Competing for government procurement contracts: The role of corporate social responsibility

Abstract

Research Summary: This study examines whether corporate social responsibility (CSR) improves firms’ competitiveness in the market for government procurement contracts. To obtain exogenous variation in firms’ social engagement, I exploit a quasi‐natural experiment provided by the enactment of state‐level constituency statutes, which allow directors to consider stakeholders’ interests when making business decisions. Using constituency statutes as instrumental variable (IV) for CSR, I find that companies with higher CSR receive more procurement contracts. The effect is stronger for more complex contracts and in the early years of the government‐company relationship, suggesting that CSR helps mitigate information asymmetries by signaling trustworthiness. Moreover, the effect is stronger in competitive industries, indicating that CSR can serve as a differentiation strategy to compete against other bidders. Managerial Summary: This study examines how companies can strategically improve their competitiveness in the market for government procurement contracts—a market of economic importance (15–20% of GDP). It shows that companies with higher social and environmental performance (CSR) receive more procurement contracts. This effect is stronger for more complex contracts, in the early years of the government–company relationship, and in more competitive industries. These findings indicate that firms’ CSR can serve as a signaling and differentiation strategy that influences the purchasing decision of government agencies. Accordingly, managers operating in the business‐to‐government (B2G) sector could benefit from integrating social and environmental considerations into their strategic decision making.

Chief sustainability officers and corporate social (Ir)responsibility

“…The results of the first-stage model show that the industry trend of setting up a CSO position significantly predicts the likelihood of CSO presence in the focal firm (β = 0.188, p = .000; see Appendix A for details). The corresponding F-statistic is 19.03, which is well above the threshold for a "strong" instrument (Flammer, 2018;Stock, Wright, & Yogo, 2002). Table 1 presents the descriptive statistics of and the correlations among the variables.…”

“…We determined the industry of a firm by its two‐digit SIC code reported in Compustat. Following Flammer (), we regressed the likelihood of hiring a CSO on the instrumental and control variables in the first stage and used the fitted value of CSO presence as the predictor of corporate social performance in the second stage. The results of the first‐stage model show that the industry trend of setting up a CSO position significantly predicts the likelihood of CSO presence in the focal firm ( β = 0.188, p = .000; see Appendix A for details).…”

“…These findings once again confirm that the effects of CSO presence on CSR versus CSiR are asymmetric. Second, we categorized corporate social initiatives into institutional and technical ones (Flammer, 2018;Godfrey et al, 2009) and examined whether the effect of CSO presence is similar for these two types of social activities. Institutional and technical social initiatives are different in terms of the stakeholders they target: institutional initiatives target "a firm's secondary stakeholders or society at large" (Godfrey et al, 2009: 425), while technical initiatives target a firm's primary stakeholders such as its employees and customers.…”

Strategic CSR: A Concept Building Meta‐Analysis

“…Governments depend on a public mandate, which incentivizes them to scrutinize the firms in their jurisdictions for how they handle and affect community interests (Doh and Guay, 2006). Higher levels of community endorsement resulting from CSR may thus lead to more favourable regulatory and enforcement conditions for the firm (Campbell, 2007;Sharma and Henriques, 2005) and higher levels of public procurement (Flammer, 2018;den Hond et al, 2014). Communities may also reciprocate by granting CSR firms a societal license to operate (Henisz et al, 2014;Prno and Slocombe, 2012).…”

Institutional and Legal Context in Natural Experiments: The Case of State Antitakeover Laws

“…37 See John, Kynazeva, and Kynazeva (2015), Amore and Bennedsen (2016), Bharath and Hertzel (2016), Caton et al (2016), Cen, Dasgupta, and Sen (2016), Fich, Harford, and Yore (2017), Flammer (2017, Gormley and Matsa (2016), Jiang and Lie (2016), Pasquariello (2017), Dass, Nanda, and Xiao (2017), John, Li, and Pang (2017), and Loderer, Stulz, and Waelchli (2017). 38 For example, Dittmar and Mahrt-Smith (2007) and John, Litov, and Yeung (2008) find stronger results with the G-index than the E-index (indicating that provisions other than classified boards matter), and Hwang andKim (2009), Harford, Humphery-Jenner, andPowell (2012), and Johnson, Karpoff, and Yi (2015) find stronger results using broad indices of takeover defenses compared to using only classified boards.…”