MGT675-Research Submission final

The Role of Corporate Social Responsibility in Enhancing Firm Performance

Thesis Submitted in Partial Fulfillment of the Requirements for the Award of the Degree of

MASTER OF BUSINESS ADMINISTRATION

BY

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Under Supervision

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COLLEGE OF BUSINESS AND FINANCIAL SCIENCES

SAUDI      ELECTRONIC  UNIVERSITY

2021

Declaration Certificate

The work entitled, ‘‘The Role of Corporate Social Responsibility in Enhancing Firm Performance’’, embodies the results of the original research work carried out by me in the College of Administrative and Financial Sciences, Department of Business Administration Saudi Electronic University. This research work has not been submitted in part or full for the award of any other degree at SEU or any other university.

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Place: – ______________________ (Full Name of the Candidate)

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TABLE OF CONTENTS

Chapter 1. Introduction

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1.1

General Introduction

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1.2

Research Questions

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1.3

Research Objectives

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1.4

Significance of the Study

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1.4.1

Managerial Relevance

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1.4.2

Scientific Implications

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Chapter 2. Literature Review

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2.1

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2.1.1

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2.1.2

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2.2

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2.2.1

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2.2.2

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2.2.2.1

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2.3

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2.3.1

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2.6

Hypotheses

Chapter 3. Methodology

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3.1

Research Approach

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3.2

Research Design

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Chapter 4. Analysis and Results

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4.1.1.

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4.1.2

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4.2

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Chapter 5. Discussion and Conclusion

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5.1

Discussion

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5.2

Conclusion

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5.3

Managerial Relevance

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5.4

Scientific Implications

5.4

Limitations and Scope for Future Research

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References

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Appendices

Bibliography

LIST OF TABLES

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LIST OF FIGURES

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Abstract

Background: – Summarize the latest knowledge on the issue by presenting a statistic, or a trend and explain why your topic is important to study. What is need or rationale of choosing your field of research?

Purpose:-What did you want to find out? Present here the statements of your research questions. What was your research focused on?

Research Design and Methodology: – How did you go about finding it? Which research design you chose and why? What methodology did you use to address the research problem? Provide crisp description of how and when outcomes were measured, including any questionnaire/instruments used, when and how the data was collected, and which statistical methods were used to analyze data and why.

Findings: – What did you find? What data or outcomes did you observe? What trend or relation between the variables you established.

Practical Implications: – Briefly describe how your research findings can be used for policy, practice, or theory building in your field. Nevertheless, you must state how your findings can be important for managers and other practitioners in the industry/corporate world.

Originality/Value – What new or novel knowledge your research contributed to the scholarly or practitioner world.

Limitations and Future Research Directions: -What were the main limitations or constraints that affected your study? Whether these limitations are expected or not, and whether they are due to research design or due to methodology or of any stage of your study. Example; there can be issues with sample size and selection, time constraints or limitations can arise due to absence of previous studies in the field etc.

Further, you must state here the scope for future research in your studied topic. Based on the results of your study, you may state the impact that your research outcome might have on future research or policy decision or the relevant field of interest of your study. Help the researchers by describing how your findings can be further advanced.

INTRODUCTION

1.1. General Introduction

The concept of corporate social responsibility (CSR) has attracted significant interest from researchers in the past few decades. More and more firms are acknowledging that they should desist from privatizing their gains and socializing their losses. Firms can communicate their CSR practices through the annual reports or through individual CSR reports. However, communicating CSR practices through individual CSR is usually perceived as superior to other means of providing CSR disclosure. This is highlighted by the fact that more than 80% of companies across the globe report on sustainability. This shows that CSR has become widely adopted as a global norm. Therefore, firms that fail to acknowledge this fact risk misaligning their activities with the accepted global practices, which may have a negative impact on the firms (KPMG, 2020). According to KPMG (2020), among 96% of the world’s largest 250 companies have annual sustainability reports with most of these companies having senior CSR managers (KPMG, 2020). Despite the increased focus on CSR, a significant number of studies on the impact of CSR on firm performance have been misleading or inclusive.

1.2. Research Questions

The research questions for this study are:

How do firms operating in Saudi Arabia manage CSR?

