CSR, Innovation and Value Creation in Rapidly Growing Norwegian SMEs

Transcription

1 CSR, Innovation and Value Creation in Rapidly Growing Norwegian SMEs Atle Midttun (BI/NBS), Atle Blomgren (IRIS/UoS), Annik Magerholm Fet (NTNU) With Tatiana Iakovleva (IRIS/UoS), Fred Wenstøp (BI/NBS), Elin Staurem (BI/NBS) and Elzbieta Toporowska (BI/NBS) Research Report, Centre for Corporate Responsibility, Norwegian Business School January 2013 Financed by The Research Council of Norway under the FORFI Programme

2 Table of Contents Introduction: 3 1. Debates and Theoretical Perspectives 4 2. Methods and Definitions 7 3. CSR and Innovation: Exploring a Multidimensional Conceptual Terrain Bringing in Business Models Exploring Effects of CSR, Innovation and Business Models on Growth and Value Creation Exploring Background Drivers 20 Concluding Comments 23 References 24 Annexes 26 2

3 Introduction Over the last couple of decades a fairly contradictory body of literature has emerged on the relationship between corporate social responsibility (CSR) and traditional business foci such as innovation and value creation. On the one hand, some scholars in this debate argue for a relationship based on the mutual reinforcement and stimulation of CSR and value creation; yet others mostly neoliberal scholars generally hold the opposite to be true. Given the theoretical complexity and diversity of positions in both the CSR and innovation literatures, this study takes an alternative approach through an empirically grounded perspective. This is achieved by confronting the theoretical positions with a mapping and analysis of CSR, innovation and value creation in the rapidly grow - ing Norwegian small and medium sized enterprises (SMEs). A general conclusion to be drawn from this study is that there are no simple answers to the role of CSR and innovation in facilitating growth and value creation. General arguments that have been stressed in the literature as well as in the public debate do not have the proposed general cross-cutting effects. The difficulty in establishing a clear connection between CSR and innovation on the one hand, and growth, productivity and value creation on the other may have to do with the complexity of both CSR and innovation. Both are multidimensional concepts branching out in several directions. Our findings are that there are fairly specific and selective effects that need careful investigation. We therefore see our work as being part of the next generation of CSR and innovation studies, where the debate for and/or against CSR and innovation is replaced by an analysis of how and under what circumstances CSR and innovation may fit in and contribute to value creation. It is important to bear in mind that the study has explored CSR and innovation in an annual cohort of the Norwegian Gazelle firms. These firms represent a high performing segment of the Norwegian business population and reflect an interesting selection of both industrial policy and business strategy points of view. While our choice of this sample limits generalization about SMEs empirically, it allows focus on the most interesting sections from both an industrial policy and a business strategy perspective. This study has been financed by the Research Council of Norway s FORFI programme 1 and undertaken by a team of researchers with economic, technology and social science backgrounds from The Norwegian Business School (BI/NBS), The Norwegian University of Science and Technology (NTNU), and the International Research Institute of Stavanger through The University of Stavanger (IRIS/UoS). We are also grateful for excellent assistance with SPSS technicalities from Nick Edward (BI/NBS). Atle Midttun Atle Blomgren Annik Magerholm Fet Project leader The Norwegian Business School IRIS/ Univ. of Stavanger Norwegian University of Science and Technology Contact: atle.midttun@bi.no Atle.Blomgren@iris.no annik.fet@iot.ntnu.no 1 The FORFI programme aims at expanding and improving the knowledge base for research and innovation policy. 3

4 1 Debates and Theoretical Perspectives Some of the literature features a fairly polarized debate over the pros and cons of CSR, innovation and value creation. The positive story presents a triple-win mantra where innovation and CSR mutually support one another, and each in turn reinforces value creation. The negative story voices a critique against CSR for destroying value and contributing to political confusion. It also argues that CSR prevents radical innovation and thereby undermines value creation. The European Union (EU) clearly supports the positive story in its so called Lisbon Agenda. In a communication from 2002 (EU 2002), the commission claimed that: CSR can make a contribution to achieving the strategic goal of becoming, by 2010, the most competitive and dynamic knowledge-based economy in the world [ ] as well as contribute to the European strategy for sustainable development. The positive story is backed by leading strategy advisors like Ian Davis, worldwide managing director of McKinsey & Company: [ ] social issues are not so much tangential to the business of business as fundamental to it. [ ] For reasons of integrity and enlightened self-interest, big firms need to tackle such [CSR] issues, in both words and actions. [ ] Companies that treat social issues as either irritating distractions or simply unjustified vehicles for attack on business are turning a blind eye to impending forces that have the potential funda - mentally to alter their strategic future (Davis 2005). A broad strand of innovation theory that emphasizes the social and institutional embeddedness of innovation also provides a basis for a positive win-win relationship between innovation and CSR (Edquist 2000, Lundvall 1992). Innovation is also argued as a basis for valuecreation within the innovation literature (Schumpeter 1943, Perez 2002 and others). On the other side, there is the Nobel Prize winner Milton Friedman s condemnation of CSR, which is one of the strongest statements of the critical position (Friedman 1970). The following statement from The New York Times Magazine in September 1970 may serve as an illustration: The businessmen believe that they are defending free enterprise when they declaim that business is not concerned merely with profit, but also with promot - ing desirable social ends; that business has a social conscience and takes seriously its responsibilities. [ ] Businessmen who talk this way are unwitting puppets of the intellectual forces that have been undermining the basis of a free society these past decades. The discussion of the social responsibilities of business are notable for their analytical looseness and lack of rigor (Friedman 1970). A less polemic, but still strong skepticism was articulated more recently by Clive Crook in the Economist (2005): CSR cannot be a substitute for wise policies. [ ] In several little-noticed respects, it is already a hindrance to them. If left unchallenged, it could well become more so. To improve capitalism, you first need to understand it. The thinking behind CSR does not meet that test. [ ] Private enterprise serves the public good only if certain stringent conditions are met. As a result, getting the most out of capitalism requires public intervention of various kinds, and a lot of it: taxes, public spending, regulation in many different areas of business activity. It also requires corporate executives to be accountable but to the right people and in the right way. There is also a critical antithesis to the win-win argument of CSR and innovation. Terms like creative destruction in the classical innovation literature (Schumpeter 1943) hardly reflect the types of social concerns that are traditionally associated with CSR. Furthermore, questions are also raised about validity of the value enhancing effect of innovation from an efficiency focused position. 4

