CORPORATE SOCIAL RESPONSIBILITY AS AN (UN)ENABLER OF

FINANCIAL PERFOMANCE – THE CASE OF THE CHEMICALS IN-

DUSTRY

Tânia Sofia Soares de Freitas

Dissertation

Master in International Business

Supervised by Manuela Castro e Silva

2019

ii

Acknowledgements

The past year has represented the greatest challenge for both my professional and

academic life. For this, I would like to highly appreciate and thank the precious help, pa-

tience and kindness from Professor Manuela Castro e Silva during this process.

To my parents, Cidália and José, and my brother, Fábio, whom have always been my

rock, thank you for lovingly encouraging me through each step and for understanding my

absences. Additionally, an enormous acknowledgement to my precious cousins, Alexan-

drine, João and Henrique, to my aunts Conceição and Luísa and uncle José for believing in

me when I did not.

A huge thank you to my friends for their unconditional love and support, particu-

larly to Estela, Luís and Tânia, who are my partners in life adventures.

Finally, to my coworkers, thank you for all the patience and support during the

hardest times we have faced together.

This dissertation is dedicated to the loving memory of my grandparents, which will

always be my guardian angels.

iii

Abstract

Chemicals industry benefits are not as well-known as the health and environmental

issues its misuse may provoke. This industry has been trying to change this factor, even

creating a program to prevent potential problems caused by it, improve security and to help

expand the communication with stakeholders named Responsible Care. Such measures are

part of Corporate Social Responsibility.

Corporate Social Responsibility has emerged to respond to the increasing stake-

holder pressure for more than just profit maximization. Two of the main benefits from

Corporate Social Responsibility have an economic dimension: costs savings and revenue

increase from higher sales and market share. Hence, literature has studied widely the rela-

tionship between Corporate Social Responsibility and Corporate Financial Performance to

comprehend to which extent one affects the other and the results found were mixed. Fur-

thermore, the country of origin affects this linkage, as shown on previous studies.

As there is a lack of research between these concepts in the chemicals industry, this

investigation aims to fill that gap, using a regression-type model for the top 50 chemicals’

firms in the timespan 2009-2017. CSR data is the independent variable, CFP the dependent

one with Debt to equity ratio and Firm size (total assets) as control variables.

The analysis conducted a geographic comparison and the results obtained reveal a

negative linkage between CSR and CFP on this industry for the whole sample – a 1 unit

increase on CSR leads to a 0,05 unit diminution on CFP for the whole sample – with Eu-

ropean enterprises following this negative trend, contrastingly with African, American and

Asian, whereas CSR and CFP are positively linked.

Key words: Corporate Social Responsibility; Corporate Financial Performance; Chemicals

Industry; Country of Origin Effect

iv

Resumo

Os benefícios da indústria dos químicos não são tão conhecidos com os problemas

de saúde e ambientais que o seu uso inapropriado pode causar. Esta indústria está a tentar

mudar este fator, criando um programa denominado “Responsible Care” para prevenir poten-

ciais problemas causados por esta, melhorar a segurança e auxiliar na expansão da comuni-

cação com os seus stakeholders.

A noção de Responsabilidade Social nas Empresas surgiu como resposta à crescen-

te pressão dos stakeholders para não existir só a maximização do lucro. Duas das suas maio-

res vantagens têm uma dimensão económica: poupança de custos e aumento das receitas

proveniente de maiores vendas e quota de mercado. Desta forma, a literatura estudou

amplamente a relação entre Responsabilidade Social nas Empresas e os seus resultados

financeiros para entender como uma impacta a outra e os resultados obtidos foram mistos.

Para além disto, o efeito país de origem afeta esta relação, como demonstrado por estudos

anteriores.

Existe uma falta de investigação na relação destes conceitos na indústria dos quími-

cos, a qual esta pesquisa pretende colmatar, utilizando um modelo de regressão economé-

trica para as 50 maiores empresas de químicos durante o período temporal 2009-2017. A

Responsabilidade Social é a variável independente, a Performance financeira é a dependente,

tendo o tamanho da empresa e o seu rácio dívida/capitais próprios como variáveis de con-

trolo.

Efetuou-se uma comparação geográfica e os resultados revelaram uma relação

negativa entre a Responsabilidade Social e a Performance financeira para esta indústria – o

aumento de 1 unidade no índice de Responsabilidade Social leva à redução de 0,05 na Per-

formance financeira – tendo as empresas europeias seguido esta tendência, ao contrário das

africanas, americanas e asiáticas, onde existe uma relação positiva.

Palavras-chave: Responsabilidade Social nas Empresas; Performance financeira das

empresas; Indústria dos Químicos; Efeito país de origem

v

Index

Acknowledgements ........................................................................................................................... ii

Abstract .............................................................................................................................................. iii

Resumo ............................................................................................................................................... iv

List of Abbreviations ....................................................................................................................... vi

Figures’ Index ................................................................................................................................... vii

Tables’ Index ................................................................................................................................... viii

Introduction ....................................................................................................................................... 1

1. Literature Review ....................................................................................................................... 3

1.1. Corporate Social Responsibility .................................................................................. 3

1.2. The relationship between CSR and CFP ................................................................... 8

1.3. Country-of-origin effect on CSR .............................................................................. 10

2. Methodology ............................................................................................................................ 13

3. Model development ................................................................................................................ 18

Conclusion ........................................................................................................................................ 21

References ......................................................................................................................................... 23

Webpages List .................................................................................................................................. 29

Attachments...................................................................................................................................... 31

vi

List of Abbreviations

CED: Committee for Economic Development

CFP: Corporate Financial Performance

CSP: Corporate Social Performance

CSR: Corporate Social Responsibility

EC: European Commission

ESG: Environmental, Social & Governance

GRI: Global Reporting Initiative

MNEs: Multinational Enterprises

ROA: Return on Assets

ROE: Return on Equity

UN: United Nations

VIF: Variance Inflation Factors

vii

Figures’ Index

Figure 1 – Society’s expectations over business responsibility...................................................5

