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Academy ol Management Review

2001, Vol. 26, No. 1, U7-1 2 7.

University of Illinois at Chicago
University of Nottingham
We outline a supply and demand model oi corporate social responsibility (CSR). Based on
this framework, we hypothesize that a firm's level of CSR will depend on its size, level of
diversification, research and development, advertising, government sales, consumer in-
come, labor market conditions, and stage in the industry life cycle. From these hypothe-
ses, we conclude that there is an "ideal" level of CSR, which managers can determine via
cost-benefit analysis, and that there is a neutral relationship between CSR and financial
Managers continually encounter demands
from multiple stakeholder groups to devote
resources to corporate social responsibility
(CSR). These pressures emerge from custom-
ers, employees, suppliers, community groups,
governments, and some stockholders, espe-
cially i nst i t ut i onal sharehol ders. With so
many conflicting goals and objectives, the def-
inition of CSR is not always clear. Here we
define CSR as actions that appear to further
some social good, beyond the interests of the
firm and that which is required by law. This
definition underscores that, to us, CSR means
going beyond obeying the law. Thus, a com-
pany that avoi ds di scri mi nat i ng agai nst
women and minorities is not engaging in a
socially responsible act; it is merely abiding
by the law.
Some examples of CSR actions include going
beyond legal requirements in adopting progres-
sive human resource management programs,
developing non-animal testing procedures, re-
cycling, abating pollution, supporting local
businesses, and embodying products with so-
cial attributes or characteristics. We limit the
scope of our analysis to satisfying the burgeon-
ing demand for CSR through the creation of
product attributes that directly support social
responsibility (e.g., pesticide-free produce) or
that signal the firm's commitment to CSR (e.g.,
dolphin-free-tuna labels).
Many managers have responded to height-
ened stakeholder interest in CSR in a very pos-
itive way, by devoting additional resources to
promote CSR. A primary reason for positive re-
sponses is the recognition of the relevance of
multiple stakeholders (Donaldson & Preston,
1995; Mitchell, Agle, & Wood, 1997). Other man-
agers have a less progressive view of stake-
holder relevance. They eschew attempts to sat-
isfy demand for CSR, because they believe that
such efforts are inconsistent with profit maximi-
zation and the interests of shareholders, whom
they perceive to be the most important stake-
This divergence in response has stimulated
an important debate regarding the relationship
between CSR and financial performance. It has
also raised two related questions regarding the
provision of CSR:
1. Do socially responsible firms outperform or
underperform other companies that do not
meet the same social criteria?
2. Precisely how much should a firm spend
on CSR?
In existing studies of the relationship between
CSR and financial performance, researchers
have primarily addressed the first question, and
the results have been very mixed. Recent stud-
ies indicate no relationship (McWilliams & Sie-
gel, 2000), a positive relationship (Waddock &
Graves, 1997), and a negative relationship
118 Academy of Management Review January
(Wright & Ferris, 1997).' This leaves managers
without a clear direction regarding the desir-
ability of investment in CSR. More important,
the second question, which is of greater impor-
tance to managers, has not been directly exam-
ined in the academic literature.
The purpose of our study is to fill this void. We
propose a methodology that enables managers
to determine the appropriate level of CSR in-
vestment, based on a theory of the firm perspec-
tive. This perspective is based on the presump-
tion that managers of publicly held firms
usually attempt to maximize shareholder
wealth, with a vigorous "market for corporate
control" as* the primary control mechanism
(Jensen, 1988). Our framework applies generally
to publicly held firms but not necessarily to pri-
vately held companies that may have alterna-
tive objectives and are not subject to the market
for corporate control. Based on this framework,
we derive hypotheses regarding the demand
and supply of CSR attributes across industries,
firms, and products. Because these hypotheses
and the conclusions we draw from them are
relevant to the extent that managers wish to
enhance shareholder wealth, we are able to in-
fer managerial implications.
Several theoretical frameworks have been
used to examine CSR. Friedman (1970) asserts
that engaging in CSR is symptomatic of an
agency problem or a conflict between the inter-
ests of managers and shareholders. He argues
that managers use CSR as a means to further
their own social, political, or career agendas, at
the expense of shareholders. According to this
view, resources devoted to CSR would be more
wisely spent, from a social perspective, on in-
creasing firm efficiency. This theory has been
tested empirically by Wright and Ferris (1997),
who found that stock prices reacted negatively
to announcements of divestment of assets in
South Africa, which they interpreted as being
consistent with agency theory.