5 Nuancing the Views A closer inspection of the literatures on CSR, innovation and value creation reveals that the polarized debate can be deconstructed into a set of more nuanced and useful propositions. The following sections present reflections of each of the three sides of the triangle. CSR & Value Creation With respect to CSR and value creation, it is quite conceivable that the contradictory views quoted above could be, at least partially, resolved if business strategies were brought into the picture. Generically diverse business strategies and business models based on them, such as cost based or differentiation based competition, could entail widely disparate roles for CSR and thus support both sides in the debate: Cost based competition implies a competitive philosophy where a company is focused strongly on efficient production, optimizing processes, and flawless organization in order to be able to sell profitably below average industry prices (Porter 1985). The firm can thereby offer lower prices to customers and gain a competitive edge against less efficient producers. In this context the potential for CSR is questionable. At least in some versions, the connotations of this business model is mean and lean with little room for softer CSR elements. Differentiation based competition implies that the company is focused strongly on developing products or services that offer unique attributes or qualities. The value added by the uniqueness of the product allows the firm to pass along increased costs to its customers. To succeed in this strategy the company must mobilize quality and innovation. This strategy potentially lends itself more easily to CSR, because CSR may play an important role as an integral part of building corporate reputation. Differentiation entails a need for customer loyalty to back up unique products, differentiating attributes and brand loyalty. Furthermore, because of the profit margins implied in its uniqueness, differentiation based competition presumably gives room for allocating resources to CSR. Several other distinctions in the business strategy literature can be highlighted, but Porter s now classical generic categories should suffice to serve as examples of how strategic orientation may condition how CSR affects value creation. CSR and Innovation With respect to CSR and innovation, it is plausible that the respective positive and negative relationship between CSR and innovation could, at least partially, be resolved by bringing variations in the dynamics of innovation into the analysis. The dynamics of innovation may vary, from incremental/sustaining to radical/disruptive, with potentially very different effects on CSR. While CSR could go well with incremental and sustaining innovation, supporting the win-win argument, combining it with radical and disruptive innovation would be more problematic, supporting the opposing position. A large segment of the innovation literature stresses the importance of incremental innovation. The strong concern with social embeddedness of the innovation process in the systems of innovation literature, for instance, shows bias in this direction. Concepts such as learning by doing by using and interacting (Lundvall 1992,1998, Edquist & McKelvey 2000) entail enduring social relations that retain a certain stability. Incremental innovation and embeddedness in much of the systems of innovation approach thereby provides multiple access points for CSR and resonates well with the idea of socially responsible business in the CSR literature. In contrast to the emphasis on the social embeddedness of the systems of innovation models, the concept of creative destruction carries connotations of disruptiveness and social conflict. Creative destruction, as Schumpeter saw it, incessantly revolutionizes the economic structure from within, incessantly destroying the old one, incessantly creating a new one (Schumpeter 1943). Like creative destruction the concept of disruptive technology or innovation carries connotations of harsh contradiction rather than soft, socially embedded transformation. The term disruptive technology (Christensen 1997) describes a new technological innovation, product or service that eventually overturns existing dominant technology or products in the market. The creative-destructive and disruptive dynamics of radical innovation obviously collide with CSR. The stakeholder approach, a traditional cornerstone of CSR (Freeman 1984), contains a strong lock-in to current actors, their outlook and orientation, and thus to a static perspective. Today s stakeholders may accept incremental innovation and/or innovation that sustains or upgrades present business models and business practices. However, the same stakeholders are not likely to support radical or transformative innovation that would lead to a devaluation of their roles and basic competencies. Similar implications also accompany wellknown CSR perspectives like Fombrun & Gardberg s (2000) focus on communicative and reputational aspects of CSR and Porter and Kramer s cluster-based CSR. The dualism of the relationship between the CSR literature and different strands of the innovation literature indicate that there is a downside to pushing an unconditional win-win argument as well as its counterpart. While incremental innovation may work well with CSR, radical innovation may need degrees of freedom for entrepreneurial experimentation that transcend existing stakeholder interests, marketing and communication strategies. Yet there are also visions among leading CSR thinkers like Elkington, voicing more radical visions of industrial transformation needed for addressing pressing climate 5

