The Effect of Geographic Diversification into weak

The Effect of Geographic Diversification into weak Institutional

Environments on the Corporate Social Responsibility of

Multinational Enterprises

Master Thesis

By Laura Ruth Born (S3236528)

[email protected]

Rijksuniversiteit Groningen - Faculty of Economics and Business

MSc. International Business and Management

June 21st, 2017

Supervisor: Esha Mendiratta, PhD

Co-assessor: Paulo J. Marques Morgado

Word count: 12442

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Abstract

Corporate social responsibility (CSR) has become a global phenomenon and is therefore

broadly discussed in the international business literature. As a result, multinational enterprises

(MNEs) are increasingly pressured to adopt CSR strategies in different markets. Despite recent

research efforts to explore the effect of geographic diversification of MNEs on corporate social

responsibility, the impact of diversification into environments with weak institutional

conditions remains underexplored. Following institutional theory, this thesis aims at

overcoming prior contradictory arguments on the behaviour of multinational enterprises in

countries characterized by weak institutions. Thus, the author hypothesizes that the geographic

diversification into developing and least developed countries leads to lower CSR. This effect is

assumed to be moderated by negative corporate reputation changes. Furthermore, the concept

of codes of conduct is introduced as a substitute for absent regulatory conditions. To test the

relationship, multiple linear regression analysis is conducted on a sample of 48 US-American

MNEs. The findings generally support the idea that geographically diversified firms engaging

in weak institutional environments in fact show higher levels of corporate social responsibility.

The results are especially robust for community and employee related CSR practices.

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Acknowledgement

I would like to express my gratitude to my supervisor, Esha Mendiratta, for her

continuous guidance, support and feedback throughout the process of my thesis.

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Table of contents

List of tables ............................................................................................................................... 5

List of figures ............................................................................................................................. 5

1. Introduction ............................................................................................................................ 6

2. Literature Review ................................................................................................................... 9

2.1 Corporate Social Responsibility ....................................................................................... 9

2.1.1 Defining Corporate Social Responsibility ................................................................. 9

2.1.2 Reasons for Corporate Social Responsibility .......................................................... 10

2.1.3 Institutional perspectives on Corporate Social Responsibility ................................ 11

2.2 The effect of geographic diversification on Corporate Social Responsibility ................ 13

2.2.1 Diversification into weak institutional environments .............................................. 14

2.2.2 The role of corporate reputation .............................................................................. 16

2.2.3 The moderating effect of codes of conduct .............................................................. 18

3. Methodology ........................................................................................................................ 20

3.1 Sample ............................................................................................................................ 20

3.2 Measures ......................................................................................................................... 20

3.2.1 Dependent variable .................................................................................................. 20

3.2.2 Independent variable ................................................................................................ 22

3.2.3 Moderators ............................................................................................................... 23

3.2.4 Control variables ...................................................................................................... 24

3.3 Analysis .......................................................................................................................... 25

4. Findings ................................................................................................................................ 25

4.1 Preliminary analysis ....................................................................................................... 25

4.2 Regression results ........................................................................................................... 27

4.3 Robustness check ............................................................................................................ 28

5. Discussion ............................................................................................................................ 31

6. Conclusion ............................................................................................................................ 35

7. Limitations and future research ............................................................................................ 37

References ................................................................................................................................ 40

Appendix .................................................................................................................................. 52

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List of tables

Table 1: Categories of Corporate Social Responsibility .......................................................... 21

Table 2: Descriptive statistics .................................................................................................. 26

Table 3: Bivariate correlations ................................................................................................. 26

Table 4: Regression results ...................................................................................................... 27

Table 5: Robustness check results ............................................................................................ 29

Table A1: Industries and frequencies ....................................................................................... 52

Table A2: List of developing and least developed countries ................................................... 53

Table A3: Descriptive statistics of CSR categories ................................................................. 55

List of figures

Figure 1: Conceptual model ..................................................................................................... 19

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1. Introduction

Multinational Enterprises (MNEs) are considered as the key drivers of globalization as

they set up operations all over the world (Jamali, 2010). Large and geographically diversified

firms have become the most influential actors in society today due to their influence on the

welfare of numerous stakeholders (Kang, 2013). The engagement in foreign markets however

leads to additional costs, which are referred to as the liability of foreignness (LOF) (Zaheer,

1995; Matten & Crane, 2005). For instance, local stakeholders might consider MNEs as a threat

or stereotype them due to a lack of information (Eden & Miller, 2004; Kostova & Zaheer, 1999).

On the one hand, international business literature suggests that companies employ

corporate social responsibility (CSR) activities in foreign markets as a coping mechanism to

overcome the liability of foreignness, for example through social contributions to the host

country (Campbell, Eden & Miller, 2012, Gardberg & Fombrun, 2006). Kostova, Roth and

Dacin (2008) for example find that social contributions to a society create a positive image,

which enhances the local support for foreign companies. Therefore, numerous studies have

found a positive link between international diversification and CSR (e.g. Strike et al., 2006;

Gao & Bansal., 2006; Kang, 2013).

On the other hand, practical evidence shows an increasing amount of corporate scandals

in recent years. The multinational company Unilever for example was subject to increased

media attention due to the extensive release of the toxic element mercury in one of its

thermometer plants in India (Borelli, 2017). As a result, an opposing stream of research argues

that MNEs behave irresponsibly by exploiting the lax social or environmental standards in

foreign markets (Low & Yeats, 1992; Lucas, Wheeler & Hettige, 1992).

These contradictory theoretical arguments have not yet clarified, if geographic

diversification affects corporate social performance positively or negatively (Keig, 2013). As a

first attempt, some authors suggest that corporate social responsibility practices of MNEs

depend on the institutional environments they engage in. Prior studies have repeatedly shown

that CSR is interpreted differently across different countries. Bondy, Matten and Moon (2004)

for example find that Canadian companies are more likely to implement CSR focused on

workplace issues, whereas German companies focus on sustainability. For multinational

companies, engaging in different environments, this poses challenges as the companies’ CSR

practices might be at odds with prevailing CSR attitudes in different markets (Yang & Rivers,

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2009). Therefore, Attig, Boubakri, El Ghoul and Guedhami (2016) point out the necessity to

consider the effect of different environmental factors when analysing the CSR strategies of

MNEs in host countries.

Prior studies investigating the relationship between geographic diversification and CSR

however do not take into consideration the differences between the institutional environments

a firm diversifies into by looking at diversification in general (Strike et al., 2006; Kang, 2013;

Rathert, 2016; Attig et al., 2016) or investigating a single host country context (e.g. Campbell

et al., 2012; Marquis & Qian, 2014). Consequently, the question, whether MNE subsidiaries

adapt their strategies to local CSR practices remains underexplored (Yang & Rivers, 2009).

This results from the fact that studies on this topic mostly focus on a developed country

context, presuming certain conditions, such as a strong institutional environment and

functioning governments and markets (Belal, 2001; Matten & Moon, 2008; Aguilera & Jackson

2003; Gjolberg 2009; Amaeshi, Adegbite & Rajwani, 2016). These studies lead to the

assumption that CSR would not exist in weak institutional environments where such conditions

are absent (Campbell, 2007). Proponents of this theory argue that MNEs diversify into countries

that are characterized by the absence of efficient regulatory arrangements, or so-called

institutional voids, to lower their costs, which is also referred to as the pollution haven

hypothesis (Khanna & Palepu, 1997; Mair & Marti, 2009; Walter, 1982). In line with this,

Campbell et al. (2012) argue that the lack of regulations in weak institutional contexts decreases

the local corporate social performance.

However, as MNEs increasingly expand to weak institutional environments, they shift

their CSR strategies to developing and least developed countries (Tihanyi et al., 2005; WEF,

2011). This is further emphasized by the growing economic importance of developing markets

(Hitt et al., 2006). In fact, developing countries present the fastest growing economies and

therefore provide a lucrative possibility for businesses to grow (IMF, 2006, cited in Visser,

2008). In these environments, social and environmental crises and business impacts are

especially salient, enhancing the importance of social responsibility (WRI, 2005; UNDP, 2006;

World Bank, 2006, cited in Visser, 2008). Hence, multinational companies are increasingly

expected to contribute to developing societies by filling gaps of dysfunctional governments

(Matten & Crane, 2005). As a result, prior literature repeatedly notes the importance of

expanding the research context to countries with weaker institutional conditions (e.g. Amaeshi

et al., 2016; Jamali & Mirshak, 2007; Yang & Rivers, 2009).

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So far, previous research on the relation between diversification and CSR has been

polarized (Jamali, 2010; Kolk & van Tulder, 2006). While some studies argue that MNEs adopt

CSR practices in challenging contexts as a substitute for absent regulatory institutions, others

claim that CSR arises as a complement to strong institutional environments (Rathert, 2016;

Campbell, 2007; Gjølberg, 2010). Thus, there is no consensus yet on how MNEs respond to

weak institutional contexts when it comes to adapting their CSR strategies. This study aims at

overcoming the contradictory research streams by explicitly analysing the effect of geographic

diversification into weak institutional environments on the corporate social responsibility of

MNEs. Therefore, the underlying research question of this analysis can be defined as follows:

Does the diversification into weak institutional environments influence the corporate social

responsibility of multinational enterprises?

