By combining stakeholder theory with institutional theory, the relationship between product diversification and CSP within the non-renewable energy industry was studied. By doing so, our paper contributes to existing literature in several ways and in turn provides implications for managers.
Theoretical contributions
First of all, while the relationship between product diversification and corporate financial performance is a highly studied topic in existing research (Kang 2013), the relationship between product diversification and CSP remains largely understudied.
The lack of research on the topic is interesting since diversified firms face a more complex set of stakeholders, meaning that it would be fair to assume that previous research would link product diversification to a stakeholder demand focused measure. Therefore, our paper responds to the call of Kang (2013) to conduct more boundary spanning research connecting CSP and other corporate phenomena in order to gain a more complete understanding of corporate actions. By putting an emphasis on the relationship within the energy industry specifically, this research also contributes to the question as to whether CSR practices are distributed unevenly within the industry (Frynas 2009). Understanding this discrepancy is of utmost importance since energy is one of the most important resources in the world and firms operating in the industry have a vulnerable position towards their stakeholders.
The importance of research in the energy industry is confirmed by the emphasis the United Nations put on Goal 7 of the SDGs. Therefore, the SDGs were included in this research in order to investigate how they affect the relationship between product diversification and CSP within the energy industry. This was done by conducting a longitudinal study as suggested by Patrisia and Dastgir (2017), where the difference could be measured since the adoption of the goals.
“Despite the unexpected negative interaction effects of the SDGs with unrelated and total product diversification, our results opened up opportunities for new insights and discussion of the impact of the goals and its corresponding regulations have on diversified firms.”
Managerial implications
In addition to the theoretical contributions this research delivers to the literature, it also offers several implications for managers of energy firms. First of all, this study helps managers understand how product diversification affects their corporate social performance. In general, in order to increase the CSP of an energy firm, a manager should pay attention to unrelated product diversification. This argument provides a different view on unrelated diversification as previous literature predominantly viewed unrelated diversification as an inefficient and inferior diversification strategy (Berger, Ofek 1995, as cited in Kang 2013). However, if CSP can serve as a long-term predictor of (financial) firm performance and viability (Kacperczyk 2009; Kaplan, Norton 1996; Ogden, Watson 1999), then it could be suggested that unrelated diversification may in fact have a positive effect on firm performance in the long-term (Kang 2013). Moreover, being more unrelatedly diversified means that a firm needs to take into account a higher number of stakeholders. If a firm will take into account those demands, their CSP will likely go up which in terms generate sustainable competitive advantage (Choi, Wang 2009) and better financial performance. However, it could be argued that failing to take into account rising stakeholder demands might turn the relationship into a negative effect (Patrisia, Dastgir 2017). Therefore, we recommend managers to anticipate on
the rising stakeholders demand that result from unrelated diversification in order to reach the desired effect.
However, despite the relationship between unrelated product diversification being positive throughout the years 2011-2018, the SDGs seem to negatively moderate the relationship.
“Hence, in order to continue to capture value from CSP, it is not recommended to invest in unrelated markets from 2016 on, especially not if the aim of diversifying is to escape increasing regulations. Contrastingly, managers are recommended to invest in related markets, such as renewable energy, in order to increase CSP and being able to capture more value.”
Finally, although this study does not provide enough empirical evidence to conclude that being exposed to weak institutional host country environments, it is not recommended to diversify into developing countries in order to escape regulations (McCarthy 2016). Hence, in general, it can be concluded that (unrelated) diversification is not necessarily an inferior strategy for firms to increase long-term firm performance as in fact it positively affects CSP.
“However, we argue that it is important to take into account the increased stakeholder demands and it is definitely not recommended to engage into diversification in order to escape regulations, both in terms of diversifying into weak institutional environments as well as in diverse product markets.”
Since the adoption of the Sustainable Development Goals it seems more viable for energy firms to invest into related areas such as renewable energy, this way the CSP is likely to go up which in turn positively affects financial performance.
5.4. Limitations
Despite rigorous efforts to ensure the accuracy and validity of this research, there are still some limitations to be discussed which in turn provide avenues and opportunities for future research. These limitations are related to the use of three
different databases and the effects of combining them. This could have had some effects on the results (significance tests) and limitations regarding the measurement of corporate social performance. CSP was measured using the Thomson Reuters Eikon ESG data and while it offered many advantages, such as the international orientation of the database, it also has some limitations.
6. Conclusion
The aim of this research was to provide an answer to the following research questions: “What is the effect of product diversification on the corporate social performance within energy firms and how is this relationship moderated by the strength of the institutional environment of the host country?” and “To what extent is the relationship between product diversification and CSP of energy firms moderated by the adoption of the Sustainable Development Goals since 2015?”
Multiple regressions analyses revealed that unrelated product diversification is positively related to CSP, while related- and total product diversification provide insignificant results. Moreover, the adoption of the SDGs weaken the positive relationship between unrelated- and total product diversification and CSP, while the goals positively affect the negative relationship between related product diversification, thus finding the contrary of what we expected in hypothesis 3.
Unfortunately, the empirical findings were unable to determine whether the exposure to weak institutional environments affects the positive relationship between product diversification and CSP, thus not providing evidence to confirm hypothesis 2. Nevertheless, the findings of our paper contribute to theory and provide managerial implications in different ways. This makes them worth being considered by managers in the energy industry, especially in this time where policies affecting energy firms become more stringent. Hence, while providing new insights extending current literature, this paper also emphasizes the need for future research which could deepen understanding on the topic.
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Appendices
Appendix A. List of definitions
CSR in a broad sense can be described as “actions that appear to further some social good, beyond the interests of the firm and that which is required by law”
(McWilliams, Siegel 2001: 117). This definition covers all relevant components as well as it captures an MNEs’ CSR activities in host countries (Campbell et al. 2012).
CSP -CSR and CSP are interrelated concepts and CSP can be seen as a natural consequence of CSR. This study follows the definition of Wood (1991: 693): “a business organization's configuration of principles of social responsibility, processes of social responsiveness, policies, programs, and observable outcomes as they relate to firm's societal relationships.” Thus, this definition places CSR into a broader context and constitutes the social performance as the outcome of CSR activities undertaken by a firm (Ioannou, Serafeim 2012).
Related PD - Related product diversification is operationalized as the strategy where a firm expands its business related to its current products and services and/or within the same industry (Chen, Yu 2012).
Unrelated PD - Unrelated product diversification refers to the expansion of a firm’s products and services in a different industry or market (Castañer, Kavadis 2013).
Appendix B. Description of variables
Variable Measure Value Item Source
Dependent variable Corporate social performance
ESG Score – Aggregated measure derived directly from database
Sum of related and unrelated product diversification:
Appendix B. Cont. …
The extent to which a firm is exposed to weak environments:
The number of employees of a firm in a given year
Market-to-book ratio is calculated as: Continuous variable that ranges from –
Return on Assets, calculated as follows: Continuous variable that ranges from – 100% to + 100%
Compustat IQ
Industry level effects
Mean ESG score per industry firm operates in – derived directly from database
Appendix B. Cont. …
Country level effects
- Mean ESG score for country firm located its HQ – derived directly from database
- Country level fixed effects in STATA
Continuous variable that ranges from 0 (low) to 100 (high) Not applicable
Thomson Reuters’
Eikon
Not applicable