Journal of Macromarketing http://jmk.sagepub.com/ Market Responsiveness to Societal Interests
Tracy L. Gonzalez-Padron and Robert W. Nason Journal of Macromarketing 2009 29: 392 DOI: 10.1177/0276146709344954 The online version of this article can be found at: http://jmk.sagepub.com/content/29/4/392
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Market Responsiveness to Societal Interests
Tracy L. Gonzalez-Padron1 and Robert W. Nason2
Journal of Macromarketing 29(4) 392-405 ª The Author(s) 2009 Reprints and permission: http://www. sagepub.com/journalsPermissions.nav DOI: 10.1177/0276146709344954 http://jmmk.sagepub.com
Abstract The authors provide evidence that firms can enhance their own objectives by internalizing the objectives of most stakeholder groups. This suggests that society’s objectives, as defined by stakeholders to the firm, can be augmented by the self-interest motivation at the heart of a market system. Specifically examined was the impact of stakeholder responsiveness on innovativeness. The second objective of this study was to explore the impact of compliance-based versus strategic-based regulation approaches on firm innovation and overall corporate social responsibility (CSR). Findings suggest that regulatory responsiveness decreases innovation when firms expend resources only on compliance. Firms adopting strategic-based approaches, such as voluntary regulatory programs and collaborative strategies between the firm and government, however, are more innovative and demonstrate greater CSR. This study presents empirical tests that provide a strong first step in understanding how society’s goals can be further internalized into the engine of the market system. The implication is that both firms and regulators can find areas of win–win, with society as the beneficiary. Keywords innovation, stakeholder, macromarketing, regulation, public policy, societal goals
Macromarketing has been defined by Hunt (1977) as the study of the impact and consequences of marketing on society, the study of the impact and consequences of society on marketing, and the study of the marketing systems that link the levels. The Journal of Macromarketing (2009) has now broadened this scope to include ‘‘Examining the Interactions among Markets, Marketing, and Society’’. Thus, two important macromarketing questions are how does the economic engine of a market system, the private enterprise, affect objectives of society and how is it guided by society. First, a firm may choose to incorporate additional societal goals in its products/services and processes to gain competitive advantage. The well-being of a firm’s stakeholders influences societal objectives. In aggregate, society’s goals are the sums of stakeholder’s goals, but distinct stakeholder group goals can be in conflict as well as in concert with each other. The balance of engagement with some or all stakeholder groups does not necessarily bring about a societal optimum but results in some level of improvement in overall societal goals (Laczniak and Murphy 2006). Therefore, stakeholder theory provides a basis for assessing the voluntary inclusion of stakeholder interests within the competitive decision process of the firm. Thus, greater internalization of stakeholder interests is an important macromarketing outcome. The impact of this internalization process on firm innovation is explored empirically in this article. Innovation is one marketing variable often linked with success. Innovation has implications for a more competitive and sustainable economic engine, which itself provides for such societal objectives as growth, income, jobs, wealth, and investment. Is there a market incentive for firms to help achieve more
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of society’s needs and goals including, but not limited to, those imbedded in purchase transaction? This is a study of how responsiveness to stakeholders is part of the market system and how firms in their self-interest may use stakeholder responsiveness to enhance competitiveness in some situations. Nason (1998) has pointed out that all firm market behaviors have societal (macromarketing) impacts and implications. Thus, a focus on how the system could enhance positive and reduce negative societal impacts is at the foundation of the field. Second, a firm may choose in the name of profit to incorporate limited societal goals and in fact engage in a wide range of behaviors that counter society’s interests, some of which may destroy market processes. Thus, government is a unique stakeholder in a democracy because, theoretically, it structures the economic playing field to enhance what the market can do for society. Government administrative rules, laws, and policies (hereafter referred to as regulations) become part of the economic infrastructure intended to guide and shape private sector
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Department of Marketing, Strategy, and International Business, College of Business and Administration, University of Colorado, Colorado Springs, Colorado. 2 Department of Marketing, Eli Broad Graduate School of Management, Michigan State University, East Lansing, Michigan. Corresponding author: Tracy L. Gonzalez-Padron, Department of Marketing, Strategy, and International Business, College of Business and Administration, University of Colorado, Colorado Springs, PO Box 7150, Colorado Springs, CO 80933. E-mail: tgonzale@uccs.edu
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Gonzalez-Padron and Nason behavior. For example, alternatives for addressing the negative externalities of telemarketing include government coercion through regulation and government collaboration through voluntary standards (Redmond 2005). Accordingly, marketers can use differing approaches in dealing with regulation. Thus, the second question addressed by this study is how a firm may approach its relationship with government and potential regulation. By exploring compliance-based versus strategic-based approaches to government as a stakeholder, the impact of each approach on firm innovation and corporate social responsibility (CSR) is empirically assessed. The hypotheses of this study focus on these two macromarketing propositions—(1) that greater inclusion of society’s interests through firm stakeholder responsiveness leads to greater innovation and (2) that firm–government collaborative regulatory systems enhance innovation and CSR, while firm compliance-based orientation reduces both. Background will be provided on CSR with stakeholder theory providing the foundation for the two sets of hypotheses relating stakeholder responsiveness to innovation and firm strategy regarding government. Then a unique method will be described for empirically testing the hypotheses. Analysis of the data, discussion including implications, limitations that lead to future research, and conclusions follow in that order.
