16/01/2015
Strategic Corporate Social Responsibility by Multinational Enterprises

Strategic Corporate Social Responsibility by Multinational Enterprises

We investigate the market and societal effects of a socially responsible multinational enterprise’s entry in a host market through exports and through FDI, the determinants of the multinational’s decision between exports and FDI, as well as the respective host country’s policies. We find that the multinational enterprise, seeking for a competitive advantage in the host market, strategically engages in CSR activities and meets the corresponding demand by socially conscious consumers.

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The practices, the market and societal effects of multinational enterprises (MNE) are core determinants of globalization, mainly through foreign direct investments (FDI) and interna- tional trade (United Nations, 2014a; 2014b). This core role of MNEs has recently given rise to increased attention regarding the social and environmental consequences of their activities, from business, consumers, investors, policy makers and academics.

KPMG (2013) suggests that CSR is now undeniably a mainstream business practice world- wide. Almost 93% of the top 250 companies of the Fortune Global 500 ranking for 2012 state a well-defined CSR strategy. Moreover, existing evidence suggests that consumers exhibit in- creasing trends on their awareness regarding the social and environmental consequences of firms’ production and their expectations on firms’ CSR activities are expressed through their product, services and equity purchasing decisions (Fliess et al., 2007; Becchetti et al., 2011).1 In this context, Andries (2008) highlights the increasing trends in the value of portfolios of stocks containing only SR firms, traded in the Socially Responsible Investment (SRI) and other “ethical” indices (KLD Domini 400 Social Index, Dow Jones Sustainability Index, FTSE4Good Index). McWilliams and Siegel (2011) cite evidence supporting that investors reward SR firms and penalize non-SR ones. At the same time, the promotion of CSRs has become a top priority in the policy agenda for sustainable development in many countries and international orga- nizations. Interestingly, when CSR started becoming widespread, its further encouragement became a central policy objective in both the U.S. and the E.U., aiming at the promotion of sustainable growth and competitiveness (European Commission, 2001; 2006).

Yet, Benabou and Tirole (2010) state that “Despite its growing importance, little is known about the economics of individual and corporate social responsibility” and in the same spirit Campbell et al. (2012) argue that “little research has been done on the motivations, either strategic or altruistic, behind CSR by MNEs in host countries”. Motivated by the above, this paper addresses the following questions: Do firms undertaking CSR activities perform better than not undertaking, i.e., do firms “do well by doing good”, under exports as well as under FDI? Moreover, do FDI and international trade promote consumers’ surplus and total welfare? If yes, what kind of initiatives should policy makers undertake to further encourage CSR? Should the host country’s policy maker set a subsidy or a tariff to the MNE, if the latter choose to serve the host market through exports? Should the former subsidize the MNE’s inward FDI? What determines the MNE’s decision to export to or to activate a branch plant in the host-country market? Moreover, how does the timing at which the trade policy is set influences corporate decisions as well as overall market and societal outcomes? What are the market and societal effects of a policy initiative aiming at the maximization of global total welfare?

To address the above questions, we consider two large publicly traded firms, each located in a different country. One of the firms, the multinational firm, plans to serve the foreign market either through FDI, consisted by the establishment of a production plant at a sunk cost, or through exports. The exported products are labeled as responsible products “because their production processes comply with criteria for social and environmental sustainability” (Becchetti et al., 2011) which could be in the spirit of the GRI framework (GRI, 2011). 

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