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“Corporate Social Responsibility: ATheory of

Firm Perspective
ARTICLE in THE ACADEMYOF MANAGEMENT REVIEW ■ JANUARY2001
Impact Factor: 6.17 ■ DOI: 10.5465/AMR.2001.4011987

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 e Acodemy oí Management fíeview
2001, Vol. 26, No. 1, 117-127.

NOTE

CORPORATE SOCIAL RESPONSIBILITY:

A THEORY OF THE FIRM PERSPECTIVE
ABAGAIL MCWILLIAMS
University of Illinois at Chicago
DONALD SIEGEL
University of Nottingham

We outline a supply and demand model of corporate social responsibility (CSR). Based on
this framework, we hypothesize that a lirm's level oi CSR will depend on its size, level oi
diversification, research and development, advertising, govemment sales, consumer in-
come, labor market conditions, and stage in the industry life cycle. From these hypothe-
ses, we conclude that there is an "ideal" level of CSR, which managers can determine via
cost-benefit analysis, and that there is a neutral relationship between CSR and financial
performance.

Managers contmually encounter demands from
múltiple stakeholder groups to devote resources to
corporate social responsibility (CSR). These
pressures emerge from custom- ers, employees,
suppliers, community groups, governments, and
some stockholders, espe- cially institutional
shareholders. With so many conflicting goals and
objectives, the def- inition of CSR is not always
clear. Here we define CSR as actions that appear to
further some social good, beyond the interests of the
firm and that which is required by law. This
definition underscores that, to us, CSR means going
beyond obeying the law. Thus, a com- pany that
avoids discriminating against women and
minorities is not engaging in a socially responsible
act; it is merely abiding by the law.
Some examples of CSR actions inelude going
beyond legal requirements in adopting Progressive
human resource management programs, developing
non-animal testing procedures, re- cycling, abating
pollution, supporting local businesses, and
embodying producís with social attributes or
characteristics. We limit the scope of our analysis to
satisfying the burgeon- ing demand for CSR
through the creation of product attributes that
directly support social responsibility (e.g., pesticide-
free produce) or that signal the firm's commitment
to CSR (e.g., dolphin-free-tuna labels).
Many managers have responded to height- ened
stakeholder interest in CSR in a very pos- itive way,
by devoting additional resources to promote CSR. A
primary reason for positive re- sponses is the
recognition of the relevance of múltiple stakeholders
(Donaldson & Preston, 1995; Mitchell, Agle, &
Wood, 1997). Other managers have a less
Progressive view of stakeholder relevance. They
eschew attempts to sat- isfy demand for CSR,
because they believe that such efforts are
inconsistent with profit maximi- zation and the
interests of shareholders, whom they perceive to be
the most important stakeholder.
This divergence in response has stimulated an
important debate regarding the relationship
between CSR and financial performance. It has also
raised two related questions regarding the provisión
of CSR:
1. Do socially responsible firms outperform or
underperform other companies that do not
meet the same social criteria?
2. Precisely how much should a firm spend on
CSR?
In existing studies of the relationship between
CSR and financial performance, researchers have
primarily addressed the first question, and the
results have been very mixed. Recent studies
indicóte no relationship (McWilliams & Sie- gel,
2000), a positive relationship (Waddock & Graves,
1997), and a negative relationship (Wright & Ferris,
1997).1 This leaves managers without a clear
direction regarding the desir- ability oí investment
in CSR. More important, the second question, which
is oí greater impor- tánce to managers, has not been
1 For a review oí theoretical and empirical studies oí the
relationship between corporate social performance and fi- nancial
performance, see Griffin and Mahon (1997).

