Abstract
Research and development (R&D) investment affects firms’ growth and reflects their investment energy. However, it is recorded as an expense in financial statements, according to generally accepted accounting principles (e.g., International Financial Statements Standards). This study examines whether firms’ R&D investment has a positive effect on their performance, when they engage in corporate social responsibility. The author focuses on firms that have earned corporate social responsibility awards from Global Views Magazine, Common Wealth Magazine, and the Taiwan Institute for Sustainable Energy in order to measure firms’ levels of corporate social responsibility engagement. Tobin’s Q is used as a proxy for firm performance. Because corporate social responsibility engagement is not mandatory in Taiwan, the Heckman two-stage process is used to control for an endogeneity bias. In the first stage, logit regression is employed, using a dummy variable as a proxy for a firm’s social responsibility engagement. In the second stage, the impact of corporate social responsibility on firm value is estimated by regressing Tobin’s Q on various governance and firm characteristics and on a dummy variable for social responsibility engagement. Based on all public traded companies in Taiwan for the period 2005 – 2014, and after controlling for an endogeneity bias, it is found that R&D investment is positively associated with Tobin’s Q, but only when firms engage in corporate social responsibility. Therefore, an investment strategy that meets corporate social responsibility objectives benefits firm performance. The empirical results provide policy implications for firm R&D investment and corporate social responsibility implementation.
Highlights
Due to recent food safety and financial related scandals, regulators and researchers have emphasized the importance of corporate social responsibility to enhance production quality and restore society’s confidence in Taiwan (e.g., Chen, Shiu, and Chang, 2015)
We show that the benefits of CSR engagement on improved firm performance are generated through Research and development (R&D) investment
Using the Heckman two-stage process to control for an endogeneity bias, we do not find evidence that CSR firms perform better than non-CSR firms
Summary
The research into CSR has primarily employed stakeholder theory, with CSR frequently characterized as a business philosophy influencing corporate strategy and enacted in response to stakeholder interests or demands (Carroll, 1999; McWilliams and Siegel, 2001; Salam, 2009). Jo and Harjoto (2012) show that CSR engagement positively influences corporate financial performance, supporting the conflictresolution hypothesis based on stakeholder theory. Based on the institutional theory and stakeholder theory, CSR engagement is beneficial to the firm’s development, which may affect performance in a variety of ways. By prioritizing R&D investment, managers have to make commitments on R&D investment, but they need to have confidence in generating further profits This reasoning supports the notion that in firms with high R&D expenditures, customer satisfaction can be improved through better quality products, which, in turn, increases customer’s constancy and commitment to their firm. H2: R&D investment is positively associated with firm performance, when firms engage in CSR
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