What CSR activities are undertaken by firms in Saudi Arabia?

How does CSR affect the performance of firms in Saudi Arabia?

Does CSR has a different impact on the four measures of performance used in the study (ROE, increase in number of customers, increase in number of branches, and increase in number of employees)?

1.3. Research Objectives

To determine the impact of CSR on enhancing firm performance.

Determine dimensions of CSR that have a positive impact on firm performance. These dimensions of CSR include CSR performance, which refers to the actual CSR activities of SMEs, and CSR perception, which refers to the perception of CSR activities of the SME among customers and members of the community

Determine how various dimensions of CSR have a positive (or negative) on firm performance.

1.4. Significance of the Study

It provides details to the reader on how the  study  will contribute such as what the  study  will contribute and who will benefit from it. It also includes an explanation of the work’s  importance  as well as its potential benefits. For example the above mentioned example, the significance can be written in the following way

The research makes important contributions to existing literature on the critical factors determining the success of social enterprises from both managerial and academic point of view:

1.4.1. Managerial Relevance

The findings of this research would highlight the importance of CSR in the success of SMEs in Saudi Arabia. This would enable managers formulate effective CSR programs that enable them form good relationships with interest groups. It would also enable managers know they can use leadership styles that put CSR at the center of the business operations.

1.4.2. Scientific Relevance

The findings of this research would help in highlighting the impact of CSR in the Middle East cultural context. Most research on the impact of CSR use the western cultural context to analyse CSR. Therefore, the findings of this study would go a provide insights on how CSR may be applied in different cultural contexts.

REVIEW OF LITERATURE

2.1. Corporate Social Responsibility

2.1.1. Definition of Corporate Social Responsibility

Over the past few years, the concept of corporate social responsibility has attracted attention from several scholars. Its importance has continued to grow and is expected to continue growing in the foreseeable future. Firms have an obligation beyond improving shareholder’s revenues. They have obligations to the members of its stakeholders, who comprise of people that are affected by the politics and practices of the firm. According to Edwards (2005), the ability of a company to achieve its organizational objectives is dependent on its ability to look at the ecological and social impact of their business processes and products. Therefore, CSR plays a strategic role in the competitiveness of a firm.

To determine the definition of CSR it is vital to consider how the concept has been defined by various scholars. McGuire (1963) is one of the first scholars to offer a concise definition of the concept of CSR. He claimed that organizations have a responsibility towards the society that supersedes their economic and legal responsibilities. According to Davis (1973), CSR starts where the legal requirements of the organization end. Therefore, CSR does not compromise of the legal requirements of an organization. Carrol (1999) provided a comprehensive definition of CSR. According to Carrol (1999), CSR refers to “the conduct of a business that is economically profitable, law abiding, ethical, and socially supportive” (p. 286). According to this definition, CSR comprises of four dimensions, which include economic, legal, ethical, and discretionary or philanthropic responsibilities. Carrol’s definition of CSR distinguishes the economic aspect of CSR from the non-economic aspect of CSR. Economic aspect focuses on what the firm does for itself whereas the noneconomic aspect focuses on what the firm does for the society.

CSR also refers to the business ethics of organizations in relation to business ethics. Therefore, it includes the obligations and commitments of the organization to the society. According to Daft (2003), CSR comprises of both the morality of the management and business ethics of an organization. Firms should not simply focus on fulfilling their legal obligations. They should also strive to meet the public needs. As such, CSR refers to the firm’s endeavor to strike a balance between the benefits it provides its stakeholders. These stakeholders include shareholders, employees, regulators, the community, and the society at large. As such, CSR refers to a set of integrated policies and procedures of the business activities and decision making processes are used to ensure the activities of firms have a positive impact on the society (Spitzeck, 2009).

Therefore, CSR may be defined as the persistent commitment of firms to act in an ethical manner to improve their economic performance, the welfare of their employees and their families, the local community, and the society at large. It is vital to note that CSR refer to the voluntary actions of a firm. The firms is not under any obligation to engage in activities. CSR enables organizations to achieve their economic goals while improving its benefits towards the community and the society at large (Luthans & Doh, 2018).

