Technology in Society 31 (2009) 5663

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Technology in Society
journal homepage: www.elsevier.com/locate/techsoc

The impact of corporate social responsibility on nancial performance:

Evidence from business in Taiwan
Chin-Huang Lin a, Ho-Li Yang a, b, Dian-Yan Liou c, *
a
Department of Technology Management, Chung Hua University, Taiwan
b
Department of Finance, National United University, Taiwan
c
Department of Marketing and Logistics Management, Yu Da College of Business, Taiwan

a b s t r a c t

Keywords: Several research studies have examined corporate social responsibility (CSR) and its effects
Corporate social responsibility on business performance, but their results vary widely. This may stem from awed anal-
CSR yses by regressing nancial performance on corporate social performance, and/or perhaps
Financial performance
from several inadequately controlled variables. Previous studies did not recognize
Taiwan
investment in research and development as a critical variable because there is consider-
able empirical evidence to indicate that it has a strong positive impact on protability. This
misidentication creates biased estimates of the nancial impact of CSR.
Between 2002 and 2004, we examined 1000 Taiwanese cases in which rms include their
R&D expenditures as one of their business strategies for sustainable development; they
also identify their charitable expenditures as contributions to CSR. Based on theoretical
assertions and empirical evidence in the literature, we identied a positive relationship
between CSR and nancial performance. When the model is properly specied, we found
that while CSR does not have much positive impact on short-term nancial performance, it
does offer a remarkable long-term scal advantage.
2008 Elsevier Ltd. All rights reserved.

1. Introduction

Although social issues have been debated for centuries, only recently they have joined the mainstream management
literature as a legitimate area of inquiry. In his book Give and Take, Levy [1] espouses the belief that corporate philanthropy
and social initiatives are the heart and soul of business. He stresses that social endeavors must be consistent with business
objectives for earning prot (heart) and must express the values of serving society (soul).
A growing body of research on corporate social responsibility (CSR) in social welfare has shown that certain rms have
responded to these concerns by devoting more resources to CSR. Considered an active source of competitive advantage, CSR
can be a proactive business strategy and an effective marketing tool to create and sustain a competitive advantage [2,3].
Corporations realized that to survive and compete in the hyper-competitive global market, they must evolve from doing
good to doing better [4] and may be to doing best by building added societal value. However, in some companies,
management has resisted, arguing that additional CSR investment is inconsistent with efforts to maximize prots.
This disagreement has prompted researchers to examine the relationship between CSR and nancial performance in an
effort to assess the validity of these concerns. Existing studies of this relationship have several important theoretical and

* Corresponding author. Fax: 886 2 27962796.

E-mail address: dian728@gmail.com (D.-Y. Liou).

0160-791X/$ see front matter 2008 Elsevier Ltd. All rights reserved.
doi:10.1016/j.techsoc.2008.10.004
 C.-H. Lin et al. / Technology in Society 31 (2009) 5663 57

empirical limitations. One is that these studies sometimes use models that are mis-specied by omitting variables that have
been shown to be important determinants of protability.
One such variable is the intensity of the rms R&D investments [5]. Excluding R&D from an econometric model is
especially problematic because there is long-standing theoretical literature that links R&D investment to long-term
improvements in economic performance [6]. R&D should be considered a form of investment in technical capital.
Investment in technical capital results in knowledge enhancement, which leads to product and process innovation. This
innovative activity enables rms to enhance their productivity. For example, using data from more than 2000 rms, Lich-
tenberg and Siegel [7] report a strong positive correlation between R&D investment and growth in total factor productivity.
Ben-Zion [8], Guerard et al. [9], Guerard et al. [10], and Andrews and Hall [11] report similar positive associations among R&D,
protability, and long-term shareholder returns (and other proxies for long-term nancial performance).
In Taiwan, Uni-President Corporation and Chinatrust Financial Holding Corporation are the highest CSR-contributing
companies in manufacturing and non-manufacturing industries, respectively. Since these corporations continually devote
themselves to serving society while earning a prot, we ask the following question: What is the impact of consumer behavior
and CSR activity on a rms nancial performance? Very little research has been conducted to help identify the impact of CSR
on rm performance in Taiwan.
This paper attempts to ll the gap, with the results organized as follows. First, we review and integrate the eclectic but
highly complementary theory regarding the relationship between CSR and rm performance by suggesting that this rela-
tionship is likely mediated by a number of key variables. The next section describes methodology, as well as an explanation of
formula and gures that are used to elucidate our study approach for the current Taiwanese situation. Then we analyze the
results and summarize our ndings and implications.