6 and sustainability issues (Elkington 1999). This may also indicate that CSR needs a dynamic interpretation that might align it more with radical innovation. However, this may raise the need to address both corporate and public responsibility in tandem. As radical innovation also potentially implies structural transformation and business failure, social responsibility must be taken beyond the boundaries of the firm (Midttun 2007). Innovation and Value Creation The relationship between innovation and value creation is contested, and two partially contradictory schools of thought project two different messages. First is a static efficiency perspective, describing profitability and growth achieved through efficient management and optimization. The focus is placed on operations using best-practice technological and managerial processes to produce goods and services with the optimal combination of inputs to produce maximum output for the minimum cost (Nicholson & Snyder 2011). Following the evolution of the knowledge economy, efficient management has come to include not only tangible, but also intangible resources such as human capital (Sherman 2011). (1994) thus argues that the exclusive reliance on incremental innovations would mean that these areas will very quickly exhaust the technical paradigm on which they are founded. Long-term value creation is therefore dependent on allowing a certain degree of disruptive creativity. Given the theoretical complexity and diversity of positions both in the CSR and innovation literatures, this study takes a more empirically grounded approach. Confronting the theoretical positions with a mapping and analysis of CSR, innovation and value creation in rapidly growing Norwegian SMEs, the study develops an alternative, empirically founded perspective, which warrants a more nuanced view of how CSR interacts with innovation, growth and value creation. Second, a dynamic efficiency and innovation perspective sees growth and success arising out of entrepreneurship and its ability to reap the benefits of creative adaptation to new commercial environments, and to grasp advantages of early movers (Afuah 2009, Adner 2012). Through experience in industrial deployment, innovation is also seen to translate into improved efficiency of production over time (Wene 2000). At the micro-level, the American organization theorist, Jim March (1991) sums up the dilemma with both positions and argues for a balanced view: Adaptive systems that engage in exploration to the exclusion of exploitation are likely to find that they suffer the costs of experimentation without gaining many of its benefits. [ ] Conversely, systems that engage in exploitation to the exclusion of exploration are likely to find themselves trapped in suboptimal stable equilibria. As a result, maintaining an appropriate balance between exploration and exploitation is a primary factor in system survival and prosperity. While many follow March in calling for a balanced view, there is a lack of overarching theory that bridges the two positions, which means that judgments may differ considerably. The polarized debate for and against a winwin thesis on innovation and value creation could be seen as products of different biases in evaluating static and dynamic efficiency up against each other. An additional factor to take into consideration is time. In the long run static efficiency alone, even supplemented by incremental innovation is hardly sufficient to unleash the potential of an innovation economy. Crevoisier 6

7 2 Methods and Definitions The study builds on a sample of 343 Gazelle firms that answered a questionnaire in October/November The data were collected through an electronic survey sent to managing directors of the SMEs based on the address list provided by Dagens Næringsliv, the leading Norwegian business newspaper. The response rate was about 14% when compared to the complete list of potential respondents (or 15.8 % when compared to the number of companies to whom the survey was sent). The Survey The survey 3 was directed at the managing director of the Norwegian Gazelle firms and contained questions spanning across business models, CSR and innovation. A first set of questions deals with the business model behind the firm s success. In this set the study seeks to elicit the core business outlook of the firm. A second set of questions explores the firm s engagement in innovation. This includes both an evaluation of its general innovation focus, and an assessment of its engagement in different types of innovation, as well as how radical its innovation is. A third set of questions relates to the firm s CSR activity. This includes a general question on the level of CSR engagement with specific follow-up questions on various types of CSR orientations, including social, environmental, economic and strategic. The questionnaire also includes questions on drivers and barriers to CSR. Finally, the respondents were also asked about their opinion on the relationship between CSR and innovation. Accounting and Organizational Data The managers response to CSR, innovation and growth models is supplemented with accounting and organizational data from several sources. First, the newspaper behind the Gazelle list, Dagens Næringsliv, provided an overview of the Gazelles with basic organizational and financial information. This introduces a number of background variables into the analysis such as industrial sector and region among others. Second, the Dagens Næringsliv data have been supplemented with data from various public directories. Additional data from national account directories were used to distinguish between SMEs and non-smes. Public accounting data have also been used to estimate economic success in order to explore the relationship between CSR, innovation and value creation. Parameters for Economic Success The study measures economic success in terms of growth and financial performance, both based on publicly available financial data. The measurement of growth is based on turnover during the period from 2006 to Since it is almost impossible to find a measure of financial performance that is independent of factors like relative capital-intensity, leverage, level of sales, etc., this study uses both standard measures of financial performance return on equity (ROE), return on sales (ROS), return on assets (ROA) and return on total capital (ROTC) and, at least in the CSR literature, the some - what novel measure of total factor productivity (TFP). Total factor productivity (TFP) is a measure of a company s value creation relative to inputs of labor and capital. The company s value creation (or value added) is: operating profit (or EBIT) 4 + depreciation + amortization + salary costs 5. To control for arbitrary changes from year to year, the nominal TFP figures for each year in the period have been indexed to fixed 2010 prices 6. To compensate for industry differences this study has calculated the average mean of TFP in fixed prices and then, for each company, compared this to the mean for all gazelles in the respective industries. So if a company has a high average TFP relative to industry 2 A complete list of the Gazelle firms from 2010 was provided by Dagens Næringsliv newspaper. The list contained addresses to the managers of about a quarter of the companies and was complemented through telephone inquiries with the firms. Of the ~2500 companies on the list fitting our SME criteria, 2168 were obtained. 3 Enclosed in the appendix. 4 Earnings before interest and taxes 5 It is assumed that the company s technology may be described by a Cobb-Douglas type production function: L *C, where and are labor s and capital s share of total production costs, i.e. they sum up to 1. Labor is the number of employees and labor costs are equal to salary costs. Capital is defined as capital employed (i.e. total assets minus current liabilities) and capital costs are equal to capital employed times shadow rate of interest (set at 7 %) plus actual depreciation and amortization. TFP is thus: value creation/ L *C, which may be calculated using accounting figures. 7

