organizational innovation: the Sobel test, the Aroian test, and the Goodman test. Accoding to MacKinnon et al. 1995, the Sobel test and the Aroian test perform best with sample sizes greater than 50 or so. The three tests were all significant at the p<0.01 level (Sobel test statistic: 3.71; Aroian test statistic: 3.70; Goodman test statistic: 3.72) and, thus, corroborating the mediating effect. Our finding supports a partial mediation effect of organizational innovation in the relationship between CSR and firm performance, since the effect of CSR on firm performance shrinks upon the addition of organizational

14

innovation to the model (c= 0.534, p<0.01, while is c’= 0.451, p<0.01). Thus, results offer partial support for hypothesis H3. Our results are consistent with Wagner (2010) who reveals that CSR, conceptualized as a multi-dimensional appraisal of a firm`s responsible performance, leads to innovation and strong social benefits. The results of Surroca et al. (2010) also demonstrate that intangible resources mediate the bi-directional relationship between CSR and firms financial performance. However, the results obtaind in reference to the relevance of innovation on CSR do not coincide with those found in Gallejo-Alvarez et al. (2011). Using a dynamic panel data model, they analyze this bidirectional relationship but rely on the RBV and suggest a negative effect of CSR on innovation. These results can be explained by several reasons; for instance, not all CSR projects create value for companies, because many of them increase costs (Hillman and Keim, 2001). Many studies have used narrow measures of innovation that cannot fully capture innovation efforts or prevent the differentiation of various types of innovation, despite their potentially varying effects on performance (Bocquet, 2011). The use of such proxies could explain the contradictory results of these articles. 5. CONCLUSIONS From a theoretical perspective, a relation between CSR and innovation is accepted, especially when the influence of CSR practices on innovation is considered. However, not enough empirical studies have been made regarding this relation. Moreover, although extant investigation has analyzed the direct impact of CSR on firm performance, few works have analyzed whether a mediating effect exists between CSR and firm performance through the organizational innovation. This study aims to make a contribution in this direction. Given this lack of empirical studies, this research has attempted to determine the impact of CSR practices on innovation from a firm strategic perspective to better understand the links that might exists in the context of SMEs and highlight the added value that can benefit business interaction. Despite various attempts to differentiate strategic CSR profiles, the impact of these various profiles on technological innovation remains unclear. In the saturated marketplace of today there are increasingly less factors to differentiate oneself from the competition. Responsibility is a key differentiation factor that can be sustained in the longer term. Companies who do not take account of the increasing importance of responsibility may not survive, in much the same way as those who fail to innovate. CSR and innovation have rarely been discussed in combination in the literature, at least not explicitly, although CSR is increasingly becoming a part of company discussions worldwide in the quest for greater value and competitiveness. Innovation is understood to be one of the main drivers of competitiveness, yet it is far from easy to achieve. CSR for SMEs isn’t easy, yet innovation is even harder. This study focuses on the measurement of four main dimensions of CSR (CSR with suppliers, customers, employees and the local community) and then, assesses its relationship with

15

organizational innovation and firm performance in a single integrative model by using structural equation modelling on a data set of 552 Spanish firms. Our results show that the companies who have been most proactive in their CSR activities are also the best performing companies. There is also a significative positive association between innovation and social performance. This positive link is, however, moderated. When we analyse if CRS has a mediating effect on performance through an increase on innovation capacity, our results show how CSR initiatives based on innovation processes improve the performance of SMEs. In a business environment with increasing importance on a company’s intangible, we argue that innovation may help to ensure the sustainability of a more responsible approach to business, resulting in system level solutions that are at the same time, responsible and profitable. Therefore, the focus should be on integrating the different activities and tying them to the company strategy. This being the only way to generate value. These findings indicate that corporate social responsibility is an important driver mechanism for companies to be more innovative, efficient and effective. The European Observatory of SMEs states that most small company implementation of CSR is done on an occasional basis, and not tied to business strategy. The real advantages will only be realised once CSR is tied to the core decision-making process. If we can help SMEs add value to their business operations at the same time as behaving responsibility, there will be a real chance of positive change. Despite the growth in CSR in recent years, practice is still mainly the preserve of large companies and is often tied to notions of sacrifice for small companies. There is still not a sufficient belief in added value from CSR implementation. This can be partly attributed to a lack of adequate metrics with show the value of various CSR elements. The study described within this article aims towards developing a better understanding of how CSR initiatives can lead to successful innovation in SMEs. The development of the innovation capabilities of SMEs through responsible and sustainable initiatives can contribute to the competitiveness of SMEs and the development of regional economies. These results offer several implications for theory and research on CSR and innovation. In particular, our results offer empirical confirmation of previous theoretical assumptions about the link between CSR practices and innovation. Innovation therefore represents an indispensable tool to the implementation of CSR. This finding also confirms an OECD (2009) report about the ‘‘new nature of innovation’’: Social concerns increasingly drive innovation. As concerns policy-making, there has been considerable debate about SMEs firms and their reactivity when it comes to CSR (e.g. Amato and Amato, 2007; Jenkins, 2006).

