Untangling the Corporate Social Responsibility-Financial Performance Paradox: The Role of Competitive Activity

Abstract

A central debate in corporate social responsibility (CSR) research is whether CSR hurt or help shareholders. Our study suggests that this paradoxical tension between social and competitive activities of firms is a manageable resource-allocation decision. By disaggregating competitive activity into its different forms – intensity and complexity – we develop a model that explains how firms can alleviate the resource allocation tension to improve performance. High CSR firms can enhance short-term performance by reconfiguring its resource base and reducing competitive intensity – the frequency of competitive actions. Alternatively, they can increase long-term performance by transforming its resource base and increasing competitive complexity – the variety and novelty of competitive actions. Overall, our empirical findings suggest that the positive effect of CSR on firm performance is conditional on firms’ ability to adjust the intensity and complexity of their competitive activity. Our results are robust across competitive environments with different levels of competitive pressure.