Strategic corporate social responsibility by a local firm against a multinational enterprise

Abstract

The present work considers competition between a local firm and a multinational enterprise (MNE). The MNE has a competitive advantage in terms of lower unit costs and plans to enter the local firm’s market either through exports or through FDI. The local firm may strategically become “socially responsible” and follow a “doing well by doing good” strategy by investing in socially responsible activities along its value chain. Investments in corporate social responsibility (CSR) increase the responsible firm’s equilibrium output and profit as well as consumer surplus and total welfare in its country. The multinational firm’s incentives to serve the foreign country through FDI are mitigated in the average consumer’s valuation for CSR in the responsible firm’s country implying that CSR investments by local firms give space for inward FDI by low-cost multinationals targeting consumers without environmental and social responsibility consciousness. Policy suggestions are also discussed.