INTRODUCTION
The business ethics and corporate social responsibility (CSR) literature has often asked: do socially responsible and ethical firms enjoy superior performance? While research on CSR and firm performance relationships have been very fruitful, most empirical investigation into the relationship of CSR with firm performance has studied large public firms in North America and Europe (Laplume, Sonpar, & Litz, Reference Laplume, Sonpar and Litz2008). As a result, we know little about CSR as it affects the success of smaller firms in developing countries (Maignan & Ralston, Reference Maignan and Ralston2002).
Two recent meta-analyses reported mildly positive relationships between CSR and corporate financial performance (CFP) in Western contexts (Margolis, Elfenbein, & Walsh, Reference Margolis, Elfenbein and Walsh2007; Orlitzky, Schmidt, & Rynes, Reference Orlitzky, Schmidt and Rynes2003). However, the institutional environment is an important contextual factor that shapes the CSR–CFP link. Studies have not addressed whether the CSR–CFP relationship depends on institutional and cultural factors, although ‘the assumption of social responsibility by corporations remains contextualized by national institutional frameworks and therefore differs among countries’ (Matten & Moon, Reference Matten and Moon2008: 406). When considering cross-border CSR issues, scholars must account for institutional differences (Campbell, Reference Campbell2007; Doh & Guay, Reference Doh and Guay2006; Matten & Moon, Reference Matten and Moon2008). Unlike Western countries, many developing countries have weak institutions, standards, and appeal systems (Batjargal, Hitt, Tsui, Arregle, Webb, & Miller, Reference Batjargal, Hitt, Tsui, Arregle, Webb and Miller2013; Dobers & Halme, Reference Dobers and Halme2009). Compared to their Western counterparts, civil societies and NGOs in developing economies might be too weak to positively influence corporate CSR agendas (Belal & Owen, Reference Belal and Owen2007; Kojima, Choe, Ohtomo, & Tsujinaka, Reference Kojima, Choe, Ohtomo and Tsujinaka2012). In China, for example, businesses have fewer constraining environmental laws and less labor protections (Child & Tsai, Reference Child and Tsai2005). It thus remains unknown whether the positive CSR–CFP link found in developed economies can be generalized to a developing country.
In addition, research has primarily studied CSR–CFP relationships in large public firms with unknown generalization of empirical conclusions to smaller private enterprises (Laplume et al., Reference Laplume, Sonpar and Litz2008). We suggest that smaller private firms may conduct CSR and benefit from them differently from larger firms for two main reasons. First, smaller firms are less able to influence various stakeholders. Constrained by scarce resources, small and medium-sized firms are less willing to devote time and money to non-core activities related to stakeholder demands (Welsh & White, Reference Welsh and White1981). Managers in smaller firms, compared with those in larger firms, pay more attention to profitability-related issues (Fülöp, Hisrich, & Szegedi, Reference Fülöp, Hisrich and Szegedi2000). Second, small private firms receive less media publicity so that the public is less aware of their actions (Udayasankar, Reference Udayasankar2008). This lower media attention also mitigates external pressures toward CSR. Thus smaller firms not only are less likely to engage in CSR but also are likely to reap fewer benefits from CSR activities.
The present study aims to address these gaps in the literature. Drawing on the instrumental stakeholder theory (Jones, Reference Jones1995), we examine the influence of CSR commitment on firm performance in China, a developing country. The theory explains that corporations depend on relationships with many constituent stakeholders. Among these varied stakeholders, companies strive to maintain positive relationships with customers, who are key external stakeholders and whose trust and purchasing decisions are immediate consequences of a company's social commitment (Pivato, Misani, & Tencati, Reference Pivato, Misani and Tencati2008). Thus we examine how firms’ CSR commitment influences sales growth, an important measure of organizational outcomes determined by customers (Coombs & Gilley, Reference Coombs and Gilley2005).
We focus on commitment instead of actual CSR activities for two reasons. First, small firms may not actually be able to engage in all but a subset of CSR activities, rendering direct comparisons of actual behavior impossible. However, their commitment is an important precondition for action. According to Fishbein and Ajzen's (Reference Fishbein and Ajzen1975) theory of reasoned action, actual behavior is determined by behavioral intention, which is preceded by attitude and perceived social norm. As weak institutions in developing countries may exert only limited social expectations on private firms, especially on those small ones, perceived social norm may not be a substantial factor to affect actual CSR activities. Therefore, attitudinal factors (in our case, CSR commitment) can reasonably explain the variations of overall CSR level of small firms. Second, CSR commitment can also capture the substance of CSR activities. Some companies integrate their CSR activities with daily business operations whereas others merely engage in window-dressing CSR activities (Weaver, Trevino & Cochran, Reference Weaver, Trevino and Cochran1999). Weaver et al. (Reference Weaver, Trevino and Cochran1999) found that while external pressures for social performance encouraged easily decoupled processes, top management commitments triggered integrated CSR processes. The results suggest that commitments are related to CSR activities beyond the superficial level.
