The Effect of Geographic Diversification into weak ...
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The Effect of Geographic Diversification into weak Institutional
Environments on the Corporate Social Responsibility of
Multinational Enterprises
Master Thesis
By Laura Ruth Born (S3236528)
Rijksuniversiteit Groningen - Faculty of Economics and Business
MSc. International Business and Management
June 21st, 2017
Supervisor: Esha Mendiratta, PhD
Co-assessor: Paulo J. Marques Morgado
Word count: 12442
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Abstract
Corporate social responsibility (CSR) has become a global phenomenon and is therefore
broadly discussed in the international business literature. As a result, multinational enterprises
(MNEs) are increasingly pressured to adopt CSR strategies in different markets. Despite recent
research efforts to explore the effect of geographic diversification of MNEs on corporate social
responsibility, the impact of diversification into environments with weak institutional
conditions remains underexplored. Following institutional theory, this thesis aims at
overcoming prior contradictory arguments on the behaviour of multinational enterprises in
countries characterized by weak institutions. Thus, the author hypothesizes that the geographic
diversification into developing and least developed countries leads to lower CSR. This effect is
assumed to be moderated by negative corporate reputation changes. Furthermore, the concept
of codes of conduct is introduced as a substitute for absent regulatory conditions. To test the
relationship, multiple linear regression analysis is conducted on a sample of 48 US-American
MNEs. The findings generally support the idea that geographically diversified firms engaging
in weak institutional environments in fact show higher levels of corporate social responsibility.
The results are especially robust for community and employee related CSR practices.
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Acknowledgement
I would like to express my gratitude to my supervisor, Esha Mendiratta, for her
continuous guidance, support and feedback throughout the process of my thesis.
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Table of contents
List of tables ............................................................................................................................... 5
List of figures ............................................................................................................................. 5
1. Introduction ............................................................................................................................ 6
2. Literature Review ................................................................................................................... 9
2.1 Corporate Social Responsibility ....................................................................................... 9
2.1.1 Defining Corporate Social Responsibility ................................................................. 9
2.1.2 Reasons for Corporate Social Responsibility .......................................................... 10
2.1.3 Institutional perspectives on Corporate Social Responsibility ................................ 11
2.2 The effect of geographic diversification on Corporate Social Responsibility ................ 13
2.2.1 Diversification into weak institutional environments .............................................. 14
2.2.2 The role of corporate reputation .............................................................................. 16
2.2.3 The moderating effect of codes of conduct .............................................................. 18
3. Methodology ........................................................................................................................ 20
3.1 Sample ............................................................................................................................ 20
3.2 Measures ......................................................................................................................... 20
3.2.1 Dependent variable .................................................................................................. 20
3.2.2 Independent variable ................................................................................................ 22
3.2.3 Moderators ............................................................................................................... 23
3.2.4 Control variables ...................................................................................................... 24
3.3 Analysis .......................................................................................................................... 25
4. Findings ................................................................................................................................ 25
4.1 Preliminary analysis ....................................................................................................... 25
4.2 Regression results ........................................................................................................... 27
4.3 Robustness check ............................................................................................................ 28
5. Discussion ............................................................................................................................ 31
6. Conclusion ............................................................................................................................ 35
7. Limitations and future research ............................................................................................ 37
References ................................................................................................................................ 40
Appendix .................................................................................................................................. 52
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List of tables
Table 1: Categories of Corporate Social Responsibility .......................................................... 21
Table 2: Descriptive statistics .................................................................................................. 26
Table 3: Bivariate correlations ................................................................................................. 26
Table 4: Regression results ...................................................................................................... 27
Table 5: Robustness check results ............................................................................................ 29
Table A1: Industries and frequencies ....................................................................................... 52
Table A2: List of developing and least developed countries ................................................... 53
Table A3: Descriptive statistics of CSR categories ................................................................. 55
List of figures
Figure 1: Conceptual model ..................................................................................................... 19
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1. Introduction
Multinational Enterprises (MNEs) are considered as the key drivers of globalization as
they set up operations all over the world (Jamali, 2010). Large and geographically diversified
firms have become the most influential actors in society today due to their influence on the
welfare of numerous stakeholders (Kang, 2013). The engagement in foreign markets however
leads to additional costs, which are referred to as the liability of foreignness (LOF) (Zaheer,
1995; Matten & Crane, 2005). For instance, local stakeholders might consider MNEs as a threat
or stereotype them due to a lack of information (Eden & Miller, 2004; Kostova & Zaheer, 1999).
On the one hand, international business literature suggests that companies employ
corporate social responsibility (CSR) activities in foreign markets as a coping mechanism to
overcome the liability of foreignness, for example through social contributions to the host
country (Campbell, Eden & Miller, 2012, Gardberg & Fombrun, 2006). Kostova, Roth and
Dacin (2008) for example find that social contributions to a society create a positive image,
which enhances the local support for foreign companies. Therefore, numerous studies have
found a positive link between international diversification and CSR (e.g. Strike et al., 2006;
Gao & Bansal., 2006; Kang, 2013).
On the other hand, practical evidence shows an increasing amount of corporate scandals
in recent years. The multinational company Unilever for example was subject to increased
media attention due to the extensive release of the toxic element mercury in one of its
thermometer plants in India (Borelli, 2017). As a result, an opposing stream of research argues
that MNEs behave irresponsibly by exploiting the lax social or environmental standards in
foreign markets (Low & Yeats, 1992; Lucas, Wheeler & Hettige, 1992).
These contradictory theoretical arguments have not yet clarified, if geographic
diversification affects corporate social performance positively or negatively (Keig, 2013). As a
first attempt, some authors suggest that corporate social responsibility practices of MNEs
depend on the institutional environments they engage in. Prior studies have repeatedly shown
that CSR is interpreted differently across different countries. Bondy, Matten and Moon (2004)
for example find that Canadian companies are more likely to implement CSR focused on
workplace issues, whereas German companies focus on sustainability. For multinational
companies, engaging in different environments, this poses challenges as the companies’ CSR
practices might be at odds with prevailing CSR attitudes in different markets (Yang & Rivers,
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2009). Therefore, Attig, Boubakri, El Ghoul and Guedhami (2016) point out the necessity to
consider the effect of different environmental factors when analysing the CSR strategies of
MNEs in host countries.
Prior studies investigating the relationship between geographic diversification and CSR
however do not take into consideration the differences between the institutional environments
a firm diversifies into by looking at diversification in general (Strike et al., 2006; Kang, 2013;
Rathert, 2016; Attig et al., 2016) or investigating a single host country context (e.g. Campbell
et al., 2012; Marquis & Qian, 2014). Consequently, the question, whether MNE subsidiaries
adapt their strategies to local CSR practices remains underexplored (Yang & Rivers, 2009).
This results from the fact that studies on this topic mostly focus on a developed country
context, presuming certain conditions, such as a strong institutional environment and
functioning governments and markets (Belal, 2001; Matten & Moon, 2008; Aguilera & Jackson
2003; Gjolberg 2009; Amaeshi, Adegbite & Rajwani, 2016). These studies lead to the
assumption that CSR would not exist in weak institutional environments where such conditions
are absent (Campbell, 2007). Proponents of this theory argue that MNEs diversify into countries
that are characterized by the absence of efficient regulatory arrangements, or so-called
institutional voids, to lower their costs, which is also referred to as the pollution haven
hypothesis (Khanna & Palepu, 1997; Mair & Marti, 2009; Walter, 1982). In line with this,
Campbell et al. (2012) argue that the lack of regulations in weak institutional contexts decreases
the local corporate social performance.
However, as MNEs increasingly expand to weak institutional environments, they shift
their CSR strategies to developing and least developed countries (Tihanyi et al., 2005; WEF,
2011). This is further emphasized by the growing economic importance of developing markets
(Hitt et al., 2006). In fact, developing countries present the fastest growing economies and
therefore provide a lucrative possibility for businesses to grow (IMF, 2006, cited in Visser,
2008). In these environments, social and environmental crises and business impacts are
especially salient, enhancing the importance of social responsibility (WRI, 2005; UNDP, 2006;
World Bank, 2006, cited in Visser, 2008). Hence, multinational companies are increasingly
expected to contribute to developing societies by filling gaps of dysfunctional governments
(Matten & Crane, 2005). As a result, prior literature repeatedly notes the importance of
expanding the research context to countries with weaker institutional conditions (e.g. Amaeshi
et al., 2016; Jamali & Mirshak, 2007; Yang & Rivers, 2009).
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So far, previous research on the relation between diversification and CSR has been
polarized (Jamali, 2010; Kolk & van Tulder, 2006). While some studies argue that MNEs adopt
CSR practices in challenging contexts as a substitute for absent regulatory institutions, others
claim that CSR arises as a complement to strong institutional environments (Rathert, 2016;
Campbell, 2007; Gjølberg, 2010). Thus, there is no consensus yet on how MNEs respond to
weak institutional contexts when it comes to adapting their CSR strategies. This study aims at
overcoming the contradictory research streams by explicitly analysing the effect of geographic
diversification into weak institutional environments on the corporate social responsibility of
MNEs. Therefore, the underlying research question of this analysis can be defined as follows:
Does the diversification into weak institutional environments influence the corporate social
responsibility of multinational enterprises?
