Effects of Government Regulations, Market Orientation and Ownership Structure on Corporate Social Responsibility in China: An Empirical Study
Previous research on corporate social responsibility mainly focuses on its nature and impact on business performance. This paper reports on a study that contributes to our understanding of the determinants of corporate social responsibility by focusing specifically on the role played by three strategically important variables, namely government regulation, ownership structure and market orientation. Results of a survey of 586 general managers of hotels in China suggest that the market orientation is the most significant predicator of corporate social responsibility followed by government regulation. In contrast, the ownership structure is found to have little effect. The implications of the findings for managers in China are discussed.
Recently, corporate social responsibility has received considerable attention from both academics and practitioners (See Smith 1996; Jones 1997; Griffin and Mahon, 1997; Waddock and Graves, 1997; Maignan and Ferrell, 2001; Maignan and Ralston 2002, Graafland et al, 2003; Durant 2006). This may be explained by the fact that although some studies postulated a negative relationship (e.g., Vance 1975) or no relationship (e.g., Aupperle et al, 1985) between the corporate social responsibility (CSR) and business performance, more recent studies provided the empirical evidence that there is a positive relationship between those two constructs (Abratt and Sacks 1988, Russo and Fouts 1997, Waddock and Graves 1997). In addition, the empirical evidence suggests that CSR could have other benefits to a firm. For instance, a recent survey (Smith, 1996) found that 88 percent of consumers in the study are more likely to buy from a company that is socially responsible, suggesting that CSR could be an effective marketing tool in the future. It is also reported that corporate social responsibility could have positive effects in helping companies to attract more talented and committed employees (Maignan et al 1999). In contrast to a growing body of research supporting the importance of corporate social responsibility, the issues relating to the determinants and development of a corporate social responsibility are still relatively under-researched. In addition, most of the research to date has been conducted in the developed countries, mainly in the US and Europe. Consequently, there is limited knowledge on how corporate social responsibility is perceived and implemented by companies in developing countries (Al-Khatib et al, 2004).
This paper aims to contribute to the above under-researched areas by considering the relative impacts of government regulations, ownership structure and company’s market orientation on the development of corporate social responsibility in China, the largest developing country in the world. The article begins with a brief review of the literature and then discusses the development of hypotheses. The following section explains the research method and data collection procedures. Thereafter, the results of the data analysis are presented and the final section provides a discussion and conclusion.
The Determinants of Corporate Social Responsibility
As a broad concept, corporate social responsibility has been given a variety of meanings. Along with the term of corporate social responsibility, other terms such as corporate social responsiveness, corporate social performance, corporate citizenship and stakeholder management have also been extensively used (see Magnan and Ferrei 1999, Carroll 1979; Griffin and Mahon 1997; Stanwick and Stanwick 1998; Turban and Greening 1996;Clarkson 1995; Waddock and Graves 1997). Despite of the existence of a variety of definitions, a review of literature suggests, however, that the classification framework made by Carroll (1979) has received a wide acceptance. According to Carroll (1979), corporate social responsibility is a multi-dimensional construct consisting of four types of responsibilities: economic, legal, ethical, and discretionary.
Economic responsibilities include the obligations for businesses to maintain economic wealth and to meet consumption needs. Legal responsibilities imply that businesses must fulfil their economic mission within the framework of legal requirements. Ethical responsibilities require that businesses abide by the moral rules defining appropriate behaviours in society. Discretionary responsibilities are tantamount to philanthropic responsibilities and reflect society’s desire to see businesses contributing to its development. Compared with the previous attempts to define corporate social responsibility, Carroll’s (1979) definition is a quite broad and inclusive concept, which may explain its universal appeal as it is not only used by researcher in the West, investigations in the developing countries also extensively used such a definition. As there is no previous research in China which provided the evidence to the contrary, given the breadth and increasing recognition of the definition by Carroll (1979), we use this definition in our study.
Past research on corporate social responsibility is mainly concerned with conceptualising as well as empirically assessing its impact on business performance. For example, a number of studies have been conducted in an attempt to link corporate social responsibility with financial performance (i.e., Aupperle et al, 1985, Abratt and Sacks 1988, Russo and Fouts 1997, Waddock and Graves 1997). In addition to corporate performance, recent studies also examined the impact of corporate social responsibility on other stakeholders of the companies. For example, Mohr et al (2001) looked the impact of CSR on the customer buying behaviour while Turban and Greening (1996) examined the impact of corporate social responsibility on the organisational attractiveness to employees.