To answer the question, this thesis takes an institutional perspective. The study follows

the argument that a negative effect of geographic diversification on corporate social

responsibility exists for weak institutional contexts, because regulatory and normative forces

are absent in these environments. After presenting the existing literature on corporate social

responsibility and its relationship with geographic diversification, an empirical method to

assess the effect of diversification into weak institutional environments on the corporate social

responsibility of MNEs is developed. The relationship is tested using linear regression analysis.

Understanding this relationship will help MNE managers to detect challenges in aligning their

CSR strategies with local practices (Yang & Rivers, 2009). From an empirical perspective, this

investigation responds to contradictory findings in the literature and the resulting calls to

analyse the impact of weak host-country institutions on the CSR adoption of MNEs (Campbell

et al., 2012; Attig et al., 2016; Amaeshi et al., 2016).

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2. Literature Review

2.1 Corporate Social Responsibility

2.1.1 Defining Corporate Social Responsibility

The concept of corporate social responsibility (CSR) is broadly discussed in the

literature (Carroll, 1999). However, there is no common definition (Fisher, 2004). In fact, the

notion of CSR overlaps with several related constructs, such as social responsiveness or

business ethics (Epstein, 1987). The difficulties in defining CSR stem from its dynamic,

appraisive and complex character (Moon, Crane & Matten, 2005; Carroll, 1999).

The most commonly used framework to conceptualize the business practice is the CSR

pyramid by Carroll (1991). He defines CSR as “the conduct of a business so that it is

economically profitable, law abiding, ethical and socially supportive” (Carroll, 1983: 608). This

definition implies four dimensions of CSR. Economic components refer to the responsibility to

maximize profits, maintain a strong competitive position and a high level of operating

efficiency. Legal responsibilities suggest the need to obey to the law, comply with regulations

and fulfil legal requirements. Ethical responsibilities embody expectations, norms and

standards by stakeholders that are not codified by law. As a fourth component, the model

defines philanthropic responsibilities, which include engagement in acts to promote goodwill

and welfare, such as contributions to the community (Carroll, 1991).

More recently, scholars have extended CSR theory by incorporating social performance,

stakeholder relations and corporate citizenship, shifting the focus to the management of core

business activities (Garriga & Melé, 2004; Gjolberg, 2009). Also, environmental concerns have

become a focal point in CSR conceptualizations. The European Commission for example

defines CSR as a “concept whereby companies decide voluntarily to contribute to a better

society and a cleaner environment” (COM 2001: 5). Anselmsson and Johansson (2007)

summarize the various conceptualizations in their three-dimensional model and characterize

the main features of CSR as product responsibility, human responsibility and environmental

responsibility. As a result, it is now widely accepted that CSR is a multidimensional construct,

oriented towards various stakeholder groups, such as customers, employees, regulators,

investors or the community (Sontaité-Petkeviciene, 2015).

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Previous research shows that the meanings and practices of CSR vary between different

countries. Amaeshi, Adi, Ogbechie and Amao (2006) for example find that Nigerian citizens

view CSR solely in terms of philanthropy, paying less attention to other CSR categories.

Acknowledging these differences, Matten and Moon (2008) further differentiate between

explicit and implicit forms of CSR. Explicit CSR refers to corporate actions in response to

societal interests arising from the perceived responsibility of a company. These usually include

voluntary actions, such as disaster relief donations (Roner, 2005). Explicit CSR can be

motivated by the perceived expectations of society as it results from stakeholder pressures or

partnerships with governmental or non-governmental organizations (e.g. the UN Global

Comact). Implicit CSR refers to the companies’ role within an institutional context. It arises

from values, norms and beliefs of a society, that define the proper behaviour a firm should

follow. This behaviour is implicit in that sense that it occurs as codified rules, which are not

necessarily described as CSR. Thus, implicit CSR is forced by the institutional environment

rather than a voluntary phenomenon.

Due to the many varying views of CSR, a broad rather than a specified definition of the

term seems to be appropriate for the sake of a multinational study (Matten & Moon, 2008). In

order to cover all relevant categories and capture CSR activities of MNEs in host countries,

CSR will be defined as "actions that appear to further some social good, beyond the interests of

the firm and that which is required by law” (McWilliams & Siegel, 2001: 117) for this

investigation (Campbell et al., 2012).

2.1.2 Reasons for Corporate Social Responsibility

In the literature on multinational enterprises it has often been argued that a company’s

main goal is to maximize profits and shareholder value. Researchers refer to this as the classical

approach of corporate responsibility or the theory of corporate egoism (Friedman, 1970). This

raises the question, why firms would behave in a socially responsible way (Campbell, 2007).

In fact, practice and theory show many incentives for MNEs to behave opportunistically, free-

ride on public goods, exploit employees or poison the environment in order to maximize

revenues (Albert, 1993; Crouch & Streeck, 1997; Dore, 2000; Roe, 2003). However, there are

many firms that do behave responsibly, for example by donating to charities, supporting

communities or maintaining standards of integrity and honesty (Campbell, 2007). The literature

provides several reasons for firms to accept these extra costs.

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One reason is the theory of corporate altruism, which emphasizes that companies are

responsible for contributing to the quality of life of a society (Guthrie & Parker, 1989). Sprinkle

and Maines (2010) further argue that organizations engage in CSR for four different reasons.

Next to altruistic motives, firms might use CSR to appease their stakeholders, for the sake of

employee management in terms of motivations, recruitment and retainment or for customer-

related benefits. Feldman and Vasquez-Parraga (2013) further specify consumer-related

outcomes as enhanced reactions to a company’s products, attraction and retainment of

consumers or enhanced perspectives on responsibility of a company, which in turn creates more

positive attitudes. Furthermore, engaging in CSR creates a positive reputation and image for a

firm (Weber, 2008). Similarly, Bhattacharya and Sen (2004) find positive effects on word-of-

mouth and the resilience to negative information about the company. Therefore, CSR can also

be viewed as a form of risk management (Weber, 2008). These advantages might also lead to

financial benefits. Weber (2008) for example finds increased sales and market share and cost

savings as potential outcomes of engaging in CSR.

In line with this, the strategic view emphasizes that the potential benefits CSR evokes,

such as a sustainable long-term business development, outweigh its short-term costs (Rybalko,

2016). Several studies have already found a positive effect of CSR on the financial performance

of a firm, for example due to the positive image effects in the eyes of investors and consumers

(Orlitzky, Schmidt & Rynes, 2003). As a result, companies increasingly realize the economic

value and the competitive advantages CSR can create. In a more general sense, corporate social

responsibility is expected to lead to a positive image, which affects the stakeholders’ attitudes

towards a company. This in turn increases the firm’s financial stability (Rybalko, 2016).

2.1.3 Institutional perspectives on Corporate Social Responsibility

Previous research has highlighted the importance of institutional theory for the

comparative analysis of CSR practices, because the interests of stakeholders differ across

nations (Aguilera & Jackson, 2003). Institutional theory allows for a differentiated view of the

motives of stakeholders within their national environments, which is particularly important in

this context, because motives shape the corporate governance of MNEs when it comes to CSR

adoption (Matten & Moon, 2008). The main argument of the theory is that each nation has

different rules of the game (North, 1990). These rules do not only consist of regulations by the

state and law, but also of social norms and cognitive understandings, also referred to as

institutional pillars (Scott, 2008). Organizations try to adapt to these institutions in order to gain

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legitimacy, which characterizes “the degree of cultural support for an organization” (Meyer &

Scott, 1983: 201), when interacting with their stakeholders (Meyer & Rowan, 1977). As a result,

organizational practices are often subject to so-called isomorphic processes that lead

organizations to resemble other units in the same environment (DiMaggio & Powell, 1983).

The importance of legitimacy can be explained by stakeholder theory, which states that

stakeholders interpret corporate actions and challenge the legitimacy of firms (Lamin & Zaheer,

2012). As a result, they can exert power over a firm's CSR strategy by either withholding

resources from the company or limiting the use of the resources (Frooman, 1999). The

withholding strategy can for example be manifested in the customers’ avoidance to buy

products from irresponsible firms (Yang & Rivers, 2009). In the latter case, stakeholder power

is exercised in the form of regulations or certain clauses in contracts with local actors (Yang &

Casali, 2009, cited in Yang & Rivers, 2009).

The legitimacy challenge leads to the assumption that firms try to enhance their

legitimacy by showing and reporting more responsible practices (Amaeshi et al., 2016). In some

contexts this has already led to isomorphic processes. In Europe for example, a rush of

governmental rules and initiatives can be noted (Eberhard-Harribey, 2006). Furthermore, self-

regulatory and voluntary codes of conduct, such as environmental standards like the ISO 14000,

drive companies into adopting more responsible strategies. These pressures are also referred to

as coercive isomorphism (Matten & Moon, 2008). Mimetic processes on the other hand occur

in situations characterized by high uncertainty. In these situations, companies tend to regard

best practices as legitimate and imitate these from other firms. Considering CSR, it can be noted

that MNEs are increasingly joining coalitions for CSR, subscribe to CSR training programs and

publish CSR reports (Kolk, 2005; Matten & Moon, 2008). A third source of isomorphic

pressures are educational and professional authorities, who form the normative component of

isomorphism. An example is the growing inclusion of CSR in business education or the

increased number of European professional associations (Matten & Moon, 2004; 2008). These

dynamic processes suggest that changes in CSR adoption of MNEs are based on the institutional

framework and historical development of their country (Matten & Moon, 2008).

