The Combined Effect of Firm External and Internal Factors on Corporate Social Responsibility and Firm Performance

IntroductionCorporate social responsibility (CSR) has received the attention of countless organizational decision makers. Such attention has been compelled by the increased expectations of a wide range of stakeholders for firms to behave ethically. Broadly defined, corporate social responsibility refers to "company activities voluntary by definition demonstrating the inclusion of social and environmental concerns in business operations and in interactions with stakeholders (Van Marrewijk, 2003)" Stakeholders have been increasingly pressuring organizations to engage in CSR activities. Consequently, organizations engage in CSR activities with the hope that customers will reward them (Becker Olsen, Cudmore, Hill, 2006).As such, the topic of CSR has also attracted the attention of several scholars. Many studies have tried to determine the link between CSR and various outcomes, such as overall firm performance (e.g. Griffin Mahon, 1997; McWilliams Siegel, 2000; Orlitzky, Schmidt, Rynes, 2003; Waddock Graves, 1997) brand performance (Lai, Chiu, Yang, Pai, 2010) consumer behavior (Becker Olsen et al. 2006) and customer donations (Lichtenstein, Drumwright, Braig, 2004) A few studies have also explored antecedents of the level of investments in CSR by various organizations (Beliveau, Cottrill, O'Neill, 1994; Fernandez Kranz Santalo, 2010; Rodriguez, Siegel, Hillman, Eden, 2006) However, researchers have not come to a consensus in terms of the actual effect of various factors affecting CSR, as well as outcomes caused by CSR.A firm's level of investment in CSR activities, as well as the sensitivity of stakeholders' concerns over the ethical behavior of firms, vary among industries (Cai, Jo, Pan, 2012) As such, industry factors (industry concentration, barriers to entry, etc. may influence how organizations allocate investments related to CSR. In this paper, we focus on one important aspect of the industry structure that can have an effect on the level of investments by firms on corporate social responsibility. More specifically, we discuss how industry concentration affects such investments in CSR. The argument that links industry concentration with the degree of engagement in CSR by an organization is that CSR strategies could be undertaken by companies in order for them to gain a competitive advantage, and a less concentrated market, characterized by a high level of competition, could allow the use of CSR as a differentiation strategy or, even, as a way to enter new markets. The motivation for doing this study is that the literature shows mixed results in the way industry concentration affects CSR. For example, Fernandez Kranz and Santalo (2010) found that a higher market concentration is associated with superior social responsibility levels. Beliveau et al. (1994) has also tested this relationship but found that the industry concentration level does not significantly predict CSR.This paper provides additional insights into a few of these indeterminate findings. To better understand this relationship, we incorporate R&D intensity and combine its effect to that of industry concentration in order to examine this combined effect on CSR. As such, industry concentration will create a competitive environment in which firms will strive to gain competitive advantage. Therefore, such firms will be more willing to invest in R&D in order to develop products and processes that will provide the firm with the tools needed to survive the competition. R&D intensity can fuel of the development of certain products and processes with CSR properties that will give the firm a competitive advantage, which, in turn, will positively impact firm financial performance. We build upon the work of Amit and Schoemaker (1993) by combining external factors with internal resources and capabilities to create strategic assets. Therefore, CSR can become a strategic asset through the combination of both environmental factors, which in our case would be the industry concentration, and internal resources and capabilities, which can be obtained from investments in R&D.