To answer the question, this thesis takes an institutional perspective. The study follows
the argument that a negative effect of geographic diversification on corporate social
responsibility exists for weak institutional contexts, because regulatory and normative forces
are absent in these environments. After presenting the existing literature on corporate social
responsibility and its relationship with geographic diversification, an empirical method to
assess the effect of diversification into weak institutional environments on the corporate social
responsibility of MNEs is developed. The relationship is tested using linear regression analysis.
Understanding this relationship will help MNE managers to detect challenges in aligning their
CSR strategies with local practices (Yang & Rivers, 2009). From an empirical perspective, this
investigation responds to contradictory findings in the literature and the resulting calls to
analyse the impact of weak host-country institutions on the CSR adoption of MNEs (Campbell
et al., 2012; Attig et al., 2016; Amaeshi et al., 2016).
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2. Literature Review
2.1 Corporate Social Responsibility
2.1.1 Defining Corporate Social Responsibility
The concept of corporate social responsibility (CSR) is broadly discussed in the
literature (Carroll, 1999). However, there is no common definition (Fisher, 2004). In fact, the
notion of CSR overlaps with several related constructs, such as social responsiveness or
business ethics (Epstein, 1987). The difficulties in defining CSR stem from its dynamic,
appraisive and complex character (Moon, Crane & Matten, 2005; Carroll, 1999).
The most commonly used framework to conceptualize the business practice is the CSR
pyramid by Carroll (1991). He defines CSR as “the conduct of a business so that it is
economically profitable, law abiding, ethical and socially supportive” (Carroll, 1983: 608). This
definition implies four dimensions of CSR. Economic components refer to the responsibility to
maximize profits, maintain a strong competitive position and a high level of operating
efficiency. Legal responsibilities suggest the need to obey to the law, comply with regulations
and fulfil legal requirements. Ethical responsibilities embody expectations, norms and
standards by stakeholders that are not codified by law. As a fourth component, the model
defines philanthropic responsibilities, which include engagement in acts to promote goodwill
and welfare, such as contributions to the community (Carroll, 1991).
More recently, scholars have extended CSR theory by incorporating social performance,
stakeholder relations and corporate citizenship, shifting the focus to the management of core
business activities (Garriga & Melé, 2004; Gjolberg, 2009). Also, environmental concerns have
become a focal point in CSR conceptualizations. The European Commission for example
defines CSR as a “concept whereby companies decide voluntarily to contribute to a better
society and a cleaner environment” (COM 2001: 5). Anselmsson and Johansson (2007)
summarize the various conceptualizations in their three-dimensional model and characterize
the main features of CSR as product responsibility, human responsibility and environmental
responsibility. As a result, it is now widely accepted that CSR is a multidimensional construct,
oriented towards various stakeholder groups, such as customers, employees, regulators,
investors or the community (Sontaité-Petkeviciene, 2015).
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Previous research shows that the meanings and practices of CSR vary between different
countries. Amaeshi, Adi, Ogbechie and Amao (2006) for example find that Nigerian citizens
view CSR solely in terms of philanthropy, paying less attention to other CSR categories.
Acknowledging these differences, Matten and Moon (2008) further differentiate between
explicit and implicit forms of CSR. Explicit CSR refers to corporate actions in response to
societal interests arising from the perceived responsibility of a company. These usually include
voluntary actions, such as disaster relief donations (Roner, 2005). Explicit CSR can be
motivated by the perceived expectations of society as it results from stakeholder pressures or
partnerships with governmental or non-governmental organizations (e.g. the UN Global
Comact). Implicit CSR refers to the companies’ role within an institutional context. It arises
from values, norms and beliefs of a society, that define the proper behaviour a firm should
follow. This behaviour is implicit in that sense that it occurs as codified rules, which are not
necessarily described as CSR. Thus, implicit CSR is forced by the institutional environment
rather than a voluntary phenomenon.
Due to the many varying views of CSR, a broad rather than a specified definition of the
term seems to be appropriate for the sake of a multinational study (Matten & Moon, 2008). In
order to cover all relevant categories and capture CSR activities of MNEs in host countries,
CSR will be defined as "actions that appear to further some social good, beyond the interests of
the firm and that which is required by law” (McWilliams & Siegel, 2001: 117) for this
investigation (Campbell et al., 2012).
2.1.2 Reasons for Corporate Social Responsibility
In the literature on multinational enterprises it has often been argued that a company’s
main goal is to maximize profits and shareholder value. Researchers refer to this as the classical
approach of corporate responsibility or the theory of corporate egoism (Friedman, 1970). This
raises the question, why firms would behave in a socially responsible way (Campbell, 2007).
In fact, practice and theory show many incentives for MNEs to behave opportunistically, free-
ride on public goods, exploit employees or poison the environment in order to maximize
revenues (Albert, 1993; Crouch & Streeck, 1997; Dore, 2000; Roe, 2003). However, there are
many firms that do behave responsibly, for example by donating to charities, supporting
communities or maintaining standards of integrity and honesty (Campbell, 2007). The literature
provides several reasons for firms to accept these extra costs.
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One reason is the theory of corporate altruism, which emphasizes that companies are
responsible for contributing to the quality of life of a society (Guthrie & Parker, 1989). Sprinkle
and Maines (2010) further argue that organizations engage in CSR for four different reasons.
Next to altruistic motives, firms might use CSR to appease their stakeholders, for the sake of
employee management in terms of motivations, recruitment and retainment or for customer-
related benefits. Feldman and Vasquez-Parraga (2013) further specify consumer-related
outcomes as enhanced reactions to a company’s products, attraction and retainment of
consumers or enhanced perspectives on responsibility of a company, which in turn creates more
positive attitudes. Furthermore, engaging in CSR creates a positive reputation and image for a
firm (Weber, 2008). Similarly, Bhattacharya and Sen (2004) find positive effects on word-of-
mouth and the resilience to negative information about the company. Therefore, CSR can also
be viewed as a form of risk management (Weber, 2008). These advantages might also lead to
financial benefits. Weber (2008) for example finds increased sales and market share and cost
savings as potential outcomes of engaging in CSR.
In line with this, the strategic view emphasizes that the potential benefits CSR evokes,
such as a sustainable long-term business development, outweigh its short-term costs (Rybalko,
2016). Several studies have already found a positive effect of CSR on the financial performance
of a firm, for example due to the positive image effects in the eyes of investors and consumers
(Orlitzky, Schmidt & Rynes, 2003). As a result, companies increasingly realize the economic
value and the competitive advantages CSR can create. In a more general sense, corporate social
responsibility is expected to lead to a positive image, which affects the stakeholders’ attitudes
towards a company. This in turn increases the firm’s financial stability (Rybalko, 2016).
2.1.3 Institutional perspectives on Corporate Social Responsibility
Previous research has highlighted the importance of institutional theory for the
comparative analysis of CSR practices, because the interests of stakeholders differ across
nations (Aguilera & Jackson, 2003). Institutional theory allows for a differentiated view of the
motives of stakeholders within their national environments, which is particularly important in
this context, because motives shape the corporate governance of MNEs when it comes to CSR
adoption (Matten & Moon, 2008). The main argument of the theory is that each nation has
different rules of the game (North, 1990). These rules do not only consist of regulations by the
state and law, but also of social norms and cognitive understandings, also referred to as
institutional pillars (Scott, 2008). Organizations try to adapt to these institutions in order to gain
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legitimacy, which characterizes “the degree of cultural support for an organization” (Meyer &
Scott, 1983: 201), when interacting with their stakeholders (Meyer & Rowan, 1977). As a result,
organizational practices are often subject to so-called isomorphic processes that lead
organizations to resemble other units in the same environment (DiMaggio & Powell, 1983).
The importance of legitimacy can be explained by stakeholder theory, which states that
stakeholders interpret corporate actions and challenge the legitimacy of firms (Lamin & Zaheer,
2012). As a result, they can exert power over a firm's CSR strategy by either withholding
resources from the company or limiting the use of the resources (Frooman, 1999). The
withholding strategy can for example be manifested in the customers’ avoidance to buy
products from irresponsible firms (Yang & Rivers, 2009). In the latter case, stakeholder power
is exercised in the form of regulations or certain clauses in contracts with local actors (Yang &
Casali, 2009, cited in Yang & Rivers, 2009).
The legitimacy challenge leads to the assumption that firms try to enhance their
legitimacy by showing and reporting more responsible practices (Amaeshi et al., 2016). In some
contexts this has already led to isomorphic processes. In Europe for example, a rush of
governmental rules and initiatives can be noted (Eberhard-Harribey, 2006). Furthermore, self-
regulatory and voluntary codes of conduct, such as environmental standards like the ISO 14000,
drive companies into adopting more responsible strategies. These pressures are also referred to
as coercive isomorphism (Matten & Moon, 2008). Mimetic processes on the other hand occur
in situations characterized by high uncertainty. In these situations, companies tend to regard
best practices as legitimate and imitate these from other firms. Considering CSR, it can be noted
that MNEs are increasingly joining coalitions for CSR, subscribe to CSR training programs and
publish CSR reports (Kolk, 2005; Matten & Moon, 2008). A third source of isomorphic
pressures are educational and professional authorities, who form the normative component of
isomorphism. An example is the growing inclusion of CSR in business education or the
increased number of European professional associations (Matten & Moon, 2004; 2008). These
dynamic processes suggest that changes in CSR adoption of MNEs are based on the institutional
framework and historical development of their country (Matten & Moon, 2008).
