Foreign Ownership and Corporate Social Responsibility: The Case of an Emerging Market

Introduction

The purview and definition of what is encompassed under corporate social responsibility (CSR) have been evolving over time, but much of the literature has been confined to issues pertaining to developed economies. However, lately a strand of literature has been emerging highlighting the unique context and challenges faced by firms while making CSR decisions in developing economies (Chapple & Moon, 2005). In the contemporary global economy, the place held by emerging nations has been seminal for the growth of multi-national enterprises (MNEs), with developing economies accounting for 47 per cent of the global FDI inflows in 2017. Further, half of the top FDI host nations are developing economies such as India and China (UNCTAD, 2018). With the waves of liberalization, globalization and privatization sweeping the world, MNEs have been spreading their reach to the emerging nations at a fast pace.

McWilliams and Siegel (2001) highlighted that CSR can be viewed as an ‘investment’ for a firm by linking it to the ‘theory of a firm’, where the motive of management of publicly held firms is profit maximization (Jensen, 1988). There is a wide literature citing the role of ownership structure in determining the key decisions of a firm (Baysinger et al., 1991; Graves & Waddock, 1990; Barnhart & Rosenstein, 1998, etc.), thus implying that ownership pattern of the firm will have significant involvement in decisions on social investment. The ownership structure of a firm defines the proportion of shares owned by various categories of owners such as mutual funds, banks, promoters, etc. and plays out to be a key governance mechanism that is influential in a firm’s decisions regarding social responsibility and the resource allocation for the same (De Graaf & Stoelhorst, 2009).

Earlier research, which aimed to provide evidence about linkages between the ownership structure and CSR activities of a firm, primarily focused on the cases of developed economies (Barnea & Rubin, 2010; Dam & Scholtens, 2013; Höllerer, 2013; Johnson & Greening, 1999, etc.). Many studies link the differential CSR expenditures, orientation, policies and practices worldwide to the levels of development of the nation, with developed nations having a more evolved framework for CSR (Baughn et al., 2007; Welford, 2005). A wide number of studies have highlighted that the existent literature linking CSR and international business streams is far from ‘global’ in nature. The focus of most of these studies remain on developed nations and not about the practices in the developing nations (Egri & Ralston, 2008; Frynas, 2006; Kolk & Van Tulder, 2010; Pisani et al., 2017). Hence, there is a gap in the literature linking the ownership of the firm to its CSR expenditure for developing economies, barring a few studies (Oh et al., 2011; Panicker, 2017; Qu, 2007; Yang & Rivers, 2009; Zahra et al., 1993). With the MNEs entering the developing economies at an unprecedented pace, this question requires adequate attention.

Management practices related to CSR can be vastly different in the emerging nations relative to the developed ones. Foreign-owned firms differ from domestic firms in terms of their motivation, preferences, time horizon and information asymmetry related to their CSR spending in a host country (Oh et al., 2011). Therefore, these inter-linkages between foreign ownership and CSR expenditure as compared to the domestic firms need to be explored in detail.

The purpose of this article is to provide a holistic discussion of the differential behaviour of foreign-owned firms and domestic firms listed in India—a largely unexplored context. This study proves to be a unique case due to multiple reasons. Firstly, the country went through a slew of reforms for economic liberalization in the 1990s, which were followed by an acceleration in engagement with the global economy, more foreign entrants and greater competition. With rising per capita incomes, ease of doing business reforms as well as trade facilitation measures, India’s growth rate has been predicted to be the highest among emerging economies at 7 per cent over the period 2016–2021 (World Bank, 2019). However, its corporate landscape remains quite different than of a developed one in terms of the lack of transparency in institutions, higher information asymmetry and a stronger need for knowledge about the local know-how in order to function in its territory. Secondly, India provides a unique setting since in 2014, under the governance of Clause 135 of the Companies Act 2013, the Government of India (GoI) became the first one to impose a mandatory CSR spending on the firms based in India. This mandates every firm in India having an annual turnover of more than ₹10,000 million, or their net worth exceeding ₹5,000 million, or a profit over ₹5,000 million to spend at least 2 per cent of the average of the past 3 years’ net profit as CSR expenditure. Also, the companies were directed to constitute a CSR committee with its board members being a part of it as well at least one independent director. This Act directed the companies to report their CSR policy in a report that should also be published on their official website. Further, SEBI (Security and Exchange Board of India) mandated the top listed companies in India to include a ‘Business Responsibility Report’ as a part of their annual financial report to disclose information about their CSR spending as well as the environmental, social and governance initiatives taken by them (KPMG, 2013).