The agency theory perspective has been chal-
lenged by other researchers, such as Preston
' For a review of theoretical and empirical studies of the
relationship between corporate social performance and fi-
nancial performance, see Griffin and Mahon (1997).
(1978) and Carroll (1979), who outline a corporate
social performance (CSP) framework. As expos-
ited by Carroll (1979), this model includes the
philosophy of social responsiveness, the social
issues involved, and the social responsibility
categories (one of which is economic responsi-
bility). An empirical test of the CSP framework is
presented in the work of Waddock and Graves
(1997), who report a positive association be-
tween CSP and financial performance. The CSP
model has much in common with the stake-
holder perspective, which is the most widely
used theoretical framework.
In a seminal paper on stakeholder theory.
Freeman (1984) asserts that firms have relation-
ships with many constituent groups and that
these stakeholders both affect and are affected
by the actions of the firm. Stakeholder theory,
which has emerged as the dominant paradigm
in CSR, has evolved in several new and inter-
esting ways. According to Donaldson and Pres-
ton (1995), three aspect of this theorynorma-
tive, instrumental, and descriptiveare
"mutually supportive." Jones and Wicks propose
"converging" the social science (instrumental)
and ethics (normative) components of stake-
holder theory to arrive at a normative "theory"
that illustrates "how managers can create mor-
ally sound approaches to business and make
them work" (1999: 206).
The instrumental aspect and its relationship
to conventional theories in economics and cor-
porate strategy have also received considerable
attention in the literature. For instance, Jones
(1995) developed a model that integrates eco-
nomic theory and ethics. He concluded that
firms conducting business with stakeholders on
the basis of trust and corporation have an incen-
tive to demonstrate a sincere commitment to
ethical behavior. The ethical behavior of firms
will enable them to achieve a competitive ad-
vantage, because they will develop lasting, pro-
ductive relationships with these stakeholders.
Russo and Fouts (1997) examined CSR from a
resource-based view of the firm perspective.
Using this framework, they argue that CSP (spe-
cifically, environmental performance) can
constitute a source of competitive advantage,
especially in high-growth industries.
Although these frameworks are useful, we
outline an alternative theoretical perspective
that further develops instrumental aspects of
CSR. This framework allows us to develop a set
2001 McWilliams and Siegel 119
of hypotheses regarding the determinants and
consequences of CSR. Additionally, managers
can use this framework to determine precisely
how much they should spend on CSR.
We begin our analysis of CSR by relating it to
a theory of the firm, in which it is assumed that
the management of publicly held firms attempts
to maximize profits (Jensen, 1988). Based on this
perspective, CSR can be viewed as a form of
investment. One way to assess investment in
CSR is as a mechanism for product differentia-
tion. In this context there are CSR "resources"
and "outputs." A firm can create a certain level
of CSR by embodying its products with CSR
attributes (such as pesticide-free fruit) or by
using CSR-related resources in its production
process (such as naturally occurring insect
inhibitors and organic fertilizers). As such, it
seems natural to consider the nature of the mar-
kets for CSR attributes and CSR-related re-
sources. Our analysis of these markets is based
on a simple supply and demand framework,
which we outline below.
Demand for CSR
We hypothesize that there are two major
sources of demand for CSR: (1) consumer de-
mand and (2) demand from other stakeholders,
such as investors, employees, and the commu-
nity. We begin by describing the nature of con-
sumer demand for CSR.
CSR investment may entail embodying the
product with socially responsible attributes,
such as pesticide-free or non-animal-tested in-
gredients. It may also involve the use of signals,
such as the union label in clothing, that convey
to the consumer that the company is concerned
about certain social issues. This results in the
belief that, by using these products, consumers
are indirectly supporting a cause and rewarding
firms that devote resources to CSR. Consumer-
oriented CSR may also involve intangible at-
tributes, such as a reputation for quality or reli-
ability. Fombrun and Shanley (1990) and Weigelt
and Camerer (1988) have described how reputa-
tion building is an integral component of strat-
egy formulation. A reputation for quality and
reliability may be especially important for food
products. Thus, McDonald's employs the handi-
capped and supports such organizations as the
Ronald McDonald House, establishing a reputa-
tion for CSR. The presumption is that firms that
actively support CSR are more reliable and,
therefore, their products are of higher quality.
