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The impact of corporate social responsibility on firm performance the case of in vietnamese companies

UNIVERSITY OF ECONOMICS
HO CHI MINH CITY
VIETNAM

ERASMUS UNVERSITY ROTTERDAM
INSTITUTE OF SOCIAL STUDIES
THE NETHERLANDS

VIETNAM – THE NETHERLANDS
PROGRAMME FOR M.A IN DEVELOPMENT ECONOMICS

THE IMPACT OF CORPORATE SOCIAL
RESPONSIBILITY ON FIRM PERFORMANCE:
THE CASE OF VIETNAMESE COMPANIES

BY

TRAN PHUOC LOC

MASTER OF ARTS IN DEVELOPMENT ECONOMICS


HO CHIMINHCITY, NOVEMBER2016


UNIVERSITY OF ECONOMICS
HO CHIMINHCITY
VIETNAM

INSTITUTE OF SOCIAL STUDIES
THE HAGUE
THE NETHERLANDS

VIETNAM - NETHERLANDS
PROGRAMME FOR M.A IN DEVELOPMENT ECONOMICS

THE IMPACT OF CORPORATE SOCIAL
RESPONSIBILITY ON FIRM PERFORMANCE:
THE CASE OF VIETNAMESE COMPANIES
A thesis submitted in partial fulfilment of the requirements for the degree of
MASTER OF ARTS IN DEVELOPMENT ECONOMICS

By

TRAN PHUOC LOC

Academic Supervisor:

Prof. Dr. NGUYEN TRONG HOAI

HO CHI MINH CITY, NOVEMBER2016


DECLARATION

This is to certify that this thesis titled “The impact of Corporate Social Responsibility on
Firm Performance: The case of Vietnamese companies”, which is submitted in fulfillment of
the requirements for the degree of Master of Arts in Development Economics to the VietnamNetherlands Program (VNP). The thesis constitutes only my original work and due
supervision and acknowledgement have been made in the text to all material used.

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ACKNOWLEDGEMENTS

First of all, I would like to thank and gratefully express my special appreciation to my
supervisor – Prof. Dr. Nguyen Trong Hoai for all of his guidance, useful recommendations
and valuable comments for my thesis.
Secondly, I wish to convey my deep gratitude to Dr. Pham Khanh Nam, Dr Truong
Dang Thuy for their valuable suggestions and comments for my TRD as well as the
econometrics models. Furthermore, I will never forget the dedication of all VNP teachers and
supporting staffs to give us high-quality lectures.
Next, I am also grateful to my wonderful teammates and classmates at VNP C21 for
their help and motivation in our great time together.
Special thanks to my family, friends and colleagues who support and encourage me
during the thesis and studying time in this program.

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ABBREVIATIONS
GSO

General Statistics Office of Vietnam

OLS

Ordinary Least Square

FEM

Fixed effects model

R&D

Research and Development

REM

Random effects model

ROA

Return on assets

ROE

Return on equity

SMEs

Small and Medium Enterprises

SOEs

State-owned enterprises

TCS

Vietnam Technology and Competitiveness Survey

UNIDO

United Nations Industrial Development Organization

VCCI

Vietnam Chamber of Commerce and Industry

VES

Vietnam Enterprise Survey

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ABSTRACT

This study attempts to identify the determinants of Corporate Social Responsibility
(CSR) and to examine the impacts of CSR on firm’s financial performance of 6435
Vietnamese firms extracted from the combination of the Vietnam Technology and
Competitiveness Survey (TCS) and the Vietnam Enterprise Survey (VES) within a three year
period from 2010 to 2012. By applying the panel data and Fixed Effects Model, the empirical
results suggest that CSR may have positive relationships with firm performance whereas the
determinants of CSR include firm size, R&D participation, final goods ratio and ownership
structures. These results are supported by a majority of empirical papers about CSR
(Erhemjamts et al., 2012; Margolis et al., 2007; Russo and Fouts, 1997) and theories about
CSR such as stakeholder theory, resource-based view and stewardship theory. In addition, the
study also reveals the situation of CSR in Vietnam: although a large number of Vietnamese
firms are already aware of CSR, most of firms only participate in Labor CSR, which is
mandatory by laws while Community-related CSR is generally ignored. Based on the
findings, the thesis may propose several policy recommendations to improve the CSR
practice in Vietnam.