8 median, this study counts it as a very productive company. However, it should be noted that TFP will depend on the business cycle and it is therefore not a universal measure of economic performance. However, taken together, the use of TFP and a battery of other measures provide insight into the economic success of a given enterprise. The Gazelles The concept of Gazelle firms originated in 2007 when the Norwegian business daily Dagens Næringsliv started using the previous year s financial accounts for all Norwegian-based companies to nominate gazelles, or companies with: Approved financial accounts for the previous year Total sales doubled or more over the last four years Total sales of NOK 1 million or more in the first year of operation Positive sum of operating profits over time No decline in sales between two years Incorporation as a limited company SMEs With regard to SMEs, this study follows the European Commission (European Commission 2012) which defines a Small- and Medium sized Enterprise (SME) as an enterprise that: 1) Employs fewer than 250 people 2) Has annual turnover not exceeding 50 million (approximately NOK 380 million) or a balance sheet total not exceeding 43 million (approximately NOK 325 million). 3) Is not an integral part of a group structure 7, 8 In contrast, the United States Small Business Administration also uses headcount, turnover and assets to define a small business, but has different thresholds for different industries, though most are capped at 500 employees. Like the EU definition, it also requires the companies to be independently owned and operated, and requires that headcounts and financial thresholds must take into account subsidiaries, affiliates and enterprises holding stakes in the enterprise ( predecessor entities ) (USSBA 2012). Norway does not have an official definition of an SME, but institutions like the Research Council of Norway and Innovation Norway normally use the EU definition. However, the headcount threshold is most often fixed at 100 employees (Regjeringen 2012). The overwhelming majority of the Gazelles are SMEs as far as number of employees is concerned (Figure 2.1) and only 2% do not fulfill the Norwegian requirement of having less than 100 employees. Furthermore, the absolute majority of companies on the Gazelle list are far below the SME threshold of annual turnover of no more than 380 million NOK as shown in Figure 2.6. A closer analysis of ownership, however, reveals that a subset of the Gazelle firms are de facto intimately tied to large firms which, by the EU definition, disqualifies them as independent SMEs. By this calculation 13% of the Gazelle companies qualify as non-smes. This group also constitutes roughly 10% of our sample. While dominated by SMEs, the Gazelle sample therefore allows us to contrast small and medium sized firms with large enterprises. The Sample s Match with the Population In spite of the relatively low response rate, the sample matches the Gazelle population quite well on central background variables as can be seen from Figures As shown in Figure 2.1, the sample matches the population well when it comes to number of employees. A majority of the companies surveyed have 10 or fewer employees (62% for both the population and the sample), with the group 0 to 5 employees being the largest within this. Less than one fifth of the companies in both the sample and the population have over 25 employees. The sample also matches the population quite well when it comes to age (Figure 2.2). Based on their date of registration in the Brønnøysund Register Centre (Brønnøysundregistrene 2012), the study finds that most firms are under 10 years old 9 (59% in the population and 65% in the sample), while a relatively small group of companies are over 20 years (12% in the population and 9% in the sample). 6 It should be noted that as this time period goes beyond the last year for which Gazelles were nominated (2009), there may be cases of Gazelles with a decline in sales. In other words, these companies would not have been nominated Gazelles had 2010 figures been used. 7 A) For holdings in subsidiaries of between 25 and 50% or stakes in the enterprise held by outsiders of between 25 and 50%, the relevant share of the subsidiary s and/or the holding company s headcount, turnover and balance sheet total are added to the enterprise s own financial figures. B) For holdings in subsidiaries of more than 50% or stakes in the enterprise held by outsiders of more than 50%, 100% of the subsidiary s and/or holding company s headcount, turnover and balance sheet total are added to the enterprise s own financial figures. 8 By not being an integral part of a group structure, the European Commission assumes that: The enterprise is autonomous, i.e. it does not have stakes of more than 25% in subsidiaries or other enterprises (excluding public investment corporations, venture capital companies, business angels, universities, non-profit research centers, institutional investors, regional development funds or smaller local authorities) do not hold stakes of more than 25% in the enterprise; The enterprise is owned by no more than 50% public investment corporations, venture capital companies, business angels, universities, non-profit research centers, institutional investors, regional development funds or smaller local authorities; The relevant sum totals of headcount, turnover and balance sheet total in the enterprise itself, in subsidiaries in which the enterprise holds more than 25% and in other enterprises that hold stakes of more than 25% in the enterprise, are below the thresholds for autonomous enterprises. 8

9 Population Sample Figure 2.1: Number of Employees The fact that most companies are young is not surprising, considering the criteria for being a Gazelle, such as doubling your turnover over 4 years. Rapid growth typically occurs in the early phase of a company s life cycle. The fact that almost 10 % of the companies in the sample (12% in the population) are older than 20 years is more spectacular. Presumably this reflects a shift in Population Sample Figure 2.2: Age of the Company business strategy or operations that allows them to enter a new growth phase, even as established players. The sample also mirrors the population fairly well when it comes to industry sector (Figure 2.3). The research team has divided the companies into eight different business sectors based on a three-pronged approach. First, Norway has a large oil and gas industry, consisting of both operators of oil and gas fields, and companies servicing both the national and the global oil and gas vindustry. However, a large part of the oil and gas supplier industry is not covered by any specific oil and gas related NACE code 10. To single out relevant oil and gas related companies, the project made use of a population of relevant companies developed by BI and IRIS, and used in reports to various Norwegian govern - Population (N=2517) Sample (N=343) Figure 2.3: Distribution of Companies by Industry Sector mental agencies. It should be noted that the resulting sector Oil and gas does not include operators of oil and gas fields, only service companies 11. Second, after excluding the oil and gas related firms, the remaining firms were grouped according to NACE coding. Third, the service sector (starting from NACE codes 49 onwards) were divided into Knowledge-based Services and General Services based on average salary costs per employee in the different subsets. The largest sector, knowledge-based services, is a little overrepresented in the sample compared to the population (34% over 26%). However, the second largest sector, construction, is only marginally underrepresented. The largest discrepancy appears in the retail trade sector, which accounts for 14% in the population but only 6% in the sample, followed by services other than knowledge -based. The group retail trade, the fourth largest in the population, is somewhat under-represented (14% in population, 6% in sample). The other sectors were all fairly balanced. The population is also well reflected in the sample when it comes to regions (Figure 2.4). Almost half of the Gazelles are headquartered in the region of Eastern Norway 12 (49% in the population and 47% in the sample). This is not surprising considering that this region includes the Norwegian capital Oslo and the most populous part of the country. Western Norway 13, with major cities such as Stavanger and Bergen, is the second largest region (28% in the population and 31% in the sample). The remaining companies are spread more or less equally in the three remaining regions: Southern Norway 14, Middle Norway 15 and Northern Norway 16, and the population is in each case fairly well matched by the sample. The sample also matches the population when it comes to gender of the managing directors. Both the population 9 Note that since the Gazelle list is based on accounting numbers for the past four-year period, no company on the list can be younger than five years. 10 NACE is a European industry standard classification system. 11 Note that the oil and gas suppliers include companies related to all kinds of industrial activities, from manufacturing and wholesale trade to services. 12 Eastern Norway consists of the counties Oslo, Akershus, Hedmark, Oppland, Buskerud, Telemark, Vestfold and Østfold. 13 Western Norway consists of the counties Rogaland, Hordaland, Sogn og Fjordane and Møre og Romsdal. 14 Southern Norway consists of the counties Aust-Agder and Vest-Agder. 15 Middle Norway consists of the counties Sør-Trøndelag and Nord-Trøndelag. 9