117
118 Academy oí Management Review
directly exam- ined in the academic literature.
The purpose oí our study is to fill this void. We
propose a methodology that enables managers to
determine the appropriate level oí CSR investment,
based on a theory oí the firm perspec- tive. This
perspective is based on the presump- tion that
managers oí publicly held firms usually attempt to
maximize shareholder wealth, with a vigorous
"market for corporate control" as the primary
control mechanism (Jensen, 1988). Our framework
applies generally to publicly held firms but not
necessarily to prí- vately held companies that may
have alterna- tive objectives and are not subject to
the market for corporate control. Based on this
framework, we derive hypotheses regarding the
demand and supply of CSR attributes across
industries, firms, and products. Because these
hypotheses and the conclusions we draw from them
are relevant to the extent that managers wish to
enhance shareholder wealth, we are able to in- fer
managerial implications.
THEORETICAL PERSPECTIVES ON CSR
Several theoretical frameworks have been used to
examine CSR. Friedman (1970) asserts that engaging
in CSR is symptomatic of an agency problem or a
conflict between the inter- ests of managers and
shareholders. He argües that managers use CSR as a
means to further their own social, politicál, or career
agendas, at the expense of shareholders. According
to this view, resources devoted to CSR would be
more wisely spent, from a social perspective, on in-
creasing firm efficiency. This theory has been tested
empirically by Wright and Ferris (1997), who found
that stock prices reacted negatively to
announcements of divestment of assets in South
Africa, which they interpreted as being consistent
with agency theory.
The agency theory perspective has been chal-
lenged by other researchers, such as Preston (1978)
and Carroll (1979), who outline a corporate social
performance (CSP) framework. As expos- ited by
Carroll (1979), this model ineludes the philosophy of
social responsiveness, the social issues involved,
and the social responsibility categories (one of
which is economic responsibility). An empirical test
of the CSP framework is presented in the work of
Waddock and Graves (1997), who report a positive
association between CSP and financial performance.
The CSP model has much in common with the
stake- holder perspective, which is the most widely
used theoretical framework.
In a seminal paper on stakeholder theory,
Freeman (1984) asserts that firms have relation-
ships with many constituent groups and that these
January
stakeholders both affect and are affected by the
actions of the firm. Stakeholder theory, which has
emerged as the dominant paradigm in CSR, has
evolved in several new and inter- esting ways.
According to Donaldson and Preston (1995), three
aspect of this theory—norma- tive, instrumental,
and descriptive—are "mutually supportive." Jones
and Wicks propose "converging" the social Science
(instrumental) and ethics (normative) components
of stakeholder theory to arrive at a normative
"theory" that illustrates "how managers can create
mor- ally sound approaches to business and make
them work" (1999: 206).
The instrumental aspect and its relationship to
conventional theories in economics and corporate
strategy have also received considerable attention in
the literature. For instance. Jones (1995) developed a
model that integrates economic theory and ethics.
He concluded that firms conducting business with
stakeholders on the basis of trust and Corporation
have an incentive to demónstrate a sincere
commitment to ethical behavior. The ethical
behavior of firms will enable them to achieve a
competitive ad- vantage, because they will develop
lasting, pro- ductive relationships with these
stakeholders. Russo and Fouts (1997) examined CSR
from a resource-based view of the firm perspective.
Using this framework, they argüe that CSP (spe-
cifically, environmental performance) can constitute
a source of competitive advantage, especially in
high-growth industries.
Although these frameworks are useful, we
outline an alternative theoretical perspective that
further develops instrumental aspeets of CSR. This
framework allows us to develop a set oí hypotheses
regarding the determinants and consequences oí
CSR. Additionally, managers can use this
framework to determine precisely how much they
should spend on CSR.
INVESTMENT IN CSR AT THE FIRM LEVEL
We begin our analysis oí CSR by relating it to a
theory oí the firm, in which it is assumed that the
management oí publicly held íirms attempts to
maximize proíits (Jensen, 1988). Based on this
perspective, CSR can be viewed as a form oí
investment. One way to assess investment in CSR is
as a mechanism íor product difíerentia- tion. In this
context there are CSR "resources" and "outputs." A
firm can create a certain level oí CSR by embodying
its producís with CSR attributes (such as pesticide-
free íruit) or by using CSR-related resources in its
production process (such as naturally occurring
insect inhibitors and organic fertilizers). As such, it
seems natural to consider the nature oí the mar- kets
2001 McWUliams and Siegel
íor CSR attributes and CSR-related resources. Our
analysis oí these markets is based on a simple
supply and demand íramework, which we outline
below.
Demand íor CSR
We hypothesize that there are two major sources
oí demand íor CSR: (1) consumer demand and (2)
demand from other stakeholders, such as investors,
employees, and the commu- nity. We begin by
describing the nature oí consumer demand íor CSR.
CSR investment may entail embodying the
product with socially responsible attributes, such as
pesticide-íree or non-animal-tested in- gredients. It
may also involve the use oí signáis, such as the
unión label in clothing, that convey to the consumer
that the company is concerned about certain social
issues. This results in the belief that, by using these
products, consumers are indirectly supporting a
cause and rewarding íirms that devote resources to
CSR. Consumer- oriented CSR may also involve
intangible attributes, such as a reputation íor quality
or reli- ability. Fombrun and Shanley (1990) and
Weigelt and Camerer (1988) have described how
reputation building is an integral component oí
strat- egy íormulation. A reputation íor quality and
reliability may be especially important íor food
products. Thus, McDonald’s employs the handi-
capped and supports such organizations as the
Ronald McDonald House, establishing a reputation
íor CSR. The presumption is that íirms that actively
support CSR are more reliable and, therefore, their
products are oí higher quality.
There is strong evidence that many (although
certainly not all) consumers valué CSR attributes. A
growing number oí companies have incorporated
CSR into their marketing strate- gies, because they
wish to exploit the appeal oí CSR to key segments oí
the market, such as baby boomer or "generation X"
shoppers. We need only look at the rapid growth oí
such socially responsible companies as Ben &
Jerry's, the Body Shop, and Health Valley to confirm
the importance oí CSR in marketing.
CSR as a differentiation strategy. Product (Ser-
vice) difíerentiation is used to create new demand or
to command a premium price íor an existing
product (service). Firms that adopt a difíerentiation
strategy oíten pursüe múltiple means oí
difíerentiation. An example is Ben & Jerry's, which
differentiates its products by cre- ating unique
ílavors, using high-quality ingre- dients, supporting
the local community, and pro- moting diversity in
the workplace. CSR may be a popular means oí
achieving differentiation, be- cause it allows
managers to simultaneously sat- isíy personal
119
interests and to achieve product differentiation. For
example, Ben Cohén oí Ben & Jerry's may have a
personal, as well as a professional, commitment to
diversity.
Differentiating through the use oí CSR resources,
such as recycled products or organic pest control,
may also inelude investment in re- search and
development (R&D). R&D investment may result in
both CSR-related process and product innovations,
which are each valued by some consumers. For
example, the "organic, pesticide-free" label
simultaneously indicates the use oí organic
methods, which constitutes a piocess innovation by
the íarmei, and the cre- ation oí a new product
category, which is a product innovation oí the natural
foods retailer. Ií the natural foods company is
vertically integrated, it engages in both CSR-related
process and product innovation simultaneously.
This example underscores the point that some
consumers want the goods they purchase to have
certain socially responsible attributes (product
innovation), while some also valué knowing that the
goods they purchase are produced in a socially
responsible manner (process innovation).
An additional example is New United Motor
Manuíacturing, Inc. (NUMMI), the innovative joint
venture between Toyota and General Motors, which
was established in Fremont, California, in 1984 to
build small cars for both compa- nies. The NUMMI
plant implemented many of the latest Japanese "lean
manuíacturing" meth- ods (process innovation) and
produced the Geo Prism, the prototype for GM's
new generation of small cars (product innovation).
These processes and the product innovations were
the result of R&D investment undertaken by
General Motors. Furthermore, through its unique
partnership with the United Auto Workers (UAW),
NUMMI also implemented a number of Progressive
workplace practices, such as a strong emphasis on
teamwork and employee empowerment. Con-
sequently, some consumers perceived that NUMMI
cars, such as the Geo Prism, were superior to
traditional, American-made cars, in terms of quality
and reliability. More important, many customers
also believed that by purchasing these cars, they
were demonstrating their sup- port of Progressive
human resource manage- ment practices and the
UAW.
Although R&D may result in both process and
product innovation, the vast majority of R&D is
devoted to product innovation (Link, 1982). The role
of CSR in product differentiation leads to our first
hypothesis.
Hypothesis 1: There is a positive corre-
lation between the level of product
differentiation (a proxy for which is the ratio
120 Academy oí Management Review
of R&D expenditures to sales) and the
provisión of CSR attributes.
CSR and advertising. For CSR differentiation to
be successful, potential customers must be fully
aware of CSR characteristics; otherwise, they will
purchase a similar product without such attributes.
Some of these characteristics might not be evident to
the buyer at first glance. Thus, advertising plays an
important role in raising the awareness of those
individuáis who are interested in purchasing
products with CSR attributes.
The literature on advertising distinguishes
between two types of goods: search and experi- ence
(Nelson, 1970, 1974). Search goods are products
whose attributes and quality can be deter- mined
before purchase. For example, furniture is usually
considered to be a search good. Consumers search
for the appropriate style and quality. These
attributes can be established by examining the
product before purchase. Cloth- ing is another
example of a search good. With accurate labeling as
to the textile contení, the consumer can establish the
quality of the good before purchasing it. For search
goods, most advertising will be limited to informing
the consumer as to the availability of the product
and its price.
Experience goods are products that must be
consumed before their true valué can be known. For
example, food is an experience good. The consumer
cannot determine from viewing the product how it
will taste or whether it will be safe to consume.
Advertising for experience goods, therefore, will
provide more information, usually tying the
product to an established brand ñame, such as
Heinz. The association with brand ñame provides
the consumer with information about the product
through the rep- utation of the brand.
As noted above, support of CSR creates a rep-
utation that a firm is reliable and honest. Consumers
typically assume that the products of a reliable and
honest firm will be of high quality. Advertising that
provides information about CSR attributes can be
used to build or sustain a reputation for quality,
reliability, or honesty— all attributes that are
important but difficult to determine by search alone.
For example, Heinz advertises its Starkist brand
tuna as being dol- phin free. This provides the
consumer with information that the product has
CSR attributes but also that the company is
trustworthy. By implication, the product Will be of
high quality. This type of advertising is used to
foster product differentiation, allowing the firm to
charge a premium price.
The link between advertising and CSR leads to
our next two hypotheses.
January
Hypothesis 2: Because consumers rely more
on firm reputation when purchasing
experience goods than when purchasing
search goods, CSR attributes are more likely
to be associ- ated with experience than with
search goods.
Hypothesis 3: Because consumers must be
made aware of the existence of CSR
attributes, there will be a positive correlation
between the intensity of adveitising in an
industry (a pioxy for which is the zafio oí
adveitising to sales) and the provisión oí
CSR.
Additional determinants oí consumer de- mand.
We hypothesize that income is another determinant
oí consumer demand for CSR. Whereas low-income
shoppers generally are quite price sensitive, aííluent
consumers can more easily pay a higher price for
additional CSR attributes. Goods whose demand
increases as income increases are called normal
goods. We conjecture that CSR attributes are normal
goods, which means that greater levels of afflu-
ence, as reflected in higher disposable income, will
result in greater demand for CSR.2
Hypothesis 4: Because CSR attributes are
normal goods, there will be a pos- itive
correlation between consumer income and
the provisión of CSR attributes.
Other determinants of demand inelude tastes and
preferences, demographics, and the price of
substitute produets. Consumer taste and prefer-
ences may be affected by mass media, and CSR has
become a hot topic in media circles. Jour- nalists
often provide free publicity of a firm's commitment
or lack of commitment to CSR. The media closely
scrutinize some sectors, such as the film industry
and professional sports. Celeb- rities and sports
figures often use the media to highlight their
commitment to social responsi- bility. Journalists
also closely follow the work of social activists.
Fedderson and Gilligan (1998) contend that media
attention devoted to social activists provides the
public with access to new information regarding
social attributes and methods of production. This
free publicity, whether positive or negative, helps
heighten public awareness of CSR, reduces
information asymmetry, and, thus, influences
demand for CSR.
Demographics can also affect the demand for
2 Some CSR attributes may even have the properties of a
"luxury" good. That is, an increase in income may induce greater
than proportional increases in the demand for CSR attributes
(e.g., if income increases by 10 percent, the demand for CSR
attributes will increase by more than 10 per- cent).
2001 McWUliams and Siegel
CSR. For instance, baby boomers have smaller
families, greater household incomes, and more
social awareness than previous generations. Thus,
they have the means to purchase produets with CSR
attributes and are increasingly likely to make
consumption choices based on social grounds.
Savvy firms will capitalize on this trend.
Because not all consumers place a high valué on
CSR attributes, the price of competing goods will
still affect the demand for goods and Services
provided by firms that embrace CSR, if these
competing goods are lower-cost alternativos.
Although most consumers might choose a good
with CSR attributes if its price were equal to that of
another good and many might choose a good with
CSR attributes if its price were only a little higher,
some consumers will switch away from the CSR
good if there is a substantial price difference.
Therefore, there is a positive relationship between
the demand for goods with CSR attributes and the
price of competing, or substitute, produets (the
higher the price of competing goods, the higher the
demand for goods with CSR attributes). This leads
to an additional hypothesis.
Hypothesis 5: There is a positive correlation
between the price of substitute goods and the
demand for goods with CSR attributes.
To summarize, we conjecture that the key de-
terminants of the demand for a product with CSR
attributes are the product's price, advertis- ing to
promote consumer awareness of CSR attributes, the
level of consumers' disposable income, consumers'
tastes and preferences, demographics, and the price
of substitute produets.
Table 1 presents the determinants of demand and
the predicted effect of each determinant on
TABLE 1
Determinants of Consumer Demand for CSR
Attributes
Hypothesized Effecf on
Demand
Determinant
Price of good with CSR attributes Negative
Advertising Positive
Income Positive
Tastes Indeterminate
Demographics Indeterminate
Price oí substitute goods Positive
the demand for CSR attributes—that is, whether
demand increases or decreases when the deter-
minará increases (as designated by a positive or
negative sign). As shown in the table, for some
determinants, such as tastes and demographics, the
121
effect is not easily predicted.
Other stakeholders' demand. Employees are
another important source oí stakeholder demand for
CSR. For example, they tend to support Progressive
labor relations policies, safety, fi- nancial security,
and workplace amenities, such as child care.
Workers search for signáis that managers are
responding to causes they support. Unions often
play an important role in en- couraging firms to
adopt these CSR policies. Note that unions can also
influence CSR policies at nonunion firms in the same
industry. This is analogous to the well-documented
"threat effect" of unions on nonunion wages
(Freeman & Medoff, 1983; Mills, 1994). For example,
nonunion firms may adopt Progressive work
practices to avoid unionism (Foulkes, 1980). Firms
that sat- isfy employee demand for CSR may be re-
warded with increased worker loyalty, morale, and
productivity (Moskowitz, 1972; Parket & Eibert,
1975). There is also some evidence that firms in
industries with skilled labor shortages have used
CSR as a means to recruit and retain workers
(Siegel, 1999).
Other stakeholder groups, including minority
and community groups and local and state gov-
ernments, can contribute to the demand for
producís with CSR attributes as well. For example,
governments may encourage proactive en-
vironmental practices, and community groups may
desire support for local social Services, such as those
provided by United Way. These groups will then
reward the firms by increasing their consumption of
the firms' products. For in- stance, government
contracts might require that firms undertake a
certain level of CSR invest- ment, such as minority
set-asides. Ultimately, these groups affect demand
through consumption, either their own or that of the
consumers they influence. The characteristics of
demand from stakeholder groups other than
consumers lead to the following hypotheses.
Hypothesis 6: Theie is a positive corre- lation
between unionization oí the workfoice and
the provisión oí CSR; that is, in industries
that are highly
unionized, there will be more CSR provided.
Hypothesis 7; There is a positive rela-
tionship between the shortage oí skilled
workers in an industry and the provisión oí
CSR; that is, in industries with shortages of
skilled labor, more CSR will be provided.
Hypothesis 8: There is a positive corre-
lation between government contracts and the
provisión oí CSR.
122 Academy oí Management Review January
The demand from all stakeholders can be
summed to arrive at the overall demand for
products with CSR attributes. Recognizing the
demand for CSR, managers can make decisions on
the number and level of CSR attributes and how to
produce them.