We suggest that the promise of instrumental stakeholder theory will extend current understandings of the CSR–firm performance relationship to a new institutional and cultural context. We propose that in a developing economy like China, CSR commitment will be negatively related to sales growth, and firm size will moderate the negative relationship, making it stronger for smaller firms than for larger firms. Using survey data from a sample of 630 CEOs or owners of Chinese private firms, we examine whether CSR commitments relate to firm performance and consider how firm size moderates the relationship.
THEORETICAL BACKGROUND AND HYPOTHESES
Although the CSR concept has been discussed for decades, the literature has failed to provide a well-accepted definition (McWilliams, Siegel, & Wright, Reference McWilliams, Siegel and Wright2006; for a review, see Carroll, Reference Carroll1999). One commonly accepted definition calls CSR the ‘firm's consideration of, and response to, issues beyond the narrow economic, technical, and legal requirements of the firm’ (Davis, Reference Davis1973: 312). As with many definitions originating in Western countries, that definition excludes basic legal responsibilities. In developing countries, where non-compliance, tax evasion, and fraud are common, strictly following the rules and regulations may well be manifestations of a responsible firm (Dobers & Halme, Reference Dobers and Halme2009; Jamali & Mirshak, Reference Jamali and Mirshak2007). To make sure the concept of CSR is relevant in the local context (Li, Leung, Chen, & Luo, Reference Li, Leung, Chen and Luo2012; Tsui, Reference Tsui2007, Reference Tsui2009), we define CSR more broadly as embodying legal, ethical, and discretionary responsibilities. Our definition underscores the importance for firms to integrate actively legal and ethical guidance with business practices, such as by ensuring product safety and adequate information disclosure, beyond philanthropy.
Scholars have long debated CSR's relationship to firm performance. Some have taken the profit-maximizing view to argue that social responsibility impairs shareholder value because it causes inefficient resource allocation, distracts from maximizing profits, induces unnecessary costs, and disadvantages firms in economic competition (Friedman, Reference Friedman1970; Jensen, Reference Jensen2002; McWilliams & Siegel, Reference McWilliams and Siegel1997). In contrast, others have taken a stakeholder view to assert that corporations depend on relationships with many constituent groups (stakeholders), which affect and are affected by their decisions (Donaldson & Preston, Reference Donaldson and Preston1995; Freeman, Reference Freeman1984). Key stakeholder groups include employees, customers, suppliers, creditors, communities, and the general public. Jones (Reference Jones1995) further developed instrumental stakeholder theory arguing that by building mutual trust with stakeholders, firms benefit from moral and responsible actions that reduce transaction costs and mitigate certain risks. This theory has gained empirical support for various stakeholder groups. For example, CSR decreases employee turnover (Turban & Greening, Reference Turban and Greening1997), wins customer loyalty (Fombrun & Shanley, Reference Fombrun and Shanley1990), and buffers against disruptions (Godfrey, Merrill, & Hansen, Reference Godfrey, Merrill and Hansen2009). Through effective stakeholder management, a firm can thus constitute intangible, socially complex resources that allow it to outperform competitors in creating long-term value (Surroca, Tribó, & Waddock, Reference Surroca, Tribó and Waddock2010). Building on the instrumental stakeholder theory, researchers have also considered intermediate channels through which CSR influences firm performance. For example, stakeholder actions will influence sales performance when customers endorse socially responsible firms with repeated patronage or boycott socially irresponsible firms (Rowley & Berman, Reference Rowley and Berman2000).
CSR–Firm Performance Link in a Developing Economy
Despite abundant research in past decades demonstrating that CSR conveys a universal rate of return in Western culture, scholars are conscious of contingencies: CSR may not benefit all firms in all situations (Ullmann, Reference Ullmann1985). Companies must meet certain conditions before they can benefit from CSR. When we extend the query to a developing economy, we need to reexamine the presuppositions that are taken for granted in Western contexts: how CSR affects business success may well depend on institutional environments, stakeholders’ CSR awareness, and firms’ capacity for influencing stakeholders.
