Analysis of firm CSR strategies

Corporate social responsibility (CSR) has become increasingly important. From the perspective of operations management, traditional non-CSR-compliant operations are less costly than CSR compliant operations but may be subject to the risk of being exposed to the public by third-party organizations such as Non-Governmental Organizations (NGOs) through external scrutiny. This exposure can negatively affect firms’ market share when customers are concerned about firms’ CSR compliance. This paper studies firms’ endogenous CSR compliance strategies, i.e., the incentive to adopt CSR compliant operations. We first consider a single firm's CSR compliance strategies, and then, we extend the analysis to the case of competition. We analyze how exogenous parameters, including the risk of exposure and cost premium, determine equilibrium CSR compliance strategies. We find that CSR compliant operations will be implemented either when the exposure risk is sufficiently high or when the cost premium is sufficiently low. We also discuss how competition affects firms’ CSR compliance strategies and whether firms perform better with CSR compliant operations in equilibrium. Our results show that, by adopting CSR compliant operations, firms will engage in a win-win equilibrium if the external risk is high or if the cost premium is low. Besides, we also conduct the analysis under Bertrand (price) competition. Based on these results, we provide managerial insights into when CSR compliant operations should be adopted in practice and how such adoption affects firms’ performance. Our results also imply that the practice of sustainability requires firms to consider both the external risk of exposure and cost premium.