When Necessity Becomes a Virtue: The Effect of Product Market Competition on Corporate Social Responsibility

Abstract

We test whether Corporate Social Responsibility (CSR) is driven by strategic considerations by empirically studying the link between competition and firms' social performance. We find that firms in more competitive industries have better social ratings. In particular, we show that (i) different market concentration proxies are negatively related to widely used CSR measures; (ii) that an increase in competition due to higher import penetration leads to superior CSR performance; (iii) that firms in more competitive environments have a superior environmental performance, measured by firm pollution levels; and (iv) that more product competition is associated to a larger within-industry CSR variance. We interpret these results as evidence that CSR is strategically chosen.

Strategic Corporate Social Responsibility Activities and Corporate Governance in Imperfectly Competitive Markets

“…They find that, under both Cournot and Bertrand competition, the level of CSR efforts is inversely related to the competitiveness of the private‐good market. On the contrary, Fernández‐Kranz and Santaló () provide strong evidence that firms operating in more competitive industries are more socially responsible. In the terminology of Fernández‐Kranz and Santaló (), we rather find that the ‘escape competition effect’ dominates the ‘rent dissipation effect’, and firms are more socially responsible, but only if market competition is not too fierce.…”

“… Fernández‐Kranz and Santaló (, p. 456) argue that ‘If corporate owners have altruistic preferences for the social welfare, they will commission managers to run the firm in a philanthropic manner’. Besley and Ghatak () support the view that attracting individuals committed to pro‐social behaviors can be a strategy for a CSR firm wishing to make a credible commitment to CSR; and Benabou and Tirole (, p. 10) argue for ‘delegated philanthropy’.…”

Moral management in competitive markets

“…In the special case of profit‐maximizing shareholders, from the expression for in , a reduction in leads both shareholders to strategically delegate managers with a greater focus on CSR as moral management is now more effective at crowding out a competitor’s strategic CSR (i.e., is decreasing with ). This finding helps to explain the empirical result that competitive forces cause firms to conduct more CSR (Fernández‐Kranz, ; Flammer, ). While there is a strategic motivation to increase CSR in a competitive market, competition also gives shareholders an incentive to strategically delegate moral managers, thus resulting in more CSR.…”

“…In more competitive markets this crowding out effect is more pronounced, leading shareholders to delegate managers with a stronger preference for CSR. The strategic delegation result helps to explain the empirical finding that competitive forces lead firms to engage in more prosocial behavior (e.g., Fernández‐Kranz and Santaló, ; Flammer, ).…”

“…A synonym for “moral manager” often found in the literature is “altruistic manager” (e.g., Baron, ; Fernández‐Kranz & Santaló, ), in that managers’ motivation to engage in CSR stems from altruism.…”