The impact of corporate social responsibility on firm performance the case of in vietnamese companies

3.2 Variablesandmeasurements...293.2.1 Dependentvariables...29 3.2.2 Explanatoryvariables...30 3.2.3 Controlvariables...30 3.3 Conceptualframeworkandmodelspecification...35 3.3.1 Concept

UNIVERSITYOFECONOMICS INSTITUTEOFSOCIAL

NETHERLANDSPROGRAMMEFOR

VIETNAM-M.AINDEVELOPMENTECONOMICS

THEIMPACTOFCORPORATESOCIALRESPO NSIBILITYONFIRMPERFORMANCE:THECA

SEOFVIETNAMESECOMPANIES

Athesissubmitted inpartialfulfilmentoftherequirementsforthedegreeofM A S T E R

Secondly,IwishtoconveymydeepgratitudetoDr.PhamKhanhNam,DrTruongD a n

g ThuyfortheirvaluablesuggestionsandcommentsformyTRDaswellastheeconometricsmodels.Furthermore,IwillneverforgetthededicationofallVNPteachersands u p p o r t i n g staffstogiveus high-qualitylectures

Next,IamalsogratefultomywonderfulteammatesandclassmatesatVNPC21fort h e i rhelpandmotivation in ourgreattimetogether

Specialthankstomyfamily,friendsandcolleagueswhosupportandencouragemed u r i

n g thethesisandstudyingtime in thisprogram

Thiss t u d y attemptst o i d e n t i f y t h e determinantso f CorporateSocialR e s p o n s i b i l i t

y ( C S R ) andtoexaminetheimpactsofCSRonfirm’sfinancialperformanceof6435Vietnamesefirmsextractedfromt h e c o m b i n a t i o n o f t h e VietnamT e c h n o l o g y andCompetitivenessSurvey(TCS)andtheVietnamEnterpriseSurvey(VES)withinathreeyearperiodfrom2010to2012.ByapplyingthepaneldataandFixedEffectsModel,theempiricalresultssuggestthatCSRmayhavepositiverelationshipswithfirmperformancewhereasthedeterminantsofCSRincludefirmsize,R&Dparticipation, finalgoodsratioandownershipstructures.Theseresultsaresupportedbyamajority ofempiricalpapersaboutCSR(Erhemjamtsetal.,2012;Margolisetal.,2007;RussoandFouts,1997)andtheoriesaboutC S R suchasstakeholdertheory,resource-

basedviewandstewardshiptheory.Inaddition,thes t u d y alsorevealsthesituationofCSRinVietnam:althoughalargenumberofVietnamesefirmsarea l r e a d y a w a r e o f CSR,mosto f firmso

n l y p a r t i c i p a t e i n LaborC S R , whichism a n d a t o r y

bylawswhileCommunity-relatedCSRisgenerallyignored.Basedonthefindings,thethesismayproposeseveralpolicyrecommendationstoimprovetheCSRpracticein Vietnam

Contents

DECLARATION i

ACKNOWLEDGEMENTS ii

ABBREVIATIONS iii

ABSTRACT iv

TABLE OFCONTENTS v

LIST OFTABLES vii

LIST OF FIGURES vii

INTRODUCTION 1

1.1 Problem statement 1

1.2 Researchobjectives 4

1.3 Researchquestions 4

1.4 Researchscope 5

1.5 Researchmethodology 5

1.6 Thestructureofthisstudy 5

LITERATUREREVIEW 7

2.1CorporateSocialResponsibility 7

2.1.1Definitions 7

2.2.2MeasurementofCSR 9

2.2 FirmPerformance 10

2.2.1 Definitions 10

2.2.2 Measurementsoffirmperformance 11

2.3 CorporateSocialResponsibilityandFirmPerformance 12

2.3.1 Theoreticalreview 12

2.3.2 Empiricalreview 18

RESEARCHMETHODOLOGY 23

3.1 Datacollection 23

3.1.1 VietnamEnterpriseSurvey 24

3.1.2 VietnamTechnologyandCompetitivenessSurvey 24

3.1.3 Datasampleinthisstudy 26

3.1.4 CorporateSocialResponsibilityIndex(CSRIndex) 27

3.2 Variablesandmeasurements 29

3.2.1 Dependentvariables 29

3.2.2 Explanatoryvariables 30

3.2.3 Controlvariables 30

3.3 Conceptualframeworkandmodelspecification 35

3.3.1 Conceptualframework 35

3.3.2 Modelspecification 36

3.4Analyticalapproach 38

RESEARCHFINDINGSANDDISCUSSIONS 41

4.1 OverviewofCorporateSocialResponsibilityandperformanceinVietnam 41

4.2 Descriptiveanalysisresults 46

4.3 Empiricalresults 52

4.3.1 DeterminantsofCSRengagement 52

4.3.2 EffectsofCSRonFirmPerformance 54

CONCLUSIONSANDRECOMMENDATIONS 59

5.1 Mainfindings 59

5.2 Policyimplications 60

5.3 Limitationsofthethesis 62

5.4 Futureresearch 63

REFERENCES 64

APPENDIX 71

Appendix1:RegressionresultsforFixedEffectModel 71

Appendix2:Hausmantestresults 77

Appendix3:AwarenessofCSRquestionnairesontheBaselineSurveyReport2010 79

LISTOFTABLES

Table2.1:TheoriesaboutCSR 18

Table3.1:NumberoffirmssurveyedinVESandTCSdatasetfrom2010 to2012 24

Table3.2:StructureofSurveyQuestionnairesinTCS 25

Table3.3:Categoriesoffirmsize 26

Table3.4:Categoriesofownershiptype 26

Table3.5:CorporateSocialResponsibility(CSR)Indicators 28

Table3.6:Summaryofvariables,measurementsandexpectations 34

Table4.1:CorporateSocialResponsibility(CSR)Indicatorsbyyears 47

Table4.2:MeanvalueofCSRaspectsbyFirmSize 48

Table4.3:MeanvalueofCSRaspectsbyOwnershipType 48

Table4.4:DescriptiveStatisticsofkeyvariables 49

Table4.5:CorrelationMatrixofkeyvariables 51

Table4.6:DeterminantsofCSRparticipation 53

Table4.7:SummaryofHausmantestresultsforallregressions 53

Table4.8:RegressionresultsexaminingtheimpactofCSRonROA 55

Table4.9:RegressionresultsexaminingtheimpactofCSRonROE 56

Table4.10RegressionresultsexaminingtheeffectofthreedimensionsofCSRonfirmperformance 58

