By Alan Muller

Actions that benefit society and the environment have become an important element of companies’ operations in recent decades. Because companies have both the potential to cause grave harm and to do considerable good, scholars, practitioners, and societal actors alike pay keen attention to such actions when assessing companies’ “corporate social performance” (Wernicke et al., 2021). Corporate social performance (CSP) reflects an assessment of how well companies perform on environmental, social, and governance (ESG) dimensions, such as reducing their carbon footprint or promoting diversity in the workplace. While benefitting society, CSP may also lead to tangible benefits for companies themselves. Customers, employees, and other stakeholders perceive CSP positively and may respond in ways that create value for the company, potentially offsetting, or even exceeding, the higher costs that CSP necessitates.

Yet, such positive stakeholder responses hinge on familiarity with the company and awareness of its CSP, and the belief that its CSP is motivated by sincere intentions. This is a challenge for companies that internationalize; i.e., when they expand to do business in overseas markets. As relatively unfamiliar outsiders, new entrants’ CSP is not fully positioned to make an impact on the perceptions of local stakeholders in those overseas markets.

Therefore, as long as a company’s international activities remain limited, it is principally the home country stakeholders who drive the returns to CSP. The company’s CSP is more likely to be seen, recognized, and rewarded by those stakeholders, because they are familiar with the company and more likely to make positive attributions about its CSP. As the company increases its international exposure, however, the costs required to achieve high levels of CSP go up. This is because the company needs to scale up its ESG activities, tailor them to the host country environment, or develop entirely new ones.

At the same time, because host country stakeholders lack familiarity with the new entrant or are not yet disposed to trust its motives, the company’s CSP is less likely to elicit responses that will benefit it to the same degree. Over time, as the company’s international footprint expands, overseas stakeholders become increasingly familiar with the international company, develop greater trust, and perceive that company to be more legitimate.

Accordingly, in this study, I analyze a panel of 1,056 U.S.-based international firms over the period 1995-2012 to show that CSP is associated with the greatest financial performance gains at either low or high levels of internationalization. Specifically, at low levels of internationalization, most stakeholders are still domestic. These stakeholders are familiar with the company and thus interpret its CSP in relation to what they already know about the company. For example, Best Buy, a US retailer, focuses its activities on the US and Canadian markets and scores very highly on ASSET4’s ESG index. Its CSP informs local stakeholders’ perceptions of the firm in a positive way. Similarly, at high levels of internationalization, a company would have established an international profile and reputation that would affect the perceptions of stakeholders in new, subsequent foreign markets, because those stakeholders would have already some degree of familiarity with the company beforehand. For example, Canada’s CAE inc., a company active in aviation, defense, and healthcare, has business operations all over the world and scores very highly on the ASSET4 ESG index, such that its global reputation enhances perceptions of its CSP in overseas markets. In contrast, firms with limited exposure in international markets are less able to leverage their CSP to enhance perceptions abroad. For example Tesco, a UK retailer focused primarily on the UK and Ireland (aside from some limited activities in Asia and Eastern Europe), may not have established enough of an international reputation to fully leverage its equally high ASSET4 ESG score overseas.

With respect to CSP, international expansion is a strategy for the long haul and not one for quick wins. Managers should recognize that CSP may not contribute equally to firm performance across the range of internationalization – indeed, the costs may outweigh the benefits at the mid-range – but the longer the firm expands its activities into an increasing number of international markets, the more its CSP will start to pay off.

References:

Muller, A. 2020. When Does Corporate Social Performance Pay for International Firms? Business & Society, 59(8): 1554–1588. https://doi.org/10.1177/0007650318816957

Wernicke, G., Sajko, M., & Boone, C. 2021. How much influence do CEOs have on company actions and outcomes? The example of corporate social responsibility. Academy of Management Discoveries, (in press).