In a global context however, this leads to a dilemma, since MNEs have to adapt to host
country institutions to gain external legitimacy as well as home country pressures to gain
internal legitimacy, which is also referred to as institutional duality (Hillman & Wan, 2005;
Kostova and Roth, 2002). For the adoption of CSR practices this leads to challenges, since these
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are interpreted differently in different countries. Several studies could already show differences
in CSR practices and understandings across institutional environments. Bondy et al. (2004) for
example find that Canadian companies are more likely to implement CSR focused on workplace
issues, whereas German companies focus on sustainability. Similarly, Baughn et al. (2006)
(cited in Yang & Rivers, 2009) find a link between a country’s economic development,
economic freedom and level of corruption and differences in CSR. Overall, these findings show
that corporate social responsibility is embedded in the wider institutional system of a country
(Matten & Moon, 2008). For multinational companies, engaging in multiple different
institutional environments, this has led to a debate considering the effect of increased
internationalization on CSR adoption, which will be outlined in the following chapter.
2.2 The effect of geographic diversification on Corporate Social Responsibility
A high amount of literature has already analysed the effect of increased
internationalization and the resulting differing institutional pressures on the adoption of CSR
strategies. Strike et al. (2006) for example find a positive relationship between international
diversification and social responsibility, arguing that CSR acts as a firm-level capability, which
allows for strong relationships with local stakeholders and governments and can be enhanced
through experience derived from increasing international diversification. The geographic
diversification leads to more diverse stakeholder pressures, because different countries have
different priorities when it comes to CSR issues (Kang, 2013; Becker & Henderson, 2000;
Connell, 2005). As the international visibility of firms increases, the threat of being targeted by
environmental groups becomes more salient (Kang, 2013; Porter & Krammer, 2006).
Therefore, CSR can be used as a means to overcome the increased litigation risk associated
with international dispersion (Feldman, Soyka & Ameer, 1997; Attig et al., 2016). Kang (2013)
further argues that internationally diversified firms might also have higher incentives to pursue
CSR practices as these help to build a positive brand image, which is transferrable across
international markets, and overcome the liability of foreignness. Additionally, a company can
signal its commitment to a certain market by employing social practices, which in turn can aid
to overcome communication problems (Zahra, Ireland & Hitt, 2000). In a more general sense,
several previous studies have found a positive relationship between geographic diversification
of MNEs and corporate social responsibility (Kang, 2013; Strike et al, 2016; Keig, 2013).
A contrary stream of research however proposes a negative relationship between
geographic diversification and CSR for several reasons. First, CSR investments in
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institutionally different countries involve higher levels of uncertainty (Campbell et al., 2012).
This can be attributed to the fact that CSR is not necessarily defined similarly in different
institutional contexts. As Campbell (2007) points out, CSR “may mean different things in
different places to different people and at different times” (p. 950). As a result, subsidiary
managers often face difficulties in understanding the social norms in a host country (Strike et
al., 2006). From a normative perspective, MNE managers are less able to identify with local
stakeholders from culturally different countries, which decreases the likelihood to engage in
CSR practices. As a result, managers might not only be less able to engage in overseas CSR
practices, but also less willing to do so (Campbell et al., 2012).
The increased complexity associated with international diversification might also to lead
to lower levels of CSR. In fact, the growing number of foreign subsidiaries evokes the need for
more information accommodation and control and a higher risk of failure. Furthermore, MNEs
must stretch and redistribute their resources across multiple areas. Because of financial
pressures, social practices are compromised especially in countries with low levels of
environmental or social standards (Strike et al., 2006). These findings suggest that the negative
effect of inter-regional diversification on socially responsible behaviour seems to be
particularly salient in weak institutional environments, which will be further explained in the
following chapter.
2.2.1 Diversification into weak institutional environments
In order to overcome the contradictory findings on the relationship between CSR and
geographic diversification, this study proposes to differentiate between strong and weak
institutional environments. As pointed out by Amaeshi et al. (2016), the theory that firms try to
gain legitimacy in foreign markets by showcasing social activities presumes an Anglo-Saxon
model of CSR. Therefore, strong institutional contexts, such as functioning markets and
efficient legislation, are often considered as a prerequisite for CSR practices (Matten & Moon,
2008). However, developing or the least developed markets are often characterized by the
absence or failure of institutional arrangements, so-called institutional voids, which increase
the opportunities for irresponsible behaviour (Mair & Marti, 2009; Matten & Moon, 2008).
Practical as well as empirical evidence support this theory. The multinational
corporation Nike for example was subject to a scandal considering the abuse of labour in its
manufacturing plants in China, Indonesia, Thailand, Cambodia and Mexico. In fact, the
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company forced its employees in developing countries to work excessive hours at a very low
pay and forbid to form unions or speak out about these conditions (Connor, 2001). Similarly,
Strike et al. (2006) find a positive effect of international diversification on corporate social
irresponsibility. This can be explained with the pollution haven hypothesis, which states that
MNEs diversify into countries with lower standards considering working conditions and
environmental regulations to lower their costs (Walter, 1982). Surroca, Tribó and Zahra (2013)
empirically support this hypothesis by finding that MNEs shift their irresponsible practices to
host countries with lower stakeholder expectations as a reaction to increased stakeholder
pressures in the home country. Hence, the adoption of CSR practices is also dependent on the
strength of the legal system in a country. It seems plausible that companies have less incentives
to act socially responsible when laws and penalties for irresponsible behaviour are absent or not
enforced (Yang & Rivers, 2009). Reimann, Rauer and Kaufmann (2015) find that MNEs show
less strategic commitment to CSR in emerging economies, because the significant differences
in the administrative systems create challenges and unfamiliarity with the environment, which
increase the liability of foreignness and therefore decrease the ability to commit resources for
CSR purposes.
Institutional theory further argues that the legitimacy problem in emerging economies
can be overcome with the phenomenon of mimetic isomorphism. According to previous
literature, MNE subsidiaries try to avoid pitfalls in their host countries by adapting their
strategies to local firms (Kostova & Zaheer, 1999). Considering emerging markets, Baskin
(2006) finds that CSR is “less embedded in corporate strategies, less pervasive and less
politically rooted than in most high-income OECD countries” (p. 46). This leads to the
assumption that multinational firms acting in these areas might imitate the relatively lower
levels of CSR commitment of their local competitors (Reimann et al., 2015).
From an institutional perspective, this shows that the coercive as well as normative
pressures considering the adoption of CSR strategies are less salient in weak institutional
contexts. As a result, MNEs try to overcome the legitimacy challenge through mimetic
processes. This leads to the first hypothesis:
Hypothesis 1: Diversification into weak institutional environments decreases the corporate
social performance of MNEs.
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2.2.2 The role of corporate reputation
As mentioned before, one predominant reason for multinational enterprises to engage
in corporate social responsibility is the opportunity to enhance corporate reputation. Corporate
reputation is characterized as a main strategic asset as it increases firm performance and creates
value (Roberts & Dowling, 2002; Barney, 1986). Due to the timely and socially complex
development a good reputation can form a sustained competitive advantage (Fombrun, 1996;
de Castro, Navas López & López Sáez, 2006; Deephouse, 2000). Several studies have already
shown the positive impact of reputation on firm outcomes. Walker (2009) summarizes the
strategic benefits of reputation as lower costs, the ability to charge premium prices, the creation
of competitive barriers and enhanced profitability (Fombrun, 1996; Deephouse, 2000; Roberts
& Dowling, 2002).
The tacit and intangible nature makes it hard to define the construct of reputation (de
Castro et al., 2006). Reviewing 43 papers on the topic of corporate reputation, Walker (2009)
finds that the most cited definition is the one by Fombrun (1996). It states that corporate
reputation is a “perceptual representation of a company’s past actions and future prospects that
describes the firm’s overall appeal to all of its key constituents when compared with other
leading rivals” (p. 72). This definition emphasizes that reputation comprises the aggregation of
all relevant stakeholder perceptions (Walker, 2009).
Therefore, previous studies generally support the idea that companies use CSR as a
strategic means to respond to stakeholder demands and enhance their reputation (e.g. Lai, Chiu,
Yang & Pai, 2010; Arikan et al., 2016). Stanaland, Lewin and Murphy (2011) for example show
that perceived social responsibility has a positive effect on reputation as it improves a firm’s
legitimacy. In line with this, Hooghiemstra (2000) argues that firms can influence their
reputation by engaging in corporate social reporting. However, this relationship is not a one-
way interaction (Hooghiemstra, 2000). In fact, there might be other sources of information,
such as the media, that shape the reputation of a company (Dutton & Dukerich, 1991). As a
result, several authors assume that the stakeholders’ perceptions also shape the way a company
behaves (e.g. Dutton & Dukerich, 1991; Elsbach & Kramer, 1996). In this case, the showcasing
of social responsibility is a form of corporate communication used as a response to counteract
negative reputational effects (Hooghiemstra, 2000; Brown & Deegan, 1998). This shows that
CSR acts as a form of impression management, for example through increased social or
environmental disclosures (O'Donovan, 1997, cited in Hooghiemstra, 2000). Following this
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strategy, especially firms with a predicament try to overcome legitimacy challenges
(Hooghiemstra, 2000). In line with this, Duimering and Safayeni (1998) propose that companies
try to compensate negative information by overemphasizing the positive impacts of their
activities.
The aforementioned case of Nike further illustrates this coping mechanism. Due to the
accusations against the company considering its labour standards in the developing world, the
corporate reputation had suffered significantly. According to Philip Knight, the CEO of Nike,
the company had an image “synonymous with slave wages, forced overtime and arbitrary
abuse” (cited in Connor, 2001, p. 6). To overcome this criticism, Nike committed to respect the
right of freedom of association, joined the UN Global compact and donated to support the
Permanent Normal Trade Relations in China. Knight also announced changes in the labour
conditions considering child labour, health and safety, independent monitoring and education.