LISTOFFIGURES Figure2.1:ThePyramidModelofCSR 17

Figure3.1:ConceptualFramework 36

Figure4.1:CSRAwarenesscategory 43

Figure4.2:Awarenessscoresbysectors 43

Figure4.3:Awarenessontopicsofsocial responsibility 44

Figure4.4:Awarenessontopicsofsocial responsibility–bynumberoffirms 45

CHAPTER IINTRODUCTIO

N1.1 Problem statement

Inrecentdecades,socialeffectsofenterprisesareincreasinglybecomingessentialint h

e fieldofeconomicsandmanagement(Fiorietal.,2007).However,themainobjectiveofanenterpriseistoobtainprofitsorinotherwords,toincreasefirm’sfinancialperformance.Generally,performancem a y beaffectedbyb o t h firm’sow n d e c i s i o n s a n d strategiesi n i t s business.Inthissense,researchersandscholarsm ay raiseacontroversialquestion:whatist h e levelofsocialandenvironmentaladoptionthatfirmshouldconsiderbutstillachievethefinancialtargets?

Nowadays,CSRhasemergedandbecomeanessentialconceptinthefieldsofmanagement,economicsandfirm’stheory(Moir,2001;Lindkvist&Llewellyn,2003;Margolis& W a l s h , 2 0 0

3 ) Generally,C S R focuseso n i s s u e s r e l a t e d t o s o c i a l andenvironmentaleffectsfromenterprises’operationsanddecisions.Carroll (1979,1999)definesCSRassocialresponsibilitythatenablesfirmtooperateinaprofitable,law-

abiding,moralandd i s c r e t i o n a r y manners.Previously,c o m p a n i e s utilizedm a n y measuressuchasdiversifyingtheirproducts,improvingthequalityofgoodsandservicestogainco

2mpetitiveadvantagesonthemarketplace.Nowadays,companies tendtoreinforcetheir images,

reputation,andbranddevelopmentthrought h e adoptiono f C S R activities.Infact,s o c i a l responsibilitiesareessentialt o allcompaniesandorganizationsbecauset h e customersarem o r e concernedaboutbusinessesandp r o d u c t s whichb r i n g m o r e b e n e f i t s t o h u m a n andcommunity.Therefore,a betteru n d e r s t a n d i n g o f t h e relationshipbetweenC S R andfirm’sperformancecouldleadtowiserdecisionsformanagers,stockholders,andstakeholders(Wu

&Shen,2013)

Numerousp a p e r s mayalso p r o v i d e e x t e n s i v e literatureo n t h e r e l a t i o n s h i p betweenC S R andfirmperformance(Karayeetal.,2014).Itisseenthatamajornumberofpapersarguesthepositivecorrelation(Margolis&

Walsh,2003;Orlitzkyetal.,2003)whereasafewstudiesindicatesthenegativeorneutralrelationships(Wright&Ferris,1997;McWilliams&Siegel,2000).Thispracticeinvokesacuriosityamongscholarswhointentionallywouldliketo examinethetruerelationshipbetweenCSRandperformance.Inaddition,empiricalpaperso n C S R topicsarem a i n l y c o n d u c t e d f o r d e v e l o p e d countriessuchast h e U S o r Europeancountries,whereCSRpracticeisstronglyandsystematicallydeveloped(Belal,2001;Grayetal.,1995).Ho p p e r andH o q u e (2 00 4) alsos t a t e t h a t t h e n u m b e r ofempiricalstudiesaboutC S R indevelopingcountriesiscomparativelysmall.ThislackofresearchaboutCSRpracticemayurgeresearcherstoamotivationofconductinganempiricalstudiesaboutCSR-

Performancei n d e v e l o p i n g c o u n t r i e s , e s p e c i a l l y t he A S E AN countries.ChappleandM

o o n (2007)arguet h a t t h e A S E A N w o u l d achievem a j o r focuso n C S R s t u d y s i n c e t

h e e a r l y 2 0 0 0 s

AccordingtotheVietnamChamberofCommerceandIndustry(VCCI),theconcepto fCSRwasfirstintroducedtodomesticenterprisesbytransnationalcorporationsinVietnam(Nguyen,2007).Byt h e year2 0 0 3 , Vietnamesegovernmentwasawareo f C S R practicethroughtheprogr

amofWorldBank:“Strengtheningdevelopingcountrygovernments’engagementw i t h CorporateSocialResponsibility”( T w o s e andRao,2 0 0 3 ) In2 0 0 7 , t h e

participationofVietnamtotheWTOrecordedastablesteptowardsthepromisingpictureofVietnam’sglobalizationandCSRadoption.Inthisoutlook,VietnamgovernmentandenterpriseswouldbetwomostimportantsidesinthepromotionofCSRpracticeinVietnam:t h e governmentpromulgatesande n f o r c e newpoliciesw h i l e e n t e r p r i s e s contributet o t h e implementationofCSRactivities.

Infact,t h e Vietnamesegovernmenthasp a s s e d s o m e newlawsandr e g u l a t i o n s t o i

m p r o v e C S R practice.Forinstance,t h e n e w EnvironmentProtectionLawandVietnamAgenda21forenvironment-

relatedissues;newunionlawandlaborcodetosupportemployees(Ho&Y e k i n i,2014).In2 0

0 4 , t h e governmentemployedStrategicOrientationw i t h thetargetofSustainableDevelopment.Thecampaignattemptedtodevelop19strategicareasfollowingthreeaspectsofCorporateSocialResponsibility:economic,socialandenvironmentalcriteria.This practicemayincreasetheroleo

T h i VaiRiverwithin14-years

period(Nguyen&Pham,2011).Therefore,firmshouldbec a r e f u l l y awareofitssocialresponsibilitiestobenefitsitselfandavoidcommitting harmfulactivitiestothesociety.T h e maineventthatdisseminatesCSRconceptamongVietnamesefirmswouldbetheprojectoftheUnitedNationsIndustrialDevelopmentOrganization(UNIDO),whichsupportVietnameseSMEsto“AdaptandAdoptCSRforImprovedLinkageswithGlobalSupplyChainsinSustainableProduction”(Ng

uyen,2007).Thisprojecti s financedbyt h e EuropeanU n i o n w i t h t h e essentialc o o p e r a t i o

n o f t h e V C C I t o

enhancet h e perceptiono f C S R andintroduceC S R standardsi n VietnameseS M E s , henceincreasetheirawarenessandcompetitivenessontheinternationalmarkets.

