Management Decision

The effects of corporate social responsibility on profitability: The moderating

roles of differentiation and outside investment
Sunghee Lee, Heungjun Jung,
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The effects of corporate social Effects of

CSR on
responsibility on profitability profitability

The moderating roles of differentiation

and outside investment 1383
Sunghee Lee Received 3 July 2015
Department of Business Administration, Hoseo University, Revised 19 March 2016
Accepted 2 May 2016
Cheonan-si, Republic of Korea, and
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Heungjun Jung
Business School, Korea University, Seoul, Republic of Korea

Abstract
Purpose – The purpose of this paper is to determine the effects of corporate social responsibility (CSR)
on financial performance in firms in the Korean manufacturing industry. In addition, the authors
examine the moderating role of differentiation and outside investment in the same relationship.
Design/methodology/approach – The mixed methods are used in this study. The authors first take
an analytical modeling approach, in which the authors assume that CSR has a positive effect on
consumer perceptions, which in turn can improve firm performance. Subsequently, the authors verify
the propositions with data from the Korean manufacturing industry. Additionally, the authors explore
the moderating roles of various factors in the CSR-financial performance relationship.
Findings – The results of the analysis demonstrate that the positive relationship between CSR and
financial performance depends on the levels of product differentiation and outside investment.
Specifically, these contingent variables magnify the effects of CSR on financial performance.
Practical implications – This study is particularly useful to supply chain managers. According to
the results, CSR may provide benefits for both manufacturers and retailers. As brand reputations can
be source for competitive advantage, the analytical model suggests that products made by socially
responsible firms are attractive to consumers.
Originality/value – To the authors’ knowledge, there are few studies that examine the multiple
moderating effects of differentiation and outside investment on the relationship between CSR and
financial performance (return on assets). The authors thus provide a clearer understanding of the
effects of CSR activity on firm profitability using these business strategies.
Keywords Profitability, Differentiation, Corporate social responsibility, Supply chain management,
Outside investment
Paper type Research paper

Introduction
Managing social demands is a priority for managers of organizations who believe that
corporate social responsibility (CSR) is a key marketing tool for enhancing consumers’
positive reactions to products (Sen and Bhattacharya, 2001). Many globalized retailers
accept that manufacturers’ efforts toward CSR are their best response to customer
expectations. For instance, UNIQLO, one of the world’s biggest retail fashion
companies, does business with suppliers that have CSR initiatives. This new trend
presents a research challenge from the point of view of modeling: should supply chain
management and CSR be combined into one model, or should these two constructs Management Decision
remain distinctive? Many studies have attempted to answer this question (Cruz and Vol. 54 No. 6, 2016
pp. 1383-1406
Boehe, 2008; Goering, 2012; Brand and Grothe, 2013; Chen and Slotnick, 2015; Xia and © Emerald Group Publishing Limited
0025-1747
Tang, 2011). DOI 10.1108/MD-07-2015-0268
 MD Although research on the theoretical and empirical aspects of CSR and its effect on
54,6 profitability has significantly increased, the results of studies on the relationship
between CSR and financial performance have been inconclusive. For instance, in a
meta-analysis, Margolis and Walsh (2003) reported that 54 studies identified a positive
relationship between these two constructs, seven studies revealed a negative
relationship, and 28 studies found the relationship to be non-significant.
1384 The inconsistency of these results from previous studies gives rise to the suspicion
that socially responsible corporate behaviors cannot easily be mapped onto financial
performance (Ullmann, 1985). In this vein, commentators have argued that the
CSR-financial performance relationship depends on several contingent factors that can
maximize profits, factors which have been omitted from many studies (McWilliams and
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Siegel, 2000, p. 603).

To mitigate the ambiguity surrounding previous findings, our focus in the first
study is to determine how CSR can affect financial performance in supply chain
contexts. In the second study, our primary aim is to identify moderators in the
CSR-profitability relationship. We specifically argue that the impact of CSR on financial
performance relies on business capability or corporate resources. Companies that
engage in socially responsible activities to maintain their good reputation must make
considerable efforts to differentiate themselves from their rivals. Several researchers
have pointed out that CSR involvement increases in firms with adequate financial
resources (Ullmann, 1985; Waddock and Graves, 1997) and effective human resources
( Jung and Kim, 2015). Taken together, these findings lead us to expect that the
relationship between CSR and financial performance varies depending on the firm’s
internal capability, as characterized by differentiation and outside investment.
We conduct two experiments in this paper. Study 1 utilizes the analytical modeling
approach, in which we assume that CSR has a positive effect on consumer perceptions,
which in turn can improve firm performance because customer satisfaction is a key
driver of profitability (Fornell et al., 2006). In study 1, manufacturers have two possible
options (to engage in CSR efforts or not); in this study, we compare firms’ profit levels.
In various situations, we study the effects of CSR efforts by manufacturers on
profitability. Then, in study 2, we examine the moderating effects of differentiation and
outside investment as business strategies using data collected from firms in the
manufacturing industry. Our theoretical model is illustrated in Figure 1.
The findings of the present study may help both scholars of CSR and supply chain
management and practitioners in two primary ways. First, they have the practical
implication that organizations may build positive images through engaging in socially

Differentiation

CSR Financial Performance

(ROA)

Figure 1.
A research model Outside Investment
 responsible activities. Second, we provide a contextualized understanding of CSR. Effects of
By examining differentiation and outside investment in the context of the relationship CSR on
between CSR and performance, we highlight the importance of internal resources in
realizing the higher public good in the relationship between CSR and financial returns.
profitability

Korean context
We herein develop a theoretical framework based on the Korean context. According to 1385
The Federation of Korean Industries, 234 of its 470 members published sustainability
reports in 2013. Furthermore, the average expenditure on CSR in Korean firms in 2013
was 3.76 percent of earnings before tax, which is more than twice that of large Japanese
firms (1.77 percent; Federation of Korean Industries, 2014). In Korean firms, a shift in
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CSR activities has occurred from simple donations to direct involvement in

self-improvement programs, which has affected various stakeholders and product
quality. Corporate spending reflects this shift. For example, the ratio of total donations
through partnership decreased from 95 percent in 2000 to 62.5 percent in 2012.
By contrast, the ratio of CSR budgeting for self-improvement programs increased from
5 percent in 2000 to 37.5 percent in 2010.
This statistical evidence demonstrates that the focus on CSR activities in Korean
firms is currently moving from external social issues to internal stakeholders.
As globalization has occurred, especially since the 1990s, Korean firms have expanded
the involvement of their stakeholders (e.g. employees and suppliers) in terms of CSR;
this move may help to improve their competitive advantage in terms of both quality
and reputation. For example, Kim et al. (2010) suggested that employee participation in
CSR programs in a sample of 22 Korean firms provided a sense of identification with
the organization, which may in turn increase organizational performance. At the same
time, Korean firms have increased the involvement of their suppliers in addressing
socially responsible issues. For instance, Samsung Electronics introduced the
“Samsung Standard,” establishing stricter environmental regulations for their
suppliers at the international level (Lee and Kim, 2009).
In addition, several cultural factors have pushed Korean firms to engage in socially
responsible behavior for the sake of their internal stakeholders. Like some other countries
in East Asia, Korea has long been influenced by the Confucian ideology, which focusses
on virtuous behavior toward others and practical ethics in human relations (Hofstede and
Bond, 1988). These values have affected employer-employee relations in South Korea for
centuries. For instance, Kim and Kim (2010) found that overall, perceptions of CSR of
Korean managers are positive, even those managers who strategize from a profit-
maximization perspective, because CSR can be understood as a fundamental strategy for
attaining a mutually beneficial relationship between businesses and their stakeholders.