2.1.2. Measuring of Corporate Social Responsibility

There is a popular notion that CSR has a positive impact on the firms and stakeholders. However, measurement of CSR is a very difficult undertaking. There is no specific method of conceptualizing CSR. Carrol (1999) provides an effective method of assessing CSR based on the four dimensions of CSR. These include legal, economic, ethical, and discretionary.

The Kinder, Lydenberg, and Domini (KLD) database is also one of the most commonly used methods of measuring CSR. According to the KLD database, CSR of a firm may be evaluated based on nine main attributes. These include the environment, military contracting, employee relations, product safety, community involvement, quality programs, diversity, nuclear power, and excessive compensation of executives.

According to Obeidat (2016), CSR may be measured using the internal and external social activities of a firm. Internal social activities refer to the CSR activities that are related to the work environment of employees. It may be perceived as the activities of the firm that can be undertaken inside the firm to improve the welfare of the employees. According to Longo, Mura, and Bonoli (2005), the internal activities of a firm may be categorized into four “value classes.” These include the development of the skills and abilities of workers, social justice, employee welfare and satisfaction, and quality of work.

The external CSR activities comprise of the discretionary and community involvement of the firm. It is an indication of the extent to which the firm plays a major role in its environment and how it treats its primary and secondary stakeholders.

2.2. Firm Performance

2.2.1. Definition of Firm Performance

According to Armstrong (2006), firm performance may is a continuous and flexible process through which managers and subordinates work within a certain plan dictates how they can act as partners to facilitate the achievement of a set of goals. Firm performance may be perceived from both a process and an economic perception. As a process, firm performance refers to the process of transforming inputs into useful outputs to meet certain objectives of the firm. On the other hand, from an economic perspective, firm performance may be perceived the effective link between costs and output of the firm that is vital in the achievement of certain objectives.

Firm performance refers to the ability of a firm to meet its goals while achieving the goals of its stakeholders. Firm performance may also be defined as the degree to which firms are effectively managed and how they produce and deliver value to its stakeholders. According to Ramezan, Sanjaghi, and Kalateh (2013), firm performance refers to the ability to gather and manage human, financial, and physical assets effectively to achieve a set of desired goals.

2.2.2. Measurement of Firm Performance

Evaluating firm performance may be undertaken using both financial and non-financial indicators. Financial indicators would measure the change in the financial situation of the firm or the financial objectives that have been achieved by people within the firm. Financial performance is an indication of the financial situation of the firm from various aspects. As such, some of the indicators of firm performance include return on assets (ROA), return on equity (ROE), return on sales (ROS), return on investments (ROI), general firm profitability, and size of the firm. ROA is one of the most important financial indicators of the financial performance of a firm.

The assessment of firm performance may be influenced by several factors. These include the change in the laws and regulations affecting the firm, change in the economic circumstances, or change in the cost of resources production costs of the firm. One of the major limitations of the use of financial measures in assessing the firm performance is that financial measures have a backward focus. In addition, financial measures do not provide an accurate depiction of the value creation activities of the firm.

Non-financial indicators of firm performance help in overcoming some of the shortcomings of the financial measures of firm performance. Some of these shortcomings include focus on short-term objectives, lack of a strategic perspective of the performance of the firm, and inability to effectively capture data that may be used to improve the performance of the firm.

Therefore, most researchers use non-financial indicators to assess firm performance. Non-financial performance indicators are preferred by most researchers since they focus on the strategic success of the firm. The non-financial performance indicators usually focus on the needs of all stakeholders without giving more preference on a specific stakeholder group. In addition, the subjectivity of the non-financial indicators makes it difficult for other parties to manipulate or control them.

The balance score card (BSC) is one of the most popular method of assessing the firm performance. This method was developed by Kaplan and Norton (1992). The BSC provide a financial measure of a firm and also includes non-financial aspects of firm performance. BSC usually considers the vision, mission, and strategies of the firm (Chen, Patten, and Roberts, 2011). BSC comprises of three dimensions. These include the internal process, customers, and learning and growth. BSC measures the factors that facilitate the achievement of the long-term success of the firm such as employee satisfaction, customer satisfaction, innovation, research and development, and the efficiency of the internal processes. It also assesses the improvement of the performance of the firm through the intangible factors previously mentioned (Obeidat, Tarhini, & Aqqad, 2017).

