Factors affecting SMEs Motivations for Corporate Social Responsibility. Gary Mankelow, Ali Quazi, University of Newcastle.

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1 Factors affecting SMEs Motivations for Corporate Social Responsibility Gary Mankelow, Ali Quazi, University of Newcastle Abstract This paper empirically explores the motivational factors for small and medium enterprises (SMEs) to engage in corporate social responsibility (CSR) practices. A structured questionnaire was used to collect data from members of the Hunter Business Chamber, resulting in 122 usable responses. Exploratory factor analysis identified four underlying dimensions in the CSR motivation of SME managers. Four motivational dimensions emerged that reflected themes ranging from caring for the customer and society to the financial self-interest of SMEs. These findings corroborate the previous findings of Quazi and O Brien (2000) and have important managerial implications for SMEs. SME managers are motivated towards CSR for the profit viability and growth of their businesses whilst also caring for customers and the community. Limitations and areas for further research are also discussed. Introduction and Background This exploratory research seeks to identify the motivational factors for SME owners to engage in CSR domains. A number of factors are likely to impact on their commitment to pursue CSR activities at a time when the government is withdrawing from some of the vital areas where the government has historically been the major provider of funds. SMEs are increasingly playing a significant role in the economic and social development of nations. The contributions that SMEs are making to the economy include the generation of employment opportunities and income for regional communities (Australian Government, Department of Industry Tourism and Resources, 2006). Furthermore, SMEs are also active in fulfilling their obligations on the social fronts (Mankelow, 2006). Corporate social responsibility (CSR) has historically been associated with large corporations (Jenkins, 2004). SMEs are generally believed to heavily emphasise economic imperatives rather than social goals mainly because of their survival strategy and their relatively limited financial base. However, CSR participation of SMEs is reflected in their willingness and financial capability to play a significant role in discharging their social responsibility. The significant and growing contributions of small enterprises to the Australian economy was supported by ABS (2002, p.3) which reported that the small business sector donated $251million, more than each of the medium and large business sectors. A substantial and growing contribution of small enterprises may provide an economic justification for research into small enterprise CSR. A role for management is relevant for large enterprises with its division of power between owners and managers (Cyert and March, 1963; Berle and Means, 1932) with small enterprises having a greater likelihood of coincidence of power between owners and managers. Small enterprise owners usually have a more direct impact on the operations and activities of enterprises than those of large enterprises (Wiklund, 1998a, b; Cressy, 1996; Cooper, 1982). A close and direct role of small enterprise owners may imply multi-dimensional goals; a commercial orientation as well as personal preferences, objectives, and ambitions such as 2367

2 desire for lifestyle, family, and reputation in communities (Birley and Westhead, 1994; O Farrell and Hitchens, 1988). Consequently, owners of small enterprises play a critical decision-making role in determining CSR activities. The concepts of CSR have undergone significant evolutionary development and change in nomenclature to reflect its different orientations. Carroll (1999, 1998, 1993, 1991) was a seminal contributor to modern CSR theory with later contributors including authors such as Jenkins (2006, 2004), Fuller and Tian (2006), Maignan, Ferrell, and Ferrell (2005), Matten and Crane (2005), Maignan and Ferrell (2001), Garriga and Mele (2004), Lantos (2001) and Thompson, Smith and Hood (1993). While numerous definitions of CSR appear in the literature, the definition given by the World Bank appears most appropriate in the context of our study. The World Bank defines CSR as the commitment of business to contribute to sustainable economic development working with employees, their families, the local community, and society to improve their quality of life, in ways that are both good for business and good for development (World Bank Group, 2003, p.1). A limited number of studies looked at the SMEs CSR in an Australasian context by either addressing some aspects of CSR or employing imprecise definitions of CSR. Recent studies by Schaper and Savery (2004) and Council of Small Business Organisations of Australia (2000) revealed that small businesses played a major role in supporting local communities. The Australian Bureau of Statistics Generosity of Australian Businesses (ABS, 2002) developed the concept of total giving that included philanthropy, donations, sponsorship, and enterprise strategic decisions. Research in CSR has sought to identify diverse stakeholder groups (such as supplier, creditor, employees, and the community) and dimensions of CSR, such as narrow to wider perspective as well as costs to benefit-driven orientation of CSR (Quazi and O Brien, 2000). Quazi (2003) further argued that perceived managerial views of CSR are positively linked with the managerial demographics (such as age, education, and international experience of managers) in Australian corporate sectors. These observations suggest that CSR participation has diverse facets. Accordingly, enterprise stakeholders needs are interlinked, which in turn emphasises a need for SMEs to develop different strategies towards each group of stakeholders (Maignan, Ferrell, and Ferrell, 2005). Mankelow (2005) identified motivational aspects of SME CSR in the context of regional Australia. In particular, the study examined managerial perceptions of CSR participation and the driving forces shaping the status of SMEs in terms of their actual behaviour in regard to their community involvement. An enterprise profit motive and CSR perspective of an enterprise was found to represent a range of views. At one extreme CSR participation was viewed by SMEs as an extension of profit-making activities and, at the other extreme, CSR participation was undertaken with community stakeholders based on purely altruistic motives. There is a relative paucity of information in the literature with regard to the pattern of SME CSR. This paper aims to partially fill this lacuna by identifying motivational factors of why SME owners engage in CSR activities. Research Methodology 2368