We propose that foreign-owned firms face Liability of Foreignness (LOF) in an overseas host country, which imposes higher costs on them (Hymer, 1960; Zaheer, 1995). Therefore, in the presence of such institutional pressures, these firms engage in higher than expected norms of CSR expenditure as prescribed in India as compared to the domestic firms (Filatotchev & Nakajima, 2014) to gain legitimacy. This is supported by the neo-institutional theory (Scott, 2001), that an isomorphic process (DiMaggio & Powell, 1983) is, therefore, taking place within ‘sectors’ and not ‘across’ sectors which are defined by ownership type here.

Our study tries to address a different question than what some of the recent works relating the ownership structure to CSR for the case of India have explored (Cordeiro et al., 2018; Panicker, 2017; Sahasranamam et al., 2019). While these papers focus only upon Indian firms located in India to look at the role of ownership on CSR strategies, our article looks at all the firms—Indian as well as foreign-owned that are listed on Indian stock exchanges. Mezias’ (2002) seminal work provides a guide to developing a ‘methodological and research design’ framework for studies related to the LOF. Mezias (2002) highlights some methodological challenges that need to be taken care of in the identification of LOF. It is suggested that appropriate controls for certain attributes such as size and age of the firms should be taken into consideration while trying to identify the LOF. Further, one of the most significant steps towards the determination of LOF faced by foreign firms involves a comparison between apt samples. Therefore, the comparison should take place between foreign and domestic firms in the same host country. This refutes the idea of comparing home country and host country firms as well as foreign subsidiaries in a host country with the MNC’s subsidiaries in some other countries, as followed by some earlier works (Buckley & Casson, 1976; Eden & Miller, 2001). It was further suggested to use a firm-level dummy to segregate and compare the foreign-owned and domestic firms for identifying the LOF. Further, the time period under study particularly matters for the research question we are addressing because of the major change in CSR norms in the country since 2014. Our sample spans through 2014–2018, which has not been the case for the existing studies.

This study is an important contribution to literature as it integrates the CSR and international business literature to investigate the CSR trends of foreign-owned firms in the context of an Asian developing host country. Through this study, we aim to examine the existence of differential CSR expenditure by firms based in India, on the basis of domestic versus foreign ownership, particularly after the landmark legislation of mandatory CSR passed in 2013. We use the random-effects model for 3591 firm-years for firms listed on BSE or NSE for the period 2014 to 2018. We draw the required firm-level data from the Prowess database published by the Centre for Monitoring Indian Economy (CMIE). To be specific, we proposed that foreign-owned firms in India indulged in a higher CSR expenditure than domestic firms, to gain legitimacy as they face LOF. Further, among the foreign-owned firms, the ones affiliated to business groups engaged in a higher CSR expenditure in the host country as compared to stand-alone foreign firms.

The article is structured as follows. The second section outlines the relevant literature and theoretical framework for the article. The third section discusses the objectives of this article, while the fourth section describes our data sources, key variables, as well as the methodology employed. The fifth section highlights the results and discussion of the analysis along with some managerial implications, while the sixth section elaborates upon about the limitations and future scope of the study. The last section concludes the article.

Review of Literature

Carroll (1979) defined CSR as ‘the social responsibility of the business that encompasses the economic, legal, ethical, and discretionary expectations that society has of organizations at a given point in time’. The issues pertaining to CSR, such as its definition (Carroll, 1979, 1999; Henderson, 2001; Waddock et al., 2002), its determinants (Aguilera et al., 2007; Campbell, 2007; Chih et al., 2010; Porter & Kramer, 2002, etc.), its disclosure (Belkaoui & Karpik, 1989; Reverte, 2009; Roberts, 1992, etc.) as well as the impact of various corporate governance factors such as board orientation (Ingley, 2008; O’Neill et al., 1989, etc.), board structure (Bear et al., 2010; Kilic et al., 2015, etc.), board size (Aggarwal & Nanda, 2004; Chang et al., 2017; Giannarakis, 2014, etc.) on CSR spending/disclosure have garnered attention from managers, academics and policymakers alike. The debate on these issues has been complex and evolving over the years, with its ambit widening gradually. CSR holds more importance for emerging economies due to its role in development initiatives and financial upliftment of the local communities (Bai & Chang, 2015; Rahman Belal & Momin, 2009, etc.). Therefore, over the past few years, various dimensions of CSR in the context of emerging countries have been attracting keen attention from researchers (Arya & Zhang, 2009; Jamali & Karam, 2018; Marano & Kostova, 2016; Yin & Zhang, 2012, etc.).