Our study is not exempt from limitations. The findings reported in this article are based on a sample of Spanish SMEs firms and therefore cannot be easily generalized to others countries. Future work could analyze whether the potential strength of family firms in realizing innovation with high social benefits on the basis of strong CSR also holds true

16

in samples of European SMEs firms. There is evidence that this is the case as, for example, Craig and Moores (2006) find that small and medium sized family firms in the US engage more in innovation activities in general than their non family counterparts. Furthermore, Biondi et al. (2002) show that in small and medium sized firms in Europe environmental management system implementation supports environmental innovation. Even so, more direct evidence would be desirable and could be a focus of future research as could be an analysis comparing geographies, since there are indications that the effect of corporate social performance differs across regions (Sotorrio and Sanchez, 2008). Further research also could take into account the likely complementarities between the different types of innovation; Polder et al. (2010) already have shown that product and process innovations have positive effects on productivity when combined with organizational innovation. It thus seems relevant to test for complementarity through tri-variate probit models that account for the combined effects of product, process, and organizational innovations. Other types of non-technological innovations (e.g. marketing, business models) could also be considered. More generally, our analysis might be extended with additional research on the complex relationship among CSR, innovation, and value creation that examines further the differentiated impacts on types of innovation. References

Amato, L.H., Amato, C.H. (2007): “The effects of firm size and industry on corporate giving”, Journal of Business Ethics, 72 (3), 229–241.

Aragon-Correa, J. A., Hurtado-Torres, N., Sharma, S., Garcia-Morales, V. J. (2008): “Environmental strategy and performance in small firms: A resource-based perspective”, Journal of Environmental Management, 86 (1): 88-103.

Aupperle, K., Carroll, A., Hatfield, J. (1985): “An Empirical Examination of the Relationship between Corporate Social Responsibility and Profitability”, Academy of Management Journal, 28 (2), 446-463.

Aupperle, K. E. (1991): “The Use of Forced-Choice Survey Procedures in Assessing Corporate Social Orientation”, Research in Corporate Social Performance and Policy, 12, 269–279.

Bagozzi, R.P., Yi, Y., Phillips, L.W. (1991): “Assessing construct validity in organizational research”, Administrative Science Quarterly, 36(3), 421-458.

Barclay, D., Higgins, C., Thompson, R. (1995): “The partial least squares (PLS) approach to causal modeling: Personal computer adoption and use as an illustration”, Technology Studies, 2(2), 285-309.

Barroso, C., Cepeda-Carrion, G., Roldan, J.L. (2010): Applying maximum likelihood and PLS on different sample sizes: Studies on SERVQUAL model and employee behavior model. In V. Esposito-Vinzi, W. W. Chin, J. Henseler, & H. Wang (Eds.), Handbook of partial least squares: Concepts, methods and applications. Berlin, Germany: Springer, 427-447.

Bessera, T., Miller, N. (2001): ‘‘Is the good corporation dead? The community social responsibility of small business operators’’, Journal of Socio-Economics, 30 (3), 221-242.

17

Biondi, V., Iraldo, F., Meredith, S. (2002): “Achieving sustainability through environmental innovation: the role of SMEs”, International Journal of Technology Management, 24 (5-6), 612-626.

Bocquet, R. (2011): “Product and process innovations in subcontracting: empirical evidence from the Sillon Alpin”, Industry and Innovation, 18 (7), 649-668.

Bocquet, R., Bas, C.L., Mothe, C., Poussing, N. (2013): “Are firms with different CSR profiles equally innovative? Empirical analysis with survey data”, European Management Journal, 31, 642-654.

Bowman E., Haire M. (1975): “A Strategic Posture toward Corporate Social Responsibility”, California Management Review, 18 (2), 49-58.

Chang Y-Y and Hughes M (2012) Drivers of innovation ambidexterity in small-to medium-sized firms. European Management Journal 30(1), 1-17.

Chin, W. (1998): The partial least squares approach to structural equation modeling. In Marcoulides, G. A. (Eds.). Modern methods for business research. Mahwah, NJ: Lawrence Erlbaum Associates Publisher, 295–336.