The media response to these promises was favourable for the company (Connor, 2001). In fact,
newspapers characterized these new conditions as a breakthrough and a new standard for other
companies, showing positive reputational effects (New York Times 1998; Dionne 1998, cited
in Connor, 2001). The phenomenon of CSR as a form of impression management can also be
illustrated by the example of Royal Dutch Shell. As a response to negative publicity and
boycotts, because of the decision to sink one of its oil platforms in 1995, the company started
to engage in several CSR practices. In fact, Shell started a debate with its stakeholders to discuss
alternative solutions and published ethical reports, illustrating for example the contributions to
the development of solar energy in Chile and Argentina (The Shell Report, 1998, cited in
Hooghiemstra, 2000).
The two examples emphasize that reputational changes influence the corporate social
responsibility of internationally diversified firms. Especially when a company suffers from
deteriorations in its reputation, it might use corporate social responsibility acts as a means to
overcome these challenges. Hence, it can be proposed that the effect of diversification of MNEs
on their social performance will be moderated by deteriorations in reputation, leading to the
following hypothesis:
Hypothesis 2: Deteriorations in corporate reputation weaken the negative effect of
diversification into weak institutional environments on corporate social performance.
18
In other words, even though there might be a high degree of geographic diversification,
as in the cases of Nike and Shell, negative changes in the reputation of the company lead to a
higher overall CSR performance of the firm in order to overcome legitimacy problems. It should
be noted that since the relationship was found to be reciprocal, diversification into weak
institutional environments might also influence corporate reputation. For instance, Christmann
and Taylor (2006) report that MNEs engaging in emerging markets often face image concerns
as they are accused of taking advantage of the lower standards for the sake of their profits.
2.2.3 The moderating effect of codes of conduct
So far, this thesis has argued that the different institutional environments MNEs engage
in and the resulting stakeholder pressures determine the choice of CSR strategies. However,
previous research also shows that company-level factors might have an impact. In fact, Yang
and Rivers (2009) argue that many companies subscribe to voluntary codes of conduct, which
lead them to pursue local CSR strategies for the sake of being attractive to company level
stakeholders. The authors illustrate the incentives for the adoption of these codes with the
example of the multinational company Nestlé. The company had been subject to consumer
boycotts as a response to its marketing of infant formula in developing markets. However, after
Nestlé had implemented the International Code of Marketing Breast Milk Substitutes, issued
by the World Health Organization and UNICEF, these boycotts came to an end (Sikkink, 1986).
This example shows that MNEs use codes of conduct to overcome negative spill over effects
from irresponsible actions in emerging markets, that might affect the global legitimacy of the
MNE (Surroca et al., 2013; Kostova et al., 2008; Kostova & Zaheer, 1999).
As codes of conduct differ in their content and scope, there is no common definition.
The literature however agrees, that it can be differentiated between corporate codes and
multistakeholder codes (Bondy, Matten & Moon, 2006). Company codes are written by
representatives of a company without input of other groups. According to Bondy (2003), these
codes are not expected to provide information on actual CSR practices as commitment and
guidance clarifications are found in separate documents. Furthermore, corporate codes often
reflect visions of managers about the future performance of a company (Sodeman, 1995).
Multistakeholder codes in contrast are based on the collaboration between NGOs, governments,
business coalitions and other groups. Therefore, these codes are often regarded as superior to
individual company codes as they create a universally applicable normative framework
(Dickerson & Hagen, 1998).
19
Although the literature criticises codes of conduct for their lack of transparency,
questionable independence of monitoring agencies and insufficient trustworthiness due to
conflicts of interest (National Research Council 2004; Esbenshade 2004; Pruett 2005;
Rodriguez-Garavito 2005), the positive effect on social responsibility has been supported.
Locke, Qin and Brause (2007) find that MNEs are unlikely to shift their irresponsible practices
to emerging markets, when they adopt codes of conduct. Especially in a developing market
context, voluntary codes of conduct are often regarded as a normative substitute for absent
regulatory conditions (Locke et al., 2007). In this case, codes are developed to maintain
responsibility standards in environments where governments fail to enforce these (Nadvi &
Wältring 2004). In contrast, codes might also be adopted in response to corporate scandals, like
the cases of Nike, Shell and Nestlé, and aimed at providing information to customer groups and
protect a company’s reputation (Esbenshade 2004; Locke et al., 2007). Regardless of the
underlying motives, prior research agrees that the adoption of codes of conduct by a company
is a sign of its awareness of and commitment to ethical behaviour (Locke et al., 2007). Hence,
it can be expected that the adoption of codes of conduct strengthens a firm’s corporate social
responsibility, even though they diversify into weak institutional environments. This leads to
the following hypothesis:
Hypothesis 3: The adoption of codes of conduct weakens the negative effect of diversification
into weak institutional environments on corporate social performance.
The proposed relationship between the four variables is depicted in figure 1.
H1 (-) H2 (-)
H3 (-)
Figure 1: Conceptual model
Diversification into
weak institutional
environments
Corporate Social
Performance
Deteriorations in
corporate
reputation
Codes of
conduct
20
To further analyse this relationship, the following chapter develops an empirical method to test
the introduced hypotheses.
3. Methodology
3.1 Sample
The sample of the present study includes 48 of the largest U.S. firms from the Fortune
500 list for the following reasons. First of all, firms in the U.S. are considered as pioneers when
it comes to CSR adoption and generally show higher levels of CSR contributions and reporting
compared to other nations, such as the Netherlands or France (Matten & Moon, 2008). This
enhances data availability. Secondly, these firms are more likely to pursue geographic
diversification strategies (Markides & Williamson, 1994). In order to enhance the comparability
of the companies, the home country characteristics were kept constant by limiting the setting to
one home country (Campbell et al., 2012). Furthermore, this study focuses on manufacturing
firms, because they are especially subject to social interest and external pressures when it comes
to social responsibility (Griffin & Mahon, 1997).
To reach the targeted sample, the Fortune 500 list was screened for manufacturing firms,
which were defined according to their NAICS codes found in Bureau van Dijks’ ORBIS
database. A list of the included industries is provided in appendix A1. The resulting list of
companies was analysed considering the availability of data and the presence in developing or
least developed markets. MNEs with limited data availability or purely domestic companies
were dropped from the sample (Keig, 2013). Several companies could not be included due to
limited availability of historical information on their reputation in Fortune’s Most Admired
Companies (MAC) database. This resulted in a list of 48 companies to be included in the
analysis.
3.2 Measures
3.2.1 Dependent variable
According to Wood (1991) the degree to which a company applies CSR principles and
strategies can be measured by the firm’s corporate social performance (CSP). To assess this
variable, most previous studies have used data from the Kinder, Lydenberg, and Domini
Research & Analytics database (KLD), which rates CSR adoption based on seven areas,
21
including community relations, employee relations, environment, human rights or diversity
(Tashman & Rivera, 2010). However, the literature notes several limitations considering this
measure. In fact, the KLD database was initially formed as a measure for domestic CSR
activities of US based companies. Even though it incorporates some non-US operations, the
domestic CSR activities prevail (Strike et al., 2006). Thus, the KLD database is not suited to
measure CSR activities in host countries or for a multinational analysis (Campbell et al., 2012).
The database was further subject to criticism, because it was found to not accurately predict
CSR violations, such as pollution levels or compliance violations. This results from the fact that
the database aggregates all individual assessments of social performance as a zero or one
indicator variable, which leads to low validity of the measure (Chatterji, Levine & Toffel,
2009). Hence, Chatterji et al. (2009) further argue that a continuous measure might be more
accurate.
As a result, this study employs the CSRhub database, which rates companies based on
four CSR categories, namely environment, governance, employees and community. The
performance in the four areas is aggregated into one overall corporate social performance rating.
In contrast to other databases, CSRhub incorporates global CSR data as it includes not only
home country information, but also CSR performance from all countries a company engages in
(Keig, 2013). The rating converts, normalizes and aggregates data from more than 530 sources,
such as research firms or governmental agencies (CSRhub, n.d. a; b). Therefore, CSRhub can
be expected to provide an appropriate foundation for the sake of a multinational analysis.
Furthermore, the open accessibility of the database facilitates the replicability of the results
(Keig, 2013). The average overall rating, ranging from 0 to 100, was used as a measure for
corporate social performance (CSP). In order to gain a more differentiated view of CSP, I also
included the separate scores in the four different CSR areas as a robustness check. Table 1
summarizes the coverage of the four categories.
Category Description
Community The community category includes citizenship, charitable giving,
volunteerism, human rights records, treatment of the supply chain and the
environmental and social impact of products.
22
Employees The employees dimension covers diversity, labor relations and rights,
compensation, employee training, health and safety and the compliance
with national laws and regulations.
Governance The governance category addresses board independence, executive
compensation, ethical leadership and compliance, the values that and ethics
of leadership, transparency and reporting of management practices and
stakeholder treatment.
Environment The environment category includes the use of natural resources,
environmental performance, compliance with environmental regulations,
climate change policies, energy use, pollution prevention and sustainable
development.
