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The theoretical foundations for strategic philanthropy are the resource-based view of the firm and resource dependence theory. (Morris 1998,Navarro 1988). In accordance with the resourced based view of a firm each individual company has a collection of firm based resources. Certain resources which are valuable, rare, no substitutable and difficult for rivals to imitate can lead to increased competitive advantage through reduced costs and increased revenue (Barney 1991).
Resources and be one of three things
Tangible- Capital, fixed assets
Intangible- Patents, functional know how)
In this context the two most important intangible resources that are rare, valuable, non substitutable and difficult to imitate are a firms brand name and reputation. Charitable donations have the potential to enhance a firm's brand name and corporate reputation and therefore give them a competitive advantage. According to resource based view of a firm, strategic philanthropy can create a differentiation advantage, increase revenues through customer loyalty and build a corporate reputation or brand name. This section goes into these resource based views and how applicable they are to empirical findings and relevant studies and also to see if these reasons would be resilient enough during an economic downturn for companies to justify continual corporate giving.
1-To gain competitive advantage
One of the first thorough studies into corporate philanthropy was published by Johnson (1966). Johnsons study was regarding the differences in contribution ratios across industries. He put forward the theory that firms in very competitive and very non competitive industries should have low contribution ratios in relation to firms in "rival" industries. That is to say profit maximizing monopolistic firms have little motivation to make contributions. However firms in oligopolistic (rival) industries are more likely "to seek a comparative advantage over each other by means that the atomistically competitive firms cannot, and the monopolistic firms need not, employ" (1966, pg489).
Through categorizing industries according to degrees of prevailing competition and then examining the contribution ratios in each industry Johnsons initial theory was proved correct, the highest contribution ratios were found between rival industries. A later study by Whitehead (1976) confirmed Johnsons empirical findings and his explanation of non-price competition by rival firms. It was noted that non-price competition was more intense between rival industries; this therefore implies that this giving was motivated by profit maximisation.
Principally this theory suggests that by being a philanthropic corporation this would give these companies a unique selling point to differentiate them from rivals, and could possibly lead to, as Narver (1971) suggested, consumers patronizing socially responsible firms. However even if consumers feel favourably in reference to the corporation being socially responsible, this does not necessarily mean that they will patronize the firm or differentiate the corporation because of the free rider problem.
1.1-Free rider problem
The free rider problem was first discussed in the context of the behaviour of individuals in groups (Olson 1971). Two possible problems arise from the free rider problem. Firstly in relation to consumers patronizing the corporation a new management text that describes the free rider and public goods was done by Albanese (1978). He states the benefits of philanthropy are mainly public; with this realization the consumer will receive the benefits of this regardless of their individual behaviour. In addition one consumer's behaviour will have very little, if any impact on a firm's social responsibility; therefore the consumer would not see the charitable contributions and philanthropy of a corporation as reason enough to make a preference as their individual behaviour cannot affect the behaviour of the firm. This consequently means that consumers may make their decisions of whom to do business with devoid the social philanthropy of the firm. As a result non-price competition due to philanthropy between firms may be correct however not for the same reasons Naver puts forward. Secondly in conjunction with rival firms trying to differentiate themselves through corporate philanthropy Fry (1982) stated that the free rider problem would undermine these efforts to differentiate even if consumers are partiality towards the social goals the firm are trying to pursue. Conversely Porter (2002) states that although corporate philanthropy does improve competitive context, and direct competitors along with companies in the cluster/region may often share the benefits, the ability of these other companies to be free riders does not contradict the strategic value of context focused philanthropy. He states 5 reasons why the benefits gained are substantial enough to warrant.
Lead companies are best positioned to make extensive contributions, and as a result will reap major share of the benefits.
Not all companies are based in the same location, an edge will still be gained over the competition in general, as improving context mainly benefits companies in a given location.
Corporate philanthropy is ripe for collective activity. By sharing the costs with other companies in its cluster, a company can diminish the free rider problem.
Some contextual advantages are of more value to some competitors than others. The tighter a corporations philanthropy is aligned with a their strategy, they more they will benefit through enhancing context. Moore (1995) found in their survey of the PerCent Club that 52% of companies had philanthropy strategies related to their core business. Collins (1995) also found that 55% of firms tried to relate their philanthropy to their customer base. However both Moore (1995) and Collins (1995) found a distinct lack of clear strategy for firms giving. 53% having no formal corporate policy toward philanthropy and 58% saying the corporate philanthropy programmes were unstructured. Collins concluded that firms seem to follow a "scatter-gun" approach to corporate giving.