Compared with the growing body of literature on the nature of and consequences of corporate social responsibilities, however, the issue of how to improve the companies’ level of CSR has received relatively limited attention. Two noticeable exceptions are Thomas and Simerly (1995) and Maignan et al (1999). Thomas and Simerly (1995) examined the relationship between the background of top managers evaluated in terms of internal versus external orientation and corporate citizenship, using a sample of 574 top executives in the US. A key finding of their research is that the internal orientation of top executive has negative impact on a company’s corporate social performance. Looking beyond the individual’s effects on CSR, Maignan et al (1999) investigates whether three specific dimensions of organisational culture affect corporate citizenship, including market orientation, humanistic orientation and competitive orientation.
This study continues along this line of inquiry. In addition to examining the influence of market orientation, we consider the effect of government regulations and ownership structure on a firm’s level of corporate social responsibility. Compared with market orientation, government regulations and ownership structure represent two external influences beyond management control. By considering their effects together with the impact of market orientation, it enables us to tell whether the company’s level of corporate social responsibility is more of an outcome of alignment with market forces or a result of actions from governments and corporate owners. As such, the study also contributes to the debate on the effectiveness of government regulations and corporate governance.
Government has long been viewed as among the most important change agent to influence the corporate behaviour by defining the rules of the game for companies (Garwin 1983; Weidenbaum 1999, Joseph 2002). However, due to a lack of research attention on the determinants of CSR, no empirical study has been found examining the effectiveness of various forms of government regulations in influencing companies’ CSR.
On the other hand, although the business self-regulation has been advocated (see e.g., Kolk and van Tulder 2002), it is argued that managers are largely unable to consider their firms’ impact on society or to subordinate profit-maximization to social objectives due to the bounded rationality (Maitland 1985). The recent corporate scandals surrounding the accounting firm Arthur Anderson and its client firm Enron in the US provide an example of the failure of the self-regulation by accounting professionals and highlight the potential pitfalls that might arise from the inadequacy of government regulations.
By setting up clear and strict guidelines and regulations on product quality, production processes and consumer protection, a government could send out clear signals to businesses of the necessity to rid of the practices that are in contravention with the regulations even though this may be an unsettling and even unpleasant process (Porter 1990). Therefore, we expect that:
H1: The higher the degree of government regulation pertaining to product quality and consumer protection is perceived by managers in a company, the higher degree of CSR a company will display.
One of the major arguments against corporate social responsibility is presented by Friedman (1970), who argued that the profit maximisation should be managers’ sole responsibility in order to fulfil their obligations to the company owners. The argument is based on the assumption that profit is the only objective the company owners will pursue, which is becoming increasingly debatable. For example, research showed that the institutional investors, being unable to move quickly in and out of funds without affecting share price, have strong interests not only in the financial performance of the firms in which they invest, but also in the strategies, activities and other stakeholders of those firms (Holderness and Sheehan 1988, Pound 1992). As the different owners may impose different expectations in terms of profits and corporate social performance, which in turn might influence the management’s perception as to the importance of engaging in corporate social responsibilities, we expect that
H2: There will be significant difference in the degree of corporate social responsibility among firms with different ownership structures.
Being market-oriented, a firm needs to constantly monitor and adapt to the changes in the environments in order to stay ahead of the competition (Kohli and Jaworski 1990, Narver and Slater 1990). Therefore, if we accept that corporate social responsibility is becoming more and more strategically important, as evidenced by the growing research interests and compelling findings in this area, arguably, the market-oriented companies will be among the first to appreciate it and act in accordance with the principles underlying the concept of corporate social responsibility. Research in the US found that market oriented cultures encourage firms to develop activities associated with CSR (Maignan et al 1999). As there is no empirical research outside the US contesting the opposite, we, being consistent with Maignan et al (1999), also hypothesise that:
H3: The more market-oriented a firm is, the higher degree of corporate social responsibility it will display.
As previous studies suggest that there are significant industry differences in terms of corporate social responsibility (Maignan et al, 1999), we concentrate on one industrial sector, the hotel sector, in China, to control for the industry effects. The choice was made also because of the existence of a diversified ownership structure in this sector, allowing us to examine the effects of ownership structure.
Operation and measurement
A five-stage iterative procedure, similar to the one used by Kohli et al (1993) was followed to refine the existing scales and to develop new scales, including expert review, focus group critique and two rounds of pre-testing. The complete scales are provided in the appendix. All the scales (except for ownership structure which is nominal, i.e., the respondents asked to identify their hotels’ ownership structure) are measured using 5 point Likert type scales, ranging from “not at all” to “very much”. The corporate social responsibility instrument employed in the study [Cronbach a: .88] was based on the one developed by Maignan et al (1999) while the scale for market orientation [Cronbach α: .88] was based on Kohli et al (1993). Modifications were made taking into accounts of both the specific sector characteristics and Chinese business culture. The degree of government regulations is measured by a five-item scale [Cronbach α: .74] measuring the managers’ perception of the adequacy and effectiveness of the current government regulations on product quality, production processes and protection of consumer interests.