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TABLE OF CONTENTS

Contents
DECLARATION.................................................................................................................................... i
ACKNOWLEDGEMENTS ................................................................................................................. ii
ABBREVIATIONS .............................................................................................................................. iii
ABSTRACT .......................................................................................................................................... iv
TABLE OF CONTENTS ..................................................................................................................... v
LIST OF TABLES .............................................................................................................................. vii
LIST OF FIGURES ............................................................................................................................ vii
INTRODUCTION................................................................................................................................. 1
1.1 Problem statement .......................................................................................................................... 1
1.2 Research objectives ......................................................................................................................... 4
1.3 Research questions .......................................................................................................................... 4
1.4 Research scope ................................................................................................................................ 5
1.5 Research methodology .................................................................................................................... 5
1.6 The structure of this study ............................................................................................................. 5
LITERATURE REVIEW .................................................................................................................... 7
2.1 Corporate Social Responsibility .................................................................................................... 7
2.1.1 Definitions ..................................................................................................................................... 7
2.2.2 Measurement of CSR ................................................................................................................... 9
2.2 Firm Performance ......................................................................................................................... 10
2.2.1 Definitions ................................................................................................................................... 10
2.2.2 Measurements of firm performance ......................................................................................... 11
2.3 Corporate Social Responsibility and Firm Performance .......................................................... 12
2.3.1 Theoretical review ...................................................................................................................... 12
2.3.2 Empirical review ........................................................................................................................ 18
RESEARCH METHODOLOGY ...................................................................................................... 23
3.1 Data collection ............................................................................................................................... 23
3.1.1 Vietnam Enterprise Survey ....................................................................................................... 24
3.1.2 Vietnam Technology and Competitiveness Survey ................................................................. 24
3.1.3 Data sample in this study........................................................................................................... 26
3.1.4 Corporate Social Responsibility Index (CSR Index) .............................................................. 27
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3.2 Variables and measurements ....................................................................................................... 29
3.2.1 Dependent variables................................................................................................................... 29
3.2.2 Explanatory variables ................................................................................................................ 30
3.2.3 Control variables ........................................................................................................................ 30
3.3 Conceptual framework and model specification ........................................................................ 35
3.3.1 Conceptual framework .............................................................................................................. 35
3.3.2 Model specification .................................................................................................................... 36
3.4 Analytical approach ...................................................................................................................... 38
RESEARCH FINDINGS AND DISCUSSIONS............................................................................... 41
4.1 Overview of Corporate Social Responsibility and performance in Vietnam .......................... 41
4.2 Descriptive analysis results .......................................................................................................... 46
4.3 Empirical results ........................................................................................................................... 52
4.3.1 Determinants of CSR engagement............................................................................................ 52
4.3.2 Effects of CSR on Firm Performance ...................................................................................... 54
CONCLUSIONS AND RECOMMENDATIONS ............................................................................ 59
5.1 Main findings................................................................................................................................. 59
5.2 Policy implications ........................................................................................................................ 60
5.3 Limitations of the thesis................................................................................................................ 62
5.4 Future research ............................................................................................................................. 63
REFERENCES .................................................................................................................................... 64
APPENDIX .......................................................................................................................................... 71
Appendix 1: Regression results for Fixed Effect Model .................................................................. 71
Appendix 2: Hausman test results ..................................................................................................... 77
Appendix 3: Awareness of CSR questionnaires on the Baseline Survey Report 2010 ................. 79

