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Putting Your (Charitable) Money Where Your Market Is- Valutrics

Bottom Line: Manufacturing and service firms differ in their approach to domestic and international philanthropy.

In recent years, the spotlight has shined brightly on issues surrounding corporate social responsibility (CSR), and the extent to which firms’ business practices contribute to the well-being of the local and global communities they serve. Charitable giving also falls under the CSR umbrella, of course, but philanthropy has received comparatively little attention from researchers and media relative to the overarching focus on firms’ sustainability efforts, their level of environmental impact, and the question of whether CSR pays off for the bottom line.

A new study aims to fill that gap by examining the domestic and international charitable donations of U.S. firms in the manufacturing and service sectors. And it finds that corporate philanthropy — which the authors join other researchers in defining as “gifts or monetary contributions given by corporations to social and charitable causes, such as those associated with education, culture, the arts, minorities, healthcare, and disaster relief” — isn’t pure altruism. It’s a strategic resource that large, multinational companies use to gain legitimacy in foreign markets.

Beyond altruism, corporate philanthropy is a strategic resource for gaining legitimacy in foreign markets.

Until now, most studies have focused exclusively on domestic philanthropy and have assumed that firms operating in different industries would have similar motivations for giving back to the community. But the authors of this paper delved deeper by exploring how the philanthropic patterns differ between manufacturing-oriented and service-oriented companies, especially when it comes to their domestic versus international charitable activity.

Seeking to uncover the factors that lead firms to give internationally or limit their philanthropic activities to their domestic market, the authors analyzed a sample of U.S. companies that took over firms in foreign countries from 2004 through 2010. The authors zeroed in on firms with ownership interests in overseas markets, as opposed to those that merely invested in foreign subsidiaries, because they wanted to test whether companies with a significant interest in establishing a foothold in an international business decided to donate differently to domestic and overseas causes.

A wide assortment of companies was represented. The service-oriented firms in the sample, encompassing a variety of B2B, engineering, and management operations, had assets ranging from about US$160 million to $120 billion. They acquired foreign firms in 30 different countries, including developing economies as well as more mature markets such as Canada, China, France, and Great Britain. The manufacturing firms — which produced chemicals, machinery, computer equipment, and transportation devices, among other products — had a similarly wide spectrum. Their assets were as low as about $370 million and as high as $305 billion, and they operated in 16 industries.

The authors controlled for each firm’s size and its cultural distance between the U.S. and the acquired company’s host nation, using a common metric. Their analysis revealed that for both the service and manufacturing sectors, larger firms with higher returns on assets, more available cash flow, and greater investments in RD chose to donate internationally with more frequency. Crucially, the authors also found that firms with a higher percentage of foreign sales than domestic sales donated more to international causes, suggesting that “firms use their giving dollars where it generates more in terms of impact on strategic operations.”

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And the motivation to spend the philanthropy budget on domestic rather than international causes seems to differ for manufacturing and service companies. Specifically, service-oriented firms tend to invest abroad only after they’ve become profitable in international markets, the authors found, indicating that these companies view corporate giving as a long-term commitment to strengthening their already established foothold on foreign soil.

Manufacturing firms, in contrast, are more likely to spend their charitable dollars on international markets in which they’re not particularly successful. Indeed, the researchers found evidence that many firms in the manufacturing sector seemed to intentionally use charitable donations as a way to curry favor with local governments, citizens, and potential business partners, treating philanthropy as part of the cost of doing business.

“If firms make the strategic decision to only give internationally, it may be because they are operating in a country culturally or economically dissimilar to the home country and must undertake corporate philanthropy to overcome cultural barriers or economic disparity barriers,” the authors write.

In the overall sustainability picture, the findings jibe with previous research that has found that companies with a higher level of ownership in foreign markets tend to testify to their authenticity and legality by disclosing more of their CSR initiatives than their domestically focused competitors. Indeed, host countries of multinational firms could use this information to their advantage, the authors suggest. Because service firms tend to give only when their return on assets is high, governments could consider giving tax breaks to companies in an effort to facilitate charitable donations.

Similarly, managers should recognize charitable giving for what it truly is: a scarce strategic resource that should be used carefully according to the firm’s domestic and international aims.

Source: “Why Do Some U.S. Manufacturing and Service Firms with International Operations Choose to Give Internationally Whereas Others Opt to Give Only in the United States?” by Adrian Cowan (Analytic Focus, LLC), Chia-Hsing Huang (SolBridge International School of Business), and Prasad Padmanabhan (St. Mary’s University), International Business Review, Feb. 2016, vol. 25, no. 1