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Strategic corporate social responsibility and partial privatization policy with foreign penetration

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Abstract

This study considers strategic relations between corporate social responsibility (CSR) and privatization policy in a mixed duopoly. We investigate the impact of the order of sequential games and compare with simultaneous game to highlight the significant role of the foreign shareholding ratio of the CSR-firm. We show that the privatization-then-CSR case yields a lower (higher) degree of privatization while a higher (lower) level of CSR than the CSR-then-privatization case when foreign penetration is low (high). We also show that privatization-then-CSR case can be a unique equilibrium in an endogenous timing game, while it is socially desirable when foreign penetration is neither sufficiently low nor high.

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  1. It is quite usual to observe that public firms are significant parts of the economy for many countries, such as China, India, Korea, and Japan, especially in steel, automobile, airline, finance, banking, and other industries.

  2. For example, Lee (2006), Matsumura and Shimizu (2010), and Lee et al. (2013) provided current policy issues on optimal privatization in mixed oligopolies.

  3. According to the PWC Global CEO survey (2016), 64% of the CEOs see CSR as a core part of their business, and 59% of them believe social values are important to attract top employees. For recent studies, see Wang et al. (2012), Chang et al. (2014), Lambertini and Tampieri (2015), Leal et al. (2018), Xu and Lee (2019), and Cho et al. (2019).

  4. In reality, for example, Build Your Dreams is an example of a private automobile firm in China that engages in CSR activities and issues a corporate responsibility report for more than ten years, which competes with public automobile firms, such as Dongfeng Motor Corporation and China FAW Group Corporation. Furthermore, in several developing countries, it is common for private firms with CSR activities to compete with public firms in other industries, such as banking, electricity, petroleum, transportation, etc.

  5. For empirical analysis on policy discussions between CSR and privatization, Boubakri et al. (2020) and Khan et al. (2020) assess the link between them. They find that privatized firms have, on average, better CSR intensity than other publicly listed firms. This implies that the CSR activities are closely related with the degree of partial privatization policy in reality. See also Xu and Lee (2019), Garcia et al. (2020), and Leal et al. (2021).

  6. In some cases, private firms have a first-mover advantage to engage in CSR activities for expanding their market share before the government employs public policies. For example, some recent studies on environmental regulation have allowed different timelines of the game. Poyago-Theotoky and Teerasuwannajak (2002) and Moner-Colonques and Rubio (2015) examined emission taxes when the regulator is not able to commit. They showed that firms undertake increased abatement activities generating less pollution, which might result in higher welfare. However, they concentrated on the private market, where both firms only maximize their profits under environmental policies. Recent studies examined the time inconsistency problem faced by CSR firms. See, for example, Leal et al. (2018), Garcia et al. (2018), Lee et al. (2018), and Xu and Lee (2018).

  7. For some discussion on the practical evidence of the commitment issue in real examples, see the papers cited in Lee et al. (2018) and Ino and Miyaoka (2020).

  8. In an empirical work by Suto and Takehara (2018), it is revealed that the influence of foreign ownership on the CSR of Japanese firms is significant.

  9. It is shown that flexible privatization policy can provide welfare loss in the absence of commitment to the degree of privatization. See Xu et al. (2017), Lee et al. (2018), and Haraguchi and Matsumura (2020b).

  10. A typical approach in the literature of mixed oligopolies is the assumption of increasing marginal costs as it can eliminate uninteresting corner solutions where only the public monopoly exists. The appendix provides a sensitivity analysis of the propositions with cost differences between the public and private firms under increasing marginal costs. Notably, the results obtained under increasing marginal cost in mixed oligopolies might not always be valid under constant marginal cost. In particular, it does not always provide interior solutions under constant marginal cost with the CSR-firm in our analysis. See Matsumura and Ogawa (2010, 2017), Matsumura and Okamura (2015), and Kawasaki et al. (2020) for further related discussions.

  11. We can interpret foreign penetration as an indicator of the level of market openness in financial markets. See Haraguchi and Matsumura (2014), Xu et al. (2017), Lee et al. (2018), and Kawasaki et al. (2020).

  12. A consumer-friendly CSR initiative is regarded as one in which the firm adopts consumer surplus as a proxy for its CSR concerns. In the managerial delegation contract, the firm may strategically use the CSR initiative as a commitment device to expand the outputs. Thus, the firm that adopts CSR obtains a higher profit than its profit-seeking competitors. For a recent discussion on the theoretical relation between managerial delegation and CSR, see Lambertini and Tampieri (2015), Lee and Park (2019), and Garcia et al. (2019).

