Journal of International Business Studies (2006) 37, 850–862                             & 2006 Academy of International B...
Social responsibility and the international diversification   Vanessa M. Strike et al                                     ...
Social responsibility and the international diversification   Vanessa M. Strike et al852(Sharfman et al., 2004) and consid...
Social responsibility and the international diversification   Vanessa M. Strike et al                                     ...
Social responsibility and the international diversification   Vanessa M. Strike et al854appropriately, it is difficult to ...
Social responsibility and the international diversification   Vanessa M. Strike et al                                     ...
Social responsibility and the international diversification      Vanessa M. Strike et al856return on sales lagged 1 year. ...
Social responsibility and the international diversification     Vanessa M. Strike et al                                   ...
Social responsibility and the international diversification   Vanessa M. Strike et al858others have shown that using a lag...
Social responsibility and the international diversification   Vanessa M. Strike et al                                     ...
Social responsibility and the international diversification   Vanessa M. Strike et al860  It is also important to recogniz...
Social responsibility and the international diversification   Vanessa M. Strike et al                                     ...
Social responsibility and the international diversification     Vanessa M. Strike et al862About the authors               ...
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Being good while being bad social responsabilty

  1. 1. Journal of International Business Studies (2006) 37, 850–862 & 2006 Academy of International Business All rights reserved 0047-2506 $30.00 www.jibs.netBeing good while being bad: socialresponsibility and the internationaldiversification of US firmsVanessa M. Strike, Jijun Gao Abstractand Pratima Bansal This paper contributes to the discussion on international diversification and corporate social responsibility (CSR) by suggesting that firms can beRichard Ivey School of Business, The University of simultaneously socially responsible and socially irresponsible. To test ourWestern Ontario, London, Ontario, Canada assertions, we analyze data from 222 publicly traded US firms from 1993 to 2003. The findings support our hypotheses, and have significant implicationsCorrespondence: for the way in which we conceptualize CSR.P Bansal, Richard Ivey School of Business, Journal of International Business Studies (2006) 37, 850–862.The University of Western Ontario, Office/ doi:10.1057/palgrave.jibs.8400226Building: 2N34, LNCPM, London, Ontario,Canada N6A 3K7.Tel: þ 1 519 663 0183; Keywords: corporate social responsibility; corporate social irresponsibility; multinational corporations; international diversification; time series cross-sectional analysisFax: þ 1 519 661 3959;E-mail: Introduction The protests at the World Trade Organization meetings in Seattle (1999), Quebec City (2001), Doha (2001), and Hong Kong (2005) emphasized just how important social responsibility has become to multinational organizations. The protests in Seattle were ‘the most striking expression of citizens struggling against a worldwide corporate-financed oligarchy – in effect, a plutocracy’ (Hawken, 2000). There is a vociferous community that believes multi- nationals are socially irresponsible, yet the research evidence has been mixed. Proponents argue that multinationals exploit the lax social and environmental standards in foreign countries (Low and Yeats, 1992; Lucas et al., 1992). Opponents argue that there is a positive relationship between international diversification and social responsibility, and that internationally diversified firms transfer best practices across geographical boundaries, improving social justice (Bansal and Roth, 2000; Christmann, 2004). Unlike prior research, we do not polarize the argument. Instead, we argue that firms can be socially responsible in some activi- ties and irresponsible in others. To illustrate, we use the example of Nike, a public US firm that employs 23,000 people in North America, Europe, Asia Pacific, and Latin America (Nike, 2005). The international human rights organization ‘Global’ Exchange has reported that Nike employees in developing countries are forced toReceived: 22 August 2005Revised: 28 February 2006 work excessive hours, are not paid enough to meet their most basicAccepted: 10 April 2006 needs, and are subject to violent intimidation if they speak outOnline publication date: 7 September 2006 about labor abuses (Connor, 2001). At the same time, Nike claims
  2. 2. Social responsibility and the international diversification Vanessa M. Strike et al 851to be committed to alleviating poverty by improv- operates and their importance to the firm’, whereing the well being of disadvantaged adolescent girls markets refer to different geographic locationsin the developing world. The company has also that cross national borders (Hitt et al., 1997, 767).donated US$1 million to relief organizations pro- Firms diversify internationally in order to exploitviding aid to the victims of the December 2004 foreign market opportunities and imperfections,tsunamis (Nike, 2005). and to exploit the benefits of internalization (Rug- In our paper, we addresses the question, Is the man, 1979). According to internalization theory,international diversification of large US firms related to firms can enhance organizational value by expand-corporate social responsibility (CSR)? By applying the ing abroad and controlling foreign operations ifresource-based view (RBV), we argue that interna- the expected gains are greater than the costs oftionally diversified firms both create value by acting operating foreign subsidiaries (Shahrokh, 2002).responsibly and destroy it by acting irresponsibly. International diversification provides resource-Prior research has usually treated a firm’s responsible based opportunities for firms to capture more ofactions as merely the flip side of its irresponsible the value they create through learning economiesones: a firm is responsible, for example, if it allows across subsidiaries and geographies (Kogut, 1985;employees to speak out about injustices, and is Fladmoe-Lindquist and Tallman, 1994). Value