Supply of CSR
According to the resource-based view of the firm,
resources are "all assets, capabilities, or-
ganizational processes, firm attributes, informa-
tion, knowledge, etc. controlled by the firm" (Bar-
ney, 1991: 101). The resource-based view leads us to
a supply-side perspective, which begins with the
realization that firms must devote resources to
satisfy the demand for CSR. This in- dicates that we
can modify the microeconomic concepts of the
production and cost functions to inelude CSR-
related resources and output. Thus, we assume that
firms use CSR-related capital (land and equipment),
labor, materials, and pur- chased servicés to
generóte output.
In Table 2 we describe the inputs used in
generating CSR attributes and the attendant costs.
As shown in the table, additional capital might be
required to generóte CSR characteristics. For
example, pollution abatement to achieve an
environmental standard beyond that required by
law will require the purchase of additional
equipment. Similarly, office space, supplies,
computers, telephones, and other Communications
equipment may be devoted to CSR. To the extent
that additional capital is required, capital costs will
be higher.
Although capital costs will be higher for firms
that provide CSR, the costs will not increase
uniformly across firms. The use of capital in the
provisión of CSR attributes may result in scale
economies, because capital investment often
 2001 McWilliams and Siegel 123

TABLE 2
Resources or Inputs Used in the Provisión oí CSR
Resource or Input CSR-Related Resource or Input Additional Resource or Input Costs

Capital Special equipment, machinery, and real Higher capital expenditures

estáte devoted to CSR
Materials and Services Purchase of inputs írom suppliers who are Higher-cost materials and Services
socially responsible (intermedióte goods)
Labor Progressive human resource management Higher wages and benefits and
practices and stafí to implement CSR additional workers to enhance
policies social performance

entails substantial fixed costs. An example is a
smokestack scrubber. The cost oí a scrubber is fixed,
once a particular piece oí equipment is installed. The
cost oí the scrubber will be amor- tized over the
number oí units oí output the firm produces. The
higher the level oí output, the lower the per unit
cost oí the scrubber, resulting in an economy oí
scale.3
Intermedíate materials and Services may also be
related to the provisión oí CSR. For example, the
Body Shop purchases special ingredients and
formulas that have not been animal tested, Ben &
Jerry's has a stated policy oí purchasing dairy
products írom local Vermont farmers, and Wal-Mart
advertises that its products are made in America.
Locally produced goods and Services may be more
costly than those imported írom other States and
countries, resulting in higher costs for these socially
responsible íirms. There might be scale economies
related to these costs, however, because oí the
ability oí large íirms such as Wal-Mart to obtain
quantity dis- counts an CSR-related intermedíate
goods and materials.
Firms may hire additional stafí to advance CSR
through aífirmative action, improved labor
relations, and community outreach. Exist- ing
employees also may be asked to promote these
eííorts. At the 1997 Philadelphia "sum- mit" on
voluntarism, sponsored by President Clinton and
Colín Powell, numerous compa- nies pledged to
dedicóte additional human resources to CSR
activities. Many large firms
have entire departments devoted to CSR con- cerns.
The costs oí personnel devoted to CSR and
additional CSR-related benefits provided to workers
increase the overall labor costs oí firms. However,
human resources may also generate economies oí
scale, because they represent a fixed cost that can be
amortized over numerous units oí output.
When scale economies exist, large firms will have
lower average costs for providing CSR attributes
than small firms. This implies that there may be
some differences in the return to firms within
industries. Therefore, within industries in which
CSR attributes are provided (because the
product/service can be differen- tiated), larger firms
will provide more CSR attributes. .
We conjecture that there are economies of scope
in the provisión of CSR, or cost savings that arise
from the joint production of CSR characteristics for
several related products. A large, diversified firm
can spread the cost of CSR provisión over many
different products and Services. For example, the
goodwill gen- erated from firm-level CSR-related
advertising can be leveraged across a variety of the
firm's brands. When scope economies exist, more di-
versified firms will have lower average costs of
providing CSR attributes than firms focus- ing on
one particular industry. Thus, we ex- pect a positive
relationship between firm di- versification and the
provisión of CSR attributes, all else being equal.
Our discussion of the costs of providing CSR
attributes has revealed that embodying products
with CSR attributes requires the use of additional
resources, which results in higher costs. When
considering the appropriate level of CSR
characteristics, managers must make critical
decisions regarding the optimal use of inputs