The company that is first to perform corporate philanthropy in a particular area will usually receive proportionate benefits because of the enhanced reputation it builds. An example of this is BP's campaign to fight malaria in Africa. BP not only improves public health but also the health of their workers and contractors, whilst also building strong relationships with local governments and non profit organisations, therefore advancing the goal of becoming the favoured resource development partner. Adams (1998) found that philanthropy plays a significant role in establishing and developing favourable relationships between the firm and community stakeholders.
Hypothesis 1: Firms in rival industries will see a less significant decrease in corporate charitable contributions that firms in very competitive and very non competitive industries during economic downturn
1.2 -Advertising and corporate reputation
US corporate spending on cause related marketing increased from $125 million in 1990 to an estimated $828 millions in 2002. While these campaigns are intended to provide support for worthy causes they are also implemented as to increase company visibility. In 1999 Tobacco giant Philip Morris spent $75 million on charitable contributions, and then launched a $100 million advertising campaign to publicize them. Philanthropy may be a form of advertising and therefore is profit motivated (Fry 1982).
By advertising a firms philanthropic contributions corporations are trying to do three things, firstly to gain competitive advantage over rivals, secondly to possibly patronise socially responsible consumers (however as shown before this is fundamentally flawed) and finally thirdly to increase corporate reputation. Corporate reputation is the collective reputation of corporation held by its stakeholders. And in conjunction with other factors has been identified as of growing importance (Kitchen and Laurence 2003), as it plays a significant role in increasing firm value (Gregory 1991, Fombrun 1990) and allowing access to cheaper capital (Beatty 1986).
Hence on this theory that advertising your corporate philanthropy will increase your corporate reputation and in turn increase firm value there should be a positive correlation between corporate philanthropy and firm financial performance. Gupta (1996) though his study failed to find a significant positive or negative relationship between corporate giving and profitability, these finding were corroborated by the studies of Griffin (1997) Berman et al (1999) and Seifert (2003). However this contradicts Galaskiewicz's (1997) finding as he found a strong positive correlation between firm contributions and corporate financial performance, this being measured in return on sales, return on assets and return on equity relative to the firm's industry average.
Studies by Waddock (1997) and McGuire (1988) found a more significant positive relationship between social performance and prior financial performance than between social performance and financial performance. They therefore concluded that social performance may depend on resource availability as more profitable firms can afford to act responsibly. Buchholtz et al (1999) argued that resource availability would affect corporate philanthropy; he used perceptual measures of available resources ( i.e. CEO's rating of the firms resource levels relative to other firms) and found a positive relationship between resource availability and philanthropic giving among 43 firms in two industries. This puts forward the theory that corporate philanthropy depends on available resources which can be referred to as 'slack resources' (Buchholtz et al 1999). These findings were backed up on and expanded through more rigorous empirical data by Seifert (2003) who used cash flow or free cash flow as available resources.
This leads me to my next hypothesis,
Hypotheses 2- As firms during economic downturn have less 'slack resources' this means that corporate charitable donations should decrease in accordance.
1.3- Political motivation
By having political based philanthropy firms are trying to advance their long term interests in society, be it economic or associated with the exercise of power (i.e. through a licence to operate). By doing this firms aim to preserve corporate power and autonomy, or to legitimise or protect firm economic power (Moir, 2004) The McKinsey Quarterly survey on corporate philanthropy (2007) found that 71% of companies align their philanthropic programmes with the political trends most relevant to their business. Resource dependence theory suggests that strategic philanthropy could cut input costs by fostering better cooperation from the local community on utility rates, taxes, regulatory oversight, roads etc. For example to coopt labor or local politicians a firm may donate to community improvement projects in the city where they are have the biggest impression on the community (e.g. by having a large plant etc).
An example of political motivations in corporations is a 1988 Philip Morris memo, which lays the groundwork for PM/Altria's public relations strategy of engaging in "social responsible" activities like feeding the hungry and funding domestic violence shelters. However this is far from an altruistic as the memo states (among other things) that "Benefits PM-USA may realize from a program of this type include access to political decision makers." It also says these programs could "Enhance PM-USA's position with legislative bodies who might be considering marketing sanctions, advertising bans and public smoking restrictions."
Neiheisel's (1994) political corporation model which is a hybrid of the altruistic and profit-maximizing models but with a broader focus on business's environmental and political concerns. It builds image and furthers corporate political interests "for the purpose of securing rewards and reducing penalties from significant external publics" (Neiheisel, 1994, pg 42). In his study Neihesisel finds that firms use their philanthropic activities to enhance their legitimacy. He concluded that corporate philanthropy is less about solving society's problems and more to legitimise business power and protect it from external threats.