InVietnam,manylargeenterpriseshasbeguntoengageinCSRactivitiesduetothepressureo f t h e globalizationandinternationalintegration(Nguyenetal.,2 0 1 5 ) However,over90%ofVietnamesefirmsaresmallandmedium-

sized,whichmaynotconsiderCSRasessentialrequirements.ThispracticepresentstherealitythatthebenefitsfromadoptingCSRares t i l l vaguei n V i e t n a m Inaddition,t h e n u m b e r o f studieso n CSR-

relatedtopicsi n Vietnami s r e l a t i v e l y limited (Pham,2010).Itisn e c e s s a r y tohaveanempiricals t u d y thatrevealthepotential effectsofCSRonfirmperformanceintheVietnamcontext.Hence,byemployingfirm-

leveldataandquantitativeanalysis,thisstudyattemptstoidentifythedeterminantso f C S R adoptionaswellast o answert h e questiono f whethero r n o t C S R engagementmayboost

1.4 Researchscope

This studyexaminetheeffectsofCSRactivitiesonfirmperformancein thecontextofVietnam.T h e firmd a t a i s extractedfromt h e surveyso f VietnamT e c h n o l o g y a n d CompetitivenessS u r v e y (TCS)andVietnamEnterpriseS u r v e y (VES)between2 0 1 0 and2 0 1 2 Inaddition,t h e firmperformancei n t h i s researchonlyfocuseso n financialperformance;ando t h e

r conceptso f performancesuchaseconomicperformanceandsocialperformancearebeyondthescopeofthisthesis.Inotherwords,thisstudyemploysfinancialindicatorstomeasureperformanceandtheterm“performance”wouldrepresentsfirm’sfinancialperformance

1.5 Researchmethodology

ThisstudyattemptstoconductquantitativeanalysisonthepaneldataofVietnamesefirmswhicha r e availablei n t h e V i e t n a m T e c h n o l o g y a n d CompetitivenessS u r v e y (TCS).T h epaneldataw o u l d b e employedt o capturet h e variationso f firmperformancewhenadoptingC

S R acrosst h r e e years.F o r t h e econometricm o d e l , t h i s s t u d y utilizest h e FixedEffectModelandRandomEffectModeltoexaminetherelationshipbetweenCSRandfirmperformance.Afterregressions,thetestofHausmanwouldbeappliedtodeterminewhetherFEMis

moreappropriatethan REM orviceversa

1.6 Thestructureofthis study

This studyconsists offivechapterswhichareconstructedasfollows:

 Chapter1 presentst h e overviewandproblemstatementaboutC S R practiceandreasonst

oselectthetopic,researchobjectives,researchscopeandmethodology

 Chapter2 discussest h e theoreticalandempiricall i t e r a t u r e relatedt o C S R andi t s relat

ionshipwithfirmperformance.Thissectionprimarily introducesthedefinitionso f keyconceptsinthisstudy,maintheoriesaboutCSRandlistsoutmainempirical

CHAPTER2 LITERATUREREVIEW

ThischapterintroducesthetheoreticalandempiricalliteraturerelatedtoCSRanditsrelationshipwithfirmperformance.First,thecontentincludesthedefinitionsandmeasurementsofbothCSRandfirmfinancialperformance.Second,thetheoriesandempiricalstudiesonCSR-

PerformancerelationshiparealsopresentedtofundamentallydepicttheCSRliteraturepicturesinpractice

2.1CorporateSocialResponsibility

2.1.1 Definitions

Overt h e pastfewd e c a d e s , althoughr e s e a r c h e r s haveattemptedt o

c o n t r i b u t e t o literatureo n C S R practices,t h e preciseandu n a n i m o u s definitionabout

C S R i s s t i l l notestablished(Wood,2010).Therearemanyreasonstoexplainforthisissue.Firstofall,VanMarrewijk(2003)arguest h a t differentp o i n t s o f v i e w aboutCSRtowardspecificinterestsm a y h i n d e r t h e f o r m a t i o n o f C S R c o n c e p t s.S e c o n d , i t i s difficultt o

However,almostallavailabled e f i n i t i o n s aboutC S R m a y c o n v e r g e t o o n e t h

i n g : enterpriseshavetosatisfythesocialexpectationsintheirplanningaboutmanagementstrategies( G o s s l i n g & Vocht,2 0 0 7 ) T h i s p o i n t m a y b e t r u e f o r b o t h t h e definitionsfromlargeorganizations’ andscholars’perspective.Infact,accordingtotheWorldBank,

“Corporates o c i a l r e s p o n s i b i l i t y ist h e commitmento f businesst o contributet o sustainableeconomicdevelopmentbyworkingwithemployees,theirfamilies,thelocalcommunityands o c

i e t y atlarget o i m p r o v e t h e i r livesi n wayst h a t a r e goodf o r businessandf o r development”.Alternatively,BusinessforSocialResponsibility(2000)definesCSRas“achievingcommercialsuccessinwaysthathonorethicalvaluesandrespectpeople,communities,andthenaturalenvironment”.Anotherwell-

knowndefinitionisfromtheC o m m i s s i o n oftheEuropeanCommunities (2001),CSRis“Aconceptwherebycompaniesintegratesocialandenvironmentalconcernsint h e i r businessoperationsandi n t h e i r interactionwiththeirstakeholderson avoluntarybasis”