Figure 2 – Relationship between International Management & CSR strategies and their

outcomes for CSR……………………………………………………………...…………8

viii

Tables’ Index

Table 1 – Studies Findings’ description.......................................................................................12

Table 2 – Studied Variables’ description......................................................................................15

Table 3 – Sample summarized by geographical area, number and %.....................................15

Table 4 – Sample descriptive statistics......................................................................................17

Table 5 – Variables’ correlation.....................................................................................................18

Table 6 – Variance Inflation Factors............................................................................................18

Table 7 – Total Sample descriptive statistics for ROA.............................................................18

Table 8 – Descriptive statistics for each continent....................................................................19

Table A1 – Global Top 50 chemical companies.........................................................................29

Table A2 – Final sample division by country of origin and continent....................................30

1

Introduction

In the recent years, firms’ Strategic Management has been transforming – stakeholder

demands’ do not comprise merely profit maximization (Fortanier, Kolk, & Pinske, 2011).

Such event prompts Corporate Social Responsibility (CSR) into the agenda. According to

the European Commission (2018a), CSR corresponds to organisations’ concern for their

effect on society – it can be conducted by obeying to the law or taking into consideration

not only environmental questions, but also social, ethical and human rights related on their

daily business. This matter’s growing relevance has led many firms listed on the Fortune

500 list employing full-time staff to undertake their CSR activities, impacting business, an-

nually, in millions of dollars (Robinson & Wood, 2018).

Scholars have been studying CSR since the 1960s and several definitions of this con-

cept have emerged (Carroll, 2016). The same author on 1979, built a triangular-shaped

framework to encompass CSR dimensions: economic, legal, ethical and philanthropic. Cor-

porate Financial Performance is linked to the economic dimension of CSR, which meas-

urement is performed via financial statements’ examination (Knight & Bertoneche, 2001).

Firms and country-level aspects play a significant role on financial performance, as Salah

pointed out (2018).

Apart from previous requirements, stakeholder also entail accountability and transpar-

ency on this matter (Paun, 2018). Such prospects are bounded by geographic environment

(Einwiller, Ruppel, & Schnauber, 2016). CSR Reporting fulfils these requests and has al-

ready several global standards, such as the Global Reporting Initiative (GRI), the Global

Compact by the United Nations (UN), upon others (Fortanier, Kolk, & Pinske, 2011). Ad-

ditionally, the last one provides a context for CSR analysis, identifying 3 main areas – Envi-

ronment, Social and Governance – and the subsequent issues which currently exist on each

(UN Global Compact, 2018a, 2018b, 2018c).

Chemicals are crucial elements on our daily lives; however, the improper use may cause

health and environmental problems (European Commission, 2018b). The chemicals indus-

try is estimated to employ around 20 million people (International Labour Organization,

2018). Besides this, the global chemical turnover was around 3,475 billion euros in 2017

(European Chemical Industry Council, 2018a). This summarizes the strategic relevance of

this industry for the national economies growth (International Labour Organization, 2018).

In order to prevent potential problems caused by this industry, improve security and to

help expand the communication with stakeholders, the initiative Responsible Care was born

2

(European Chemical Industry Council, 2018b).

Weber (2008) identified five major areas of CSR’s business benefits: positive effects on

company image and reputation; employee motivation, retention, and recruitment; costs

savings; revenue increases from higher sales and market share; and a decrease on CSR-

related risk. Two of these benefits are related to Corporate Financial Performance (CFP),

proofing the intimate relation between the concepts of CSR and CFP.

Therefore, it is important to find whether level of firms’ CSR commitment affects the

financial performance. On the manufacturing industry, Chen, Feldmann & Tang (2015)

analysed GRI reports from 75 sample companies, divided into five groups: automotive,

metals products industry, forest and paper, chemical and health care industry – CSR was

measured by indicators according to the GRI guidelines (Human Rights, Labor, Society &

Product responsibility categories) and financial performance was calculated return on equi-

ty, sales growth and cashflow/sales ratio. As pointed out by Acutt, Medina-Ross, &

O'Riordan (2004), the increasing complexity on global economy and social, environmental

and economic inequities are leading the chemicals industry to exhibit their commitment

and accountability towards CSR. They remarked the absence of CSR on the sector, verified

also on their context – Mexican and South African countries – conducting a series of semi-

structured interviews with individuals which belong to a large spectrum (from chemicals

corporations until national governments). Given this field’ lack of research for the chemi-

cals industry, this study aims to fill in that gap and understand to which extent CSR some-

how affects the financial performance on this case. Institutions, political decision-making,

state regulation influence on corporations acting in a socially responsible manner (Camp-

bell, 2006). Given the case when social actors are involved in the regulations’ conception,

he declares their responsiveness to it increases. Lock & Seele (2015) conducted a study

which included the chemicals industry and concluded there is difference on CSR reporting

according to the country of origin – for instance, German companies tend to report more

on social agenda, instead of the environmental one, whilst Swiss ones are the opposites.

These goals lead to the following research question: Does CSR affects financial per-

formance on the chemicals industry? Does this effect change geographically? In

order to answer this question, a quantitative approach will take place via econometrics (re-

gression-type) model. The sample used is the top 50 chemicals companies in the world and

the time frame is 9 years (2009-2017).

3

1. Literature Review

The aim for this chapter is to summarize the existent research on CSR and CSP field

studies, thus, giving an overview on the matter and providing the background for this in-

vestigation. This chapter is subdivided in three subchapters: Corporate Social Responsibility;

The relationship between CSR and CFP and lastly, The country-of-origin effect on CSR. First one

aims to summarize the literature existent on Corporate Social Responsibility and how is

measured enterprises’ commitment to it. The second subchapter will provide the synopsis

on the 3 main perspectives, present in literature, regarding the relationship between CSR

and CFP: positive, negative and null. Finally, the third subchapter summarizes how

home/host countries and respective values, institutional organizations and public policies

affect CSR, and, consequently, CFP.