2. Literature overview

The relationship between social welfare and company protability today constitutes one of the main subjects of study and
research on the theme of social responsibility. Corporate social responsibility describes a rms obligation to protect and
improve social welfare now as well as in the future, by generating sustainable benets for stakeholders [12].
Regarding the demonstrated link between social responsibility and economic reward, existing literature authors express
varying, and at times contradictory, opinions on the subject [2,1316]. Friedman [17] asserts that a businesss primary
responsibility is to make money, and that the only interests that matter when making managerial decisions are those of the
shareholders. He argues that ethical and discretionary considerations are irrelevant, and decisions that include these factors
may harm a rms nancial performance. Preston [18] espouses an opposing viewpoint, arguing that social issues can be just
as important as market factors in determining long-run success, and thus deserve the same attention and rigorous analysis
that have been devoted in the past to the market environment.
Some researchers argue that socially responsible initiatives create additional costs that may put a rm at an economic
disadvantage compared to less socially responsible organizations [19,20]. These additional costs could stem from activities
such as employee welfare programs, charity, community development, plant maintenance in economically depressed loca-
tions, and establishment of environmentally friendly policies [21]. Others have found no relationship between CSR and rm
performance [10,22].
Moskowitz [23], Parket and Eilbirt [24], and Sturdivant and Ginter [13] found social responsibility is to be positively related
to an organizations stock market performance. Possible explanations offered by these authors for their ndings include
improved relationships with important stakeholders such as banks, investors, and government agencies. A rm might benet
from CSR because its environmentally conscious decisions are often tied to lower waste and therefore lower costs. As an
example, a Ford plant in Texas was remodeled to reduce waste-water runoff. This led to fewer municipal charges for pollution,
and by some estimates it saved the company millions in nes. These improved relationships can increase investments in these
rms by shareholders [23,25], elevate employee morale, increase customer goodwill [26], and improve relationships with
government agencies that might reduce regulatory costs [21].

2.1. The link between CSR and consumer behavior

In addition to the direct link between CSR and increased protability, it is clear that companies also recognize the markets
demand for them to address product-liability risks; environmental impacts of their facilities; and the health, safety, and well
being of their employees. Consequently, there have been numerous studies on CSR, corporate ethics, and social sponsorship
that suggest a link between social initiatives and improved nancial performance [16,21,27], as well as studies that
demonstrate the link between social initiatives and positive affective, cognitive, and behavioral responses from consumers
[2833].
From a strategic business perspective, the rms economic benets from CSR have been documented in their link to
consumers positive product and brand evaluations, choice, and brand recommendations [3,28,3335]. Through a variety of
theoretical lenses, these studies have demonstrated that CSR plays a role in consumer behavior and has a spill over or halo
effect on consumer judgments, such as the evaluation of new products. A halo effect is the bias resulting from a measure that
spills over to another measure [36]. For example, strong consumer belief about the performance characteristics of a Lexus may
58 C.-H. Lin et al. / Technology in Society 31 (2009) 5663

spill over into beliefs about its reliability; a consumers overall attitude toward a brand might spill over into his assessment of
specic attributes of that brand [37].
There is strong evidence that many consumers value CSR attributes [29]. Therefore, an increasing number of companies
incorporate CSR into their marketing strategies to exploit the appeal of CSR to key segments of the market. We need only look
at the rapid growth of such socially responsible companies as Ben & Jerrys, the Body Shop, and Health Valley to see the
importance of CSR in marketing.