Literature review
Although there is no consensus about the definition, CSR has been commonly defined
as a set of obligations for multiple stakeholders toward society as a whole beyond the
usual business interests and minimum legal requirements (Carroll, 1991; McWilliams
and Siegel, 2000; Sen and Bhattacharya, 2001). Based on this broad concept of CSR,
some scholars have suggested that it arises not only from ethical motivations, but also
from business needs in competitive business environments (e.g. Porter and Kramer,
2006). In the supply chain, CSR is particularly critical to the fulfillment of business needs.
Because CSR can ultimately affect the willingness of consumers to purchase products
(Hsueh, 2014), customer satisfaction with products (Luo and Bhattacharya, 2006), and
 MD consumer-company identification (Lii and Lee, 2012), the social reputations of firms are
54,6 closely related to firm performance (Chen and Slotnick, 2015). This is why both
manufacturers and retailers have focussed more and more on CSR initiatives in recent
years. In line with this perspective, we conduct our literature review of studies that have
examined strategic CSR.
CSR as a strategic perspective helps us to understand how firms gain competitive
1386 advantage through engaging in socially responsible behaviors. Burke and Logsdon
(1996, p. 497) defined strategic CSR as “policies which are related to the organizational
mission linked to its accomplishment [that] have much higher centrality than
traditional corporate philanthropy programmes.” Advocates of strategic CSR argue
that firms engaging in strategic CSR provide a public good in conjunction with
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business strategy (Baron, 2001; McWilliams et al., 2006). Other scholars posit that
strategic CSR is more profitable than simple altruistic CSR. For instance, Hillman and
Keim (2001) found that while there is a positive relation between stakeholder
management and firm performance based on strategic CSR, participation rooted in
straight donations is negatively associated with firm performance.
In the CSR literature written from the strategic perspective, socially responsible
activities have been shown to create competitive advantage by building reputation,
mobilizing resources, and differentiating products (Boehe and Cruz, 2010; Jung and Kim,
2015; McWilliams et al., 2006; Porter and Kramer, 2006). Scholars have also suggested that
socially responsible firms are more attractive to employees, consumers, and other social
groups, which in turn increases firm sustainability (Porter and Van der Linde, 1995).
For instance, corporations engaging in strategic CSR are more likely to choose needed
activities when they encounter strong state regulations, NGO monitoring, and scrutiny
from other stakeholders, especially customers, because participation in CSR programs
reduces risk when negative events occur (Vogel, 2005). This perspective helps firms to
maintain social legitimacy (Waddock et al., 2002). In this line of research, strategic CSR
theory states that a firm’s commitment to socially responsible responses can be a source of
competitive advantage (Hart and Dowell, 2010).
On the other hand, CSR involvement does not necessarily automatically translate into
firm performance. Many researchers have examined the impact of CSR on business
returns and the influence of contextual variables (Ullmann, 1985; Wang et al., 2015).
In particular, scholars have focussed heavily on the role of environmental context (Goll
and Rasheed, 2004). Writing from the resource-based viewpoint, for instance, Russo and
Fouts (1997) suggested that industry growth moderates the influence of social
performance on economic performance. In a meta-analysis, Wang et al. (2015) identified
contingent variables such as institutional business systems in both developing and
developed economies that explain heterogeneity in business returns in relation to CSR.
Because adaptation to unpredictable, rapid environmental changes is not easy, the role of
organizational capability and the ability to deal with uncertainty have been scrutinized
frequently in the CSR context. In Tang et al.’s (2012) study, written from the absorptive
capacity perspective, the authors suggested that strategic engagement in CSR moderates
financial performance. Hull and Rothenberg (2008) proposed a moderating role of firm
innovation in the link between CSR and economic performance. Zhu et al. (2014) found
that ethical leadership moderates the indirect effect of CSR on firm performance through
firm reputation. Ramanathan and Akanni (2015) provided evidence of the moderating
role of organizational efficiency in the link between environmental performance and
profitability. Cruz et al. (2015) suggested that having a differentiation strategy helps to
reinforce market position and generate long-term returns.
 In line with this thinking, we propose that the impact of CSR on profitability Effects of
depends on the firm’s internal capability, as reflected in its strategic choices regarding CSR on
differentiation and outside investment. We posit that these factors may strengthen the
relationship between CSR and financial outcome.
profitability

Model setup
Our model is based on the channel competition theory developed by McGuire and 1387
Staelin (1983), who investigated two manufacturers that provided substitutable
products to one retailer. This model of channel competition showing the
substitutability of products is useful in research on changing environments. Channel
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competition theory can also be extended to the competing agent model, which involves
incentive collision in strategic delegation situations (Shin et al., 2015). Further, a
competitive game model can be used to identify strategies for forwarders and shippers
(Watada et al., 2014). The results of prior studies demonstrate great consistency in
diverse competitions irrespective of channel characteristics. Dumrongsiri et al. (2008)
compared two sales approaches: acquiring products directly from a manufacturer and
acquiring them indirectly from a retailer. They demonstrated an equilibrium in which
both the manufacturer and retailer can achieve profit maximization. In addition,
scholars also identified factors other than price, such as quality and service (Banker
et al., 1998; Tsay and Agrawal, 2000). Like Swami and Shah (2013), who showed a
connection between channel competition theory and corporate environmental
consciousness, we attempt to demonstrate the efficacy of CSR activity from the
channel competition perspective. Unlike Swami and Shah (2013), however, we consider
competition among firms according to CSR effort using the strategy of differentiation.
We examine the supply chain structure problem, which deals with channel competition,
in terms of manufacturers’ decision-making about investing in CSR (see, Figure 2).
One of the key parameters examined in this study is the level of product differentiation
(0oθo1). When θ (representing the level of product differentiation) approaches 1, two
products become more substitutable; on the other hand, when θ is close to 0, manufacturers
become monopolistic in their respective markets. The coefficient of the impact on the
market of CSR effort (0 ⩽ γ ⩽ 1) stands for the effectiveness of a given firm’s CSR effort and
the level of substitutability between channels. As γ approaches 1, firm demand and profit
increase significantly. On the other hand, lower γ means that a firm’s CSR effort does not
affect its performance greatly. Further, we assume that the effort for each firm has an
identical impact and that consumers feel the same effect from firm effort. All parameters
used in this study are presented in Table I.

