The Economic Logic of Corporate Social Responsibil

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The Economic Logic of Corporate Social Responsibility: 

The Economic Logic of Corporate Social Responsibility Implications for Strategy, Policy and Education Michael Barkusky, Vancouver BC and Frank Lorne, Hong Kong SAR

Private versus “Social” Costs and Benefits: 

Private versus “Social” Costs and Benefits We include “ecological” costs and benefits in our definition of “social” costs and benefits We do this even though a very long-term view may be necessary to show the ultimate impact of ecological degradation on human beings In this sense, we start from the value premises associated with the Ecological Economic Movement

Corporate Social Responsibility (CSR) and External Costs: 

Corporate Social Responsibility (CSR) and External Costs We consider CSR strategies to be any strategies to treat, voluntarily, as internal costs, costs that are legally “external” to the firm We observe that some voluntary “internalization” occurs in modern, developed economies We recognize it may sometimes have direct ethical drivers (“entrepreneur with a mission”) We were interested in better understanding such economic drivers as may exist and operate

Issues of Policy Interest: 

Issues of Policy Interest “Market Failure” is often matched by “Government Failure” Coasian bargaining usually requires law reform and may be precluded by high transaction costs Coasian bargaining is only distributionally neutral where preferences quasi-linear Coasian bargaining ignores macro-scale substitutability limits Pigouvian Taxes are seldom easily enacted CSR may provide useful alternatives

Why might firms adopt CSR strategies: 

Why might firms adopt CSR strategies Direct Ethical Motivations – (not principal interest in this paper but clearly contributory factor in Case Studies considered here) Eco-efficiency benefits (dynamic, not predicted by comparative static competitive models) May Provide Product Differentiation Benefits Part of Complex, Innovation-based Long Run- Survival Strategy (Schumpeterian “Creative Destruction”)

Economic “Rationality” of CSR: 

Economic “Rationality” of CSR Unlikely that CSR is “everywhere and always” privately economically rational (PER) under existing institutions Probable that it might be PER under certain circumstances If so, it would be useful to understand the nature of those circumstancesa

Implications of CSR as PER: 

Implications of CSR as PER Where and when becomes an interesting empirical question Von Hayek/ Friedman view of CSR as meddlesome “usurpation” collapses Left-wing critique (e.g. Bakan) as PR-fraud is simultaneously much weakened CSR may provide “leverage” for Ecological Economics policy reform agenda

Implications for Education: 

Implications for Education Current curricula and emphasized topics seem to produce graduates who adhere to either von Hayek/Friedman or Bakan-like views This may be because of excessive pedagogic focus on pure monopoly or pure competition CSR likely only makes sense under Oligpolistic or (possibly) conditions of Monopolistic Competition Market structures where CSR may be PER are in fact those that are more prevalent, empirically

Education (cont.): 

Education (cont.) Oligopoly theory is more complex, more unsettled and harder to teach Ultimately, though it is more relevant empirically, and more useful A few simple innovations would really help Better curricula would produce graduates with a broader “feasibility set” Innovation advantages in both private strategy and public policy might emerge

Revenue (Benefits) : 

Revenue (Benefits) Revenue characterized simply as P*Q is only so useful, because of lags and uncertainties, These lags and uncertainties are particularly pronounced under oligopolistic conditions Just as management accountants learned from economic theory about opportunity costs, micro-economists could learn from modern financial accounting theory that revenues are simply periodic estimates of future cash flows

Revenue (Benefits) (cont.): 

Revenue (Benefits) (cont.) In n-firm oligopoly, demand could be specified as: q1 = f1(p1, p2, … pn,DE1,DE2,…DEn, AE1,AE2 … AEn, OV) To focus on substantive differentiation we could treat AE and OV as parametric If we simplify to a duopoly case, remain eclectic about functional form, and concentrate on DE of firm i we get the expression p1 = a1 + a2.q1 + a3 q1-1 + a4 (1+ DE1) -1 q2 when we choose to express demand inversely

