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

UNIVERSITY OF ECONOMICS ERASMUS UNVERSITY ROTTERDAM HO CHI MINH CITY INSTITUTE OF SOCIAL STUDIES VIETNAM – THE NETHERLANDS PROGRAMME FOR M.A IN DEVELOPMENT ECONOMICS THE IMPACT OF COR

UNIVERSITY OF ECONOMICS ERASMUS UNVERSITY ROTTERDAM

HO CHI MINH CITY INSTITUTE OF SOCIAL STUDIES

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 INSTITUTE OF SOCIAL STUDIES

VIETNAM 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

Vietnam-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

ABBREVIATIONS

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

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

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

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

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,

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 CSR-Performance 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

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

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?

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

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

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,

“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)

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 extra-financial 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

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

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

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

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

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 firm-level, Russo and Fouts (1997) also indicate that high environmental performance would lead

to better financial performance though competitive advantage

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

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

Figure 2.1: The Pyramid Model of CSR

Source: Carroll (1991)

In summary, there are various points of view about the effects of CSR on firm’s performance although most of recent theories tend to show positive impacts of CSR, especially in the long run However, it is assured from theoretical literature that there would

be a causal nexus between CSR and firm’s financial performance Social Performance may

be a causal determinant of firm’s performance in some ways Table 2.1 summarizes all of

theories about CSR discussed in this study:

Table 2.1: Theories about CSR

Negative

Jensen and

Meckling (1976) Agency Theory

CSR is considered as a tool for managers

to exploit firm's resources; there is possible conflicts of interest between managers and shareholders

stakeholders who could provide strong support for firms

Positive

Wernerfelt

(1984)

Resource-based view (RBV)

A corporate includes different resources;

social responsibility would create competitive advantage and thus increase firm’s performance

Positive

Waddock and

Graves (1997)

Slack resources hypothesis

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

Positive

Donaldson and

Davis (1991)

Stewardship Theory

Moral managers tend to lead firm to attend CSR activities regardless of the effects of CSR on firm performance

CSR may include social activities that benefits firm’s stakeholders in term of maximizing profits for shareholders

Positive

2.3.2 Empirical review

The impact of CSR on firm’s performance has been discussed in a large number of empirical studies However, the results from those studies have been very mixed and do not reach to a consensus about whether and how CSR engagement would lead to better performance (Orlitzky et al., 2003; Luo et al., 2015) For instance, Margolis and Walsh

(2003) proposed the review of 109 empirical studies that examine the relationship between Corporate Social Responsibility and firm’s performance between the years 1972 and 2002 Among those studies, there are54 studies that indicate a positive relationship; 28 studies that provide the insignificant correlation; only 7 studies that suggests a negative relationship; and the remaining part of 20 papers has showed mixed results In another research, Margolis et al (2007) provides a more comprehensive analysis with 167 papers within a35-years period The result from this study suggests the positive relationship but the impact of CSR on firm performance is relatively small Furthermore, the authors also recommend that theoretical and empirical studies in the future are expected to provide more knowledge about the reasons why firms adopt CSR, the actions that firms tends to employ and especially the mechanisms that link CSR to firm’s performance (see Garcia Castro et al., 2010)

In fact, there is a large number of papers that present the positive nexus between CSR and firm performance (Johnson & Greening, 1999; Waddock & Graves, 1997; Lo et al., 2012), while the negative relationship or no correlation could be found in some other papers (Bromiley & Markus, 1989; Barla, 2007) The debate among economic researchers on this relationship continues with no final conclusion There are many reasons that lead to the conflicting results from previous studies One plausible reason could be due the unavailability

of reliable measurements of social performance or the omission of important variables that may moderate this relationship (Reverte et al., 2015; Surroca et al., 2010; García-Castro et al., 2010) For example, McWilliams and Siegel (2000) confirm that the omissions of innovation-related variable could leads to model misspecifications and unreliable results In fact, many papers examine the mediating roles of innovation in the nexus between social performance and firm’s performance (Lockett et al., 2006) Another possible reason is that firm performance is fundamentally considered as short-term result whereas CSR mainly

focus on long-term and qualitative non-financial benefits (e.g firm’s reputation, customer satisfaction, brand image, etc.)