In a global context however, this leads to a dilemma, since MNEs have to adapt to host

country institutions to gain external legitimacy as well as home country pressures to gain

internal legitimacy, which is also referred to as institutional duality (Hillman & Wan, 2005;

Kostova and Roth, 2002). For the adoption of CSR practices this leads to challenges, since these

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are interpreted differently in different countries. Several studies could already show differences

in CSR practices and understandings across institutional environments. Bondy et al. (2004) for

example find that Canadian companies are more likely to implement CSR focused on workplace

issues, whereas German companies focus on sustainability. Similarly, Baughn et al. (2006)

(cited in Yang & Rivers, 2009) find a link between a country’s economic development,

economic freedom and level of corruption and differences in CSR. Overall, these findings show

that corporate social responsibility is embedded in the wider institutional system of a country

(Matten & Moon, 2008). For multinational companies, engaging in multiple different

institutional environments, this has led to a debate considering the effect of increased

internationalization on CSR adoption, which will be outlined in the following chapter.

2.2 The effect of geographic diversification on Corporate Social Responsibility

A high amount of literature has already analysed the effect of increased

internationalization and the resulting differing institutional pressures on the adoption of CSR

strategies. Strike et al. (2006) for example find a positive relationship between international

diversification and social responsibility, arguing that CSR acts as a firm-level capability, which

allows for strong relationships with local stakeholders and governments and can be enhanced

through experience derived from increasing international diversification. The geographic

diversification leads to more diverse stakeholder pressures, because different countries have

different priorities when it comes to CSR issues (Kang, 2013; Becker & Henderson, 2000;

Connell, 2005). As the international visibility of firms increases, the threat of being targeted by

environmental groups becomes more salient (Kang, 2013; Porter & Krammer, 2006).

Therefore, CSR can be used as a means to overcome the increased litigation risk associated

with international dispersion (Feldman, Soyka & Ameer, 1997; Attig et al., 2016). Kang (2013)

further argues that internationally diversified firms might also have higher incentives to pursue

CSR practices as these help to build a positive brand image, which is transferrable across

international markets, and overcome the liability of foreignness. Additionally, a company can

signal its commitment to a certain market by employing social practices, which in turn can aid

to overcome communication problems (Zahra, Ireland & Hitt, 2000). In a more general sense,

several previous studies have found a positive relationship between geographic diversification

of MNEs and corporate social responsibility (Kang, 2013; Strike et al, 2016; Keig, 2013).

A contrary stream of research however proposes a negative relationship between

geographic diversification and CSR for several reasons. First, CSR investments in

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institutionally different countries involve higher levels of uncertainty (Campbell et al., 2012).

This can be attributed to the fact that CSR is not necessarily defined similarly in different

institutional contexts. As Campbell (2007) points out, CSR “may mean different things in

different places to different people and at different times” (p. 950). As a result, subsidiary

managers often face difficulties in understanding the social norms in a host country (Strike et

al., 2006). From a normative perspective, MNE managers are less able to identify with local

stakeholders from culturally different countries, which decreases the likelihood to engage in

CSR practices. As a result, managers might not only be less able to engage in overseas CSR

practices, but also less willing to do so (Campbell et al., 2012).

The increased complexity associated with international diversification might also to lead

to lower levels of CSR. In fact, the growing number of foreign subsidiaries evokes the need for

more information accommodation and control and a higher risk of failure. Furthermore, MNEs

must stretch and redistribute their resources across multiple areas. Because of financial

pressures, social practices are compromised especially in countries with low levels of

environmental or social standards (Strike et al., 2006). These findings suggest that the negative

effect of inter-regional diversification on socially responsible behaviour seems to be

particularly salient in weak institutional environments, which will be further explained in the

following chapter.

2.2.1 Diversification into weak institutional environments

In order to overcome the contradictory findings on the relationship between CSR and

geographic diversification, this study proposes to differentiate between strong and weak

institutional environments. As pointed out by Amaeshi et al. (2016), the theory that firms try to

gain legitimacy in foreign markets by showcasing social activities presumes an Anglo-Saxon

model of CSR. Therefore, strong institutional contexts, such as functioning markets and

efficient legislation, are often considered as a prerequisite for CSR practices (Matten & Moon,

2008). However, developing or the least developed markets are often characterized by the

absence or failure of institutional arrangements, so-called institutional voids, which increase

the opportunities for irresponsible behaviour (Mair & Marti, 2009; Matten & Moon, 2008).

Practical as well as empirical evidence support this theory. The multinational

corporation Nike for example was subject to a scandal considering the abuse of labour in its

manufacturing plants in China, Indonesia, Thailand, Cambodia and Mexico. In fact, the

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company forced its employees in developing countries to work excessive hours at a very low

pay and forbid to form unions or speak out about these conditions (Connor, 2001). Similarly,

Strike et al. (2006) find a positive effect of international diversification on corporate social

irresponsibility. This can be explained with the pollution haven hypothesis, which states that

MNEs diversify into countries with lower standards considering working conditions and

environmental regulations to lower their costs (Walter, 1982). Surroca, Tribó and Zahra (2013)

empirically support this hypothesis by finding that MNEs shift their irresponsible practices to

host countries with lower stakeholder expectations as a reaction to increased stakeholder

pressures in the home country. Hence, the adoption of CSR practices is also dependent on the

strength of the legal system in a country. It seems plausible that companies have less incentives

to act socially responsible when laws and penalties for irresponsible behaviour are absent or not

enforced (Yang & Rivers, 2009). Reimann, Rauer and Kaufmann (2015) find that MNEs show

less strategic commitment to CSR in emerging economies, because the significant differences

in the administrative systems create challenges and unfamiliarity with the environment, which

increase the liability of foreignness and therefore decrease the ability to commit resources for

CSR purposes.

Institutional theory further argues that the legitimacy problem in emerging economies

can be overcome with the phenomenon of mimetic isomorphism. According to previous

literature, MNE subsidiaries try to avoid pitfalls in their host countries by adapting their

strategies to local firms (Kostova & Zaheer, 1999). Considering emerging markets, Baskin

(2006) finds that CSR is “less embedded in corporate strategies, less pervasive and less

politically rooted than in most high-income OECD countries” (p. 46). This leads to the

assumption that multinational firms acting in these areas might imitate the relatively lower

levels of CSR commitment of their local competitors (Reimann et al., 2015).

From an institutional perspective, this shows that the coercive as well as normative

pressures considering the adoption of CSR strategies are less salient in weak institutional

contexts. As a result, MNEs try to overcome the legitimacy challenge through mimetic

processes. This leads to the first hypothesis:

Hypothesis 1: Diversification into weak institutional environments decreases the corporate

social performance of MNEs.

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2.2.2 The role of corporate reputation

As mentioned before, one predominant reason for multinational enterprises to engage

in corporate social responsibility is the opportunity to enhance corporate reputation. Corporate

reputation is characterized as a main strategic asset as it increases firm performance and creates

value (Roberts & Dowling, 2002; Barney, 1986). Due to the timely and socially complex

development a good reputation can form a sustained competitive advantage (Fombrun, 1996;

de Castro, Navas López & López Sáez, 2006; Deephouse, 2000). Several studies have already

shown the positive impact of reputation on firm outcomes. Walker (2009) summarizes the

strategic benefits of reputation as lower costs, the ability to charge premium prices, the creation

of competitive barriers and enhanced profitability (Fombrun, 1996; Deephouse, 2000; Roberts

& Dowling, 2002).

The tacit and intangible nature makes it hard to define the construct of reputation (de

Castro et al., 2006). Reviewing 43 papers on the topic of corporate reputation, Walker (2009)

finds that the most cited definition is the one by Fombrun (1996). It states that corporate

reputation is a “perceptual representation of a company’s past actions and future prospects that

describes the firm’s overall appeal to all of its key constituents when compared with other

leading rivals” (p. 72). This definition emphasizes that reputation comprises the aggregation of

all relevant stakeholder perceptions (Walker, 2009).

Therefore, previous studies generally support the idea that companies use CSR as a

strategic means to respond to stakeholder demands and enhance their reputation (e.g. Lai, Chiu,

Yang & Pai, 2010; Arikan et al., 2016). Stanaland, Lewin and Murphy (2011) for example show

that perceived social responsibility has a positive effect on reputation as it improves a firm’s

legitimacy. In line with this, Hooghiemstra (2000) argues that firms can influence their

reputation by engaging in corporate social reporting. However, this relationship is not a one-

way interaction (Hooghiemstra, 2000). In fact, there might be other sources of information,

such as the media, that shape the reputation of a company (Dutton & Dukerich, 1991). As a

result, several authors assume that the stakeholders’ perceptions also shape the way a company

behaves (e.g. Dutton & Dukerich, 1991; Elsbach & Kramer, 1996). In this case, the showcasing

of social responsibility is a form of corporate communication used as a response to counteract

negative reputational effects (Hooghiemstra, 2000; Brown & Deegan, 1998). This shows that

CSR acts as a form of impression management, for example through increased social or

environmental disclosures (O'Donovan, 1997, cited in Hooghiemstra, 2000). Following this

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strategy, especially firms with a predicament try to overcome legitimacy challenges

(Hooghiemstra, 2000). In line with this, Duimering and Safayeni (1998) propose that companies

try to compensate negative information by overemphasizing the positive impacts of their

activities.