isirresponsible if it silences them. However, this created if the good, service, or activity satisfies aapproach fails to recognize irresponsible actions for need or provides benefits that contributes posi-which there are no responsible analogs. For exam- tively to the quality of life, knowledge, and safety ofple, violence against employees is irresponsible, but firms’ stakeholders (Haksever et al., 2004). On thethe absence of violence is not necessarily responsi- other hand, firms destroy value by making irre-ble; it should be the status quo. Prior research also sponsible choices that affect negatively an identifi-fails to model outcomes where firms are responsible able social stakeholder’s some operations, such as employee relations, and In recent years, international business researchersnot in others, such as corporate governance. have paid closer attention to the role of multi- The failure to disaggregate responsible actions from national enterprises (MNEs) in society. Manytheir negative counterparts may partly explain the researchers have suggested that global and institu-inconclusive findings in prior research between CSR tional pressures have pushed MNEs toward higherand financial performance. For example, Margolis levels of CSR (Sharfman et al., 2004). Scholarsand Walsh (2003) reviewed 95 studies that tested have noted that MNEs have been motivated towhether social responsibility was related to financial apply reasonable labor standards with respectperformance: 42% of them showed the relationship to pay, working hours, child labor, and union-was either mixed, inconsistent, or non-existent. ization because of global standardization and in We develop this paper as follows. First, we review order to protect their reputations (Caves, 1996).the literature and debates on international diversi- Most of the prior research in this area has focusedfication and social responsibility. Second, we define on the natural environment, possibly becausesocial responsibility, decompose it into its respon- MNEs dominate pollution-intensive industriessible and irresponsible parts, and review the results and because of the significant cost-related benefitsof past studies that have aggregated responsibility of offshore pollution havens (Rugman andand irresponsibility. Third, we develop hypotheses Verbeke, 1998). Host-country government regula-about the international diversification of large US tions, peer firms, and media attention have all beenfirms, social responsibility, and irresponsibility, shown to be related to environmental responsibil-using the RBV as the theoretical basis for our ity (Christmann and Taylor, 2001; Christmann,arguments. We proceed to describe the data, 2004; Bansal, 2005).analysis, and results of the study. Our study is Some scholars propose that MNEs are irrespon-based on the analysis of time-series cross-sectional sible, and the arguments are usually grounded indata from 222 companies from 1993 to 2003. Lastly, the MNE’s search for lower costs (Mani and Wheel-we discuss potential limitations, future research, er, 1998). They source labor below the subsistenceand implications. level and install cheap equipment that cannot meet high environmental standards. Critics of thisInternational diversification hypothesis, however, point out that it has littleWe define international diversification as the statistical support (Rugman and Verbeke, 1998),‘number of different markets in which a firm even though there is substantial anecdotal evidence Journal of International Business Studies
  3. 3. Social responsibility and the international diversification Vanessa M. Strike et al852(Sharfman et al., 2004) and considerable public later in the methodology section), Union Pacificattention. Many members of government, environ- performed well in 2003 in the Diversity dimensionmental groups, human rights groups, and the (rated 2), but poorly in the Corporate Governancegeneral public are convinced that MNEs have a and Community dimensions (both rated –1).negative social impact (Letchumanan and Kodama, These scores add to zero, yet there is no question2000). The arguments for MNEs not acting respon- that the firm has undertaken responsible andsibly, though, extend beyond costs. We describe irresponsible actions.these arguments below. This dampening of the aggregated CSR construct has likely influenced prior findings. Griffin andCorporate social (ir)responsibility Mahon (1997) conducted an in-depth review of 25In this paper, we use Bateman and Snell’s (2002) years of research on corporate social performancedefinition of CSR to ground our own: CSR is the and financial performance and found no clearset of corporate actions that positively affects an empirical relationship. Authors who have aggre-identifiable social stakeholder’s interests and does gated the CSR and CSiR dimensions in the KLDnot violate the legitimate claims of another identi- database have suggested that it does not track CSRfiable social stakeholder (in the long run). In turn, strengths and weaknesses equally well, so that somewe define corporate social irresponsibility (CSiR) items may dominate others (Hillman and Keim,as the set of corporate actions that negatively 2001). In the next section, we theoreticallyaffects an identifiable social stakeholder’s legiti- develop the relationship between CSR and CSiRmate claims (in the long run). by applying the RBV. CSR and CSiR are characteristics of an organiza-tion that can vary in degree. The greater a firm’s The resources and capabilities of socialcumulative positive actions, the more responsible (ir)responsibilityit is, and, similarly, the greater a firm’s negativeactions, the more irresponsible it is. In the context Corporate social responsibilityof MNEs, we assume that the cumulative actions of The RBV assumes that resources and capabilitiessubsidiaries influence the CSR or CSiR of the provide firms with a competitive advantage thatparent corporation. If a subsidiary acts irresponsi- allows them to pursue opportunities or avoidbly, it reflects on the MNE’s irresponsibility. threats (Barney, 1991). To secure a competitiveWe subscribe to Bartlett and Ghoshal’s (1989) view advantage, the resources and capabilities must beof an MNE as a network of sometimes loosely valuable, rare, and not easily imitated or substi-connected organizations in different geographic tuted relative to competitors.locations. As well, we also recognize that MNEs