The hotel sample consists of 600 hotels drawn randomly against the sampling frames of 2935 hotels with more than one star listed in the Directory of the Chinese Starrated Hotels (1999). A questionnaire together with a covering letter and a stamped return envelope was sent out by post to each of the companies. The mail package was addressed to the hotel general manager. A total of 14 hotels could not be reached because of incorrect addresses, resulting in an effective base of 586 hotels. With a cut-off date 4 weeks after the mailing, 143 completed questionnaires were received, resulting in the response rates of 24.4%. Following Armstrong and Overton (1977), non-response bias in the survey was assessed by comparing the early respondents’ (two weeks prior to the cut-off time) and late respondents’ value on a number of key variables including market orientation, corporate social responsibility and government regulations. None of the differences was found to be significant by t-tests, suggesting that the non-response was less likely to be a cause for concern in subsequent analysis.
Analysis and Results
H1 and H3 were tested by the regression analysis and the results are provided by Table I.
H2 was tested by the ANOVA test. Table II provides the F-test result together with a summary of the corporate social responsibility mean scores by ownerships structure.
Support for H1 in relation to the impact of government regulations is found (b=.26 p=. 000), suggesting that the managers’ perception of the adequacy and effectiveness of the government regulations has a direct impact on the level of corporate social responsibilities and hence demonstrating the positive role a government could play in fostering a corporate social responsibility. This finding has significant implications for governments in the developing countries which normally either lack adequate regulations to control such aspects of business as product quality and production processes and to protect the interests of consumers or simply do not have adequate resources to enforce those regulations. It appears important for those governments to recognise the need to strengthen those regulations in relation to such aspects of business as product quality, production process and consumer protection in order to raise the aspirations of the businesses.
Support for H3 in relation to the role of market orientation in developing a corporate social responsibility is also found (b=.48 p=.000). The finding is consistent with the empirical study in the US by Maignan et al (1999), suggesting that market-oriented companies in China also realise the importance of responding to the demands and expectations of their stakeholders by developing a higher level of corporate social responsibility.
Contrary to the hypothesis, corporate ownership did not seem to have a significant importance on a firm’s level of CSR. Alternatively, it is possible that the effect does exist but was not detected because of the potentially insufficient power of the statistical test as a result of the relatively small sample size. This may be a direct effect of the fact that ownership may have little control over management decisions, although clearly more research on this topic is needed.
This paper has focused attention on the determinants of corporate social responsibility in a major, but under-researched economy – namely China. The research has evaluated both recognised antecedents based on the original work of Maignan et al (1999) and proposed new factors which are expected to affect the development of corporate social responsibility. A survey of 143 companies in China shows that in the current research context, market orientation is the most significant predicator of corporate social responsibility followed by government regulations, suggesting that the development of a corporate social responsibility is an outcome of both market forces and government actions.
The findings have a number of theoretical as well as practical implications for policy makers, especially those in the developing economies. A main theoretical contribution of our study is that it shed lights on the key determinants of a corporate social responsibility in the contexts of developing countries and highlighted the government’s role in the development of a corporate social responsibility. Given the tendency among developing countries to regard all forms of government regulations as excessive and restrictive to competition, therefore, targets for abolishment, a key practical implication of our study to policy makers is that while there is clearly a need to rid the excessive regulations relating to competition, there may also be a case for tightening up the existing regulations or even developing new regulations that address to enhance levels of consumer protection, encourage increases in product quality and generally provide greater incentives for a move towards corporate social responsibility.
Limitations and Directions for Future Research
The results reported above provide some useful insights into issues surrounding the development of corporate social responsibility in a developing economy. However, they are not without limitations. These relate to several areas. First, as an exploratory study, we only examined the impact of three factors. It is recognised that a variety of other factors such as industry type, organisational life cycle, culture and quality of management may also contribute to the CSR level. Therefore, one future research task is to examine the effects of these additional factors on the development of corporate social responsibility. Secondly, the cross-sectional design we adopted for this study enables the generation of important insights into the determinants of a corporate social responsibility but understanding of the change processes involved in improving a corporate social responsibility is very limited. Future research could usefully adopt a more in-depth and longitudinal design to explore these change processes. Finally, as with many previous studies, data were obtained from top managers. It would be useful to obtain a broader sample of managers and perhaps even non-managers in future studies, so that any potential bias in the data resulting from the level of the informants will be minimised.
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