Foreign subsidiary CSR as a buffer against parent firm reputation risk

Abstract

This study examines the influence of parent firm reputation risk on the level of corporate social responsibility activities of foreign subsidiaries. We first argue that a strong reputation risk spillover occurs from parent firms to their foreign subsidiaries due to the high visibility of multinationals, the control of parent firms over their subsidiaries, and the liability of foreignness associated with foreign firms in host countries. Then, we argue that subsidiaries may resort to CSR in their host country to reduce the spillover effect. Thus, we hypothesize a positive relationship between parent firm reputation risk and foreign subsidiary CSR activities. Moreover, we explore several contingency factors at both the parent firm and subsidiary levels that affect the extent of spillover and the need for subsidiaries to use CSR as a buffer against parent firm reputation risk. We find that the positive relationship between parent firm reputation risk and foreign subsidiary CSR activities is weaker for foreign subsidiaries that directly report to parent firm, with longer operations in the host country and larger institutional distance between host and home countries. Using a unique sample of subsidiaries of large multinationals in China from 2009 to 2016, we find general support for our arguments.

Corporate social responsibility, organisational reputation and liability of foreignness

“…Both technical and institutional CSR have a positive impact on the reputation of the parent organisation, supporting hypotheses 2a and 2b. The result is similar to Zhou and Wang (2020); according to them, high subsidiary CSR activities help subsidiaries gain legitimacy and reduce the reputation risk of the parent firm.…”

“…The nonutilitarian characteristics of institutional CSR increase the likelihood of winning the favour and acceptance of its audience, thereby enhancing the trust of consumers in the parent enterprise. The sound organisational reputation of the parent company also helps the subsidiary to win the favour of the host country's government -benefitting from supportive policies or preferential treatment -to further improve the effectiveness of SR (Yoon, Gurhan-Canli, & Schwarz, 2006) and alleviate the possible negative impact of a crisis on the subsidiary (Zhou & Wang, 2020), this helps the subsidiary to overcome the LOF. Thus, we propose:…”

Interorganizational Spillover: A Review and a Proposal for Future Research

“…Foreign subsidiaries may also anticipate the threat of negative reputation spillover following an adverse event at their parent firm. As a result, subsidiaries will engage in more CSR activities when the parent firm’s reputation risk is higher (Zhou & Wang, 2020). When competitor CEOs observe peer CEOs win prestigious awards in top business publications, they sense a threat to their own status.…”

International diversification, legitimacy, and corporate social performance of extractive industry multinationals

“…Many studies have since explored the different CSP responses taken at the subsidiary level to the legitimacy and SLO challenges subsidiaries face in their local countries (Baum & Oliver, 1992; Chiu & Sharfman, 2011; Yang & Rivers, 2009). More recently, Zhou and Wang (2020) have examined how CSP at the subsidiary level can be used to handle negative reputational spillovers emanating from the corporate level. There is a paucity of research, however, exploring how effects of legitimacy and SLO pressures at the subsidiary and corporate levels interact in shaping a corporation's global CSP.…”