3 There are limits to scale economies. After all economies oí

scale are exhausted, average cost will climb with additional

output. This diseconomy oí scale is usually associated with
physical capital constraints or with managerial limita- tions.
Managerial limitations might, for example, result in less
flexibility in responding to social issues in very large íirms.
 124 Academy oí Management Review
that generate these attributes.4 Thus, a firm's cost oí
producing CSR attributes is positively related to the
number oí these characteristics. The cost íunction
has the usual properties. First, it is monotonically
increasing in CSR attributes; that is, it costs more to
generate additional characteristics. Second, at some
point there are increasing incremental costs oí
providing CSR, which results in a standard upward-
sloping supply curve íor CSR attributes. The nature
oí the supply oí CSR attributes leads to the follow-
ing hypotheses regarding the provisión oí CSR
across industries and íirms.
Hypothesis 9: Firms that provide CSR
attributes will have higher costs than firms
in the same industry that do not provide
CSR attributes.
Hypothesis 10: The presence oí scale
economies in the provisión oí CSR attributes
results in a positive correla- tion between
firm size and the provisión oí CSR
attributes.
Hypothesis 11: The presence oí scope
economies in the provisión oí CSR attributes
results in a positive correla- tion between the
level oí diversiíica- tion oí a íirm and the
provisión oí CSR attributes.
A caveat to Hypothesis 9 must be mentioned. As
noted earlier, a íirm may fundamentally change its
production process in response to a CSR concern,
such as conservation. Thus, it is conceivable that a
CSR-oriented process innova - tion could result in the
creation oí a CSR char- acteristic at the same or even
a lower level oí cost. Examples oí this, however, are
difíicult to íind, whereas examples oí higher costs
íor CSR products abound. For instance, a trip to the
su- permarket reveáis that goods with social char-
acteristics (e.g., organic produce) typically cost more
than similar goods without social characteristics
(e.g., nonorganic produce).
Determining the Appropriate Level oí
CSR Investment
The supply and demand íramework implies that
there is some optimal level oí CSR attributes for
firms to provide, depending on the demand for
these characteristics and the costs oí generating
them. Companies that do not supply CSR attributes
have lower costs, but they face a diíferent (lower at
4 In our model we assume that the two íirms use the same
production technology. This does not apply to a situation in
which firms adjust their production processes to reflect CSR
concerns.
January
every price) demand curve than íirms that do
provide them. Firms that supply CSR will have
higher costs for every level oí output than firms that
do not supply CSR and produce similar goods.
Those consumers who valué CSR are willing to
pay a higher price íor a product with an additional
social characteristic than for an identical product
without this characteristic. This result is contin- gent
on consumers being aware oí the existence oí the
CSR attribute. If consumers are not aware oí this
additional social feature, they will choose the lower-
priced product. Thus, advertising plays an
important role in determining the optimal level oí
CSR attributes or outputs provided. Advertising
also helps raise awareness regarding íirms' use oí
CSR inputs, which may be oí interest to several
stakeholder groups.
The provisión oí CSR attributes will depend as
well on certain characteristics oí the market, such as
the degree to which firms can differentiate their
products and the industry life cycle. Thus, one is
likely to íind CSR attributes in industries with
highly diíferentiated products, such as food, cos-
metics, pharmaceuticals, financial Services, and
automobiles. In the embryonic and growth stages oí
the industry liíe cycle, we expect that. there is little
product diíferentiation, as firms íocus on per-
fecting the production process and satisfying rap-
idly growing demand. As growth slows, and espe-
cially as the industry maturos, there is likely to be a
great deal oí differentiation. For example, in the ice
cream industry, simple flavors, such as va- nilla,
dominated in the embryonic and growth stages. As
tastes and markets became more so- phisticated,
more flavors were introduced. In the current
maturity phase there is substantial product
differentiation (flavors, íat contení, modes oí
delivery, and so forth). Ben & Jerry's has capital-
ized on the possibility oí diíferentiation through
flavors and CSR attributes.
Demographic and technological changes also can
stimulate demand for CSR attributes. The rapid rise
in the number oí working women has resulted in an
increase in the demand for corpo- rate-supplied day
care, flexible work schedules, and telecommuting.
On the supply side, the rise of the internet has made
it much easier for firms to target consumers who
have social goals. This is evident in the substantial
growth in the number of web sites devoted to CSR
activity. These have dramatically reduced the cost of
transmitting CSR information to consumers and
other interested stakeholders. Examples inelude the
Toyota and Honda web sites, which are devoted to
information about their electric cars. On the demand
side, the internet makes it easier for groups who
share common social goals to exchange information.
2001 McWiüiams and Siegel
For example, there are virtual communities
(geocities) for those outside the mainstream of
society.
MANAGERIAL IMPLICATIONS
Our analysis reveáis that there is some level of
CSR that will maximize profits while satisfying the
demand for CSR from múltiple stakeholders. The
ideal level of CSR can be determined by cost- benefit
analysis. To maximize profit, the firm should offer
precisely that level of CSR for which the increased
revenue (from increased demand) equals the higher
cost (of using resources to pro- vide CSR). By doing
so, the firm meets the de- mands of relevant
stakeholders—both those that demand CSR
(consumers, employees, community) and those that
"own" the firm (shareholders).
On the demand side, managers will have to
evalúate the possibility of product/service dif-
ferentiation. Where there is little ability to dif-
ferentiate the product or Service, demand may not
increase with the provisión of CSR. On the supply
side, managers will have to evalúate the resource
costs of promoting CSR while being cognizant of the
possibility that there may be scale and/or scope
economies associated with the provisión of CSR. In
sum, managers should treat decisions regarding
CSR precisely as they treat all investment decisions.
DISCUSSION
In this study we attempt to answer a question
that has received inadequate attention in the CSR
literature: Precisely how much should a firm spend
on CSR? We addressed this issue using a supply
and demand theory of the firm framework and
found that there is a level of CSR investment that
maximizes profit, while also satisfying stakeholder
demand for CSR. This level of investment can be
determined through cost-benefit analysis. Managers
can use our framework to make decisions regarding
CSR investment by employing the same analytical
tools used to make other investment decisions.
We have also developed several hypotheses re-
garding CSR activity—for example, the provisión of
CSR will depend on R&D spending, advertising
intensity, the extent of product differentiation, the
percentage of govemment sales, consumer income,
the tightness of the labor market, and the stage of
the industry life eyele. Additionally, the likelihood
of economies of scale and scope in the provisión of
CSR implies that large, diversified companies will
be more active in this arena. Most important, our
model indicates that although firms providing CSR
will have higher costs than firms not providing CSR,
125
they will each have the same rate of profit.
To assess the impact of CSR on profitability, we
present the following simple example. As- sume
there are two firms that produce identical goods,
except one company adds a social char- acteristic to
its product. Invoking the theory of the firm, we
assume that each firm makes opti- mal choices,
which means that each produces at a profit-
maximizing level of output. It can be shown that, in
equilibrium, both will be equally profitable. The
firm that produces a CSR at- tribute will have higher
costs but also higher revenues, whereas the firm that
produces no CSR attributes will have lower costs
but also lower revenues. Any other result—for
instance, one firm earning a higher rate of return—
would cause the other firm to switch product
strategies. Note that our conclusión is based on the
as- sumption that there are no entry barriers asso-
ciated with providing the social characteristic.
Our conclusión that profits will be equal may
explain why there is inconsistent evidence re-
garding the relationship between CSR provisión and
firm performance. According to our argu- ment, in
equilibrium there should be no relationship. CSR
attributes are like any other attributes a firm offers.
The firm chooses the level of the attribute that
maximizes firm performance, given the demand for
the attribute and the cost of providing the attribute,
subject to the caveat that this holds true to the extent
that managers are attempting to maximize
shareholder wealth. From this we predict that there
will generally be a neutral relationship between CSR
activity and firm financial performance.
It appears that the lack oí consistency in em-
pirical studies of CSR is due to a lack oí theory
linking CSR to market torces. Our supply and
demand framework filis this void, allowing us to
predict that the provisión oí CSR will vary across
industries, products, and firms. There- fore, those
empirical studies in which research- ers have not
controlled for all the firm or indus- try
characteristics we have identified here are probably
misspecified.
Uníortunately, many oí our hypotheses are dif-
íicult to test empirically, given the lack of data on
the demand íor and supply of CSR. We propose that
the government or management re- searchers
working with government support systematically
collect information on the social characteristics of
products and CSR activity at the firm and industry
level.5 This would enable researchers to test our
5 The firm of Kinder, Lydenberg, and Domini provides a
"rating" of selected publicly held firms based on their social
performance in eight categories, including community, di-
versity, employee relations, product, environment, South Africa,
military, and nuclear power. This rating has been used as a proxy
 126 Academy oí Management Review January
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"hedonic" analysis (Griliches, 1990) of CSR to Economy, 81: 729-754.
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Preston, L. (Ed.). 1978. Research in corporate social performance
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McGraw-Hill.
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for the supply of CSR.