Table 1: Categories of Corporate Social Responsibility (CSRhub, 2014)
3.2.2 Independent variable
In the context of corporate social responsibility research, the international
diversification of MNEs is usually measured as the number of unique countries a firm operates
in (Keig, 2013; Bansal, 2005; Strike et al., 2006). To measure the intensity and depth of the
exposure to foreign environments, one method is to use the number of foreign subsidiaries a
company has formed (Chetty, Eriksson & Lindbergh, 2006; Strike et al., 2006). Since this study
is aimed at analysing the actual presence in a country to draw conclusions on the effect of the
exposure to weak institutional environments, the present analysis adapts this measure by
specifying it for developing and least developed countries. As a result, diversification into weak
institutional environments was measured as the number of developing and least developed
countries a company has at least one subsidiary in. This information was derived from Bureau
van Dijk’s ORBIS database, that lists all subsidiaries and their locations for each company.
Developing and least developed countries were defined in line with the United Nations World
Economic Situation and Prospects (WESP) country classification, which reflects the basic
economic conditions of each nation (WESP, 2014). An overview of the countries covered in
the analysis can be found in appendix A2.
23
3.2.3 Moderators
Deteriorations in reputation. According to previous studies, a common measure for
corporate reputation (CR) is the Fortune Most Admired Companies (MAC) survey. The survey
reflects the judgement of senior managers, outside directors and industry analysts, who evaluate
companies in the industries they are familiar with (Wartick, 1992). Furthermore, the MAC
reflects the perceptions of the different stakeholder groups, such as owners, managers,
customers and employees (Preston & Sapienza, 1989). Thus, the measure is consistent with the
definition of corporate reputation used in this study (Wartick, 1992). The survey further allows
for the assessment of year-to-year changes of reputation across eight categories, namely
innovation, people management, use of corporate assets, social responsibility, quality of
management, financial soundness, long-term investment value, quality of products and services
and global competitiveness (Wartick, 1992; Mahon & Wartick, 2012). The MAC is one of two
complete and publicly available measures, that have been used to assess different stakeholder
views of corporate reputation. A second alternative is the American Customer Satisfaction
index (ACSI) (Mahon & Wartick, 2012). However, the ACSI measures the satisfaction of
households with the products they frequently use rather than perceptions about companies (the
ACSI). Other measures, such as Fortune’s “Best Companies to Work for” or Business Week’s
“Most-Generous Corporate Donors” were found to be more based on selected indicators of
groups or individuals rather than stakeholder surveys (Mahon & Wartick, 2012). Following
these prior findings, the MAC data set was used to evaluate the corporate reputation of the
analysed companies. A dummy variable was constructed, which attains the value 1 if there was
a deterioration in reputation and 0 if there was none. This resulted in two variables of corporate
reputation deteriorations. The first one (CRD) assesses possible negative changes in reputation
in the years directly before the analysis (2015-2016) and therefore accounts for immediate CSR-
related responses to deteriorations. The second measure (NT) includes a long-term perspective
and is based on a negative trend between the years 2012 and 2016. To account for reverse
causality between diversification into weak institutional environments and deteriorations in
reputation as mentioned in chapter 2, the years before the point of analysis (2017) were selected.
Four years were chosen, because cases of reputational crises, such as Nike and Shell, show that
companies respond to these image concerns often within one to four years (Connor, 2001; The
Shell Report, 1998, cited in Hooghiemstra, 2000). Next to that, the choice of years resulted
from the availability of the overall MAC ratings, which were not accessible for the years 2013
and 2014.
24
Codes of conduct. The information on firms’ adoption of codes of conduct was derived
from their sustainability reports and company websites. To capture the relation these codes
might have with CSR, only CSR-related codes were considered in the analysis. These include
the ISO 14001 or EMS environmental standards, the ISO 50001 energy management standards
and the OECD guidelines for multinational companies. The reason for the choice of these codes
is that they were also used by previous research to assess CSR by the MCSI Asset4 database,
which leads to the assumption that they best capture CSR-related standards. Furthermore, the
aforementioned codes were the most prevalent codes in companies’ sustainability reports. The
UN Global Compact was not included, because it is already covered in the governance section
of the CSRhub database (CSRhub, 2014). Due to the aforementioned characteristics of codes,
only multistakeholder codes were included. According to Jeffcott and Yanz (2000, cited in
Bondy et al., 2006) multistakeholder codes are more efficient when it comes to issues in the
developing world. Besides, Jackson (2013) points out that almost every US-based multinational
company has developed a corporate code, which was also the case for the given sample. For
this reason, no effect would be expected in the regression analysis. As pointed out by Potoski
and Prakash (2005), the adoption of a code can be measured as a dummy variable attaining the
value 1 if the company follows a code of conduct and 0 if not. This method was adopted for the
sake of this study. Companies were rated with a 1 for each of the aforementioned codes they
adopt. This resulted in a binary variable, ranging from 0 to 3, as a measure for codes of conduct
(CoC).
3.2.4 Control variables
Two control variables were included in the analysis, because they have been found to
influence corporate social performance. The first control variable is firm size. In fact, larger
firms generally have a higher social performance as they have more resources to commit to
CSR (Perrini, Russon & Tencati, 2007). Furthermore, larger firms are more visible and
therefore face higher levels of stakeholder pressure when it comes to behaving responsibly
(Brammer, Pavelin & Porter, 2009). In line with previous studies, firm size is measured as the
total assets a company has (e.g. Soleimani, Schneper & Newburry, 2014; Campbell et al., 2012).
Next to firm size, I controlled for firm performance to check whether better performing
firms might be more likely to commit to CSR (Jackson & Apostolakou, 2010). Previous
literature has argued that firms with more slack resources invest more in social activities
(Waddock & Graves, 1997). As a proxy for a firm’s performance, I followed prior studies by
25
using the return on assets (ROA) of the previous year (Campbell et al., 2012). The ROA was
calculated by dividing the net income by total assets (Johnson & Greening, 1999). The data for
net income and total assets was derived from the Compustat Capital IQ database.
3.3 Analysis
To examine the relationship between the described variables, hierarchical moderated
regression analysis was conducted using IBM SPSS 23.0. This method seems to be appropriate
as it is used to assess the relationship between a single interval scale dependent variable (i.e.
CSP) and several predictor variables that show moderating effects (Cohen, Cohen, West &
Aiken, 2003).
To test Hypothesis 1, I conducted the regression analysis for the overall CSP rating as
an independent variable. In order to avoid the possibility that responsible corporate behaviour
in one area can outweigh the irresponsible behaviour in other areas, I repeated the regression
for the four categories that form the overall rating as independent variables to check the
robustness of the results across different practices. To evaluate the interaction effect between a
company’s reputation changes and its diversification as specified in Hypothesis 2, the two
different time horizons as mentioned before were considered separately. Interaction terms for
the two moderating effects were formed by multiplying the variables for changes in corporate
reputation and codes of conduct with the variable of diversification into weak institutional
environments (Cohen et al., 2003).
As the analysis also includes control variables, three models were used to test the
relationship between companies’ diversification into weak institutional environments and
corporate social performance (Keig, 2013). The resulting findings will be presented in the next
chapter.
4. Findings
4.1 Preliminary analysis
Before conducting the regression analysis, several necessary assumptions were
inspected. In fact, it was tested if the data is normally distributed and linear, which was found
to be prevalent. A Durbin-Watson test was run in order to check whether there is autocorrelation
in the variables. Since the Durbin-Watson measure had a value of 2,247, which is between the
26
recommended values of 1.5 and 2.5, the data can be assumed to be independent (Karadimitriou
& Marshall, n.d). Table 2 summarizes the study’s descriptive statistics.
Variables Minimum Maximum Mean Std. Deviation
CSP 49 69 59,98 4,949
Diversification 1 45 18,38 11,219
CRD 0 1 ,40 ,494
NT 0 1 ,42 ,498
CoC 0 3 ,69 ,776
Firm size 9231000 3216860000 505602083,3 647743933,5
ROA -,00089 86,50802 2,81297 13,74746
Table 2: Descriptive statistics, N = 48
Moreover, I tested for multicollinearity by examining the correlations between the variables.
Table 3 shows the correlation matrix.
Since none of the correlations in the sample exceeds the recommended threshold of 0.70,
redundancy in the variables was not an issue. Only the dependent variable of CSP and its sub-
categories show higher levels of correlation. Since these variables were used in different
regression models, this is not expected to distort the results. Furthermore, the variance inflation
factor scores (VIF) were below the recommended threshold of 10.0, showing that
multicollinearity was not a problem in the analysis (Hair, Black, Babin & Anderson, 2010). The
correlations already give a hint about the relationship between the variables. Diversification
seems to be positively correlated with overall CSP and all four sub-categories, suggesting that
Variables 1 2 3 4 5 6 7 8
1. CSP
2. Community .824***
3. Governance .866*** .585***
4. Employees .873** .694*** .662***
5. Environment .892*** .635*** .775*** .647***
6. Diversification .245 .381** .115 .263 .137
7. CRD -.179 -.184 .035 -.23 -.167 .099
8. NT .116 .204 .006 .175 .057 .12 .266
9. CoC .032 -.029 -.067 .131 .018 -.011 -.336** -.151
Table 3: Bivariate correlations, Significance levels: **p < 0.05, ***p < 0.01
27
higher international diversification into developing and least developed countries is associated
with higher levels of CSR. This relation is especially strong for community-related CSR, since
the correlation is significant on the 5%-level. Interestingly, the short-term measure of
deteriorations in reputation (CRD) seems to be negatively correlated with all CSR categories.