The role of ownership pattern in the determination of CSR engagement of firms has been explored in the existing literature, majorly in the context of developed economies (Dam & Scholtens, 2013; Johnson & Greening, 1999; Neubaum & Zahra, 2006, etc.). However, the different characteristics and the distinctive motivations of foreign-owned firms in an overseas market are fundamental in determining their true extent of engagement in CSR initiatives. The results of these studies suggest that ownership structure can drive differences in the CSR activities of a firm, which might also vary according to the characteristics of host countries. CSR literature has increasingly been delving into the underlying strategic goals for CSR activities of firms such as regulatory compliance, competitive advantage, legitimacy, stakeholder pressures, ethical motives, etc. (Dillon & Fischer, 1992; Lawrence & Morell, 1995; Porter & Kramer, 2006; Sharma & Vredenburg, 1998).

Further, with the proliferation of cross-border integration, foreign-owned MNEs have penetrated the emerging economies in order to exploit their market potential. International Business literature has studied in detail the costs and disadvantages faced by firms operating in the globalized world. The earliest theory about the ‘Liability of Foreignness’ (LOF), highlighting the higher costs faced by foreign firms operating in an overseas market as compared to the indigenous firms was contributed by Hymer (1960). LOF has been defined as ‘all additional costs a firm operating in a market overseas incur that a local firm would not incur’ (Zaheer, 1995). This has been identified as a source of competitive disadvantage for foreign firms operating in overseas markets. Hymer (1960) postulated that these additional costs or disadvantages can result from spatial costs due to geographical distance causing increased transport and coordination costs; an unfamiliar business environment in the host country due to lack of information about laws, regulations, language, etc.; differential treatment in the host country due to sentiment pertaining to ‘legitimacy’ of foreign firms as well as nationalistic fervour towards home firms; and rules-based restrictions regarding business engagement with certain countries by the home country.

Existing studies define legitimacy as a generalized perception or assumption that the actions of an entity are desirable, proper, or appropriate within some socially constructed system of norms, values, beliefs and definitions

The lack of information about the foreign-owned firms in the host country often causes a negative stereotyping of them. This is often accompanied by stricter regulations and scrutiny for those MNEs, beginning a cycle of lack of trust and legitimacy. The International Business literature is rife with studies where authors have tried to examine the significance of legitimacy for MNEs, using the institutional theory. (Hillman & Wan, 2005; Kostova & Zaheer, 1999; Marano & Tashman, 2012; Suchman, 1995; Xu & Shenkar, 2002).

The institutionalism literature also discusses the strategies adopted by MNEs to circumvent the adverse impact of LoF through aiming to achieve legitimacy in the host country (Beddewela & Fairbrass, 2016; Caussat et al., 2019; Rodgers et al., 2019). Much of the research in institutional theory draws from the concepts of institutional sociology, which suggest that the conduct of an organization is impacted by the institutional environment it operates in. These ‘institutions’ broadly refer to the formal and informal economic, political, social or legal rules accepted by society (Ntim & Soobaroyen, 2013). These rules could be coercive (enforced by law, standards and regulations), normative (defined by members of a profession) and mimetic (driven by stakeholders and society) in nature (DiMaggio & Powell, 1983; Meyer & Rowan, 1977). These institutional pressures cause an organization to undergo an ‘isomorphic process’. The organizations in the same institutional environment, facing formal regulatory and legal environment, cultural expectations, behavioural norms as well as other kinds of stimuli, are expected to experience an isomorphic convergence towards a common practice over time.

Further, the theory of new institutionalism focuses on context-specific, organizational sectors synonymous with boundaries drawn in the context of industries (sectors), professions and societies (DiMaggio & Powell, 1991). Therefore, viewing the sub-classes of organizations such as foreign-owned entities and foreign business groups, as different sectors, the firms belonging to the same sub-sector are likely to be similar. It is likely that the practices and conduct of firms belonging to each ‘sector’ may observe some convergence within that sector, which might be different than the ones adopted by the other ‘sector’.