Manufacturer 1 Manufacturer 2

w1 s1 s2 w2

Retailer
Figure 2.
Supply structure
p1 p2 with two
manufacturers and
Consumers one retailer
 MD Term Definition
54,6
αi Intrinsic product quality for manufacturer i’s product (i ¼ 1, 2)
γ Market impact coefficient of CSR effort
θ Level of product differentiation
pi Price for manufacturer i’s product (i ¼ 1, 2)
qi Demand for manufacturer i’s product (i ¼ 1, 2)
1388 si CSR effort by manufacturer i (i ¼ 1, 2)
Table I. pi Retail price for manufacturer i’s product (i ¼ 1, 2)
Definition of terms wi Wholesale price for manufacturer i’s product (i ¼ 1, 2)
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We model the consumer utility function considering CSR effort, utilizing the models
widely used in previous studies (Dixit and Stiglitz, 1977; Singh and Vives, 1984).
In previous literature, the typical assumption has been that rational consumers select the
products of highest utility. We consider first a duopolistic competition with a quadratic
utility function, following the parameter conditions in Vives (2001) when i is 1 or 2:
1
2 
CS ¼ qi ðai þ gsi Þþ q3i ða3i þ gs3i Þ  qi þ q23i þ 2yqi q3i pi qi p3i q3i (1)
2
Consumer surplus denoted by CS in this paper can be transformed into the following
demand function by solving two differential equations together. While finding the
quantities to maximize the consumer utility, supply chain members such as
manufacturers and retailers make their pricing, quality, and other relevant decisions,
including CSR by applying demand (or inverse demand) functions based on utility-
based functions.
From (1), we estimate the following demand function:
ðai ya3i Þþ gðsi ys3i Þð pi yp3i Þ
qi ¼ (2)
1y2
In order for the consumer surplus to be quadratic and strictly concave, αi−θα3−i should
be larger than 0. The demand function is linearly affected by differences in quality, CSR
effort, and price between two competing goods. A manufacturer’s demand is positively
affected by the quality of its own products, CSR effort, and the competitor’s price.
The manufacturer’s demand is, however, negatively influenced by its own price, the
quality of its competitor’s products, and the competitor’s CSR efforts.
We assume that firms have convex cost functions in terms of CSR effort by
manufacturers. Then, the following functions are obtained.
Manufacturer i:
1
pi ¼ qi wi  ðsi Þ2 (3)
2
Retailer r:
pr ¼ qi ð pi wi Þþ q3i ð p3i w3i Þ (4)
We therefore have a three-stage model. Competing manufacturers simultaneously
choose CSR effort levels at stage 1 and decide their wholesale prices at stage 2.
The retailer decides the prices for the two manufacturers’ products at stage 3.
 Hereafter, we follow the protocol of Banker et al. (1998) and other relevant studies Effects of
(e.g. Lee et al., 2016). CSR on
To ensure profit maximization, each firm’s profit should meet the concavity
conditions under price, quality, and effort equilibrium. We solve these games through
profitability
backward induction. Then, the following prices can be obtained from the retailer’s
profit function:
ðgsi þ wi þ ai Þ
1389
pi ¼ (5)
2
From the equilibrium price, we see that the retail price is positively influenced by CSR
effort, quality, and wholesale price. Then, the values resulting from Equation (5) will be
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inserted into Equation (3). As a result, the following wholesale price can be obtained:


 

g 2y2 si ys3i þ 2y2 ai ya3i
wi ¼ (6)
4y2
Then, the values resulting from Equations (6) and (5) will be inserted into Equation (3).
As a result, the following model for CSR effort can be obtained:





 
g 2y2 2y2 4g2 y2 ai y 4y2 a3i
si ¼
2

2
3
 (7)
g4 2y2 2g2 4y2 2y2 þ 4y2 1y2
Under the above conditions, the optimal profit functions for the manufacturer and the
retailer are identified as follows:

2

2 



 2
4y2 1y2 g2 2y2 2y2 4g2 y2 ai y 4y2 a3i
pi ¼ 
2

2
3
2 (8)
2 g4 2y2 2g2 4y2 2y2 þ 4y2 1y2

0 0
2
2

 
2  11

 g4 2y2 þ 4y2 47y2 þ 3y4 þ 4g2 47y2 þ 3y4 ai þ a3i 2
B 2 2B 
CC
@ 4y @ 2
2

 AA
þ 2y g4 2y2 y2 4y2 1y2 2g2 814y2 7y4 þ y6 ai a3i
pr ¼   

2

2
3
 2
4 g4 2y2 2g2 4y2 2y2 þ 4y2 1y2

(9)
From (8), we find that the intrinsic product quality for manufacturer i’s product affects
the profit level, which indicates that the manufacturer’s profit increases as its own
intrinsic product quality improves and its competitor’s quality deteriorates.
As shown above, both firms have higher profit when CSR effort is made than when
no CSR effort is made under the same conditions, assuming that CSR effort induces
more utility for consumers. Four possible cases are presented in Table II. Further
details are provided in the Appendix.
To focus on the effects of CSR effort on corporate performance, we assume that α1
and α2 are identical. We therefore set α1 ¼ α2 ¼ α.
In the scenario described here, the two players have a choice: no CSR effort vs CSR
effort. The superscript NN stands for no CSR effort on the part of either manufacturer,
 MD and CN stands for an asymmetrical CSR environment, in which manufacturer 1 only
54,6 makes a CSR effort. Manufacturers choose their actions simultaneously, after which
their strategies for investing in CSR effort or not affect their profits.
Based on Table II and the Appendix, we find that pN1 N ¼ pN2 N ¼
ða ð1yÞÞ=ð2ð2yÞ2 ð1 þ yÞÞ under no effort and pCC
2 CC 2 2 2
1 ¼ p2 ¼ ða ðð4y Þ ð1y Þ g
2 2
2 2 2 2 2
ð2y Þ ÞÞ=ð2ðð2yÞ ð1 þ yÞð2 þ yÞg ð2y ÞÞ Þ when both manufacturers put in effort.
2
2
1390 Further, under the asymmetrical condition, pN1 C ¼ pCN 2 ¼ ða ð1y Þðð2yÞ
2
2 2 2 2 2 2 2 2 2
ð1yÞð2 þ yÞ þ g ð2y ÞÞ Þ=ð2ðg ð2y Þ ð4y Þ ð1y ÞÞ Þ and
2 2
p1 ¼ pN2 C ¼
CN
2 2 2 2 2 2 2
ða ð2yy Þ Þ=ð2ðð4y Þ ð1y Þg ð2y Þ ÞÞ are obtained. From this, the following
2 2

lemmas can be established:

