The economic logic of corporate social responsibility: implications for strategy, policy and education

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This paper explores the phenomenon of firms in imperfectly competitive industries voluntarily choosing to internalise social and environmental costs that they are not legally obliged to bear. It is possible to construct variant models of 'differentiated oligopoly' in which expenditures of resources on the creation of seemingly 'external' benefits appear economically logical to decision-makers in firms for whom maximising shareholder value is still a primary, if not dominant objective. The key to understanding this phenomenon, appears to be a more sophisticated view of consumer demand for differentiated products and a more dynamic, multiperiod and capital theory-integrated view of costs. Certain ideas of Lancaster on consumer demand and of Alchian on costs, that have not enjoyed the prominence they arguably deserve, are very helpful in this regard. The drive to innovation (Schumpeterian 'creative destruction') the ubiquity of competition over 'quality' or 'features' rather than price, the ever-present need of oligopolists to deter new entrants and dynamically diminishing returns to investment in conventional advertising, are all relevant factors. Theoretical aspects of the phenomenon are explored and reference is made to selected recent case studies. Implications of the analysis for efforts to achieve more realism and effectiveness in teaching managerial economics and management accounting, and for better microdesign of tax-shifting and other policies suggested by ecological economists, are drawn out. By consciously harnessing the forces, which motivate corporate Social Responsibility (CSR) as a competitive strategy, governments may be able to economise on scarce political capital and obtain greater leverage out of any given package of ecologically focused, tax-shifting initiatives.