Objective of the Study

The study aims to unfold the relationship between foreign ownership and CSR strategies while exploring the primary rationale behind them in an emerging economy context. This is done in the single-country context of India, which has shown rapid GDP growth over the past years and adopted a unique CSR policy vide clause 135 of the Companies Act 2013, which is largely understudied. This analysis is carried out as a comparison between the CSR strategies of foreign-owned firms and the domestic firms based in the host country followed by a relative study between foreign-owned private versus foreign-owned business-affiliated firms, to draw a contrast. The results provide for important prescriptions for Indian policymakers as well as have significant managerial implications for firms targeting overseas markets.

Theoretical Framework

The neo-institutional theory put forth by Scott (2001) assumes that the organizations not only seek ‘economic efficiency’ but are also looking for legitimacy. In the backdrop of varied institutional pressures faced by organizations in a developing host country, institutional theory has been a widely used perspective to understand the usage of strategies like CSR to seek legitimacy (Campbell et al., 2012; Fernando & Lawrence, 2014; Hah & Freeman, 2014; Jackson & Apostolakou, 2010; Rathert, 2016). Therefore, different CSR strategies could be followed by organizations differentiated into sectors due to diverse organizational characteristics like ownership type (Goodrick & Salancik, 1996). Our article thus chooses the LOF and neo-institutional theory framework to explain the differential CSR engagement for firms in various ownership-based ‘sectors’ but the same institutional environment. Therefore, differential CSR strategies will be undertaken by foreign-owned firms versus domestic firms and foreign business group-affiliated firms versus foreign-owned standalone firms, in a host country.

Data and Methodology

Empirical Model

Dependent Variable

The analysis uses the natural log of CSR expenditure (in Rupees) as the main dependent variable. Our study looks into total CSR expenditure of firms rather looking into ‘community-related’ CSR, ‘environmental’ CSR, ‘employee-based’ CSR, etc., which have been sometimes criticized of being ‘context-specific’ to Western nations (Banerjee, 2003; Belal, 2001; Cordeiro et al., 2018; Lindgreen & Swaen, 2010). CSR spending data are missing for the majority of the firms in the selected time period for our dataset and this reduces our sample set to about 3591 firm years. Even within that, it is found that CSR data are positively skewed, with a large number of firms reporting zero or little CSR expenditure. This is possible since the government mandate only requires companies to spend a certain percentage of their profits towards CSR, and many firms report zero or negative average annual profits. This distribution is therefore truncated at the lower end and is right-skewed (Refer to Figure 1).

Independent Variables

The four relevant categories explored in this article are—foreign private, Indian private, foreign groups and Indian groups, as highlighted in the classification provided by CMIE. CMIE uses a variety of sources to classify firms into these categories, such as historical reports published by the government for anti-trust purposes, tracking the corporate venture and public listing announcements as well as other filings made by firms to SEBI. This classification provided by Prowess has been used extensively in existing literature (Khanna & Palepu, 2000; Khanna & Rivkin, 2001; Lodh et al., 2014; Sarkar & Sarkar, 2009, etc.) due to its accuracy. Companies within a business group are typically organized as separate legal entities and are required to publish financial statements in standalone and consolidated form, which are used in this article as added reference points. All government companies are dropped from the dataset, since their CSR activities may not be independently decided but may be influenced by government directives and multiple other factors. The main independent variable for examining the first proposition is an indicator variable, which takes a value of ‘one’ if the primary ownership of the firm is foreign and ‘zero’ if it is Indian. For testing the second proposition, an indicator variable is used which takes values depending upon whether the firm is affiliated to a foreign business group or is a foreign-owned standalone firm, based on the ownership pattern as per the Annual Reports. It takes the value of ‘zero’ if the firm is affiliated to a foreign business group or ‘one’ if it is a standalone foreign firm. While testing the second proposition, the comparison is made only between foreign firms—standalone versus group firms; therefore, the sample size reduces to 291.

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Figure 1.

Distribution of Log of Annual CSR Spending by Firms

A preliminary look at our data shows that while the CSR expenditure incurred by foreign-owned firms has been rising over time, the expenditure by Indian firms has declined and remained constant over the past 4 years (Refer to Figure 2).