3 This research design builds on a survey of members of the Hunter Business Chamber (HBC) based at Newcastle, Australia. Participants were invited to take part in the study through an article in the Hunter Business Chamber newsletter. A structured and refined questionnaire based on prior pilot surveys was mailed to 1,120 members of HBC. After follow up, a total of 122 completed questionnaires were returned yielding a 10 percent response rate. This response rate is deemed acceptable given the sensitive nature of the subject of study. Principal component analysis using Varimax rotation was employed to identify the underlying dimensions of twenty statements drawn from the literature reflecting motivations influencing SMEs to engage in CSR practices. 16 strongly loading items (loadings.5) for factors having Eigen values greater than 1 were retained. The four resulting factors were named based on the themes captured in the items comprising that factor (see Table 1), with terms used consistent with the CSR literature.. Results and Discussions Exploratory factor analysis of the motivational data resulted in four factors. The underlying themes identified ranged from caring for society and customers to the business of business is business. This suggests that SMEs are diverse in terms of their commitment to themselves, their customers and the community overall. The four factors that emerged (presented in Table 1) explained 79% of the variance. The nature of the factors are described herewith: Factor 1: Caring for customers and the community. This factor represents SMEs willingness to ensure a reasonable financial return for their investment and, at the same time, addresses the views of their customers and the expectations of the community. Factor 2: Profit through caring. This factor clearly illustrates SMEs sincerity with regard to their obligations to the internal markets comprising the most valuable constituents, their employees. The view represented in this factor clearly shows a passion for balancing the economic and social obligations of SMEs. Factor 3: Community orientation. This factor shows that the SMEs care about the assessment that the community makes of the contribution that SMEs make to the welfare of the community. This recognition is likely to further motivate the SMEs to be pursue more socially responsible practices. Factor 4: The business of business is business. This factor stresses the primary importance of making sufficient profits for the survival and growth of the business to be able to serve societal needs. This suggests that SMEs are interested in supporting community services if there is an industry-wide practice in CSR. This may stem from the fact that SMEs are driven by their willingness to match the activities of competing firms for strategic purposes. In summary, the factor analysis results reveal a diverse SME commitment, ranging from profit orientation to community and customer orientation. The importance of Factor 1 (explaining 31 percent of the total variance), suggests that SMEs are committed to profit for their survival, but, at the same time, they are not guided by selfish attitudes to the bottom line. Rather, it signifies that SMEs are also serious about their obligations to the broader stakeholders in the 2369

4 community. Factor 4 reflects the classical motivational doctrine of profit maximization in terms of Friedman s (1970, 1962) philosophy, however, this is not a dominant factor in explaining SMEs perceptions of their corporate and social commitments. Item Table 1 Motivations for SME CSR Factor 1: Caring for the customers & community Factor 2: Profit through caring Factor 3: Community orientation Factor 4: Business of business is business Long-term survival.973 Customer approval.861 Customer loyalty maintenance.845 Enhancement of corporate image.828 Addressing recipient needs.557 Addressing community needs.879 Profit maximization.881 Enhanced staff morale.592 Staff welfare.851 Better contribution to community.720 Planned expenditure level.894 Community acceptance.626 Donations beyond tax implications.609 Business s interest in CSR.636 Donations based on tax incentives.524 Following industry standards in CSR.821 Eigen value Percent of variance explained 30.7% 25.7% 12.8% 10.6% Conclusions and Implications Perhaps, not surprisingly, the diverse motivations of SME owners are reflective of the pluralistic nature of people and the heterogeneous nature of SMEs. The SME motivations were grouped into four underlying dimensions: Caring for the customers and community, Profit through caring, Community orientation and The business of business is business. The findings have potential impacts on internal stakeholders, such as employees and customers, and external stakeholders, such as suppliers, community groups (sporting clubs and charities) and government policy-makers. The concept of caring is evident in Factors 1, 2 and 3, whilst an emphasis on profitability is evident in Factor 4. SME owners take on different roles, such as running a business and being part of the community, which, in turn, impacts on SME CSR participation with internal and 2370

5 external stakeholders. For example, employees can receive flexible working hours in excess of award conditions and SMEs may sponsor local sporting clubs as a form of giving back to the community. External stakeholders, for example, community organisations (sporting clubs and charities - Lifeline) receive CSR in the form of goods and services and donations of time by the owner and employees. Whilst government expenditures on local communities have been reduced as a partial consequence of a user pays approach, the SME sector is both willing and able to make significant contributions to support predominantly local events and organizations in recognition of their community obligations and profit potential. Limitations and Further Research This study is not free from limitations. The survey results hint at the tip of an iceberg about the roles, motivations, and significance of SME CSR in the Australian economy. This is an exploratory study in a regional city but the results suggest that replication is worthwhile in different geographical locations.. One can argue about the relatively small sample size of the study but this may not be a significant limiting factor as it is an exploratory attempt to provide a preliminary picture of the possible motivations underpinning small business CSR commitment. The future studies can use the scales that have been applied in this research to undertaking a confirmatory factor analysis to verify the dimensionality revealed in this research. Such an attempt can then make significant contributions towards confirming the factors and the items comprising a particular factor over space and time. 2371