This can be attributed to the fact, that correlation does not necessarily imply causality (Wright,
1921). Since the points in time of measurement of CSR and CRD were very close, it might also
be that low levels of CSR lead to negative changes in reputation. This is further evidenced by
the fact that when applying a long-term measure of reputation deteriorations (NT), the
correlation becomes positive. Therefore, the long-term measure of changes in reputation was
used for subsequent calculations.
4.2 Regression results
To further analyse the relationships between the dependent and independent variables
and the role of the hypothesized moderating effects, linear regression analysis was conducted.
The findings of the three models used in the first regression, which defines overall CSP as the
dependent variable, are depicted in table 4.
Variables Model 1 Model 2 Model 3
Firm size 1.670 (.00) 1.956E-9* (.00) 2.022E-9* (.00)
ROA -.001 (.053) .032 (.054) .034 (.054)
Diversification - .129* (.066) .055 (.084)
NT x Diversification - - .084 (.072)
CoC x Diversification - - .054 (.044)
Overall model R² .048 (4.935) .125 (4.786) .165 (4.785)
Change in R² .077* .04
F-value for change in R² 1.132 3.851 1.009
Significance F change .332 .056 .373
Overall F value 1.132 2.086 1.656
Table 4: Regression results, Dependent variable = CSP, Unstandardized coefficients with corresponding
standard errors, N = 48, Significance levels: *p < 0.1
Model 1 only contains the control variables. Neither firm size nor firm performance
seem to have a unique effect on corporate social performance. The two control variables explain
4,8% of the variance in CSP. The overall model however is not statistically significant (p =
.332).
28
When adding the independent variable (diversification) in model 2, firm size has a
statistically significant positive effect on CSP, which is in line with previous studies. The
explanatory power rises to 12,5% (R² = .125). Hypothesis 1 predicted that higher levels of
geographic diversification into weak institutional environments lead to lower levels of overall
corporate social performance. The analysis shows, that diversification is positively related to
CSP (B = .129). This effect was found to be significant at the 10%-level (p = .056). Therefore,
hypothesis 1 was not supported. Instead the opposite relationship seems to be prevalent.
In model 3 the moderating effects of codes of conduct and deteriorations in corporate
reputation were added. When using the long-term measure of changes in reputation, the
explanatory power of the model rises to 16,5% (R² = .165). When looking at the coefficients,
the interactions between CoC and diversification and NT and diversification are not significant.
Furthermore, model 3 overall does not show significance, which is why the moderating effect
of codes of conduct and deteriorations in corporate reputation on the relationship between of
diversification into weak institutional environments and the overall corporate social
performance could not be proven. Hence, hypothesis 2 and hypothesis 3 were not supported.
4.3 Robustness check
I applied a robustness check to examine how the coefficients behave when the
specifications of the regression are modified (Lu & White, 2014). One concern when using an
aggregate measure to assess corporate social performance is the possibility that different actions
can outweigh each other. For instance, Nike donated US$1 million to tsunami victims and
claims to support disadvantaged girls in developing markets, while at the same time exploiting
the labor conditions in these countries (Nike, 2005, cited in Strike et al., 2006; Connor, 2001).
Since CSR in developing markets is often associated with philanthropic actions (Visser, 2008),
it might be that community-related actions in these markets overshadows the irresponsible
behavior when it comes to employee treatment. To avoid the compensating effect of responsible
behaviour in one area on irresponsible behaviour in other areas, the robustness of the results
was checked by differentiating between the four different CSR categories in the CSRhub
database. The related descriptive statistics are depicted in appendix A3. For the effects of
diversification into weak institutional environments on community, environment, governance
and employees, the analyses show slightly differing results than for the overall CSP rating. The
findings for the four categories are summarized in table 3.
29
Variables Model 1 Model 2 Model 3
Dependent variable = Community
Firm size 2.475-10 (.0) 6.931-10 (.0) 6.901-10 (.0)
ROA -.009 (.059) .043 (.058) .044(.058)
Diversification - .201*** (.07) .134 (.09)
NT x Diversification - - .095 (.077)
CoC x Diversification - - .036 (.047)
Overall model R² .002 (5.476) .16 (5.08) .19 (5.105)
Change in R² .158*** .03
F-value for change in R² .035 8.302 0.783
Sig F change .965 .006 .464
Overall F value .035 2.795* 1.974
Dependent variable = Governance
Firm size 1.375E-9 (.0) 1.532-9 (.0) 1.591E-9 (.0)
ROA .025 (.051) .043 (.053) .044 (.054)
Diversification - .071 (.065) .042 (.084)
NT x Diversification - - .023 (.073)
CoC x Diversification - - .028 (.044)
Overall model R² .037 (4.729) .062 (4.719) .071 (4.806)
Change in R² .025 .009
F-value for change in R² .858 1.196 .207
Sig F change .431 .28 .814
Overall F value .858 .973 0.645
Dependent variable = Employees
Firm size 2.581E-9 (.0) 2.984E-9* (.0) 3.081E-9* (.0)
ROA -.031 (.074) .016 (.075) .019 (.073)
Diversification - .181* (.091) .038 (.114)
NT x Diversification - - .173* (.098)
CoC x Diversification - - .098 (.059)
Overall model R² .066 (6.844) .144 (6.628) .22 (6.475)
Change in R² .078* .076
F-value for change in R² 1.601 3.986 2.049
Sig F change .213 .052 .142
Overall F value 1.601 2.467* 2.371*
Table 5: Robustness check results, Unstandardized coefficients with corresponding standard errors N = 48,
Significance levels: *p < 0.1, **p < 0.05
30
Variables Model 1 Model 2 Model 3
Dependent variable = Environment
Firm size 2.703E-9** (.0) 2.906E-9** (.0) 2.987 E-9** (.0)
ROA -.005 (.061) .018 (.064) .02 (.065)
Diversification - .091 (.078) .018 (.10)
NT x Diversification - - .079 (.086)
CoC x Diversification - - .057 (.052)
Overall model R² .091 (5.708) .118 (5.684) .147 (5.722)
Change in R² .028 .029
F-value for change in R² 2.24 1.376 0.71
Sig F change .118 .247 .498
Overall F value 2.24 1.965 1.447
Table 5 continued: Robustness check results, Unstandardized coefficients with corresponding standard errors
N = 48, Significance levels: *p < 0.1, **p < 0.05
When looking at community-related CSR as a dependent variable, diversification leads
to a significant change in R² (Sig. F Change = .006). The second model, which adds
diversification to the regression as explained before, is also statistically significant on the 10%-
level (p = .051). Therefore, diversification into weak institutional environments is a significant
predictor for community-related CSP. Overall, the model explains 19% of the variance in
community-related responsibility.
Considering the governance dimension of CSR, neither a positive nor a negative effect
of diversification can be noted. Since none of the coefficients is significant and the values are
small, the tested variables do not predict the level of governance-related CSR. The models
overall have the lowest level of explanatory power as the variables only explain 7,1% of the
variance in governance.
For the environment as well as the employee dimension of CSR firm size does have a
positive effect and is a significant predictor in the model. For employees, the second model also
suggests that diversification has a significant positive effect (B = .181), contradicting the
proposed assumption, that firms diversify into developing and least developed markets to
exploit lower labor standards and compensation levels. In contrast, for the environment
diversification into weak institutional environments is not a significant predictor.
Overall, the effect of diversification on CSP, community, governance and environment
is independent of codes of conduct or changes in corporate reputation, since the interaction
31
effects were not significant in these models. Only for the employee dimension, the third model
is significant on the 10%-level. When looking at the coefficients, the interaction effect between
deteriorations in reputation and diversification is a significant predictor of employee-related
CSR. The possible reasons for these results will be discussed in the next chapter.
5. Discussion
This study aimed at analysing the effect of multinational companies’ geographic
diversification into weak institutional environments on their corporate social performance.
Specifically, the study hypothesized that the lack of coercive and normative pressures and the
unfamiliarity with the institutional contexts in developing and least developed countries
decrease a firm’s ability and willingness to engage in CSR activities. Overall, this hypothesis
was not supported. Instead, the opposite relationship was found. This finding is in line with
previous research, arguing that CSR in an international context helps to overcome legitimacy
challenges, fosters stakeholder relationships and creates a positive image. It seems like
companies view CSR as a valuable resource to establish a competitive advantage even in
environments where it is less embedded. It can also be speculated that MNEs diversifying into
developing and least developed countries use CSR in order to fill institutional voids. Khanna
and Palepu (1997) for example note that it is difficult to communicate the quality of a firm to
stakeholders in emerging markets since the quality of the information infrastructure is poor. As
a result, MNEs adopt CSR practices to show their superior quality and differentiate themselves
from competitors. In this context, the literature often classifies CSR as a signal to show
environmental or social stewardship in institutions characterized by high opacity (Berliner &
Prakash, 2013; Wijen, 2014).