There is strong evidence that many (although
certainly not all) consumers value CSR at-
tributes. A growing number of companies have
incorporated CSR into their marketing strate-
gies, because they wish to exploit the appeal of
CSR to key segments of the market, such as
baby boomer or "generation X" shoppers. We
need only look at the rapid growth of such so-
cially responsible companies as Ben & Jerry's,
the Body Shop, and Health Valley to confirm the
importance of CSR in marketing.
CSR as a differentiation strategy. Product (ser-
vice) differentiation is used to create new de-
mand or to command a premium price for an
existing product (service). Firms that adopt a
differentiation strategy often pursue multiple
means of differentiation. An example is Ben &
Jerry's, which differentiates its products by cre-
ating unique flavors, using high-quality ingre-
dients, supporting the local community, and pro-
moting diversity in the workplace. CSR may be a
popular means of achieving differentiation, be-
cause it allows managers to simultaneously sat-
isfy personal interests and to achieve product
differentiation. For example, Ben Cohen of Ben
& Jerry's may have a personal, as well as a
professional, commitment to diversity.
Differentiating through the use of CSR re-
sources, such as recycled products or organic
pest control, may also include investment in re-
search and development (R&D). R&D investment
may result in both CSR-related process and
product innovations, which are each valued by
some consumers. For example, the "organic,
pesticide-free" label simultaneously indicates
the use of organic methods, which constitutes a
process innovation by the taimei, and the cre-
ation of a new product category, which is a prod-
uct innovation of the natuial foods letailei. Ii the
natural foods company is vertically integrated,
it engages in both CSR-related process and
product innovation simultaneously. This exam-
ple underscores the point that some consumers
want the goods they purchase to have certain
socially responsible attributes (product innova-
tion), while some also value knowing that the
goods they purchase are produced in a socially
responsible manner (process innovation).
120 Academy of Management fleview January
An additional example is New United Motor
Manufacturing, Inc. (NUMMI), the innovative
joint venture between Toyota and General Mo-
tors, which was established in Fremont, Califor-
nia, in 1984 to build small cars for both compa-
nies. The NUMMI plant implemented many of
the latest Japanese "lean manufacturing" meth-
ods (process innovation) and produced the Geo
Prism, the prototype for GM's new generation of
small cars (product innovation). These processes
and the product innovations were the result of
R&D investment undertaken by General Motors.
Furthermore, through its unique partnership
with the United Auto Workers (UAW), NUMMI
also implemented a number of progressive
workplace practices, such as a strong emphasis
on teamwork and employee empowerment. Con-
sequently, some consumers perceived that
NUMMI cars, such as the Geo Prism, were supe-
rior to traditional, American-made cars, in terms
of quality and reliability. More important, many
customers also believed that by purchasing
these cars, they were demonstrating their sup-
port of progressive human resource manage-
ment practices and the UAW.
Although R&D may result in both process and
product innovation, the vast majority of R&D is
devoted to product innovation (Link, 1982). The
role of CSR in product differentiation leads to
our first hypothesis.
Hypothesis 1: There is a positive corre-
lation between the level of product
differentiation (a proxy for which is
the ratio of R&D expenditures to sales)
and the provision of CSR attributes.
CSR and advertising. For CSR differentiation
to be successful, potential customers must be
fully aware of CSR characteristics; otherwise,
they will purchase a similar product without
such attributes. Some of these characteristics
might not be evident to the buyer at first glance.
Thus, advertising plays an important role in
raising the awareness of those individuals who
are interested in purchasing products with CSR
The literature on advertising distinguishes
between two types of goods: search and experi-
ence (Nelson, 1970, 1974). Search goods are prod-
ucts whose attributes and quality can be deter-
mined before purchase. For example, furniture
is usually considered to be a search good. Con-
sumers search for the appropriate style and
quality. These attributes can be established by
examining the product before purchase. Cloth-
ing is another example of a search good. With
accurate labeling as to the textile content, the
consumer can establish the quality of the good
before purchasing it. For search goods, most ad-
vertising will be limited to informing the con-
sumer as to the availability of the product and
its price.