Control Variables

The analysis controls for several variables, which may determine CSR spending, apart from the broader firm and industry characteristics. These variables include—firm size, profitability, leverage, research and development (R&D) expenditure, advertising expenditure and age apart from industry fixed effects. Firms with smaller scale of operations, resource access constraints and lower visibility may be less likely to participate in CSR activities (Blombäck & Wigren, 2009; Lepoutre & Heene, 2006; Sahasranamam et al., 2019; Udayasankar, 2008, etc.) On the contrary, larger firms have higher visibility and greater pressures to engage in CSR initiatives (Tversky & Kahneman, 1974). Hence, the size of the firm in this study has been controlled for and is measured as total annual sales. The relationship between a firm’s financial performance and CSR expenditure is well documented in the literature (Kapoor & Sandhu, 2010; Margolis & Walsh, 2003; McWilliams & Siegel, 2000; Nelling & Webb, 2009; Orlitzky et al., 2003). This has been controlled for using two variables—return on assets (ROA) and debt-to-equity ratio of the firm to measure leverage. Debt-to-equity ratio is calculated as the firms’ debt divided by total assets over 3 years and a higher ratio would indicate lower CSR spending, as per the slack-resources theory (Waddock & Graves, 1997). Existing literature provides mixed results about the impact of firm age on CSR spending, with research suggesting it may have a positive impact (Moore, 2001; Pradhan & Nibedita, 2019; Withisuphakorn & Jiraporn, 2016) or a negative impact (Cochran & Wood, 1984). However, its significance in determining CSR expenditure is well established. In this article, the firm age is calculated as the number of years since its inception till the year of analysis.

CSR spending and R&D expenditure of a firm may overlap when both are incurred to meet sustainability targets, and both allow companies to advance in their position of competitive advantage and innovation. Studies have found that there exists a positive relation between R&D expenditure and CSR activities when both are targeted at product innovations (McWilliams & Siegel, 2001; Padgett & Galan, 2010). Padgett and Moura-Leite (2012) further postulate that the promotion of differentiated products with positive social benefits may lead to higher CSR expenditure. Similarly, firms often invest in advertising and promotion to showcase their CSR attributes and gain corporate reputation (Dean, 2003; McWilliams & Siegel, 2001). This allows companies to create goodwill within the community while differentiating itself from its competitors to gain market share. Thus, advertising and R&D expenditure need to be controlled for while examining the CSR activities of a firm. Further, industry groups are included to control for broader trends within them. Table 1 summarizes the variables under study and their description.

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Table 1.

Description of Variables

Variable	Description
Dependent variable
CSR expenditure	Measured as annual CSR expenditure as reported in the annual reports of the firms
Independent variables
Foreign ownership	Takes a value of 1 if the firm is foreign-owned and 0 if the firm is domestic.
Foreign business group	Takes a value of 1 if the firm belongs to a foreign business group and 0 if it is a foreign standalone firm
Control variables
Firm size	Measured as total sales of the firm (Annual)
ROA	Measures profitability of the firm by calculating return on assets.
Debt-to-equity ratio	Measures leverage and is calculated as the firms’ debt divided by total assets over a period of three years
Age	Measured as the number of years since the inception of the firm till the year of analysis
R&D expenditure	Ratio of annual R&D expenditure to total firm sales.
Advertising expenditure	Ratio of annual advertising expenditure to total firm sales
Industry type	Firms are grouped into nine industries based on NIC code (National Industrial Classification, Ministry of Statistics and Program Implementation, Government of India).

Source: The authors.

Note: All data extracted from Prowess CMIE.

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Figure 2.

CSR Spending by Firm Type Over Time

Results and Discussion

Table 2(a) presents the correlations and Table 2(b) presents the means and standard deviation for the important variables. The average CSR expenditure for Indian firms is ₹54.01 million, which is significantly lower than that for foreign firms—₹94.65 million. The average age of firm, mean return on assets, the average debt-to-equity ratio, advertising and R&D expenditures are also significantly different between the two groups. Pairwise correlation results indicate that CSR spending is positively and significantly associated with the age of the firm, its total sales (size of the firm) and its returns to assets ratio, whereas it is negatively associated with the debt-to-equity ratio, though the correlation is not significant.

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Table 2(a).