1.1. Corporate Social Responsibility

From a macroeconomic point of view, corporations have grown their wealth – out of

100 biggest economic entities, 69 are companies (Global Justice Now, 2016) – becoming

even more powerful actors. Therefore, there is an increased attention on how firms act

towards society – if their voice is used in a socially responsible form.

The idea flourished on major businessmen minds and presented itself on numerous

forms in American economic circle around 1920 (Frederick, 2006). This time frame, period

prior to the 1950s, was named by Carroll (2008) as philanthropic one – firms’ social contri-

butions were mainly through donations. CSR concept has gained several definitions over

the years and Bhaduri & Selarka (2016) identified 6 phases to its development: the first and

second one are dated between 1950-60s, when the idea was brought into academic spot-

light; in 1970s there was a fast evolution; during the 1980s stakeholder theory and business

ethics were linked to CSR; in the 1990s firms involved CSR activities on their business;

lastly, from 2000s onwards, scholars concentrated on the effect of CSR in business strategy.

Frederick (2006) acknowledged the three predominant ideas during the 1950s: firms’

managers shall operate as public trustworthy figures; philanthropy was recognized as an

exhibit of firms’ supporting noble causes; lastly, enterprises shall counterweight competi-

tors’ allegations and corporate resources. Carroll (2008) described this decade as more the-

oretical than practical and pointed out Bowen’s major contributions to the academic field.

4

Bowen (1953) defined CSR as an obligation of businessmen to according society’ stand-

ards. Carroll & Shabana (2010) considered this perception as a decade ahead of its time.

In the following decade, McGuire (1963) extended this point of view to firms’ not hav-

ing only legal and economic duties, but also other responsibilities towards society. Accord-

ing to Frederick (1960), society’s (human and economic) resources should not be used for

self or firms’ interest, but for major social causes. Davis (1960) set the definition on mana-

gerial context – when business executives’ behaviour goes outside the corporation interest

(economic or technical), they are acting in a socially responsible way. Walton (1967) argued

that the intimate strings between the firm and society shall be taken into consideration by

top management whilst they are pursuing their objectives. Both authors disagreed on the

return these actions might have – Davis (1960) suggested they might pay off on the long

run; on the other hand, Walton (1967) stated there might be no measurable economic re-

turn from them. During this time, CSR was nourished by extrinsic and socially conscious

drivers (Carroll & Shabana, 2010).

Carroll (1979) followed this trend, whilst building the pyramid which compiles CSR’s

four dimensions – economic, legal, ethical and philanthropic – and companies were ex-

pected to fulfill them. Economic responsibility embodies the business requirement to pro-

vide profit. Legal responsibility is linked to companies obeying to laws and regulations.

Ethical responsibility is to act beyond legal requisitions. Philanthropic responsibility is to

engage voluntarily on social activities, such as charitable donations, for instance. Commit-

tee for Economic Development (CED) (1971) revealed public was increasing concern over

environmental problems (air and water pollution) and that enterprises were not providing

enough attention to societal problems. Besides, CED (1971) pointed out society had wid-

ened their expectations over business’ responsibilities, which might be represented graph-

ically in three concentric circles (Figure 1).

5

Figure 1. Society’s expectations over business responsibility, built upon CED (1971)

The inner circle represents the effective accomplishment of the economic purpose

(employment, products and economy’s positive development); the intermediate circle refers

to the economic function fulfillment’, keeping in mind changeable social values and priori-

ties, such as environmental preservation, both candidates and employees’ fair treatment,

health care for them and rigorous disclosure of information for costumers; lastly, the outer

circle encompasses emergent public concerns related to poverty and urban disfigurement,

for example, and the belief where business has access to the resources which will help solv-

ing them. On the 1970s, concepts such as corporate social responsibility, responsiveness

and performance grew into the center of debate (Carroll & Shabana, 2010).

Davis (1973) gathered the main arguments on favour and against CSR. Concerning

points on favour of CSR: the first lays on long-run self-interest – both social goods and

programs will outcome in bigger profit for the business. Regarding avoidance of govern-

ment regulation – when the businessman accomplishes both private and public goods,

there is no need for new laws, thus, he retains power and a flexible decision making. Sever-

al organizations were ineffective whilst attempting to solve social problems, hence, it was

decided to give business a try and it has the resources (talent management; innovative

mindset and increasingly productive capitals) to provide solutions to social problems and

they may be dealt with a profitable outcome – problems can become profits. For instance,

chemical firms’ waste turned into profit on some specific scenarios. Lastly, in an economic

point of view, this type of question should be handled prior to any negative consequence –

prevention is better than curing. Falck & Heblich (2007) affirmed CSR was a path for both

societies and firms to thrive. On other perspective, Smith (2003) claims CSR benefits cor-

porations through (in)direct economic efficiencies. Additionally, CSR might help enhancing

Outer circle

Interme-diate circle

Inner circle

6

firms’/product reputation, when it pursues a differentiation strategy (McWilliams & Siegel,

2011).

In contrast, there are also ideas against CSR. Firstly, it is defended that economic crite-

ria are the only valid ones to quantify a firm’ success and, whose sole goal is profit maximi-

zation. Business is forced into social activities, which present costs and, subsequently, ousts

minor firms from the industry. This is reported to have occurred on the chemicals industry.

Other arguments presented are lack of accountability and lack of broad support will cause

business to face an unreceptive context whilst attempting to increase social involvement,

potentially causing side-effects and failing the assignment. Nowadays, reputational risk also

displays as a threat, when there is an abuse from companies, even if it is a remote place

(Smith, 2003). Moreover, CSR can present as a risk to shareholders, when there is a special

attention to environment, leading to an increase of production costs, causing the firms to

be in disadvantage regarding its competitors (Nguyen & Nguyen, 2015).