393 compliance and reporting policies to viewing environmental concerns as an opportunity to gain a competitive advantage (Menon and Menon 1997; Crane 2000). Firms that view CSR as a source of opportunity, innovation, and competitive advantage look beyond the costs and constraints of regulatory compliance, adopting a stakeholder orientation (Porter and Kramer 2006). Marketers are in a prominent position to include stakeholder concerns in strategic planning and promote CSR practices within the firm for competitive advantage (Maignan and Ferrell 2004). The experience of marketers in developing customer relationships may extend to establishing relationships with other stakeholders, including regulatory agencies. Companies using green new product development processes include stakeholders with broader environmental expertise (Polonsky and Ottman 1998). For example, DuPont included a diversity of stakeholders from India, Africa, and Latin America in developing its strategy for biotechnology development, even inviting environmental proponents, such as the former head of Greenpeace International, to provide divergent views on the issue (Hart and Sharma 2004). While examples abound, little empirical evidence exists to support the impact of stakeholder orientation on innovation. Furthermore, while anecdotal accounts highlight the positive outcomes from regulatory and community collaboration, little empirical research exists that examines the effect such responsiveness to regulatory agencies has on firm innovativeness and CSR. This study, therefore, explores two related phenomena affecting firm innovation and CSR. The first is what impact stakeholder orientation has on firm innovation; the second is what the related impact of partnerships with one stakeholder—government—has on innovation and CSR. The empirical evidence presented has both public policy and managerial implications. Firm behaviors that include stakeholder orientation clearly advance societal goals, perhaps while enhancing firm profitability, and collaboration with public institutions as a strategy may further help achieve both macro and micro interests.
Theoretical Background
CSR refers to a firm’s obligation to meet economic, legal, ethical, and discretionary expectations that society has of an organization. Managers recognize that the role of companies in society goes far beyond simply meeting obligations to shareholders (Bonini, Mendonca, and Oppenheim 2006). While corporate leaders are talking about CSR, far fewer are incorporating CSR in the ongoing actions and decisions of the firm. According to the 2007 State of Corporate Citizenship in the U.S., while 73 percent of the 751 executives surveyed believe that corporate citizenship needs to be a priority, only 39 percent report it as part of their business planning process. For many companies, increasing government and regulatory scrutiny affects marketing strategy and, in particular, innovation. For example, the financial services industry has come under intense public and regulatory scrutiny in terms of governance and transparency. Biotechnology firms face challenges because their new products account for an increasing share of product approvals and thus receive greater scrutiny by regulators, employers, and consumers (Simon 2006). Pharmaceutical companies are also under pressure to provide more affordable treatments for diseases in developing countries (Blowfield and Frynas 2005; Khanna 2006), potentially stifling innovation and new product development (Miles, Munilla, and Covin 2002; Calfee and Bate 2004). The European Union continues to protect the environment and public health through regulation, affecting companies of all sizes around the world. In many ways, growing regulatory concerns over the environmental impact of corporate practices have begun to influence marketing strategies, with firms moving from just adhering to
Hypothesis Development Stakeholder Responsiveness and Innovation
Stakeholder theory is a theoretical perspective in CSR research that examines the organization’s orientation toward multiple stakeholders (e.g., Maignan, Ferrell, and Ferrell 2005; Munilla and Miles 2005). For example, Maignan and Ferrell (2004) define CSR as ‘‘the duty (motivated by both instrumental and moral arguments) to meet or exceed stakeholder norms dictating desirable organizational behaviors’’ (p. 5). Organizations acting in a socially responsible manner align behaviors with norms and demands of their key stakeholders. Proponents of stakeholder theory argue that managers must satisfy various constituents (e.g., customers, employees, suppliers, local community organizations) that would withdraw support for the firm if important social responsibilities were unmet (Freeman 1984). Thus, stakeholders are viewed as a