Firm performance can also be measured through the method proposed by Delaney and Huselid (1996). These method comprises of seven dimensions. They include product and/or service innovation, product and/or service quality, employee attraction, employee retention, customer satisfaction, employee relation, and management and employee relations. This method provides a comprehensive view of firm performance since it focuses on all levels of the organization.

Ariff, et al. (2014) also proposed another method of measuring the nonofficial performance of a firm. This method comprises of several indicators, which include human resource management, talent management, good corporate governance, reputation, international ranking, academic performance, and influence of risks on the operations of the firm.

Firm performance can also be measured from the nonfinancial aspects of using four dimensions as proposed by Mitchell (2002). These include the firm’s response to the needs of the stakeholders, effectiveness, efficiency, and financial feasibility of the firm. Firm performance can also be evaluated using six dimensions, which include knowledge management, organizational communication, strategic performance, stakeholder’s satisfaction, teamwork, and company growth. Knowledge management informational systems services, financial performance, and social and innovative performance may also be used to evaluate firm performance (Yassien & Mufleh, 2017).

2.3. CSR and Financial Performance

Two major schools of thought help in explaining relationship between CSR and firm performance. The first school of thought comprises of the opponents of CSR. Friedman (1970) and other neoclassical economists ascribe to this school of thought. This school of thought claims that CSR has a negative impact on firm performance. It claims that profit maximization is the main aim of the existence of a firm. Therefore, CSR makes firms incur an additional costs, which reduces its profitability. They claim they firms should leave CSR to the government.

The second school of thought comprises of supporters of CSR. Freeman (1984) is one of the pioneers of this school of thought. This school of thought claims that CSR has a positive impact on firm performance. It claims that since businesses exist within the society, they should be perceived as social institutions. Therefore, they have an obligation of giving back to the community.

For the businesses of enterprises to be sustainable, they should meet the needs of the key stakeholders. The quality of the relationship between firms and their stakeholders plays a major role in the success of the business. It helps in differentiating the firm from its rivals, which provides it with a competitive advantage. CSR and financial performance are closely linked to each other. CSR influences firm performance whereas firm performance influences CSR. This implies that launching CSR initiatives helps in improving firm performance. On the other hand, a firm should have good financial performance to have funds to engage in various CSR initiative.

A study by Martınez-Ferrero and Frias-Aceituno (2015) helped in showing the relationship between firm performance and CSR. The study analyzed the relationship between firm performance and CSR and the direction of causality between the two using a sample of that comprised of international non-financial listed companies. The findings of the research study showed that there is a positive bidirectional causality relationship between CSR and financial performance of firms.

Even though some empirical research on the relationship between firm performance and CSR have had mixed results, most of studies have showed that CSR has a positive impact on firm performance. This justifies the strategic importance of CSR in business operations. The

A study undertaken by Choongo (2017) showed that there CSR has a positive impact on firm performance. Torugsa, O’Donohue, and Hecker (2012) claim that firms have improve their financial performance by proactively seeking to advance their CSR initiatives.

According to Longo, Mura, and Bonoli (2005), CSR plays a major role towards improving business growth since it facilitates the improvement of business image, which leads to an improvement in customer loyalty in addition to enhancing the relationship between the firm and its employees and the community at large. CSR also have a positive impact on firm performance since it may help in attracting and retaining highly skilled employees (Greening & Turban, 2000).

As highlighted by Roblek et al. (2014), firms that use the sustainability concept and apply new innovative concepts such as “social innovation” and “ecoinnovation” are bound to generate better value and social development especially in the current business environment, where knowledge economy and low-carbon emissions are some of the main factors that improve firm reputation and competitiveness.

Firms can improve their efficiency and effectiveness in the society by improving their CSR strategies and developing unique nonfinancial reporting that provides a positive reflection of their business models. This would enable firms achieve greater levels of sustainability, which is one of the most important aspects of the modern business operations (Dogru, 2020).