Nobel prize winner Friedman (1970) looked at CSR through a distinct angle – firms’

only social responsibility is to use its resources to obtain more profit (known as the stock-

holder theory). Schwarzt & Saiia (2012) argue that this definition ought to be regarded

from an ethical point of view, considering that shareholders have moral rights. They have

identified the ethical obligations firms shall not breach – core values (responsibility, trust-

worthiness), utilitarianism (acting towards the common good, despite the fact it might not

be the best for the firm), Kantianism (respect others), moral rights and justice. Jones (1980)

defended companies had duty with other society groups, apart from stockholders (compa-

ny owners). Such groups are identified as stakeholders – costumers, suppliers, employees,

media, government, global competitors, amongst others (Freeman, 1984). Tuzzolino &

Armandi (1981) built theoretical framework to evaluate organizational social responsibility.

When a firm fulfils physiological and safety desires, it is addressing its stockholders; whilst

accomplishes the affiliative demand, it is responding to its peers; whenever the enterprise

achieves self-actualization, it contents all the claimers. They argued this type of analysis

might assist on organizational governance.

According to Bhaduri & Selarka (2016), the 1980s were associated to business ethics,

thought who developed from moral philosophy presented in the previous decade (Carroll,

2015). Epstein (1989) defined business ethics as the rules which delimited the correct way

to act for firms’ executives, being influenced by societal values, institutional’ policies and

moral significance. He considered CSR offers guideline for managers’ actions and attempts

7

to assess business’ social performance and has brought the concept of corporate social

responsiveness onto the spotlight, which shed a light on handling strategically societal val-

ues as business is structuring policymaking processes.

Carroll (2008) remarks that during 1990s there were no major contributions to the con-

struction of CSR as a concept, instead there was a growth on the literature field of com-

plementary themes, such as: stakeholder theory, business ethics, sustainability, corporate

citizenship and corporate social performance (CSP). Wood (1991) conceptualized CSP as a

firms’ composition of social responsibility’s prepositions, social responsiveness’ techniques

and societal correlated policies/programs and its respective observable results. He also

articulated three principles for social responsibilities – institutional, organizational and indi-

vidual levels – determining CSP as a wider notion than CSR.

Nowadays, CSR is vital concept for corporations, impacts costumers on their buying

choice and other stakeholders (Moravcikova, Stefanikova & Rypakova, 2015). CSR activi-

ties promote values and opportunities to society and organizations (Verboven, 2011).

Therefore, it is important to communicate them properly. CSR Reporting helps on this

matter.

As Verboven (2011) declared, public is aware of the less positive situations the chemi-

cals industry may create, but not of the benefits. Hence, it is essential to the industry to

build a sustainable corporate image and reputation. This is verified on the growth of CSR

reporting for this industry, according to KPMG (2017) it was around 8% between 2015

and 2017. Nevertheless, one of the main difficulties currently existent is how to measure

the level of companies’ CSR commitment. Several external elements influence how multi-

national enterprises engage with CSR: industry sensitivity, local institutional constrains

(laws, regulations, national business system) and/or the gap between home and host coun-

try – which will affect the decision and relationships (Orudzheva & Gaffney, 2018). The

same authors defended CSR initiatives shall take into consideration the part of global hier-

archies between developed and developing world, hence it influences the effectiveness of

Multinational Enterprises (MNEs) competitive advantage from the developing group, re-

ducing the existent inequality between the developed and developing world. Whilst analys-

ing CSR policies of 37 MNEs, Bondy & Starkey (2014) discovered that global strategies, as

well as integrated internationalization strategies do not unravel both local and global CSR

topics – the issues identified by headquarters are prioritized and local ones are disregarded.

The image below summarizes their study findings:

8

Figure 2. Relationship between International Management & CSR strategies and their outcomes for CSR,

built upon Bondy & Starkey (2014)

1.2. The relationship between CSR and CFP

Currently, socially responsible behaviour is seen as a manner to increase competitive

advantage (López, Garcia & Rodriguez, 2007). Thus, it is essential to verify whether this

also translates into a better financial performance. Existent literature has found different

results regarding the correlation between CSR and CFP. Besides, Griffin & Mahon (1997)

suggest that research shall be done in one industry specific context to boost outcomes’

internal corroboration.

CFP embodies business performance when economic/financial goals are achieved and

is operationalized by accounting and market measures (Venkatraman & Ramanujam, 1986;

Orlitzky, 2008). Orlitzky (2008) gathered the casual (benefic) mechanics which associate

CSR and CFP on literature: enhancing organizational reputation; improving internal re-

sources and skills; increasing rivals’ costs; attracting a more productive workforce; boosting

sales revenues and reducing business risk and also concluded that organizational size does

not influence their relationship.

Solutions for global-local CSR issues

•Universal

•Culturally specific

•Culturally tailored

•Culturaly blended

CSR internationalization strategies

•Global

•Local (multidomestic)

•Integrated (transnational): Effiency-response

•Integrated (transnational): Interpenetration

Pressures on choice of CSR internationalization

strategy

•Expectations for Stakeholder Management

•CSR Issues

•Organization’s International Strategy

9

Positive association between CSR and CFP

Firstly, it will be analysed which are the scholars whom have a found a positive relation

on these two concepts. Preston & O’Bannon (1997) supported this idea on their study

about social and financial performance on major United States enterprises. 10 years before

these findings, Bruyn (1987) pointed that taking into consideration the social factor on

investment decision making rises the chances for economic return. Waddock & Graves

(1997) reached the same conclusion analysing 469 companies from the Standard & Poor’s

500 list and connected this with slack resources and good management theory, using Kind-

er Lydenberg Domini (KLD) rating system for CSR. Orlitzky, Schmidt & Rynes (2003) led

a 52 studies meta-analysis which concluded how CSR is positively associated with CFP –

bidirectional and coexistent, CSR is more interrelated to CFP’s accounting-based measures

than market based-measures, reputation is a relevant intermediary for this interaction and

that a firm might establish an equally beneficial relation with stakeholders. Bird, Hall,

Momentè & Reggiani (2007) explored how the market reacts to CSR activities and revealed

there was a valuation of proactive employee-related endeavours, when environment and

diversity requisites were achieved at a minimum level.