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394 means by which the firm achieves its ends. Stakeholder theory suggests a strategic approach to stakeholder management that provides direction for enhanced organizational performance (Friedman and Miles 2006). Sustainable companies develop expertise in understanding the formation of stakeholder groups, their key issues, and their potential for helping or harming the corporation. Freeman (1984) warns that the consequences of not adopting a stakeholder approach include legal action, regulation, and loss of markets. Stakeholder orientation refers to the extent to which a firm understands and addresses stakeholder issues in daily operations and strategic planning. Adoption of a stakeholder orientation provides firms with an opportunity to understand its impact on stakeholders, anticipate changing societal expectations, and use its capacity for innovation to create additional business value from superior social and environmental performance (Laszlo et al. 2005). A stakeholder orientation includes the generation and dissemination of information about the firm’s stakeholders and the firm’s responsiveness as a whole to this intelligence (Maignan and Ferrell 2004). Stakeholder responsiveness refers to ‘‘the initiatives the firm adopts to ensure that it abides by or exceeds stakeholder expectations and has a positive impact on stakeholder issues’’ (Thorne, Ferrell, and Ferrell 2008, 50). Companies demonstrating a high degree of stakeholder responsiveness use a diverse range of activities, including engagement in philanthropic activities, reduction of environmental impacts, and the introduction of practices that empower employees (Brammer and Pavelin 2006). Stakeholder research often considers six stakeholders: customers, employees, shareholders, suppliers, community, and government regulatory agencies (Maignan, Ferrell, and Ferrell 2005). Stakeholder theory suggests that stakeholder orientation leads to firm innovation. Innovation relates to the implementation of new ideas, products, and processes (Hurley and Hult 1998). While marketing traditionally focuses on product innovation, organizational innovation differentiates between technical innovation, referring to work activities related to products and services, and administrative innovation, referring to processes indirectly related to products and services (Damanpour 1991). Focusing on the degree to which an organization encourages introducing new ideas and processes, Hult and Ketchen (2001) found an organization’s openness to new ideas, products, or processes to be an influencing factor in developing positional advantage. There is evidence of a relationship between market-focused firms and innovation (Deshpande, Farley, and Webster 1993; Day 1994). Han, Kim, and Srivastava (1998) found a positive relationship between customer orientation and innovation. A stakeholder orientation effects marketing through product differentiation (i.e., environmental, organic), reputation building (i.e., advertising), competitive advantage (i.e., first mover, barrier to entry), and innovation (McWilliams and Siegel 2001). Research tends to support the notion that responding to stakeholders influences firm innovation; however, little research provides evidence of this relationship by stakeholder group. This study examines whether actions responding to the six
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Journal of Macromarketing 29(4) stakeholder groups generate greater marketing outcomes through the following hypotheses. Customers are key stakeholders that help establish the firm’s reputation and identification (Greenley and Foxall 1996; Ferrell 2004). The relationship between a customer and a firm exists because of mutual expectations built on trust, good faith, and fair dealing in their interactions. In fact, there is an implied covenant of good faith and fair dealing, and performance cannot simply be a matter of the firm’s own discretion. Not only is this an ethical requirement but it also has been legally enforced in some states (Ferrell 2004). Firms face complex decisions on how to respond to the expectations of customers regarding fair practices relating to consumer health and safety, credit and ownership, marketing and advertising, and sales and warranties (Thorne, Ferrell, and Ferrell 2008). Responses may include educating consumers, developing safe and sustainable products, and supporting philanthropic programs. Researchers often explain green marketing strategies as a response to environmental pressure from consumers (Crane 2000). Hypothesis 1a: The greater the customer responsiveness, the more innovative the firm. A focus on employees is increasingly important in strategic marketing and is starting to compete for executive attention (Jackson 2001). Employees can position the organization in the minds of customers, employees, and other stakeholders. Issues relating to employee stakeholders include wages and benefits, health and safety, diversity, and work–life balance. While responses to employee stakeholders often relate to legal and economic issues, many firms seek to attract and retain the best talent through family-friendly work programs, such as on-site day care, extensive training opportunities, and openness through company communications. An influential driver of innovations is employee-management interaction through feedback mechanisms (Blum-Kusterer and Hussain 2001). Hypothesis 1b: The greater the employee responsiveness, the more innovative the firm. Suppliers are an important stakeholder to the firm. A focus on suppliers entails attention to the needs of the supply chain and to socially responsible purchasing practices, including buying criteria relating to diversity, the environment, and labor concerns. The network of relationships inherent in the supply chain has resulted in a greater likelihood that organizations will shoulder more responsibility for the actions of their suppliers (Phillips and Caldwell 2005). Firms that depend on global suppliers for goods and services have to consider how to avoid supply chain problems like those that Nike experienced when exposed for ‘‘slave-labor conditions’’ in Asian countries (Bachman 2000). As firms recognize social issues related to their supply chain, some seek vendors with good social policies and help them become competent or assist competent vendors to become socially responsive (Drumwright 1994).
