The Impact of Domestic CSR on the Internationalisation of Emerging-Market Multinational Enterprises: Evidence from India.

Date01 Diciembre 2021
AuthorShirodkar, Vikrant

1 Introduction

The internationalisation of firms from emerging economies is gaining widespread academic attention, as these new types of multinationals are increasingly engaging in foreign direct investment (FDI) in both developed and developing countries (Awate et al., 2012; Buckley, 2018; Buckley et al., 2014, 2015; Friel, 2021; Hernandez & Guillen, 2018; Pattnaik et al., 2021). Emerging-market multinational enterprises (EMNEs) are catching up with their developed country counterparts by upgrading their technological capabilities via foreign acquisitions and alliances. However, they are also known to face additional barriers to internationalisation due to their weaker home institutions and due to their relative newness to international business, which consequently results in a negative perception of EMNEs among stakeholders in host countries (Marano et al., 2017).

In this context, we suggest that less is known about the extent to which EMNEs' domestic corporate social responsibility (CSR) (i.e., CSR conducted in their home country) impacts their internationalisation prospects. Understanding this connection can be important for a variety of reasons. First, CSR activities are becoming important not only for gaining legitimacy but also for contributing to the government's developmental initiatives within emerging economies (Caussat et al., 2019; Hadjikhani et al., 2019; Hah & Freeman, 2014; Zheng et al., 2015). The predominant notion of CSR among companies operating in emerging economies is that philanthropic activities generate a 'social licence to operate' and reduce the risk of being accused of unethical or irresponsible behaviour (Krichewsky, 2019; Rajak, 2011). The benefits accrued through CSR can become important firm-specific advantages for EMNEs in regard to improving their internationalisation prospects (Ramamurti, 2012). Specifically, we expect that the legitimisation and reputational advantages engendered through CSR can potentially reduce EMNEs' 'liabilities of origin' during internationalisation (Attig et al., 2016; Marano & Tashman, 2012; Marano et al., 2017).

Second, despite the heterogeneity in the institutional characteristics of various emerging economies, governments in many emerging economies have been tightening regulations regarding CSR. Within developed countries, CSR reporting laws such as those in France and Denmark, the Swedish sustainability legislation, the Scottish Sustainable Procurement Action Plan and the Canadian Green Procurement Policy are well-known examples of CSR and sustainability-related regulations. Among the emerging economies, Mauritius was the first to implement mandatory CSR legislation in 2009, followed by India, who, in 2013, made it mandatory for firms to spend funds on CSR. In India, which forms the context of our study, CSR legislation requires medium-to-large companies to spend 2% of their average net profits gained over the previous three years on socioeconomic development activities, which fall under a broad set of themes specified under schedule VII of the Companies Act of 2013. While such regulations encourage firms to actively contribute to sustainable development, they also increase operational costs for firms. EMNEs, in particular, are technologically resource-constrained compared to their counterparts from developed countries (Ramamurti, 2012). Therefore, it is important to examine whether EMNEs indeed benefit from their domestic CSR insofar as their effects on internationalisation are concerned. Based on this, our key research question is as follows: To what extent does domestic CSR impact the internationalisation of EMNEs?

To answer this question, we rely on a sample of 686 firms from India, which includes a wide range of large and medium-sized firms operating in a variety of industries. We also test the moderating effects of EMNEs' government ownership and the nature of the target market on the relationship between EMNEs' domestic CSR and their scope of internationalisation. Government (or state) ownership forms an important feature of many EMNEs and is closely associated with their internationalisation prospects, as per past studies (Cui & Jiang, 2012; Zhou, 2018). Government ownership engenders EMNEs with 'ascribed' nonmarket advantages that can be used to facilitate internationalisation (Deng et al., 2018). Similarly, the target market of the EMNE can play an important moderating role in the effect of EMNEs' domestic CSR on their scope of internationalisation. This is because the liabilities of origin that EMNEs face during internationalisation are likely to be more pronounced when EMNEs invest in developed countries or in institutionally stronger emerging economies (Marano et al, 2017). As such, EMNEs' domestic CSR can be expected to create greater legitimisation advantages when they invest in such host countries.