 McWilliams and Siegel

Abagail McWilliams is professor and head oí the Managerial Studies Department,

University oí Illinois at Chicago. She received her Ph.D. in economics from The Ohio State
University. Her research interests inelude market structure and firm performance, strategic
human resource management, gender issues in worker mobility, and corporate social
responsibility.
Donald Siegel is professor of industrial economics at the Nottingham University Business
School in the United Kingdom. He received his Ph.D. in business economics from Columbio
University. His research interests inelude productivity analysis. the economic and
managerial implications of technological change, university technol- ogy transfer, Science
parks, and corporate social responsibility.
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NOTE

CORPORATE SOCIAL RESPONSIBILITY:

A THEORY OF THE FIRM PERSPECTIVE
ABAGAIL MCWILLIAMS
University of Illinois at Chicago
DONALD SIEGEL
University of Nottingham

We outline a supply and demand model oi corporate social responsibility (CSR). Based on
this framework, we hypothesize that a firm's level of CSR will depend on its size, level of
diversification, research and development, advertising, government sales, consumer in-
come, labor market conditions, and stage in the industry life cycle. From these hypotheses,
we conclude that there is an "ideal" level of CSR, which managers can determine via cost-
benefit analysis, and that there is a neutral relationship between CSR and financial
performance.

Managers continually encounter demands from
multiple stakeholder groups to devote resources to
corporate social responsibility (CSR). These
pressures emerge from customers, employees,
suppliers, community groups, governments, and
some stockholders, especially institutional
shareholders. With so many conflicting goals and
objectives, the definition of CSR is not always clear.
Here we define CSR as actions that appear to further
some social good, beyond the interests of the firm
and that which is required by law. This definition
underscores that, to us, CSR means going beyond
obeying the law. Thus, a company that avoids
discriminating against women and minorities is not
engaging in a socially responsible act; it is merely
abiding by the law.
Some examples of CSR actions include going
beyond legal requirements in adopting progressive
human resource management programs, developing
non-animal testing procedures, recycling, abating
pollution, supporting local businesses, and
embodying products with social attributes or
characteristics. We limit the scope of our analysis to
satisfying the burgeoning demand for CSR through
the creation of product attributes that directly
support social responsibility (e.g., pesticide-free
produce) or that signal the firm's commitment to
CSR (e.g., dolphin-free-tuna labels).
Many managers have responded to heightened
stakeholder interest in CSR in a very positive way,
by devoting additional resources to promote CSR. A
primary reason for positive responses is the
recognition of the relevance of multiple stakeholders
(Donaldson & Preston, 1995; Mitchell, Agle, &
Wood, 1997). Other managers have a less
progressive view of stakeholder relevance. They
eschew attempts to satisfy demand for CSR, because
they believe that such efforts are inconsistent with
profit maximization and the interests of
shareholders, whom they perceive to be the most
important stakeholder.
This divergence in response has stimulated an
important debate regarding the relationship
between CSR and financial performance. It has also
raised two related questions regarding the provision
of CSR:
1. Do socially responsible firms outperform or
underperform other companies that do not
meet the same social criteria?
2. Precisely how much should a firm spend on
CSR?
In existing studies of the relationship between
CSR and financial performance, researchers have
primarily addressed the first question, and the
results have been very mixed. Recent studies
indicate no relationship (McWilliams & Siegel,
2000), a positive relationship (Waddock & Graves,
1997), and a negative relationship (Wright & Ferris,
1997).6 This leaves managers without a clear
direction regarding the desirability of investment in
CSR. More important, the second question, which is
of greater importance to managers, has not been
6 For a review of theoretical and empirical studies of the
relationship between corporate social performance and financial
performance, see Griffin and Mahon (1997).