First, we argue that without coherent institutional support, socially responsible firms will lose market opportunities by avoiding unethical deals. Institutional environment plays the role of monitoring and enforcing contracts between managers and stakeholders (Hill & Jones, Reference Hill and Jones1992). However, developing countries generally have weak institutions underlined by corruption, bureaucratic inconsistency, and arbitrary law enforcement (Batjargal, et al., Reference Batjargal, Hitt, Tsui, Arregle, Webb and Miller2013; Dobers & Halme, Reference Dobers and Halme2009). In China, for example, the contemporary business environment is embedded in a weak legal system and inadequate civic accountability (Snell & Tseng, Reference Snell and Tseng2003). Chinese laws such as consumer rights protection and commercial bribery regulation, remain largely underdeveloped, inconsistent (Tan, Reference Tan2009), and poorly enforced (Naughton, 2007). Because default incurs low cost, firms may generate sales unethically by misrepresenting the quality or durability of the product or by offering kickbacks or bribes to the sourcing agents of potential clients. Firms that take advantage of institutional voids to circumvent imposed ethical standards win more sales in the short run. On the other hand, firms with high CSR commitment rely on self-regulation to uphold higher ethical standards guiding their business conduct. They choose to avoid unethical practices and give up short-term market expansion.
Second, if virtue has no market and stakeholders fail to demand CSR (Vogel, 2004), ethical firms will lose price-sensitive customers who are unwilling to pay for CSR costs. Some customers deeply value and prefer ethical products even at premium prices. A 1997 survey showed that 71 precent of French consumers would choose a ‘child-labor-free’ product even if it were more expensive than the alternatives (Garone, Reference Garone1999). More than 75 percent of American consumers claim to avoid purchasing products made under poor working conditions (O’Rourke, Reference O’Rourke2004), and 65 percent report willingness to pay more for products that protect the environment (Pew Research Center, 2003). Although CSR has a stronghold in developed countries, consumers in developing economies have not yet shown strong preferences for socially and environmentally responsible products. Awareness of CSR appears to have emerged gradually in developing economies, such as Malaysia (Ramasamy & Hung, Reference Ramasamy and Hung2004) and Indonesia (Bala & Yeung, 2008). In developing countries where income per capita is relatively lower and consumers are more price-sensitive, many avoid ethical products because additional CSR investment costs typically make products more expensive. If most customers do not value CSR, firms may fail to benefit sufficiently from socially responsible conduct. By conducting business ethically, such as ensuring employee welfare and investing in pollution control, corporations with strong CSR commitment may be unable to offer prices low enough to attract customers.
Third, if firms lack stakeholder influence capacity, customers may perceive the CSR commitment to be unreliable, unconvincing, and unworthy of increased customer favour and loyalty. Stakeholder influence capacity refers to ‘the ability of a firm to identify, act on, and profit from opportunities to improve stakeholder relationships through CSR’ (Barnett, Reference Barnett2007: 803). Past interactions with various stakeholders constitute a firm's aggregate and intangible stakeholder influence capacity stock, which further influences stakeholders’ awareness of, interpretation of, and reaction to, the firm's social actions. For example, customers will interpret a firm's social commitment by considering its previous relationship with customers. Two firms may make the same investment in improving product quality but each may elicit different interpretations. The firm with a consistent track record in product quality will generate public goodwill, while the firm lacking prior investments may find its efforts overlooked or, if noticed, met with scepticism. Compared with their counterparts in developed economies, firms in developing countries are more frequently involved in such practices as fraud, corruption, and deception (Jamali & Mirshak, Reference Jamali and Mirshak2007), which makes customers sceptical about their social commitment. In China, for example, customers suspect that firms undertake social initiatives for window-dressing purposes (Lin, Reference Lin2010; Marquis & Qian, in press) or for establishing legitimacy (Feng & Wang, Reference Feng and Wang2010). Thus, social commitment may fail to benefit firms in developing countries because their customers are likely to distrust their goodwill and unlikely to respond with loyalty.
Given those arguments, we postulate:
Hypothesis 1: In a developing economy (China), firms’ corporate commitment to CSR will relate negatively to sales performance.
The Moderating Effect of Firm Size
We posit that that relationship between CSR commitment and firm performance may further depend on firm size; customers are more likely to know about and trust CSR activities of large firms.