Experience goods are products that must be
consumed before their true value can be known.
For example, food is an experience good. The
consumer cannot determine from viewing the
product how it will taste or whether it will be
safe to consume. Advertising for experience
goods, therefore, will provide more information,
usually tying the product to an established
brand name, such as Heinz. The association
with brand name provides the consumer with
information about the product through the rep-
utation of the brand.
As noted above, support of CSR creates a rep-
utation that a firm is reliable and honest. Con-
sumers typically assume that the products of a
reliable and honest firm will be of high quality.
Advertising that provides information about
CSR attributes can be used to build or sustain a
reputation for quality, reliability, or honesty
all attributes that are important but difficult to
determine by search alone. For example, Heinz
advertises its Starkist brand tuna as being dol-
phin free. This provides the consumer with in-
formation that the product has CSR attributes
but also that the company is trustworthy. By
implication, the product will be of high quality.
This type of advertising is used to foster product
differentiation, allowing the firm to charge a
premium price.
The link between advertising and CSR leads
to our next two hypotheses.
Hypothesis 2: Because consumers rely
more on firm reputation when pur-
chasing experience goods than when
purchasing search goods, CSR at-
tributes are more likely to be associ-
ated with experience than with search
Hypothesis 3: Because consumers must
be made aware of the existence of
CSR attributes, there will be a positive
correlation between the intensity of
2001 McWilhams and Siegel 121
advertising in an industry (a proxy for
which is the ratio of advertising to
sales) and the provision of CSR.
Additional determinants of consumer de-
mand. We hypothesize that income is another
determinant of consumer demand for CSR.
Whereas low-income shoppers generally are
quite price sensitive, affluent consumers can
more easily pay a higher price for additional
CSR attributes. Goods whose demand increases
as income increases are called normal goods.
We conjecture that CSR attributes are normal
goods, which means that greater levels of afflu-
ence, as reflected in higher disposable income,
will result in greater demand for CSR.^
Hypothesis 4: Because CSR attributes
are normal goods, there v/ill be a pos-
itive correlation between consumer
income and the provision of CSR at-
Other determinants of demand include tastes
and preferences, demographics, and the price of
substitute products. Consumer taste and prefer-
ences may be affected by mass media, and CSR
has become a hot topic in media circles. Jour-
nalists often provide free publicity of a firm's
commitment or lack of commitment to CSR. The
media closely scrutinize some sectors, such as
the film industry and professional sports. Celeb-
rities and sports figures often use the media to
highlight their commitment to social responsi-
bility. Journalists also closely follow the work of
social activists. Fedderson and Gilligan (1998)
contend that media attention devoted to social
activists provides the public with access to new
information regarding social attributes and
methods of production. This free publicity,
whether positive or negative, helps heighten
public awareness of CSR, reduces information
asymmetry, and, thus, influences demand
for CSR.
Demographics can also affect the demand for
CSR. For instance, baby boomers have smaller
families, greater household incomes, and more
social awareness than previous generations.
Thus, they have the means to purchase products
with CSR attributes and are increasingly likely
to make consumption choices based on social
grounds. Savvy firms will capitalize on this
Because not all consumers place a high value
on CSR attributes, the price of competing goods
will still affect the demand for goods and ser-
vices provided by firms that embrace CSR, if
these competing goods are lower-cost alterna-
tives. Although most consumers might choose a
good with CSR attributes if its price were equal
to that of another good and many might choose
a good with CSR attributes if its price were only
a little higher, some consumers will switch
away from the CSR good if there is a substantial
price difference. Therefore, there is a positive
relationship between the demand for goods with
CSR attributes and the price of competing, or
substitute, products (the higher the price of com-
peting goods, the higher the demand for goods
with CSR attributes). This leads to an additional
Hypothesis 5: There is a positive corre-
lation between the price of substitute
goods and the demand for goods with
CSR attributes.