The aforementioned case of Nike further illustrates this coping mechanism. Due to the

accusations against the company considering its labour standards in the developing world, the

corporate reputation had suffered significantly. According to Philip Knight, the CEO of Nike,

the company had an image “synonymous with slave wages, forced overtime and arbitrary

abuse” (cited in Connor, 2001, p. 6). To overcome this criticism, Nike committed to respect the

right of freedom of association, joined the UN Global compact and donated to support the

Permanent Normal Trade Relations in China. Knight also announced changes in the labour

conditions considering child labour, health and safety, independent monitoring and education.

The media response to these promises was favourable for the company (Connor, 2001). In fact,

newspapers characterized these new conditions as a breakthrough and a new standard for other

companies, showing positive reputational effects (New York Times 1998; Dionne 1998, cited

in Connor, 2001). The phenomenon of CSR as a form of impression management can also be

illustrated by the example of Royal Dutch Shell. As a response to negative publicity and

boycotts, because of the decision to sink one of its oil platforms in 1995, the company started

to engage in several CSR practices. In fact, Shell started a debate with its stakeholders to discuss

alternative solutions and published ethical reports, illustrating for example the contributions to

the development of solar energy in Chile and Argentina (The Shell Report, 1998, cited in

Hooghiemstra, 2000).

The two examples emphasize that reputational changes influence the corporate social

responsibility of internationally diversified firms. Especially when a company suffers from

deteriorations in its reputation, it might use corporate social responsibility acts as a means to

overcome these challenges. Hence, it can be proposed that the effect of diversification of MNEs

on their social performance will be moderated by deteriorations in reputation, leading to the

following hypothesis:

Hypothesis 2: Deteriorations in corporate reputation weaken the negative effect of

diversification into weak institutional environments on corporate social performance.

18

In other words, even though there might be a high degree of geographic diversification,

as in the cases of Nike and Shell, negative changes in the reputation of the company lead to a

higher overall CSR performance of the firm in order to overcome legitimacy problems. It should

be noted that since the relationship was found to be reciprocal, diversification into weak

institutional environments might also influence corporate reputation. For instance, Christmann

and Taylor (2006) report that MNEs engaging in emerging markets often face image concerns

as they are accused of taking advantage of the lower standards for the sake of their profits.

2.2.3 The moderating effect of codes of conduct

So far, this thesis has argued that the different institutional environments MNEs engage

in and the resulting stakeholder pressures determine the choice of CSR strategies. However,

previous research also shows that company-level factors might have an impact. In fact, Yang

and Rivers (2009) argue that many companies subscribe to voluntary codes of conduct, which

lead them to pursue local CSR strategies for the sake of being attractive to company level

stakeholders. The authors illustrate the incentives for the adoption of these codes with the

example of the multinational company Nestlé. The company had been subject to consumer

boycotts as a response to its marketing of infant formula in developing markets. However, after

Nestlé had implemented the International Code of Marketing Breast Milk Substitutes, issued

by the World Health Organization and UNICEF, these boycotts came to an end (Sikkink, 1986).

This example shows that MNEs use codes of conduct to overcome negative spill over effects

from irresponsible actions in emerging markets, that might affect the global legitimacy of the

MNE (Surroca et al., 2013; Kostova et al., 2008; Kostova & Zaheer, 1999).

As codes of conduct differ in their content and scope, there is no common definition.

The literature however agrees, that it can be differentiated between corporate codes and

multistakeholder codes (Bondy, Matten & Moon, 2006). Company codes are written by

representatives of a company without input of other groups. According to Bondy (2003), these

codes are not expected to provide information on actual CSR practices as commitment and

guidance clarifications are found in separate documents. Furthermore, corporate codes often

reflect visions of managers about the future performance of a company (Sodeman, 1995).

Multistakeholder codes in contrast are based on the collaboration between NGOs, governments,

business coalitions and other groups. Therefore, these codes are often regarded as superior to

individual company codes as they create a universally applicable normative framework

(Dickerson & Hagen, 1998).

19

Although the literature criticises codes of conduct for their lack of transparency,

questionable independence of monitoring agencies and insufficient trustworthiness due to

conflicts of interest (National Research Council 2004; Esbenshade 2004; Pruett 2005;

Rodriguez-Garavito 2005), the positive effect on social responsibility has been supported.

Locke, Qin and Brause (2007) find that MNEs are unlikely to shift their irresponsible practices

to emerging markets, when they adopt codes of conduct. Especially in a developing market

context, voluntary codes of conduct are often regarded as a normative substitute for absent

regulatory conditions (Locke et al., 2007). In this case, codes are developed to maintain

responsibility standards in environments where governments fail to enforce these (Nadvi &

Wältring 2004). In contrast, codes might also be adopted in response to corporate scandals, like

the cases of Nike, Shell and Nestlé, and aimed at providing information to customer groups and

protect a company’s reputation (Esbenshade 2004; Locke et al., 2007). Regardless of the

underlying motives, prior research agrees that the adoption of codes of conduct by a company

is a sign of its awareness of and commitment to ethical behaviour (Locke et al., 2007). Hence,

it can be expected that the adoption of codes of conduct strengthens a firm’s corporate social

responsibility, even though they diversify into weak institutional environments. This leads to

the following hypothesis:

Hypothesis 3: The adoption of codes of conduct weakens the negative effect of diversification

into weak institutional environments on corporate social performance.

The proposed relationship between the four variables is depicted in figure 1.

H1 (-) H2 (-)

H3 (-)

Figure 1: Conceptual model

Diversification into

weak institutional

environments

Corporate Social

Performance

Deteriorations in

corporate

reputation

Codes of

conduct

20

To further analyse this relationship, the following chapter develops an empirical method to test

the introduced hypotheses.

3. Methodology

3.1 Sample

The sample of the present study includes 48 of the largest U.S. firms from the Fortune

500 list for the following reasons. First of all, firms in the U.S. are considered as pioneers when

it comes to CSR adoption and generally show higher levels of CSR contributions and reporting

compared to other nations, such as the Netherlands or France (Matten & Moon, 2008). This

enhances data availability. Secondly, these firms are more likely to pursue geographic

diversification strategies (Markides & Williamson, 1994). In order to enhance the comparability

of the companies, the home country characteristics were kept constant by limiting the setting to

one home country (Campbell et al., 2012). Furthermore, this study focuses on manufacturing

firms, because they are especially subject to social interest and external pressures when it comes

to social responsibility (Griffin & Mahon, 1997).

To reach the targeted sample, the Fortune 500 list was screened for manufacturing firms,

which were defined according to their NAICS codes found in Bureau van Dijks’ ORBIS

database. A list of the included industries is provided in appendix A1. The resulting list of

companies was analysed considering the availability of data and the presence in developing or

least developed markets. MNEs with limited data availability or purely domestic companies

were dropped from the sample (Keig, 2013). Several companies could not be included due to

limited availability of historical information on their reputation in Fortune’s Most Admired

Companies (MAC) database. This resulted in a list of 48 companies to be included in the

analysis.

3.2 Measures

3.2.1 Dependent variable

According to Wood (1991) the degree to which a company applies CSR principles and

strategies can be measured by the firm’s corporate social performance (CSP). To assess this

variable, most previous studies have used data from the Kinder, Lydenberg, and Domini

Research & Analytics database (KLD), which rates CSR adoption based on seven areas,

21

including community relations, employee relations, environment, human rights or diversity

(Tashman & Rivera, 2010). However, the literature notes several limitations considering this

measure. In fact, the KLD database was initially formed as a measure for domestic CSR

activities of US based companies. Even though it incorporates some non-US operations, the

domestic CSR activities prevail (Strike et al., 2006). Thus, the KLD database is not suited to

measure CSR activities in host countries or for a multinational analysis (Campbell et al., 2012).

The database was further subject to criticism, because it was found to not accurately predict

CSR violations, such as pollution levels or compliance violations. This results from the fact that

the database aggregates all individual assessments of social performance as a zero or one

indicator variable, which leads to low validity of the measure (Chatterji, Levine & Toffel,

2009). Hence, Chatterji et al. (2009) further argue that a continuous measure might be more

accurate.

As a result, this study employs the CSRhub database, which rates companies based on

four CSR categories, namely environment, governance, employees and community. The

performance in the four areas is aggregated into one overall corporate social performance rating.

In contrast to other databases, CSRhub incorporates global CSR data as it includes not only

home country information, but also CSR performance from all countries a company engages in

(Keig, 2013). The rating converts, normalizes and aggregates data from more than 530 sources,

such as research firms or governmental agencies (CSRhub, n.d. a; b). Therefore, CSRhub can

be expected to provide an appropriate foundation for the sake of a multinational analysis.

Furthermore, the open accessibility of the database facilitates the replicability of the results

(Keig, 2013). The average overall rating, ranging from 0 to 100, was used as a measure for

corporate social performance (CSP). In order to gain a more differentiated view of CSP, I also

included the separate scores in the four different CSR areas as a robustness check. Table 1

summarizes the coverage of the four categories.

Category Description

Community The community category includes citizenship, charitable giving,

volunteerism, human rights records, treatment of the supply chain and the

environmental and social impact of products.

22

Employees The employees dimension covers diversity, labor relations and rights,

compensation, employee training, health and safety and the compliance

with national laws and regulations.

Governance The governance category addresses board independence, executive

compensation, ethical leadership and compliance, the values that and ethics

of leadership, transparency and reporting of management practices and

stakeholder treatment.

Environment The environment category includes the use of natural resources,

environmental performance, compliance with environmental regulations,

climate change policies, energy use, pollution prevention and sustainable

development.