First, large enterprises are more visible (Udayasankar, Reference Udayasankar2008). Because they exert greater social impact (Cowen, Ferreri, & Parker, Reference Cowen, Ferreri and Parker1987), they are more easily targeted for social and environmental actions. For example, environmental NGOs are more likely to target firms that significantly impact the environment (Hendry, Reference Hendry2006). Activist–stakeholder groups also target prominent market leaders (Rowley & Berman, Reference Rowley and Berman2000) because they are financially able to respond to stakeholder voices. The media, too, spotlights larger firms more frequently. In developing countries, NGO, social-activist, and media attention serve as substitutes for institutional monitoring (Kojima et al., Reference Kojima, Choe, Ohtomo and Tsujinaka2012). Large firms are more likely to find their unethical conduct spotlighted and thus are less likely to generate revenue from unethical deals.
Second, large firms also have sufficient resources to commit to CSR, which makes stakeholders see the CSR commitment as more credible. While small- and medium-sized firms are constrained by scarce resources and tend to concentrate on profit issues (Fülöp et al., Reference Fülöp, Hisrich and Szegedi2000), large firms have more slack resources. Even if a large firm lacks a track record of CSR commitment, its talent pool and financial liquidity may well suggest that it is capable of contributing to social welfare. Firm resources then substitute for its stakeholder influence capacity stock; large firms, even though they have limited interactions with stakeholders in the past, are more likely than small ones to generate trust by committing to CSR. Therefore, we hypothesize:
Hypothesis 2: Firm size will moderate the relationship between firms’ commitment to CSR and sales performance; large firms will show a weaker negative association than will small firms.
METHOD
Data and sample
We conducted the study in China, the largest and fastest-growing developing economy. As with many other developing countries, China has weak institutions and arbitrary law enforcement, bureaucratic inconsistency, ambiguous property rights, and significant corruption (Belal & Momin, Reference Belal and Momin2009). We chose to study private firms because their decisions to participate in CSR are made relatively autonomously, with less compliance pressure from citizens in the community or local governments.
As a part of a larger study on Chinese private enterprises, in 2008, we collected survey data from CEOs or founders of 630 private enterprises in eight major cities across the Pearl River Delta (PRD) Region and the Yangtze River Delta (YRD) Region. To generate enough sample firms in the two regions, we first combined multiple directories of private firms (e.g., the 2007 Statistics Yearbook of Private Enterprises) and chose 4,430 as our target sample, proportionally selected for industry, scale, and geographic distribution. Second, we mailed questionnaires and return envelopes to the CEOs/founders of those firms. After excluding cases with unreachable addresses or phone numbers, we retained a short list of 1,150 target firms. We then arranged two rounds of phone calls and received 254 returned surveys, yielding a response rate of 22 percent. Then we trained a team of graduate students to visit both the non-responding firms and some additional qualified private firms. The onsite visits improved our response rate substantially, and we obtained another 816 questionnaires. Altogether, we had 1,070 survey responses.
To screen the returned surveys, we first dropped those that failed to answer more than two-thirds of the questionnaire, leaving us with 902 valid responses. We then used listwise deletion, a conservative method to deal with missing data in which the analysis is conducted only on cases with complete information, yielding a final sample of 630 enterprises.
About 57 percent of the enterprises are located in the Yangtze River Delta region. Most are small, with fewer than 100 employees (58.73%) and annual sales revenues of less than 50 million Yuan (74.13%).Footnote [1] All surveys were completed by CEOs or business owners whose average age was 42.5 years and average management experience was 12.65 years. Table 1 illustrates the sample characteristics.
Table 1. Sample characteristics
We ran a series of independent sample tests to compare the retained group of 630 complete responses with the deleted group of 272 with missing data on key study variables, including CSR commitment, sales growth, industry, employee number, sales volume, CEO tenure, CEO education, location, and firm age. Significant differences were found in only two of the nine variables. CEO education level was relatively lower for dropped cases, and more of the dropped group was from the Yangtze River Delta. Therefore selection bias seems limited.
Measures
All measures included in this study were initially written in English and then translated by professionals into Chinese. We used a standard back-translation procedure to check language consistency and ensure semantic equivalence.