According to the stakeholder theory, higher level of CSR would lead to a higher firm performance. The stakeholder theory claims that the achievement of an organization is dependent on the ability of the business to take care of its relationship with its stakeholders. This implies that firms should strive to improve and maintain good relations with its interest groups. The implementation of CSR is one of the main methods through which firms can build and maintain good relationship with its interest groups. As such, the costs involved in the implementation of the CSR initiatives would indirectly improve the financial performance of the firm as it would improve relationship with interest groups.

The resource-based theory also shows that there is a positive relationship between CSR and firm performance. The costs that firms incur in implementing CSR initiatives may enable the firm develop new internal resources such as organizational culture and knowhow. It may also provide external benefits through the improvement of the reputation of the firm (Branco & Rodrigues, 2006). Therefore, firms that engage in CSR improve their reputation, which ultimately helps in improving their performance over time.

According to Cheng, Ioannou, and Serafeim (2014), superior CSR is an indication of the commitment of the firm to and engagement with its stakeholders based on mutual trust. Ethical solutions to commitment issues are more efficient than mechanisms that firms implement to tackle opportunism. Therefore, firms that form their relationships with stakeholders based on mutual trust and cooperation are bound to have less agency costs, transaction costs, and other costs related to team production. These agency costs include monitoring costs, warranty costs, bonding costs, and residual losses. This shows that superior engagement with stakeholders reduces the likelihood of opportunistic behavior. This leads to an improvement in profit-generation capabilities of the firm.

In addition, firms with superior CSR performance are more likely to disclose their CSR strategies through their sustainability reports. In addition, the sustainability reports are more likely to have assurances provided by third parties. Therefore, the CSR reports improve the transparency of the firms in relation to the social and environmental impact of the firms and the governance structures of the firms. Increased availability of credible data on the CSR strategies of the firms and financial disclosures reduces information symmetry, which reduces the capital constraints of the firms. This increases the firm’s access to capital, which improves its financial performance (Cheng, Ioannou, & Serafeim, 2014). As such, it is pertinent to claim that CSR has a positive impact on firm performance.

2.4. CSR and SMEs

Various requirements, such as awareness of stakeholders, government rules and regulations, and volatility of the business environment, are needed to implement CSR initiatives. These requirements play a major role in determining the centrality of CSR initiatives on the business operations. Both multinationals and small medium enterprises (SMEs) can implement these strategies (Khurshid et al., 2016). Implementing CSR initiatives not only helps in improving the welfare of the public and the society at large but also helps in improving the ethical image of SMEs.

All organizations, whether small or large, have an impact on the society and the environment through the operations of the organizations, products or services, and their interactions with the stakeholders. As such, CSR is vital in all firms whether they are small SMEs or multinational corporations. Most literature on CSR focuses on large firms with only a few studies focusing on CSR in small firms.

The focus of most studies on CSR in large organizations, assumes the understanding of CSR in the context of large organizations may is also applicable to small firms. However, according to Jenkins (2004), CSR as understood in large organizations cannot be simply “copied and pasted” in small firms. This is because large firms and small firms are structurally different. In addition, the management styles implemented in large firms is different from the one implemented in small firms. This may affect the content, extent, and nature of CSR activities that large firms and small firms implement.

One of the major differences between large firms and small firms is that management and ownership cannot be separated in small firms. Therefore, the control of small firms is maintained by the owner. This enables the owner to make personal choices on the allocation of resources. Therefore, the implementation of CSR activities in SMEs is mainly based on the personal attitudes of the owner or manager.

Another difference between small firms such as SMEs and large firms is that certain barriers to CSR are inherent in the operations of SMEs. For instance, SMEs have time and financial resources constraints, which limit their ability to implement CSR initiatives. Most SMEs have a short-term focus, which may imply that certain long-term investments such as CSR projects do not have an urgent concern. However, it is vital to note that the fact that SMEs are smaller and flatter implies that they are better placed than large firms to implement CSR initiatives that take advantage of the opportunities provided by CSR to maximize their business benefits through making the most of the opportunities (Perez-Sanchez, 2003). It is also vital to note that the issues that signi