Clarkson, M. (1995): “A Stakeholder Framework for Analysing and Evaluating Corporate Social Performance”, Academy of Management Review, 20 (1), 92-118.

Commission Interdépartementale du Développement Durable (CIDD) (2006). Cadre de référence. La responsabilité sociétale des entreprises en Belgique. available on the web site http://www.cidd.be/FR/publications/.

Craig, J.B., Moores, K. (2006): “A 10-year longitudinal investigation of strategy, systems, and environment on innovation in family firms”, Family Business Review, 19 (1), 1-10.

Davidson, W., Worrell D. (1990): “A Comparison and Test of the Use of Accounting and Stock Market Data in Relating Corporate Social Responsibility and Financial Performance”, Business and Economic Review, 21 (3), 7-19.

Devinney, T. M., Yip, G. S., Johnson, G. (2008): “Using frontier analysis to evaluate company performance”. Working Paper.

Doh J., Howton S., Howton S., Siegel D. (2009): “Does the Market Respond to an Endorsement of Social Responsibility? The Role of Institutions, Information and Legitimacy”, Journal of Management, 20 (1), 1-25.

Donaldson, T., Preston, L. (1995): “The stakeholder theory of the corporation: Concepts, evidence, and implications”, Academy of Management Review, 20 (1), 65–91.

European Commission (EC) (2007) “Responsible and Sustainable Innovation for European SMEs: RESPONSE”, Response Project.

Fornell, C., Larcker, D.F. (1981): “Evaluating structural equation models with unobservable variables and measurement error”, Journal of Marketing Research, 18 (1), 39-50.

Freeman, R.E. (1984): “Strategic Management: A Stakeholder Approach”, Pitman, Boston, MA.

Gallego-Alvarez, I., Prado-Lorenzo J. M., Garcıa-Sanchez, I-M. (2011): “Corporate social responsibility and innovation: A resource-based theory”, Management Decision, 49 (10), 1709-1727.

Gyves, S., O`Higgins, E. (2008): “Corporate Social Responsibility: An Avenue for Sustainable Benefit for Society and the Firm?”, Society and Business Review, 3 (3), 207-223.

18

Grayson, D. (2008): “Press release of lifeworth”, Geneva/Cranfield School of Management, 14 february.

Hair, J.F., Anderson, R.E., Tatham, R.L., Black, W.C. (1998): Multivariate data analysis (5th ed). Prentice-Hall, London.

Hammann, J., Weber, R., Lowenstein, R. (2009): “Self interest through delegation: an additional rationale for the principal agent relationship”, American Economic Review, 5, 55-70.

Hart, S.L. (1995): “A natural-resource-based view of the firm”, Academy of Management Review, 20 (4), 986–1014.

He, Z.L., Wong, P.K. (2004): “Exploration vs. exploitation: an empirical test of the ambidexterity hypothesis”, Organization Science, 15 (4), 481-494.

Hillman, A.J., Keim, G.D. (2001): “Shareholder value, stakeholder management, and social issues: what’s the bottom line?”, Strategic Management Journal, 22(2), 125-139.

Ingram, R. and Frazier, K. (1980): “Environmental performance and corporate disclosure”, Journal of Accounting Research, 18 (2), 614-621.

Jawahar I., McLaughlin, G. (2001): “Toward a Descriptive Stakeholder Theory: An Organisational Life Approach”, Academy of Management Review, 26 (3), 397-414.

Jenkins H. (2006): “Small business champions for corporate social responsibility”, Journal of Business Ethics, 67, 241-256.

Judge, W. Q., Douglas, T. J. (1998): “Performance Implications of Incorporating Natural Environmental Issues Into The Strategic Planning Process: An Empirical Assessment”, The Journal of Management Studies, 35 (2): 241.

Lee, H., Choi, B., (2003): “Knowledge enablers, processes and organizational performance: An integrated view and empirical examination”, Journal of Management Information Systems, 20 (1), 179-228.

Lindell, M.K., Whitney, D.J. (2001): “Accounting for common method variance in cross-sectional research designs”, Journal of Applied Psychology, 86(1), 114–121.

Lindgreen, A., Swaen, V., Johnston, W.J. (2009): “Corporate social responsibility: An empirical investigation of U.S. organizations”, Journal of Business Ethics, 85 (Suppl.2), 303–323.

Lockett, A., Moon, J., Visser, W. (2006): “Corporate social responsibility in management research: focus, nature, salience and sources of influence”, Journal of Management Studies, 43 (1), 115-136.

Lubatkin, M.H., Simsek, Z., Ling, Y., Veiga, J.F. (2006): “Ambidexterity and performance in small- to mediumsized firms: the pivotal role of top management team behavioral integration”, Journal of Management, 32 (5), 646–672.