Contingent Demand Specification p1 = a1 + a2.q1 + a3 q1-1 + a4 (1+ DE1) -1 q2 : 

Contingent Demand Specification p1 = a1 + a2.q1 + a3 q1-1 + a4 (1+ DE1) -1 q2

Costs : 

Costs There is much mis-education about costs We compared accounting and economic teaching about costs, and found both wanting “Costs” can be Investment in Assets Distinction seldom clear ex ante Alchian’s very useful ideas (1959 paper “Costs and Output”) unfortunately not adequately pursued by microeconomists or accountants Ex-post costs are largely decision-irrelevant Ex-ante costs are always guesses to some degree, and more so in oligopoly

Costs (continued): 

Costs (continued) We will need to replace single-period with multi-period analysis Dynamic variation of costs with cumulative output (“learning curve”) as important if not more so than traditional static (single production-function-derived) cost-output relationship

Specifying Costs as a function of Rate of Output: 

Specifying Costs as a function of Rate of Output We work with a standard 3rd degree polynomial function: TC1 = a1 q13 + a2.q12 + a3 q1 + a4 q is rate of output per time period n Planned Cumulative output Σq1p is not an argument t = 1 in standard Cost Functions but is a crucial factor in any dynamic strategy

Total Cost as a function of Rate of Output (per unit time) TC1 = a1 q13 + a2.q12 + a3 q1 + a4 : 

Total Cost as a function of Rate of Output (per unit time) TC1 = a1 q13 + a2.q12 + a3 q1 + a4

Average and Marginal Costs as a function of rate of Output AC1 = a1 q12 + a2.q1 + a3 MC = 3a1 q12 + 2 a2.q1 + a3: 

Average and Marginal Costs as a function of rate of Output AC1 = a1 q12 + a2.q1 + a3 MC = 3a1 q12 + 2 a2.q1 + a3

Costs and Revenues: 

Costs and Revenues Only in pure competition can one determine unambiguously that any given expenditure, ex ante, is “sure to raise costs” In oligopoly not only is a great deal more empirical data necessary, but strategic unpredictability obscures cost predictions Greater insight can be found by looking at Costs together with Revenues (Benefits) and dynamically (in a multi-period context)

Multi Period Model: 

Multi Period Model Algebra a little expansive to fit on a slide Uses discounted cash flows Recognizes “substantive differentiation” as an intangible asset (stock variable) “SIA” SIA depreciates over time SIA requires continuous re-investment Investment in SIA returns benefits through more favourable demand configuration for “own” variety All variables “dated” Technology can change shifting cost curves

New Issues and Insights: 

New Issues and Insights “Substantive Differentiation” is an alternative to Advertising when consumers are bored and cynical about self-serving claims Firms earn credibility (trust) by demonstrating public spiritedness CSR can play a role as a stratagem to deter entry Lancastrian view on product variety counters traditional view that more differentiation inimical to social welfare Continuous technical change invalidates many preconceptions about costs

Policy Implications : 

Policy Implications Competitive CSR strategies can provide “leverage” mechanism for ecological tax reform Governments can economize on scarce political capital Will however, require “standards evolution” for Triple Bottom Line Accounting

Implications for Education: 

Implications for Education The teaching of microeconomics and managerial economics can continue evolving Greater convergence of more qualitatively-taught courses on business strategy with more analytical courses on micro-theory is quite feasible Models must become a bit more complex to be more realistic, but need not necessarily become intractable

Case Studies: Two of the Best-known Pioneers …: 

Case Studies: Two of the Best-known Pioneers …

Case Studies: Some of the Leaders…: 

Case Studies: Some of the Leaders…

Case Studies: Two companies reputedly trying hard, but still facing many challenges, not least proving their CSR credibility… : 