10 Population Sample Mean turnover (million NOK) Population Mean turnover (million NOK) Sample Figure 2.4: Regions, Percentage of the Companies within Each and the sample reflect that high growth firms are male dominated (83%) 17 (Figure 2.5). Figure 2.6 Growth in Turnover for the Period of , with Mean for Each Quarter Population Sample Figure 2.5: Gender of General Manager The study measures economic success in terms of growth and financial performance, both based on publicly available financial data, as previously described. The measuring of growth is based on turnover over the period of The growth and economic per - formance data in this study are registered over a longer period than for the qualification under the Gazelle criteria. This implies that some of the firms in our data may have negative results in spite of the Gazelle criteria. Both with respect to growth (Figure 2.6) and distribution of economic value creation (TFP) (Figure 2.7), the sample matches the population fairly closely. Population Sample Figure 2.7 TFP Distribution among the Gazelle Firms for Period Compared to Industry Median Statistical Techniques Three central statistical approaches are used throughout this study: factor analysis, regression analysis and correlation analysis. Factor analysis, a statistical method used to study the underlying dimensions of a set of variables, has been used to identify core dimensions of Business models, CSR, innovation and value creation. Regression analysis has subsequently been used to identify characteristics of, or drivers behind each of them, allowing us to understand how the typical value of the dependent variable changes when any one of the indepen - dent variables is varied, while the other independent variables are fixed (Wikipedia 2012a). The study has used backward elimination, which involves starting with all candidate variables, testing the deletion of each variable using a chosen model comparison criterion, deleting the variable (if any) that improves the model the most by being deleted, and repeating this process until no further improvement is possible (Wikipedia 2012b). Correlation analysis with control for background variables has been used to study the degree of association between pairs of variables. Unlike regression analysis, correlation makes no assumption about causality. The variables in each pair are treated in a symmetrical fashion. We have calculated Pearson correlation coefficients by using partial correlation analysis that allows for control variables. 16 Northern Norway consists of the counties Nordland, Troms and Finnmark. Svalbard has also been included in this group. 17 For comparison with other groups see SSB: 18 In the sample, one of the companies had an extreme value compared to the others. It had a turnover of NOK million, which was three times the turnover of the second-highest. If this company is removed the mean of the top quarter is NOK million. In the population, three companies had turnover values that were significantly higher than the rest. If these are removed, the mean in the top quarter is NOK 109 million. 10

11 3 CSR and Innovation: Exploring a Multidimensional Conceptual Terrain Thus far, we have presented the opposing perspectives in the literature on CSR and innovation, showing the strong win-win position where the two factors play together in furthering successful business development, as well as a negative position claiming the opposite. However, we have also argued that, upon closer inspection, the polarized debate could be deconstructed to a set of more nuanced positions. This chapter seeks to shed empirical light on the debate by exploring CSR and innovation and how they are aligned in the Gazelle firms. Exploring CSR The Gazelle firms, according to their own perception, are fairly engaged in CSR. As indicated in Figure 3.1, 47% report that they engage to a medium-high (4) to high extent (5). However, there is considerable spread in the Gazelles CSR commitment. A large group comprising 36% report that they have a medium focus (3) on CSR, and as much as 17% have little (2) or no (1) CSR engagement. The 15 CSR dimensions are clustered together in four factors that together explain close to 60% of the variance (Table 3.1). To simplify, we call them Strategic CSR, Environmental CSR, Stakeholder CSR and Charity CSR. The factors comprised of multiple dimensions are detailed below. Strategic CSR: The strategically and socially oriented Gazelles see themselves as generally strongly CSR focused; they have core products/services that respond to a social challenge; and they have a CSR as a central focus in the company s management, vision and values, as well as in its marketing and profiling. Environmental CSR: The environmentally oriented Gazelles focus on environmental certification; they include environmental performance in their annual report; they take measures to reduce the environmental impact of products/services; and their core products/services respond to an environmental challenge. Figure 3.1: CSR Engagement Exploring CSR dimensions CSR, as a general concept, covers a number of subdimensions. To explore the multidimensionality of CSR, this study includes a set of 15 CSR questions, ranging across much of the CSR spectrum (see questionnaire questions 6a-n). Through factor analysis the study has sought to elicit the main CSR-approaches among the Gazelle firms. Stakeholder CSR: The stakeholder, ethics, governance and engagement oriented Gazelles participate in development discussions with employees; they follow-up on workers and human rights in the supply chain; they have an active focus on responsible customer follow-up; and they have established ethical guidelines and/or measures against corruption and fraud. Charity CSR: The charity and local partnership oriented Gazelles engage in financial support to local and/or charitable institutions; and are in active partnership with the local community. 11

