BMAN24312 International Business:

Lecture 9 Corporate Social Responsibility and MNCs

Part 1

Dr. William Il-kuk Kang

 Today’s agenda

Outline
1. Emergence of Stakeholder view of firms and key challenges
2. Instrumental and Integrative approaches to CSR
3. Challenge for MNCs

Objectives
4. Understand the core premises of stakeholder theory and its practical
challenges
5. Understand different types of CSR practices firms can utilise in
addressing the challenges
6. Understand the institutional and cultural challenges for the MNCs
7. Understand global CSR institutions and their limitations
 Who ‘owns’ the firm?

Conventional View:
Organisation’s sole purpose was to maximise profit and value for
shareholders

In Corporate Governance:
Agency theory approach
“the process of supervision and
control intended to ensure that the
company’s management acts in
accordance with the interests of
shareholders”
(Solomon, 2007, p. 13)
 Shareholder view and criticisms
Ownership as residual rights to income
(Alchian & Demsetz, 1972)
• Ex-ante complete contracting
perspective
• Shareholder/agency theory based
view
The shareholder value rests on a number of
important (and potentially problematic)
assumptions:
• The firm is essentially a set of assets owned
by shareholders and managed by the firm’s
managers
• Employees, suppliers and debtholders are
protected by complete and ‘fair’ contracts
• Other stakeholders (e.g. local communities or
the environment) are protected by laws and
regulations
• Shareholders are the only risk takers and
therefore need extra protection
In practice, contracts even with direct
stakeholders such as employees and
suppliers are not complete nor fair
• For instance, employees make firm-
specific investments that also need
protection (Becht et al. 2003)
• According to Blair and Stout (2017), a
corporation is better seen as a team
production effort where various
stakeholders contribute and where giving
one type of stakeholder special rights is
likely to hamper firm-specific investments
and/or lead to expropriation of other
stakeholders’ investments
There may be no contracts or markets for
important effects of a firm’s activities
• This often leads to externalities (e.g.
pollution) – effects of the firm’s choices
that it does not have an incentive to take
into account
 Stakeholders as ‘owners’

Ownership as residual control rights in the deployment of property

(Grossman & Hart, 1986; McGahan, 1997)
• ex-post complete contracting perspective
• Stakeholder perspective
• All investors who create transaction and/or firm-specific property
under the reasonable expectation of a return on investment
through interaction with the firm (Aguilera & Jackson, 2003)
- Residual control rights should be assigned to the parties
whose relationship-specific investments have the largest
marginal impact on joint value creation (Grossman & Hart,
1986; Hart & Moore, 1990)
- Not about contribution, but about asset specificity and
technical inseparability (Blair & Stout, 1999; Rajan &
Zingales, 1998)
 Two key principles of stakeholder
theory
Firms’ Social requirements

Stakeholder Moral
Fairness Obligation

Source: Adapted from T. Donaldson & L. Preston, 1995, The stakeholder theory of the corporation:
Concepts, evidence, and implications (p. 69), Academy of Management Review, 20: 65–91.
 Stakeholders and firm survival

•A stakeholder is any group or individual

who can affect or is affected by the
achievement of the organization’s
objectives (Freeman, 1984)

•Primary stakeholder groups are those

on whom the firm relies for survival and
prosperity (usually thought to be
shareholders, customers, employees,
suppliers and government)

•Secondary stakeholder groups are

“those who influence or affect, or are
influenced or affected by, the corporation,
but they are not engaged in transactions
with the corporation and are not essential
for its survival” (Clarkson, 1995). These Source: Peng & Meyer. 2016. International Business p. 282

may include the media and various non-

governmental organisations (NGOs)
 Definitions of CSR

Context-specific organisational actions and policies that take into

account stakeholders’ expectations and the triple bottom line of
economic, social, and environmental performance (Aguinis &
Glavas 2012: 933)

A ‘firms’ consideration of, and response to, issues beyond the narrow
economic, technical, and legal requirements of the firm to accomplish
social benefits along with the traditional economic gains which the
firm seeks. (Peng & Meyer, 2016: 280)

Corporate Social Responsibility encompasses the economic, legal,

ethical, and philanthropic expectations placed on organisations by
society at a given point in time (Carroll & Buchholtz 2002)
However, still key challenge
remains,
 Bondy et al. (2012)

Broader notions of CSR shared between multiple stakeholders, but

MNCs focus on strategic forms of CSR activity and are moving away
from a societal understanding of CSR.
 Different perspectives in CSR

Based on the existing practices and theoretical arguments, Garriga and Mele
(2004) identified four different approaches in CSR:

• Instrumental CSR – in which the corporation is seen as only an instrument for

wealth creation, and its social activities are only a means to achieve economic
results

• Integrative CSR – in which the corporation is focused on the satisfaction of

social demands

• Political CSR – which concern themselves with the power of corporations in

society and a responsible use of this power in the political arena

• Ethical CSR – based on ethical responsibilities of corporations to society:

firms’ primary concern should be ‘ethics’ over profit
 Instrumental CSR

Friedman (1970), there is one and only one social

responsibility of business is to increase its profits so
long as it stays within the rules of the game
Profits
CSR
Porter and Kramer (2006), stakeholders’ views are Competitive
obviously important, but these groups can never fully performance
Advantage
understand a corporation’s capabilities, competitive
positioning, or the trade-offs it must make (Porter &
Kramer, 2006: 4)

Focuses on profits and value creation

E.g. importance of
A vast literature has studied whether CSR increases brand value in the
or reduces profitability industry
• Many studies find a positive effect, some find
no effect, while only relatively few find a
negative effect
• The meta-analysis of many previous studies
by Orlitzky et al. (2003) suggested that CSR
overall is positively associated with financial
performance
 Integrative CSR approach

Key principles in integrative approach:

• Process rather than outcome (how can firms behave responsibly?)
• Stakeholder expectation and legitimacy

“corporate management should take into account social demands, and

integrate them in such a way that the business operates in accordance
with social values” (Garriga & Mele, 2004: 57)
Carroll’s “CSR pyramid”

• Previously firms were

only expected to fulfil
economic and legal
responsibility

• With incrementing
pressure from global
institution and
increased
expectations, firms
now also have to
consider ethical
responsibility
Tesla and its CSR