To summarize, we conjecture that the key de-
terminants of the demand for a product with
CSR attributes are the product's price, advertis-
ing to promote consumer awareness of CSR at-
tributes, the level of consumers' disposable in-
come, consumers' t ast es and preferences,
demographics, and the price of substitute prod-
Table 1 presents the determinants of demand
and the predicted effect of each determinant on
Determinants of Consumer Demand for
CSR Attributes
^ Some CSR attributes may even have the properties of a
"luxury" good. That is, an increase in income may induce
greater than proportional increases in the demand for CSR
attributes (e.g., if income increases by 10 percent, the de-
mand for CSR attributes will increase by more than 10 per-
Price of goad with CSR attributes
Price of substitute goods
Hypothesized Effect
on Demand
122 Academy of Management Review January
the demand for CSR attributesthat is, whether
demand increases or decreases when the deter-
minant increases (as designated by a positive or
negative sign). As shown in the table, for some
determinants, such as tastes and demographics,
the effect is not easily predicted.
Other stakeholders' demand. Employees are
another important source of stakeholder de-
mand for CSR. For example, they tend to support
progressive labor relations policies, safety, fi-
nancial security, and workplace amenities, such
as child care. Workers search for signals that
managers are responding to causes they sup-
port. Unions often play an important role in en-
couraging firms to adopt these CSR policies.
Note that unions can also influence CSR policies
at nonunion firms in the same industry. This is
analogous to the well-documented "threat ef-
fect" of unions on nonunion wages (Freeman &
Medoff, 1983; Mills, 1994). For example, nonunion
firms may adopt progressive work practices to
avoid unionism (Foulkes, 1980). Firms that sat-
isfy employee demand for CSR may be re-
warded with increased worker loyalty, morale,
and productivity (Moskowitz, 1972; Parket &
Eibert, 1975). There is also some evidence that
firms in industries with skilled labor shortages
have used CSR as a means to recruit and retain
workers (Siegel, 1999).
Other stakeholder groups, including minority
and community groups and local and state gov-
ernments, can contribute to the demand for
products with CSR attributes as well. For exam-
ple, governments may encourage proactive en-
vironmental practices, and community groups
may desire support for local social services,
such as those provided by United Way. These
groups will then reward the firms by increasing
their consumption of the firms' products. For in-
stance, government contracts might require that
firms undertake a certain level of CSR invest-
ment, such as minority set-asides. Ultimately,
these groups affect demand through consump-
tion, either their own or that of the consumers
they influence. The characteristics of demand
from stakeholder groups other than consumers
lead to the following hypotheses.
Hypothesis 6; There is a positive corre-
lation between unionization of the
workforce and the provision of CSR:
that is, in industries that are highly
unionized, there will be more CSR
Hypothesis 7: There is a posifive rela-
tionship between the shortage of
skilled workers in an industry and the
provision of CSR: that is, in industries
with shortages of skilled labor, more
CSR will be provided.
Hypothesis 8: There is a positive corre-
lation between government contracts
and the provision of CSR.
The demand from all stakeholders can be
summed to arrive at the overall demand for
products with CSR attributes. Recognizing the
demand for CSR, managers can make decisions
on the number and level of CSR attributes and
how to produce them.
Supply of CSR
According to the resource-based view of the
firm, resources are "all assets, capabilities, or-
ganizational processes, firm attributes, informa-
tion, knowledge, etc. controlled by the firm" (Bar-
ney, 1991: 101). The resource-based view leads
us to a supply-side perspective, which begins
with the realization that firms must devote re-
sources to satisfy the demand for CSR. This in-
dicates that we can modify the microeconomic
concepts of the production and cost functions to
include CSR-related resources and output. Thus,
we assume that firms use CSR-related capital
(land and equipment), labor, materials, and pur-
chased services to generate output.
In Table 2 we describe the inputs used in
generating CSR attributes and the attendant
costs. As shown in the table, additional capital
might be required to generate CSR characteris-
tics. For example, pollution abat ement to
achieve an environmental standard beyond that
required by law will require the purchase of
additional equipment. Similarly, office space,
supplies, computers, telephones, and other com-
munications equipment may be devoted to CSR.
To the extent that additional capital is required,
capital costs will be higher.