2.2. The link between R&D and consumer behavior

The integration of technology development with product innovation may be present in R&D and be a foundation for
competitive advantage as efforts become more aligned with overall business strategy [38]. Investment in R&D may produce
CSR-related process and product innovations that many consumers value. Investment in CSR promotes product differenti-
ation at the product and rm levels. Some rms produce goods or services with attributes or characteristics that signal to the
consumer that the company is concerned about certain social issues. Also, many companies try to establish a corporate image
of social responsibility. Both strategies encourage consumers to believe that by consuming the product, they are directly or
indirectly supporting a cause.
These strategies are effective with consumers who like to champion rms that devote resources to CSR. Consequently,
many products have labels that indicate the use of certain ingredients and production methods that promote CSR. For
example, natural-food companies place labels on their products signifying the use of organic, pesticide-free ingredients.
Cosmetic rms boast of animal-free testing, and manufacturing companies display ENERGY STAR stickers [5]. Each
example underscores the point that some consumers want the goods they purchase to possess certain socially responsible
attributes (product innovation), while some also value knowing that the goods they purchase are produced in a socially
responsible manner (process innovation).
According to Ogrizek [39], there are clear, concrete, market-driven benets and competitive advantages for companies
that integrate their business policies with CSR. Therefore, by integrating consumer behavior and R&D, CSR activity can be
considered in various forms such as traditional philanthropy, cause-related marketing, or events involving employees. For
example, strong local communities with quality housing, schools, and shopping attract and retain competent workers. A
companys efforts in these areas may pay off in recruiting and retaining skilled personnel. Similarly, workers tend to want to
work for a good company. A company that supports employee participation in the local community through, for example,
volunteer days, tutoring programs, or cancer walks may improve worker retention. These activities may also improve the
image of the company with customers and, in turn, boost sales.

2.3. The link between CSR-business strategy and business benets

It is evident from the literature that many companies realize the link between being socially active, increasing stakeholder
expectations, and creating prot [40,41]. One issue that became apparent in our research was the notion of CSR-business
strategy. It was apparent that including CSR as an integral part of business strategy is highly benecial in terms of CSR
evaluation and measurement, and determining its impact on prot.
According to a study by Anderson and Bieniaszewska [42], business awareness of the relationship between socially
responsible investment and reputation, linked to their desire to have a positive impact on the societies in which they operate,
indicates that business strategies play an important role in CSR; also, that such an approach to CSR may result in higher
nancial exibility in terms of increased social investment. From a supply-chain perspective, a companys desire to be seen as
socially responsible is not necessarily shared by other players in the chain. For instance, if a supplier acts opportunistically, the
buyer will probably not engage in future transactions. Moreover, the buyer might tell other companies that the supplier is an
unreliable partner. On the other hand, there might be costs associated with establishing and maintaining a reputation as an
effective business strategy. The suppliers choice of action therefore depends on a value of the costs and benets of being
a reliable partner. Relying on this protective mechanism requires an analysis of the power structures in the relationship, the
characteristics of the transactions, and the external environment [43].

2.4. The link between public policy and R&D

Given the uncertainty that often plagues research into social welfare (not to mention the amount of money needed to
perform the research and the shear amount of time needed to see any results), most rms are reluctant to invest in such
research. Therefore, governments must incorporate not only medical and health research but also quality-of-life and
accessibility research into the subsidies they provide. Governments have funded, with a fair amount of success, risky research
projects that the private sector would not attempt. Experiments to stimulate technological solutions to preserve the natural
environment are just beginning. The government can also perform such research or pay private industry to carry it out. More
recently, laws and programs have allowed greater collaboration between institutions such as government laboratories,
universities, and private companies. Public and private versions of all of these initiatives exist, and they seem to work best for
new technology setups. Overall, government does a better job on the supply side (e.g., funding risky, public-interest R&D) of
technological innovation rather than on the demand side (e.g., procurement).
 C.-H. Lin et al. / Technology in Society 31 (2009) 5663 59

Fig. 1 illustrates the links between the three rolesdconsumer behavior, business strategies, and public policydand how
they contribute to corporate earning prot and serving society interconnected by R&D.

3. Methodology

To measure the impact of CSR on nancial performance, our sample was extracted from the top 1000 (by sales revenue)
Taiwan-based companies as evaluated by Common Wealth Magazine. For each company, nancial data was retrieved from the
Taiwan Economic Journal Databank from January 2002 to December 2004.
In the analysis we selected companies that appeared to be most sensitive to the social responsibility issue, in order to
achieve a more signicant inquiry. To reduce bias in the result, the companies studied were based on the following
identication:

 The rms have been listed on the Taiwan stock exchange market for more than three years
 The rms must be ranked within the top 200 Taiwanese manufacturing rms, top 500 service companies, or top 100
nancial institutions, by sales revenue as evaluated by Common Wealth Magazine
 Each selected rm donated a minimum of NT$2.5 million in 2003.