6 References Australian Government, Department of Industry Tourism and Resources, Encouraging Enterprise: A Report on Small Business Canberra, AGPS, Australia. Australian Bureau of Statistics, Generosity of Australian Businesses. Canberra, AGPS, Australia. Council of Small Business Organisations of Australia, The Spirit of Enterprise- National survey of Small Business Involvement. Available from accessed 30 June, Berle, A., Means, G., The Modern Corporation and Private Property, Macmillan, New York, U.S.A. Birley, S., Westhead, P., A taxonomy of business start-up reasons and their impact on firm growth and size. Journal of Business Venturing 9, Carroll, A.B., The pyramid of corporate social responsibility: Toward the moral management of organizational stakeholders. Business Horizons 34, Carroll, A.B., Business and Society: Ethics and Stakeholder Management. (2 nd Ed.) South-Western Publishing, Cincinnati, U.S.A. Carroll, A.B The four faces of corporate citizenship. Business and Society Review 100/101, 1-7. Carroll, A.B., Corporate social responsibility: Evolution of a definitional construct. Business and Society 38(3), Cooper, A.C., The entrepreneurship: Small business interface. In: Kent, C.A., Sexton, D.L., Vesper, K.H., (Eds.), Encyclopedia of Entrepreneurship. Prentice-Hall, Englewood Cliffs, NJ, pp Cressy, R., Pre-entrepreneurial income, cash-flow growth and survival of startup businesses: Model and tests on U.K. data. Small Business Economics 8, Cyert, R., March, J., A Behavioral Theory of the Firm, Prentice-Hall, Englewood Cliffs. Fox, T., Ward, H., Howard, B., Public Sector Roles in Strengthening Corporate Social Responsibility, World Bank, New York Friedman, M., Capitalism and Freedom, Chicago, Chicago University Press, U.S.A. Friedman, M., 1970., The social responsibility of business is to increase its profits, The New York Times Magazine, 13 September, Fuller, T. Tian, Y., Social and symbolic capital and responsible entrepreneurship: An empirical investigation of SME narratives. Journal of Business Ethics 67,

7 Garriga, E., Mele, D., Corporate Social Responsibility Theories: Mapping the Territory. Journal of Business Ethics 53, Jenkins, H., Small business champions for corporate social responsibility. Journal of Business Ethics 67: Jenkins, H., A critique of conventional CSR theory: An SME perspective. Journal of General Management 29(4), Lantos, G., 2001, The boundaries of strategic corporate social responsibility. Journal of Consumer Marketing 18(7), Maignan, I., Ferrell, O. C., Corporate Citizenship as a Marketing instrument- concepts, evidence and research directions. European Journal of Marketing 35 (3/4), Maignan, I., and Ferrell, O. C., Ferrell, L., A stakeholder model for implementing social responsibility in marketing. European Journal of Marketing 39 (9/10), Malholtra, N., Hall, J., Shaw., Oppenheim, P., Marketing Research, 2 nd Prentice Hall, Sydney, Australia Edition, Mankelow, G., What motivates small enterprises to participate in corporate social responsibility? The Australasian Journal of Business and Social Enquiry 4 (1), Matten, D., Crane, A., Corporate citizenship: toward an extended theoretical conceptualization. Academy of Management Review 30(1): O'Farrell, P., N., Hitchens, D. M., Alternative theories of small-firm growth: A critical review. Environment and Planning A 20, pp Quazi, A., Identifying the determinants of corporate managers perceived social obligations. Management Decision 41, Quazi, A., O Brien, D., An empirical test of a cross-national model of corporate social responsibility. Journal of Business Ethics 25, Schaper, M., Savery, L., Entrepreneurship and Philanthropy: the case of Australian small firms. Journal of Developmental Entrepreneurship 9(3), Thompson, J., Smith, H. L. Hood, J. N., Charitable contributions by small business. Journal of Small Business Management31(3), Wiklund, J., 1998a, Small firm growth and performance: Entrepreneurship and beyond. Jonkoping International Business School, Jonkoping University. Wiklund, J., 1998b, Entrepreneurial orientation as predictor of performance and entrepreneurial behaviour in small firms: Longitudinal evidence. In: P. D., Reynolds, W. D., Bygrave, N. M., Carter, S., Manigart, C. M,. Mason, G. D., Meyer., K. G (Eds), Shaver Frontiers of Entrepreneurship Research, Babson College,

8 World Bank Group, 2003.Corporate Socially Responsibility Practice: Strengthening the Implementation of CSR in Global Supply Chains, World Bank, Washington DC, October. 2374

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