Although capital costs will be higher for firms
that provide CSR, the costs will not increase
uniformly across firms. The use of capital in the
provision of CSR attributes may result in scale
economies, because capital investment often
2001 McWilliams and Siegel 123
Resources or Inputs Used in the Provision of CSR
Resource or Input CSR-Related Resource or Input Additional Resource or Input Costs
Materials and services
Special equipment, machinery,
and real estate devoted to CSR
Purchase of inputs from suppliers
who are socially responsible
Progressive human resource
management practices and
staff to implement CSR policies
Higher capital expenditures
Higher-cost materials and services
(intermediate goods)
Higher wages and benefits and
additional workers to enhance
social performance
entails substantial fixed costs. An example is a
smokestack scrubber. The cost of a scrubber is
fixed, once a particular piece of equipment is
installed. The cost of the scrubber will be amor-
tized over the number of units of output the firm
produces. The higher the level of output, the
lower the per unit cost of the scrubber, resulting
in an economy of scale.^
Intermediate materials and services may also
be related to the provision of CSR. For example,
the Body Shop purchases special ingredients
and formulas that have not been animal tested,
Ben & Jerry's has a stated policy of purchasing
dairy products from local Vermont farmers, and
Wal-Mart advertises that its products are made
in America. Locally produced goods and ser-
vices may be more costly than those imported
from other states and countries, resulting in
higher costs for these socially responsible firms.
There might be scale economies related to these
costs, however, because of the ability of large
firms such as Wal-Mart to obtain quantity dis-
counts on CSR-related intermediate goods and
Firms may hire additional staff to advance
CSR through affirmative action, improved la-
bor relations, and community outreach. Exist-
ing employees also may be asked to promote
these efforts. At the 1997 Philadelphia "sum-
mit" on voluntarism, sponsored by President
Clinton and Colin Powell, numerous compa-
nies pledged to dedicate additional human
resources to CSR activities. Many large firms
^ There are limits to scale economies. After all economies
of scale are exhausted, average cost will climb with addi-
tional output. This diseconomy of scale is usually associated
with physical capital constraints or with managerial limita-
tions. Managerial limitations might, for example, result in
less flexibility in responding to social issues in very large
have entire departments devoted to CSR con-
cerns. The costs of personnel devoted to CSR
and additional CSR-related benefits provided
to workers increase the overall labor costs of
firms. However, human resources may also
generate economies of scale, because they
represent a fixed cost that can be amortized
over numerous units of output.
When scale economies exist, large firms will
have lower average costs for providing CSR
attributes than small firms. This implies that
there may be some differences in the return to
firms within industries. Therefore, within in-
dustries in which CSR attributes are provided
(because the product/service can be differen-
tiated), larger firms will provide more CSR
We conjecture that there are economies of
scope in the provision of CSR, or cost savings
that arise from the joint production of CSR
characteristics for several related products. A
large, diversified firm can spread the cost of
CSR provision over many different products
and services. For example, the goodwill gen-
erated from firm-level CSR-related advertising
can be leveraged across a variety of the firm's
brands. When scope economies exist, more di-
versified firms will have lower average costs
of providing CSR attributes than firms focus-
ing on one particular industry. Thus, we ex-
pect a positive relationship between firm di-
versification and the provision of CSR
attributes, all else being equal.
Our discussion of the costs of providing CSR
attributes has revealed that embodying prod-
ucts with CSR attributes requires the use of ad-
ditionql resources, which results in higher costs.
When considering the appropriate level of CSR
characteristics, managers must make critical
decisions regarding the optimal use of inputs
124 Academy of Management Review lanuary
that generate these attributes.^ Thus, a firm's
cost of producing CSR attributes is positively
related to the number of these characteristics.
The cost function has the usual properties. First,
it is monotonically increasing in CSR attributes;
that is, it costs more to generate additional char-
acteristics. Second, at some point there are in-
creasing incremental costs of providing CSR,
which results in a standard upward-sloping
supply curve for CSR attributes. The nature of
the supply of CSR attributes leads to the follow-
ing hypotheses regarding the provision of CSR
across industries and firms.
Hypothesis 9: Firms that provide CSR
attributes will have higher costs than
firms in the same industry that do not
provide CSR attributes.