Negative association between CSR and CFP

Mittal, Sinha & Singh (2008) have found a negative relationship between CSR and CFP

on their study for the Indian context – reduced evidence that companies with ethics' code

would generate greater market/economic value added than the remaining ones.

Crisóstomo, Freire & Vasconcellos (2011) discovered a negative linkage between CSR and

firm value for the Brazilian scenario. Looking through the United States framework, Fish-

er-Vanden & Thorburn (2011) discovered a negative response from the market, when

firms adhere as members to Environmental Protection Agency Climate Leaders, voluntary

program aiming greenhouse gas reduction.

Null association between CSR and CFP

The research conducted by Auperlee, Carroll & Hatfield (1985) created an own meas-

ure for CSR, based on the CSR pyramid presented by Caroll on 1979 (legal, economic, eth-

10

ical and philanthropic dimensions) and it found no correlation between profitability and

social responsibility. Ullman (1985) claimed no trend can be discovered whilst studying the

association between these concepts. He justifies this by a deficiency on theory, inadequate

definition of the key words and lack of empirical data available.

1.3. Country-of-origin effect on CSR

Culture concept is commonly used for nations and organizations and it has six dimen-

sions: power distance; uncertainty avoidance; individualism versus collectivism; masculinity

(assertive) versus femininity (caring); long term versus short term orientation; and lastly,

indulgence versus restrain. Countries’ classification under these criteria are relative, hence

they are obtained in comparison to others (Hofstede, 2011). These dimensions might also

be applied to firms’ stakeholders – consumers, shareholders and employees – as a manner

to explain their behavior. Apart from this, consumer propensity to punish firms’ when do

act responsible are related to the Hofstede framework (Williams & Zinkin, 2008).

Ding, Ferreira & Wongchoti (2019) defend that CSR’s broaden scenario may be justi-

fied by enterprise headquarters’ home culture. Matten & Moon (2008) argue that historical

and well-established institutions are the reason for differences on CSR on several countries

(European and United States). Given that, the authors compiled the motives for CSR sys-

tem discrepancies – political/financial/education/labour & cultural systems, nature of the

firm, organization of market procedures and, lastly, coordination and control arrangements.

Cultural background and business ethics culture possess strategic relevance – the forward-

looking values’ management obtains increased relevance on a global economy – it shall

prevent cultural misunderstandings and breach mutual values (Palazzo, 2002). The author

enhanced the importance of acknowledging intercultural dissimilarities and respective con-

sequences on the journey for trustworthy economic partnership, while simultaneously con-

sidering own’s cultural background and other cultures’ values. Bondy & Starkey (2014)

findings showed that despite MNEs recognized the relevance of local host country cul-

tures, none used this whilst architecting their CSR policy – the firms adapted the general

one to the local culture.

Existent research focuses mainly on developed economies, as stated by Orudzheva &

Gaffney, (2018), providing less consideration to what firms from developing countries per-

form outside their country. On differences between German and United States multina-

11

tionals enterprises (MNEs), Einwiller, Ruppel & Schnauber (2016) discovered the ones

who follow global reporting standards have higher similarities on their reports. Internation-

al institutions which create such standards promote events, provoking a growth on the

interaction among adherent enterprise. For firms aiming to enhance their CSR commit-

ment, joining global guidelines will provide them easier access to knowledge on CSR im-

plementation, management and reporting. Additionally, it assists on discovering ways to

handle countries (home/host) and international demands (Fortanier, Kolk, & Pinske,

2011). There is also some evidence of country-of-origin effects – German MNEs’ reports

focus more on environmental matters; US ones emphasizes on society. As contrasting to

local firms, MNEs are subject to pressure both in home and host countries. Apart from

this, their image shall be pictured as socially responsible agents whom pony up sustainable

development. with the aim of gain license to operate in foreign markets. Lastly, high stages

of corporate social performance will lead MNEs to rise their reputation/legitimacy in their

operational areas and, thus, increase their revenues and financial performance level

(Aguilera-Caracuel, Guerrero-Villegas, Vidal-Salazar & Delgado-Márquez, 2015). Compar-

ing MNEs origin from developed and developing world, the latter face greater challenges

whilst using CSR as a manner to increment their competitive advantage, whenever

measures exceed legal compliance, particularly when host country forms part of a distinct

(higher/lower) hierarchical group from their own country of origin. Furthermore, from a

strategic point of view, MNEs rooted on developing countries would struggle to institute

CSR initiatives which strength its positioning, rather than just copycat industry’s best prac-

tices (Orudzheva & Gaffney, 2018).

Lyon, Delmas, Maxwell, Bansal, Chiroleu-Assouline, Crifo, Durand, Gond, King, Le-

nox, Toffel, Vogel. & Wijen (2018) defend that CSR assessment shall include the degree to

which companies sustain (or oppose) public policies that contribute to sustainability. Vogel

(2005) declares there were few firms which took any position on political initiatives, be-

cause they were apprehensive it may increase government regulatory requirements. Apart

from this, he recommends enterprises shall reevaluate their relationship to government, if

they want to commit truly to acting responsibly. In order to help this endeavor, Lyon et al

(2018) suggest three paths – transparence on corporate political activity, align the latter

with public statements and CSR efforts, and, become an advocate for public policies which

will empower the private sector to better chase sustainability efforts and commitments

(without acquire competitive disadvantage).

12

The effects from country of origin related to CSR and its respective dimensions also

play a role on CFP as well, particularly, the contextual factors. National labor market and

financial system provide the framework which will bound firms’ resources and capabilities

(Bobillo, López-Iturriaga & Tejerina-Gaite, 2010).

