Impact of Corporate Social Responsibility Intensity on Corporate Reputation and Financial Performance of Indian Firms

Abstract The rising importance of CSR over the last few decades has stirred the interest of academia and corporate on the subject. CSR attracted attention in the Indian context with the implementation of the Companies Bill, 2013, which mandated firms to invest 2 per cent of their net profits in social activities. The linkages between CSR and profitability using factors such as corporate reputation, competition intensity, and advertising have been tested in the developed countries. These linkages have sparsely been tested in emerging economies such as India, which motivated me to conduct this study. Neville et al. (2005) proposed a theoretical model integrating stakeholders, and internal and external factors influencing the CSR-FP relationship. This study modified and used Neville's et al. (2005) model to test the proposed linkage in the Indian context. Structural Equation Modeling revealed a significant relationship between CSR Intensity and corporate reputation; significant role of social initiative and corporate strategy fit in enhancing the corporate reputation of a firm; and a significant role of advertising and promotion in enhancing corporate reputation. Other variables such as competitive intensity, supplier power, customer power and employee power were found to have no significant role on the proposed relationships. Keywords CSR intensity corporate reputation firm performance stakeholder JEL Classification M14 Introduction Liberalization and globalization, presence of MNCs in Asian markets, rising consumer expectations from businesses, and emergence of pressure groups have augmented the cause of CSR in the Asian sub-continent. Responding to social pressure is important for a firm as it can directly affect its market value by pushing away investors from the firm or indirectly by harming the reputation or brand equity of the firm. Firms may be encouraged to perform socially responsible activities to ward off negative attention from NGOs (Baron 2009). Moreover, Indian consumers have become increasingly aware of the wider social role of business in the society (Mishra and Suar 2010). Consequently, Indian companies have started focusing on CSR activities to build trust amongst their significant stakeholders (Mishra and Suar 2010; Carroll and Shabana 2010). CSR is instrumental for a firm to gain public appreciation; to make up for perceived wrong doings of an industry; and/or manage their reputation. The Companies Bill, 2013, India, which aimed at bringing the management of the corporate sector in line with global norms, directed companies to invest in social and ethical causes. Given this statutory requirement, companies need to invest in CSR activities that have an impact on firm performance and ensure that the CSR expenditure undertaken on their part is beneficial to them in the long run. This study accordingly addresses the CSR-FP link in the Indian context. Neville et al. (2005: 1190) proposed a theoretical model integrating stakeholders, internal factors (Reputation Management Capability; Social Initiative and Corporate Strategy Fit) and external factors (Stakeholder Power; Competitive Intensity) that affect the link between CSR and FP. The model also envisaged the moderating role of stakeholders in the CSR-FP relationship. This study intended to test the validity of the model in the Indian context. The postulates provided by Neville et al. (2005) consider stakeholders in its entirety which is an erroneous approach. Given the presence of several different groups of stakeholders (Freeman 1984: 25) with their varying significance to a firm, they need to be analyzed separately. Previous research (Rose and Thomsen 2004) identified employees, customers and suppliers as major stakeholders who are likely to significantly influence the performance of a firm, due to their ability to control critical resources of the firm. Therefore, this study endeavors to analyze Neville's model in the Indian context focusing on customers, suppliers and employees, who significantly affect the performance a firm. …