are According to the RBV, reputation is an intangibleinvolved in a bundle of activities. Consequently, it resource leading to a sustained competitive advan-is possible for one subsidiary of an organization to tage (Barney, 1991; Deephouse, 2000). Corporateengage in a responsible activity, while another may reputation is linked directly to social responsibilityact irresponsibly. MNEs, therefore, may be simulta- (Fombrun, 1996). Larger firms are more visible andneously socially responsible and irresponsible. For subject to more media scrutiny, especially as theythe purposes of this study, MNE actions are judged diversify internationally. As a result, they are oftenby stakeholders in the home country. Acceptable the target of incipient stakeholder attention, inten-standards for many workplace issues (e.g., diversity, sifying their interest in protecting their reputationlabor conditions) will vary across host countries, (Fombrun, 1996). Appearing socially responsiblebut an MNE is (ir)responsible by its home-country helps to deflect some of that attention.standards. US MNEs may develop a competitive advantage Prior research has found significantly inconsis- by building strong, socially responsible reputationstent results between CSR and CSiR, suggesting according to US standards. The key to ensuringthey are subject to different dynamics (McGuire that subsidiaries adhere to US home standards iset al., 2003). When CSR and CSiR are aggregated the MNE’s ability to learn to coordinate multipleto predict financial performance, as has been the subsidiaries in foreign countries, which becomescase in most studies (Waddock and Graves, 1997), increasingly challenging as firms diversify inter-strengths can offset weaknesses, reducing variation nationally. Socially irresponsible MNEs can bein the dependent variable. To illustrate, according perceived to be an ‘exploiting consortium’, ato Kinder, Lydenberg, Domini (KLD) (described label that can damage their reputation, making itJournal of International Business Studies
  4. 4. Social responsibility and the international diversification Vanessa M. Strike et al 853difficult to secure a social and legal license to home-country CSR standards in the local environ-operate (Luo, 2001). ment. For these reasons we predict: The organizational learning literature maintainsthat MNEs’ knowledge base and learning ability are Hypothesis 1: CSR is positively related to a firm’samong the most critical resources and capabilities level of international diversification.for achieving a sustainable competitive advantage(Gupta and Govindarajan, 2000). Internationally Corporate social irresponsibilitydiversified firms have a greater opportunity to learn While CSiR is also affected by reputation andbecause they are exposed to new and different ideas learning, firms act irresponsibly because it isfrom diverse contexts (Kochhar and Hitt, 1995) and difficult to manage the increased complexityvarious social, cultural, and environmental chal- that comes with international diversification. Aslenges. Responding to these challenges requires the firms expand globally, the volume and diversityfirm to develop knowledge about international of information they must process increase (e.g.,markets and their idiosyncrasies (Hitt et al., 1997). signals between foreign affiliates) (Boyacigiller,Firms also have to be able to: 1990). One of the greatest challenges confronting internationally diversified firms is coordinating,(1) communicate effectively with different commu- integrating, and exchanging resources among nities about their expectations; geographically dispersed subsidiaries (Kostova and(2) manage the complexity of regulations in Roth, 2003). International diversification escalates different countries; the coordination costs of balancing the numerous(3) negotiate with governments to influence reg- demands of different cultural and national differ- ulations; and ences, and imposes management challenges that(4) innovate to meet home-country CSR standards strain the firms’ stock of resources and capabilities that the host country may not consider to be (Geringer et al., 1989; Kostova and Zaheer, 1999). important because of differing norms, values, Internationally diversified firms need to coordi- and stages of economic development. nate geographic regions in order to exploitThese proprietary capabilities equip internationally potential economies of scope in their internaldiversified firms to take actions that are deemed to resources (Hitt et al., 1997). As the MNE grows,be responsible by home-country standards, such as each new subsidiary must be monitored andrespecting the land, culture, and human rights of controlled individually; also, it becomes a memberindigenous people in the host country and mini- of a larger network of subsidiaries. The number ofmizing the firm’s environmental impact. ties increases not by just one, but by the number Relationships with host-country stakeholders of ties that already exist in the MNE network. Thegive foreign firms more opportunity to learn about network must accommodate more information,unstated cultural norms, beliefs, and values, and more controls, more rewards, and retributions.about how to communicate and negotiate so they There are also more opportunities for the systemcan operate to home standards within the host to fail: poor managerial capabilities, cognitiveenvironment. MNEs are also strongly motivated limits, and constrained information systems areto build healthy government relationships, because endemic in open systems such as MNE networks.success in the host country often depends on MNEs may act irresponsibly, not out of malice orgovernment-sanctioned access to markets and ill will, but because they have to stretch theirinfrastructure (Luo, 2001). The value created by resources and capabilities in order to coordinatekey resources, such as those described above, and monitor subsidiaries. Subsidiaries in countriescannot be easily duplicated (Hillman and Keim, with relatively low environmental or social justice2001). They are idiosyncratic to the firm and they standards may be inclined to compromise on thesetake time to develop; they are tacit, socially standards because of financial pressures. For exam-complex, and difficult to imitate. As international ple, Wal-Mart tried to implement fair labor prac-diversification increases, we expect firms will tices in its foreign operations, but its subsidiaries inincrease both the size of their network and their China continued to mistreat factory workersability to communicate, negotiate, and build because the parent MNE had not invested enoughrelationships in international contexts. Through resources and capabilities in managing the sub-these experiences, firms learn how to learn, devel- sidiaries’ activities (Roberts and Bernstein, 2000).oping greater sensitivity about how to operate to Even though MNEs try to resource their subsidiaries Journal of International Business Studies