12 Table 3.1. Factor Analysis of Dimensions of CSR (q5 and q6) PCA, Variables/Varimax rotated component Factor 1: Factor 2: Factor 3: Factor 4: Commu- Strategic Environmental Stakeholder Charity nality CSR CSR CSR CSR Extent to which the company is focused on CSR in general (q5) Development discussions/performance assessments with employees (q6a) Follow-up of worker rights and human rights in the supply chain (q6b) Core products/services focuses on a social/societal challenge (q6c) Financial support to local and/or charitable institutions (q6d) Environmental certification (Eco-Lighthouse, ISO or the like) (q6e) Environmental information included in annual report (q6f) Measures to reduce greenhouse gas (GHG) emissions in daily operations (e.g. energy efficiency measures, video/telephone conferences, reduced fuel consumption) (q6g) Measures to reduce the environmental impact of products/services (e.g. new materials, improved design) (q6h) Core products/services focuses on an environmental challenge (q6i) CSR has a central focus in the company s management, vision and values (q6j) CSR is a central focus in the company s marketing activities and profiling (q6k) Active focus on responsible customer follow-up (q6l) Established ethical guidelines and/or measures against corruption and fraud (q6m) Active partnership with the local community (q6n) Eigenvalue Percent variance explained (rotation sum of squared loadings 20.5% % % 9.813% Cummulative percent of variance 20.5% % % Exploring Innovation With respect to innovation, quite a few Gazelle firms comply with the expectation that growth firms in the age of the knowledge economy are strongly innovation driven. Close to half of them see themselves as strongly or fairly strongly focused on innovation (Figure 3.2). Yet a significant subset, almost 25 percent, has little or no preoccupation with innovation; and about the same Figure 3.2: Innovation Focus proportion reports only medium innovation-engagement. Exploring Innovation Dimensions The inclusion of a number of questions both on the functions and radicality of innovation has allowed the study to explore the Gazelle firms orientation to innovation in more detail. Following conventional differentiation, questions include distinctions between product- and service oriented innovation; process and organizational oriented; and marketing oriented innovation. For each of these types of innovation, the respondents were asked to indicate the level of radicality of their innovation. A factor analysis confirms the empirical relevance of these distinctions. The study finds that Gazelle firms cluster into three innovation approaches two of the approaches follow conventional distinctions, while a third combines two categories. In all three factors, functional innovation focus goes together with radical innovation in the same field: (Table 3.2). The 9 innovation dimensions are clustered together in three factors that together explain close to 71% of the variance (Table 3.2). To simplify, we call them Product and service innovation, Process innovtion and Marketing innovation. Product and service oriented innovation focuses on radical innovation in this field. Firms that score high on this factor are also those that profile a high general engagement in innovation. Process innovation combines process and organizational innovation. The process and organizationally oriented firms also engage in radical innovation in the same fields. Marketing innovation 12

13 Table 3.2 Factor Analysis of Dimensions of Innovation PCA, Variables/Varimax rotated component Factor 1: Factor 2: Factor 3: Commu - Product & Process Marketing nality service Innovation Innovation Innovation Focus on innovation in general (q2) Focus on product/service innovation (q3 a) Focus on process innovation (q3 b) Focus on organizational innovation (q3 c) Focus on marketing innovation (q3 d) Radicality of product/service innovation (q4 a) Radicality of process innovation (q4 b) Radicality of organizational innovation (q4 c) Radicality of marketing innovation (q4 d) Eigenvalue Percent variance explained (rotation sum of squared loadings) 28.7% 24.00% 18.2% Cummulaticve percent of variance 28.7% 52.7% 71.00% combines a strong focus on marketing innovation with radical innovation in marketing. Exploring CSR & Innovation Contrary to the win-win thesis and its counterpart, the study finds that there is no general correlation between CSR and innovation in the Gazelle firms, when controlling for background factors. It is only when the CSR and innovation variables are decomposed into their subordinate dimensions that significant correlations are found (Table 3.3). Strategic CSR and process innovation are the most strongly correlated. In other words, firms focusing on process innovation appear to find CSR relevant and supportive. Process innovation involves engagement with the company s internal stakeholders, and a strategic CSR engagement by the firm appears to enhance trust and collaboration, which facilitates improvements and creative change. Charity CSR and marketing innovation also apparently go well together. Charity CSR represents an outwardoriented mode that evidently supports marketing innovation. However, marketing innovation is also associated with strategic CSR, indicating that a broad CSR engagement in the organization also expresses itself in its market engagement. Environmental CSR is correlated with product and service innovation, presumably reflecting a bias of such innovation towards solving environmental challenges. Inversely, one could imagine this reflects product and service innovation coming out of an environmentallyoriented CSR engagement. To sum up, the Gazelle study indicates that the most promising entry point for CSR to further innovation is through process innovation. CSR aligns most pervasively with innovation through broad, strategically oriented CSR. Table 3.3 Summing up Correlations between CSR & Innovation 19 Factor 1: Factor 2: Factor 3: Factor 4: Strategic Environmental Stakeholder Charity CSR CSR CSR CSR Factor 1: Product & service Innovation Correlation Significance (2-tailed) Factor 2: Process Innovation Correlation Significance (2-tailed) Factor 3: Marketing Innovation Correlation Significance (2-tailed) The table presents partial correlations with control for background variables: Age of the firm; Number of employees in 2010; Non SME vs. SME; Gender of General Manager; Gazelle Experience; Farming and Fishery; Oil and Gas; Construction; Manufacturing; Retail trade; Wholesale trade; General Services; Knowledge-based Services; Western Norway; Eastern Norway; Northern Norway; Southern Norway; and Middle Norway. 13