  13. It can be shown that the second-order conditions for the maximization problem are satisfied. That is, \({\partial }^{2}{\pi }_{2}/\partial {\alpha }^{2}<0\) when \(\alpha\) is equal to the value in Eq. (8).

  14. Note that \({\beta }_{1}\) satisfies that \(2\theta +{\theta }^{2}-\left(10+14\theta +6{\theta }^{2}\right){\beta }_{1}+\left(2-4\theta +2{\theta }^{2}\right){\beta }_{1}^{2}=0\).

  15. In a free entry mixed market, Matsumura and Kanda (2005) showed that full nationalization is optimal without foreign penetration, whereas Cato and Matsumura (2012), Xu et al. (2017), and Lee et al. (2018) showed that the government always chooses partial privatization when there is foreign ownership in private firms.

  16. It can be shown that the second-order conditions for the maximization problem are satisfied. That is, \({\partial }^{2}W/\partial {\theta }^{2}<0\) when \(\theta\) is equal to the value in Eq. (10).

  17. Note that \({\alpha }_{1}\) satisfies that \(6-\left(23+8\beta +6{\beta }^{2}\right){\alpha }_{1}+3\left(3+{\beta }^{2}\right){\alpha }_{1}^{2}-\left(2-4\beta +3{\beta }^{2}\right){\alpha }_{1}^{3}=0\).

  18. In the presence of a CSR-firm, the output substitution from the privatization policy can induce the cost-saving effect of the public firm along with the rent-leakage effect to the CSR-firm. See Kim et al. (2019).

  19. Note that both \({\alpha }_{2}\) and \({\alpha }_{3}\) satisfy that \(12-7\beta +16{\beta }^{2}+6{\beta }^{3}+2\left(10+\beta -16{\beta }^{2}-6{\beta }^{3}\right){\alpha }_{k}-(6-7\beta -2{\beta }^{2}){\alpha }_{k}^{2}=0\) where \(k=2, 3\).

  20. Note that as it is difficult to obtain explicit outcomes in the equilibrium, we take numerical simulations with \(\beta \in \{\mathrm{0,0.1},\dots ,\mathrm{0.9,1}\}\) and provide Tables 1, 2, and3 to show the explicit equilibrium outcomes of the three cases in Sect. 3. Furthermore, when comparing the equilibrium outcomes of the different cases, we first used the “function fitting” to obtain the value of equilibrium results for \(\beta \in \left[\mathrm{0,1}\right]\) and then compared them in Sect. 4.

  21. The proofs of the propositions and lemmas are omitted, since we can easily compare the results in the figures and tables. Note that the first, the second, and the third column of Fig. 1 is described in the graphs of Tables 1, 2, and 3, respectively, and the fourth column of Fig. 1 shows the comparisons among the three models.

  22. Note that the equilibrium outcome in the S game indicates \({\alpha }^{S}\upepsilon [0.0127, 0.1996]\).

  23. In the presence of a CSR-firm, the optimal privatization policy depends on the output-substitution effect and cost-saving effect among the firms along with the rent-leakage effect to the CSR-firm. See Kim et al. (2019) and Xu and Lee (2019).

  24. In the presence of foreign penetration, the optimal privatization policy can be reversed depending on the different timeline in a free entry mixed market. See Xu et al. (2017) and Lee et al. (2018).

  25. Note that consumer surplus in a homogeneous product market is proportional to the market output, that is, \(CS={Q}^{2}/2\).

  26. When comparing \({W}^{P}\) and \({W}^{S}\), the equality holds only when \(\beta =0\).

  27. In a free entry mixed market, flexible privatization policy can provide welfare loss in the absence of commitment to the ex-ante degree of privatization. See Xu et al. (2017), Lee et al. (2018), Chen et al. (2019), and Haraguchi and Matsumura (2020b).

  28. Chang et al. (2016) and Wang et al. (2016) presented models of international licensing in private oligopolies, while Kim et al. (2018) and Wang et al. (2020) analyzed public licensing in mixed oligopolies.

  29. Pal (1998) and Matsumura and Ogawa (2010) argued that private leadership is more robust. Ino and Matsumura (2010) showed that private leadership provides the highest social welfare in free-entry mixed markets. However, public leadership is also supported by Wang and Mukherjee (2012), Wang and Lee (2013), and Chen et al. (2019). Additionally, Gelves and Heywood (2013) found that mergers of public and private firms could improve welfare under public leadership.