  5. 5. Social responsibility and the international diversification Vanessa M. Strike et al854appropriately, it is difficult to monitor and control sources, including company survey, expert panelthem because of the physical and cultural dis- assessment, and public disclosures. The ratingstances. Subsidiaries may not always fully under- reflect each firm’s worldwide social and environ-stand the social standards to which they must mental performance, but because of the greatersubscribe, or may choose to compromise those availability of US data, there are more data availablestandards because they know that monitoring on local operations. Prior to 2001 KLD rated thesystems are not always adequate. Consequently, international operations under the heading ‘non-irresponsible subsidiary actions can go unchecked. US operations’. Since then, they have renamedFor these reasons we predict: that heading ‘human rights’ and included non-US and non-human rights ratings in the other Hypothesis 2: CSiR is positively related to a firm’s categories: for example, non-US charitable giving level of international diversification. initiatives were included in the community category after 2001.Methods We extracted geographic sales data from the Compustat Industrial Annual file in the CompustatSample North America database. We collected financialThe original sample was drawn from the KLD and information and sales by geographical segmentCo. Index. Since 1991, KLD has evaluated the social from the Segments file of the same database. Weperformance of approximately 650 publicly listed used the Lexis-Nexis Directory of Corporate Affilia-firms based in the US. We identified 287 firms tions (which lists all corporate affiliations for USfor which there were KLD data over the research public firms) to establish the number of countriesperiod (1993 and 2003); 1993 was the first year in in which each firm had subsidiaries and its numberwhich international diversification data were avail- of foreign and 2003 was the last year in which socialresponsibility data were available when this study Dependent variableswas initiated. Two of these firms were droppedbecause they were not included in Compustat. We CSR and CSiRdropped an additional 49 firms because of unclear KLD evaluates each firm along 13 different cate-geographic segment names within the Compustat gories of CSR strengths or concerns (weaknesses).database. For example, we could not accurately Within each of these categories are items to whichclassify segments generically labeled ‘North Amer- KLD assigns a ‘1’ or ‘0’ according to whether orica, Domestic’, or ‘US, Mexico’ into the ‘domestic’ not a firm meets certain criteria. Seven of thesecategory of our international diversification mea- categories are ‘qualitative’ and consist of bothsure. Another 14 firms were discarded because there strengths and concerns; six are ‘exclusionary’ andwas more than 1 year of missing geographic data. comprised only concerns. We used only the The final sample consisted of 222 firms, resulting seven qualitative categories to operationalize thein 2442 observations over the research period. T-tests two dependent variables, because the six exclu-confirmed that there were no systematic differences sionary screens are heavily industry-biased and notbetween the sampled firms and those excluded from central core social issues. This approach makes thethe sampling process across key variables. The measures of CSR and CSiR more consistent; hadaverage firm size in 2003 was US$27 billion in total we included the exclusionary categories thereassets. The largest firm was American International would have been six CSiR categories with no CSRGroup (US$678.3 billion) and the smallest was Isco equivalents. Our approach has been used in priorInc. (US$54.4 million). The sampled firms operated KLD studies (Griffin and Mahon, 1997; Hillmanin up to 59 foreign countries, on average in nine. The and Keim, 2001). We also excluded seven itemsFord Motor Co. had the highest international sales from the analysis because they were added by KLD(US$60.7 billion); on average across all years, inter- in 2002 or 2003 and had too few observations for anational sales were US$3.7 billion. longitudinal analysis. The KLD measures are avail- able from the authors upon request.Data sources The values of strengths were summed to representThe social responsibility data were drawn from CSR, and the values of concerns were summed tothe KLD database. The KLD evaluation of social represent CSiR. The higher the value of each ofperformance is based on a wide range of data these variables, the greater was the firm’s CSR andJournal of International Business Studies
  6. 6. Social responsibility and the international diversification Vanessa M. Strike et al 855CSiR. Skewness and kurtosis were checked and diaries held by the firm (NFSU). We measuredfound to be acceptable. Similar aggregate measures international dispersion as the total number ofof social responsibility have been used in previous foreign countries in which the firm had sub-studies (Waddock and Graves, 1997), and their sidiaries (NFCO) (Allen and Pantzalis, 1996; Edenvalidity has been tested and proved (Sharfman, et al., 2002).1996). The KLD data are acknowledged as the The final measure of international diversificationbest available, despite their limitations (Waddock, was the factor score obtained from a principle2003). In addition, CSR is a theory-based formative components factor analysis of FSTS, NFSU, andconstruct, so the issues of construct validity NFCO (Eden et al., 2002). All three indicators wereand reliability that typically apply in a reflective standardized before entering factor analysis, and aconstruct are not as relevant. Bagozzi (1994, 333) unique factor emerged (eigenvalue¼2.29). Theargues that ‘reliability in the internal consistency Cronbach’s alpha for the three variables was 0.84,sense and construct validity in terms of convergent suggesting a high level of reliability. The skewnessvalidity and discriminant validity are not mean- and kurtosis of this index measure were checkedingful when indexes are formed as a linear sum of and found acceptable. Its standardized values weremeasurements.’ We standardized both variables used in subsequent analysis.before entering them into the analysis. Diamantopoulos and Winklhoffer (2001) list four Control variablescritical issues that need to be addressed for valid As McWilliams and Siegel (2000) argued, researchformative index construction: content specifica- and development (R&D) intensity and advertisingtion, indicator specification, indicator collinearity, intensity may influence CSR, so we included bothand external validity. We address the first two by as control variables. R&D intensity was measured asexplicitly defining CSR/CSiR and use commonly R&D expense/total sales, and advertising intensityemployed component indicators (Agle et al., 1999). was measured as advertising expense/total sales.The indicator collinearity condition is met because However, many values for these terms were miss-there was weak correlation among the indicators ing, so we followed the lead of prior researchersand small variation inflation factors when regres- (Russo and Fouts, 1997) and used industry averagessing CSR/CSiR on their component parts. Lastly, as a proxy. We applied a square root transformationother studies have used similar measures of CSR to and log transformation to the R&D intensity andpredict other outcomes, which is evidence that the advertising intensity measures, respectively, owingconstruct is externally valid (Griffin and Mahon, to high skewness and kurtosis. In addition, we1997; Hillman and Keim, 2001). Finally, our CSR/ included asset age as a control because Cochran andCSiR measures were highly consistent over time Wood (1984) showed that asset age, measured as aand thus likely reliable. ratio of the net and gross plant, property, and equipment, was statistically related to CSR. We tookIndependent variables the negative of this variable, where higher values of asset age denote older assets, which is moreInternational diversification intuitive then the Cochran and Wood measure.The measure of international diversification Firms with risky operations have been found to actincluded both an international depth component, responsibly in order to proactively reduce riskwhich is the weight of foreign markets in the global (Orlitzky and Benjamin, 2001). To control for firmmarket of that firm, and an international breadth risk, we used the coefficient of variation of the dailycomponent, which is the dispersion of a firm’s stock prices for each firm in each year (standardinternational activities across multiple markets. deviation/mean). We applied a log transformationAcknowledging the separate influences of breadth to address skewness and kurtosis.and depth is consistent with recent trends in the Firm size has been shown to affect CSR ratings ininternational diversification literature (Johanson prior studies (Johnson and Greening, 1999), andand Vahlne, 1977; Hitt et al., 1997). We followed we included firm size as a control, measured as theEden et al. (2002) to measure depth from two natural log of total assets. Prior research hasaspects: foreign market penetration, as measured also found that previous financial performance posi-by the firm’s sales outside the US as a percentage of tively affects firms’ subsequent social performanceits total sales (FSTS); and foreign market presence, (Waddock and Graves, 1997), so we controlled foras measured by the number of foreign subsi- previous financial performance, represented by the Journal of International Business Studies
  7. 7. Social responsibility and the international diversification Vanessa M. Strike et al856return on sales lagged 1 year. Slack resources can based on a series of the likelihood ratio test (Singeraffect the extent to which firms are willing and and Willett, 2003). We detected significant auto-able to invest in socially responsible initiatives. We correlation within the panels, and thus triedmeasured slack resources as the ratio of current two specification options: common autocorrela-assets over current liabilities (Bansal, 2005). A log tion coefficients to all panels (corr(ar1)) and paneltransformation was applied to normalize the values specific autocorrelations (corr(psar1)). There was noof this variable. All control variables were standar- significant improvement in log likelihood from thedized so that the coefficients of all continuous increased complexity of shifting from corr(ar1) tovariables in the model are comparable. To control corr(psar1): thus we used corr(ar1) as the autocor-for industry effects we used dummy variables. Using relation pattern.the one-digit North American Industry Classifica-tion System, we identified five major industry Resultscategories. Food and Other Services were assigned Table 1 reports the means, standard deviations, andto one industry, as they had few observations (55) correlations for all variables, except industry dum-and did not warrant separate industry dummies; mies used in the study. We report the descriptivethe other four categories were Mining, Utilities statistics of the mean collapsed data. To collapse theand Construction; Trade and Transportation; Pro- data, we took the mean and standard deviation offessional and Information Services; and Manufac- each variable for each firm across the 11 years, andturing (the reference group). reported the statistics of those variables. As we used standardized variables in the analysis, theData analysis correlation matrix was based on standardizedTime-series cross-sectional data analysis is able to values. Correlation matrixes for individual yearscontrol for unobservable, firm-specific, and time- are available from the authors upon request. To testinvariant effects (Halaby, 2004). It is a significant for multicollinearity, we checked the correlationimprovement on most prior CSR research, which matrix and variance inflation factors (VIFs) of thehas relied heavily on a single year of data. regression models on both pooled data and indivi-Exceptions include McWilliams and Siegel (2001) dual years of data. We found that all VIFs wereand Ruf et al. (2001). smaller than 3 (numbers higher than 10 indicate To analyze the data, we