Hypothesis 10: The presence of scale
economies in the provision of CSR at-
tributes results in a positive correla-
tion between firm size and the provi-
sion of CSR attributes.
Hypothesis 11: The presence of scope
economies in the provision of CSR at-
tributes results in a positive correla-
tion between the level of diversifica-
tion of a firm and the provision of CSR
A caveat to Hypothesis 9 must be mentioned.
As noted earlier, a firm may fundamentally
change its production process in response to a
CSR concern, such as conservation. Thus, it is
conceivable that a CSR-oriented process innova-
tion could result in the creation of a CSR char-
acteristic at the same or even a lower level of
cost. Examples of this, however, are difficult to
find, whereas examples of higher costs for CSR
products abound. For instance, a trip to the su-
permarket reveals that goods with social char-
acteristics (e.g., organic produce) typically cost
more than similar goods without social charac-
teristics (e.g., nonorganic produce).
* In our model we assume that the two firms use the same
production technology. This does not apply to a situation in
which firms adjust their production processes to reflect CSR
Determining the Appropriate Level of
CSR Investment
The supply and demand framework implies
that there is some optimal level of CSR at-
tributes for firms to provide, depending on the
demand for these characteristics and the costs
of generating them. Companies that do not sup-
ply CSR attributes have lower costs, but they
face a different (lower at every price) demand
curve than firms that do provide them. 'Firms
that supply CSR will have higher costs for every
level of output than firms that do not supply CSR
and produce similar goods.
Those consumers who value CSR are willing to
pay a higher price for a product with an additional
social characteristic than for an identical product
without this characteristic. This result is contin-
gent on consumers being aware of the existence of
the CSR attribute. If consumers are not aware of
this additional social feature, they will choose the
lower-priced product. Thus, advertising plays an
important role in determining the optimal level of
CSR attributes or outputs provided. Advertising
also helps raise awareness regarding firms' use of
CSR inputs, which may be of interest to several
stakeholder groups.
The provision of CSR attributes will depend as
well on certain characteristics of the market, such
as the degree to which firms can differentiate their
products and the industry life cycle. Thus, one is
likely to find CSR attributes in industries with
highly differentiated products, such as food, cos-
metics, Pharmaceuticals, financial services, and
automobiles. In the embryonic and growth stages
of the industry life cycle, we expect that there is
little product differentiation, as firms focus on per-
fecting the production process and satisfying rap-
idly growing demand. As growth slows, and espe-
cially as the industry matures, there is likely to be
a great deal of differentiation. For example, in the
ice cream industry, simple flavors, such as va-
nilla, dominated in the embryonic and growth
stages. As tastes and markets became more so-
phisticated, more flavors were introduced. In the
current maturity phase there is substantial prod-
uct differentiation (flavors, fat content, modes of
delivery, and so forth). Ben & Jerry's has capital-
ized on the possibility of differentiation through
flavors and CSR attributes.
Demographic and technological changes also
can stimulate demand for CSR attributes. The
rapid rise in the number of working women has
resulted in an increase in the demand for corpo-
2001 McWilliams and Siegel 125
rate-supplied day care, flexible work schedules,
and telecommuting. On the supply side, the rise of
the internet has made it much easier for firms to
target consumers who have social goals. This is
evident in the substantial growth in the number of
web sites devoted to CSR activity. These have
dramatically reduced the cost of transmitting CSR
information to consumers and other interested
stakeholders. Examples include the Toyota and
Honda web sites, which are devoted to informa-
tion about their electric cars. On the demand side,
the internet makes it easier for groups who share
common social goals to exchange information. For
example, there are virtual communities (geocities)
for those outside the mainstream of society.
Our analysis reveals that there is some level of
CSR that will maximize profits while satisfying
the demand for CSR from multiple stakeholders.
The ideal level of CSR can be determined by cost-
benefit analysis. To maximize profit, the firm
should offer precisely that level of CSR for which
the increased revenue (from increased demand)
equals the higher cost (of using resources to pro-
vide CSR). By doing so, the firm meets the de-
mands of relevant stakeholdersboth those that
demand CSR (consumers, employees, community)
and those that "own" the firm (shareholders).