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Acknowledgements

We thank the two anonymous referees for their careful and constructive comments on an earlier version of this paper. All remaining errors are ours. This work was supported by the Key Program of National Natural Science Foundation of China (42030409) and the China Postdoctoral Science Foundation (2019M651098).

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Authors and Affiliations

  1. Department of Economics and Trade, Dalian Maritime University, 1 Linghai Road, Dalian, 116026, China

    Lili Xu & Fanrui Su

  2. Department of Economics, Chonnam National University, 77 Yongbong-Ro, Bukgu, Gwangju, 61186, Republic of Korea

    Sang-Ho Lee

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Appendix: the sensitivity of the propositions

Appendix: the sensitivity of the propositions

One justification of cost difference is that the public firm might invest more in public activities rather than the CSR-firm to increase consumers’ well-being, for example, of people in the low-income level or remote local areas. In particular, in the objective functions in Eqs. (2) and (3), we have \(U={\pi }_{1}+(1-\theta )CS+(1-\theta )\left(1-\beta \right){\pi }_{2}\) and \(V={\pi }_{2}+\alpha CS\). Thus, as far as \(1-\theta >\alpha\) in the weights on CS, the public firm is more concerned about the consumers than the CSR-firm. Thus, we check the sensitivity of the propositions under cost difference.

Assume that each firm’s cost function is quadratic, and the cost function of the public and private firm are \({C}_{1}\left({q}_{1}\right)={c}_{1}{{q}_{1}}^{2}/2\) and \({C}_{2}\left({q}_{2}\right)={c}_{2}{{q}_{2}}^{2}/2\), where \({c}_{1}=1\) and \(0<{c}_{2}=c\le 1\). Thus, each firm’s marginal cost is \({q}_{1}\) and \({cq}_{2}\), respectively. In particular, we check the situation when (i) \(c=1/4\); (ii) \(c= 1/2\); (iii) \(c= 3/4\); and (iv) \(c= 1\), respectively, and then show that most of the main findings in propositions still hold.

1.1 Proposition A1

Main findings in Proposition 1 hold, except \({\alpha }^{P}>{\alpha }^{C}\) if \(c\in (0,1/4]\) .

It implies that the P game yields a lower (higher) degree of privatization than the C game when foreign penetration is sufficiently low (high) irrespective of the value of \(c\). However, if \(c\in (0,1/4]\), the P game always yields a higher level of CSR than the C game irrespective of foreign penetration.

1.2 Proposition A2

Main findings in Proposition 2 hold when \(c\in \left(0, 1\right]\) .

1.3 Proposition A3

Main findings in Proposition 3 hold when \(c\in \left(0, 1\right]\) .

1.4 Proposition A4

Main findings in Proposition 4 hold, but the CSR-then-privatization can be an equilibrium outcome when foreign penetration is high if \(c\in (0,3/4].\)

It states that the C game is an equilibrium and socially desirable when foreign penetration is relatively high. In particular, we have \({\pi }_{2}^{C}>{\pi }_{2}^{S}\) if \(c\in (0,3/4]\), and thus, (iv) in Lemma 4 disappears. Thus, \({(T}_{1}, {T}_{2})=(\mathrm{2,1})\) can be an equilibrium outcome if \(c\in (\mathrm{0,3}/4]\). That is, if \(c\in (0,3/4]\), the C game is an equilibrium and socially desirable when foreign penetration is relatively high, i.e., \(0.940<\beta \le 1\).

1.5 Proposition A5

Main findings in Proposition 5 hold, but the CSR-then-privatization is socially desirable when foreign penetration is high if \(c\in (0,3/4]\) .

It demonstrates that the P game can be an equilibrium in an endogenous timing game and socially desirable when foreign penetration is neither low nor high irrespective of the value of \(c\). However, if \(c\in (0,3/4]\), the C game can also be an equilibrium and socially desirable when foreign penetration is relatively high. Thus, the modeling of the opposite timeline of the game between the government and the firms is also feasible and desirable when the cost difference is not very small, and foreign penetration is sufficiently high.

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Xu, L., Su, F. & Lee, SH. Strategic corporate social responsibility and partial privatization policy with foreign penetration. JER 74, 251–278 (2023). https://doi.org/10.1007/s42973-021-00075-x

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