However, there are several other possible reasons for the results. Previous studies on the
relationship between internationalization and CSR continuously report difficulties in
empirically supporting the pollution haven or corporate crime hypotheses (Kang, 2013; Strike
et al., 2006). Strike et al. (2006) for example assume that insignificant findings result from the
aggregated measurement of positive and negative components of CSR, suggesting the
distinction between CSR and corporate social irresponsibility (CSIR). Pursuing this method,
the authors find that internationalization is positively related to CSR as well as CSIR. For the
prevalent study this implies that the not supported first hypothesis, which proposed a negative
effect of internationalization on CSP, might be attributed to the fact that positive corporate
32
actions in some areas might offset the irresponsible behaviour in other areas. Therefore,
companies can shift their irresponsible behaviour to developing and least developed markets,
for example through exploiting the local workforce, but on the other hand engage in CSR by
donating to charities, which might lead to a high overall CSR score. This effect is further
strengthened by the fact that the used measure for CSR aggregates CSR attributes from all
countries a company engages in. As a result, practices in developing and least developed
countries might be overshadowed by activities in developed markets. In order to prove the
hypothesized relationship, a more specific measure of CSR, which distinguishes between CSR
and CSIR on the one hand and between developed and developing/least developed markets on
the other hand would have been more accurate. However, such data was not available for this
investigation. The only measure that distinguishes between CSR strengths and concerns is the
KLD database. However, this data mainly incorporates US-based activities, which is why
international information is very limited (Keig, 2013; Strike et al., 2006). As this thesis is only
targeted at developing and least developed countries, this data seems to be inappropriate.
The results can also be attributed to the nature of the sample used in this analysis. In
fact, only large and well-performing firms selected from the Fortune 500 list were observed.
However, large firms generally commit more to CSR than smaller firms due to their visibility
and availability of resources (Perrini et al., 2007; Brammer et al., 2009). Therefore, the
observation of a more diversified sample including smaller firms might lead to different results.
In line with previous research, firm size was also found to have a positive effect on CSP. This
suggests that larger firms act more responsibly regardless of their degree of internationalization.
The thesis further hypothesized that the effect of diversification on CSP is moderated
by the adoption of codes of conduct and negative changes in reputation. However, these
moderating effects do not show significance. This suggests that the social performance of
MNEs is independent of their reputation changes and their commitment to codes of conduct.
This finding can also be attributed to the fact, that the main effect tested in the analysis goes in
the opposite direction as expected.
The low values in B as well as the levels of overall R² can further be explained by the
fact that there are other critical variables that determine CSP. This is in line with previous
research, which found several other predictors of CSR engagement. Yang and Rivers (2009)
for example argue that CSP in a multinational context depends on institutional factors, such as
NGO activism, consumer demands or community voice as well as organizational level factors,
33
such as the parent-firm relations, employee power or shareholder demands. Also managerial
factors, such as individual values, determine CSP (Hemingway & Maclagan 2004; Visser
2007). This implies that the variables of diversification, corporate reputation and codes of
conduct are not the only factors influencing CSP, which is why other contextual and subsidiary-
level measures should be included in predicting it. However, data from the analysed developing
and least developed markets on such factors was not available for this thesis.
To account for the compensating effect of the different CSR areas, the regression
analysis was repeated for the four CSR categories. The positive effect of diversification on CSR
was robust for the community and the employee dimension, whereas no effect was found for
governance and environment. This draws attention to the necessity to take the different types
of CSR into consideration when conducting multinational CSR studies.
A possible explanation for the differing results can be found by distinguishing between
implicit and explicit forms of CSR as conceptualized by Matten and Moon (2008). The
community dimension for example includes a company’s citizenship and its philanthropic and
charitable activities. Thus, it characterizes voluntary engagement in local as well as global
communities (CSRhub, 2014). According to Matten and Moon (2008), these activities can be
classified as an explicit form of CSR as they constitute a response to stakeholder demands that
is not caused by implicit institutional rules and norms. These activities are not embedded in a
certain institutional environment as they are not caused by certain standards or regulations, such
as the ISO codes or UN Global compact. The results show that companies do not struggle to
implement community-related CSR when diversifying into weaker institutional environments.
As explicit CSR is an overarching construct, firms rather adopt these CSR practices to
overcome legitimacy challenges or gain a superior reputation in the market, even though the
institutional environments differ. This finding can also be attributed to the fact that institutional
environments shape the understanding of CSR. In fact, in developing countries CSR is often
understood in terms of philanthropy and community development (Visser, 2008). This suggests
that companies do indeed adapt their CSR strategies to the institutional environments in less
developed countries by pursuing those practices that are regarded as most important by the local
stakeholders. The fact that the positive effect for community-related CSR was stronger than for
other forms of CSR might also be a sign that companies have more difficulties in adopting more
institutionally embedded CSR in developing and least developed countries as hypothesized in
this study.
34
An example are environment-related CSR practices. In contrast to community-related
factors, environmental practices are subject to coercive pressures as they are often caused by
environmental regulations (CSRhub, 2014). Such standards depend on the institutional context
as they are less prevalent in weak institutional environments. It can be assumed that MNEs do
not engage in this form of CSR to enhance stakeholder relations, because it is regarded as less
important in the local institutional environment. Especially in countries where the coverage of
basic rights is not given, CSR targeted at the creation of basic standards can be expected to be
more important than environmental issues or corporate governance (Rathert, 2016).
Considering the employee dimension, this study finds that firms that diversify more into
developing and least developed countries, act more responsibly towards their employees. As
the employee category covers fair and equal compensation, labour rights and health and safety
of the workforce (CSRhub, 2014), these findings oppose the hypothesis that firms exploit the
workforce in weaker institutional environments. This might suggest that corporate scandals,
such as the case of Nike, are exceptions and MNEs generally do not exploit their employees
due to lower standards. Matten and Moon (2008) propose a similar effect comparing European
and US-American CSR practices. They argue that the absence of institutionally embedded
codified rules for employment-related issues leaves space for more explicit CSR. Therefore,
the high levels of employee-related CSR in developing and least developed countries can be
regarded as a substitute for coercive institutional factors.
The results suggest that internationally diversified firms, engaging in developing and
least developed countries, increase their employee-related CSR activities as a response to
negative changes in their reputation. This is in line with prior theory as it shows that MNEs try
to overcome image concerns by enhancing their employee conditions. Thus, hypothesis 2 can
be supported for the employee category. The fact that the effect was evidenced for this category
might be attributed to increasing criticism considering the working conditions in developing
countries as a response to corporate scandals as shown in the Nike example. For instance, an
increasing amount of reports issues the low salary, excessive working hours and unsafe
conditions in developing markets (e.g. Pruett, 2005; Connor & Dent, 2006, cited in Locke et
al., 2007). The types of reputational changes leading to these results however require further
analysis.
Besides, the underlying reasons why MNEs engage more in certain CSR areas (i.e.
community and employees) as a response to diversifying into weak institutional environments
35
than in others requires further research. Furthermore, the aggregated measurement of CSR leads
to the possibility that responsible employee treatment or community support in the home
countries or other developed markets overshadows the irresponsible behaviour in developing
host countries. However, some conclusions can be drawn from this study.
6. Conclusion
This thesis aimed at answering the question, if the diversification into weak institutional
environments of multinational enterprises influences their corporate social responsibility. It
participates in the debate, if corporate social responsibility acts as a complement to or as a
substitute for strong institutional conditions (Jackson & Apostolakou, 2010; Matten & Moon,
2008; Rathert, 2016). Based on contradictory findings in the literature on whether multinational
companies exploit labour and environmental standards in their host countries or adopt corporate
social responsibility practices in order to overcome the liability of foreignness and enhance
legitimacy in the local markets, this study emphasizes the need to consider the different
institutional environments firms diversify into. More specifically, it was argued that while CSR
might be used as a means to build stakeholder relations and create a positive image in strong
institutional environments, the practices of CSR in developing or least developed markets
differ. CSR is not only less embedded in regulatory institutions in these countries, but also
interpreted differently (Visser, 2008; Amaeshi, 2006). This creates uncertainty for MNEs when
it comes to choosing appropriate CSR strategies (Campbell et al., 2012). Following institutional
theory, this study further argued that this uncertainty can be overcome through mimetic
isomorphism, which would lead to the imitation of the relatively lower CSR standards in the
developing or least developed host countries (Reimann et al., 2015).
Therefore, it was hypothesized that the diversification into weak institutional
environments leads to lower levels of corporate social performance. To test this relationship,
48 US-based multinational companies engaging in developing or least developed markets were
analysed. In contrast with the proposed theory, the regression results suggested that
diversification into these environments in fact leads to a higher corporate social performance.
This result was particularly robust for the employee and community dimensions of CSR. The
findings therefore showed that weak institutional conditions drive certain types of CSR
(Rathert, 2016). More specifically, MNEs engaging in developing and least developed countries
adopt those practices that target concerns which are regarded as the most important in the local
36
environments. The study provides new evidence that firms adapt their CSR strategies to the
institutional environments they engage in. Besides, CSR can not only act as a complement to,
but also as a substitute for strong institutions (Rathert, 2016).
Considering the employee dimension of CSR, it was further proven that previous
deteriorations in corporate reputation have a positive impact on the relationship between
diversification and CSR. This provides support for prior theory, arguing that CSR can be used
as a form of impression management to overcome reputational challenges.
For the international business literature, the findings of the study contradict the theory
that MNEs diversify into countries where regulatory arrangements are absent in order to exploit
the local labour standards. From an institutional theory perspective, the assumption that
companies follow mimetic isomorphic behaviour in developing and least developed host
countries was also rejected. These results highlight the importance of CSR in a global context.
For multinational companies, the analysis leads to the implication that competitive
pressures must be considered when engaging in developing or least developed markets.