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LIST OF TABLES
Table 2.1: Theories about CSR ............................................................................................................. 18
Table 3.1: Number of firms surveyed in VES and TCS dataset from 2010 to 2012............................. 24
Table 3.2: Structure of Survey Questionnaires in TCS ......................................................................... 25
Table 3.3: Categories of firm size ......................................................................................................... 26
Table 3.4: Categories of ownership type .............................................................................................. 26
Table 3.5: Corporate Social Responsibility (CSR) Indicators .............................................................. 28
Table 3.6: Summary of variables, measurements and expectations...................................................... 34
Table 4.1: Corporate Social Responsibility (CSR) Indicators by years ................................................ 47
Table 4.2: Mean value of CSR aspects by Firm Size ............................................................................ 48
Table 4.3: Mean value of CSR aspects by Ownership Type................................................................. 48
Table 4.4: Descriptive Statistics of key variables ................................................................................. 49
Table 4.5: Correlation Matrix of key variables ..................................................................................... 51
Table 4.6: Determinants of CSR participation ...................................................................................... 53
Table 4.7: Summary of Hausman test results for all regressions. ......................................................... 53
Table 4.8: Regression results examining the impact of CSR on ROA ................................................. 55
Table 4.9: Regression results examining the impact of CSR on ROE. ................................................. 56
Table 4.10 Regression results examining the effect of three dimensions of CSR on firm performance
.............................................................................................................................................................. 58

LIST OF FIGURES
Figure 2.1: The Pyramid Model of CSR ............................................................................................... 17
Figure 3.1: Conceptual Framework ...................................................................................................... 36
Figure 4.1: CSR Awareness category ................................................................................................... 43
Figure 4.2: Awareness scores by sectors. ............................................................................................. 43
Figure 4.3: Awareness on topics of social responsibility ...................................................................... 44
Figure 4.4: Awareness on topics of social responsibility – by number of firms ................................... 45

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CHAPTER I
INTRODUCTION
1.1 Problem statement
In recent decades, social effects of enterprises are increasingly becoming essential in
the field of economics and management (Fiori et al., 2007). However, the main objective of
an enterprise is to obtain profits or in other words, to increase firm’s financial performance.
Generally, performance may be affected by both firm’s own decisions and strategies in its
business. In this sense, researchers and scholars may raise a controversial question: what is
the level of social and environmental adoption that firm should consider but still achieve the
financial targets? Eventually, the concept of Corporate Social Responsibility (CSR) emerged
as a new approach to resolve both social and environmental issues (Uadiale & Fagbemi,
2012). In general, CSR refers to the basic idea that enterprises attempt to satisfy social
concerns and expectations in certain ways (Gossling & Vocht, 2007). Until the late 1970s,
CSR was still considered as a joke or an opposite standpoint by contemporary investors and
scholars (Lydenberg, 2005). However, from the 1990s, the concept of CSR has been widely
accepted and promoted from governments, enterprises to individuals.
Nowadays, CSR has emerged and become an essential concept in the fields of
management, economics and firm’s theory (Moir, 2001; Lindkvist & Llewellyn, 2003;
Margolis & Walsh, 2003). Generally, CSR focuses on issues related to social and
environmental effects from enterprises’ operations and decisions. Carroll (1979, 1999)
defines CSR as social responsibility that enables firm to operate in a profitable, law-abiding,
moral and discretionary manners. Previously, companies utilized many measures such as
diversifying their products, improving the quality of goods and services to gain competitive
advantages on the marketplace. Nowadays, companies tend to reinforce their images,

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reputation, and brand development through the adoption of CSR activities. In fact, social
responsibilities are essential to all companies and organizations because the customers are
more concerned about businesses and products which bring more benefits to human and
community. Therefore, a better understanding of the relationship between CSR and firm’s
performance could lead to wiser decisions for managers, stockholders, and stakeholders (Wu
& Shen, 2013).
Numerous papers may also provide extensive literature on the relationship between
CSR and firm performance (Karaye et al., 2014). It is seen that a major number of papers
argues the positive correlation (Margolis & Walsh, 2003; Orlitzky et al., 2003) whereas a few
studies indicates the negative or neutral relationships (Wright & Ferris, 1997; McWilliams &
Siegel, 2000). This practice invokes a curiosity among scholars who intentionally would like
to examine the true relationship between CSR and performance. In addition, empirical papers
on CSR topics are mainly conducted for developed countries such as the US or European
countries, where CSR practice is strongly and systematically developed (Belal, 2001; Gray et
al., 1995). Hopper and Hoque (2004) also state that the number of empirical studies about
CSR in developing countries is comparatively small. This lack of research about CSR
practice may urge researchers to a motivation of conducting an empirical studies about CSRPerformance in developing countries, especially the ASEAN countries. Chapple and Moon
(2007) argue that the ASEAN would achieve major focus on CSR study since the early
2000s.
According to the Vietnam Chamber of Commerce and Industry (VCCI), the concept
of CSR was first introduced to domestic enterprises by transnational corporations in Vietnam
(Nguyen, 2007). By the year 2003, Vietnamese government was aware of CSR practice
through the program of World Bank: “Strengthening developing country governments’
engagement with Corporate Social Responsibility” (Twose and Rao, 2003). In 2007, the

