Oliver Balch tackles key topics in academic thinking and research on sustainability

Few ideas get closer to the heart of corporate capitalism than the notion of competitiveness. The brainchild of Adam Smith, competition is presented as the fuel that oils the wheels of efficient markets. Consumers want a sledge hammer or a 4x4 van or a super-sonic data processor, and companies will, via the market’s “invisible hand”, respond efficiently to that demand. The cheapest, most responsive and/or most attractive company wins the sale. Competition is cut-throat: for every winner, there’s a loser (or, more likely, several losers).

The relationship between corporate social responsibility and competitiveness is an intriguing yet not altogether smooth one. There’s the immediate issue of survival of the fittest. Where does that leave the minnows in the market, for instance? The opportunities for market incumbents or big players to nudge ahead of others for reasons other than their competitive qualities (read: political lobbying, personnel poaching, aggressive advertising, and so forth) are legion.

Or consider the societal effects of corporate competitiveness. Smith’s model ideally assumes perfect knowledge and fair terms. By meeting market demand, companies satisfy buyers’ needs (and, by extension the needs of multiple buyers: ie society), while meeting their own need for capital accumulation. But, in the real world knowledge asymmetries and power imbalances are ever-present. Hence, the neat confluence of social impact and profit maximisation is not always so tidily realised.    

The response on both counts is legislation. The lightness of touch of legislation depends heavily on just how responsible companies choose to be. Whatever they decide, some basic legal frameworks need to be in place. Think anti-trust laws, for example. Or rules against insider trading. Looking forward, an emerging consideration for responsible competitiveness centres on environmental and, to a lesser degree, social externalities. A growing awareness now exists about the long-term indirect impacts on the planet of company decisions that lead to short-term corporate advantage.

So investing in a fleet of diesel-powered trucks may be allowed by legislation and may help give companies a cost advantage. Yet the costs in terms of atmospheric carbon over time are much higher than, say, an equivalent all-electric fleet. Measures like a mandatory carbon price are put forward to square this circle. For now, however, the dominance of old-style shareholder primacy allows business to play the anti-competitiveness card. Hence, the US withdrawal from the Paris Agreement. The logic: fighting climate change (allegedly) makes US manufacturing “non-competitive”.

But is this true? A close reading of the CSR literature gives cause for doubt. Much of the existing research on competitiveness has focused on the individual firm. The positive correlation between responsibility and (usually, long-term) competitive advantage is solid (see Siegel & Vitaliano 2007). The most compelling arguments highlight benefits such as reductions in operating costs, access to new markets, the retention and attraction of talent, better stakeholder relations, and improved brand reputation. For those well-versed in the business case for CSR, these will all be familiar themes.

Less mainstream, yet arguably more relevant to current global political economy concerns, is the more macro case: ie national competitiveness. Politicians vie constantly for their country’s economy to be rated above that of their neighbours. A good ranking in the World Economic Forum’s (WEF) Global Competitiveness Index, for instance, spells greater inward investment and business confidence. Yet nowhere in WEF’s 400-page report or among the index’s 114 indicators is the acronym CSR or any of its equivalents to be found. 

That is a gross oversight, yet an understandable one. After all, no clear definition exists as to what national competitiveness actually comprises. The nearest derives from the aforementioned WEF index, which defines the term as “the set of institutions, policies and factors that determine the level of productivity of a country”. The European Commission, in contrast, takes a macro-economic interpretation, defining it as a “sustained rise in the standards of living”. Layer the notion of responsibility on top of competitiveness and pinning down the term becomes even trickier. MacGillivray et al (2003) suggest as a broad-brush definition the enhancement to a country’s economic productivity (usually expressed in per capita GDP at price parity) originating from the explicit recognition of social, economic and environmental performance. While a precise definition of “responsible competitiveness” has yet to be agreed, the general consensus suggests that "positive welfare outcomes" serve well as a general yardstick. 

While it might be assumed that scaling firm-level CSR performance up to the macro-level would give a rough indicator of national competitiveness, the literature suggests this isn’t necessarily the case. As Tracey Swift and Simon Zadek (2002) note, CSR could end up benefiting a country’s large companies but being detrimental to its small- and medium-sized enterprises. Or, alternatively, countries could end up being unable to meet exacting CSR standards and therefore find themselves facing “non-tariff” barriers to trade.

Where a positive correlation between CSR and national competitiveness is identified, it tends to relate to one of four determinants: human capital, unit cost economies, firm-level strategy, and innovation. Corroborating empirical evidence is thin on the ground, however. The exception is for innovation. Research by Ioanna Boulouta and Christos Pitelis (2014) posits that CSR-based strategies can improve the quality of human resources, which creates better workplace environments and ultimately fosters innovation. A commitment to addressing societal challenges can also be a catalyst for innovation, they add. Think micro-credit, for instance. Or so-called “bottom of the pyramid” business models.

Boulouta and Pitelis’ argument turns on the value derived from two engines of innovation: CSR-based positioning strategies (such as cost leadership, differentiation and niche strategies); and CSR-based entry-deterrence strategies (such as the aforementioned non-tariff barriers to trade that could, among other potential advantages, raise exports for responsible countries within equally responsible peer countries). Drawing on macroeconomic data from 19 developed countries over a six-year period and mapping it against firm-based CSR performance data from specialist fund management firm Sustainable Asset Management, the researchers find strong evidence of the link between innovation, CSR and national competitiveness.

Interestingly, the link is strongest in countries that are weak when it comes to innovation. This may be because such countries can use CSR-based differentiation strategies to make up for a poor national innovation record. In contrast, highly innovative countries are already known for producing high quality products/services, so a reputation for CSR doesn’t represent a substantive addition. In some cases, CSR may even be used as a substitute for a strong national innovation system. Simply by banning “irresponsible” products, low-innovation countries can gain a competitive edge because their own products suddenly appear more competitive.
 

Further reading

Boulouta, I & C Pitelis 2014. Who Needs CSR? The Impact of Corporate Social Responsibility on National Competitiveness. Journal of Business Ethics, 119: 349-364. 

MacGillivray, A, Begley, P, & S Zadek (eds). The state of responsible competitiveness 2007. London: AccountAbility.

Prasnikar, J (ed). 2006. Competitiveness, Social Responsibility and Economic Growth. Nova Science Publishers: Hauppauge, New York.

Siegel, D & D Vitaliano. 2007. An empirical analysis of the strategic use of corporate social responsibility. Journal of Economics and Management Strategy, 17: 773–792.

Swift, T & S Zadek. 2002. Corporate responsibility and the competitive advantage of nations. London: AccountAbility.

 

 

World Economic Forum  bottom of the pyramid