Table 1: Categories of Corporate Social Responsibility (CSRhub, 2014)

3.2.2 Independent variable

In the context of corporate social responsibility research, the international

diversification of MNEs is usually measured as the number of unique countries a firm operates

in (Keig, 2013; Bansal, 2005; Strike et al., 2006). To measure the intensity and depth of the

exposure to foreign environments, one method is to use the number of foreign subsidiaries a

company has formed (Chetty, Eriksson & Lindbergh, 2006; Strike et al., 2006). Since this study

is aimed at analysing the actual presence in a country to draw conclusions on the effect of the

exposure to weak institutional environments, the present analysis adapts this measure by

specifying it for developing and least developed countries. As a result, diversification into weak

institutional environments was measured as the number of developing and least developed

countries a company has at least one subsidiary in. This information was derived from Bureau

van Dijk’s ORBIS database, that lists all subsidiaries and their locations for each company.

Developing and least developed countries were defined in line with the United Nations World

Economic Situation and Prospects (WESP) country classification, which reflects the basic

economic conditions of each nation (WESP, 2014). An overview of the countries covered in

the analysis can be found in appendix A2.

23

3.2.3 Moderators

Deteriorations in reputation. According to previous studies, a common measure for

corporate reputation (CR) is the Fortune Most Admired Companies (MAC) survey. The survey

reflects the judgement of senior managers, outside directors and industry analysts, who evaluate

companies in the industries they are familiar with (Wartick, 1992). Furthermore, the MAC

reflects the perceptions of the different stakeholder groups, such as owners, managers,

customers and employees (Preston & Sapienza, 1989). Thus, the measure is consistent with the

definition of corporate reputation used in this study (Wartick, 1992). The survey further allows

for the assessment of year-to-year changes of reputation across eight categories, namely

innovation, people management, use of corporate assets, social responsibility, quality of

management, financial soundness, long-term investment value, quality of products and services

and global competitiveness (Wartick, 1992; Mahon & Wartick, 2012). The MAC is one of two

complete and publicly available measures, that have been used to assess different stakeholder

views of corporate reputation. A second alternative is the American Customer Satisfaction

index (ACSI) (Mahon & Wartick, 2012). However, the ACSI measures the satisfaction of

households with the products they frequently use rather than perceptions about companies (the

ACSI). Other measures, such as Fortune’s “Best Companies to Work for” or Business Week’s

“Most-Generous Corporate Donors” were found to be more based on selected indicators of

groups or individuals rather than stakeholder surveys (Mahon & Wartick, 2012). Following

these prior findings, the MAC data set was used to evaluate the corporate reputation of the

analysed companies. A dummy variable was constructed, which attains the value 1 if there was

a deterioration in reputation and 0 if there was none. This resulted in two variables of corporate

reputation deteriorations. The first one (CRD) assesses possible negative changes in reputation

in the years directly before the analysis (2015-2016) and therefore accounts for immediate CSR-

related responses to deteriorations. The second measure (NT) includes a long-term perspective

and is based on a negative trend between the years 2012 and 2016. To account for reverse

causality between diversification into weak institutional environments and deteriorations in

reputation as mentioned in chapter 2, the years before the point of analysis (2017) were selected.

Four years were chosen, because cases of reputational crises, such as Nike and Shell, show that

companies respond to these image concerns often within one to four years (Connor, 2001; The

Shell Report, 1998, cited in Hooghiemstra, 2000). Next to that, the choice of years resulted

from the availability of the overall MAC ratings, which were not accessible for the years 2013

and 2014.

24

Codes of conduct. The information on firms’ adoption of codes of conduct was derived

from their sustainability reports and company websites. To capture the relation these codes

might have with CSR, only CSR-related codes were considered in the analysis. These include

the ISO 14001 or EMS environmental standards, the ISO 50001 energy management standards

and the OECD guidelines for multinational companies. The reason for the choice of these codes

is that they were also used by previous research to assess CSR by the MCSI Asset4 database,

which leads to the assumption that they best capture CSR-related standards. Furthermore, the

aforementioned codes were the most prevalent codes in companies’ sustainability reports. The

UN Global Compact was not included, because it is already covered in the governance section

of the CSRhub database (CSRhub, 2014). Due to the aforementioned characteristics of codes,

only multistakeholder codes were included. According to Jeffcott and Yanz (2000, cited in

Bondy et al., 2006) multistakeholder codes are more efficient when it comes to issues in the

developing world. Besides, Jackson (2013) points out that almost every US-based multinational

company has developed a corporate code, which was also the case for the given sample. For

this reason, no effect would be expected in the regression analysis. As pointed out by Potoski

and Prakash (2005), the adoption of a code can be measured as a dummy variable attaining the

value 1 if the company follows a code of conduct and 0 if not. This method was adopted for the

sake of this study. Companies were rated with a 1 for each of the aforementioned codes they

adopt. This resulted in a binary variable, ranging from 0 to 3, as a measure for codes of conduct

(CoC).

3.2.4 Control variables

Two control variables were included in the analysis, because they have been found to

influence corporate social performance. The first control variable is firm size. In fact, larger

firms generally have a higher social performance as they have more resources to commit to

CSR (Perrini, Russon & Tencati, 2007). Furthermore, larger firms are more visible and

therefore face higher levels of stakeholder pressure when it comes to behaving responsibly

(Brammer, Pavelin & Porter, 2009). In line with previous studies, firm size is measured as the

total assets a company has (e.g. Soleimani, Schneper & Newburry, 2014; Campbell et al., 2012).

Next to firm size, I controlled for firm performance to check whether better performing

firms might be more likely to commit to CSR (Jackson & Apostolakou, 2010). Previous

literature has argued that firms with more slack resources invest more in social activities

(Waddock & Graves, 1997). As a proxy for a firm’s performance, I followed prior studies by

25

using the return on assets (ROA) of the previous year (Campbell et al., 2012). The ROA was

calculated by dividing the net income by total assets (Johnson & Greening, 1999). The data for

net income and total assets was derived from the Compustat Capital IQ database.

3.3 Analysis

To examine the relationship between the described variables, hierarchical moderated

regression analysis was conducted using IBM SPSS 23.0. This method seems to be appropriate

as it is used to assess the relationship between a single interval scale dependent variable (i.e.

CSP) and several predictor variables that show moderating effects (Cohen, Cohen, West &

Aiken, 2003).

To test Hypothesis 1, I conducted the regression analysis for the overall CSP rating as

an independent variable. In order to avoid the possibility that responsible corporate behaviour

in one area can outweigh the irresponsible behaviour in other areas, I repeated the regression

for the four categories that form the overall rating as independent variables to check the

robustness of the results across different practices. To evaluate the interaction effect between a

company’s reputation changes and its diversification as specified in Hypothesis 2, the two

different time horizons as mentioned before were considered separately. Interaction terms for

the two moderating effects were formed by multiplying the variables for changes in corporate

reputation and codes of conduct with the variable of diversification into weak institutional

environments (Cohen et al., 2003).

As the analysis also includes control variables, three models were used to test the

relationship between companies’ diversification into weak institutional environments and

corporate social performance (Keig, 2013). The resulting findings will be presented in the next

chapter.

4. Findings

4.1 Preliminary analysis

Before conducting the regression analysis, several necessary assumptions were

inspected. In fact, it was tested if the data is normally distributed and linear, which was found

to be prevalent. A Durbin-Watson test was run in order to check whether there is autocorrelation

in the variables. Since the Durbin-Watson measure had a value of 2,247, which is between the

26

recommended values of 1.5 and 2.5, the data can be assumed to be independent (Karadimitriou

& Marshall, n.d). Table 2 summarizes the study’s descriptive statistics.

Variables Minimum Maximum Mean Std. Deviation

CSP 49 69 59,98 4,949

Diversification 1 45 18,38 11,219

CRD 0 1 ,40 ,494

NT 0 1 ,42 ,498

CoC 0 3 ,69 ,776

Firm size 9231000 3216860000 505602083,3 647743933,5

ROA -,00089 86,50802 2,81297 13,74746

Table 2: Descriptive statistics, N = 48

Moreover, I tested for multicollinearity by examining the correlations between the variables.

Table 3 shows the correlation matrix.

Since none of the correlations in the sample exceeds the recommended threshold of 0.70,

redundancy in the variables was not an issue. Only the dependent variable of CSP and its sub-

categories show higher levels of correlation. Since these variables were used in different

regression models, this is not expected to distort the results. Furthermore, the variance inflation

factor scores (VIF) were below the recommended threshold of 10.0, showing that

multicollinearity was not a problem in the analysis (Hair, Black, Babin & Anderson, 2010). The

correlations already give a hint about the relationship between the variables. Diversification

seems to be positively correlated with overall CSP and all four sub-categories, suggesting that

Variables 1 2 3 4 5 6 7 8

1. CSP

2. Community .824***

3. Governance .866*** .585***

4. Employees .873** .694*** .662***

5. Environment .892*** .635*** .775*** .647***

6. Diversification .245 .381** .115 .263 .137

7. CRD -.179 -.184 .035 -.23 -.167 .099

8. NT .116 .204 .006 .175 .057 .12 .266

9. CoC .032 -.029 -.067 .131 .018 -.011 -.336** -.151

Table 3: Bivariate correlations, Significance levels: **p < 0.05, ***p < 0.01

27

higher international diversification into developing and least developed countries is associated

with higher levels of CSR. This relation is especially strong for community-related CSR, since

the correlation is significant on the 5%-level. Interestingly, the short-term measure of

deteriorations in reputation (CRD) seems to be negatively correlated with all CSR categories.

