How corporate social responsibility affects firms’ strategic decisions : examining links among corporate social responsibility, vertical integration, and new product introductions

Firms seek competitive advantages either through cost leadership or product differentiation strategies. Cost leadership may be achieved by shifting away from vertical integration (VI) to vertical de-integration through outsourcing that often results in significant cost and flexibility gains. Product differentiation can be achieved through new product introductions (NPI) that can help firm enter new markets and meet changing consumer needs. However, modern firms not only face pressure to be competitive, but also to be socially responsible. As firms increasingly incorporate corporate social responsibility (CSR) in their operations, a key question emerges about the effect of CSR on fundamental strategic decisions related to vertical integration (VI) and new product introductions (NPI). The primary aim of this thesis is to address this question. Toward that end, the thesis is divided into three main sections described below. First, it takes stock of the extant literature on VI, especially because this construct has grown in numerous disparate directions that has led not only to conceptual ambiguity, but also rendered a bewildering array of empirical findings. The first section of this thesis, therefore, synthesizes VI literature before analyzing the effect of CSR on VI. In contrast, NPI -the other construct used in this thesis- is relatively well understood and hence the NPI based empirical section does not need a theoretical precursor. The second section comprises an examination of the link between CSR and VI. Consistent with transaction costs economics theory, panel data regression results show that higher CSR performance is associated to higher VI. In other words, socially responsible firms tend to vertically integrate, i.e., outsource less. The third section comprises the analysis of the link between CSR engagement and NPI. In this section, I consider CSR as a multidimensional construct that bundles multiple and even dissimilar activities together. Drawing on the knowledge based view of the firm, panel data regression results show that while discretionary activities concerning environmental and social engagement (labeled as informal CSR) directly and positively affect the rate of NPI, compliance-oriented corporate governance activities (labeled as formal CSR) do not directly affect the rate of NPI.