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Lemma 1. Suppose the competitor makes no CSR effort; then the firm with a CSR
strategy makes a higher profit than the competitor only if
ðð2 þ yÞ2 ð2ð3yÞy2 ÞÞ=ðð1 þ yÞð2y2 ÞÞ 4 g2 .
Lemma 2. Suppose the competitor makes an effort toward CSR; then the firm with
no CSR strategy makes a higher profit than the competitor only if
g2 4 ðð2 þ yÞ2 ð2ð3yÞy2 ÞÞ=ðð1 þ yÞð2y2 ÞÞ.
In many non-cooperative game-theoretic settings (Banker et al., 1998; Tsay and
Agrawal, 2000), the propositions tend to reflect comparative results under specific
conditions between competitors. The two propositions in this paper refer to the
situation when a manufacturer or retailer is better off in terms of both CSR and
substitutability. From Lemma 1 and Lemma 2, Table II, and the argument outlined
above, we make the following proposition:
P1. A manufacturer’s profit under conditions of CSR effort and lower product
substitutability is larger than that with no CSR effort and higher product
substitutability.
The intuition of P1 is that the role of CSR effort in enhancing a manufacturer’s profit
is strengthened by adopting a strategy of product differentiation. Combining CSR
effort and a differentiation strategy offers greater profit; conversely, CSR effort
without differentiation may be useless. P1 will be validated in the empirical analysis
in the next section.
When both firms have no formal CSR strategy, then engaging in CSR will provide
more profit under the following conditions:
(1) When the competitor engages in CSR:

ð2yÞ2 ð1 þ yÞð2yð2 þ yÞÞ

 4g2
ð1yÞ 2y2

Manufacturer 2
Table II. No CSR Effort CSR Effort
Equilibrium profits
for four Manufacturer 1 No CSR effort pN1 N , pN2 N pN1 C , pN2 C
possible cases CSR effort pCN
1 , p2
CN pCC
1 , p2
CC
 (2) When the competitor chooses not to engage in CSR: Effects of
CSR on

2

4y2 1y2 profitability

 4 g2
2 2
2y

Further, ðð4y2 Þ2 ð1y2 ÞÞ=ðð2y2 Þ2 Þ is larger than ðð2yÞ2 ð1 þ yÞð2yð2 þ yÞÞÞ= 1391
ðð1yÞð2y2 ÞÞ for all levels of product differentiation. This indicates that the coefficient
of the impact on the market of CSR effort (γ) is feasible in a wide area for case 2 and the
incentive to invest in CSR is greater if the competitor does not engage in CSR. Otherwise, in
cases pN1 N to pCN
1 , CSR is likely to be more beneficial than in cases p1
NN
to pCC
1 .
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When α and γ are assumed to be 1, firm profitability when CSR effort is and is not
exerted varies, as shown in Figure 3. As the above statement shows, less differentiated
products (those with high θ) provide a comparative advantage under the no CSR effort
condition. This means that the effect of CSR effort is greater when an independent
market is secured.
Now we turn to retailer profits, which will increase or decrease under different
conditions. If CSR effort increases utility and creates more demand in the market, the
retailer will share these benefits. Thus, we establish the following proposition:
P2. A retailer’s profit when both manufacturers engage in CSR effort is larger than
that when no CSR effort is exerted.
P2 suggests that the positive effects of CSR effort are not enjoyed by manufacturers
only. As the intermediary in a supply chain, the retailer shares the benefit together with
the manufacturers, and may actually request that manufacturers be involved in CSR.
The proposition is valid for the following reasons. Under ð2ð2yÞ2 ð1 þ yÞ
ð2 þ yÞÞ=ð2y2 Þ 4g2 and the condition in which both manufacturers exert CSR
effort, the retailer earns more profit than would be the case if no CSR effort was exerted.
Further, ð2ð2yÞ2 ð1 þ yÞð2 þ yÞÞ=ð2y2 Þ is always larger than 1, and γ2 should be less
than 1; therefore, P2 is demonstrated.
When α and γ are assumed to be 1, the retailer’s firm profitability varies under: first,
the no CSR effort strategy; second, the CSR effort strategy; and third, the asymmetrical
case, as shown in Figure 4.

0.15

CC

0.10
NN
Profit

0.05

0.00 Figure 3.
0.0 0.2 0.4 0.6 0.8 Manufacturers’ profit
Differentiation
 MD 0.4

54,6
0.3
CC r

1392 Profit
0.2
NC r = CN r

NN r
0.1
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Figure 4. 0.0
Retailers’ profit 0.0 0.2 0.4 0.6 0.8
Differentiation

It should be noted that less differentiation can increase retailer profit and asymmetrical
CSR effort can provide more profit when differentiation is low. Unlike manufacturers,
retailers enjoy more profit when substitutability is higher. This explains why the decline
in the equilibrium wholesale price is faster than that of the retail price. Figure 4 illustrates
how retailer profit under conditions of asymmetrical CSR effort and very high
substitutability may exceed retailer profit when both manufacturers exert CSR effort.
In this case, the higher substitutability condition would be better for the retailer. For this
reason, the retailer may try to coordinate different CSR options with manufacturers
under conditions of very high substitutability in order to increase profits.

Empirical analysis
In this section, we conduct an empirical analysis from a game-theoretic perspective to
validate our propositions. Before the analysis, we briefly describe the background of
our hypotheses. Given the preliminary conclusion that a manufacturer’s CSR activities
increase profitability for both manufacturers and retailers, we posit that consumers’
reactions in response to socially responsible behavior from manufacturers may be
positively associated with buying behavior. As Mohr et al. (2001) argued, consumers
must first be aware of a firm’s level of social responsibility before deciding on
purchases. Therefore, consumers may consider engagement in CSR programs as an
informational cue for society. Based on this argument, Mohr and Webb (2005)
concluded that high-level CSR will influence purchase intent positively. Becker-Olsen
et al. (2006) also identified a positive relationship between CSR initiatives and purchase
behavior. We therefore expect that a manufacturer’s CSR effort may increase the
possibility of its benefiting considerably from customer loyalty to its products.
We therefore present the following hypothesis:
H1. Engagement in CSR has a positive relationship with firm profitability.
As previously mentioned, the effect of CSR on financial performance may rely on
firm-specific strategies to meet customers’ needs. Prior evidence indicates that the impact
of CSR on financial performance is ambiguous due to the added costs of CSR activity
( Jung and Kim, 2015; Waddock and Graves, 1997). Therefore, we argue that the
relationship between CSR effort and financial performance may not be consistently
positive; rather, it may be contingent on product differentiation as a competitive strategy.
 Product differentiation has been previously defined as a method of distinguishing goods Effects of
or services from those of competitors (Chamberlin, 1965). Because product differentiation CSR on
gratifies customers’ needs, it can play a crucial role in profitability for companies that
engage in CSR. For instance, Patagonia, the firm producing outdoor products in California,
profitability
sells CSR-based differentiated goods at prices 50 percent or higher than those of its
competitors (Husted and Allen, 2007). This evidence suggests if socially responsible firms
offer better products, customers may be more attracted to them. Conversely, CSR effort is 1393
likely to fail if firms offer poor-quality products (Sen and Bhattacharya, 2001).
We therefore present the following hypothesis:
H2. Product differentiation moderates the relationship between CSR and firm
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profitability such that the relationship is stronger under higher differentiation