14 4 Bringing in Business Models As a further step to highlight the nuances of the otherwise simplistic arguments for and against CSR and innovation, the study has brought in business models as a conditioning factor. As a basis for this analysis, the study has elicited the Gazelle firms own perception of drivers behind their successful growth, from a list of 12, spanning a broad spectrum of business approaches. At an aggregate level, six factors stand out as more or less equally important (Figure 4.1): conquering market shares; innovation; increases in demand; competitiveness; and efficiency and recruitment. Correspondingly, the following six factors (in descending order) stand out as being less important to growth: collaboration with other companies; own R&D; CSR; higher prices; collaboration with public agencies; and collaboration with research institutes. Apparently the Gazelles see CSR and collaborative engagement with other entities as less important to economic growth. Figure 4.1: Perceived Growth Drivers (q. 1) [scale 0 5] With the intention of moving beyond averages and probing into underlying variation, the study has undertaken a factor analysis which found that the 12 growth drivers cluster together in three factors that together explain close to 50% of the variance in growth (Table 4.1). The first factor focuses on collaboration with research institutions and public entities 20 (A) in line with the innovation, CSR and collaborative growth arguments. The second factor focuses on competitiveness 21 (B) in line with the economic arguments for optimization and efficiency. The third factor focuses on finding market opportunities (C) 22. In other words, these factors indicate that there are three distinct business models among the Gazelle firms. 20 Question 1: f,g,i,i,j,k,(l) 21 Question 1: b, d, e, h 22 Question 1: (a, c, l) 14

15 Table 4.1: Factor Analysis of Growth Drivers Factor 1: Factor 2: Factor 3: Commu - Collaborative Competitive Market nality Business Business oriented Model Model Business Model Increased demand (Q1a) Conquest of market share (Q1b) Higher selling price (Q1c) Increased efficiency (Q1d) Increased competitiveness (Q1e) Focus on innovation (Q1f) Focus on CSR (Q1g) Successful recruiting of new employees (Q1h) Emphasis on the company s own R&D (Q1i) Emphasis on cooperation with research institutions (Q1j) Emphasis on cooperation with public entities (Q1k) Emphasis on cooperation with other companies (Q1l) Eigenvalue Percent variance explained (rotation sum of squared loadings % % % Cummulative percent of variance) % % % Exploring Correlation with CSR and Innovation Exploring the relationship between CSR and Innovation to business models among the Gazelle firms, the study finds that there is indeed a strong alignment: Correlation with CSR The business model that correlates most broadly with CSR is the collaborative model. It correlates significantly with Strategic CSR, Environmental CSR, and Charity CSR (table 4.2). This finding indicates that there is a soft competitive model, which draws extensively on a broad CSR engagement. The competitive and market oriented business models interconnect less, and more selectively with CSR. The competitive business model correlate significantly with stakeholder CSR, whereas market oriented businesses correlate with strategic CSR (Table 4.2). Correlation with Innovation The correlation between business models and innovation primarily hinges on product and service innovation, which correlates significantly with all business models (Table 4.3). By far the strongest correlation is found between the collaborative business model and product and service innovation, indicating that this model is strongly innovation-based. There is also a significant positive correlation between the competitively-focused Table 4.2: Correlation between Business Models and CSR 23 Factor 1: Factor 2: Factor 3: Collaborative Competitive Market Business Business oriented Model Model Business Model Factor 1: Strategic CSR Correlation Significance (2-tailed) Factor 2: Environmental CSR Correlation Significance (2-tailed) Factor 3: Stakeholder CSR Correlation Significance (2-tailed) Factor 4: Charity CSR Correlation Significance (2-tailed) The table presents partial correlations with control for background variables: Age of the firm; Number of employees in 2010; Non SME vs SME; Gender of General Manager; Gazelle Experience; Farming and Fishery; Oil and Gas; Construction; Manufacturing; Retail trade; Wholesale trade; General Services; Knowledge-based Services; Western Norway; Eastern Norway; Northern Norway; Southern Norway; and Middle Norway. 15

16 business model and product and service innovation, indicating that this model is also to a large extent innovation-based. The market-oriented business model, however, is negatively correlated with product and service innovation. One possible interpretation is that this business model represents a harvesting approach, with little place for innovation. This finding would be in line with March s (1991) distinction between exploration and exploitation. Under the exploitation mode there is consolidation of sales of existing products and services, with little investment in new product development. In addition to the alignment between product and service innovation and several business models, there is also affinity between process innovation and competitive business orientation. Apparently, businesses that prioritize efficiency and competitiveness also work actively on improving their organizational capabilities through innovation. Table 4.3: Correlation between Business Models and Innovation 24 Factor 1: Factor 2: Factor 3: Product & Process Market service innovation innovation innovation Factor 1: Collaborative Business model Correlation Significance (2-tailed) Factor 2: Competitive Business model Correlation Significance (2-tailed) Factor 3: Market oriented Business model Correlation Significance (2-tailed) The table presents partial correlations with control for background variables: Age of the firm; Number of employees in 2010; Non SME vs SME; Gender of General Manager; Gazelle Experience; Farming and Fishery; Oil and Gas; Construction; Manufacturing; Retail trade; Wholesale trade; General Services; Knowledge-based Services; Western Norway; Eastern Norway; Northern Norway; Southern Norway; and Middle Norway. 16