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participation of Vietnam to the WTO recorded a stable step towards the promising picture of
Vietnam’s globalization and CSR adoption. In this outlook, Vietnam government and
enterprises would be two most important sides in the promotion of CSR practice in Vietnam:
the government promulgates and enforce new policies while enterprises contribute to the
implementation of CSR activities.
In fact, the Vietnamese government has passed some new laws and regulations to
improve CSR practice. For instance, the new Environment Protection Law and Vietnam
Agenda 21 for environment-related issues; new union law and labor code to support
employees (Ho & Yekini, 2014). In 2004, the government employed Strategic Orientation
with the target of Sustainable Development. The campaign attempted to develop 19 strategic
areas following three aspects of Corporate Social Responsibility: economic, social and
environmental criteria. This practice may increase the role of government in CSR activities
and is stepping stone to the “Green Growth” strategies for the years between 2011 and 2020.
In addition, enterprises would be important actors who devote to the success of CSR
since they are the ones who conduct CSR activities. Without social responsibilities, firm may
operate to maximize profits regardless of its impacts on the society. One of most serious
problems caused by firms may be environmental degradation. For example, the case of
Vedan, a Taiwanese food manufacturer, was sentenced in 2008 for its illegal exhaust of waste
into Thi Vai River within 14-years period (Nguyen & Pham, 2011). Therefore, firm should be
carefully aware of its social responsibilities to benefits itself and avoid committing harmful
activities to the society. The main event that disseminates CSR concept among Vietnamese
firms would be the project of the United Nations Industrial Development Organization
(UNIDO), which support Vietnamese SMEs to “Adapt and Adopt CSR for Improved
Linkages with Global Supply Chains in Sustainable Production” (Nguyen, 2007). This
project is financed by the European Union with the essential cooperation of the VCCI to

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enhance the perception of CSR and introduce CSR standards in Vietnamese SMEs, hence
increase their awareness and competitiveness on the international markets.
In Vietnam, many large enterprises has begun to engage in CSR activities due to the
pressure of the globalization and international integration (Nguyen et al., 2015). However,
over 90% of Vietnamese firms are small and medium-sized, which may not consider CSR as
essential requirements. This practice presents the reality that the benefits from adopting CSR
are still vague in Vietnam. In addition, the number of studies on CSR-related topics in
Vietnam is relatively limited (Pham, 2010). It is necessary to have an empirical study that
reveal the potential effects of CSR on firm performance in the Vietnam context. Hence, by
employing firm-level data and quantitative analysis, this study attempts to identify the
determinants of CSR adoption as well as to answer the question of whether or not CSR
engagement may boost firm’s financial performance in Vietnam.

1.2 Research objectives
The main objectives of this study are:
 To investigate the determinants of CSR adoption of Vietnamese firms.
 To empirically examine the relationship between CSR and firm performance in
term of three CSR perspectives: Labor, Management, and Community.

1.3 Research questions
In order to achieve the research objectives, this study attempts to answer two
questions:
 What are the key factors that may affect the adoption of CSR?
 Whether CSR has positive impacts on performance of Vietnamese firms?

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1.4 Research scope
This study examine the effects of CSR activities on firm performance in the context of
Vietnam. The firm data is extracted from the surveys of Vietnam Technology and
Competitiveness Survey (TCS) and Vietnam Enterprise Survey (VES) between 2010 and
2012. In addition, the firm performance in this research only focuses on financial
performance; and other concepts of performance such as economic performance and social
performance are beyond the scope of this thesis. In other words, this study employs financial
indicators to measure performance and the term “performance” would represents firm’s
financial performance.
1.5 Research methodology
This study attempts to conduct quantitative analysis on the panel data of Vietnamese
firms which are available in the Vietnam Technology and Competitiveness Survey (TCS).
The panel data would be employed to capture the variations of firm performance when
adopting CSR across three years. For the econometric model, this study utilizes the Fixed
Effect Model and Random Effect Model to examine the relationship between CSR and firm
performance. After regressions, the test of Hausman would be applied to determine whether
FEM is more appropriate than REM or vice versa.
1.6 The structure of this study
This study consists of five chapters which are constructed as follows:
 Chapter 1 presents the overview and problem statement about CSR practice and
reasons to select the topic, research objectives, research scope and methodology.
 Chapter 2 discusses the theoretical and empirical literature related to CSR and its
relationship with firm performance. This section primarily introduces the definitions
of key concepts in this study, main theories about CSR and lists out main empirical