than under lower differentiation.
Enhanced capability can also play a positive role in widespread supply chains by
increasing a firm’s ability to compete with other firms and exploiting technology
efficiently (Blalock and Simon, 2009). A firm may enhance its capability using various
approaches. Among them, outside investment can provide good opportunities for
accumulating the considerable resources required when launching new business
projects (Bowen and De Clercq, 2008). For all businesses, engaging in activities for the
benefit of various stakeholders or society as a whole requires financial investment.
Involvement in strategic CSR may increase availability of financial resources, and
ultimately, returns. For example, a firm supported by outside investors may be able to
appeal to consumers by showing its contributions to stakeholders and society, as a
result may survive longer than a firm without such financial resources. Accordingly,
we put forward the following hypothesis:
H3. Outside investment moderates the relationship between CSR and firm
profitability such that the relationship is stronger under higher investment
than under lower investment.
Sample
We tested the proposed framework using data drawn from the Korean manufacturing
survey, which is a survey conducted for panel data construction by the Korea Productivity
Center. The survey was first constructed in 2013 through face-to-face interviews with
seven managers of various departments (e.g. planning, finance, marketing, operations,
R&D, etc.). The survey was administered in 601 manufacturing firms using stratified
sampling. Thus, the collected data may be regarded as representative of the characteristics
of manufacturing industries in South Korea. In this study, 576 firms were included in the
analysis, and 25 with missing values were excluded. Firms in the sample were from the
auto (28.5 percent), machine (33.3 percent), shipbuilding (18.8 percent), and electronics
(19.4 percent) industries. In total, 17 companies (3 percent) were KSE-listed firms and
52 companies (9 percent) were Korean Securities Dealers Automated Quotations
(KOSDAQ)-listed firms. The KOSDAQ data were benchmarked by that from its American
counterpart, the NASDAQ. In addition, 161 companies (28.0 percent) were audit firms, and
the remaining 346 companies (60.1 percent) were unlisted firms in the exchange market.

Measures
CSR. The data include information about CSR programs for core stakeholders:
employees, suppliers, and customers. We measured CSR as a composite variable
according to the protocol used in Berman et al.’s (1999) study, which includes four kinds
 MD of responsibility: for the environment, employees, suppliers, and customers.
54,6 Environmental responsibility was measured using five items scored on a seven-point
Likert scale (1 ¼ strongly disagree, 7 ¼ strongly agree). The following five items were
addressed to plant managers: “my firm continuously invests in R&D for ecofriendly
products”; “my firm initiates activities for prevention of pollution in its operating
processes”; “my firm is involved in activities for greenhouse gas reduction”; “my firm
1394 conducts educational programs about environmental protection”; and “my firm has a
monitoring system for suppliers to make production ecofriendly.” The average score of
all five items was used to represent environmental responsibility ( α ¼ 0.88).
Responsibility for employees was measured using three items, including the average
amount of time allowed for education and training for employees during the last year,
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employment type, and work safety statistics. These items have been suggested by the
Global Reporting Initiative and ISO26000 (International Standard Organization) as
examples of CSR for employees. The average amount of time spent on education and
training was calculated by determining the total amount of time spent on education
and training for each employee and dividing it into the total number of employees (total
time for education and training/total employees). Employment type was measured by
calculating the ratio of standard employees to contingent workers as compared to the
total number of employees (number of standard employees/(number of standard
employees+the number of contingent workers)×100). Information about time spent on
education and training and about the ratio of standard employees to contingent
workers was provided by HR managers. In order to measure work safety, we calculated
the annual injury rate (number of injuries/total employees×100). This information was
provided by operating managers. Work safety was measured by determining the
reverse value of the injury rate. The average score of these three standardized items
was used as a proxy for responsibility for employees.
Responsibility for suppliers was measured using two items scored on a seven-point
Likert scale (1 ¼ strongly disagree, 7 ¼ strongly agree). The following items were
addressed to plan managers: “my firm cooperates with suppliers based on a philosophy
of mutual development”; and “contracts with suppliers are fairly written based on a
philosophy of mutual benefit and respect.” The average score for both items was used
for responsibility for suppliers (α ¼ 86). Finally, we measured responsibility for
customers using five items measured on a seven-point Likert scale. The following items
were addressed to marketing managers: “my firm systematically evaluates customer
satisfaction and investigates complaints”; “information for customers is easily
available”; “it is important for firms to evaluate customer satisfaction and investigate
complaints”; “my firm utilizes a feedback system for customer satisfaction/complaints”;
and “my firm has developed a culture based on customer needs.” The average score for
all five items was used for responsibility for customers (α ¼ 93). Next, we standardized
the data for all four types of responsibility through z-score transformation. The
standardized Cronbach’s α score for CSR was 0.60.
Return on assets (ROA). We measured financial performance using ROA calculated as
the ratio of net income to total assets (net income/total assets). ROA has been used in many
studies as a measure of financial performance (e.g. Venkatraman and Ramanujam, 1986).
Differentiation. Since differentiation is a strategy used to make the products of one
company distinct from those of its rivals, we treated the product differentiation
variable as an indicator of an advantage compared to competitors. Items representing
differentiation included the following: “my firm is able to develop a variety of products
 compared to its rivals”; “my firm has the ability to fill customers’ needs compared to its Effects of
rivals”; and “my firm is able to alter production in response to market trends well CSR on
compared to its rivals.” Questions regarding these three items were asked of production
managers and scored on a seven-point Likert scale (1 ¼ strongly disagree, 7 ¼ strongly
profitability
agree). The average score for these three items was used for differentiation ( α ¼ 0.88).
Outside investment. Outside investment was measured by a single item scored on a
seven-point Likert scale (1 ¼ very hard, 7 ¼ very easy) using the following item: 1395
“My firm has been successful in attracting in investment by others.” This information
was provided by financial managers.
Control variables. We identified ten control variables. In our model, we expect that the
relationship between CSR and financial performance is affected by industry, ownership
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structure, firm size, firm age, union, labor costs, investment in R&D, capital intensity, the
debt ratio, and cost reduction. Because firm size, firm age, and industry have been
suggested in prior studies to be factors that affect the link between CSR and financial
performance (Ullmann, 1985), we selected these control variables. We measured firm size as
the logarithm of the total number of employees. Industry was classified using four dummy
variables (auto, machine, shipbuilding, and electronics manufacturing). Because there is
evidence that larger firms may engage in CSR more explicitly than smaller firms, we
controlled for ownership structure as a proxy for capacity. To control for firm listing on the
exchange market, we used four dummy variables (listed, KOSDAQ, audit, and unlisted).
Also, labor unions and labor costs may affect overall firm financial performance (Freeman
and Medoff, 1985). Since the sample included both unionized and non-unionized firms,
robust tests were conducted to control for the effects of unionization in the relationship
between CSR and ROA. We measured this variable using a dichotomous scoring system
(1 ¼ unionized firm, 0 ¼ non-unionized firm). Labor costs were calculated by determining
average costs (total labor costs/total employees). According to the findings of previous
studies, R&D investment, the debt ratio, and capital intensity play a crucial role in the
relationship between CSR and financial performance (Waddock and Graves, 1997; Berman
et al., 1999). R&D investment was measured on a seven-point Likert scale (1 ¼ very low,
7 ¼ very high) using the following item: “My firm evaluates R&D investment for technical
innovation of products.” Capital intensity was computed as the logarithm of fixed assets
divided by the total number of employees. The debt ratio was measured as the ratio of total
debts to total assets. Finally, we controlled for cost reduction strategies (in contrast to
differentiation strategies). Having a cost reduction strategy was measured on a seven-point
Likert scale (1 ¼ strongly disagree, 7 ¼ strongly agree) using the following item: “It is
important in my firms’ business strategy to reduce costs.”