applied the xtgls com- multicollinearity).mand in the STATA package. General least-square Table 2 presents the results of the GLS regression(GLS) analysis accommodates the presence of analyses testing the hypotheses. Autocorrelationheteroskedasticity, autocorrelation within panels, was high, even though it was addressed in ourand cross-sectional correlation. In the analysis, we statistical analysis: the common coefficients asspecified the error structure across panels as calculated by the Durbin–Watson technique wereheteroskedastic with no cross-sectional correlation 0.7747 and 0.7189 for the models with CSR andTable 1 Descriptive statistics and correlation matrix Mean s.d. 1 2 3 4 5 6 7 8 9 10CSR 2.65 2.16 1.00CSiR 2.16 1.84 0.33*** 1.00International diversification –0.001 0.96 0.38*** 0.39*** 1.00R&D intensity 0.04 0.04 0.22* 0.07 0.40*** 1.00Advertising intensity 0.03 0.02 0.13 0.03 0.31*** 0.40*** 1.00Risk 0.13 0.05 0.10 –0.02 0.13 0.27** 0.02 1.00Asset age –0.54 –0.09 0.05 0.06 0.25* 0.18 0.17 0.05 1.00Size 8.54 1.50 0.46*** 0.61*** 0.32*** 0.07 –0.05 –0.11 0.11 1.00Lag of return on sales 0.10 0.07 0.08 –0.05 0.11 0.38*** 0.15 –0.12 0.24** 0.03 1.00Slack resources 1.71 0.95 –0.17 –0.20 0.03 0.33*** 0.13 0.38*** –0.13 –0.43*** 0.14 1.00Mean and s.d. were obtained from original variable values, and the correlation coefficients were based on standardized variables.*Po0.05.**Po0.01.***Po0.001.Journal of International Business Studies
  8. 8. Social responsibility and the international diversification Vanessa M. Strike et al 857CSiR as dependent variables, respectively. This mance is not significantly related to CSR, it doesindicates that there was a high degree of consis- negatively affect the level of CSiR, consistent withtency in the firm’s CSR and CSiR over time, the findings of Waddock and Graves (1997). Lastly,providing some confidence in the reliability of the the coefficient for slack resources is positive andrepeated measures of the dependent variables marginally significant (Po0.10) with CSR.(Campbell and Stanley, 1963). Model 1 shows the In the CSR model, only the coefficient for therelationship between the level of international industry dummy variable for Food and Otherdiversification and CSR. There is a statistically Services is significant with a positive coefficientsignificant, positive linear relationship between (Po0.05). The coefficients for the other threeinternational diversification and CSR, supporting industries are not significant. In the CSiR model,Hypothesis 1. The same relationship is also the coefficient for the dummy variable for theobserved in Model 2, where CSiR is the dependent Professional and Information Services industriesvariable, supporting Hypothesis 2. variable is significant (Po0.001); the coefficient for We controlled for R&D intensity, advertising the Mining, Utilities, and Construction industryintensity, asset age, firm risk, firm size, previous variable is marginally significant (P¼0.098).financial performance, organizational slack, and The coefficients for the Trade and Transporta-industry in both models. The results show that tion, and Food and Other Services variables areR&D intensity is related to CSR, but does not affect not significant.firms in the CSiR model. There is no significant We also tested the robustness of the results. First,relationship between advertising intensity and we included a lagged dependent variable as aeither CSR or CSiR. Asset age is significantly and control variable in the models. Our final modelpositively associated with both CSR and CSiR. The remained intact, except that the autocorrelationeffect of firm risk is not significant in either model. coefficients were much lower than reported inLarger firms show a higher level of both CSR and Table 2. Some researchers use a lagged dependentCSiR, confirming the importance of size in social variable as a control variable when autocorrelationissues research. Although prior financial perfor- is present within the dependent variable; however,Table 2 GLS analysis results of model testingIndependent variables Dependent variables Model 1: CSR Model 2: CSiRInternational diversification 0.079*** (0.024) 0.059** (0.022)R&D intensity 0.074** (0.024) 0.029 (0.022)Advertising intensity 0.022 (0.016) 0.008 (0.013)Risk –0.006 (0.007) 0.0001 (0.007)Asset age 0.052** (0.020) 0.14*** (0.019)Size 0.35*** (0.034) 0.50*** (0.028)One year lag of return on sales 0.011 (0.009) –0.031** (0.01)Slack resources 0.028w (0.016) –0.006 (0.014)Industry 1: Mining, Utilities, and Construction 0.046 (0.099) 0.16w (0.097)Industry 2: Trade and Transportation 0.11 (0.088) –0.081 (0.087)Industry 3: Professional and Information Services –0.038 (0.082) –0.29*** (0.053)Industry 4: Food and Other Services 0.40** (0.15) 0.014 (0.11)Intercept –0.23*** (0.035) –0.086* (0.036)Observations (N) 1799 1799AR(1) coefficient r (common autocorrelation coefficient to all panels) 0.7747 0.7189Log likelihood –586.22 –787.41Wald w2 177.27*** (d.f.: 12) 584.68*** (d.f.: 12)The number of estimated covariances (number of firm panels) is 169 for both models.Standard errors are in parentheses.w Po0.1.*Po0.05.**Po0.01.***Po0.001. Journal of International Business Studies
  9. 9. Social responsibility and the international diversification Vanessa M. Strike et al858others have shown that using a lagged dependent to argue for this relationship, the obsolescingvariable may suppress the explanatory power of bargaining theory can also explain this relation-theoretical variables (Achen, 2000). We do not ship. This theory predicts that, over time, nationalthink that it is necessary to use a lagged dependent governments will become more effective atvariable in a longitudinal study using the GLS striking bargains, thereby diminishing the bargain-technique because autocorrelation is automatically ing power of MNEs. As such, firms have the greatestaddressed. However, for the sake of thoroughness, power when they first enter a country, yet,we included it in our tests. over time, local competitors emerge and sunk costs Second, it could be argued that international make it difficult for MNEs to pull out easilydiversification should be lagged 1 year behind CSR/ (Vachani, 1995). Host-country governments mayCSiR. We tested this, and the lagged international then pressure MNEs to act increasingly responsiblydiversification was not significant with CSR, but over time. As we did not investigate