Asfromtheperspectiveofresearchers,McWilliamsandSiegel(2001,p.117)definesC S Ras“actionsthatappeartofurthersomesocialgood,beyondtheinterestofthefirmandt h a t whichisrequiredbylaw”.Inaddition,thedefinitionofFrooman(1997,p.227)coulde x e m p l i f y

C S R : “Ana c t i o n bya firm,whicht h e firmchoosest o t a k e , t h a t s u b s t a n t i a l l y affectsanidentifiablesocialstakeholder’swelfare”.T h e s e definitionssuggestst h a t CSRactivitiesi s t h e v

o l u n t a r y initiativeso f firmw h i c h goesb e y o n d i t s legalresponsibilitiest o s a t i s f y bothsociety’s andother stakeholders’co ns id er at io ns Intheearlierdefinition, tobe m o r e specificinthegeneralstandardsofCSR,Carroll(1979)proposesthedefinitionofCSRasfollows:CSRrepresentsthesocialresponsibilityofafirmintermoffourbasiccategories:economic,legal,ethicaland

d i s c r e t i o n a r y e x p e c t a t i o n s Thesecategoriesseemst o p a r t l y inheritfromtheearlierdefinitionsaboutCSRbutitmaysynthesizesandcategorizesfirm’ssocialresponsibilitiesinamoreexhaustiveway.ThisdefinitionofCarroll(1979)isbelievedt o bethemostunobscuredconceptualizationofCSRsinceitilluminethefirm'sdutiestowards o c i e t y andfurthermore, distinguishbetweent h e attemptstomake profitsands o c i a l responsibilitiesofthemanagements(Lozano,2008; Wood, 2010)

Insummary,asociallyresponsiblecorporationissuggestedtotakeactionsthate x t e n d sbeyondthelegalrequirementsandsatisfytheexpectationsofitsmajorstakeholders.Fromliterature,CSRcouldbeconsideredasthecomprehensivesetofprograms,policiesandmindsetstointegratefirm’sbusinessoperationsintosocialandenvironmentalconcerns.

Inn o n - U S countrieswhereKLDdatai s

n o t available,researchersoftene m p l o y s e c o n d a r y dataforCSRperformancefromothersurveys.AssaidbyGhauriandGronhaug,

(2005):“ S e c o n d a r y datai s usefuln o t o n l y t o f i n d t h e informationt o s o l v e o u r researchproblem,b u t alsobetterunderstandande x p l a i n o u r researchproblem”.Incontrastt o t h e extra-

financialratings,thesecondarydataprovideacomplementary approachf or CorporateSocialPerformance(CSP)sincetheyarebasedonfirm’sactualactivitiesbutnotevaluationsfromotheragencies.Therefore,themostpopularmeasureforCSRwouldbetheCSRIndex,whichisextractedfromthesecondarydata

2.2 FirmPerformance

2.2.1 Definitions

Intoday'sbusinessandmanagementstrategy,itisbelievedthatfirmperformanceiso n eofthemostessential concept.Furthermore,firmperformanceisthetargetthatallfirmm u s t improve

tosurviveortosatisfyitsmajorstakeholders.Althoughthereisalargebodyofliteratureandmanypapersconsiderfirm'sperformanceasthemaindependentvariable,thepreciseandcommondefinitionofperformancestilldoesnotexist(Richard,Devinney,Yip,

&Johnson,2009).Thisissuecouldleadtodiverseresultsfromperformance-relatedstudiesd u e t o t h e l a c k ofc o n s e n s u s , differentwayso f measurementandd i m e n s

i o n a l i t y o f firmperformance.Therefore,Glick,WashburnandMiller(2005)suggeststhatresearcherstendtoe m p l o y onlyoneorseveralindicatorstorepresentfirmperformanceduetotheunavailabilityo f essentialvariableson thedataset

Infact,firmperformanceisacomplicatedconceptwithmulti-dimensionalconstruct.VenkatramanandR a m a n u j a m (1987)categorizecorporatep e r f o r m a

n c e i n t o threedifferentaspects:financialperformance,businessperformance,andorganizationaleffectiveness.Financialp e r f o r m a n c e ofa firmc a n b e a s s e s s e d byseveralaccounting-

basedorfinancialindicatorsofthatfirm.Theseindicatorsmaybesubjectivesincetheytendtomeasurefirm’sp r o f i t a b i l i t y byo b s e r v i n g t h e financialsituationsandbusinessresultsoffirm

S o m e basicp r o x i e s forfinancialperformancecouldbeROA(returnonassets),ROE(returnonequity),andROS(returnonsales).Inaddition,businessperformanceholdsafundamentalpositioninmanagementstudiesandpractices.Itcanbeseenasthemarket-

basedmeasurethatincludesb o t h financialandoperationalperformance.T h e r e i s a l o n g l i s

t o f indicatorst h a t c a n b e u t i l i z e d tomeasurebusinessperformance:salesgrowth,marketshare,productdevelopment,etc.Organizationaleffectivenessi s anotheraspecto f firmperformanc

et h a t representst h e

Firmproductivityreflectsfirm'se f f i c i e n c y ofproductionandi s c a l c u l a t e d ast h e r

atioofusefuloutputwith theamountofphysicalinputsbeing used.Basedonthecharacteristicsandtreatmentofinputandoutput,LiebermanandKang(2008)indicatesthatp r o d u c t i v

i t y couldb e m e a s u r e d bysingle-, m u l t i - o r

total-factorp r o d u c t i v i t y ratio.T h e factorcouldbeo ne single elementt h a t c o n t r i b u t e tothefirm'sp r o d u c t i o n suchas:capital,labor,material,etc.Productivitymeasureisgenerallyconsideredastotalfactorproductivitys i n c e itreferstoallfactorsofproduction.Thisapproachwouldintuitivelyrepresentsfirm'sc a p a b i l i t y ofproduction.Single-factorormulti-

factorproductivityratiomaynotreflectfirm'soverallproductivityandcouldleadtomisleadingresults

in theanalysis

Firmp r o f i t a b i l i t y employsaccountingindicators s u c h asRO A o r RO E t o analyz

efirm'sfinancialcondition.Theseindicatorsm a y reflectfirm'sperformancei n anoverallperspectiveb u t n o t observet h e multinationalcharacteristicso f firm'sp r o d u c t i o n process.O r l i t

z k y etal

(2003)arguesthatbothaccountingandmarketindicatorscouldbeappliedtomeasurefirm’sperformance.SincethisstudyexaminetheimpactsofCSRonfirm'sfinancialperformance,t h e o v e r a l lfinancialindicatorswouldb e appropriatetocapturefirmperformance.Therefore,themeasurementofprofitabilitywouldbesuitableandisutilizedint h e m e t h o d o l o g y of thisstudy