Results
Table III provides the descriptive statistics and correlations among variables. In order
to conduct a robust analysis, we tested the relationships between CSR, having a
differentiation strategy, and other investment and financial performance indicators
using a model including all ten control variables.
Testing of the proposed moderation effect was performed using PROCESS, as
suggested by Hayes (2013). In addition to estimating the coefficients of the model using
OLS regression, PROCESS provides conditional effects in multiple moderation
models. Table IV reports the results of testing of the relationships between CSR,
differentiation, outside investment, and ROA. As shown in Model 1, CSR was positively
associated with ROA ( β ¼ 4.77, p o 0.05). This result supports H1.
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MD
54,6

1396

Table III.
Descriptive statistics
Mean SD 1 2 3 4 5 6 7 8 9 10 11

1. CSR −0.01 0.57

2. ROA 6.76 29.98 −0.01
3. Differentiation 5.00 1.06 0.34** 0.01
4. Outside investment 4.41 1.23 0.13** 0.06 0.08*
5. Firm age 18.54 11.22 0.05 −0.07 0.08 0.13*
6. Firm size 4.66 0.90 0.18** −0.01 0.10* 0.05 0.33**
7. Union 0.17 0.37 0.10* −0.01 0.00 0.04 0.34* 0.35**
8. Labor costs (Korean won) 31,131 8,701.81 0.14** −0.07 0.09* 0.09* 0.28* 0.28** 0.26**
9. R&D investment 4.48 1.52 0.14** 0.02 0.08* 0.14* 0.02 0.05 0.06 0.10*
10. Capital intensity 5.43 1.20 0.13** −0.42** 0.07 0.09* 0.32** −0.07 0.06 0.30** 0.06
11. Debt ratio 0.63 0.54 −0.10* 0.53** −0.07 −0.11* −0.11** 0.01 0.05 −0.11** 0.05 −0.24**
12. Cost reduction 5.34 1.14 0.15** −0.10* 0.22** 0.03 0.09* 0.07 −0.04 0.11** −0.04 0.09* −0.11*
Notes: n ¼ 576. *p o 0.05; **p o0.01
 Variables 1 2 3 4
Effects of
CSR on
Intercept 62.25 (10.12)*** 54.74 (9.13)*** 57.91 (10.65)*** 65.27 (9.98)*** profitability
Industry (auto) 3.65 (2.97) 3.61 (2.97) 2.93 (2.92) 3.13 (1.29)
Industry (machine) 5.30 (2.84)* 5.15 (2.84)* 4.76 (2.80)* 4.69 (2.79)*
Industry (electronic) 7.88 (3.18)* 7.88 (3.18)** 7.79 (3.14)** 7.80 (3.13)**
Listed company 7.78 (6.45) 7.82 (6.44) 9.84 (6.36) 9.57 (6.35)
KOSDAQ-listed company 13.46 (3.85)*** 13.56 (3.84)*** 13.80 (3.79)*** 13.47 (3.79)*** 1397
External auditors’ company 1.73 (2.30) 1.74 (2.30) 2.03 (2.27) 2.03 (2.27)
Firm age 0.23 (0.10)** 0.22 (0.10)** 0.20 (0.10)* 0.20 (0.10)*
Firm size −5.82 (1.34)*** −5.83 (1.34)*** −5.86 (1.32)*** −5.96 (1.31)***
Unions 4.89 (2.95)* 5.05 (2.95)* 4.78 (2.91) 4.91 (2.91)*
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Labor cost 0.00 (0.00)** 0.00 (0.00)** 0.00 (0.00)** 0.00 (0.00)**
R&D investment 0.17 (0.65) 0.18 (0.65) −0.19 (0.64) −0.08 (0.65)
Capital intensity −10.93 (0.99)*** −10.93 (0.99)*** −11.10 (0.97)*** −11.03 (0.97)***
Previous year debt ratio 25.65 (1.85)*** 26.06 (1.86)*** 26.30 (1.82)*** 26.24 (1.82)***
Cost reduction −1.28 (0.88) −1.39 (0.87) −1.29 (0.86) −1.37 (0.86)
Differentiation 1.87 (1.01)* 2.12 (1.00)** 1.64 (0.98)* 1.90 (0.99)*
Outside investment 3.15 (0.80)*** 3.21 (0.80)***
CSR 4.77 (1.89)** 4.36 (1.88)** 5.14 (1.92)*** 5.16 (1.92)***
CSR × Differentiation 2.91 (1.58)* 3.20 (1.59)** 2.70 (1.57)*
CSR × Cost reduction −1.88 (1.35)
CSR × Investment 3.44 (1.28)*** 3.14 (1.29)**
R2 0.43 0.43 0.45 0.45
ΔR2 0.01 0.01 0.01 0.01 Table IV.
F for ΔR 2
3.39* 2.67* 7.20* 5.09*** The moderating
F 24.73*** 25.46*** 25.04*** 23.96 effects in the
Notes: n ¼ 576. Unstandardized β; electronic industry and unlisted company as reference dummy relationship between
variable. *p o0.10; **p o 0.05; ***p o0.01 (two-tailed) CSR and ROA