time-relatedthere was a marginally significant relationship with effects, we could not test this argument.CSiR (P¼0.057). It seems that this effect extends to In the second hypothesis, we maintained thatyet another year for CSiR, but not for CSR. there continues to be a reputation and learning Third, we ran the analysis without replacing the effect, but that the increasing complexity ofmissing values of R&D intensity and advertising international diversification leads to increasingintensity with industry average. The results did not irresponsibility. This relationship may also bechange, but the significance level of the coefficient explained by the often-heard pollution havenof international diversification became marginal for hypothesis. This argument suggests that MNEsCSiR (P¼0.051). Though causality was not hypothe- diversify into poorly regulated countries in ordersized, we also tested for reverse causality. Interna- to capitalize on the lower costs associated withtional diversification was significantly and positively cheap labor, substandard working conditions,related with CSR; CSiR was not significant. and weak environmental regulations (Walter, Lastly, we tried a number of other common 1982). There have been few empirical tests of thismeasures for firm size, such as number of employ- hypothesis, and the evidence for it is weak (Eske-ees and log of sales, in addition to the one that we land and Harrison, 1997). Our results here alsofinally employed, log of total assets. No differences cannot offer definitive insights because our regres-were found. These sensitivity tests suggested that sion analysis does not illuminate the direction ofthe results were robust to alternative methodo- causality. However, it is worth noting that thelogical treatments. pollution haven hypothesis would not have pre- dicted a positive linear relationship between inter-Discussion national diversification and CSR.In this study, we investigated the relationship Overall, these findings have important implica-between international diversification and social tions. First, we found that CSR and CSiR move inresponsibility. We argued that the construct of the same direction as international diversification:social responsibility is coarse and should be decom- therefore, there is strong support for decomposingposed into its negative and positive aspects. Firms, social responsibility into its positive and negativewe argued, can simultaneously act responsibly components. Prior research often combines them,and irresponsibly. We teased apart, theoretically, which means that one offsets the other becausethe differences between CSR and CSiR. Applying CSiR is represented as negative values and CSR asthe RBV, we hypothesized that international diver- positive values.sification is positively related with CSR and Also, CSiR is often conceptualized as merely thewith CSiR. Firms that diversify internationally both reverse of CSR. For example, a firm is sociallycreate value by acting responsibly and destroy value responsible if it has a diverse board of directors andby acting irresponsibly. Both of our hypotheses irresponsible if it does not. This issue is importantwere supported. both to researchers and to practitioners. We suggest In the first hypothesis, we argued that MNEs that the two are not merely opposite reflectionsrecognize the competitive advantage secured by of each other, but they are separate yet relatedthe reputation and learning acquired through responsibility: hence, there is a positive Our study shows that researchers need to payrelationship between international diversification careful attention to the specific components ofand social responsibility. While we used the RBV CSR. We have shown that failing to decompose CSRJournal of International Business Studies
  10. 10. Social responsibility and the international diversification Vanessa M. Strike et al 859into its positive and negative components may capabilities such as research and development alsohave led to non-significant and possibly even invest in CSR. Neither R&D intensity nor advertis-spurious results in prior studies. Other studies ing intensity was significantly related to CSiR. Assethave recognized that CSR can be decomposed age was positively related to both CSR and CSiR.into people and product components (Johnson New technologies allow MNEs to incorporate aand Greening, 1999) and stakeholder management higher level of environmental responsibility that isand issues components (Hillman and Keim, 2001). embedded in the technology into their productionThese components may have different outcomes. processes, leading to higher CSR. However, newerOur findings take this one step further by under- technologies also involve higher risks because ofscoring the coarseness of the CSR construct and learning costs, leading to higher CSiR.encouraging researchers to be more thoughtful in The only significant industry coefficient for CSRtheir conceptualization of this construct. was Food and Other Services; its positive value For practitioners, this study shows that discussions suggests that this industry is more socially respon-about international diversification and CSR must be sible than the benchmarked Manufacturingapproached cautiously. Clearly, international diver- industry. In respect to CSiR, the Professional andsification can create positive social spin-offs, and Information Services industry is found to be lessthese should be encouraged. However, practitioners irresponsible than the benchmarked Manufactur-must also recognize that there are a commensurate ing industry, and Mining, Utilities, and Construc-set of challenges associated with controlling and tion is more so.preventing irresponsibility. Our research also sug- To complement our findings, further researchgests that it is misleading to simply say that might examine the impact of the MNE strategy oninternational diversification is either good or bad. the relationship between international diversifica-With increasing diversification, firms become more tion and CSR. For instance, we did not includesocially responsible and more socially irresponsible. measures of global and multi-domestic strategyThis study, then, raises additional questions, and in the analysis, primarily because good archivalavenues for future research, such as: can the shift measures were not available. Control mechanismstowards irresponsibility be better managed? will likely