From another point of view, different motives in CSR adoption could be the reason that leads to various CSR-Performance nexus within a firm Bénabou and Tirole (2010) state that firms adopt CSR activities due to three main motives: altruism, strategic policy and green washing Baron (2001) argues that altruism motive or selflessness may decrease firm performance since firm participates in CSR to help and benefits other people Strategic motive means firm attend CSR in order to obtain more profits; therefore, this motive may enhance firm’s performance Finally, greenwashing is a way to promote firm’s brand image

by proving to customers that firm’s products are environmentally friendly but actually not In this sense, Frankental (2001) indicates that greenwashing allow firms to achieve better performance in some ways without considerably modifications in firm’ operation It can be seen that the motives of firms in CSR engagement may result in different outcomes in term of financial performance

Previous empirical papers on the impacts of CSR on performance could be categorized into two main types The first one of study attempts to observe the short-run financial impacts of CSR engagement by applying the event study methodology However, this kind of papers show different results For instance, the negative relationship could be found in the studies of Wright and Ferris (1997) while Posnikoff (1997) discovered a positive relationship Since these papers shows inconsistent results, there is no stable conclusion for the effects of CSR on short-run performance or abnormal returns (McWilliams & Siegel, 1997) The second type of this topic focus on the long-term effects of CSR on financial performance, which can be measured by firm's financial or accounting-based indicators These studies generally utilize quantitative approach and also produce diverse results For example, Cochran and Wood (1984) employ three accounting indexes to measure firm’s

performance: the ratio of returns to assets, the ratio of returns to sales and excess market value of firm They may also added the age of assets as a control variable, which is argued to

be able to solve the spurious positive relationships between CSP and firm’s performance The results suggest that the addition of this controlling variable may confirms the positive relationship between CSR and firm performance, but the impact of CSR is much weaker than the case of without asset age In addition, Waddock and Graves (1997) utilize firm-level data

of eight CSR aspects from the Standard and Poors 500 (S&P 500 - conducted by KLD) and apply weighting techniques to calculate a weighted CSP Index for each company The authors may also employs CSP Index as a main explanatory variable to perform the regression analysis with three indicators of dependent variable: ROA, ROE, and ROS Control variables such as size, risk, and industry are also included in the analysis The results may also indicate the positive effects of CSP index on financial performance

In another research, Lin et at (2009) investigates 1000 Taiwanese firms that strongly commit CSR and R&D adoption from 2002 to 2004 At the beginning, the empirical results suggest CSR positively affects firm’s financial performance when the authors followed theoretical and empirical reviews However, when five financial indicators representing the long-term effects of CSR are considered, the paper only confirm that CSR may have positive impacts on long-term performance The short-term financial performance would not receive benefits from CSR adoption Additionally, Aupperle et al (1985) apply forced-choice instrument survey to examine the impacts of CSR on risk-adjusted returns on assets (ROA) in one-year and five-year to consider the short-term and long-term effects, respectively Additionally, the CSR measures would be the overall firm-level CSR Index From the results, the authors states that CSR has no statistically significant relationship with firm’s performance

One possible reason explaining why different research may produce various results for the relationship between CSR and firm performance could be endogeneity issues Margolis and Walsh (2003) states that numerous current studies attempt to observe the direct correlation between CSR and firm performance In this sense, the typical methodology to examine the relationship between CSR and firm’s performance is to regress firm’s performance (e.g Tobin’s Q, return on equity, etc.) on CSR measures However, this practice would leads to the omissions of several interacting factors in this relationships and the results would not be consistent and reliable (Wood, 2010) In fact, model misspecification or endogeneity could result in biased coefficients in the regression analysis One plausible issue