Independent variable
We measured CSR commitment using a thirteen-item seven-point scale on perceived role of ethics and social responsibility (PRESOR) developed by Singhapakdi and associates (Singhapakdi, Vitell, Rallapalli, & Kraft, Reference Singhapakdi, Vitell, Rallapalli and Kraft1996). The scale measures the extent to which our respondents believe that corporate ethics and social responsibility are important for organizational effectiveness. The scale items emphasize baseline CSR issues and therefore fit well with our definition of CSR. Following Ang and Leong (Reference Ang and Leong2000), we computed the average score across all items, with higher scores indicating stronger CSR commitment. Cronbach's alpha for the construct was 0.83. Both the Chinese and English versions of the thirteen items of this scale are shown in the Appendix.
Dependent variable
We asked respondents to report the average sales growth of their firms in the past three years. To lessen outlier impacts, we winsorized the variable (Dixon & Yuen, Reference Dixon and Yuen1974) by setting the values of the top and bottom 1 percent observations equal to the closest, unwinsorisized observation. In our case, sales growth lower than – 10% was replaced by – 10%, the 1st percentile value, and sales growth higher than 100 percent was replaced by 100 percent, the 99th percentile value.
Moderating and control variables
The moderator firm size was measured using four ordinal classifications: (1) 1–100 employees, (2) 101–1,000 employees, (3) 1,001–3,000 employees, and (4) more than 3,000 employees.
The literature has documented a number of firm, industry, and location variables that may affect firm performance. At firm level, we controlled for firm age, provided by respondents indicating the founding year of their firms. We calculated firm age by subtracting its founding year from the current year. We also considered the effects of CEO's management experience and CEO's education. More-experienced or well-educated managers may be better able to identify and exploit business opportunities, and thus enable firms to expand more effectively. We defined CEO's management experience by the number of years the CEO had in top management positions. CEO's education is an ordinal variable with 1 denoting high school or below, 2 denoting junior college, 3 denoting bachelor's degrees, 4 denoting master's degrees, and 5 denoting PhDs.
Firms in high-growth industry environments are in favorable situations for achieving sales growth. We included an industry growth indicator, market munificence, and four dummy variables to control for industry effects. Market munificence describes an environment's ability to support sustained growth (Dess & Beard, Reference Dess and Beard1984) and is positively related to firm growth (Sapienza, Smith, & Gannon, Reference Sapienza, Smith and Gannon1988). We measured market munificence using the average growth in industry employment over the past five years (Li & Tang, Reference Li and Tang2010), obtained from the Chinese Statistics Yearbook. We also controlled four dummies to indicate whether firms belonged to manufacturing, wholesale and retail, IT service, real estate, or other industries. We chose those four dummies because most firms (75.4 percent) in our sample belong to those industries.
To control for location effects, we controlled whether a firm is located in Yangtze River Delta or Pearl River Delta. The variable was coded ‘1’ for Yangtze River Delta and ‘0’ for Pearl River Delta.
Common Method Bias
We collected the information on independent and dependent variables from the same respondents, so common method bias was of concern. We used the following procedural remedies to control potential common method bias influences (Podskoff, MacKenzie, Lee, & Podsakoff, Reference Podsakoff, MacKenzie, Lee and Podsakoff2003). First, to minimize social desirability problems, we assured respondents that their information and answers were anonymous and would be used aggregately only for research purposes. Second, in designing and administrating the surveys, we used different response formats for measuring the predictor and criterion variables. We measured the predictor using a Likert-type scale, and the criterion variable by having respondents fill in the blanks. The two variables were also placed in different parts of our survey. Third, to measure the dependent variable, we used an objective measure, sales growth, rather than a perceptual one, which is claimed to be quite useful in controlling many biases (Spector, Reference Spector2006). To confirm the accuracy of the self-reported measure, we compared the self-reported sales growth with industry-level sales growth using the Chinese Statistics Yearbook, which releases private firms’ industry total revenue and number of firms in secondary industries (i.e., mining, manufacturing, and production and supply of electricity, gas, and water). We calculated the three year average revenue growth rates of the private firms in these three industries from 2004–2007 and compared them with the corresponding self-reported mean values in our sample. Two findings were obtained. First, the ranking of average firm revenue growth in these three industries as calculated with secondary industry information is consistent with that in our sample. In both cases, the mining industry enjoyed the highest average sales growth rate, followed by manufacturing industry, and then the industry of production and supply of electricity, gas, and water. Second, in the manufacturing industry, where we obtained a large sample (n = 315), average sales growth of the surveyed firms (23.39 percent) was very close to the growth rate calculated by secondary industry data (22.02 percent). The statistics suggested that the self-reported sales growth accords well with the secondary industry data in our sub-sample of industrial firms.