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Gonzalez-Padron and Nason Hypothesis 1c: The greater the supplier responsiveness, the more innovative the firm. A shareholder focus typically refers to a form of profit orientation concentrating on performance accountability between top management and the firm’s shareholders. The scandals of Enron, Tyco, and other firms highlight shareholder issues relating to corporate governance and accountability. Meeting the needs of shareholders directly affects both return on assets and net profit margin (Martinez and Norman 2004). Investors are looking with increasing favor on shareholder proposals that ask firms to disclose and to monitor their political contributions, to report on their fair employment policies, and to issue broad-based reports on sustainability. In response, firms are implementing policies and programs to ensure board of director independence, avoid employee or management opportunism, and increase transparency. Hypothesis 1d: The greater the shareholder responsiveness, the more innovative the firm. Host communities have a stake in the firm’s outcomes influencing health, education, and ecological well-being. Laczniak and Murphy (2006) argue that marketers are obligated to ensure that their marketing operations will not impose external costs on society, including the physical environment. Community stakeholders include many nongovernmental organizations (NGOs) and other potential activist groups that have an interest in social issues and the ability to mobilize public opinion (Banerjee, Iyer, and Kashyap 2003). Community advocacy groups can influence corporate and marketing strategy. For example, a chemical company’s plans to locate in an economically deprived Louisiana community changed in response to community opinion (Berry 2003). Firm responses to community stakeholders include programs that improve the quality of life by supporting health and wellness, education, recreational activities, and environmental initiatives through philanthropy and employee volunteerism. For example, employee volunteerism generates opportunities to interact with other volunteers and other constituents that increase social ties that could lead to great innovation (Laverie and MacDonald 2007). Hypothesis 1e: The greater the community responsiveness, the more innovative the firm. Firms that focus on regulatory stakeholders pay attention to the regulatory environment, trends, and policies that affect organizational practices and activities. Regulations seek to create a fair competitive environment for businesses, safeguard natural resources, protect consumers, and ensure safe workplaces. Typically, the influences of regulatory forces on a firm are a function of top management commitment and are affected by the industry in which the firm operates (Banerjee, Iyer, and Kashyap 2003). Firms expend resources to comply with regulatory requirements through hiring, training, and monitoring employees. Responses to regulatory stakeholders include
395 compliance, participation in government and industry selfregulatory programs, and collaborations with regulatory and governmental agencies. A regulation–innovation paradox develops when regulations may seek to encourage innovation, yet the cost of compliance can detract from firm innovation. Environmentalists argue that regulations provide incentives for firms to develop innovative ways of reducing pollution that increase competitiveness (Porter 1991; Porter and van der Linde 1999). A recent study supports that higher regulations in Europe relates to higher process innovation for environmental impact and employee welfare (Pavelin and Porter 2008). Intellectual property rights offer pharmaceutical firms protection of their economic assets while product regulatory approval provides an entry barrier of competition and the lack of such laws in developing countries deters HIV drug availability (Hammer 2002). However, studies of the effects of regulation on new product innovation provide mixed results (Popper and Nason 1994; Jaffe and Palmer 1997). Many firms believe that the costs of regulation outweigh its benefits and support self-regulation or actively lobby governments for deregulation. A study of telecommunication firms during a period (1992–1995) of lesser regulation showed increases in innovation, which if continued could have resulted in 62 percent more new services to consumers (Prieger 2002). Pharmaceutical companies seek to influence pharmaceutical regulation and price control regimes by citing studies showing that price regulations for uniform prices discourage innovation and competition (Backhaus 1983; Danzon 2000; Doran and Henry 2008). For some firms, federal government agencies and nonprofit organizations have the greatest impact on the success of a new product development project (Bunn, Savage, and Holloway 2002). New products from biotechnology and pharmaceutical firms depend on regulatory agency approvals designed to ensure the safety and effectiveness of new products (Simon 2006). Biomedical firms saw a dramatic decrease in the number of new products during the initial years after Food and Drug Administration (FDA) regulations were introduced in 1976 (Hauptman and Roberts 1987). More recently, anticipated drug-safety regulations from the FDA could double the annual cost of clinical testing, reducing research and development (R & D) investment that leads to breakthrough therapies (Shelby, Califf, and Schulman 2006). Medical device manufacturers surveyed in Australia expect that planned regulations relating to product quality will increase costs and the delivery time of new products to the market (Svistounov et al. 2007). Along with high product development costs, regulatory compliance and NGO pressures potentially stifle innovation and new product development (Backhaus 1983; Miles, Munilla, and Covin 2002; Calfee and Bate 2004). For example, while U.S. government health care policies have indirectly lowered drug prices to benefit consumers, one study found that the lower prices resulted in lower investments in research and development, which in turn reduced innovation (Santerre, Vernon, and Giaccotto 2006). Therefore, it is expected that expending resources for responding to regulatory stakeholders
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Table 1. Regulatory Stakeholder Approaches Strategic Approach Regulatory Compliance Focus on meeting standards and legal obligations Publish policy, establish systems, train employees Voluntary Adoption Following organization- or government-provided frameworks Certification (ISO 1400, EMAS, SA 8000) or member of program (UN Global Compact, Climate Registry)
Journal of Macromarketing 29(4)
Regulatory Collaboration Working with/influencing regulatory agencies or industry Innovating processes to preclude or in anticipation of regulation
will have a negative effect on firm innovation, leading to the following hypothesis: Hypothesis 1f: The greater the regulatory responsiveness, the less innovative the firm. Approaches to Regulatory Stakeholders Managing the expectations of regulatory stakeholders is not a simple task. The degree of social responsibility varies from a minimal compliance approach that focuses only on meeting the letter of the law to a strategic approach that integrates the expectations of multiple stakeholders in the planning processes (Thorne, Ferrell, and Ferrell 2008). A strategic approach views social responsibility as a means to create value for customers and superior returns for the firm and consists of voluntary initiatives and collaborative partnerships with regulatory bodies. Firms adopting strategic perspectives in response to regulatory stakeholders seek innovative solutions for improving processes and products, thereby gaining a competitive advantage (Porter and Kramer 2006; Epstein 2008). Table 1 outlines these two approaches to regulatory stakeholders. A compliance approach is a minimalist response in which the focus is on meeting regulatory standards (Epstein 2008). A firm in one study expresses a compliance approach by stating, ‘‘I think as long as we’re compliant and we’re not going to get fined we’re happy to leave it like that for the time being’’ (Williamson, Lynch-Wood, and Ramsay 2006). A compliance approach considers regulatory concerns a ‘‘cost of doing business,’’ which some firms view as a tax imposed by government, NGOs, and consumer groups (Munilla and Miles 2005). They feel that such costs reduce resources available for new product development or capital investments. For example, automotive firms reacting to laws requiring reduced pollution and emissions developed defensive product features instead of building more efficient and nonpolluting cars (Menon and Menon 1997). During the period from 1968 to 1974, the American car manufacturers met emissions regulation by controlling engine spark timing, controlling air to fuel ratio, and using exhaust gas recirculation (EGR), which incurred a significant fuel economy penalty. The minimal focus on compliance especially hurt Chrysler, who was unprepared for the escalating gasoline prices in the 1970s. American consumers turned instead to smaller and fuel-efficient Japanese and European cars. A voluntary approach involves adoption of industry organization or governmental frameworks for environmental and