13

2. Methodology

The main goal for this dissertation is to determine how Corporate Social Responsibility

and country of origin affect Corporate Financial Performance on the chemicals’ industry.

Several studies have documented the relationship between Corporate Social Responsi-

bility and Corporate Financial Performance. Galant & Cadez (2017) have compiled the

previously used measurements for both CSR and CFP amid the existent literature. Regard-

ing CSR, the frequent methodologies are: reputation indices (SC KLD 400 social index,

Fortune magazine reputation index, Dow Jones Sustainability Index and Vigeo Index) de-

veloped by rating agencies based on several criteria – economic, environmental, social,

governance and ethics, among others; content analyses on the firms’ communication; ques-

tionnaire-based surveys; and one-dimensional measures (philanthropy, for instance). Con-

cerning CFP, research found it is assessed via accounting-based – Return on Assets (ROA),

Return on Equity (ROE), Return on capital employed, Return on Sales, Net (operating)

income and/or market-value indicators (stock returns and company’ market value, for ex-

ample). A list of different studies and its main results may be found underneath:

Table 1

Studies Findings’ description

Author(s) Research' goal Methodology Sample Results

Auperlee, Carroll

& Hatfield (1985)

Evaluate CSR-

profitability associa-

tion

Forced-choice in-

strument survey

Companies with their

chief executive

officers listed in

Forbes 1981 Annual

Directory

Inexistent relationship

between profitability and

CSR

Ullman (1985) Determine the link

between, social

disclosure, social

performance, and

economic perfor-

mance

Conceptual frame-

work

Prior studies on the

matter for US Corpo-

rations

Inexistent relationship

among the 3 concepts

Preston &

O'Bannon (1997)

Analyze the relation-

ship between CSR

and CFP

Statistical analysis 67 large United States'

corporations

Positive CSR-CFP rela-

tionship

14

Author(s) Research' goal Methodology Sample Results

Waddock &

Graves (1997)

Examine the rela-

tionship between

CSP and CFP

Regression-type

model

Kinder, Lydenberg,

Domini & Co rated

companies

Positive CSP-CFP rela-

tionship

Orlitzky,

Schmidt &

Rynes (2003)

Provide a rigorous

framework for CSP-

CFP knowledge area

Studies' meta-

analysis

Prior CSR-CSP 52

studies

Positive CSP-CFP rela-

tionship

Bird, Hall,

Momentè &

Reggiani (2007)

Which types of

CSR activities are

(not) rewarded by

improved

market perfor-

mance?

Regression-type

model

S&P500 index Valuation of proactive

employee-related endeav-

ors, when environment

and diversity requisites

were achieved at a mini-

mum level.

Mittal, Sinha &

Singh (2008)

Linkage between

good financial per-

formance measure

and

corporate responsi-

bility's indicators

(level of CSR disclo-

sure, for instance) in

the Indian context

Regression-type

model

50 companies from

the S&P CNX Nifty

(India)

Reduced evidence that

companies with ethics'

code would generate

greater market/economic

value added than the

remaining ones.

Crisóstomo,

Freire &

Vasconcellos

(2011)

Assess CSR-CFP's

(market-value) link-

age in the Brazilian

scenario

Regression-type

model

Listed Brazilian firms' Negative CSR impact on

firms' value

Fisher-Vanden &

Thorburn (2011)

Market's response to

firms' joining volun-

tary environmental

programs

Event study Corporations adherent

to specific environ-

mental programs &

Ceres principles

Decrease in market value,

when companies' an-

nounce joining Climate

Leaders

Kalish (2015) Look into CSR's

influence on finan-

cial performance in

German and Ameri-

can context

Regression-type

model

US and German firms'

listed in the Reputa-

tion Institute’s Global

RepTrak 100

Different CSR impacts on

financial performance,

depending upon country

15

Author(s) Research' goal Methodology Sample Results

Maqbool &

Zameer (2018)

Investigate CSR-

CFP relationship in

the Indian context

Panel regression

model

28 Indian commercial

banks listed in Bom-

bay stock exchange

Positive CSR-CFP rela-

tionship

Own elaboration

Kalish (2015) investigated this relationship across German and United States firms

listed in the Reputation Institute’s Global RepTrak 100 for a 3 years’ spectrum (2011, 2012

and 2013) and compared the data results obtained for each country. Drawing upon his

study, this dissertation aims to understand the linkage between CSR and CFP for chemicals

industry on several regions and conclude on possible differences/similarities among them.

The empirical part of this research will include a predominantly quantitative approach to

study the association between CSR and CFP on the chemicals industry.

An econometric (regression-type) analysis will be performed and the sample are the top

fifty chemical enterprises according to Chemical & Engineering News (2018), specified in

table 3 and will be studied during a 9 years’ (2009-2017) time frame (T=9). However, due

to missing data for variables described below, the list was shortened to 29 firms (N=29). In

order to analyze the influence of country of origin effect, the sample was divided into re-

gions, related to their home continent: Africa, America, Asia and Europe, whose detailed

description is on table 4. Hence, the observations are 261 (N*T) for a balanced panel data,

since there is available information for all years, computed into Eviews 10 (x64).

CSR data, the independent variable, was obtained via Thomson Reuters Environmental

(resources use, emissions and Innovation), Social (Workforce, Human Rights, Community

and Product Responsibility & Governance (Management, Shareholders and CSR Strategy)

(ESG) Score, which has available data since 2002 to some enterprises – the score result

from a weighted evaluation of all 178 indicators – 34% for Environmental Pillar, 35,5% for

Social and 30,5% for Governance. The information is obtained based on public reported

figures by the firms themselves (Thomson Reuters, 2019).