RESULTS
Table 2 presents descriptive statistics and correlations for the study variables. Several patterns are worth noting. First, the mean annual sales growth was about 23 percent, with a standard deviation of about 19 percent, providing significant variability for statistical tests. Other studies inspecting Chinese firms’ sales growth have reported similar growth levels (e.g., Chow, Huang, & Liu, Reference Chow, Huang and Liu2008; Park & Luo, Reference Park and Luo2001). Second, CSR commitment was negatively correlated with sales growth. This preliminary result was consistent with our first hypothesis. Third, firms with higher sales growth were younger, managed by higher-educated CEOs, and more likely to operate in munificent markets. Surprisingly, CEO's management experience was negatively correlated with sales growth, perhaps because experienced CEOs are more likely to run older companies that tend to have slower sales growth. We also found CSR commitment to be positively associated with firm size, which is consistent with findings in CSR studies stating that larger firms are more socially responsible (e.g., Gao, Heravi, & Xiao, Reference Gao, Heravi and Xiao2005).
Table 2. Descriptive statistics and correlations
Notes: Firm size is coded as an ordinal variable in the correlation matrix. 1 = 1–100 employees, 2 = 101–1000 employees, 3 = over 1000 employees. It will be transformed into dummies in the regression analysis.
†p < 0.10, *p < 0.05
The first hypothesis (H1) predicts a negative relationship between CSR commitment and sales growth. Using OLS, we regressed sales growth on firm age, location, industry dummies, market munificence, CEO management experience, CEO education, and CSR commitment. Model 1 in Table 3 presents the regression results. Marginal support was found for H1. The regression coefficient was significantly negative at p <0.10. To interpret the practical significance of CSR commitment's impact on sales growth, one-standard-deviation increase in CSR commitment reduced sales growth by 1.21 raw percentage points, or 5.26 percent relative to the mean.
Table 3. Results of OLS regression on CSR commitment
Notes: Robust standard errors are in parentheses.
Firm size1 = 1–100 employees; Firm size2 = 101–1000 employees.
†p <0.10, *p <0.05, **p <0.01, ***p <0.001
The second hypothesis (H2) predicts the moderation of the relationship between CSR commitment and sales growth by firm size. We used binary coding scheme to indicate whether a firm has employees numbering size(1) fewer than 100, size(2) 101–1,000, or size(3) more than 1,000. In this procedure, we first regressed sales growth on the control, independent, and two dummy moderator variables. We then entered two interaction terms into the regression. We tested the moderating effect of firm size by examining whether the added interaction terms significantly increased the explanation of variance (R 2).
Results of the moderated regression analyses for firm size appear in Models 2 and 3 in Table 3. Model 2 represents the restricted model including control, independent, and dummy moderator variables. The two size dummies insignificantly affected sales growth. Model 3 represents the full model that adds two interaction variables. Both interaction effects were significant. As predicted, firm size moderated the relationship between CSR commitment and sales growth. For the smallest firms (1–100 employees), the coefficient was most negative. It became less negative for larger firms with 101–1,000 employees, and turned positive for firms with more than 1,000 employees. The change in R 2 was significant (F = 3.20, p <0.05). Figure 1 illustrates the moderating role of firm size. As shown, both the strength and direction of the effect of CSR commitment on firm growth differed depending on the size of the firm. Smaller firms (with no more than 100 employees) demonstrated negative association between CSR commitment and firm growth, no relationship were shown for medium-sized firms (with 101–1,000 employees), and the relationship became positive for large firms (more than 1,000 employees).
Figure 1. Moderating effect of firm size on the relationship between CSR commitment and sales growth
DISCUSSION
Drawing on instrumental stakeholder theory (Jones, Reference Jones1995), we examine how CSR commitment relates to firm performance in terms of sales growth in the context of a developing country. Using a sample of 630 Chinese domestic private enterprises, we find that in China's weak institutional context, CSR commitment is negatively associated with a firm's sales growth. Firm size moderates the negative relationship between CSR commitment and sales growth; this relationship becomes positive for larger firms.
Our research makes several important contributions to the literature on corporate ethics and social responsibility. First, although most previous CSR studies have focused on large public companies in developed countries, we extend the literature to the context of private firms in a developing economy and thus challenge common pre-suppositions (Kisenyi & Gray, 2005). Our baseline result indicates that, overall, commitment to business ethics and CSR is negatively associated with performance in terms of sales growth. Although the relationship is only marginally significant, it opposes the prevalent CSR literature that has observed positive associations based on studies of large public firms in developed countries (Orlitzky et al., Reference Orlitzky, Schmidt and Rynes2003). In contrast, our results suggest that although CSR may enhance long-term value creation for firms that have supportive institutions, China's relatively weak institutions still make CSR a burden to private firms. This finding calls for a more careful investigation into different institutional environments and their roles in enhancing or impeding corporate social initiatives.