Correlation Matrix

Variables	Correlation
	1	2	3	4	5	6	7
1. CSR expenditure	1.00
2. Firm size	0.5938***	1.00
3. ROA	0.1087***	0.2187**	1.00
4. Debt-to-equity ratio	–0.0054	0.0145*	–0.0017	1.00
5. Age	0.1621***	0.1669**	–0.025**	–0.005	1.00
6. R&D expenditure	0.2793***	0.1552**	–0.000	–0.006	0.06***	1.00
7. Advertising expenditure	0.3092***	0.1629**	0.0143**	–0.007	0.093***	0.098***	1.00

Source: The authors.

Note: **Significant at 0.01 level (2-tailed); *significant at 0.05 level (2-tailed) (N = 2404).

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Table 2(b).

Descriptive Statistics

	Foreign-owned Firms		Indian Firms		2-Sided paired t-test
Variables	Mean	S. D.	Mean	S. D.	p-Value
CSR expenditure	94.65	18.02	54.01	4.96	0.023
Firm size	8.17	0.09	6.04	0.02	0.000
ROA	1.41	0.422	0.85	0.01	0.000
Debt-to-equity ratio	0.38	0.05	1.73	0.10	0.000
Age	42.41	0.88	29.31	0.11	0.000
R&D expenditure	95.75	15.35	36.13	3.40	0.002
Advertising expenditure	592.95	119.76	40.00	2.09	0.000
	Foreign Standalone Firms		Foreign Business Group Firms		2-Sided paired t-test
Variables	Mean	S. D.	Mean	S. D.	p-Value
CSR expenditure	52.06	9.05	202.66	58.04	0.000
Firm size	7.73	0.110	9.88	0.13	0.000
ROA	1.50	0.52	1.04	0.44	0.666
Debt-to-equity ratio	0.39	0.06	0.34	0.14	0.727
Age	38.17	0.82	59.06	2.50	0.000
Advertising expenditure	232.64	37.43	2010.14	558.80	0.000
R&D expenditure	93.28	18.54	105.44	20.40	0.7505

Source: The authors.

Note: **Significant at 0.01 level (2-tailed); *significant at 0.05 level (2-tailed) (N = 2404). S.D. refers to standard deviation.

The results of OLS regression analysis for both the propositions are reported in Table 3. Models (1) and (3) use OLS to estimate the relation for the first and second proposition, respectively. Model (1) provides results for the first proposition that states that foreign firms indulge in higher CSR activities in the host country relative to domestic firms. The coefficient of the dummy indicating foreign ownership is positive and significant, supporting the first proposition. Similarly, in model (3), the dummy for the firm belonging to a family group is positive and significant, thus supporting the second proposition. Thus, it is seen that both foreign ownership (in model [1]) and being affiliated to a foreign business group rather than a standalone form (in model [3]) positively and significantly affect CSR spending in the host country.

Among the control variables, firm size is a positive and significant determinant in both models (1) and (3). Debt-to-equity ratio is not significant in model (1), which departs from the existing results in the literature and theoretical frameworks such as the slack-resource theory (Rahrovani & Pinsonneault, 2012). Our results seem to suggest that a high level of debt would potentially make it tough for a listed firm to commit and engage in long-term activities like CSR and instead focus on short-term profit-generating activities to appease shareholders. The debt-to-equity ratio and age of the firm are not significant for model (3). Both advertising expenditure and R&D expenditure are positively and significantly correlated with CSR expenditure.

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Table 3.

Regression Models

Models
Variables	(1)	(2)	(3)	(4)
Firm size	0.6192***(0.017)	0.5172***(0.015)	0.7405***(0.047)	0.6361***(0.064)
ROA	0.3302***(0.078)	0.2747***(0.026)	0.3601***(0.084)	0.2782***(0.106)
Debt-to-equity ratio	–0.0062(0.007)	–0.0013(0.002)	0.298(0.291)	–0.3429(0.262)
Age of firm	0.0031***(0.000)	0.0037***(0.001)	0.0033(0.002)	0.006(0.004)
R&D expenditure	0.0001***(0.000)	0.0001***(0.000)	0.0001***(0.000)	0.000***(0.000)
Advertising expenditure	0.0001***(0.000)	0.0001***(0.000)	0.0001***(0.000)	0.000***(0.000)
Foreign ownership	0.2830***(0.060)	0.3038***(0.099)	—	—
Foreign group	—	—	0.3715***(0.108)	0.444**(0.200)
Constant	–2.1418***(0.665)	–2.306***(0.324)	–3.856***(0.448)	–3.750***(0.541)
N	3591	3591	291	291

Source: The authors.