To test the proposed moderating effects in the relationship between CSR

and financial performance, we conducted mean centering of the variables used in
the interaction to avoid problems related to multicollinearity. In Model 1,
the interaction of CSR and differentiation (CSR×differentiation) significantly
predicted ROA ( β ¼ 2.91, p o 0.10) and its R2 value was significantly increased
(F for the change in R2 value ¼ 3.39, p o 0.10). This result supports the moderating
role of differentiation in the link between CSR and ROA. In addition, we tested
the moderating effects of both differentiation and cost reduction as a business
strategy. Model 2 in Table IV presents the results for testing of these two
factors. Whereas the coefficient of the interaction between CSR and having a cost
reduction strategy is not significant ( β ¼ −1.88, p W 0.10), that for the interaction
between CSR and differentiation is significant ( β ¼ 3.20, p o 0.05). These findings
confirm that the linkage between CSR and financial performance depends on
product differentiation. shows the conditional effect of CSR on ROA at plus and
minus one standard deviation. Whereas the coefficient of the conditional effect is
not significant at the −1 standard deviation of differentiation, that for the conditional
effect is significant at the mean value and +1 standard deviation. Moreover,
the pattern for the significant moderating effect of differentiation is illustrated
in Figure 5, where we see that the positive relationship between CSR and ROA is
stronger when differentiation is higher than when it is lower. Therefore, the proposed
H2 was supported.
 MD
54,6

ROA
1398
Moderator
Low Differentiation
High Differentiation
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Low CSR High CSR

ROA

Figure 5. Moderator
Interaction graph for Low-Other investment
the moderating role High-Other investment
of differentiation
(CSR-ROA)
Low CSR High CSR

Similarly, in Model 3, the interaction of CSR and outside investment (CSR × outside
investment) significantly predicted ROA ( β ¼ 3.44, po0.01) and its R2 value was
significantly increased (F for the change in R2 value ¼ 7.20, po0.10). The conditional
effects reported in Table VI also support the moderating effects of outside investment.
Model 4 presents the results for testing of the moderating effects of both differentiation
and outside investment. Both the coefficients of the interactions between CSR and
differentiation, and between CSR and outside investment, significantly predicted ROA
( β ¼ 2.70, po0.10, β ¼ 3.14, po0.05, respectively). Table VII shows the results for
testing of the overall conditional effects of multiple moderators. The results support the
moderating role of outside investment in the link between CSR and ROA (Tables IV-VII).

Conclusions
Although there is some skepticism about the role of CSR in relation to the balance of
interests among stakeholders, we argue that CSR may contribute to firm success
because it is related to consumer purchasing activity (Luo and Bhattacharya, 2006).
From this perspective, we developed propositions based on game theory in study 1,
hypothesizing that the effects of engaging in CSR activity can be maximized in firms
adopting strategies such as differentiation and outside investment. In sum, we argue
that CSR effort in firms with differentiation and outside investment strategies can
improve financial returns related to CSR effectively.
 The results of study 1 show that engagement in CSR boosts financial performance Effects of
and further enhances profits by interacting with differentiation. Because higher profits CSR on
are associated with strong differentiation (i.e. less substitutability), CSR may not
provide large benefits in firms with very little product differentiation. In contrast with
profitability
the manufacturer, the retailer may make more profit under conditions of greater
substitutability when CSR effort is made because of the lack of a balanced market
structure; under these conditions, the equilibrium wholesale price declines faster than 1399
the retail price, and differentiation weakens. Further, an imbalance in CSR investment
may enhance the retailer’s profit in very high-substitutability environments.
With data from firms in Korean manufacturing industries, we empirically examined
the relationship between CSR and ROA and the moderating roles of differentiation and
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outside investment in that relationship. The major findings of this study are as follows.
First, CSR was positively associated with ROA. This result is consistent with the
findings of Orlitzky et al. (2003). Second, our analyses supported the moderating role of
product differentiation in the relationship between CSR and profit for manufacturers.
On the other hand, cost reduction had no significant effect on the relationship between
CSR and manufacturers’ profit. Moreover, outside investment enhanced the positive
association between CSR and financial performance. Our findings on this moderating
effect of outside investment enrich our understanding of the importance of firm
capability in choosing to engage in social programs. In addition, the results go beyond
the findings of previous studies in which CSR was found to be directly associated with
financial performance.

Differentiation Effect SE t p Table V.

Conditional effect of
−1.06(−1SD) 1.39 2.46 0.56 0.57 CSR on ROA at
0.00 4.77 1.88 2.39 0.02 values of the
1.06 (+1SD) 7.57 2.58 2.93 0.00 differentiation

Investment Effect SE t p Table VI.

Conditional effect of
−1.23(−1SD) 0.92 2.13 0.43 0.67 CSR on ROA at
0.00 5.14 1.92 2.67 0.01 values of the
1.23 (+1SD) 9.36 2.80 3.35 0.00 outside investment