Second, our study emphasizes the importance of firm size as a contingency variable of CSR. Firms of different sizes tend to have dissimilar social activities (Madden, Scaife, & Crissman, Reference Madden, Scaife and Crissman2006) and distinct economic motivations (Udayasankar, Reference Udayasankar2008). However, empirical testing has been scarce for the possible moderating role of firm size. Our results yield some intriguing implications. Business ethics and CSR activities seem to be incompatible with short-term business growth for small firms but are highly compatible for larger firms. Larger private firms seem to benefit from committing to business ethics and CSR because their visibility and resource enable them to induce stakeholder response to support beneficial social conduct and/or sanction misconduct. Thus we can view smaller and larger private firms as operating in different social and institutional environments. For larger private firms (firms above 1,000 employees in our sample), business ethics and CSR receive more systematic support, helping to offset costs and generate returns on CSR activities, which changes the CSR–CFP relationship. An alternative explanation is that larger firms can afford to have a stronger commitment to CSR. Our finding of the moderation of firm size may reconcile the literature's conflicting results regarding CSR–CFP relationships.
Third, our study views CSR more broadly by incorporating CSR's minimum admonition to ‘do no harm’, which the literature has largely ignored (Campbell, Reference Campbell2007). Research has primarily emphasized corporate actions that promote social welfare beyond basic legal and ethical requirements. For example, recent studies of Chinese private firms considered discretionary social behaviours, such as donations (e.g., Su & He, Reference Su and He2010), but we still know little about the economic consequences of assuming legal and ethical responsibilities. Lu (Reference Lu2009) used case examples to show that many firms actively engaged in discretionary social activities and even won awards for outstanding CSR, but still failed to commit to baseline ethical requirements. In this paper, we turn our focus from merely voluntary CSR to CEOs’/entrepreneurs’ CSR commitments, which we believe are the key drivers of a wide range of CSR activities including legal and ethical responsibilities.
Limitations and Future Research
Several caveats should be noted to interpret the findings of this study. First, the sample is primarily small and medium-sized firms of fewer than 1,000 employees. The average firm age is 8.46 years. The large firms (over 1,000 employees) comprise only about 7 percent of the sample. The results, thus, may have limited generalizability to larger and more mature firms. Similarly, because we use a sample of Chinese private firms, our results may not be generalized to other ownership types, such as state-owned enterprises (SOEs) and foreign-invested enterprises (FIEs). SOEs and FIEs may have distinct assumptions and logics for CSR. Third, our study focuses primarily on sales growth, a short-term financial indicator. However, CSR may influence firm financial performance gradually and indirectly through organizational intangibles such as innovation, brand image, and employee morale. Scholars could use a longer time horizon and investigate intangible aspects of organizational effectiveness.
Due to the cross-sectional design, one cannot conclude that CSR commitment produces weak sales growth for small firms. However, it would be even more difficult to explain why and how slower growth may trigger a higher commitment to CSR. One possible alternative explanation is that CSR commitment might be a justification for slow revenue growth by the CEO/entrepreneur. But this interpretation may not account for the moderation effect we found: it is difficult to theorize why CEOs/entrepreneurs of smaller firms are more likely than those of larger firms to make such justifications. Therefore, the self-justification interpretation seems to be less plausible. Future studies can further explore intermediate process between CSR and sales growth.
Research is needed to investigate whether firm size also moderates the CSR–CFP relationship in developed countries. Our study suggests that the CSR–CFP link is different for firms of different sizes. However, whether the conclusion from our study can be generalizable to developed countries calls for further empirical tests.
Future research can also distinguish different CSR actions and their performance implications individually and/or interactively. CSR commitment is indeed a multi-faceted construct. Firms do not invest equally in all kinds of CSR activities. It would be intriguing to investigate the economic consequences of differently-constructed CSR portfolios.
CSR scholars could also conduct case studies to demonstrate how firms in developing countries, especially those small and young ones, balance economic and social goals. Though weak institutions in developing countries may hinder overall social initiatives, some firms may still manage to do good and do well. Set as benchmarks, those firms’ practices and experiences can illuminate and encourage future followers to engage in CSR proactively.