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social performance. Industry and governments establish nonbinding guidelines to address societal concerns without statutory regulation. For example, firms agree to follow guidelines to encourage corporate social responsiveness when joining the United Nations Global Compact. Studies show that a combination of nonmarket (regulatory, local community, NGOs) and market (consumer, supplier, competitor, and investor) pressures influence participation in a voluntary program (Koehler 2007). Specifically regarding voluntary environmental programs, Koehler (2007) finds that firms responding to nonmarket pressures are more likely to adopt government-initiated voluntary programs, while market pressures incite participation in industry-initiated programs, such as ISO 14001, that signal environmental consciousness and effective cost management. One firm indicated that pressure from customers forced them to seek ISO 14001 certification—‘‘one of our major customers wants every supplier to be accredited’’ (Williamson, LynchWood, and Ramsay 2006). Nike argues that competitive pressures are forcing universal standards in supply-chain working conditions (Grein and Gould 2007). Similarly, Hawkes (2007) finds industry self-regulation on marketing food to young people is more prevalent than statutory restrictions. For example, the Confederation of the Food and Drink Industries of the European Union and the International Chamber of Commerce publish guidelines so that food marketing does not undermine the importance of a healthy diet. Collaborative initiatives between businesses and governments leverage the firm’s resources and capabilities to benefit society. Porter and Kramer (2006) argue that a symbiotic relationship develops when collaborative social projects relate to a firm’s core competencies, creating stronger businesses and stronger communities. A survey of 445 firms by the UN Global Compact and Dalberg Global Development Advisors (2007) finds that two thirds of respondents engaged in partnerships with governments and NGO’s to address humanitarian and development challenges, and the majority cited a desire to engage in relevant CSR programs as their primary reason. Distinctive advantages are expected from such partnerships, such as reduced unfavorable litigation, reduced levels of negative publicity, and favorable regulatory policies (Harrison and St John 1996). Firms adopting strategic regulatory approaches gain a competitive advantage by looking beyond the costs of compliance to seek innovative solutions to regulatory pressures to improve product and processes. The article of Porter and Kramer (2006) argues that investments in social initiatives strengthen company competitiveness through (1) improving a
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Gonzalez-Padron and Nason firm’s competitive context or ‘‘factors in the external environment that significantly affect the underlying drivers of competitiveness in those places where the company operates,’’ (2) increasing innovation through new products and services, (3) providing access to market segments as positive outcome of collaborations with government or nonprofit organizations, (4) achieving a reliable supply of high quality materials for production, and (5) increasing demand for a firm’s product and services. Collaboration with regulatory agencies and governments can create a positive regulatory environment, influence law and public policy, and lower costs of compliance (Epstein 2008, 79-80). Likewise, a firm’s reputation for CSR (a firm’s obligation to meet economic, legal, ethical, and discretionary expectations of society) is enhanced through involvement with voluntary and collaborative projects to address social issues. Therefore, the following hypotheses examine the outcomes of adopting a compliance or strategic approach to regulatory authority: Hypothesis 2: A firm’s strategic regulatory approach alleviates the negative effect of regulatory responsiveness on innovation. Hypothesis 3: Firms adopting strategic regulatory approaches are more innovative. Hypothesis 4: Firms adopting strategic regulatory approaches have greater CSR.
397 overall CSR score is the summation of ratings for the seven major areas from the 2006 KLD database. To generate scores of responsiveness to the six stakeholder groups, the authors used prior research to allocate the 113 items in the 2005 KLD database to community, customer, employee, regulatory, shareholder, and supplier. Not all stakeholder groups included in the stakeholder orientation measure are represented explicitly in the KLD database. Suppliers and regulatory agencies do not have a distinct category, while the KLD category referring to product is a common proxy for customer and the KLD category for governance is often used for shareholders. In prior research, items relating to diversity in purchasing or contracting with women- and/or minority-owned businesses have been used for measuring supplier stakeholder relations (Hillman and Keim 2001). Likewise, a number of items relate to government and regulatory agencies. For example, the Tax Disputes in the Community category refers to major tax disputes involving federal, state, local, or non-U.S. government authorities. Some items represented actions to more than one stakeholder. Strengths were summed and concerns subtracted to obtain an overall score for responsiveness to each stakeholder group. Because the stakeholder responsiveness scores consist of differing numbers of criteria, the resulting indices were normalized by transforming each data point to its z score equivalent—resulting in a normal distribution for each variable such that the mean is equal to 0 and the standard deviation is equal to 1 (Mattingly and Berman 2006). Innovation reflects the implementation of new ideas, products, or processes (Hurley and Hult 1998). While marketing traditionally focuses on product innovation, this study also includes innovative managerial processes indirectly related to products and services (Damanpour 1991). The measure for innovation is the sum of three items relating to innovation in the KLD database for the year 2006: R & D/innovation, beneficial products and services, and innovative giving. R & D/ innovation relates to the degree that a company is a leader in its industry for R & D, particularly by bringing notably innovative products to market. Beneficial products and services relate to the degree that the company derives substantial revenues from environmental services, products that promote the efficient use of energy, innovative products with environmental benefits, or innovative remediation products. Examples include products or services to improve the quality of drinking water, to treat municipal and industrial wastewater, and in the cleanup of contaminated sites. Innovative giving relates to corporate philanthropy and measures the degree that management seeks nontraditional approaches in addressing social issues. There are two control variables used to ensure that any relationships found are not a result of other confounding variables. First, the Standard Industrial Classification (SIC) from Compustat was included to account for variances in innovation due to industry. Attention to stakeholders and social responsiveness has been shown to be related to industry type, especially where the nature of the industry attracts greater public scrutiny (e.g., forestry, energy, or mining; Banerjee, Iyer, and Kashyap 2003; Brammer and Millington 2003).