2.3 CorporateSocialResponsibilityandFirm Performance

2.3.1 Theoreticalreview

TherelationshipbetweenCSRinvestmentandfirm’sfinancialperformancehasbeendiscussedin manywell-known theories.This sectionsummarizesmost ofthe

importanttheoriesinpreviousCSRstudiesfrombasicto moreadvancedlevel ofcomplication:

o f viewisthenstronglycriticizedbymanyscholarsandotherstakeholders of firm Asaresult,therearemanytheoriesthatemergetosolvethosecriticisms:AgencyTheory,Stakeholdertheory,andthePyramidModelofCSR

AgencyTheory:thistheorywouldbefirstdevelopedbyJensenandMeckling(1976).T h e

a g e n c y p e r s p e c t i v e indicatest h a t t h e r e i s alwaysconflicto f interestsbetweenshareholdersandfirm’smanagers.T h i s c o n f l i c t i s g e n e r a l l y namedt h e “ a g e n c y problem”.Overall,afirmincludesvariousgroupsofinterestsandagencyproblemcanonlybesolvedwhentheequilibriumpointofdifferentinterestsisachieved(Krisnawatietal.,2014).Accordingtothistheory,theinterestsofshareholdersandfirm’smanagerswouldneveralignandCSRmaybetheoutcomeofthoseconflicts(JensenandMeckling,1976).Inthissense,managersmayutilizecorporateresourcestoincreasetheirownwealthandutilitiesinsteadoft o i n v e s t i n p o t e n t i a l projectswhichmayimprove firm’sfinancialperformance.Therefore,C S R activitiesm a y l e a d t o p o o r firm’sperformanceands h a r e h o l d e r s ’ wealthcouldb e

reduced.ThistheorysuggeststhatCSRinvestmentsandresourcesshouldbeefficientlyspentt o improvefirm’sperformancebutnottofurtherineligiblemanager’swealth.Basedonthev i e w ofAgencyTheory,StakeholderTheoryandStewardshipTheoryemergedtosolvethea g e n c

y problem

StakeholderTheory:I n contrastt o e a r l y t h e o r y whichmayindicatet h e negativerelat

ionshipbetweenC S R andfirm’performance,subsequenttheoriess h o w s t h e p o s i t i v e effects

o f C S R o n performance.Forinstance,t h e stakeholderp e r s p e c t i v e fromFreeman(1984)proposestheidea

thatafirmcansurviveonlyifithasabilitytosatisfyitsstakeholdersw h o couldc o n s i d e r a b l y affec

tt h e f i r m ’ s welfare.Int h i s case,stakeholdersa r e referredt o groupso r i n d i v i d u a l s t h a t haveinterestsandr e l a t i o n s w i t h t h e firm,suchascustomers,employees,suppliers…

Thistheoryi s widelyacceptedamongresearchersandisfurtherdevelopedin variousways.Forinstance,BlombäckandWigren(2009)suggeststhatfirmandstakeholdersshouldshaketheirhandstobenefitallrelevantparties.Inotherwords,besidest h e goalo f gainingp r o f i t s f

o r stockholders,f i r m s s h o u l d participatei n C S R activitiestos a t i s f y

non-financialstakeholdersw h o couldp r o v i d e s t r o n g s u p p o r t f o r f i r m s Moreover,Clarkson(1995)claimsthatbringingwealthandvaluetostakeholdersist h e onlywaythatallowfirmstobem o r e prosperous.In2 0 0 2 , J e n s e n introducedt h e

v a l u e maximizationconceptwhichharmonizesthestakeholdertheoryandvalueoffirminthelongrun.Infact,valuemaximizationsuggeststhatlong-

runmarketvalueisoneofthemostimportantobjectiveo f firmwhereasstakeholdert h e o r y a d v i s

e s managerst o s a t i s f y t h e interestsandbenefitsofallstakeholders.Jensenassertedthatthefirm’sprimarygoalistomaximizefirm’svalueandprovedt h a t firm’svaluemaximizationi s n o t alwaysconflictw i t h a particularstakeholder.T h i s a p p r o a c h hasr e m o v e d t h e practiceofvariousf i r

m ’ s objectivesi n traditionalstakeholderperspectivesuchashighsalary foremployees,low pricesf o r customersorcharityfortheorphanchildren

InstrumentalStakeholderTheory:StakeholderTheoryofFreeman(1984)wouldbea par

adigmandfoundationfor manylattertheories(Margolis& W a l s h , 2003).Th e influentialstudyfromDonaldsonandPreston(1995)categorizestheStakeholderTheoryintothreetypes:descriptive,normative,andinstrumentaltheory.AlthoughStakeholderTheoryisdevelopedintovariousversions,theInstrumentalStakeholderTheorymaybereceivedmosto f attentionfromresearchers( M c W i l l i a m s andSiegel,2 0 0 1 ; Surrocaetal.,2010).J o n e s (1995)arguest h a t InstrumentalStakeholderT h e o r y c o n s i d e r s s o c i a l activitiesasaninstrumenttomaximizeprofitsandtherefore,increaseshareholders’wealth.Inotherwords,C S R aresocialactivitiesthatbenefits firm’sstakeholdersintermofmaximizing profitsforshareholders.T h i s s t u d y m a i n l y f o c u

s o n t h e o u t c o m e s , e s p e c i a l l y t h e economicb e n e f i t s whenfirmparticipatesinactivitiesthatbenefitsvarioustypesof stakeholders

s u b s t i t u t a b l e Thisv i e w suggeststhatCSRwouldcreatecompetitiveadvantageandthusincreasefirm’sperformance.Int h e f i r s t RBVframeworkt h a t a p p l y f o r C S R , Hart( 1