In relation to the dependent variable, CFP – the measurement unit used was ROA,

which is a profitability indicator (Corporate Finance Institution, 2019a) and this choice was

based upon Kalish’ methodology (2015). For the control variables: Firm size (total assets)

and debt to equity ratio - which is calculated via dividing Total Debt over Shareholders

16

equity’ (Corporate Finance Institution, 2019b) and provides information regarding risk –

were chosen, drawing upon Maqbool & Zameer (2018).

Table 2

Studied Variables’ description

Variable Description Source

Corporate Social Responsibil-

ity (0-100 scale)

ESG Score

Thomson Reuters Datastream

ROA (%) Net income/Assets

Debt to equity ratio Total Debt/Shareholder’s Equity

Firm size (€) Total Assets

Own elaboration

The final sample was summarized by geographic area on table 3, so there is a clear

number of firms belonging to each continent.

Table 3

Sample summarized by geographical area, number and %

Geographic

area

Number of firms (%)

Africa 1 (3%)

America 6 (21%)

Asia 12 (41%)

Europe 10 (35%)

Total 29 (100%)

Own elaboration

Furthermore, the equation formulated for the regression-type econometric model is as

follows in order to test the possible relationship between CFP and CSR. symbolizes the

disturbance, represents the independent term and, lastly, are regression

coefficients.

Model Equation:

The data extracted corresponds to the end of each fiscal year and will be applied to all

distinct geographic area, as well as to the total sample to answer the following hypothesis.

17

There is a subjacent hypothesis (H0) which determines there is no relationship between the

studied variables.

H1: CSR has a positive impact on financial performance.

H2: CSR impact on financial performance changes geographically.

18

3. Model development

On this chapter, model results will be displayed, as well as the process. Table 4 summa-

rizes the descriptive statistics for the whole sample. Before drawing any conclusions, there

are several essential tests to carry out.

Frequently on statistical/econometric work, the disturbance is considered as normally

distributed, which might lead to incorrect conclusions (Jarque, 2011), hence, in order to

evaluate this, the test drafted by Jarque & Bera (1980) shall be used. The value which

should exist to accept the normal residual regression hypothesis shall be between 5 and 10,

however, a greater value was obtained (43.49523), therefore, the hypothesis for normal

residual regression is rejected for this model.

Table 4

Sample descriptive statistics

Descriptive Statistics ROA CSR ASSETS DEBT_EQUITY

Mean 5.532294 63.51313 33421332 0.778506

Median 5.101710 68.15272 14702698 0.600000

Maximum 18.96018 90.30202 3.14E+08 3.390000

Minimum -8.344030 12.84683 1708829. 0.010000

Std. Dev. 3.795751 16.44797 54621306 0.600727

Skewness 0.512515 -1.105617 3.369756 1.548677

Kurtosis 4.366032 3.873711 14.51876 5.896852

Jarque-Bera (residuals) 43.49523

P-value test 0.000000 0.000000 0.000000 0.000000

Sum 1443.929 16576.93 8.72E+09 203.1900

Sum Sq. Dev. 3746.009 70339.26 7.76E+17 93.82692

Observations 261 261 261 261

Own computation

Furthermore, it is crucial to verify collinearity’s presence among the variables, which

occurs if the correlation percentage exceeds 85% - in the given context this amount was

never surpassed (Table 5), collinearity is non-existent. In order to complement these out-

comes, it is relevant to determine whether the variables are multicollinear via the Variance

Inflation Factors (VIF) examination – as the results present on table 6 are all below 10,

multicollinearity won’t represent an obstacle.

19

Table 5

Variables’ correlation

CSR DEBT_EQUITY ROA ASSETS

CSR 1.000000 -0.212492 -0.107282 0.249936

DEBT_EQUITY -0.212492 1.000000 -0.438856 -0.247449

ROA -0.107282 -0.438856 1.000000 0.141748

ASSETS 0.249936 -0.247449 0.141748 1.000000

Own computation

Table 6

Variance Inflation Factors

VIF

CSR 1.094861

DEBT_EQUITY 1.093418

ASSETS 1.113613

Own computation

Apart from the previous tests, there is also another one – p-value analysis to determine

whether the results achieved are statistically relevant or not – it might at 1% or 5.%. This

value shall be near 0 in order to have results’ significance. On table underneath are repre-

sented the results for the model (total sample), when the model is computed.

Table 7

Total Sample descriptive statistics for ROA

Variables Results

10.96439

-0.052429

5.77E-09

-2.948093

R-squared 0.240908

Adjusted R-squared 0.232047

Own computation

The results displayed on table 4 are only statistically relevant for a significance of 1%,

because p-value= 0.000000 and CSR has negative impact on CFP (ROA) on this case, as

20

verified by the coefficient, β1, displayed on table 7, which expresses the relation between

the dependent and independent variable – one additional unit on CSR leads to a 0,05 unit

reduction on CFP. The results for β0 represents the average value CFP takes when all the

other variables are 0, β2 translates the positive impact from firm size on the financial per-

formance and β3 represents the negative impact from debt to equity ratio on CFP. The R-

squared value (Table 7) shows that in this scenario 24% ROA variation is justified by the

CSR and the respective control variables (total assets and debt-to-equity ratio).

Otherwise from the total sample, Africa (for 5% level of significance, because the

p-value exceeds 1%), America and Asia results’ reveal a positive influence from CSR on

CFP (for a 1% significance level). European continent follows the trend from the total

sample, as shown on table 8.

Asia’s growth on Gross Domestic Product plays an important role for the chemicals

industry, whilst Brexit’s consequences – economic, political and legal – and elections on

central European countries (Pricewaterhouse Coopers, 2017) may justify the results ob-

tained. Even though there have been several droughts on South Africa and the country

might introduce a carbon tax (KPMG, 2017), the South African company still has a small,

but positive outcome – an increase of 1 unit on CSR score will lead to an approximate

0,006 unit improvement on the firms’ ROA.