Note: Standard errors in parenthesis; ***, ** and * significant at 0.01, 0.05 and 0.10 levels, respectively. Industry and time dummies have been used in each estimation.

Since it is believed that the OLS estimates may be biased due to omitted variables and skewed distribution of the CSR expenditure, we address it by using a random-effects panel data model. Therefore, this study uses a random-effects panel data model for the estimation of models (2) and (4). Random effects results are similar to the OLS results. The proposition that foreign ownership has a positive effect on the firm’s CSR expenditure is supported by the analysis. Foreign ownership leads to the coefficient of log CSR to be higher by 0.3038, thus if ownership switches from Indian to foreign, the average CSR expenditure increases by ₹1.35 million.

The results for model (4) support the proposition, which states that belonging to a foreign business group increases log CSR spending by 0.444 and it is significant at 5 per cent level. This can be interpreted as follows: A foreign-owned business group-affiliated firm spends on an average ₹1.55 million more on CSR, in comparison to foreign standalone firms even after controlling for firm size, age and financial position. These results are in line with the findings in the existing literature that long-term oriented investors are likely to drive CSR spending. The results for other control variables in models (2) and (4) are consistent with past literature and it is found that firm size, age, and returns to asset are all significant and positively associated, while the debt-to-equity ratio has a negative and significant relationship with CSR expenditure.

In summary, it is observed that foreign ownership (versus domestic) and foreign-business group affiliation (versus foreign—standalone) have a positive and significant impact on the CSR spending of a firm for the case of India.

Limitations and Future Research

Despite providing crucial theoretical and practical insights into the CSR and international business literature, this study has some limitations that can motivate future research. Since this study is set in a single-country context of India, which has a unique institutional environment, growth story as well as CSR mandate etc., the generalization of these results deserves discretion. The choice of a particular country does assure a homogenous institutional and legal environment, but caution is recommended in generalizing the results for other developing nations. Therefore, a replication of this study may or may not lead to similar results in a different institutional context or for the case of emerging market MNEs entering the developed markets, given the role of institutions in driving CSR (Kolstad & Wiig, 2011; Rathert, 2016; Young & Marais, 2012, etc.). However, there exists literature that supports active engagement in CSR in the context of strong institutions (Campbell, 2007) since such an institutional environment enables the stakeholders to pressurize the firms to behave in a socially responsible manner. Therefore, future research to test similar hypotheses for other emerging nations (like China, Brazil, Turkey etc.), as well as developed nations, is needed. Also, though our study controls for the industry group, a detailed examination of the relationship between foreign ownership and CSR commonalities and differences across industries can be studied in the future.

Further research in this direction can explore the role of various types of distances such as cultural and institutional distance between the foreign country and the host country on the CSR expenditure, particularly for the case of emerging economies such as India and China. Also, subject to the availability of data, the disaggregation of the CSR expenditure into activities such as environmental conservation, company diversity, labour practices and philanthropic efforts can be carried out to understand which of these avenues is chosen by foreign firms to acquire legitimacy in the host country.

The model with random effects is used to account for unobserved heterogeneity across observations; however, causal inferences cannot be derived from this analysis. LOF is suggested as a reason by the authors but cannot be empirically verified completely. This is only one of the many plausible explanations about why foreign-owned companies may engage in higher CSR expenditure. Further, one of the future works can also try to focus upon investigating the different types of LOF faced by MNEs in host countries—cultural and linguistic differences, political and institutional regulations, and the geographic difference between parent and home countries and the corresponding impact on CSR strategies (Mezias, 2002). Such an in-depth investigation can be very helpful in providing a roadmap for the MNEs to decide where to locate as well as about steps to mitigate the risks of LOF faced.

Conclusion

The study contributes to the initial attempts aiming to understand the motivations that guide the CSR strategies of foreign firms relative to the local firms in an emerging market host country. The results highlighted that on average, the CSR expenditure of the foreign firms in the host country exceeds that of the local firms. The study further delves into the behaviour of business group-affiliated foreign firms relative to standalone foreign firms towards CSR initiatives in a host country. It is sincerely hoped that this study would help elicit the interest of scholars to carry out future work in this relatively ‘understudied’ domain to reach insightful conclusions to be adopted by managers and policymakers.