According to a new study, if there is more competition in the market among companies, they tend to spend even more on Corporate Social Responsibility.
A research paper authored by Prof. Ross Levine from the University of California, Berkeley – Haas School of Business, Wenzhi Ding and Chen Lin from the University of Hong Kong and Wensi Xie from the Chinese University of Hong Kong analysed 90 per cent of the world stock market capitalization and concluded that in the face of intensified competition, companies increase their CSR spending as a profitable strategy to build trust and goodwill among consumers.
The paper titled ‘Competition Laws, Ownership and Corporate Social Responsibility’ is the first study ever which aims to understand the behaviour of companies pertaining to their CSR activities in different scenarios.
“When I first started reading about corporate social responsibility, it was couched in terms of business leaders acting on good intentions, ethics, and morality. I was a bit sceptical,” said Levine, an expert on how regulations shape economies. “It’s possible they could have good intentions, but I wondered about that being the driving force behind big investments in strengthening connections with workers and customers and suppliers and communities.”
For the purpose of the study, Professor Levine and his co-authors used a dataset of competition laws across countries, including rules on mergers and acquisitions, to create an index of which countries are more or less favourable to competition. They combined that with data from Thomson Reuters on CSR activities related to worker safety and benefits, treatment of customers and suppliers, and environmental protections. The sample included about 14,000 firms in 47 countries from 2002 to 2015.
The expected outcome was that of reduced CSR spending in an intensely competitive environment as for-profit companies would want to cut down on their costs to book more profits. However, through comprehensive research, they observed a pattern across the globe of a higher level of CSR activities associated with increased competition among companies.
According to the report, the reason behind such increased spending was attributed to benefit the stakeholders. It states that, as firms cannot write and enforce formal contracts for every little activity it conducts, it has to rely on several ‘implicit’ agreements. In order to secure such agreements, the companies need their stakeholders to place trust on them and their actions. Therefore they engage in CSR activities to display their trustworthiness to its stakeholders.
The study also noted that the relationship between competition and CSR is even stronger in countries where those socially responsible activities are more highly valued. To measure this, the authors constructed a country-specific measure of how much citizens value things like workers’ rights or the environment, which they call their social norms index. Through such analysis, it was found that the relationship between CSR and competition was twice as strong in countries that were in the top half of the index.