On the demand side, managers will have to
evaluate the possibility of product/service dif-
ferentiation. Where there is little ability to dif-
ferentiate the product or service, demand may
not increase with the provision of CSR. On the
supply side, managers will have to evaluate the
resource costs of promoting CSR while being
cognizant of the possibility that there may be
scale and/or scope economies associated with
the provision of CSR. In sum, managers should
treat decisions regarding CSR precisely as they
treat all investment decisions.
In this study we attempt to answer a question
that has received inadequate attention in the
CSR literature: Precisely how much should a
firm spend on CSR? We addressed this issue
using a supply and demand theory of the firm
framework and found that there is a level of CSR
investment that maximizes profit, while also
satisfying stakeholder demand for CSR. This
level of investment can be determined through
cost-benefit analysis. Managers can use our
framework to make decisions regarding CSR in-
vestment by employing the same analytical
tools used to make other investment decisions.
We have also developed several hypotheses re-
garding CSR activityfor example, the provision
of CSR will depend on R&D spending, advertising
intensity, the extent of product differentiation, the
percentage of government sales, consumer in-
come, the tightness of the labor market, and the
stage of the industry life cycle. Additionally,
the likelihood of economies of scale and scope in
the provision of CSR implies that large, diversified
companies will be more active in this arena. Most
important, our model indicates that although
firms providing CSR will have higher costs than
firms not providing CSR, they will each have the
same rate of profit.
To assess the impact of CSR on profitability,
we present the following simple example. As-
sume there are two firms that produce identical
goods, except one company adds a social char-
acteristic to its product. Invoking the theory of
the firm, we assume that each firm makes opti-
mal choices, which means that each produces at
a profit-maximizing level of output. It can be
shown that, in equilibrium, both will be equally
profitable. The firm that produces a CSR at-
tribute will have higher costs but also higher
revenues, whereas the firm that produces no
CSR attributes will have lower costs but also
lower revenues. Any other resultfor instance,
one firm earning a higher rate of returnwould
cause the other firm to switch product strategies.
Note that our conclusion is based on the as-
sumption that there are no entry barriers asso-
ciated with providing the social characteristic.
Our conclusion that profits will be equal may
explain why there is inconsistent evidence re-
garding the relationship between CSR provision
and firm performance. According to our argu-
ment, in equilibrium there should be no relation-
ship. CSR attributes are like any other attributes
a firm offers. The firm chooses the level of the
attribute that maximizes firm performance,
given the demand for the attribute and the cost
of providing the attribute, subject to the caveat
that this holds true to the extent that managers
are attempting to maximize shareholder wealth.
From this we predict that there will generally be
a neutral relationship between CSR activity and
firm financial performance.
126 Academy o/ Management Review
It appears that the lack of consistency in em-
pirical studies of CSR is due to a lack of theory
linking CSR to market forces. Our supply and
demand framework fills this void, allowing us to
predict that the provision of CSR will vary
across industries, products, and firms. There-
fore, those empirical studies in which research-
ers have not controlled for all the firm or indus-
try characteristics we have identified here are
probably misspecified.
Unfortunately, many of our hypotheses are dif-
ficult to test empirically, given the lack of data
on the demand for and supply of CSR. We pro-
pose that the government or management re-
searchers working with government support
systematically collect information on the social
characteristics of products and CSR activity at
the firm and industry level.^ This would enable
researchers to test our hypotheses and also al-
low them to conduct an "hedonic" analysis
(Griliches, 1990) of CSR to determine exactly
how much consumers and other stakeholders
are willing to pay for CSR attributes.
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2001 McWilliams and Siegel 127
Abagail McWilliams is professor and head of the Managerial Studies Department,
University of Illinois at Chicago. She received her Ph.D. in economics from The Ohio
State University. Her research interests include market structure and firm perfor-
mance, strategic human resource management, gender issues in worker mobility, and
corporate social responsibility.
Donald Siegel is professor of industrial economics at the Nottingham University
Business School in the United Kingdom. He received his Ph.D. in business economics
from Columbia University. His research interests include productivity analysis, the
economic and manageri al implications of technological change, university technol-
ogy transfer, science parks, and corporate social responsibility.