influence CSR/CSiR within the MNE In addition to the hypothesized relationships, network. Future researchers are encouraged tomany of the controls used in this study emerged investigate this issue using different methodolo-as significant. The significant positive importance gies, such as surveys, to test these relationships.of firm size for CSR supports arguments that large In our study, we recognize that CSR and CSiRfirms are more visible and, therefore, more scruti- interact; the arguments of corporate reputation,nized and concerned about their reputation. Our learning, and complexity spill over to both CSRstudy focused on large US publicly traded firms; and CSiR. In this paper, we have focused onfuture studies could also focus on smaller, entre- the core arguments most relevant to CSR and CSiR.preneurial, and owner-operated firms. This avenue We encourage future researchers to explore thefor future research is particularly important because interactions between CSR and CSiR, possible non-international entrepreneurship is a subject of linear effects, and other mediating variables.increasing interest and attention (McDougall and It is also important to acknowledge the US-centricOviatt, 2000). Firm size was also positively related nature of the arguments and data analysis. Normal-to CSiR. Large firms may find it more difficult izing the analysis to the US meant that we lost someto manage their social relationships because of the of the richness in different national approaches tocomplexity that comes with their size. Or, it could social and environmental issues, and imposed USbe that large firms are more scrutinized than standards on MNE performance. However, foreignsmall firms and we simply know more about their markets comprise a rich diversity of economicirresponsible actions. Closely related to scrutiny, stages, political regimes, and norms, which wouldlarger firms may be more transparent about their lead to quite different host-country assessmentsoperations, so that they may score high on both of CSR and CSiR. Had the analysis been rooted inCSR and CSiR. We could not control for transpar- a country with lower standards of CSR (or higherency, because of the availability of this data, but it is CSiR), we might have seen a decreasing relationshipworthy of future research. with international diversification and CSiR. We R&D intensity was positively associated with encourage future researchers to extend this study toCSR, suggesting that firms that invest in long-term other cultural contexts. Journal of International Business Studies
  11. 11. Social responsibility and the international diversification Vanessa M. Strike et al860 It is also important to recognize the limitations of national diversification and developed a measurethe KLD data in representing CSR (Sharfman, 1996). that incorporated both the depth and the disper-The specific items do not load well on each of the sion of international diversification. Second, cor-qualitative screens. Nevertheless, researchers have porate reputation and organizational learning mayconceded that this data source is one of the best explain the positive relationship between interna-available for measuring CSR (Sharfman, 1996; Hill- tional diversification and CSR. Third, our findingsman and Keim, 2001). Until researchers in this area highlight the importance and impact of the com-are able to agree on the theoretical construct of plexities of operating in a foreign environment.CSR, a sound measurement of CSR and CSiR will The issue of the social responsibility of MNEscontinue to be elusive. We also leave this challenge has been a cornerstone for arguments opposingto future research. neo-liberal trade philosophy. Proponents of this philosophy argue that social welfare is facilitatedConclusion through the economic gains generated by freeThis research contributes to the discussion of social trade. Opponents suggest that international diver-responsibility and internationalization by under- sification may compromise social justice andscoring the point that CSiR needs separate and environmental integrity. Our study has offeredconsidered treatment, and that firms that are important insights into this discussion. Instead ofinvolved extensively in international diversifica- casting a vote on the side that is more right, wetion are likely to be operating both responsibly and suggest that both sides have valid arguments, andirresponsibly. These findings suggest that if we are the answers may lie in the underlying progress in our understanding of the relationshipbetween international diversification and socialresponsibility, we must do so with a sharper vision Acknowledgementsof what we include in our core constructs and the We thank and acknowledge the contributions of Glennnature of the proposed relationships. ˆ Rowe, Nien-he Hsieh and Kersi Antia, as well as the In addition to this overall message, we should valuable insights of the anonymous reviewers, partici-like to highlight other key contributions of this pants of the JIBS Focused Issue Workshop, and the JIBSresearch. First, we revisited the construct of inter- Guest Editors.ReferencesAchen, C. 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  13. 13. Social responsibility and the international diversification Vanessa M. Strike et al862About the authors and business strategy. He primarily applies a long-Vanessa M. Strike is a PhD candidate at the Richard itudinal design to empirical studies, and multi-Ivey School of Business, University of Western disciplinary approaches to theory development.Ontario. Her research interests are primarily in theareas of social responsibility, entrepreneurship, and Pratima Bansal is an associate professor and thefamily business. Shurniak Professor of International Business at the Richard Ivey School of Business. She receivedJijun Gao is a PhD candidate at the Richard Ivey her doctorate from the University of Oxford.School of Business, University of Western Ontario. Her research interests are primarily in the areasHis research interests include business and society, of sustainable development and internationalinternational business, sustainable development, business.Accepted by Lorraine Eden, Amy Hillman, Peter Rodrignez and Donald Siegel, Guest Editors, 4 October 2006. This paper has been with the author for tworevisions.Journal of International Business Studies
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