Based on these three criteria, 33 rms were selected. The key drivers for adding optimum societal welfare in which specic
business organizations operate are:

 having a strong commitment to corporate and social governance

 having an open dialogue with external stakeholders
 being determined to achieve environmental sustainability.

To achieve these three principles, Zairi and Peters [44] proposed devoting a certain percentage of corporate pre-tax prot
to community involvement in the form of donations that can be used to target and focus on charitable work, supporting
education, health, and welfare. Therefore, our study considered donations as an indicator of CSR concern in each business, and
we used the donation ratio as a CSR proxy variable
We use Return on Assets (ROA) as the short-term variable of corporate nancial performance (CFP). Then we created two
simulated CSR rms portfolios based on manufacturing companies and non-manufacturing companies, respectively. Then
regression analyses were undertaken to test the data in the short term (a one-year period).
First, we tested the association of the rate of return for the ethical rms by Taiwan Stock Exchange Index (TAIEX):

Ri;t ai bi Rm;t 3i;t

where Ri.t is the rate of return on individual stock i at time t, and i 1,2,., n; 3i,t is the error term at time t; ai is the intercept
term; bi is the coefcient of the rate of return on TAIEX; Rm,t is the rate of return on TAIEX from January 2002 to December
2004.
Next we tested the association of the rate of return on assets with the number obtained as the CSR, in order to understand
the relationship between CFP and CSP.
With regard to long-term (in our study, three years) variables of CFP, ve specialized nancial indicators are effective
metrics for examining the investment accomplishments of the CSR portfolio and non-CSR portfolio, respectively. These ve

Serving Society:
Corporate Financial
Corporate Social
Performance
Responsibility

Corporate Research
& Development

Earning Profit Driver: Social Welfare Driver:

Business Strategies Public Policy

Dynamic Role:
Consumer Behavior

Fig. 1. Illustration of linkages.

60 C.-H. Lin et al. / Technology in Society 31 (2009) 5663

nancial indicators are: the Jensen measure, the amended Jensen measure, the Treynor measure, the Sharpe measure, and the
MCV measure. They are briey introduced as follows:
Jensen measuredThis performance measure shows the relationship between the expected rate of return and the risk of
the CSR portfolio. The higher the Jensen measure, the better the portfolio performs. The Jensen measure is written as
   
Jp Rp  Rf  bp Rm  Rf

where Jp shows the Jensen measure of portfolio p; Rp indicates the rate of return on market m; Rf expresses the risk-free rate;1
bp represents the market risk of portfolio p.
The amended Jensen measuredThis measure was proposed by SmithTito [45], and evaluates the risk premium under
systematic risk. The higher the amended Jensen measure, the better the portfolio performs. The amended Jensen measure is
written as
 
Rp  Rf  
Jp0  Rm  R f
bp
where Jp0 indicates the amended Jensen measure of portfolio p.
Treynor measuredTreynor developed a performance measure according to the post-capital market line (CML). However,
he used the b coefcient of the rate of return on a portfolio to measure systematic risk. The higher the Treynor indicator, the
better the portfolio performs. The Treynor measure is written as

Rp  RF
Tp
bp
where Tp is the Treynor indicator of portfolio p.
Sharpe measuredThis measure was proposed by Sharpe according to the post-CML. Sharpe used the standard deviation
of the rate of return on an investment portfolio to measure total nancial risk, as he assumed that investors had not diversied
their risks. The higher the Sharpe indicator, the better the portfolio performs. The Sharpe measure is written as

Rp  Rf
Sp
sp
where Sp indicates the Sharpe measure of portfolio p; sp is the standard deviation of portfolio p.
MCV measuredThis measure was proposed by Moses et al. [46]. They considered the risk premium of the market portfolio,
the investment portfolios ability for risk diversication, and the ability to pick stocks. The MCV measure is written as

Jp
MCVp
Dp
where MCVp is MCV measure of portfolio p; Jp is the Jensen measure of portfolio p; Dp is the unsystematic risk of portfolio p.
The MCV indicator measures the excess premium of the unsystematic risk of portfolio p. The higher the MCV indicator, the
better the portfolio performs.