Luo, X., Homburg, C. (2007): “Neglected outcomes of customer satisfaction”, Journal of Marketing, 71 (2): 133-149

Manu, F.A. (1992): “Innovation orientation, environment and performance: A comparison of U.S. and European markets”, Journal of International Business Studies, 23 (2), 333-59.

Margolis, J. D., Elfenbein, H. A., Walsh, J. P. (2007): “Does it pay to be good? A meta-analysis and redirection of research on corporate social and financial performance”, Working Paper. Boston: Harvard Business School.

MacGregor, S.P., Fontrodona. J. (2007): “Exploring the Fit between CSR and Innovation”, Working paper, University of Navarra, IESE Business School

19

MacGregor, S.P., Spinach, X., Fontrodona, J. (2007): “Social innovation: Using design to generate business value through corporate social responsibility”, IESE Business School, University of Gerona, Spain.

MacKinnon, D. P., Ghulam, W., Dwyer, J. (1995), “A Simulation Study of Mediated Effect Measures,” Multivariate Behavioral Research, 30 (1), 41–62

McGuire J., Sundgren A., Schneeweis, T. (1988): “Corporate Social Responsibility and Firm Financial Performance”, Academy of Management Journal, 31 (4), 854-872.

McWilliams A., Siegel, D. (2000): “Corporate Social Responsibility and Financial Performance: Correlation or Misspecification”, Strategic Management Journal, 21, 603-609.

Mendibil, K., J. Hernandez, X. Espinach, E. Garriga., Macgregor, S. (2007): “How Can CSR Practices Lead to Successful Innovation in SMEs?”, Publication from the RESPONSE Project, Strathclyde, 141.

Mill, G. (2006): “The Financial Performance of a Socially Responsible Investment Over Time and a Possible Link with Corporate Social Responsibility”, Journal of Business Ethics, 63 (2), 131-48.

Murillo, D., Lozano J. (2006): “SMEs and CSR: An Approach to CSR in Their Own Words”, Journal of Business Ethics, 67 (3), 227-40.

Neville B., Bell S., Menguc B. (2005): “Corporate Responsibility, Stakeholders and the Social Performance – Financial Performance Relationship”, European Journal of Marketing, 39 (9/10), 1184-1198.

Nidumolu, R., Prahalad, C.K., Rangaswami, M.R. (2009): “Why sustainability is now the key driver of innovation”, Harvard Business Review, September, 2-9.

Nunnally, J.C. (1967): Psychometric Theory. McGraw-Hill, New York. OECD (2009): The new nature of innovation, http://www.newnatureofinnovation.org Orlitzky M., Schmidt F., Rynes S. (2003): “Corporate Social and Financial Performance:

A Meta Analysis”, Organisation Studies, 24 (3), 403-441. Park S., Lee, S. (2009): “Financial Rewards for Social Responsibility Cornell”, Hospitality

Quarterly, 50 (2), 168-179. Petter, S., Straub, D., Rai, A (2007): “Specifying formative constructs in information

systems research”, MIS Quarterly, 31(4), 623-656. Perrine F. (2012): “A conceptual framework of corporate social responsibility and

innovation”, Global Journal of Business Research, 6 (5), 85-96. Podsakoff, P.M., Organ, D.W. (1986): “Self-reports in organizational research: problems

and prospects”, Journal of Management, 12(4), 531-544. Polder, M., Van Leeuwen, G., Mohnen, P., Raymond, W. (2010). Product, process and

organizational innovation: drivers, complementarity and productivity effects. UNU-MERIT Working Paper Series 035, Maastricht Economic and Social Research and Training Centre on Innovation and Technology.

Porter, M. (1991): “America’s Green Strategy”, Scientific American, 264 (4), 96. Porter., Michael E., Claas van der Linde. (1995): “Toward a New Conception of the

Environment-Competitiveness Relationship”, Journal of Economic Perspectives, 9 (4): 97-118.

Prado-Lorenzo, J., Gallego-Alvarez I., Garcia-Sanchez I., Rodriguez-Dominguez L. (2008) “Social Responsibility in Spain: Practices and Motivations in Firms”, Management Decision, 46 (8), 1247-1271.

20

Preston L., O Bannon D. (1997): “The Corporate Social – Financial Performance Relationship”, Business & Society , 36 (4), 419-430.

Quinn R.E., Rohrbaugh, J. (1983): “A spatial model of effectiveness criteria: towards a competing values approach to organizational analysis”, Management Science, 29 (3), 363-77.