This can be attributed to the fact, that correlation does not necessarily imply causality (Wright,

1921). Since the points in time of measurement of CSR and CRD were very close, it might also

be that low levels of CSR lead to negative changes in reputation. This is further evidenced by

the fact that when applying a long-term measure of reputation deteriorations (NT), the

correlation becomes positive. Therefore, the long-term measure of changes in reputation was

used for subsequent calculations.

4.2 Regression results

To further analyse the relationships between the dependent and independent variables

and the role of the hypothesized moderating effects, linear regression analysis was conducted.

The findings of the three models used in the first regression, which defines overall CSP as the

dependent variable, are depicted in table 4.

Variables Model 1 Model 2 Model 3

Firm size 1.670 (.00) 1.956E-9* (.00) 2.022E-9* (.00)

ROA -.001 (.053) .032 (.054) .034 (.054)

Diversification - .129* (.066) .055 (.084)

NT x Diversification - - .084 (.072)

CoC x Diversification - - .054 (.044)

Overall model R² .048 (4.935) .125 (4.786) .165 (4.785)

Change in R² .077* .04

F-value for change in R² 1.132 3.851 1.009

Significance F change .332 .056 .373

Overall F value 1.132 2.086 1.656

Table 4: Regression results, Dependent variable = CSP, Unstandardized coefficients with corresponding

standard errors, N = 48, Significance levels: *p < 0.1

Model 1 only contains the control variables. Neither firm size nor firm performance

seem to have a unique effect on corporate social performance. The two control variables explain

4,8% of the variance in CSP. The overall model however is not statistically significant (p =

.332).

28

When adding the independent variable (diversification) in model 2, firm size has a

statistically significant positive effect on CSP, which is in line with previous studies. The

explanatory power rises to 12,5% (R² = .125). Hypothesis 1 predicted that higher levels of

geographic diversification into weak institutional environments lead to lower levels of overall

corporate social performance. The analysis shows, that diversification is positively related to

CSP (B = .129). This effect was found to be significant at the 10%-level (p = .056). Therefore,

hypothesis 1 was not supported. Instead the opposite relationship seems to be prevalent.

In model 3 the moderating effects of codes of conduct and deteriorations in corporate

reputation were added. When using the long-term measure of changes in reputation, the

explanatory power of the model rises to 16,5% (R² = .165). When looking at the coefficients,

the interactions between CoC and diversification and NT and diversification are not significant.

Furthermore, model 3 overall does not show significance, which is why the moderating effect

of codes of conduct and deteriorations in corporate reputation on the relationship between of

diversification into weak institutional environments and the overall corporate social

performance could not be proven. Hence, hypothesis 2 and hypothesis 3 were not supported.

4.3 Robustness check

I applied a robustness check to examine how the coefficients behave when the

specifications of the regression are modified (Lu & White, 2014). One concern when using an

aggregate measure to assess corporate social performance is the possibility that different actions

can outweigh each other. For instance, Nike donated US$1 million to tsunami victims and

claims to support disadvantaged girls in developing markets, while at the same time exploiting

the labor conditions in these countries (Nike, 2005, cited in Strike et al., 2006; Connor, 2001).

Since CSR in developing markets is often associated with philanthropic actions (Visser, 2008),

it might be that community-related actions in these markets overshadows the irresponsible

behavior when it comes to employee treatment. To avoid the compensating effect of responsible

behaviour in one area on irresponsible behaviour in other areas, the robustness of the results

was checked by differentiating between the four different CSR categories in the CSRhub

database. The related descriptive statistics are depicted in appendix A3. For the effects of

diversification into weak institutional environments on community, environment, governance

and employees, the analyses show slightly differing results than for the overall CSP rating. The

findings for the four categories are summarized in table 3.

29


Dependent variable = Community

Firm size 2.475-10 (.0) 6.931-10 (.0) 6.901-10 (.0)

ROA -.009 (.059) .043 (.058) .044(.058)

Diversification - .201*** (.07) .134 (.09)



Overall model R² .002 (5.476) .16 (5.08) .19 (5.105)

Change in R² .158*** .03

F-value for change in R² .035 8.302 0.783

Sig F change .965 .006 .464

Overall F value .035 2.795* 1.974

Dependent variable = Governance

Firm size 1.375E-9 (.0) 1.532-9 (.0) 1.591E-9 (.0)

ROA .025 (.051) .043 (.053) .044 (.054)

Diversification - .071 (.065) .042 (.084)



Overall model R² .037 (4.729) .062 (4.719) .071 (4.806)

Change in R² .025 .009

F-value for change in R² .858 1.196 .207

Sig F change .431 .28 .814

Overall F value .858 .973 0.645

Dependent variable = Employees

Firm size 2.581E-9 (.0) 2.984E-9* (.0) 3.081E-9* (.0)

ROA -.031 (.074) .016 (.075) .019 (.073)

Diversification - .181* (.091) .038 (.114)

NT x Diversification - - .173* (.098)


Overall model R² .066 (6.844) .144 (6.628) .22 (6.475)

Change in R² .078* .076


Sig F change .213 .052 .142

Overall F value 1.601 2.467* 2.371*

Table 5: Robustness check results, Unstandardized coefficients with corresponding standard errors N = 48,

Significance levels: *p < 0.1, **p < 0.05

30


Dependent variable = Environment

Firm size 2.703E-9** (.0) 2.906E-9** (.0) 2.987 E-9** (.0)

ROA -.005 (.061) .018 (.064) .02 (.065)

Diversification - .091 (.078) .018 (.10)



Overall model R² .091 (5.708) .118 (5.684) .147 (5.722)

Change in R² .028 .029


Sig F change .118 .247 .498

Overall F value 2.24 1.965 1.447

Table 5 continued: Robustness check results, Unstandardized coefficients with corresponding standard errors

N = 48, Significance levels: *p < 0.1, **p < 0.05

When looking at community-related CSR as a dependent variable, diversification leads

to a significant change in R² (Sig. F Change = .006). The second model, which adds

diversification to the regression as explained before, is also statistically significant on the 10%-

level (p = .051). Therefore, diversification into weak institutional environments is a significant

predictor for community-related CSP. Overall, the model explains 19% of the variance in

community-related responsibility.

Considering the governance dimension of CSR, neither a positive nor a negative effect

of diversification can be noted. Since none of the coefficients is significant and the values are

small, the tested variables do not predict the level of governance-related CSR. The models

overall have the lowest level of explanatory power as the variables only explain 7,1% of the

variance in governance.

For the environment as well as the employee dimension of CSR firm size does have a

positive effect and is a significant predictor in the model. For employees, the second model also

suggests that diversification has a significant positive effect (B = .181), contradicting the

proposed assumption, that firms diversify into developing and least developed markets to

exploit lower labor standards and compensation levels. In contrast, for the environment

diversification into weak institutional environments is not a significant predictor.

Overall, the effect of diversification on CSP, community, governance and environment

is independent of codes of conduct or changes in corporate reputation, since the interaction

31

effects were not significant in these models. Only for the employee dimension, the third model

is significant on the 10%-level. When looking at the coefficients, the interaction effect between

deteriorations in reputation and diversification is a significant predictor of employee-related

CSR. The possible reasons for these results will be discussed in the next chapter.

5. Discussion

This study aimed at analysing the effect of multinational companies’ geographic

diversification into weak institutional environments on their corporate social performance.

Specifically, the study hypothesized that the lack of coercive and normative pressures and the

unfamiliarity with the institutional contexts in developing and least developed countries

decrease a firm’s ability and willingness to engage in CSR activities. Overall, this hypothesis

was not supported. Instead, the opposite relationship was found. This finding is in line with

previous research, arguing that CSR in an international context helps to overcome legitimacy

challenges, fosters stakeholder relationships and creates a positive image. It seems like

companies view CSR as a valuable resource to establish a competitive advantage even in

environments where it is less embedded. It can also be speculated that MNEs diversifying into

developing and least developed countries use CSR in order to fill institutional voids. Khanna

and Palepu (1997) for example note that it is difficult to communicate the quality of a firm to

stakeholders in emerging markets since the quality of the information infrastructure is poor. As

a result, MNEs adopt CSR practices to show their superior quality and differentiate themselves

from competitors. In this context, the literature often classifies CSR as a signal to show

environmental or social stewardship in institutions characterized by high opacity (Berliner &

Prakash, 2013; Wijen, 2014).

However, there are several other possible reasons for the results. Previous studies on the

relationship between internationalization and CSR continuously report difficulties in

empirically supporting the pollution haven or corporate crime hypotheses (Kang, 2013; Strike

et al., 2006). Strike et al. (2006) for example assume that insignificant findings result from the

aggregated measurement of positive and negative components of CSR, suggesting the

distinction between CSR and corporate social irresponsibility (CSIR). Pursuing this method,

the authors find that internationalization is positively related to CSR as well as CSIR. For the

prevalent study this implies that the not supported first hypothesis, which proposed a negative

effect of internationalization on CSP, might be attributed to the fact that positive corporate

32

actions in some areas might offset the irresponsible behaviour in other areas. Therefore,

companies can shift their irresponsible behaviour to developing and least developed markets,

for example through exploiting the local workforce, but on the other hand engage in CSR by

donating to charities, which might lead to a high overall CSR score. This effect is further

strengthened by the fact that the used measure for CSR aggregates CSR attributes from all

countries a company engages in. As a result, practices in developing and least developed

countries might be overshadowed by activities in developed markets. In order to prove the

hypothesized relationship, a more specific measure of CSR, which distinguishes between CSR

and CSIR on the one hand and between developed and developing/least developed markets on

the other hand would have been more accurate. However, such data was not available for this

investigation. The only measure that distinguishes between CSR strengths and concerns is the

KLD database. However, this data mainly incorporates US-based activities, which is why

international information is very limited (Keig, 2013; Strike et al., 2006). As this thesis is only

targeted at developing and least developed countries, this data seems to be inappropriate.