17 5 Exploring Effects of CSR, Innovation and Business Models on Growth and Value Creation. The Gazelle firms are selected for their growth and value creation. Nevertheless, there is a considerable spread of growth, productivity and value creation even among the Gazelle firms,25 which allows us to ask the question, Do CSR, innovation or business models have effects on growth and value creation? As demonstrated in Tables 5.1 and 5.2, below, the study finds no simple answers. The tables are produced with backward regression analysis, initially with a large number of potential explanatory variables. These are deleted, one after another, until a set with significant variables remains. This chapter concentrates on the explanatory effect of CSR, innovation and business models, while the effects of other variables are discussed in the next chapter. We see that CSR and innovation have no general crosscutting effects on growth and productivity, although CSR does have a negative effect on value creation. This does not preclude broader effects of specific CSR and innovation approaches, however, as well as effects of particular business models. With respect to growth, stakeholder CSR comes close to being a significant driver, as shown in Table 5.1. This could be interpreted as a possible positive effect of good governance. Gazelle growth also comes close to being significantly and positively stimulated by marketing innovation, possibly indicating a good payoff from novel marketing engagement. With respect to value creation, charity oriented CSR appears to have a negative effect on ROA (Table 5.2) and ROE (Table 5.3), while no effect on ROS (Table 5.4). In other words, this type of goodwill CSR does not appear to enhance value creation or productivity, rather to the contrary, it apparently supports the neoliberal critique of CSR as wasteful expenditure. Table 5.1: Exploring effects of CSR, Innovation and Business Models on Growth 26 Model 23 Unstandardized Coefficients Standardized Coefficients t Sig. B Std. Error Beta (Constant) Age of the firm INon SME vs SME Factor 3: Stakeholder CSR Factor 3: Marketing Innovation Dependent Variable: Growth in Turnover MEAN Adj. R Square For further documentation of growth and value creation, see the annex to chapter Background variables controlled for in this regression: Age of the firm; Number of employees in 2010; Non SME vs. SME; Gender of General Manager; Gazelle Experience; Farming and Fishery; Oil and Gas; Construction; Manufacturing; Retail trade; Wholesale trade; General Services; Knowledge-based Services; Western Norway; Eastern Norway; Northern Norway; Southern Norway; and Middle Norway. CSR, innovation and businessmodels are based on previonsly defind factors. The same variables are used in all following tables in this chapter. 17

18 Table 5.2: Exploring effects of CSR, Innovation and Business Models on ROA Model 23 Unstandardized Coefficients Standardized Coefficients t Sig. B Std. Error Beta (Constant) Knowledge-based Services feb Northern Norway Factor 4: Charity CSR Factor 3: Marketing Innovation Dependent Variable: ROA2010 Adj. R Square Table 5.3: Exploring effects of CSR, Innovation and Business Models on ROE Model 23 Unstandardized Coefficients Standardized Coefficients t Sig. B Std. Error Beta (Constant) Factor 3: Market oriented Business Model Knowledge-based Services Northern Norway Factor 4: Charity CSR Dependent Variable: ROE2010 Adj. R Square Table 5.4: Exploring effects of CSR, Innovation and Business Models on ROS Model 24 Unstandardized Coefficients Standardized Coefficients t Sig. B Std. Error Beta (Constant) Knowledge-based Services Middle Norway Factor 3: Marketing Innovation Dependent Variable: ROS2010 Adj. R Square With respect to productivity, strategic CSR seems to weaken it, apparently lending support to the neoliberal critique on a broader basis. The collaborative business model is negatively related to productivity (TFP). See Table 5.5. Table 5.5: Exploring effects of CSR, Innovation and Business Models on TFP Model 22 Unstandardized Coefficients Standardized Coefficients t Sig. B Std. Error Beta (Constant) Number of employees in Gazelle Experience Eastern Norway , Factor 1: Strategic CSR Factor 3: Marketing Innovation Dependent Variable: TFP i. Industry MEDIAN Adj. R Square

19 The findings regarding innovation are also intriguingly complex. On the one hand, marketing innovation apparently enhances growth, although the finding is hardly significant (Table 5.1). On the other hand it also has a negative effect on two value indicators (Tables 5.2, 5.4). It is negatively related to return on assets, return on sales, but has no effect on return on equity. Smart and creative marketing apparently boosts sales volume but tends to undermine return. Furthermore, marketing innovation also has a negative effect on productivity (Table 5.5). To sum up, the study finds that there are fairly specific and selective effects of CSR, innovation, and business models, that neither justify the optimistic win-win mantra of the most optimistic CSR and innovation supporters, nor the counter position of its neo-liberal critics. Business models also score ambiguously with respect to value creation. On one hand the market-oriented business model supports return on equity (Table 5.3), while there are no business models with significant effects on return on assets and return on sales (Tables 5.2 and 5.4). 19

20 6 Exploring Background Drivers Having explored the core nexus: CSR, innovation, business models, and their relation to growth and value creation, this chapter turns to other background factors. While these factors have been included as control variables in other chapters, this chapter sets them centre stage. CSR Focusing first on CSR, it may again be observed that there are hardly any strong, cross-cutting effects across the various CSR approaches. The variables of firm size, age, SME-status, and sectorial and regional anchoring matter, but only for some CSR types, and sometimes even with different signs. The clearest cross-cutting CSR conditioner is the construction industry. This sector significantly promotes general CSR, environmental CSR and charity CSR, but not strategic- and stakeholder CSR (Table 6.1). However, other sectors also have effects on CSR orientation. Both manufacturing and service sectors significantly enhance environmental CSR. Service sector also comes close to having significant effect on general CSR, and the primary sectors similarly for environmental CSR. Similarly, SME status also has an effect on CSR, but in both directions. While independent SME status Table 6.1: CSR and Significant Conditioning Factors 27 (The CSR variables were dependent variables in separate regression analyses) Standardised. Beta coefficients and General Strategic Environmental CSR Stakeholder CSR Charity p-values CSR CSR CSR Age St.Beta St.Beta St. Beta Sig Sig Sig Indep. SME + St. Beta St. Beta St.Beta Aligned SME - Sig Sig Sig Size ( Number of employees) St. Beta Sig Constr Constr. Constr St.Beta St. Beta St. Beta Sig Sig Sig Services Manuf. Sector St.Beta0.098 St. Beta Sig Sig Services St. Beta Sig Primary St. Beta Sig West N West N Region St. Beta St. Beta Sig Sig North N Mid N St. Beta St. Beta Sig Sig North N St. Beta Sig For documentation of the regression analyses behind the table see Annex. 20