Contrary to the assumption that countries with less regulatory standards provide an opportunity
to lower costs by lowering socially responsible behaviour, this study finds that diversified
MNEs still show high levels of corporate social performance. As a result, MNEs trying to
exploit these conditions by behaving irresponsibly might face competitive disadvantages (Keig,
2013). The fact that the high levels of CSR were especially significant for the employee and
community dimension might show an opportunity to gain a pioneer position in other CSR areas,
such as environmental or governance issues, in developing and least developed markets. This
further suggests, that MNE managers must be aware of the different CSR priorities in weak
institutional environments. They have to consider the fact that CSR strategies targeted at
creating basic standards, such as community-related initiatives, might be more efficient in these
countries than other practices (Rathert, 2016).
Overall, this investigation finds that the diversification into weak institutional
environments does influence the corporate social performance of multinational enterprises. This
effect was found to be positive. The study contributes to the international business literature by
shifting the research focus to weak institutional environments as it particularly analyses the
effect of diversification into developing and least developed countries on corporate social
performance. Additionally, the study draws attention to the necessity to differentiate between
37
the CSR categories when conducting comparative CSR studies as some areas were found to be
more affected than others.
The results of the present study however must be interpreted with caution. In fact, the
aggregate measurement of responsibility and irresponsibility as well as domestic and foreign
CSR practices might lead to compensating effects, which may have distorted the results. The
limitations will be further discussed in the next chapter.
7. Limitations and future research
This study is subject to several limitations, which might offer future research
opportunities. First, the use of single measures for corporate social performance as well as
corporate reputation raises questions about the comparability of the different included
stakeholder views. In order to form one single variable of reputation or corporate social
responsibility, it must be assumed that all respondents use the same criteria and draw the same
conclusions when evaluating the companies (Mahon & Wartick, 2012). Additionally, the
aggregation of these measures poses some challenges. As mentioned before, CSP reflects
responsible as well as irresponsible behaviour of firms. Consequently, it is hard to detangle the
effects of diversification on the CSR and CSIR. Responsible actions might overshadow
irresponsible behaviour, which is why the higher CSR levels for more internationally dispersed
firms found in this study might outweigh the resulting irresponsible behaviour. As a result,
future research should distinguish between corporate responsibility and corporate wrongdoing
by analysing the two constructs separately (Strike at al., 2006). Moreover, the CSRhub database
aggregates corporate practices from all locations a MNE engages in. Hence, the results are not
clearly attributable to diversification into weak institutional environments. The higher CSR
performance might also be due to geographic dispersion into other areas or CSR practices in
the home country environments of the firms. For future research, it can be recommended to
focus on data that only measures the CSR performance of the subsidiaries in developing or least
developed countries to gain more reliable results.
Next to the use of aggregated measures, the sample of the present study poses some
limitations. In fact, it was only focused on large firms due to data availability. This might be a
biased sample as large firms have been found to have a higher corporate social performance in
general. With the increasing importance of international entrepreneurship, it might be
interesting for future research to focus on smaller and private firms (McDougall & Oviatt, 2000;
38
Strike et al., 2006). Moreover, the sample only covers American firms engaging in developing
and least developed countries. The scope should therefore be extended to other home countries
in future studies. Particularly firms from weak institutional environments engaging in other
developing countries may lead to worthwhile results, since the institutional environments are
more similar here, which might decrease legitimacy challenges (Reimann et al., 2015). Besides,
the sample is relatively small compared to similar studies (e.g. Kang, 2013; Keig, 2013; Strike
et al., 2006). This decreases the generalizability of the results.
The quantitative nature of the study does not allow to draw conclusions on the
underlying reasons, why MNEs increase their CSR commitment when diversifying into weak
institutional environments. It might be to fill institutional voids, overcome institutional
challenges, such as the weak information infrastructure, gain legitimacy in the eyes of local
stakeholders or to show off the superior firm quality (Khanna & Palepu, 1997; Matten & Moon,
2008). In order to clarify the processes that define the choice of CSR strategies in developing
and least developed countries, more qualitative approaches, for example through in-depth
interviews with subsidiary managers, might be helpful. Besides, reverse causality might be an
issue. When interpreting CSR as a firm-level resource, there is the possibility that higher levels
of corporate social performance enable firms to diversify into more countries (Attig et al.,
2016).
Another limitation concerns the measurement of the moderating variable of codes of
conduct. In fact, the adoption of codes was measured based on self-reported indications in
sustainability reports or on corporate websites. As a result, the actual compliance with these
codes cannot be validated. Previous literature has already pointed out the difficulties in
monitoring and the lack of trustworthiness when it comes to codes of conduct. A possible
solution for future studies could be to only consider those codes, where the adoption was
validated by external agencies. However, even though codes might be validated, the
independence of monitoring agencies stays questionable (National Research Council 2004;
Esbenshade 2004; Pruett 2005; Rodriguez-Garavito 2005).
Finally, the present study only focuses on one point in time and as a result does not
account for changes in MNEs corporate social performance over time. It has been previously
argued that while companies face high levels of knowledge deficiencies and unfamiliarity when
first entering a market, this disadvantage might diminish with growing experience (Barkema &
Vermeulen 1997). At the beginning of the geographic diversification process the MNE may
39
need to focus on its core business activities and its compliance with host country institutions
(Gaur & Lu 2007). After the business is established, there might be more capacity to commit
to CSR practices in this country (Gardberg & Fombrun 2006). Therefore, future research should
pursue long-term studies to examine the possibility that corporate social performance in
developing and least developed countries might grow over time.
40
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Appendix
NAICS Code Description Frequency
3112
3121
3152
3162
3221
3253
3254
3256
3262
3279
3314
3329
3331
3336
3339
3341
3342
3344
3345
3346
3352
3361
3363
3364
3391
3399
Grain and Oilseed Miling
Beverage Manufacturing
Cut and Sew Apparel Manufacturing
Footwear Manufacturing
Pulp, Paper, and Paperboard Mills
Pesticide, Fertilizer, and Other Agricultural Chemical
Manufacturing
Pharmaceutical and Medicine Manufacturing
Soap, Cleaning Compound, and Toilet Preparation
Manufacturing
Rubber Product Manufacturing
Other Nonmetallic Mineral Product Manufacturing
Nonferrous Metal (except Aluminium) Production and
Processing
Other Fabricated Metal Product Manufacturing
Agriculture, Construction, and Mining Machinery
Manufacturing
Engine, Turbine, and Power Transmission Equipment
Manufacturing
Other General Purpose Manufacturing
Computer and Peripheral Equipment Manufacturing
Communications Equipment Manufacturing
Semiconductor and Other Electronic Component
Manufacturing
Navigational, Measuring, Electromedical, and Control
Instruments Manufacturing
Manufacturing and Reproducing Magnetic and Optical Media
Household Appliance Manufacturing
Motor and Vehicle Manufacturing
Motor Vehicle Parts Manufacturing
Aerospace Product and Parts Manufacturing
Medical Equpment and Supplies Manufacturing
Other Miscellaneous Manufacturing
2
3
1
1
1
1
4
3
1
1
1
1
2
1
2
4
2
1
3
1
1
2
1
2
3
3
Sum 48
Table A1: Industries and frequencies
53
Developing countries Least developed countries
Algeria Algeria
Angola
Argentina
Bahrain
Bangladesh
Barbados
Benin
Bolivia (Plurinational State of)
Botswana
Brazil
Brunei Darussalam
Burkina Faso
Burundi
Cabo Verde
Cameroon
Central African Republic
Chad
Chile
China
Colombia
Comoros
Congo
Costa Rica
Côte d’Ivoire
Cuba
Democratic Republic of the Congo
Djibouti
Dominican Republic
Ecuador
Egypt
El Salvador
Equatorial Guinea
Eritrea
Ethiopia
Gabon
Gambia
Ghana
Guatemala
Guinea
Guinea-Bissau
Guyana
Haiti
Honduras
Hong Kong SAR
India
Indonesia
Iran (Islamic Republic of)
Iraq
Israel
Jamaica
Jordan
Kenya
Kuwait
Lebanon
Lesotho
Liberia
Libyab
Madagascar
Malaysia
Afghanistan
Angola
Bangladesh
Benin
Bhutan
Burkina Faso
Burundi
Cambodia
Central African Republic
Chad
Comoros
Democratic Republic of the
Congo
Djibouti
Equatorial Guinea
Eritrea
Ethiopia
Gambia
Guinea
Guinea-Bissau
Haiti
Kiribati
Lesotho
Liberia
Madagascar
Malawi
Mali
Mauritania
Mozambique
Myanmar
Nepal
Niger
Rwanda
Samoa
Sao Tome and Principe
Senegal
Sierra Leone
Solomon Islands
Somalia
South Sudan
Sudan
Timor Leste
Tuvalu
Togo
Uganda
United Republic of Tanzania
Vanuato
Yemen
Zambia
54
Malawi
Mali
Mauritania
Mauritius
Mexico
Morocco
Mozambique
Myanmar
Namibia
Nepal
Nicaragua
Nicaragua
Niger
Nigeria
Oman
Pakistan
Panama
Papua New Guinea
Paraguay
Peru
Philippines
Qatar
Republic of Korea
Rwanda
Sao Tome and Prinicipe
Saudi Arabia
Senegal
Sierra Leone
Singapore
Somalia
South Africa
Sri Lanka
Sudan
Syrian Arab Republic
Taiwan Province of China
Thailand
Togo
Trinidad and Tobago
Tunisia
Turkey
Uganda
United Arab Emirates
United Republic of Tanzania
Uruguay
Venezuela (Bolivarian Republic of)
Viet Nam
Yemen
Zambia
Zimbabwe
Table A2: List of developing and least developed countries