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findings of prominent studies on CSR-Performance relationship. These background
would be the basis to form the conceptual framework utilized in this study.
 Chapter 3 reveals the data, methodology and measurements of variables to establish
the econometric models based on the conceptual framework.
 Chapter 4 presents the overview of CSR practice in Vietnam, descriptive statistics, as
well as regression results of the study.
 Chapter 5 expresses the main findings, policy implementations based on the key
findings. In addition, this part also discusses the research limitations and future
development of the topic.

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CHAPTER 2

LITERATURE REVIEW
This chapter introduces the theoretical and empirical literature related to CSR and its
relationship with firm performance. First, the content includes the definitions and
measurements of both CSR and firm financial performance. Second, the theories and
empirical studies on CSR-Performance relationship are also presented to fundamentally
depict the CSR literature pictures in practice.
2.1 Corporate Social Responsibility
2.1.1 Definitions
Over the past few decades, although researchers have attempted to contribute to
literature on CSR practices, the precise and unanimous definition about CSR is still not
established (Wood, 2010). There are many reasons to explain for this issue. First of all, Van
Marrewijk (2003) argues that different points of view about CSR toward specific interests
may hinder the formation of CSR concepts. Second, it is difficult to visualize the CSR
concept since its related concepts – Corporate social performance (CSP) and corporate social
responsiveness – are still in controversial status (Wood, 2010). In addition, Talaei and Nejati
(2008) suggests that various definitions about CSR may come from the consequences of
unclear concept about CSR. As a result, empirical studies on CSR are becoming difficult to
conduct due to diverse views and definitions of CSR (Lozano, 2008; Orlitzky, Siegel, &
Waldman, 2011).
However, almost all available definitions about CSR may converge to one thing:
enterprises have to satisfy the social expectations in their planning about management
strategies (Gossling & Vocht, 2007). This point may be true for both the definitions from
large organizations’ and scholars’ perspective. In fact, according to the World Bank,

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“Corporate social responsibility is the commitment of business to contribute to sustainable
economic development by working with employees, their families, the local community and
society at large to improve their lives in ways that are good for business and for
development”. Alternatively, Business for Social Responsibility (2000) defines CSR as
“achieving commercial success in ways that honor ethical values and respect people,
communities, and the natural environment”. Another well-known definition is from the
Commission of the European Communities (2001), CSR is “A concept whereby companies
integrate social and environmental concerns in their business operations and in their
interaction with their stakeholders on a voluntary basis”.
As from the perspective of researchers, McWilliams and Siegel (2001, p. 117) defines
CSR as “actions that appear to further some social good, beyond the interest of the firm and
that which is required by law”. In addition, the definition of Frooman (1997, p. 227) could
exemplify CSR: “An action by a firm, which the firm chooses to take, that substantially
affects an identifiable social stakeholder’s welfare”. These definitions suggests that CSR
activities is the voluntary initiatives of firm which goes beyond its legal responsibilities to
satisfy both society’s and other stakeholders’ considerations. In the earlier definition, to be
more specific in the general standards of CSR, Carroll (1979) proposes the definition of CSR
as follows: CSR represents the social responsibility of a firm in term of four basic categories:
economic, legal, ethical and discretionary expectations. These categories seems to partly
inherit from the earlier definitions about CSR but it may synthesizes and categorizes firm’s
social responsibilities in a more exhaustive way. This definition of Carroll (1979) is believed
to be the most unobscured conceptualization of CSR since it illumine the firm's duties toward
society and furthermore, distinguish between the attempts to make profits and social
responsibilities of the managements (Lozano, 2008; Wood, 2010).