Qu, R. (2009): “The impact of market orientation and corporate social responsibility on firm performance Evidence from China”, Asia Pacific Journal of Marketing and Logistics, 21, 570-582.

Russo M.V., Fouts, P.A. (1997): “A resource-based perspective on corporate environmental performance and profitability”, Academy of Management Journal, 40 (3), 534-599.

Russo A., Perrini F. (2010): “Investigating Stakeholder Theory and Social Capital: CSR in Large Firms and SMEs”, Journal of Business Ethics, 91, 207-221.

Sharma, S., Vredenburg, H. (1998): “Proactive corporate environmental strategy and the development of competitively valuable organizational capabilities”, Strategic Management Journal, 19, 729-753.

Soto-Acosta, P., Meroño-Cerdan, A. (2008): “Analyzing e-Business value creation from a resource-based perspective”, International Journal of Information Management, 28 (1), 49-60.

Sotorrio, L.L., Sánchez, J.F. (2008): “Corporate social responsibility of the most highly reputed European and North American firms”, Journal of Business Ethics, 82 (2), 379-390.

Spence, M., Ben Boubaker Gherib, J., Ondoua Biwole, V. (2007): “Développement durable et PME. Une étude exploratoire des déterminants de leur engagement”, Revue internationale PME, 20 (3-4), 17-42.

Surroca Jordi., Tribò Jorep A., Waddock, S. (2010): “Corporate Responsibility and Financial Performance: the Role of Intangible Resources”, Strategic Management Journal, 31 (5), 463-490.

Tenenhaus, M., Esposito, V., Chatelin, Y., Lauro, C. (2008): “PLS path modeling”, Computational Statistics & Data Analysis, 48, 159-205.

TNS Gallup (2005): Mapping of CSR activities among SMEs, Gallup & DCCA, http://www.eogs.dk/graphics/_ny%20eogs/indsats%20for%20bedre%20erhvervsvilk%e5r/virksomheders%20samfundsengagement/rapporter/survey_gallup.pdf

Thorne D., Ferrell O., Ferrell C. (1993): Business and Society: A Strategic Approach to Corporate Citizenship Houghton Mifflin Co.: Boston

Waddock, S. A., Graves, S. B. (1997): “The corporate social performance- financial performance link”, Strategic Management Journal, 18 (4): 303-319.

Wagner, M. (2010): “Corporate Social Performance and Innovation with High Social Benefits: A Quantitative Analysis”, Journal of Business Ethics, 94 (4), 581-594.

Wilson, E. (1980): “Social responsibility of business: What are the small business perspectives?”, Journal of Small Business Management, 18 (3), 17-24.

Wolfe, L. (2003): “The Introduction of Path Analysis to the Social Sciences, and Some Emergent Themes: An Annotated Bibliography”, Structural Equation Modelling, 10 (1), 1-34.

21

Appendix. Measures

Variables Description

CRS with employees RE1 RE2 RE3 RE4 RE5

Our company takes into account Employees’ interests for decision-making Supports employees willing to take further training Helps employees achieving work-like balance Understands the importance of stable employment Develops training programmes for employees regularly

CRS with customers RC1 RC2 RC3 RC4

Our company meets its commitments about quality and price Informs customers about appropriate use and risks of products Takes the necessary steps to avoid customer complaints Give response to customer complaints

CRS with suppliers RS1 RS2 RS3

Our company takes into account suppliers’ interests for decision-making

Asks suppliers about the image of our firm Informs suppliers about changes in our company

CRS with local community


Takes into account the local community’s interests for decision-making Supports Cultural and sport activities within its local community Keeps transparent relationships with local politicians. Considers itself as a part of the community and worries about its development Conducts programmes to support disadvantaged groups

Environmental Resp. ER1 ER2 ER3 ER4 ER5 ER6

Designs products and packaging to be reused, repaired or recycled Exceeds voluntarily environmental regulations Invest in saving energy Adopts measures to design ecological products or services Implements programmes to reduce water consumption Performs environmental audits periodically

Organiz. innovation OI1

OI2

OI3 OI4 OI5

The number of new or improved products/services launched to the market is above the average of your industry The number of new or improved internal processes is above the average of your industry Top management emphasizes on research and development In the last five year, new product lines have been introduced Changes introduced in our products during the last five years are important


Our profits are above the average of your industry Our return on assets is above the average of your industry


Our company has introduced improvements relative to.... Customer service Relations with customers Customer loyalty


Our company has improved with regard to... staff absenteeism the working environment Employees’ loyalty and morale

Note. All questions are five-point (1-5) Likert-type scales

22

Documents

corporate social responsibility and its effect on organizational