9 9 5 ) suggestst h a t environmentalsocialresponsibilitycouldbearesourcethatallowsfirmstoobtainsustainablecompetitiveadvantage.I n addition,byapplyingenvironmentalandfinancialdataatf i

r m

-level,RussoandFouts(1997)alsoindicatethathighenvironmentalperformancewouldleadt o

b e t t e r financialperformancethoughcompetitiveadvantage

Slackresourceshypothesis:Thistheory isfirstpresentedbyWaddockand Graves(1997

)withtheideathatfirmswithbetterperformancewouldhavemorefinancialcapabilityt o addressandsolvesocial issues.Furthermore,WaddockandGravesalsopointedoutthat therewo ul d b ecausaleffectsbetweenC S R andfirmperformance.Int h i s sense,f i r m w i t h highfinancialperformancewouldbeabletoaffordmoreonsocialissueswhereasCSRalsoenablesfirmtoachievemoresuccessinfinancialperspective.Infact,financiallysuccessfulfirmshavesufficientresourcestoallocatetheinvestmentintostrategiccampaignsinthelongr u n suchase n v i r o n m e n t a l problems,employeeandc o m m u n i t y r e l a t i o n s Therefore,t h e adoptionofCSRwouldallowfirmtohavelong-

termbenefitssuchas:betterpublicimage,improvedcustomercommunityr e l a t i o n s , andattractiverecruitmentopportunities.Tiago(2012)arguest h a t slackresourcesw o u l d b e assignedt o s

o m e b u t n o t allareasofsocialconcerns(e.g.environmentalproblems,communityrelations )andinvestmentineachareaw o u l d bringvarious level ofoutcomesto thecompany

StewardshipTheory:BasedontheideaofStakeholdertheory,DonaldsonandDavis(199

1)developedandintroducedStewardshiptheory.Thistheoryp r o v i d e s thebasistoanswertheagencyproblem(Krisnawatietal.,2014).Stewardshipperspectivesuggeststhatexecutivemanagers,w h o havem o r a l principles,t e n d t o leadfirmt o attendC S R activitiesregardlessoftheeffectsofCSRonfirmperformance(DonaldsonandDavis,1991).Anotherfurtherdevelopmentf r o m t h

e originalidea,M u t h andDonaldson( 1 9 9 8 ) arguest h a t t h e r e alwaysexistscertainmotivesorimperativetopreventandsolveconflictsofinterestbetweenmanagersandstockholders.Accordingt

themanagersarethestewardsandtheyhavetoo b t a i n twotargets:tosatisfyallrelevantstakeholdersandtoachieve targetedfirm’sperformance.W h e n t h e interestso f stakeholdersarealignedw

i t h t h e manager’sgoals,t h e equilibriumo f t h i s relationshipi s achieved.Thisequilibriump o i n twouldb e t h e targeto f

StewardshipTheory.T h i s approacht e n d s t o contrastw i t h t h e a g e n c y t h e o r y i n term

o f manager’smotivationtoparticipatein CSRactivities

ThePyramidModelofC S R :Basedo n t h e ShareholderTheory,C a r r o l l (1991)deve

lopedthistheorywiththenotionthatfirm'smainobjectiveistomakeprofit,butprofitmaximizationm a y n o t b e t h e u n i q u e r e s p o n s i b i l i t y o f a f i r m T h i s m o d e l introducesf o u r layersofresponsibilitythatafirmshouldfollow:economic,legal,ethicalandphilanthropiccriteria.Itc a n bes e e n f r o m t h e m o d e l t h a t e c o n o m i c aspectw o u l d bet h e m o s t importantobjectiveofafirmsinceitislocatedatthebottomofthemodel.ThisisconsistentwiththeShareholderTheoryofFriedman(1970).Onlyiffirmisabletomakeprofitsforshareholdersandmeettheeconomiccriteria,nextlayersinthemodelwouldbeexecuted.Thesecondlayeri s legalaspectwhichr e q u i r

e s firmt o c o n f i r m t o lawsandregulationsf r o m governments.Ethicalcriteriawouldbethenextlayer,thisisfirm’sdutytodo“good”thingstosatisfyitsstakeholders.Thetoplayerofthemodelisphilanthropiccriteria.Thislayerrepresentsfirm’slevelofcontributiontoitscommunityorsociety.Carroll(1991)suggeststhatafirmshouldf o l l o w allfourtypesofresponsibilityinordertoobtainprofitsandprosperity.ThisPyramidModelo f CS R w o u l d bet he baseto t h e d e v e l o p m

e n t o f severall a t t e r complicatedm o d e l s aboutCSR.ThesenewmodelsemploystheideafromCarroll(1991)withdifferentaspectsofr e s p o n s i b i l i t y atupperlayersofthepyramid.Thedeeperinvestigationofthesenewmodelsm a y beout ofscopeofthisstudy

Table2.1:Theoriesabout CSR

Theoretical perspective(s) Keyargument/result

Themaingoaloffirmis tomaximize

Effectsof CSRon Perform ance

CSRisconsideredasatoolformanagerstoe xploitfirm'sresources;thereispossibleconf lictsofinterestbetweenmanagersandshare holders

Besidesthegoalofgainingprofitsforstock holders,firmsshouldparticipateinCSRact ivitiestosatisfyotherstakeholderswhocou ldprovidestrongsupportforfirms

Resource-Slackresources hypothesis

StewardshipTh eory

socialresponsibilitywouldcreatecompetit iveadvantageandthusincreasefirm’sperfo rmance

Firmwithhighfinancialperformancewoul dbeabletoaffordmoreonsocialissueswher easCSR

alsoenablesfirmtoachievemoresuccessin financialperspective

MoralmanagerstendtoleadfirmtoattendC

SR activitiesregardlessoftheeffectsofCSRon firmperformance

CSRmayincludesocial activitiesthatbenefitsfirm’sstakeholder sintermofmaximizingprofitsforshareh olders