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In summary, a socially responsible corporation is suggested to take actions that
extends beyond the legal requirements and satisfy the expectations of its major stakeholders.
From literature, CSR could be considered as the comprehensive set of programs, policies and
mindsets to integrate firm’s business operations into social and environmental concerns.
2.2.2 Measurement of CSR
CSR literature indicates many challenges in measuring firm’s social performance
(Graves & Waddock, 1994). In fact, due to various definitions of CSR, there is lack of
consensus in the way to measure CSR. However, previous papers tend to utilize extrafinancial ratings or scores provided by agencies such as Kinder, Lydenberg, Domini & Co.,
Inc (KLD) in the US or Vigeo in Europe. For instance, KLD index has been widely used to
represent the level of firm’s CSR adoption of US firms. This index is computed from the
KLD database which contains comprehensive sets of survey, financial statements,
government reports and academic journals to determine multiple dimensions of firm’s
Corporate Social Performance (CSP).There are many studies that employs KLD Index to
measure CSR (Waddock & Graves, 1997; McWilliams & Siegel, 2000; Garcia-Castro et al.,
2010).
In non-US countries where KLD data is not available, researchers often employ
secondary data for CSR performance from other surveys. As said by Ghauri and Gronhaug,
(2005): “Secondary data is useful not only to find the information to solve our research
problem, but also better understand and explain our research problem”. In contrast to the
extra-financial ratings, the secondary data provide a complementary approach for Corporate
Social Performance (CSP) since they are based on firm’s actual activities but not evaluations
from other agencies. Therefore, the most popular measure for CSR would be the CSR Index,
which is extracted from the secondary data.

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2.2 Firm Performance
2.2.1 Definitions
In today's business and management strategy, it is believed that firm performance is
one of the most essential concept. Furthermore, firm performance is the target that all firm
must improve to survive or to satisfy its major stakeholders. Although there is a large body of
literature and many papers consider firm's performance as the main dependent variable, the
precise and common definition of performance still does not exist (Richard, Devinney, Yip,
& Johnson, 2009). This issue could lead to diverse results from performance-related studies
due to the lack of consensus, different ways of measurement and dimensionality of firm
performance. Therefore, Glick, Washburn and Miller (2005) suggests that researchers tend to
employ only one or several indicators to represent firm performance due to the unavailability
of essential variables on the dataset.
In fact, firm performance is a complicated concept with multi-dimensional construct.
Venkatraman and Ramanujam (1987) categorize corporate performance into three different
aspects: financial performance, business performance, and organizational effectiveness.
Financial performance of a firm can be assessed by several accounting-based or financial
indicators of that firm. These indicators may be subjective since they tend to measure firm’s
profitability by observing the financial situations and business results of firm. Some basic
proxies for financial performance could be ROA (return on assets), ROE (return on equity),
and ROS (return on sales). In addition, business performance holds a fundamental position in
management studies and practices. It can be seen as the market-based measure that includes
both financial and operational performance. There is a long list of indicators that can be
utilized to measure business performance: sales growth, market share, product development,
etc. Organizational effectiveness is another aspect of firm performance that represents the

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efficiency of firm’s business operation to achieve its objectives. It attempts to capture firm
performance through leadership, firm's structure, quality, employee's satisfaction, etc.
2.2.2 Measurements of firm performance
Previous studies suggests that firm performance can be measured by either
productivity or profitability:
Firm productivity reflects firm's efficiency of production and is calculated as the
ratio of useful output with the amount of physical inputs being used. Based on the
characteristics and treatment of input and output, Lieberman and Kang (2008) indicates that
productivity could be measured by single- , multi- or total-factor productivity ratio. The
factor could be one single element that contribute to the firm's production such as: capital,
labor, material, etc. Productivity measure is generally considered as total factor productivity
since it refers to all factors of production. This approach would intuitively represents firm's
capability of production. Single-factor or multi-factor productivity ratio may not reflect firm's
overall productivity and could lead to misleading results in the analysis.
Firm profitability employs accounting indicators such as ROA or ROE to analyze
firm's financial condition. These indicators may reflect firm's performance in an overall
perspective but not observe the multinational characteristics of firm's production process.
Orlitzky et al. (2003) argues that both accounting and market indicators could be applied to
measure firm’s performance. Since this study examine the impacts of CSR on firm's financial
performance, the overall financial indicators would be appropriate to capture firm
performance. Therefore, the measurement of profitability would be suitable and is utilized in
the methodology of this study.