is that CSR may have correlation with firm’s characteristics that may also influence corporate performance In case of those unobserved characteristics have significant correlation with CSR and are omitted from regression analysis, the regression results of Ordinary Least Square (OLS) would be biased and unreliable Another issue resides in the direction of causal link between CSR and firm performance There is one controversial question among researchers: does engaging in CSR lead to superior performance or does firms with better performance have enough capability to participate in CSR activities? (Fodio et al., 2013) In practice, it is possible that many companies participate in CSR activities because they are performing well or expecting higher profitability To sum up, although there are controversial findings among theoretical and empirical papers on the CSR topics, the viewpoint of positive relationship seem to be dominant with the majority of empirical studies and strong theoretical arguments The next chapter will show the data collection as well as construct the empirical models as to examine the CSR-Performance nexus in the context of Vietnam

CHAPTER 3

RESEARCH METHODOLOGY

The research methodology of this thesis would be presented in this chapter First, it presents the data collection procedure and basic information of the studied data Secondly, this chapter proposes the conceptual framework, definitions of main variables as well as the empirical models to answer the research questions Finally, estimation methods and selection

for alternative regression models would be revealed at the end of this chapter

3.1 Data collection

There are two sets of data utilized in this study: the first is the Vietnam Enterprise Survey (VES) from 2010 and 2012 and the second one is the Vietnam Technology and Competitiveness Survey (TCS) during the same period This period is selected for analysis in the study due to some reasons First of all, with the concentration on technology, innovation and CSR practices, the TCS data is first released in 2010 as an additional survey for the VES dataset, which has been released every year since 2000 Especially, since 2010, the survey project of the United Nations Industrial Development Organization (UNIDO) “Helping Vietnamese SMEs Adapt & Adopt CSR for Improved Linkages with Global Supply Chains

in Sustainable” would be an important international event that propagate the CSR knowledge among Vietnamese firms Therefore, this study examine the CSR practices of Vietnamese firms from 2010, which is the time when CSR has become more popular in Vietnam However, the TCS data may be not available on the CIEM website from 2013, it is not possible to prolong the studied period This short research period of only three years may be a limitation of this study

3.1.1 Vietnam Enterprise Survey

The Vietnam Enterprise Survey (VES) is a comprehensive survey conducted by the General Statistics Office of Vietnam (GSO) every year to observe the firm-level data for almost all existing Vietnam firms and agencies With the first publication from 2000, Vietnam Enterprise Survey yearly covers all types of firms including foreign firms, state and non-state enterprises in 63 Vietnam provinces and cities In addition, the quality and number

of questions in the VES increases year by year; therefore, this survey would be a reliable source to investigate about firms and business sector in the context of Vietnam

This study employs information about firm characteristics such as firm performance, total assets, leverage … from VES 2011- 2013 to obtain firm-level data between the years

2010 and 2012 It should be noted that this study employs VES from 2011 to 2013; however, the surveys are conducted at previous calendar years, from 2010 to 2012 Therefore, the firm’s characteristics in this study should belong to the years 2010-2012 These firm-level information would be merged with Corporate Social Responsibility data from the Vietnam Technology and Competitiveness Survey (TCS) to form a complete panel dataset from 2010

Source: Vietnam Enterprise Survey

3.1.2 Vietnam Technology and Competitiveness Survey

Being a part of the Vietnam Enterprise Survey, the Vietnam Technology and Competitiveness Survey (TCS) mainly focus on firm’s innovation and technology TCS has been released every year since 2010 as a result from the cooperation of four organizations:

the Central Institute for Economic Management (CIEM), the General Statistics Office (GSO), the Development Economics Research Group (DERG) and the University of Copenhagen The difference between TCS and VES is that TCS specializes in questions related to technology, innovation and even Corporate Social Responsibility whereas VES proposes more general information about characteristics of enterprises It could be said that TCS is an additional survey focused on technology and innovation for the VES data since almost all the firms surveyed in TCS is a subset of the VES dataset Table 3.2 may show the structure of survey questionnaires in the TCS dataset This research attempts to exploit questions relating

to Corporate Social Responsibility practice in the TCS dataset These CSR questions are designed as YES/NO questions to establish dummy variables which are the base to calculate CSR Index The CSR Index would be the main explanatory variable for the regression models in this study