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Method
The hypothesized relationships are tested using a sample of organizations representing publicly traded firms on the U.S. stock exchange. Our sample consists of 172 firms from various industries, 30 firms (17 percent) are from durable goods (e.g., automobiles, household appliances, personal computers), 37 (22 percent) from nondurable goods (e.g., beverages, pharmaceuticals, cigarettes, apparel), 42 (24 percent) are services (e.g. airlines, hotels, and banking), 32 (19 percent) are retail (e.g., department stores, discount stores, supermarkets), and 31 (18 percent) provide utilities (e.g., power, telecommunications). The firms range from 4 to 154 years old, have total sales on average of U.S.$34.5 billion (from U.S.$782 million to U.S.$346 billion), and employ from 2,000 to 1.9 million people. Responsiveness to the six stakeholder groups and overall CSR are measured through the KLD social indicators provided by KLD Research & Analytics, Inc, the social investment research firm founded by Kinder, Lydenberg, and Domini. KLD conducts research on the social, governance, and environmental performance of publicly traded companies for reporting to institutional investors worldwide. Through their commercial database of corporate ratings, SOCRATES, the company provides narrative accounts and ratings on more than 90 indicators in seven major areas, including community, corporate governance, diversity, employee relations, environment, human rights, and product. The KLD data provide a good assessment of CSR with construct validity established in empirical studies (Sharfman 1996; Szwajkowski and Figlewicz 1999). The
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Table 2. Relationship of Stakeholder Responsiveness and Innovationa Independent Variable Hypothesis 1a Hypothesis 1b Hypothesis 1c Hypothesis 1d Hypothesis 1e Hypothesis 1f Controls Industry Size (employees) DR2 F R2 Adjusted R2
Note. Dependent variable: innovation. N ¼ 160. * p < .10. *** p < .01.
Likewise, institutional pressures from competitors promote homogeneous activities in respect to responsiveness to stakeholders (Griffin and Weber 2006). Second, size of the firm (number of employees) was included. Size influences the urgency and salience of stakeholder relations, with larger firms given greater public scrutiny. Size can also influence the type and level of stakeholder relations and responsiveness. Large firms may have more resources for implementing social responses, while smaller firms may be more flexible to respond to changing social issues.
Analysis
Due to the relatively small sample size, multiple regression analysis is appropriate for testing hypothesis 1 and hypothesis 2 that propose a relationship between one or more factors of interest and an outcome (Cohen et al. 2003). A series of hierarchical multiple regression equations were used with the control variables entered as a block in step 1, followed by the hypothesized variables in step 2. Analysis will use the least squares technique to estimate the regression coefficients (bj) for each stakeholder responsiveness (Xj) on innovation (Y) in an equation of the form: Y ¼ b0 þ b 1 X1 þ b 2 X2 þ b 3 X3 þ b 4 X4 þ b 5 X5 þ b 6 X6 þ u where u denotes a random disturbance term. The regression coefficient (bj) represents the expected change in innovation associated with a one-unit change in the ith stakeholder responsiveness. The results of the regression analysis presented in table 2 show that responsiveness to stakeholders explains 29 percent of the variance in innovation. Firms responding to multiple stakeholders through socially responsive actions experience greater innovation. Results show that responsiveness to customers, employees, and the community can increase innovation, while responsiveness to regulatory agencies can
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decrease innovation. Customer (.14, p < .10), employee (.24, p < .01), and community (.42, p < .01) responsiveness had a positive relationship with innovation, supporting hypotheses 1a, 1b, and 1e. Of the six stakeholder groups, only shareholder responsiveness (hypothesis 1d) did not have a statistically significant relationship with innovation. Supplier responsiveness (–14, p < .10) had a negative relationship with innovation; therefore, hypothesis 1c is not supported. Supplier responsiveness includes supplier diversity programs and compliance with labor standards domestically and offshore that may detract resources from innovation. Regulatory responsiveness (–.26, p < .01) had a negative relationship with innovation, supporting hypothesis 1f. The control variables of industry and size of firm were not statistically significant.