The results can also be attributed to the nature of the sample used in this analysis. In

fact, only large and well-performing firms selected from the Fortune 500 list were observed.

However, large firms generally commit more to CSR than smaller firms due to their visibility

and availability of resources (Perrini et al., 2007; Brammer et al., 2009). Therefore, the

observation of a more diversified sample including smaller firms might lead to different results.

In line with previous research, firm size was also found to have a positive effect on CSP. This

suggests that larger firms act more responsibly regardless of their degree of internationalization.

The thesis further hypothesized that the effect of diversification on CSP is moderated

by the adoption of codes of conduct and negative changes in reputation. However, these

moderating effects do not show significance. This suggests that the social performance of

MNEs is independent of their reputation changes and their commitment to codes of conduct.

This finding can also be attributed to the fact, that the main effect tested in the analysis goes in

the opposite direction as expected.

The low values in B as well as the levels of overall R² can further be explained by the

fact that there are other critical variables that determine CSP. This is in line with previous

research, which found several other predictors of CSR engagement. Yang and Rivers (2009)

for example argue that CSP in a multinational context depends on institutional factors, such as

NGO activism, consumer demands or community voice as well as organizational level factors,

33

such as the parent-firm relations, employee power or shareholder demands. Also managerial

factors, such as individual values, determine CSP (Hemingway & Maclagan 2004; Visser

2007). This implies that the variables of diversification, corporate reputation and codes of

conduct are not the only factors influencing CSP, which is why other contextual and subsidiary-

level measures should be included in predicting it. However, data from the analysed developing

and least developed markets on such factors was not available for this thesis.

To account for the compensating effect of the different CSR areas, the regression

analysis was repeated for the four CSR categories. The positive effect of diversification on CSR

was robust for the community and the employee dimension, whereas no effect was found for

governance and environment. This draws attention to the necessity to take the different types

of CSR into consideration when conducting multinational CSR studies.

A possible explanation for the differing results can be found by distinguishing between

implicit and explicit forms of CSR as conceptualized by Matten and Moon (2008). The

community dimension for example includes a company’s citizenship and its philanthropic and

charitable activities. Thus, it characterizes voluntary engagement in local as well as global

communities (CSRhub, 2014). According to Matten and Moon (2008), these activities can be

classified as an explicit form of CSR as they constitute a response to stakeholder demands that

is not caused by implicit institutional rules and norms. These activities are not embedded in a

certain institutional environment as they are not caused by certain standards or regulations, such

as the ISO codes or UN Global compact. The results show that companies do not struggle to

implement community-related CSR when diversifying into weaker institutional environments.

As explicit CSR is an overarching construct, firms rather adopt these CSR practices to

overcome legitimacy challenges or gain a superior reputation in the market, even though the

institutional environments differ. This finding can also be attributed to the fact that institutional

environments shape the understanding of CSR. In fact, in developing countries CSR is often

understood in terms of philanthropy and community development (Visser, 2008). This suggests

that companies do indeed adapt their CSR strategies to the institutional environments in less

developed countries by pursuing those practices that are regarded as most important by the local

stakeholders. The fact that the positive effect for community-related CSR was stronger than for

other forms of CSR might also be a sign that companies have more difficulties in adopting more

institutionally embedded CSR in developing and least developed countries as hypothesized in

this study.

34

An example are environment-related CSR practices. In contrast to community-related

factors, environmental practices are subject to coercive pressures as they are often caused by

environmental regulations (CSRhub, 2014). Such standards depend on the institutional context

as they are less prevalent in weak institutional environments. It can be assumed that MNEs do

not engage in this form of CSR to enhance stakeholder relations, because it is regarded as less

important in the local institutional environment. Especially in countries where the coverage of

basic rights is not given, CSR targeted at the creation of basic standards can be expected to be

more important than environmental issues or corporate governance (Rathert, 2016).

Considering the employee dimension, this study finds that firms that diversify more into

developing and least developed countries, act more responsibly towards their employees. As

the employee category covers fair and equal compensation, labour rights and health and safety

of the workforce (CSRhub, 2014), these findings oppose the hypothesis that firms exploit the

workforce in weaker institutional environments. This might suggest that corporate scandals,

such as the case of Nike, are exceptions and MNEs generally do not exploit their employees

due to lower standards. Matten and Moon (2008) propose a similar effect comparing European

and US-American CSR practices. They argue that the absence of institutionally embedded

codified rules for employment-related issues leaves space for more explicit CSR. Therefore,

the high levels of employee-related CSR in developing and least developed countries can be

regarded as a substitute for coercive institutional factors.

The results suggest that internationally diversified firms, engaging in developing and

least developed countries, increase their employee-related CSR activities as a response to

negative changes in their reputation. This is in line with prior theory as it shows that MNEs try

to overcome image concerns by enhancing their employee conditions. Thus, hypothesis 2 can

be supported for the employee category. The fact that the effect was evidenced for this category

might be attributed to increasing criticism considering the working conditions in developing

countries as a response to corporate scandals as shown in the Nike example. For instance, an

increasing amount of reports issues the low salary, excessive working hours and unsafe

conditions in developing markets (e.g. Pruett, 2005; Connor & Dent, 2006, cited in Locke et

al., 2007). The types of reputational changes leading to these results however require further

analysis.

Besides, the underlying reasons why MNEs engage more in certain CSR areas (i.e.

community and employees) as a response to diversifying into weak institutional environments

35

than in others requires further research. Furthermore, the aggregated measurement of CSR leads

to the possibility that responsible employee treatment or community support in the home

countries or other developed markets overshadows the irresponsible behaviour in developing

host countries. However, some conclusions can be drawn from this study.

6. Conclusion

This thesis aimed at answering the question, if the diversification into weak institutional

environments of multinational enterprises influences their corporate social responsibility. It

participates in the debate, if corporate social responsibility acts as a complement to or as a

substitute for strong institutional conditions (Jackson & Apostolakou, 2010; Matten & Moon,

2008; Rathert, 2016). Based on contradictory findings in the literature on whether multinational

companies exploit labour and environmental standards in their host countries or adopt corporate

social responsibility practices in order to overcome the liability of foreignness and enhance

legitimacy in the local markets, this study emphasizes the need to consider the different

institutional environments firms diversify into. More specifically, it was argued that while CSR

might be used as a means to build stakeholder relations and create a positive image in strong

institutional environments, the practices of CSR in developing or least developed markets

differ. CSR is not only less embedded in regulatory institutions in these countries, but also

interpreted differently (Visser, 2008; Amaeshi, 2006). This creates uncertainty for MNEs when

it comes to choosing appropriate CSR strategies (Campbell et al., 2012). Following institutional

theory, this study further argued that this uncertainty can be overcome through mimetic

isomorphism, which would lead to the imitation of the relatively lower CSR standards in the

developing or least developed host countries (Reimann et al., 2015).

Therefore, it was hypothesized that the diversification into weak institutional

environments leads to lower levels of corporate social performance. To test this relationship,

48 US-based multinational companies engaging in developing or least developed markets were

analysed. In contrast with the proposed theory, the regression results suggested that

diversification into these environments in fact leads to a higher corporate social performance.

This result was particularly robust for the employee and community dimensions of CSR. The

findings therefore showed that weak institutional conditions drive certain types of CSR

(Rathert, 2016). More specifically, MNEs engaging in developing and least developed countries

adopt those practices that target concerns which are regarded as the most important in the local

36

environments. The study provides new evidence that firms adapt their CSR strategies to the

institutional environments they engage in. Besides, CSR can not only act as a complement to,

but also as a substitute for strong institutions (Rathert, 2016).

Considering the employee dimension of CSR, it was further proven that previous

deteriorations in corporate reputation have a positive impact on the relationship between

diversification and CSR. This provides support for prior theory, arguing that CSR can be used

as a form of impression management to overcome reputational challenges.

For the international business literature, the findings of the study contradict the theory

that MNEs diversify into countries where regulatory arrangements are absent in order to exploit

the local labour standards. From an institutional theory perspective, the assumption that

companies follow mimetic isomorphic behaviour in developing and least developed host

countries was also rejected. These results highlight the importance of CSR in a global context.

For multinational companies, the analysis leads to the implication that competitive

pressures must be considered when engaging in developing or least developed markets.

Contrary to the assumption that countries with less regulatory standards provide an opportunity

to lower costs by lowering socially responsible behaviour, this study finds that diversified

MNEs still show high levels of corporate social performance. As a result, MNEs trying to

exploit these conditions by behaving irresponsibly might face competitive disadvantages (Keig,

2013). The fact that the high levels of CSR were especially significant for the employee and

community dimension might show an opportunity to gain a pioneer position in other CSR areas,

such as environmental or governance issues, in developing and least developed markets. This

further suggests, that MNE managers must be aware of the different CSR priorities in weak

institutional environments. They have to consider the fact that CSR strategies targeted at

creating basic standards, such as community-related initiatives, might be more efficient in these

countries than other practices (Rathert, 2016).

