Does Firm Innovation Affect CSR? What the Academics Say

Is a sustainable company more innovative or, vice versa, is an innovative company more in favor of sustainability? And is there any link between innovation and CSR? Two notable academic studies help us to answer these questions. The first one is from Rui Shen, Yi Tang, and Ying Zhang and was published as a Harvard Business School Working Paper in 2016 using a sampling of 3,315 publicly-listed US firms from 2001 through 2011. The second study was conducted by Xinghua Gao and Yonghong Jia, both from Governors State University, Illinois, and published in September 2015. To better understand how different aspects of CSR influence corporate innovation outcomes, the authors examined five social dimensions: community, diversity, employee relations, the environment, and products.

What do the studies tell us?

The most important finding is that, yes, there is a positive link between CSR and innovation. Shen, Tang, and Zhang write: “We find that more innovative firms also engage more in CSR activities. This effect is stronger for firms of higher risk and/or operating in a less munificent environment. Additionally, firms with higher innovation reap greater financial benefits from their CSR activities.”

Innovation is risky

Innovation is considered by most experts as being a key factor in determining a company’s ability to maintain advantages against its competitors. The more a company is willing to, and capable of, inventing and reinventing itself, the better it can respond to fast – and often abrupt – market changes. This is a well-known fact. But few efforts have been made “to examine whether or not innovation may influence a firm’s other strategic choice,” write Shen, Tang, and Zhang. This is all the more extraordinary because innovation activities are highly complex and have uncertain outcomes – traits that normally produce sleepless nights at the C-level and among investors. Innovation means limited control of the process and always implies risk. That is why companies with less open cultures or control-obsessed management are less innovative by nature.

How does CSR come into the game?

CSR helps to reduce the level of uncertainty and the information asymmetry between the company and its main stakeholders by serving as a credible signal. It is a fact that companies with a good CSR reputation maintain a good social image in the eyes of the public – they accumulate moral capital, in a manner of speaking. This moral compass can help to “identify emerging problems, prevent fraud, preserve corporate reputation, and minimize any penalty when transgression occurs,” say Shen, Tang, and Zhang. That creates a reaction: To meet potential concerns, an innovative company must be motivated to engage more in CSR. Gao and Jia write: “CSR enhances innovation because CSR initiatives help foster a culture for employees to be creative, enhance firms’ access to external financing, and form an enthusiastic and effective workforce.”

Key findings

1. Companies featuring greater innovation record higher levels of CSR.
2. This correlation becomes stronger when the company’s risk level is higher or when it is operating in a less munificent market.
3. The positive effects of innovation on CSR are stronger for companies with greater financial leverage.
4. CSR brings more financial benefits to companies well known for their innovation performance.
5. Companies scoring high on CSR performance obtain better price terms from capital suppliers.
6. These positive financial effects are weaker when market munificence is higher.