Table 3.2: Structure of Survey Questionnaires in TCS

Input and supplier relations

The details of major suppliers’ locations and the value of inputs obtained, differentiated across domestic and international suppliers

Output and customer relations

The details of major customers’ locations and value of outputs sold, differentiated between domestic and international customers

Innovation and technology

capacities

Diagnostic questions targeting the constraints affecting technology adaptation and level of the firms’ investment in technology transfers or research and development

quality) along which competition occurs

Corporate Social Responsibility

(CSR)

Questions relating to formal and informal commitment

to CSR practices

3.1.3 Data sample in this study

Since most of firms in TCS is generally considered as a subset for VES data, the TCS and VES are merged together to obtain the common observations for each year The results consist of 7707, 8636 and 7931 for the years 2010, 2011 and 2012, respectively Afterwards, the data for every single year is then appended to create a strongly balanced panel data from

2010 to 2012 After removing for all outliers, the final dataset includes 6435 Vietnamese enterprises with 19305 observations

To investigate the characteristics of firms in the dataset in the next sections, this research categories enterprises into different sizes and ownership structures Table 3.3 and 3.4 list categories of firm size and firm ownership, respectively

Table 3.3: Categories of firm size

Firm Size Number of employees No of obs

Table 3.4: Categories of ownership type

3.1.4 Corporate Social Responsibility Index (CSR Index)

To measure the overall aspects of Corporate Social Responsibility in Vietnam, the Vietnam Technology and Competitiveness Survey categorizes CSR activities into 3 different aspects: (i) labor support and environmental standards, (ii) management criteria and commitment, (iii) charity and community-based activities Each aspect includes indicators to capture CSR engagement by counting the number of CSR activities per firm The individual CSR Index generally represents the overall number of CSR activities per firm for one aspect

In other words, the individual CSR Index is aggregately computed by other CSR indicators in the survey Finally, the overall CSR Index of one particular firm is the summary of CSR Indexes of three CSR sub-components: labor, management, and community Base on the structure of TCS, the Total CSR Index could range from 0 to 16 Table 3.3 summarizes all indicators that constitute indexes for each three components of CSR in TCS survey

In detail, labor or “compliance” indicators are mandatory legal responsibilities that most firms have to comply with This includes firm’s obligatory provision for employees such as labor contracts, trade union committees, social and health insurance In contrast, management and community components may be classified as “beyond compliance” Managerial responsibilities consists of four criterion that may focus on firm’s strategy in CSR adoption by querying whether firm has its own CSR supervision mechanism, CSR policies, CSR committee and also CSR awards The last indicators of CSR would belong to the community-related type This type of CSR component suggests firm to attend social activities, which may not create benefits for firm and is not mandatorily required by law

Table 3.5: Corporate Social Responsibility (CSR) Indicators

1 All permanent employees have a written labor contract?

2 Enterprise has a local/plant level trade union?

3 Enterprise pays contribution to social insurance for

employees?

4 Enterprise pays contribution to health insurance for

employees?

1 Has committee/board overseeing CSR practices?

2 Has written down CSR policy?

3 Member of groups or has agreements that promote CSR

standards?