4. Empirical results

Our study denes companies that are over the average donation ratio in a manufacturing industry or a non-manufacturing
industry as higher-CSR rms and those under the average donation ratio as lower-CSR rms.
Table 1 shows the association between nancial performance and the extent of CSR. The results demonstrate that the
intensity of CSR investments for manufacturing and non-manufacturing industries has no signicant positive relationship
with the ROA. It implies that, at least in the short run, it is not a case of the better a rms CSR investments, the better its CFP.
Our study calculates the weight of each CSR rm by dividing the capital amount of each rm by the sum of all 33 rms
capital. This mission depends on the ve specialized indicators (discussed above) to evaluate the performance of the
manufacturing and non-manufacturing industries with nancial data from each corporation for the last three years. Table 2
shows all the measures. They indicate that the performance of the higher-CSR portfolio is better than lower-CSR portfolio in
both the manufacturing industry and the non-manufacturing industry, but especially in the manufacturing industry. It
implies that the more a rm invests in CSR, the better is its CFP over the long term.
According to the literature, R&D investment and CSR are likely to be highly correlated because both are associated with
product and process innovation, and there is considerable empirical evidence showing that investment in R&D has a strong
positive impact on protability. After using the ve specialized nancial indicators to verify this phenomenon, we nd that

1
In our study, risk-free rate is dened as the one-month term deposit interest rate of the National Taiwan Bank.
 C.-H. Lin et al. / Technology in Society 31 (2009) 5663 61

Table 1
Regression analysis for ROA and CSR/R&D.

(1) (2) (3) (4)

Intercept 50.753 54.3 6.523 11.348
(1.196) (0.821) (1.755) (1.690)
CSR1 19.030 8.061
(0.459) (0.797)
CSR2 0.962
(0.284)
R&D 0.907 21.854
(0.083) (1.044)
R&D * CSR1 38.108
(1.253)

Notes: 1. CRS1 denes donation ratio, CSR2 denes donation rank, and R&D denes R&D ratio; 2. Parentheses demonstrate t-value.

during the short-term period, the nancial performance of observed companies with low R&D expenditure is worse, whereas
the nancial performance of companies with high R&D expenditures is better (illustrated in Table 3).

5. Discussion and conclusion

Over several decades, the pressure on rms to engage in CSR has increased. Many managers have responded to these
pressures, but some have resisted. Those who resist typically invoke the tradeoff between socially responsible behavior and
protability. Further, when social initiatives are not aligned with business objectives, CSR could become a liability and
diminish previously held beliefs among customers about rms.
Researchers have responded by attempting to demonstrate the effect of CSR on protability. However, the results of several
empirical studies of the relationship between CSR and protability have been inconclusive, reporting positive, negative, and
neutral results. Possible explanations for these varied results include differences in operationalizing the variables across
studies and an inconsistent relationship mediated by one or more variables.
Our study reviewed literature and sought empirical support for this contention, and our ndings suggest that even if
positive CSR activities do not increase immediate protability, they may be instrumental in reducing the risk of damage to
brand evaluations in the long run. This permits a potentially novel conceptualization of the impact of CSR as being like an
insurance policy.
Since many organizations show remarkable concern when undertaking social initiatives in a highly competitive envi-
ronment, the growth in socially responsible investments and in CSR awareness among the public may lead to successful rms
proactively balancing short-term nancial goals with long-term sustainable corporate brand building [4,39,47]. Thus,
marketers should select social programs carefully and ensure that their communications make the connection between the
social domain and the rm so that consumers perceive initiatives as proactive and socially motivated.
Analyzing the impact of CSR on nancial performance is a complex issue. Depending solely on a traditional approach does
not resolve the question because it lacks a measure of rm-level investment in R&D. As noted, a large body of empirical
evidence demonstrates that R&D investment has a strong positive impact on protability. Every technology-based company
struggles to keep R&D focus aligned with corporate business strategy [48]. Given the long-term orientation of sustainable
development, successful R&D investments may result from a longer time horizon. This is especially true when examining the
relevance of intangible assets, such as reputation and knowledge networks, which can turn into a source of market value and
a competitive advantage. Moreover, a point of focus for companies actively engaged in R&D was to show that CSR should not
be perceived simply as an add-on or purely philanthropic endeavor but as a central strategy in the rms pursuit of prot.
Like all empirical research, our study has several limitations that one needs to bear in mind while interpreting its results.