Assessment of Regulatory Tactics
The tactics for engaging regulatory agencies as a stakeholder were assessed through a qualitative content analysis of 172 corporate annual reports. The documents for coding consist of annual reports from fiscal year 2004 from Mergent OnLine or the corporate Web site. Content analysis is a method for analyzing a variety of text, visual, and verbal data through reducing large quantities of content into defined categories (Harwood and Garry 2003). Content analysis of corporate annual reports as a method of data collection has been used in marketing studies of customer orientation (Judd and Tims 1991), market orientation (Noble, Sinha, and Kumar 2002), and CSR communication (Branco and Rodrigues 2006). This research used the computer software Atlas.ti to organize, code, and analyze quotations from the annual reports relating to the appropriate variables. Features of Atlas.ti include tools to manage, extract, compare, explore, and reassemble meaningful quotes from the documents through visual linking of concepts (Muhr and Friese 2004). The coding consisted of two steps. First, four graduating marketing majors were hired as coders to identify and code sentences that express
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Gonzalez-Padron and Nason
Table 3. Cross-Tabulation of Regulatory Tactics Strategic No Compliance Total No Yes 75 (43.6 percent) 52 (30.2 percent) 127 (73.8 percent) Yes 26 (15.1 percent) 19 (11.0 percent) 45 (26.2 percent) Total
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101 (58.7 percent) 71 (41.3 percent) 172
an orientation toward stakeholders, including government and regulatory stakeholders. A master code list generated from the prior literature and the initial qualitative review of annual reports included the following instructions for coding phrases relating to a regulatory orientation:
Code: Regulatory Phrases that demonstrate attention to regulatory and governmental agencies, including the importance of the complying with legal regulations, partnering with the local government to address concerns, desire to meet their requirements. Regulatory refers to agencies in the local, country, and world level - such as FDA, FTC, SEC, and other applicable regulatory agencies in the US and international markets (EU requirements/ regulations for product registration, safety). For example: Partnering with regulatory agencies to develop guidelines or meet requirements, recognizing the role of agencies and the influence on business operations, paying attention to the agency/government attitudes - anticipating changes in tactics or goals.
Multiple independent coders for each document were trained, supervised, and provided a codebook to establish interrater reliability (Noble, Sinha, and Kumar 2002). A standard measure of the degree of agreement beyond chance alone is Cohen’s (1960) k coefficient. Initial ks for regulatory stakeholder averaged 73 percent in each document. On completion of coding a set of documents, the coders met to discuss and resolve differences resulting in a final measure of regulatory responsiveness. Second, the authors identified the regulatory approach that each phrase represented, using the criteria from table 1 as a framework. A compliance approach mentioned activities such as monitoring compliance enforcement, expending resources in response to regulations, and compliance training for employees. For example, Alcoa referenced technology improvements at a Spanish factory to meet European Union environmental standards, and Gannett cited ‘‘a costly government requirement’’ as the reason for installing high-definition television in U.S. stations. Strategic regulatory approaches included voluntary adoption and collaborative projects. Voluntary adoption included references to participation in climate or labor compliance programs sponsored by federal or local governments, such as the United States Department of Labor’s Apparel Manufacturer’s Compliance Program Agreement. Firms coded for adopting collaborative projects mention partnering with governments, NGOs, and other companies to address regulatory or social issues. For example, the pharmaceutical companies of
Bristol-Myers Squibb, Merck, and Pfizer mention projects to ensure that medicines, health care training, and community education are more accessible to people in need all over the world. The results of the analysis highlight the approaches that firms use in addressing regulatory issues (table 3). The study found that 71 firms (41.3 percent) focused on regulatory compliance by monitoring regulations, fulfilling compliance requirements, and implementing policies that ensure adherence to all applicable regulations and legislation. However, a total of 45 firms (26.2 percent) used strategic approaches to regulatory issues. Of these firms, 21 (12.2 percent) specifically mentioned voluntary adoption of standards through certification or participation in government programs and 35 firms (20.3 percent) mentioned collaborative efforts with government and industry organizations. To assess how regulatory approaches influence the relationship of stakeholder responsiveness to innovation, additional hierarchical regression was performed for hypothesis 2 using the split sample method. The regression model from hypothesis 1 was performed on two groups—those using strategic regulatory approaches and those that did not. The results are in table 4. In support of hypothesis 2, firms that did not mention either tactic or used only compliance approaches had a moderate and negative relationship between regulatory responsiveness and innovation (–.33, p < .01). For firms using strategic approaches, regulatory responsiveness had a positive but not statistically significant relationship with innovation. Additionally, firms using strategic regulatory approaches have stronger relationships for employee, shareholder, and community responsiveness, suggesting that those firms have a greater capacity for stakeholder management. Comparison of means provides insights into whether a compliance or strategic focus affects the degree of innovativeness and overall CSR. Results show that firms expending resources on compliance have lower innovation and CSR scores than firms that do not; however, the difference is not statistically significant and may be from chance (table 5). Firms that use voluntary and collaborative approaches have higher innovation (.46) and CSR (7.93) scores than firms that do not (.17, 4.39, respectively). Thus, results support hypothesis 3 and hypothesis 4 that firms adopting strategic regulatory approaches have greater innovation and corporate social responsiveness than firms adopting only compliance approaches. Results from the empirical hypothesis tests are summarized in table 6. Overall, the results of the data analysis supported seven of the nine subhypotheses presented in this study.