We contribute to prior research on EMNEs' internationalisation in a number of ways. First, we explain the association between domestic CSR and internationalisation by focusing on EMNEs. EMNEs are distinctively known to engage in internationalisation to (1) escape home-institutional 'constraints' and (2) leverage their home-based nonmarket 'advantages' to facilitate internationalisation (Cuervo-Cazurra, 2008; Marano et al., 2017; Nuruzzaman et al., 2020). Prior studies have examined the role of EMNEs' 'domestic' nonmarket advantages on their internationalisation scope; however, most of these studies have focused on the role of EMNEs' political connections (Deng et al., 2018; Du & Luo, 2016). We argue that domestic CSR provides EMNEs with similar nonmarket advantages to improve their internationalisation prospects and that EMNEs' ownership structures (private vs. government owned) and the target market where they seek to internationalise moderate this relationship. Second, we contribute to the recent set of studies, which suggest that EMNEs' CSR can reduce their liabilities of origin when investing overseas (Marano et al., 2017; Tashman et al., 2019). Prior studies in this context have focused on EMNEs' CSR communication, and we contribute by examining CSR expenditures, which potentially provide a more realistic account of CSR. Third, we focus on EMNEs' internationalisation based on their ability to create a foreign subsidiary versus a domestic subsidiary. Prior research on EMNEs' internationalisation has largely focused on their exporting behaviour. However, this trend has increasingly changed in recent years, and EMNEs are committing more to international markets through foreign direct investment (EDI). As such, we contribute to this new range of studies that focus on EMNEs' outward EDI (Witt & Lewin, 2007; Xia et al., 2014; Yan et al., 2018). Finally, we make an important contribution by focusing on the context of India, where regulations concerning CSR have recently developed in a distinctive way (by making CSR spending mandatory); however, thus far, few studies have focused on this issue (Aswani et al., 2020; Subramaniam et al., 2017). Past research on the internationalisation of EMNEs has largely focused on China. By focusing on India, the second-largest emerging economy, we also try to fill the focus gap by looking at a different yet relevant context.

In the following sections, we first provide a background to theory, followed by developing our hypotheses on the relationship between domestic CSR and internationalisation and on the moderating effects of government ownership and the target market of internationalisation. This is followed by the description of our methods.

We then present our results from our empirical analysis, which is finally followed by discussion and conclusions.

2 Theoretical Background and Hypotheses

Most prior research on the firm-specific advantages (FSAs) driving the internationalisation of firms has focused on firms' possession of 'market-based' assets, such as innovative products, superior management capabilities and managers' international experience, which enable them to seek rents from a variety of international markets (Buckley & Casson, 1998; Dunning, 2000; Erramilli et al., 1997; Kotha et al., 2001; Rugman & Verbeke, 1992; Scott-Kennel & Giroud, 2015). However, recent research on the factors motivating EMNEs' internationalisation suggests that the development of such market-based FSAs does not fully explain their internationalisation behaviour. EMNEs' 'nonmarket' advantages generated through their embedding within both home- and host-country institutions significantly complement their market-based FSAs in internationalisation (Bhaumik et al., 2016; Wei & Nguyen, 2017).

Institutions comprise both formal (regulatory) and informal (normative, cultural) forces that define the 'rules of the game' (North, 1996). In most emerging economies, formal institutions are weak and are characterised by institutional 'voids', which are manifested through, for instance, information asymmetries, ambiguities in regulations, and ineffective control-enforcing mechanisms (Khanna & Palepu, 2000). Institutional weaknesses can also be manifested via lower levels of political stability, corruption control, voice and accountability, governmental effectiveness, and the enforcement of the rule of law (Kaufmann et al., 2010). Weak formal institutions increase the level of uncertainties for firms and compel them to rely on informal relationships (with suppliers, customers, and other firms), connections (to the government and to other regulatory officials) and other types of affiliations (e.g., with influential business groups) to safeguard access to critical resources (Khanna & Palepu, 2000).

We build on institutional theory and utilise the existing literature on EMNEs' internationalisation to develop our hypotheses on the relationship between EMNEs' domestic CSR and their internationalisation scope. When MNEs enter foreign markets, their FSAs developed at home form important sources of their competitive advantages...

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