117
118 Academy ol Management Review
directly examined in the academic literature.
The purpose of our study is to fill this void. We
propose a methodology that enables managers to
determine the appropriate level of CSR investment,
based on a theory of the firm perspective. This
perspective is based on the presumption that
managers of publicly held firms usually attempt to
maximize shareholder wealth, with a vigorous
"market for corporate control" as the primary
control mechanism (Jensen, 1988). Our framework
applies generally to publicly held firms but not
necessarily to privately held companies that may
have alternative objectives and are not subject to the
market for corporate control. Based on this
framework, we derive hypotheses regarding the
demand and supply of CSR attributes across
industries, firms, and products. Because these
hypotheses and the conclusions we draw from them
are relevant to the extent that managers wish to
enhance shareholder wealth, we are able to infer
managerial implications.
THEORETICAL PERSPECTIVES ON CSR
Several theoretical frameworks have been used to
examine CSR. Friedman (1970) asserts that engaging
in CSR is symptomatic of an agency problem or a
conflict between the interests of managers and
shareholders. He argues that managers use CSR as a
means to further their own social, political, or career
agendas, at the expense of shareholders. According
to this view, resources devoted to CSR would be
more wisely spent, from a social perspective, on in-
creasing firm efficiency. This theory has been tested
empirically by Wright and Ferris (1997), who found
that stock prices reacted negatively to
announcements of divestment of assets in South
Africa, which they interpreted as being consistent
with agency theory.
The agency theory perspective has been chal-
lenged by other researchers, such as Preston (1978)
and Carroll (1979), who outline a corporate social
performance (CSP) framework. As expos- ited by
Carroll (1979), this model includes the philosophy of
social responsiveness, the social issues involved,
and the social responsibility categories (one of
which is economic responsibility). An empirical test
of the CSP framework is presented in the work of
Waddock and Graves (1997), who report a positive
association between CSP and financial performance.
The CSP model has much in common with the
stakeholder perspective, which is the most widely
used theoretical framework.
In a seminal paper on stakeholder theory,
Freeman (1984) asserts that firms have relationships
with many constituent groups and that these
January
stakeholders both affect and are affected by the
actions of the firm. Stakeholder theory, which has
emerged as the dominant paradigm in CSR, has
evolved in several new and interesting ways.
According to Donaldson and Preston (1995), three
aspect of this theory—normative, instrumental, and
descriptive—are "mutually supportive." Jones and
Wicks propose "converging" the social science
(instrumental) and ethics (normative) components
of stakeholder theory to arrive at a normative
"theory" that illustrates "how managers can create
morally sound approaches to business and make
them work" (1999: 206).
The instrumental aspect and its relationship to
conventional theories in economics and corporate
strategy have also received considerable attention in
the literature. For instance, Jones (1995) developed a
model that integrates economic theory and ethics.
He concluded that firms conducting business with
stakeholders on the basis of trust and corporation
have an incentive to demonstrate a sincere
commitment to ethical behavior. The ethical
behavior of firms will enable them to achieve a
competitive advantage, because they will develop
lasting, productive relationships with these
stakeholders. Russo and Fouts (1997) examined CSR
from a resource-based view of the firm perspective.
Using this framework, they argue that CSP (spe-
cifically, environmental performance) can constitute
a source of competitive advantage, especially in
high-growth industries.
Although these frameworks are useful, we
outline an alternative theoretical perspective that
further develops instrumental aspects of CSR. This
framework allows us to develop a set of hypotheses
regarding the determinants and consequences of
CSR. Additionally, managers can use this
framework to determine precisely how much they
should spend on CSR.
INVESTMENT IN CSR AT THE FIRM LEVEL
We begin our analysis of CSR by relating it to a
theory of the firm, in which it is assumed that the
management of publicly held firms attempts to
maximize profits (Jensen, 1988). Based on this
perspective, CSR can be viewed as a form of
investment. One way to assess investment in CSR is
as a mechanism for product differentiation. In this
context there are CSR "resources" and "outputs." A
firm can create a certain level of CSR by embodying
its products with CSR attributes (such as pesticide-
free fruit) or by using CSR-related resources in its
production process (such as naturally occurring
insect inhibitors and organic fertilizers). As such, it
seems natural to consider the nature of the markets
2001 McWilliams and Siegel 119
for CSR attributes and CSR-related resources. Our interests and to achieve product differentiation. For
analysis of these markets is based on a simple example, Ben Cohen of Ben & Jerry's may have a
supply and demand framework, which we outline personal, as well as a professional, commitment to
below. diversity.
Differentiating through the use of CSR resources,
Demand for CSR such as recycled products or organic pest control,
may also include investment in research and
We hypothesize that there are two major sources development (R&D). R&D investment may result in
of demand for CSR: (1) consumer demand and (2) both CSR-related process and product innovations,
demand from other stakeholders, such as investors, which are each valued by some consumers. For
employees, and the community. We begin by example, the "organic, pesticide-free" label
describing the nature of consumer demand for CSR. simultaneously indicates the use of organic
CSR investment may entail embodying the methods, which constitutes a process innovation by
product with socially responsible attributes, such as the farmer, and the creation of a new product
pesticide-free or non-animal-tested ingredients. It category, which is a product innovation of the natural
may also involve the use of signals, such as the foods retailer. If the natural foods company is
union label in clothing, that convey to the consumer vertically integrated, it engages in both CSR-related
that the company is concerned about certain social process and product innovation simultaneously.
issues. This results in the belief that, by using these This example underscores the point that some
products, consumers are indirectly supporting a consumers want the goods they purchase to have
cause and rewarding firms that devote resources to certain socially responsible attributes (product
CSR. Consumer- oriented CSR may also involve innovation), while some also value knowing that the
intangible attributes, such as a reputation for quality goods they purchase are produced in a socially
or reliability. Fombrun and Shanley (1990) and responsible manner (process innovation).
Weigelt and Camerer (1988) have described how
reputation building is an integral component of
strategy formulation. A reputation for quality and
reliability may be especially important for food
products. Thus, McDonald’s employs the handi-
capped and supports such organizations as the
Ronald McDonald House, establishing a reputation
for CSR. The presumption is that firms that actively
support CSR are more reliable and, therefore, their
products are of higher quality.
There is strong evidence that many (although
certainly not all) consumers value CSR attributes. A
growing number of companies have incorporated
CSR into their marketing strategies, because they
wish to exploit the appeal of CSR to key segments of
the market, such as baby boomer or "generation X"
shoppers. We need only look at the rapid growth of
such socially responsible companies as Ben &
Jerry's, the Body Shop, and Health Valley to confirm
the importance of CSR in marketing.
CSR as a differentiation strategy. Product (ser-
vice) differentiation is used to create new demand
or to command a premium price for an existing
product (service). Firms that adopt a differentiation
strategy often pursue multiple means of
differentiation. An example is Ben & Jerry's, which
differentiates its products by creating unique
flavors, using high-quality ingredients, supporting
the local community, and promoting diversity in the
workplace. CSR may be a popular means of
achieving differentiation, because it allows
managers to simultaneously satisfy personal
120 Academy of Management Review
An additional example is New United Motor
Manufacturing, Inc. (NUMMI), the innovative joint
venture between Toyota and General Motors, which
was established in Fremont, California, in 1984 to
build small cars for both companies. The NUMMI
plant implemented many of the latest Japanese "lean
manufacturing" methods (process innovation) and
produced the Geo Prism, the prototype for GM's
new generation of small cars (product innovation).
These processes and the product innovations were
the result of R&D investment undertaken by
General Motors. Furthermore, through its unique
partnership with the United Auto Workers (UAW),
NUMMI also implemented a number of progressive
workplace practices, such as a strong emphasis on
teamwork and employee empowerment. Con-
sequently, some consumers perceived that NUMMI
cars, such as the Geo Prism, were superior to
traditional, American-made cars, in terms of quality
and reliability. More important, many customers
also believed that by purchasing these cars, they
were demonstrating their support of progressive
human resource management practices and the
UAW.
Although R&D may result in both process and
product innovation, the vast majority of R&D is
devoted to product innovation (Link, 1982). The role
of CSR in product differentiation leads to our first
hypothesis.
Hypothesis 1: There is a positive correlation
between the level of product differentiation
(a proxy for which is the ratio of R&D
expenditures to sales) and the provision of
CSR attributes.
CSR and advertising. For CSR differentiation to
be successful, potential customers must be fully
aware of CSR characteristics; otherwise, they will
purchase a similar product without such attributes.
Some of these characteristics might not be evident to
the buyer at first glance. Thus, advertising plays an
important role in raising the awareness of those
individuals who are interested in purchasing
products with CSR attributes.
The literature on advertising distinguishes
between two types of goods: search and experience
(Nelson, 1970, 1974). Search goods are products
whose attributes and quality can be determined
before purchase. For example, furniture is usually
considered to be a search good. Consumers search
for the appropriate style and quality. These
attributes can be established by examining the
product before purchase. Clothing is another
example of a search good. With accurate labeling as
to the textile content, the consumer can establish the
quality of the good before purchasing it. For search
January
goods, most advertising will be limited to informing
the consumer as to the availability of the product
and its price.
Experience goods are products that must be
consumed before their true value can be known. For
example, food is an experience good. The consumer
cannot determine from viewing the product how it
will taste or whether it will be safe to consume.
Advertising for experience goods, therefore, will
provide more information, usually tying the
product to an established brand name, such as
Heinz. The association with brand name provides
the consumer with information about the product
through the reputation of the brand.
As noted above, support of CSR creates a rep-
utation that a firm is reliable and honest. Consumers
typically assume that the products of a reliable and
honest firm will be of high quality. Advertising that
provides information about CSR attributes can be
used to build or sustain a reputation for quality,
reliability, or honesty— all attributes that are
important but difficult to determine by search alone.
For example, Heinz advertises its Starkist brand
tuna as being dolphin free. This provides the
consumer with information that the product has
CSR attributes but also that the company is
trustworthy. By implication, the product Will be of
high quality. This type of advertising is used to
foster product differentiation, allowing the firm to
charge a premium price.
The link between advertising and CSR leads to
our next two hypotheses.
Hypothesis 2: Because consumers rely more
on firm reputation when purchasing
experience goods than when purchasing
search goods, CSR attributes are more likely
to be associated with experience than with
search goods.
Hypothesis 3: Because consumers must be
made aware of the existence of CSR
attributes, there will be a positive correlation
between the intensity of advertising in an
industry (a proxy for which is the ratio of
advertising to sales) and the provision of
CSR.
Additional determinants of consumer demand.
We hypothesize that income is another determinant
of consumer demand for CSR. Whereas low-income
shoppers generally are quite price sensitive, affluent
consumers can more easily pay a higher price for
additional CSR attributes. Goods whose demand
increases as income increases are called normal
goods. We conjecture that CSR attributes are normal
goods, which means that greater levels of affluence,
2001 McWilliams and Siegel
as reflected in higher disposable income, will result
in greater demand for CSR. 7
Hypothesis 4: Because CSR attributes are
normal goods, there will be a positive
correlation between consumer income and
the provision of CSR attributes.
Other determinants of demand include tastes and
preferences, demographics, and the price of
substitute products. Consumer taste and preferences
may be affected by mass media, and CSR has
become a hot topic in media circles. Journalists often
provide free publicity of a firm's commitment or
lack of commitment to CSR. The media closely
scrutinize some sectors, such as the film industry
and professional sports. Celebrities and sports
figures often use the media to highlight their
commitment to social responsibility. Journalists also
closely follow the work of social activists. Fedderson
and Gilligan (1998) contend that media attention
devoted to social activists provides the public with
access to new information regarding social
attributes and methods of production. This free
publicity, whether positive or negative, helps
heighten public awareness of CSR, reduces
information asymmetry, and, thus, influences
demand for CSR.
Demographics can also affect the demand for
CSR. For instance, baby boomers have smaller
families, greater household incomes, and more
social awareness than previous generations. Thus,
they have the means to purchase products with CSR
attributes and are increasingly likely to make
consumption choices based on social grounds.
Savvy firms will capitalize on this trend.
Because not all consumers place a high value on
CSR attributes, the price of competing goods will
still affect the demand for goods and services
provided by firms that embrace CSR, if these
competing goods are lower-cost alternatives.
Although most consumers might choose a good
with CSR attributes if its price were equal to that of
another good and many might choose a good with
CSR attributes if its price were only a little higher,
some consumers will switch away from the CSR
good if there is a substantial price difference.
Therefore, there is a positive relationship between
the demand for goods with CSR attributes and the
price of competing, or substitute, products (the
higher the price of competing goods, the higher the
demand for goods with CSR attributes). This leads
7 Some CSR attributes may even have the properties of a
"luxury" good. That is, an increase in income may induce greater
than proportional increases in the demand for CSR attributes
(e.g., if income increases by 10 percent, the demand for CSR
attributes will increase by more than 10 percent).
121
to an additional hypothesis.
Hypothesis 5: There is a positive correlation
between the price of substitute goods and the
demand for goods with CSR attributes.
To summarize, we conjecture that the key de-
terminants of the demand for a product with CSR
attributes are the product's price, advertising to
promote consumer awareness of CSR attributes, the
level of consumers' disposable income, consumers'
tastes and preferences, demographics, and the price
of substitute products.
Table 1 presents the determinants of demand and
the predicted effect of each determinant on
TABLE 1
Determinants of Consumer Demand for CSR
Attributes
Hypothesized Effect on
Demand
Determinant
Price of good with CSR attributes Negative
Advertising Positive
Income Positive
Tastes Indeterminate
Demographics Indeterminate
Price of substitute goods Positive
the demand for CSR attributes—that is, whether
demand increases or decreases when the deter-
minant increases (as designated by a positive or
negative sign). As shown in the table, for some
determinants, such as tastes and demographics, the
effect is not easily predicted.
Other stakeholders' demand. Employees are
another important source of stakeholder demand for
CSR. For example, they tend to support progressive
labor relations policies, safety, financial security,
and workplace amenities, such as child care.
Workers search for signals that managers are
responding to causes they support. Unions often
play an important role in encouraging firms to
adopt these CSR policies. Note that unions can also
influence CSR policies at nonunion firms in the same
industry. This is analogous to the well-documented
"threat effect" of unions on nonunion wages
(Freeman & Medoff, 1983; Mills, 1994). For example,
nonunion firms may adopt progressive work
practices to avoid unionism (Foulkes, 1980). Firms
that satisfy employee demand for CSR may be re-
warded with increased worker loyalty, morale, and
productivity (Moskowitz, 1972; Parket & Eibert,
1975). There is also some evidence that firms in
industries with skilled labor shortages have used
CSR as a means to recruit and retain workers
(Siegel, 1999).
122 Academy o/ Management Review
Other stakeholder groups, including minority
and community groups and local and state gov-
ernments, can contribute to the demand for
products with CSR attributes as well. For example,
governments may encourage proactive en-
vironmental practices, and community groups may
desire support for local social services, such as those
provided by United Way. These groups will then
reward the firms by increasing their consumption of
the firms' products. For instance, government
contracts might require that firms undertake a
certain level of CSR investment, such as minority
set-asides. Ultimately, these groups affect demand
through consumption, either their own or that of the
consumers they influence. The characteristics of
demand from stakeholder groups other than
consumers lead to the following hypotheses.
January
generating CSR attributes and the attendant costs.
As shown in the table, additional capital might be
required to generate CSR characteristics. For
example, pollution abatement to achieve an
environmental standard beyond that required by
law will require the purchase of additional
equipment. Similarly, office space, supplies,
computers, telephones, and other communications
equipment may be devoted to CSR. To the extent
that additional capital is required, capital costs will
be higher.
Although capital costs will be higher for firms
that provide CSR, the costs will not increase
uniformly across firms. The use of capital in the
provision of CSR attributes may result in scale
economies, because capital investment often

Hypothesis 6: There is a positive correlation

between unionization of the workforce and
the provision of CSR; that is, in industries
that are highly
unionized, there will be more CSR provided.
Hypothesis 7; There is a positive relationship
between the shortage of skilled workers in an
industry and the provision of CSR; that is,
in industries with shortages of skilled labor,
more CSR will be provided.
Hypothesis 8: There is a positive correlation
between government contracts and the
provision of CSR.
The demand from all stakeholders can be
summed to arrive at the overall demand for
products with CSR attributes. Recognizing the
demand for CSR, managers can make decisions on
the number and level of CSR attributes and how to
produce them.

Supply of CSR
According to the resource-based view of the firm,
resources are "all assets, capabilities, organizational
processes, firm attributes, information, knowledge,
etc. controlled by the firm" (Barney, 1991: 101). The
resource-based view leads us to a supply-side
perspective, which begins with the realization that
firms must devote resources to satisfy the demand
for CSR. This indicates that we can modify the
microeconomic concepts of the production and cost
functions to include CSR-related resources and
output. Thus, we assume that firms use CSR-related
capital (land and equipment), labor, materials, and
purchased services to generate output.
In Table 2 we describe the inputs used in
2001 McWilliams and Siegel 123

TABLE 2
Resources or Inputs Used in the Provision of CSR
Resource or Input CSR-Related Resource or Input Additional Resource or Input Costs

Capital Special equipment, machinery, and real Higher capital expenditures

estate devoted to CSR
Materials and services Purchase of inputs from suppliers who are Higher-cost materials and services
socially responsible (intermediate goods)
Labor Progressive human resource management Higher wages and benefits and
practices and staff to implement CSR additional workers to enhance
policies social performance

entails substantial fixed costs. An example is a
smokestack scrubber. The cost of a scrubber is fixed,
once a particular piece of equipment is installed.
The cost of the scrubber will be amortized over the
number of units of output the firm produces. The
higher the level of output, the lower the per unit
cost of the scrubber, resulting in an economy of
scale.8
Intermediate materials and services may also be
related to the provision of CSR. For example, the
Body Shop purchases special ingredients and
formulas that have not been animal tested, Ben &
Jerry's has a stated policy of purchasing dairy
products from local Vermont farmers, and Wal-Mart
advertises that its products are made in America.
Locally produced goods and services may be more
costly than those imported from other states and
countries, resulting in higher costs for these socially
responsible firms. There might be scale economies
related to these costs, however, because of the
ability of large firms such as Wal-Mart to obtain
quantity discounts on CSR-related intermediate
goods and materials.
Firms may hire additional staff to advance CSR
through affirmative action, improved labor
relations, and community outreach. Existing
employees also may be asked to promote these
efforts. At the 1997 Philadelphia "summit" on
voluntarism, sponsored by President Clinton and
Colin Powell, numerous companies pledged to
dedicate additional human resources to CSR
activities. Many large firms
have entire departments devoted to CSR concerns.
The costs of personnel devoted to CSR and
additional CSR-related benefits provided to workers
increase the overall labor costs of firms. However,
human resources may also generate economies of
scale, because they represent a fixed cost that can be
amortized over numerous units of output.
When scale economies exist, large firms will have
lower average costs for providing CSR attributes
than small firms. This implies that there may be
some differences in the return to firms within
industries. Therefore, within industries in which
CSR attributes are provided (because the
product/service can be differentiated), larger firms
will provide more CSR attributes. .
We conjecture that there are economies of scope
in the provision of CSR, or cost savings that arise
from the joint production of CSR characteristics for
several related products. A large, diversified firm
can spread the cost of CSR provision over many
different products and services. For example, the
goodwill generated from firm-level CSR-related
advertising can be leveraged across a variety of the
firm's brands. When scope economies exist, more di-
versified firms will have lower average costs of
providing CSR attributes than firms focusing on one
particular industry. Thus, we expect a positive
relationship between firm diversification and the
provision of CSR attributes, all else being equal.
Our discussion of the costs of providing CSR
attributes has revealed that embodying products
with CSR attributes requires the use of additional
resources, which results in higher costs. When
considering the appropriate level of CSR
characteristics, managers must make critical
decisions regarding the optimal use of inputs

8 There are limits to scale economies. After all economies of

scale are exhausted, average cost will climb with additional

output. This diseconomy of scale is usually associated with
physical capital constraints or with managerial limitations.
Managerial limitations might, for example, result in less
flexibility in responding to social issues in very large firms.
124 Academy o/ Management Review January
 125 Academy o/ Management Review
that generate these attributes.9 Thus, a firm's cost
of producing CSR attributes is positively related to
the number of these characteristics. The cost
function has the usual properties. First, it is
monotonically increasing in CSR attributes; that is, it
costs more to generate additional characteristics.
Second, at some point there are increasing
incremental costs of providing CSR, which results in
a standard upward-sloping supply curve for CSR
attributes. The nature of the supply of CSR
attributes leads to the following hypotheses
regarding the provision of CSR across industries
and firms.
Hypothesis 9: Firms that provide CSR
attributes will have higher costs than firms
in the same industry that do not provide
CSR attributes.
Hypothesis 10: The presence of scale
economies in the provision of CSR attributes
results in a positive correlation between firm
size and the provision of CSR attributes.
Hypothesis 11: The presence of scope
economies in the provision of CSR attributes
results in a positive correlation between the
level of diversification of a firm and the
provision of CSR attributes.
A caveat to Hypothesis 9 must be mentioned. As
noted earlier, a firm may fundamentally change its
production process in response to a CSR concern,
such as conservation. Thus, it is conceivable that a
CSR-oriented process innovation could result in the
creation of a CSR characteristic at the same or even a
lower level of cost. Examples of this, however, are
difficult to find, whereas examples of higher costs
for CSR products abound. For instance, a trip to the
supermarket reveals that goods with social char-
acteristics (e.g., organic produce) typically cost more
than similar goods without social characteristics
(e.g., nonorganic produce).
Determining the Appropriate Level of
CSR Investment
The supply and demand framework implies that
there is some optimal level of CSR attributes for
firms to provide, depending on the demand for
these characteristics and the costs of generating
them. Companies that do not supply CSR attributes
have lower costs, but they face a different (lower at
9 In our model we assume that the two firms use the same
production technology. This does not apply to a situation in
which firms adjust their production processes to reflect CSR
concerns.
January
every price) demand curve than firms that do
provide them. Firms that supply CSR will have
higher costs for every level of output than firms that
do not supply CSR and produce similar goods.
Those consumers who value CSR are willing to
pay a higher price for a product with an additional
social characteristic than for an identical product
without this characteristic. This result is contingent
on consumers being aware of the existence of the
CSR attribute. If consumers are not aware of this
additional social feature, they will choose the lower-
priced product. Thus, advertising plays an
important role in determining the optimal level of
CSR attributes or outputs provided. Advertising
also helps raise awareness regarding firms' use of
CSR inputs, which may be of interest to several
stakeholder groups.
The provision of CSR attributes will depend as
well on certain characteristics of the market, such as
the degree to which firms can differentiate their
products and the industry life cycle. Thus, one is
likely to find CSR attributes in industries with
highly differentiated products, such as food, cos-
metics, pharmaceuticals, financial services, and
automobiles. In the embryonic and growth stages of
the industry life cycle, we expect that, there is little
product differentiation, as firms focus on perfecting
the production process and satisfying rapidly
growing demand. As growth slows, and especially
as the industry matures, there is likely to be a great
deal of differentiation. For example, in the ice cream
industry, simple flavors, such as vanilla, dominated
in the embryonic and growth stages. As tastes and
markets became more sophisticated, more flavors
were introduced. In the current maturity phase
there is substantial product differentiation (flavors,
fat content, modes of delivery, and so forth). Ben &
Jerry's has capitalized on the possibility of
differentiation through flavors and CSR attributes.
Demographic and technological changes also can
stimulate demand for CSR attributes. The rapid rise
in the number of working women has resulted in an
increase in the demand for corporate-supplied day
care, flexible work schedules, and telecommuting.
On the supply side, the rise of the internet has made
it much easier for firms to target consumers who
have social goals. This is evident in the substantial
growth in the number of web sites devoted to CSR
activity. These have dramatically reduced the cost of
transmitting CSR information to consumers and
other interested stakeholders. Examples include the
Toyota and Honda web sites, which are devoted to
information about their electric cars. On the demand
side, the internet makes it easier for groups who
share common social goals to exchange information.
For example, there are virtual communities
126 Academy of Management Review
(geocities) for those outside the mainstream of
society.
MANAGERIAL IMPLICATIONS
Our analysis reveals that there is some level of
CSR that will maximize profits while satisfying the
demand for CSR from multiple stakeholders. The
ideal level of CSR can be determined by cost- benefit
analysis. To maximize profit, the firm should offer
precisely that level of CSR for which the increased
revenue (from increased demand) equals the higher
cost (of using resources to provide CSR). By doing
so, the firm meets the demands of relevant
stakeholders—both those that demand CSR
(consumers, employees, community) and those that
"own" the firm (shareholders).
On the demand side, managers will have to
evaluate the possibility of product/service dif-
ferentiation. Where there is little ability to dif-
ferentiate the product or service, demand may not
increase with the provision of CSR. On the supply
side, managers will have to evaluate the resource
costs of promoting CSR while being cognizant of the
possibility that there may be scale and/or scope
economies associated with the provision of CSR. In
sum, managers should treat decisions regarding
CSR precisely as they treat all investment decisions.
DISCUSSION
In this study we attempt to answer a question
that has received inadequate attention in the CSR
literature: Precisely how much should a firm spend
on CSR? We addressed this issue using a supply
and demand theory of the firm framework and
found that there is a level of CSR investment that
maximizes profit, while also satisfying stakeholder
demand for CSR. This level of investment can be
determined through cost-benefit analysis. Managers
can use our framework to make decisions regarding
CSR investment by employing the same analytical
tools used to make other investment decisions.
We have also developed several hypotheses re-
garding CSR activity—for example, the provision of
CSR will depend on R&D spending, advertising
intensity, the extent of product differentiation, the
percentage of government sales, consumer income,
the tightness of the labor market, and the stage of
the industry life cycle. Additionally, the likelihood
of economies of scale and scope in the provision of
CSR implies that large, diversified companies will
be more active in this arena. Most important, our
model indicates that although firms providing CSR
will have higher costs than firms not providing CSR,
they will each have the same rate of profit.
January
To assess the impact of CSR on profitability, we
present the following simple example. Assume there
are two firms that produce identical goods, except
one company adds a social characteristic to its
product. Invoking the theory of the firm, we assume
that each firm makes optimal choices, which means
that each produces at a profit-maximizing level of
output. It can be shown that, in equilibrium, both
will be equally profitable. The firm that produces a
CSR attribute will have higher costs but also higher
revenues, whereas the firm that produces no CSR
attributes will have lower costs but also lower
revenues. Any other result—for instance, one firm
earning a higher rate of return—would cause the
other firm to switch product strategies. Note that
our conclusion is based on the assumption that there
are no entry barriers associated with providing the
social characteristic.
Our conclusion that profits will be equal may
explain why there is inconsistent evidence re-
garding the relationship between CSR provision and
firm performance. According to our argument, in
equilibrium there should be no relationship. CSR
attributes are like any other attributes a firm offers.
The firm chooses the level of the attribute that
maximizes firm performance, given the demand for
the attribute and the cost of providing the attribute,
subject to the caveat that this holds true to the extent
that managers are attempting to maximize
shareholder wealth. From this we predict that there
will generally be a neutral relationship between CSR
activity and firm financial performance.
It appears that the lack of consistency in em-
pirical studies of CSR is due to a lack of theory
linking CSR to market forces. Our supply and
demand framework fills this void, allowing us to
predict that the provision of CSR will vary across
industries, products, and firms. Therefore, those
empirical studies in which researchers have not
controlled for all the firm or industry characteristics
we have identified here are probably misspecified.
Unfortunately, many of our hypotheses are dif-
ficult to test empirically, given the lack of data on
the demand for and supply of CSR. We propose that
the government or management researchers
working with government support systematically
collect information on the social characteristics of
products and CSR activity at the firm and industry
level.10 This would enable researchers to test our
hypotheses and also allow them to conduct an
10 The firm of Kinder, Lydenberg, and Domini provides a
"rating" of selected publicly held firms based on their social
performance in eight categories, including community, diversity,
employee relations, product, environment, South Africa, military,
and nuclear power. This rating has been used as a proxy for the
supply of CSR.
2001 McWilliams and Siegel 127
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 McWilliams and Siegel

Abagail McWilliams is professor and head of the Managerial Studies Department,

University of Illinois at Chicago. She received her Ph.D. in economics from The Ohio State
University. Her research interests include market structure and firm performance, strategic
human resource management, gender issues in worker mobility, and corporate social
responsibility.
Donald Siegel is professor of industrial economics at the Nottingham University Business
School in the United Kingdom. He received his Ph.D. in business economics from Columbia
University. His research interests include productivity analysis, the economic and
managerial implications of technological change, university technology transfer, science
parks, and corporate social responsibility.