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2.3 Corporate Social Responsibility and Firm Performance
2.3.1 Theoretical review
The relationship between CSR investment and firm’s financial performance has been
discussed in many well-known theories. This section summarizes most of the important
theories in previous CSR studies from basic to more advanced level of complication:
Shareholder Theory: Shareholder theory may be considered as the first theory about
CSR since the criticisms of this theory would be utilized to form the CSR concept. This
perspective originated from the Theory of The Firm, which postulate the idea that the main
objective of firm is to maximize its profits. In this early view, Friedman (1962, 1970)
suggests that firms should merely focus on maximizing its profits and are not mandatorily
forced to do any social responsibilities. In other words, shareholders are the most important
stakeholders and firm need to utilize all of its resources to increase shareholders’ wealth. This
point of view is then strongly criticized by many scholars and other stakeholders of firm. As a
result, there are many theories that emerge to solve those criticisms: Agency Theory,
Stakeholder theory, and the Pyramid Model of CSR.
Agency Theory: this theory would be first developed by Jensen and Meckling
(1976). The agency perspective indicates that there is always conflict of interests between
shareholders and firm’s managers. This conflict is generally named the “agency problem”.
Overall, a firm includes various groups of interests and agency problem can only be solved
when the equilibrium point of different interests is achieved (Krisnawati et al., 2014).
According to this theory, the interests of shareholders and firm’s managers would never align
and CSR may be the outcome of those conflicts (Jensen and Meckling, 1976). In this sense,
managers may utilize corporate resources to increase their own wealth and utilities instead of
to invest in potential projects which may improve firm’s financial performance. Therefore,
CSR activities may lead to poor firm’s performance and shareholders’ wealth could be

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reduced. This theory suggests that CSR investments and resources should be efficiently spent
to improve firm’s performance but not to further ineligible manager’s wealth. Based on the
view of Agency Theory, Stakeholder Theory and Stewardship Theory emerged to solve the
agency problem.
Stakeholder Theory: In contrast to early theory which may indicate the negative
relationship between CSR and firm’ performance, subsequent theories shows the positive
effects of CSR on performance. For instance, the stakeholder perspective from Freeman
(1984) proposes the idea that a firm can survive only if it has ability to satisfy its stakeholders
who could considerably affect the firm’s welfare. In this case, stakeholders are referred to
groups or individuals that have interests and relations with the firm, such as customers,
employees, suppliers…This theory is widely accepted among researchers and is further
developed in various ways. For instance, Blombäck and Wigren (2009) suggests that firm and
stakeholders should shake their hands to benefit all relevant parties. In other words, besides
the goal of gaining profits for stockholders, firms should participate in CSR activities to
satisfy non-financial stakeholders who could provide strong support for firms. Moreover,
Clarkson (1995) claims that bringing wealth and value to stakeholders is the only way that
allow firms to be more prosperous. In 2002, Jensen introduced the value maximization
concept which harmonizes the stakeholder theory and value of firm in the long run. In fact,
value maximization suggests that long-run market value is one of the most important
objective of firm whereas stakeholder theory advises managers to satisfy the interests and
benefits of all stakeholders. Jensen asserted that the firm’s primary goal is to maximize firm’s
value and proved that firm’s value maximization is not always conflict with a particular
stakeholder. This approach has removed the practice of various firm’s objectives in
traditional stakeholder perspective such as high salary for employees, low prices for
customers or charity for the orphan children.