Case Studies: Two companies reputedly trying hard, but still facing many challenges, not least proving their CSR credibility…

The Body Shop’s Stated CSR Causes…: 

The Body Shop’s Stated CSR Causes…

Leadership, Intriguing Market Positioning or just more Greenwashing ?: 

Leadership, Intriguing Market Positioning or just more Greenwashing ? We understand that our responsibilities go beyond regulation. This is why we have a multi-functional approach to environmental issues throughout the company. - From Chevron Canada Website Beyond Petroleum

World Business Council for Sustainable Development: 

World Business Council for Sustainable Development 3M Company ABB Asea Brown Boveri ABN AMRO Bank Aguas de Barcelona (AGBAR) Alcoa Anglo American plc Anova Holding Aracruz Celulose Arthur D. Little Asahi Glass Assurances Générales de France AT&T Aventis

The List goes on …: 

The List goes on … BASF Bayer Billiton BG Plc BOC Group The Boston Consulting Group BP Brodrene Hartmann Broken Hill Proprietary Co. BT Cargill Incorporated CEMEX CH2M Hill Chemical Works Sokolov China Petro-Chemical Corporation CIMPOR Codelco Companhia Vale do Rio Doce Conoco

And on …: 

And on … DaimlerChrysler Danfoss Deloitte Touche Tohmatsu Denso Corporation Det Norske Veritas Deutsche Bank Dow Chemical Company DuPont Eastman Kodak Company Environmental Resources Management ESKOM Estudio Juridico Gross BrownF. Hoffmann-La Roche FALCK Group Fiat Auto Fletcher Challenge Limited Ford Motor Company Fortum Corporation

And on …: 

And on … General Motors Corporation Gerling- Konzern Insurances Grupo IMSA GrupoNUEVA Grupo Vitro Heidelberger Zement Heineken Henkel Hitachi Chemical Holderbank Imperial Chemical Industries Interface International Herald Tribune International Paper Company Italcementi Group

And on …: 

And on … Japan Atomic Power Company John Laing plc Johnson & Johnson JSC NORD Kajima Corporation Kansai Electric Power Kikkoman Corporation KPMG Lafarge LG Group L’Oreal Michelin Group Mitsubishi Corporation Mitsui & Co. Mitsui Chemicals Monsanto Company

And on …: 

And on … Newmont Mining Corporation Nippon Telegraph & Telephone Corp Nissan Nokia Noranda Norsk Hydro Norske Skogindustrier Novartis International Novo Nordisk OAO Gazprom Ontario Power Generation Petro-Canada Phelps Dodge Corporation Placer Dome PLIVA d.d. PowerGen plc Procter & Gamble Company

And on …: 

And on … Rabobank Group Rio Tinto RMC Group Rohm and Haas Rosneftegazstroy JSC Royal Philips Electronics S.C. Johnson & Son Samsung Electronics Seiko Group Severn Trent SGS Société Générale de Surveillance Hld Shell International Siam Cement Sibirsky Aluminium Group Skandia Insurance Company Skanska AB Sonae S.G.P.S. Sonatrach Sony Corporation

And on ..: 

And on .. Sociedade Portuguesa de Papel Ssangyong Cement Industrial Statoil STMicroelectronics Stora Enso Storebrand Suez Lyonnaise des Eaux Sulzer Ltd. Suncor Energy Swiss Re Taiheiyo Cement Corporation Taiwan Cement Corporation Teijin Limited Texaco ThermoRetec Corporation Time Warner

Until almost everyone is on board .... : 

Until almost everyone is on board .... Tokyo Electric Power Company Toray Industries Toyota Motor Corporation TransAlta Corporation TXI UBS Unilever Unocal UPM-Kymmene Corporation Volkswagen Votorantim Participações Western Power Corporation Westvaco Corporation Weyerhaeuser Company WMC Limited Xerox Corporation Yasuda Fire & Marine Insurance Co. Zurich Financial Services Group

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