Positive

2.3.2 Empiricalreview

TheimpactofCSRonfirm’sperformancehasbeendiscussedinalarge n u m b e r ofempiricalstudies.However,theresultsfromthosestudieshavebeenverymixedanddonotreachtoa

consensusaboutwhetherandhowCSRengagementwouldleadtobetterperformance( O r l i t z

k y e t al.,2 0 0 3 ; Luoetal.,2 0 1 5 ) Forinstance,MargolisandW a l s h

(2003)proposedthereviewof109 empiricalstudiesthat e xa mi ne therelationshipbetweenCorporateSocialR e s p o n s i b i l i t y andf i r m ’sperformancebetweent h e years1 9 7 2 and2 0 0 2 A m o

n g thosestudies,thereare54studiesthatindicateapositiverelationship;28studiesthatp r o v i

d e theinsignificantcorrelation;only7studiesthatsuggestsanegativerelationship;andt h e remainingpartof20papershasshowedmixedresults.Inanotherresearch,Margolisetal.(2007)

providesamorecomprehensiveanalysiswith yearsperiod.Theresultfromt h i s s t u d y suggestst h e p o s i t i v e relationshipb u t t h e impac

& Markus,1 9 8 9 ; Barla,2 0 0 7 ) T he debatea m o n g e co no mi c researcherso n t h i s relationshipcontinuesw i t h n o finalconclusion.Therearemanyr e a s o n s t h a t leadt o t h e conflictingresul

unavailabilityo f reliableme as ur em en ts ofsocialperformanceo r t h e omission ofimportantvariablesthat m a y moderatethis relationship(Reverteetal.,2015; Surrocaetal.,2010; García-Castroetal.,2010).Forexample,McWilliamsandSiegel(2000)confirmthattheomissionsofinnovation-

relatedvariablecouldleadstomodelmisspecificationsandunreliableresults.Infact,manyp a p

e r s e x a m i n e t h e m e d i a t i n g roleso f i n n o v a t i o n i n t h e n e x u s betweensocialperformanceandfirm’sperformance(Lockettetal.,2006) An o t h e r possible reasoni s that firmperformancei s f u n d a m e n t a l l y consideredass h o r t - t e r m r e s u l t whereasC S R m a i n l y

db e n e f i t s o t h e r people.Strategicm o t i v e meansfirma t t e n d C S R i n ordert o obtainm o

r e p r o f i t s ; therefore,t h i s m o t i v e m a y enhancefirm’sperformance.Finally,greenwashingisawaytopromotefirm’sbrandimagebyprovingtocustomersthatfirm’sproductsareenvironmentallyfriendlybutactuallynot.Int h i s sense,Frankental(2001)indicatesthatgreenwashingallowfirmstoachievebetterperformanceinsomewayswithout considerably modificationsinfirm’operation.Itcanbeseenthat themotives offirms in CSRengagementmayresultindifferentoutcomesintermoffinancialperformance

Previousempiricalp a p e r s o n t h e impactso f C S R o n performancecouldb e categorize

di n t o t w o maintypes.T h e firsto n e o f s t u d y attemptst o observet h e s h o r t

-r u n financialimpactsofCSRengagementbyapplyingthee v e n t study methodology.However,t h i s k i n d o f p a p e r s s h o w differentresults.F o r instance,t h e negativer e l a t i o n s h i p couldb e f o u n d inthestudiesofWrightandFerris(1997)whilePosnikoff(1997)discoveredapositiverelationship.Sincethesepapersshowsinconsistent results,thereisnostableconclusionfor

b a s e d indicators.Thesestudiesg e n e r a l l y u t i l i z e quantitativeapproachandalsop r o d u c e diverser e s u l t s F o r example,CochranandW o o d (1984)e m p l o y t h r e e a c c o u n t i n g i n

d e x e s t o measurefirm’s

performance:t h e ratioofreturnst o assets,t h e r a t i o o f r e t u r n s t o salesandexcessmarketvalueoffirm.Theymayalsoaddedtheageofassetsasacontrolvariable,whichisarguedtob e abletosolvethespuriouspositiverelationshipsbetweenCSPandfirm’sperformance.TheresultssuggestthattheadditionofthiscontrollingvariablemayconfirmsthepositiverelationshipbetweenCSRandfirmperformance,buttheimpactofCSRismuchweakerthant h e caseofwithoutassetage.Inaddition,WaddockandGraves(1997)utilizefirm-

leveldatao f

eightCSRaspectsfromtheStandardandPoors500(S&P500-conductedbyKLD)anda p p l y weightingtechniquestocalculateaweightedCSPIndexforeachcompany.TheauthorsmayalsoemploysCSPIndexasamainexplanatoryvariabletoperformtheregressionanalysiswiththreeindicatorsofdependentvariable:ROA,ROE,andROS.Controlvariable ssuchassize,risk, andindustry arealsoincludedi n theanalysis T he results mayalsoindicatethe positiveeffectsof CSP indexonfinancialperformance

Inanotherresearch,Linetat

(2009)investigates1000TaiwanesefirmsthatstronglycommitCSRandR&Dadoptionfrom2002to2004.Atthebeginning,theempiricalresultssuggestCSRpositivelyaffectsfirm’sfinancialperformancewhentheauthorsfollowedtheoreticalandempiricalreviews.However,when five financialindicatorsrepresentingthelong-

termeffectsofCSRareconsidered,thepaperonlyconfirmthatCSRmayhavepositiveimpactsonlong-termperformance.Theshort-

termfinancialperformancewouldnotreceivebenefitsfromCSRadoption.Additionally,Aupperleetal.(1985)applyforced-choiceinstrumentsurveytoexaminetheimpactsofCSR onrisk-adjustedreturnsonassets(ROA)inone-yearandf i v e - y e a r to considertheshort-term andlong-term effects,respectively.Additionally,theCSRmeasureswouldbetheoverallfirm-

levelCSRIndex.Fromtheresults,t heauthorsstatest h a t C S R hasn o statisticallysignificantrelationshipw i t h firm’sperformance