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Instrumental Stakeholder Theory: Stakeholder Theory of Freeman (1984) would be
a paradigm and foundation for many latter theories (Margolis & Walsh, 2003). The
influential study from Donaldson and Preston (1995) categorizes the Stakeholder Theory into
three types: descriptive, normative, and instrumental theory. Although Stakeholder Theory is
developed into various versions, the Instrumental Stakeholder Theory may be received most
of attention from researchers (McWilliams and Siegel, 2001; Surroca et al., 2010). Jones
(1995) argues that Instrumental Stakeholder Theory considers social activities as an
instrument to maximize profits and therefore, increase shareholders’ wealth. In other words,
CSR are social activities that benefits firm’s stakeholders in term of maximizing profits for
shareholders. This study mainly focus on the outcomes, especially the economic benefits
when firm participates in activities that benefits various types of stakeholders.
Resource-based view of the firm (RBV): The level of CSR engagement can be
explained by the resource-based view of the firm (RBV). This theory is first developed by
Wernerfelt (1984) with the idea that a corporate includes various resources (all assets,
attributes, knowledge …) and these resources could be utilized to create sustainable
competitive advantage. The RBV suggests firm to contribute its resources to meet the
demand for CSR. This perspective is inherited from the earlier study of Penrose (1959) and
further developed by Barney (1991). In 1991, Barney pointed out four criteria for a source of
sustainable competitive advantage: valuable, rare, inimitable, and non-substitutable. This
view suggests that CSR would create competitive advantage and thus increase firm’s
performance. In the first RBV framework that apply for CSR, Hart (1995) suggests that
environmental social responsibility could be a resource that allows firms to obtain sustainable
competitive advantage. In addition, by applying environmental and financial data at firmlevel, Russo and Fouts (1997) also indicate that high environmental performance would lead
to better financial performance though competitive advantage.

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Slack resources hypothesis: This theory is first presented by Waddock and Graves
(1997) with the idea that firms with better performance would have more financial capability
to address and solve social issues. Furthermore, Waddock and Graves also pointed out that
there would be causal effects between CSR and firm performance. In this sense, firm with
high financial performance would be able to afford more on social issues whereas CSR also
enables firm to achieve more success in financial perspective. In fact, financially successful
firms have sufficient resources to allocate the investment into strategic campaigns in the long
run such as environmental problems, employee and community relations. Therefore, the
adoption of CSR would allow firm to have long-term benefits such as: better public image,
improved customer community relations, and attractive recruitment opportunities. Tiago
(2012) argues that slack resources would be assigned to some but not all areas of social
concerns (e.g. environmental problems, community relations...) and investment in each area
would bring various level of outcomes to the company.
Stewardship Theory: Based on the idea of Stakeholder theory, Donaldson and Davis
(1991) developed and introduced Stewardship theory. This theory provides the basis to
answer the agency problem (Krisnawati et al., 2014). Stewardship perspective suggests that
executive managers, who have moral principles, tend to lead firm to attend CSR activities
regardless of the effects of CSR on firm performance (Donaldson and Davis, 1991). Another
further development from the original idea, Muth and Donaldson (1998) argues that there
always exists certain motives or imperative to prevent and solve conflicts of interest between
managers and stockholders. According to this, the managers are the stewards and they have to
obtain two targets: to satisfy all relevant stakeholders and to achieve targeted firm’s
performance. When the interests of stakeholders are aligned with the manager’s goals, the
equilibrium of this relationship is achieved. This equilibrium point would be the target of

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Stewardship Theory. This approach tends to contrast with the agency theory in term of
manager’s motivation to participate in CSR activities.
The Pyramid Model of CSR: Based on the Shareholder Theory, Carroll (1991)
developed this theory with the notion that firm's main objective is to make profit, but profit
maximization may not be the unique responsibility of a firm. This model introduces four
layers of responsibility that a firm should follow: economic, legal, ethical and philanthropic
criteria. It can be seen from the model that economic aspect would be the most important
objective of a firm since it is located at the bottom of the model. This is consistent with the
Shareholder Theory of Friedman (1970). Only if firm is able to make profits for shareholders
and meet the economic criteria, next layers in the model would be executed. The second layer
is legal aspect which requires firm to confirm to laws and regulations from governments.
Ethical criteria would be the next layer, this is firm’s duty to do “good” things to satisfy its
stakeholders. The top layer of the model is philanthropic criteria. This layer represents firm’s
level of contribution to its community or society. Carroll (1991) suggests that a firm should
follow all four types of responsibility in order to obtain profits and prosperity. This Pyramid
Model of CSR would be the base to the development of several latter complicated models
about CSR. These new models employs the idea from Carroll (1991) with different aspects of
responsibility at upper layers of the pyramid. The deeper investigation of these new models
may be out of scope of this study.

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