Differentiation Other investment Effect SE t p

−1.06 −1.23(−1SD) −1.56 2.56 −0.61 0.54

−1.06 0.00 2.29 2.54 0.90 0.37
−1.06 1.23(−1SD) 6.14 3.37 1.82 0.07
0.00 −1.23(−1SD) 1.31 2.14 0.61 0.54
0.00 0.00 5.16 1.92 2.68 0.01 Table VII.
0.00 1.23(−1SD) 9.01 2.80 3.21 0.00 Conditional effect of
1.06 −1.23(−1SD) 4.18 2.85 1.46 0.14 CSR on ROA at
1.06 0.00 8.03 2.55 3.14 0.00 values of the
1.06 1.23(−1SD) 11.88 3.15 3.77 0.00 moderators
 MD The present study makes several theoretical contributions to the body of research on
54,6 stakeholder and supply chain management. First, we extend previous CSR research by
highlighting the contingent role of firms’ abilities to differentiate their products and
mobilize financial resources. Although CSR encompasses a wide range of
responsibilities, there is little research on how self-improvement and product quality
operate in CSR contexts. While researchers have paid attention to the importance of
1400 innovation for sustainability in general, studies of the effect on inside capability
(i.e. differentiation) and outside capability (i.e. investment) in combination with CSR are
scarce. Based on our findings, we suggest that strategic CSR (as opposed to arbitrary
donations to external stakeholders) plays an important role in profitability.
Second, the theoretical mechanism utilized in the current study explains the effect of
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CSR on supply chain management. In this study, our analytical approach shows that
manufacturers’ CSR efforts in competitive environments improve performance through
retailers’ sales at the firm level. As manufacturers rush to enter the global market, CSR
involvement does not seem to be a choice for firms in the supply chain any more.
Rather, engaging in CSR activities provides a competitive advantage for firms in
congruence with consumer expectations. In these circumstances, we can presume that
retailers would use the benefits gained from the CSR efforts of manufacturers to their
own benefit, even requesting that manufacturers be involved in more socially
responsible activities. In our supply chain structure, two manufacturers compete with
each other and a retailer would cooperate with manufacturers to maximize their profits.
In this paper, we investigate the nature of competition and cooperation between firms
under CSR context. At the same time, the results of this study demonstrate that firm
profitability within certain supply chains depends on how well firms differentiate their
products and mobilize financial investments compared to their rivals.
Third, our findings may contrast from those of studies written from the traditional
perspective on business strategy. Specifically, our results demonstrate that while the
juxtaposition of CSR and product differentiation improves financial performance, the
interaction between CSR and cost minimization is not significant in terms of ROA in
firms in advanced and developing economies. This finding may challenge the general
belief that cost minimization strategies are preferable in developing countries. It may
also encourage firms to utilize cost leadership as a way to gain competitive advantage.
In addition, our findings support the notion that differentiation is an important
decision-making strategy for enhancing the benefits of engaging in CSR in transitional
economies such as that in Korea.
Finally, we analyzed the effect of CSR on financial performance using a mixed
methodological approach, which is a very meaningful way of confirming CSR
outcomes. Although there are some literatures combined game-theoretic approach and
CSR into one model, our approach further shows that such combination is validate in
supply chain.
Our findings may help practitioners who make decisions about engaging in CSR
activity. First, managers should consider the two sources of competitive advantage
discussed here (i.e. differentiation and outside investment) as potential ways of improving
financial performance. On the other hand, outside investment may enable socially
responsible firms to increase intangible assets such as social reputation. The results of the
empirical analysis demonstrated that manufacturers’ profits definitely improved when
product differentiation and outside investment were high. Our study therefore reinforces
the idea that managers should focus on specific customers’ needs and long-term investors’
interests even while engaging in socially responsible behaviors.
 Second, this study is particularly useful to supply chain managers. As has been Effects of
argued in the past, brand reputations can be crucial for firms in the supply chain CSR on
(Amaeshi et al., 2007). Our analytical model demonstrates that products made by
socially responsible firms are attractive to consumers, as CSR involvement increases
profitability
both product demand and profits for retailers and manufacturers. In our model, CSR
effort is a form of investment to entice consumers, although there is a trade-off with the
optimal effort level to maximize the supply chain profit. Thus, our contribution differs 1401
from those of Brand and Grothe (2013) and Goering (2012). In addition, manufacturers’
CSR effort may affect the financial performance of wholesalers as well as their own
performance. In future, supply chain management professionals in manufacturing
industries should conduct consumer evaluations to investigate how engaging in
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socially responsible actions can bring higher returns and improve performance.
This study has a few limitations, which may be seen as potential avenues for future
research. First, in the empirical analysis, we could not test the effect of manufacturers’
CSR efforts on retailers’ financial performance because the survey was designed for
manufacturers only. To determine the effects of this variable on retailer profits as
proposed in the analytical model, future research should include retailers’ financial
performance. Second, our sample only includes firms in manufacturing industries.
Therefore, the implications of this study will be limited to the manufacturing sector.
To improve the generalizability of the results, future research should expand the
sample to include various industries. Despite its limitations, the present study also has
a number of strengths. Its main theoretical and practical contributions stem from
identifying the role of differentiation and outside investment in the CSR context.

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Appendix
Equilibrium outcomes are obtained through backward induction and can be simplified as an
expression by setting α1 ¼ α2 ¼ α:
(1) No CSR efforts from either competing manufacturer.
• Retail price:


2 3y2 ai ya3i
pi ¼
 (A1)
2 4y2
• Wholesale price:


2y2 ai ya3i
wi ¼ (A2)
4y2
• Manufacturer and retailer profits:


 2
yai  2y2 a3i
pi ¼

2 (A3)
2 1y2 4y2



 
43y2 ai 2 þ a3i 2 2y3 ai a3i Effects of
pr ¼

2 (A4) CSR on
4 1y2 4y2
profitability
(2) CSR effort exerted by one manufacturer but not the competing manufacturer.
• Retail price for first manufacturer:
1405





  
2 12 þ19y2 8y4 þ y6 ai y 2 2 þ g2  5 þg2 y2 þ y4 a3i
pi ¼ 
2

2  (A5)
2 g2 2y2  1y2 4y2
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• Retail price for second manufacturer:

0




 1
1@ 1y2 2y2 4g2 y2 a3i y 4y2 ai A
p3i ¼ a3i þ

2
2 (A6)
2 1y2 4y2 g2 2y2

• Wholesale price for first manufacturer:



 
45y2 þy4 2y2 ai ya3i
wi ¼

2
2 (A7)
1y2 4y2 g2 2y2

• Wholesale price for second manufacturer:





 
1y2 2y2 4g2 y2 a3i y 4y2 ai
w3i ¼

2
2 (A8)
1y2 4y2 g2 2y2

• CSR effort:



 
g 2y2 2y2 ai ya3i
si ¼

2
2 (A9)
1y2 4y2 g2 2y2

• Manufacturer profit with CSR effort:

 2
2y2 ai ya3i
pi ¼ 

2
2  (A10)
2 1y2 4y2 g2 2y2

• Manufacturer profit with no CSR effort:





 2
1y2 2y2 4g2 y2 a3i y 4y2 ai
p3i ¼ 

2
2 2 (A11)
2 1y2 4y2 g2 2y2
 •
MD Retailer profit:
54,6 0
2



  1
4y2 47y2 þ3y4 ai 2 þ 2y 45y2 þy4 g2 y4 2 4y2 þy4 ai a3i
B  C
@
2
2

 A
þ g4 2y2 þ 4y2 47y2 þ3y4 4g2 814y2 þ7y4 y6 a3i 2
pr ¼   

2
2
 2
1406 4 g4 y2 2 þ y2 4 y2 1

(A12)
About the authors
Sunghee Lee is an Assistant Professor of Department of Business Administration at Hoseo
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University in the Republic of Korea. His research interests are in the areas of technology management,
operations-marketing interface and supply chain management. His research has appeared in
International Journal of Production Economics, Total Quality Management & Business Excellence.
Heungjun Jung is a Research Fellow at Korea Labor Institute, in the Republic of Korea.
He received his PhD from the Korea University and worked as a Research Professor in
Korea University Business School. Dr Jung’s previous published research has appeared
in Journal of Business Ethics, Relations Industrielles/Industrial Relations, and Advances in the
Economic Analysis of Participatory & Labor-Managed Firms. Dr Heungjun Jung is the
corresponding author and can be contacted at: hjunjung@kli.re.ke

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