Competition Laws, Norms and Corporate Social Responsibility

Investors and companies increasingly focus on corporate social responsibility (CSR). For example, Larry Fink, the CEO of BlackRock, the world’s largest asset manager, argued in 2020 that, “… a company cannot achieve long-term profits without embracing … the needs of a broad range of stakeholders,” such as customers, employees, suppliers, and the communities where the company operates. In 2019, the Business Roundtable, a group of U.S. CEOs, committed to investing in their employees, dealing fairly and ethically with suppliers, and protecting the environment. Moreover, about 1500 international companies with almost $90 trillion of assets were signatories to the United Nations-supported Principles for Responsible Investing. While many companies express support for CSR, CSR activities differ markedly across firms and countries, raising questions about what determines CSR.

In this paper, we focus on one potential determinant of CSR activities—product market competition—and evaluate differing views about the impact of competition on CSR. One set of views holds that competition spurs CSR. For example, the stakeholder value maximization view argues that intensifying competition induces firms to (1) strengthen relationships with customers, workers, suppliers, and local communities to repel other firms that are increasingly trying to compete for those stakeholders and (2) CSR strengthens those relationships by signaling the firm’s commitment to honor implicit agreements to ensure worker well-being, provide safe products to customers, fulfill informal agreements with suppliers, and protect the environment. A related view, the product differentiation view, also stresses the positive effects of competition on CSR. It stresses that an intensification of competition spurs firms to differentiate their products to obtain greater pricing power and cushion the adverse ramifications of competition on profits. Boosting CSR is one strategy for accomplishing that differentiation.

A second set of views suggests that intensifying competition will reduce CSR. If firms face financing constraints, competition can compel firms to focus more on short-term survival and therefore forgo expenditures that payoff in the long-run. For example, investing in workplace safety could boost loyalty and long-run profits, but the large upfront costs necessary to improve safety combined with difficulties in borrowing to make those investments could prevent firms from making those improvements. Competition can also trigger unethical behavior. For example, an increase in competition could induce some firms to abuse workers or pollute to reduce costs. Other firms would then face pressures to follow or be forced out of business. From this perspective, competition encourages firms to focus less on ethical considerations—and associated CSR activities. Furthermore, some may view CSR as inefficient, wasteful use of corporate resources that reduces shareholder value. Consequently, to the extent that competition reduces inefficiencies, it would reduce CSR.

Competition and CSR

To distinguish among these views, we examine how competition laws shape CSR. By competition laws, we refer to the rules regulating competition among firms, such as those concerning mergers and acquisitions, anticompetitive agreements, and the ability of firms to exploit dominant positions. To measure these laws, we use the new Competition Law Index by Professors Anu Bradford and Adam Chilton, where higher values indicate laws that more stringently foster competition. To measure each firm’s CSR, we use data from Thomson Reuters, which compiles information from annual reports, stock exchange filings, the news media, etc. In total, we have data on about 1800 firms across 47 countries over the 2002-2015 period.

Consistent with both the stakeholder and product differentiation views, we find that intensifying the stringency of competition laws is associated with an increase in CSR. The estimates indicate that a one standard deviation increase in the Competition Law Index is associated with one-quarter of a standard deviation increase in CSR activity. This is large considering that we are focusing on only one possible determinant of cross-firm differences in CSR. The results are robust to controlling for other factors determinants. For example, we control for all time-invariant features of firms, industries, and countries by including firm effects, all time-varying differences in industries by including industry-year effects, and many national characteristics that evolve over time, such as economic and financial development, institutional quality, political stability, and the degree of government regulation.

Competition, Norms, and CSR

To better understand the CSR-competition nexus, we next examine a corollary of the stakeholder view. The stakeholder view suggests that by investing in the well-being of workers, customers, suppliers, and local communities, CSR builds loyalty and trust with those stakeholders. Thus, when an intensification of competition induces firms to compete for resources and markets, they respond by investing more in CSR. A natural corollary is that competition will have a bigger effect on CSR when firms expect CSR activities to generate greater loyalty and trust. To evaluate this corollary, we use a proxy measure of the likely impact of CSR on stakeholders. We use data from the World Value Survey on the degree to which individuals in a country prioritize the types of activities associated with CSR (e.g., protecting the environment, fostering worker and human rights) and construct a Social Norms index. The stakeholder view suggests that the CSR-enhancing effects of competition will be stronger in societies with stronger preferences for such norms.

Consistent with the stakeholder view, we find that the CSR-boosting effects of more stringent competition laws are greater in societies with higher values of the Social Norms index. Indeed, the impact of the Competition Law Index on CSR is about twice as large among firms in countries with above the median levels of Social Norms as among the full sample of firms and countries.

More evidence

We next evaluate two additional mechanisms underlying the stakeholder view. First, this view stresses that more stringent competition laws combat monopolistic power and thereby boost CSR. If this is the mechanisms linking competition laws and CSR, then we should observe a bigger effect of competition law stringency on CSR among firms with greater pre-existing market power. This is what we find: firms with greater pre-existing market power boost CSR more following the enactment of stronger competition laws. Indeed, the CSR-boosting effects of competition laws are more than twice as large among firms with above the medium levels of pre-existing market power.

Second, the stakeholder view highlight the importance of financing constraints in shaping the responsiveness of CSR to competition. Specifically, if intensifying competition increases the expected benefits from investing in CSR and there are sizeable upfront costs to making CSR investments, then financing constraints will shape the ability of firms to respond to an intensification of competition law stringency. Again, we find evidence consistent with this prediction: the impact of competition laws on CSR is smaller among more financially constrained firms.

Taken together, our results are consistent with the stakeholder value maximization view that (1) intensifying competition induces firms to invest in strengthening bonds with non-shareholder stakeholders (e.g., customers, workers, and suppliers), (2) this effect is stronger among firms in countries with higher values of the Social Norms Index, and (3) the CSR-boosting effects are stronger among firms with greater pre-existing market power and weaker financial constraints.

The complete paper is available for download here.