Onep o s s i b l e reasone x p l a i n i n g whydifferentresearchmayproduce v a r i o u s result

sf o r therelationshipbetweenCSRandfirmperformancecouldbeendogeneityissues.MargolisandWalsh(2003)statesthatnumerouscurrentstudiesattempttoobservethedirectcorrelationbetwee

nC S R andfirmperformance.Int h i s sense,t h e t y p i c a l m e t h o d o l o g y t o e x a m i n e t h e r

e l a t i o n s h i p betweenC S R andf i r m ’ s performancei s toregressfirm’sperformance(e.g.Tobin’sQ,returnonequity,etc.)onCSRmeasures.However,thispracticew o u l d leadstotheomissionsofseveralinteractingfactorsinthisrelationshipsandtheresultsw o u l d notbeconsistentandreliable(Wood,2010).Infact,modelmisspecificationore n d o g e n e i t y couldresultinbiasedcoefficientsintheregressionanalysis.Oneplausibleissuei s thatCSRmayhavecorrelationwithfirm’scharacteristicsthatmayalsoinfluencecorporateperformance.Inc a s e o f t h o s e unobservedcharacteristicshaves i g n i f i c a n t correlationw i t h C S R andareomittedf r o m regressionanalysis,t h eregressionresultsofO r d i n a r y LeastSquare(OLS)wouldbebiasedandunreliable.Anotherissueresidesinthedirectionofcausall i n k betweenCSRandfirmperformance.There isonecontroversialquestionamongresearchers:doesengagingi n C S R leadt o s u p e r i o r performanceordoesfirmsw i t h betterperformancehaveenoughcapabilitytoparticipateinCSRactivities?

(Fodioetal.,2013).Inpractice,i t i s p o s s i b l e t h a t manyc o m p a n i e s participatei n C S R activitiesbecausetheyareperformingwellorexpectinghigherprofitability.Tosumup,althoughtherearecontroversialfindingsamongtheoreticalandempiricalpapersontheCSRtopics,theviewpointofpositiverelationshipseemtobedominantwiththemajorityofempiricalstudiesandstrongtheoreticalarguments.Thenextchapterwillshowthedatacollectionaswellasconstructtheempiricalm o d e l sasto examinetheCSR-Performancenexus in thecontextofVietnam

CHAPTER3 RESEARCHMETHODOLOGY

Theresearchmethodology ofthis thesiswouldbepresentedinthis chapter.First,itpresentst h e d a t a c o l l e c t i o n procedureandbasicinformationo f t h e s t u d i e d data.Secondly,t h i

s chapterproposestheconceptualframework,definitionsofmainvariablesaswellastheempiricalmodelstoanswertheresearchquestions.Finally,estimationmethodsandselectionf o r alternativ

e regressionmodels would berevealedattheendofthischapter

3.1 Data collection

Therea r e tw osetso f d a t a u t i l i z e d i n t h i s s t u d y : t h e f i r s t i s t h e VietnamEnterprise

S u r v e y ( V E S ) from2 0 1 0 and2 0 1 2 andt h e secondo n e i s t h e VietnamTechnologya n dCompetitivenessSurvey(TCS)duringthesameperiod.Thisperiodisselectedforanalysisint h e studyduetosomereasons.Firstofall,withtheconcentrationontechnology,innovationandCSRpractices,theTCSdataisfirstreleasedin2010asanadditionalsurveyfortheVESdataset,whichhasb e e

n releasede v e r y yearsi nc e2 00 0 Especially,s i n c e 20 10 , t h e s u r v e y projectoftheUnitedNationsIndustrialDevelopmentOrganization(UNIDO)“HelpingVietnameseSMEsAdapt&AdoptCSRforImprovedLinkageswithGlobalSupplyChainsi n Sustainable”wouldbeanimportantinternationaleventthatpropagatetheCSRknowledgeamongV i e t n a m e s e f i r m s Therefore,t

h i s s t u d y e x a m i n e t h e C S R practiceso f V i e t n a m e s e firmsfrom2010,whichisthetimewh

inVietnam.However,t h e T C S datamayb e n o t availableont h e CIEMwebsitef r o m 2 0 1 3 , i t

i s n o t p o s s i b l e t o prolongthestudiedperiod.This shortresearchperiodofonlythreeyearsmaybeal i m i t a t i o n o f t h i s study

3.1.1 VietnamEnterprise Survey

TheVietnamEnterprise S ur ve y (VES)isa comprehensivesurvey conductedbytheGeneralS t a t i s t i c s Officeo f Vietnam(GSO)e v e r y yeart o o b s e r v e t h e f i r m -

l e v e l dataf o r almostallexistingVietnamfirmsandagencies.Withthefirstpublicationfrom2000,VietnamEnterpriseSurveyyearlycoversalltypesoffirmsincludingforeignfirms,stateandnon-stateenterprisesin63Vietnamprovincesandcities.Inaddition,thequalityandnumbero f question

si n t h e VESincreasesyearbyyear;therefore,t h i s s u r v e y w o u l d b e a reliablesourcetoinvestigateabout firmsandbusinesssector in thecontext ofVietnam

Thisstudyemploysinformationaboutfirmcharacteristicssuchasfirmperformance,totalassets,l ev er ag e …fromVES2011- 2 0 1 3 toobtain firm-

leveld at a betweent h e years2 0 1 0 and2012.ItshouldbenotedthatthisstudyemploysVESfrom2011to2013;however,t h e surveysa r e conductedatpreviouscalendaryears,from2 0 1 0 t o 2 0 1 2 Therefore,t h e firm’scharacteristicsi n t h i s s t u d y should b e l o n g t o t h e years2010-

2012.Thesefirm-levelinformationw o u l d b e mergedw i t h CorporateS o c i a l R e s p o n s i b i l i t y datafromt h e VietnamT e c h n o l o g y andCompetitivenessSurvey(TCS)toformacompletepaneldatasetfrom2010t o 2 0 1 2

BeingapartoftheVietnam EnterpriseSurvey,theVietnamTechnology andCompetitivenessSurvey(TCS)mainlyfocusonfirm’sinnovationandtechnology.TCShasbeenreleasedevery yearsince 2010asaresultfromthecooperationoffourorganizations: