Multinationals and Corporate Social Responsibility in Host Countries: Does Distance Matter?

Abstract

Prior studies have found that foreign affiliates of multinational enterprises (MNEs) suffer from liability of foreignness (LOF). Foreign affiliates may be able to improve their social legitimacy and overcome LOF by demonstrating social commitment to host country constituents through corporate social responsibility (CSR). If LOF is positively related to the distance between the home and host countries, and CSR activities confer social legitimacy benefits to foreign affiliates, we should expect CSR activities and distance to be positively related. However, we argue that despite this potential motivation, foreign affiliates from more distant home countries are in fact less likely to engage in host country CSR. Our argument focuses on the ways distance affects the MNE’s willingness and ability to engage in CSR abroad. We also predict that host-country CSR reputation negatively moderates this relationship. Using Community Reinvestment Act data for foreign bank affiliates from 32 countries in the United States over 1990-2007, we find strong support for our hypotheses. The paper enriches our understanding of CSR practices in MNEs, and of when and how MNEs try to overcome legitimacy issues in host countries.

Keywords: Corporate Social Responsibility, Liability of Foreignness, Cultural Distance, Institutional Distance, CAGE, Community Reinvestment Act, Banking

JEL Classification: M14, D21, F23, G21, G38