Table 8

Descriptive statistics for each continent

Variables Africa America Asia Europe

22.89648 10.95349 12.43991 8.254806

0.006125 0.023201 0.067867 -0.020019

-5.17E-7 -8.30E-10 -1.40E-9 3.01E-08

-17.43148 -2.757487 -3.652106 -4.546819

R-squared 0.852604 0.377248 0.390684 0.148835

Adjusted R-squared 0.764166 0.339883 0.373108 0.119143

P-value 0.016070 0.000026 0.000000 0.002991

Own computation

Inoue & Lee (2011) conducted a study in which it was analyzed several CSR dimen-

sions relationship with profitability, which produced mixed outcomes for each dimension

and varied across the tourism-related industries. The justification was that CSR initiatives

change across time and also stakeholders perceptions, which might be applied for the ESG

score, particularly for the Governance pillar.

21

Conclusion

Literature has found mixed results regarding the relationship between Corporate Social

Responsibility and Corporate Financial Performance.

Currently, there is still a lack of research on the chemicals industry regarding Corporate

Social Responsibility, Corporate Financial Performance and how their linkage changes geo-

graphically. Hence, this study used a quantitative approach via econometrics (regression-

type) model with the top 50 chemicals companies in the world as sample and for period

between 2009-2017. The sample was reduced to 29 companies, due to missing data for

some firms in the analysis’ time frame, which represents an anaysis restriction, because the

results would be more robust if the existent sample increased.

Firstly, there was an overview to the subject, followed by methodology explanation and

model development. Several tests took place to understand the relationship between the

variables, which revealed they are not multicollinear and the residuals are not normally dis-

tributed, rejecting the null hypothesis. After computing the model, the results established

CSR plays a negative effect on CFP for the whole sample – a 1 unit variation on CSR leads

to a 0,05 unit decrease on CFP – and on the European sub-sample, at a 1% level of signifi-

cance, but the amount reduction is smaller (0,02), whilst for Africa (at a 5% level of signifi-

cance), America and Asia the opposite occurs. On a macro level, this might represent the

effects produced by the Brexit on Europe and Asia’s Gross Domestic Product growth over

the recent years. On the literature point of view, mixed results may be justified due to the

following reasons: measurement difficulties, weak theoretical groundwork for CSP concep-

tualization, neglecting relevant variables’ on model construction and the unclear causality’

direction (Gallant & Cadez, 2017). Chen, Feldmann & Tang (2015) conducted a study

comparing different manufacturing industries, which revealed no major differences among

CSR practices.

As further steps, there shall be a deeper analysis for a larger sample computing more

factors for the CFP, such as market-value indicators (stock returns and company’ market

value, for example) in order to complement the accounting-based analysis used. ROE was

not used in the model, because the results were not statistically relevant at any level of sig-

nificance. Since the available information was based on data disclosed by the firms, there is

always subjective inherent and missing figures. In order to solve this matter, Gallant &

Cadez (2017) suggest a standardization in CSR reporting and mandatory data disclosure. In

22

order to easy the process for data extraction and analysis, listed firms shall publish their key

results on relative terms (percentage results); including the CSR information, not only men-

tion the indicatives on their reports.

Both Corporate Social Responsibility and country of origin have been present on litera-

ture as influencing factors for firms’ financial performance; however, there have been few

which explored this for the chemicals industry. Thus, this study aims to assist this gap and

provide more insight on the matter and provide a basis for future research.

23

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31

Attachments

Table A1

Global Top 50 chemical companies

BASF PRAXAIR

DOWDUPONT YARA

SINOPEC LANXESS

SABIC BAYER

INEOS DSM

FORMOSA PLASTICS ASAHI KASEI

EXXONMOBIL EASTMAN CHEMICAL

LYONDELLBASELL INDUSTRIES ARKEMA

MITSUBISHI CHEMICAL SYNGENTA

LG CHEM CHEVRON PHILLIPS CHEMICAL

AIR LIQUIDE BOREALIS

RELIANCE INDUSTRIES INDORAMA

DUPONT SK INNOVATION

LINDE HUNTSMAN CORP.

TORAY INDUSTRIES AIR PRODUCTS & CHEMICALS

AKZONOBEL ECOLAB

EVONIK INDUSTRIES WESTLAKE CHEMICAL

COVESTRO WANHUA CHEMICAL

BRASKEM SASOL

PPG INDUSTRIES MOSAIC

SUMITOMO CHEMICAL PTT GLOBAL CHEMICAL

LOTTE CHEMICAL TOSOH

SHIN-ETSU CHEMICAL DIC

SOLVAY HANWHA CHEMICAL

MITSUI CHEMICALS CLARIANT

Own elaboration

32

Table A2

Final sample division by country of origin and continent

Company Name Country of Origin Continent

BASF Germany Europe

SINOPEC China Asia

SABIC Saudi Arabia Asia

FORMOSA PLASTICS Taiwan Asia

EXXONMOBIL United States of America

(USA) America

MITSUBISHI CHEMICAL Japan Asia

LG CHEM South Korea Asia

AIR LIQUIDE France Europe

LINDE AG Germany Europe

TORAY INDUSTRIES Japan Asia

AKZONOBEL Netherlands Europe

PPG INDUSTRIES United States of America

(USA) America

SUMITOMO CHEMICAL Japan Asia

SHIN-ETSU CHEMICAL Japan Asia

MITSUI CHEMICALS Japan Asia

YARA Norway Europe

LANXESS AG Germany Europe

BAYER AG Germany Europe

DSM Netherlands Europe

ASAHI KASEI Japan Asia

EASTMAN CHEMICAL United States of America

(USA) America

ARKEMA France Europe

SK INNOVATION South Korea Asia

HUNTSMAN CORP. United States of America

(USA) America

ECOLAB United States of America

(USA) America

WESTLAKE CHEMICAL United States of America

(USA) America

SASOL South Africa Africa

TOSOH Japan Asia

CLARIANT Switzerland Europe

Own elaboration