4 Has been awarded CSR type certifications or awards?

3.2 Variables and measurements

3.2.1 Dependent variables

This research investigate the relationship between the CSR activities and performance, so the dependent variable would be firm performance However, since the limitation of dataset, only financial performance are considered in the regression analysis of this research Orlitzky et al (2003) suggests previous papers tend to utilize both accounting and market-based indicators to examine the CSR-performance nexus These two types of measures propose different implications in economic theories (Hillman & Keim, 2001) For instance, accounting measures reveals the limitation that they may only consider the historical data of firm’s performance In addition, it is probable that the accounting-based indicators suffers from deviations caused by inconsistent procedures and mistiness manipulation from managers (Branch, 1983) These issues may not affect market-based indicators since market measures would be market performance, which express the investors’ evaluation of firm’s capability to generate profits Therefore, market-based measures are more reliable due to its independence to firm’s accounting procedures and managerial behaviors (McGuire et al., 1988) One of the most popular market measures is Tobin’s Q, which is calculated by taking the ratio of firm’s market value to book value (or the he replacement cost of the firm's assets) Oba (2009) argues that this indicator widely used because it does not require researchers to measure the rate of return

Since the data for market value of firms is not available in the VES and TCS survey, it

is not possible to compute market-based indicators through those surveys Hence, to estimate firm’s financial performance, this study utilizes two accounting measures: return on assets (ROA) and return on equity (ROE) ROA and ROE reflect the effectiveness of firm in the utilization of total assets and total equity ROA, calculated by dividing net income by total assets, reflects firm’s profit relative to its total assets ROA is argued to be a popular proxy

for firm performance as it is utilized by many empirical papers ROE, representing the amount of profit that firm can create with a specific amount of money invested by shareholders, can be measured by taking the ratio of net income over total equity These two indicators are widely applied in dominant studies such as: Cochran and Wood (1984); Waddock and Graves (1997); Wu and Shen (2013)

3.2.2 Explanatory variables

The main explanatory variable in this study is CSR Index, which is extracted from the Vietnam Technology and Competitiveness Survey The concept and measurement of CSR Index is widely utilized in numerous empirical studies (see e.g Wang, D.H.-M., et al., 2015;

Wu and Shen; 2013) This study may be the first to employ CSR-related information in the TCS to investigate the effects of CSR on firm performance In the TCS, CSR Index allows researchers to examine the level of CSR engagement of firms in the Vietnamese context Based on the structure of questionnaires in TCS survey, this CSR Index is integer number ranged from 0 to 16 Each firm may have its own CSR Index for every year in the sample period (2010-2012) In this case, firm with low CSR Index would attend less CSR activities than firm with higher CSR Index (see Table 3.5 in section 3.1.4 for more details about the components that constitute CSR Index in this study)

3.2.3 Control variables

Beside the effect of CSR on firm performance, there are components that may also influence firm performance according to previous theoretical and empirical literature These components would be considered as control variables and included to the empirical model with the purpose of controlling for heterogeneity at firm level Below are all the control variables employed in this study:

Firm size

Firm size is an important indicator which is believed to have significant relationship with firm performance Therefore, most of previous studies about firm performance employ firm size as a mandatory control variables (see e.g Surroca et al., 2010; Waddock and Graves, 1997) In addition, previous studies suggest the positive nexus between firm size and CSR measures (Waddock and Graves, 1997; McWilliams and Siegel, 2000) since it is argued that larger firms may participate in more CSR initiatives due to the pressures from its stakeholders (Boesso and Kumar, 2007) In addition, McWilliams and Siegel (2001) states that the average cost for CSR activities of larger firms may be proportionately smaller than for small firms This study measures firm size as the logarithm of total labor but not total assets to remove the impacts of different scales in various firms’ industries In addition, the logarithm is applied to reduce the effects of heteroscedasticity when the figures are large numbers

Firm age

In addition to firm size, firm age would be another common control variable for firm performance and a significant factor determining the CSR adoption behavior of firms Huergo and Jaumandreu (2004) argues that the older and more experienced firms may propose higher chances to engage in CSR activities In addition, Erhemjamts et al (2012) states that firm’s profit margin may reduce when firm gets older; therefore, old firms tend to engage more in CSR to improve their brand image and reputation Firm age or the number of years in operation of firm, is measured by subtract the year of conducting survey by the firm’s established year (Saeidi et al., 2015)

R&D Engagement

Research and development is expected to have positive relationship with firm’s performance In fact, O’Sullivan and Dooley (2008) argues that Research and Development