Overall, this investigation finds that the diversification into weak institutional

environments does influence the corporate social performance of multinational enterprises. This

effect was found to be positive. The study contributes to the international business literature by

shifting the research focus to weak institutional environments as it particularly analyses the

effect of diversification into developing and least developed countries on corporate social

performance. Additionally, the study draws attention to the necessity to differentiate between

37

the CSR categories when conducting comparative CSR studies as some areas were found to be

more affected than others.

The results of the present study however must be interpreted with caution. In fact, the

aggregate measurement of responsibility and irresponsibility as well as domestic and foreign

CSR practices might lead to compensating effects, which may have distorted the results. The

limitations will be further discussed in the next chapter.

7. Limitations and future research

This study is subject to several limitations, which might offer future research

opportunities. First, the use of single measures for corporate social performance as well as

corporate reputation raises questions about the comparability of the different included

stakeholder views. In order to form one single variable of reputation or corporate social

responsibility, it must be assumed that all respondents use the same criteria and draw the same

conclusions when evaluating the companies (Mahon & Wartick, 2012). Additionally, the

aggregation of these measures poses some challenges. As mentioned before, CSP reflects

responsible as well as irresponsible behaviour of firms. Consequently, it is hard to detangle the

effects of diversification on the CSR and CSIR. Responsible actions might overshadow

irresponsible behaviour, which is why the higher CSR levels for more internationally dispersed

firms found in this study might outweigh the resulting irresponsible behaviour. As a result,

future research should distinguish between corporate responsibility and corporate wrongdoing

by analysing the two constructs separately (Strike at al., 2006). Moreover, the CSRhub database

aggregates corporate practices from all locations a MNE engages in. Hence, the results are not

clearly attributable to diversification into weak institutional environments. The higher CSR

performance might also be due to geographic dispersion into other areas or CSR practices in

the home country environments of the firms. For future research, it can be recommended to

focus on data that only measures the CSR performance of the subsidiaries in developing or least

developed countries to gain more reliable results.

Next to the use of aggregated measures, the sample of the present study poses some

limitations. In fact, it was only focused on large firms due to data availability. This might be a

biased sample as large firms have been found to have a higher corporate social performance in

general. With the increasing importance of international entrepreneurship, it might be

interesting for future research to focus on smaller and private firms (McDougall & Oviatt, 2000;

38

Strike et al., 2006). Moreover, the sample only covers American firms engaging in developing

and least developed countries. The scope should therefore be extended to other home countries

in future studies. Particularly firms from weak institutional environments engaging in other

developing countries may lead to worthwhile results, since the institutional environments are

more similar here, which might decrease legitimacy challenges (Reimann et al., 2015). Besides,

the sample is relatively small compared to similar studies (e.g. Kang, 2013; Keig, 2013; Strike

et al., 2006). This decreases the generalizability of the results.

The quantitative nature of the study does not allow to draw conclusions on the

underlying reasons, why MNEs increase their CSR commitment when diversifying into weak

institutional environments. It might be to fill institutional voids, overcome institutional

challenges, such as the weak information infrastructure, gain legitimacy in the eyes of local

stakeholders or to show off the superior firm quality (Khanna & Palepu, 1997; Matten & Moon,

2008). In order to clarify the processes that define the choice of CSR strategies in developing

and least developed countries, more qualitative approaches, for example through in-depth

interviews with subsidiary managers, might be helpful. Besides, reverse causality might be an

issue. When interpreting CSR as a firm-level resource, there is the possibility that higher levels

of corporate social performance enable firms to diversify into more countries (Attig et al.,

2016).

Another limitation concerns the measurement of the moderating variable of codes of

conduct. In fact, the adoption of codes was measured based on self-reported indications in

sustainability reports or on corporate websites. As a result, the actual compliance with these

codes cannot be validated. Previous literature has already pointed out the difficulties in

monitoring and the lack of trustworthiness when it comes to codes of conduct. A possible

solution for future studies could be to only consider those codes, where the adoption was

validated by external agencies. However, even though codes might be validated, the

independence of monitoring agencies stays questionable (National Research Council 2004;

Esbenshade 2004; Pruett 2005; Rodriguez-Garavito 2005).

Finally, the present study only focuses on one point in time and as a result does not

account for changes in MNEs corporate social performance over time. It has been previously

argued that while companies face high levels of knowledge deficiencies and unfamiliarity when

first entering a market, this disadvantage might diminish with growing experience (Barkema &

Vermeulen 1997). At the beginning of the geographic diversification process the MNE may

39

need to focus on its core business activities and its compliance with host country institutions

(Gaur & Lu 2007). After the business is established, there might be more capacity to commit

to CSR practices in this country (Gardberg & Fombrun 2006). Therefore, future research should

pursue long-term studies to examine the possibility that corporate social performance in

developing and least developed countries might grow over time.

40

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Appendix

NAICS Code Description Frequency

3112

3121

3152

3162

3221

3253

3254

3256

3262

3279

3314

3329

3331

3336

3339

3341

3342

3344

3345

3346

3352

3361

3363

3364

3391

3399

Grain and Oilseed Miling

Beverage Manufacturing

Cut and Sew Apparel Manufacturing

Footwear Manufacturing

Pulp, Paper, and Paperboard Mills

Pesticide, Fertilizer, and Other Agricultural Chemical

Manufacturing

Pharmaceutical and Medicine Manufacturing

Soap, Cleaning Compound, and Toilet Preparation

Manufacturing

Rubber Product Manufacturing

Other Nonmetallic Mineral Product Manufacturing

Nonferrous Metal (except Aluminium) Production and

Processing

Other Fabricated Metal Product Manufacturing

Agriculture, Construction, and Mining Machinery

Manufacturing

Engine, Turbine, and Power Transmission Equipment

Manufacturing

Other General Purpose Manufacturing

Computer and Peripheral Equipment Manufacturing

Communications Equipment Manufacturing

Semiconductor and Other Electronic Component

Manufacturing

Navigational, Measuring, Electromedical, and Control

Instruments Manufacturing

Manufacturing and Reproducing Magnetic and Optical Media

Household Appliance Manufacturing

Motor and Vehicle Manufacturing

Motor Vehicle Parts Manufacturing

Aerospace Product and Parts Manufacturing

Medical Equpment and Supplies Manufacturing

Other Miscellaneous Manufacturing

2

3

1

1

1

1

4

3

1

1

1

1

2

1

2

4

2

1

3

1

1

2

1

2

3

3

Sum 48

Table A1: Industries and frequencies

53

Developing countries Least developed countries

Algeria Algeria

Angola

Argentina

Bahrain

Bangladesh

Barbados

Benin

Bolivia (Plurinational State of)

Botswana

Brazil

Brunei Darussalam

Burkina Faso

Burundi

Cabo Verde

Cameroon

Central African Republic

Chad

Chile

China

Colombia

Comoros

Congo

Costa Rica

Côte d’Ivoire

Cuba

Democratic Republic of the Congo

Djibouti

Dominican Republic

Ecuador

Egypt

El Salvador

Equatorial Guinea

Eritrea

Ethiopia

Gabon

Gambia

Ghana

Guatemala

Guinea

Guinea-Bissau

Guyana

Haiti

Honduras

Hong Kong SAR

India

Indonesia

Iran (Islamic Republic of)

Iraq

Israel

Jamaica

Jordan

Kenya

Kuwait

Lebanon

Lesotho

Liberia

Libyab

Madagascar

Malaysia

Afghanistan

Angola

Bangladesh

Benin

Bhutan

Burkina Faso

Burundi

Cambodia

Central African Republic

Chad

Comoros

Democratic Republic of the

Congo

Djibouti

Equatorial Guinea

Eritrea

Ethiopia

Gambia

Guinea

Guinea-Bissau

Haiti

Kiribati

Lesotho

Liberia

Madagascar

Malawi

Mali

Mauritania

Mozambique

Myanmar

Nepal

Niger

Rwanda

Samoa

Sao Tome and Principe

Senegal

Sierra Leone

Solomon Islands

Somalia

South Sudan

Sudan

Timor Leste

Tuvalu

Togo

Uganda

United Republic of Tanzania

Vanuato

Yemen

Zambia

54

Malawi

Mali

Mauritania

Mauritius

Mexico

Morocco

Mozambique

Myanmar

Namibia

Nepal

Nicaragua

Nicaragua

Niger

Nigeria

Oman

Pakistan

Panama

Papua New Guinea

Paraguay

Peru

Philippines

Qatar

Republic of Korea

Rwanda

Sao Tome and Prinicipe

Saudi Arabia

Senegal

Sierra Leone

Singapore

Somalia

South Africa

Sri Lanka

Sudan

Syrian Arab Republic

Taiwan Province of China

Thailand

Togo

Trinidad and Tobago

Tunisia

Turkey

Uganda

United Arab Emirates

United Republic of Tanzania

Uruguay

Venezuela (Bolivarian Republic of)

Viet Nam

Yemen

Zambia

Zimbabwe

Table A2: List of developing and least developed countries

55

Variables Minimum Maximum Mean Std. Deviation

Community 48 68 58,42 5,363

Environment 48 72 61,46 5,856

Employees 48 76 64,48 6,931

Governance 45 65 55,17 4,715

Table A3: Descriptive statistics of CSR categories

Documents

The Effect of Geographic Diversification into weak