In addition to inquiring about the economic consequences of business ethics and CSR, further academic endeavors can take a humanistic approach to examine other important social outcomes such as health, satisfaction, and justice (Tsui & Jia, Reference Tsui and Jia2013). CSR is essentially a tool of satisfying various stakeholders, so the immediate consequence of CSR activities should be enhanced stakeholder welfare. Rather than taking it for granted, scholars could seriously test whether CSR really improves social welfare at large.
Implications for Practice
By examining CSR in the Chinese private sector, our study offers some suggestions for policymakers and practitioners. In contrast to Western literature's suggestion of overall positive CSR–CFP relationships, our findings suggest that CSR commitment may be detrimental to business growth for small firms. However, our central message is not to discourage small firms in developing economies from engaging in CSR. Rather, our study calls for governments, NGOs, and social activists to play a vital role in building stronger institutions and upholding CSR values. Given the misaligned interests between corporations and society, society has the responsibility in keeping corporations accountable (Lee, Reference Lee2008). For example, policymakers can take further steps to develop comprehensive laws and regulations and ensure strong enforcement. Industry associations and unions can raise industry-wide standards and professional guidelines as supplements to legislation. Joint efforts can be made to nurture social consciousness among stakeholder groups because good citizens will generate good corporations. Furthermore, education institutions, such as business schools, can play an active role in enhancing CSR awareness, so business executives and professionals will take social initiatives proactively. Ultimately, only when strong institutions and values support CSR can we expect firms to incorporate CSR into their strategic cores.
We also provide guidelines for Chinese private enterprises in their efforts to embrace business ethics and social activities at different stages. Small private firms may not benefit immediately from committing to CSR but some CSR activities may build market recognition to sustain long-term business growth. Rather than viewing CSR as contradictory to business, management can make important strategic decisions that cultivate long-term benefits. Ultimately, CSR can be tightly woven into every fibre of organizational reality.
CONCLUSION
Using data from the Chinese private sector, our study extends investigations of the CSR–firm performance relationship to a developing economy. Contrary to findings in Western CSR literature, we find that CSR in the Chinese context has a small negative relationship to sales growth. However, the relationship is positive for large companies. The results call for further efforts to provide an integrative framework that explains conflicting CSR effects found in different contexts. More important, we believe significant attention should be paid to baseline business ethics and CSR issues in developing economies. We hope more researchers will join us in this endeavor.
APPENDIX I
Corporate Social Responsibility Commitment Scale (PRESOR)
(From Singhapakdi et al., Reference Singhapakdi, Vitell, Rallapalli and Kraft1996)
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1. The most important concern for a firm is making a profit, even if it means bending or breaking the rules (R).
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2. To remain competitive in a global environment, business firms will have to disregard ethics and social responsibility (R).
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3. If survival of business enterprise is at stake, then ethics and social responsibility must be ignored (R).
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4. Efficiency is much more important to a firm than whether or not the firm is seen as ethical or socially responsible (R).
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5. If the stockholders are unhappy, nothing else matters (R).
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6. Being ethical and socially responsible is the most important thing a firm can do.
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7. The ethics and social responsibility of a firm are essential to its long term profitability.
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8. The overall effectiveness of a business can be determined to a great extent by the degree to which it is ethical and socially responsible.
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9. Business ethics and social responsibility are critical to the survival of a business enterprise.
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10. A firm's first priority should be employee morale.
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11. Business has a social responsibility beyond making a profit.
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12. Social responsibility and profitability can be compatible.
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13. Good ethics is often good business.
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1. 公司最关心的问题应该是盈利，即使这意味着违反规则。
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2. 为了保持竞争力，公司有时不得不忽略道德和社会责任问题。
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3. 如果公司生存受到威胁，就不应该再考虑道德和社会责任问题了。
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4. 对公司而言，效率比道德和社会责任问题更重要。
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5. 没什么东西比得上股东的满意。
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6. 遵守道德，承担社会责任是公司最重要的任务。
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7. 要获得长期的利益，遵守道德、承担社会责任是必须的。
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8. 企业的整体效益很大程度上取决于其遵守道德规范，承担社会责任的程度。
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9. 商业道德和社会责任是企业生存下去的关键所在。
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10. 公司的第一要务是提高员工士气。
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11. 公司在盈利之外需要承担更多的社会责任。
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12. 社会责任和盈利可以是兼容的。
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13. 遵守道德的企业通常业绩做得更好。