 First, as pointed out by Waddock and Graves [49], measurement is problematic when studying CSR. Relying as we did on
the survey methodology, we did not have an objective measure of a rms corporate social performance. It is possible
that representatives of some Taiwanese rms may have exaggerated their rms commitment to social responsibility,
thereby causing bias.

Table 2
Performance analysis of CSR portfolio.

CSR Industry classication Jenson1 Jenson2 Sharpe Treynor MCV

Higher Manufacturing industry 0.224286 0.115714 0.64357 1.80214 0.072857
Non-manufacturing 0.86167 2.98 1.145 4.89667 0.54333

Lower Manufacturing industry 0.06091 0.64273 0.74273 2.56091 0.06273

Non-manufacturing 0.975 1.12 1.175 3.035 0.53
62 C.-H. Lin et al. / Technology in Society 31 (2009) 5663

Table 3
Performance analysis of R&D portfolio.

Jenson1 Jenson2 Sharpe Treynor MCV

Higher R&D 0.386364 0.250909 0.66273 1.66818 0.131818
Lower R&D 0.064 0.148 0.678 2.066 0.04

 Second, the sample was limited to large manufacturing rms, which potentially limits its application to small rms or
service businesses.
 Third, our study did not control for potential industry effects that could inuence relationships between the variables.

We believe that the results of this study carry numerous important implications for future research.

 First, they suggest clearly that the social responsibility/rm performance relationship is context-specic. Therefore,
development of both a theoretical understanding and managerial implications depends heavily on identifying the
contextual factors that enhance a positive relationship between social responsibility and rm performance.
 Second, organizational factors may play an equally important moderating role in the relationship between social
responsibility and organizational outcomes. Considering both organizational and environmental factors simultaneously
likely provides a richer understanding of the relationship between social responsibility and nancial performance.
Organizational factors, such as a rms strategy and resource position, could be particularly promising internal contin-
gency factors that could be incorporated into future research.
 Finally, the dependent variable of this study, namely nancial performance, is inuenced by a variety of rm and industry
factors. Therefore, any inference of a causal relationship must be made with caution. Organizational outcomes more
directly resulting from social responsibility than nancial performance may, therefore, be more appropriate as dependent
variables.

The results of this study also have important implications for practicing managers. Although managers may decide to
avoid or engage in socially responsible activities based solely on their values and beliefs, the results of this study suggest that
such activities can also have a strong economic rationale in certain conditions of earning prot and serving society. Through
R&D as an intermediary variable, consumer behavior, business strategies, and public policy are not critical roles for earning
prot and serving society in the short run. However, in the long run, business strategies and public policy resemble drivers
even though the role of consumer behavior uctuates irregularly between driver and effector for earning prot and serving
society.
In conclusion, this study points to the need to move social responsibility research from bivariate relationships to a more
context-specic approach. The consideration of environmental complexity and dynamism as moderators is an important start
that may provide a more comprehensive understanding of this important and unresolved research issue.

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Chin-Huang Lin has a Ph.D. in Science Management from National Chiao Tung University, Taiwan. Currently, Dr. Lin is an associate professor and also director
of human resources at Chung Hua University, Taiwan. His research interests are in system dynamics, technology, and production management. He is also
involved in many national research projects and presents at academic conferences. His articles have appeared in Technovation, Technological Forecasting &
Social Change, and other journals.

Ho-Li Yang is a Ph.D. candidate at the Department of Technology Management, Chung Hua University, Taiwan. He is also a lecturer in the Department of
Finance at National United University, Taiwan. For several years, he has been interested in the areas of nancial business. He has many articles published in
conferences and journals in Taiwan.

Dian-Yan Liou received his Ph.D. in technology management from Chung Hua University, Taiwan. He received an MBA from Dallas Baptist University, Dallas,
Texas. He currently works on the application of system dynamics and is an assistant professor in the Department of Marketing & Logistics Management at Yu
Da College of Business, Taiwan. He is interested in innovation management and marketing strategy and has just published his tenth book, Product
Management: Strategic Marketing Perspective. His papers have appeared in Technological Forecasting & Social Change, Human Resource management, and other
journals. He has published articles in newspapers and magazines to share ideas with the general public in Taiwan.