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Table 4. Regulatory Approach Influence on Stakeholder Responsiveness Effect on Innovationa None/Compliance Variable Customer responsiveness Employee responsiveness Supplier responsiveness Shareholder responsiveness Community responsiveness Regulatory responsiveness Controls Industry Size (employees) F R2 Adjusted R2
Note. Dependent variable: innovation. * p < .10. ** p < .05. *** p < .01.
Journal of Macromarketing 29(4) Our results also highlight a stronger relationship between employee, shareholder, and community stakeholder responsiveness with innovation for those firms adopting a strategic approach to regulation (see table 4). The weak positive relationship of customer responsiveness with innovation (p < .10) is no longer statistically significant for either approach. This suggests that firms engaging in strategic approaches have an overall greater capability in multiple stakeholder relationship management that leads to innovation. However, the negative relationship for shareholder responsiveness, although weak (p < .10), warrants further research to examine the interconnected networks of relationships between stakeholder groups. This could lead us to examine the antecedents of implementing strategic stakeholder management and the use of voluntary or collaborative regulatory approaches. Emerging themes from annual reports provide important insights for marketers on outcomes from projects with regulatory stakeholders. The themes relate to the recommendation of Porter and Kramer (2006) to invest in social initiatives that strengthen company competitiveness. Strategic CSR approaches can improve a firm’s competitive context or ‘‘factors in the external environment that significantly affect the underlying drivers of competitiveness in those places where the company operates’’ (Porter and Kramer 2006, 85). These can include the quantity and quality of available personnel, the rules and incentives that govern competition, the size and sophistication of demand, and the availability of suppliers. For example, Honeywell partners with the National Aeronautics and Space Administration (NASA) in a middle school science education program in anticipation of a ‘‘talented workforce of scientists, engineers and technologists’’ (Honeywell International 2004). The study found that firms adopting collaborative approaches report improvements in products or services, access to markets, reliable supply chains, the shaping of future markets, and industry’s competitive structure. A number of firms make statements in the annual reports that link collaboration with innovation through new products and services. For example, Heinz sponsors studies and symposiums with leading nutritionists, dieticians, and physicians from around the world for bolstering nutrient content and reducing sodium and fats in ketchup, soups, sauces, and frozen foods. Examples of product improvements are especially evident in the durable goods industry, where technological advances provide a competitive advantage. International Business Machines Corporation (IBM) credits its engagement with ‘‘governments, academia think tanks and NGOs on emerging trends in technology, society and culture’’ for its innovative capabilities, products, and services (International Business Machines Corporation 2004). Raytheon states that it develops next-generation technologies through ‘‘research and development, government-sponsored programs, strategic industry partnerships, portfolio acquisitions, and relationships with U.S. universities’’ (Raytheon Company 2004). Ford expects that hydrogen-powered automobiles are possible only through partnerships involving industry, energy providers, and government. Service companies in highly regulated industries, such as
Table 5. Comparison of Means Regulatory Approaches Innovation Approach Regulatory compliance No Yes Strategic regulatory No Yes Total n 98 63 120 41 161 T-Score, Mean (SD) 1.14 .28 (.55) .19 (.40) –2.67** .17 (.40) .46 (.67) .24 (.50) CSR T-Score, Mean (SD) .91 5.53 (4.12) 4.94 (5.30) –4.38*** 4.39 (3.30) 7.93(4.78) 5.30 (4.03)
Note. CSR ¼ corporate social responsibility. ** p < .05. *** p < .01.
Discussion
This study finds that firms able to respond to multiple stakeholders through socially responsive actions experience greater innovation. Results show that responsiveness to customers, employees, and the community has positive effects on innovation, whereas responses to regulatory stakeholders have negative effects on innovation. However, while regulatory responsiveness decreases innovation when firms expend resources only on compliance, this negative relationship is not evident when the firm embraces strategic approaches to regulatory issues. Results further support that firms adopting voluntary programs or engaging in collaborative initiatives are more innovative than are firms focusing only on compliance. The study also shows that regulatory compliance, while a necessary part of doing business, does not mean greater CSR. However, strategic approaches have a positive effect on CSR. Hence, support is provided for initiatives such as the UN Global Compact that stress voluntary and collaborative efforts in addressing social issues.
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Table 6. Summary of Hypotheses Tests Hypothesis 1 Hypothesis Hypothesis Hypothesis Hypothesis Hypothesis Hypothesis Hypothesis 2 Hypothesis 3 Hypothesis 4 a 401
1a 1b 1c 1d 1e 1f
Innovation is affected by stakeholder responsiveness Customer responsiveness þ ! innovation Employee responsiveness þ ! innovation Supplier responsiveness þ ! innovation Shareholder responsiveness þ ! innovation Community responsiveness þ ! innovation Regulatory responsiveness – ! innovation Strategic regulatory approaches alleviated the effect of regulatory responsiveness on innovation Strategic regulatory approaches þ ! innovation Strategic regulatory approaches þ ! corporate social responsibility
Supported Supported Not supporteda Not supported Supported Supported Supported Supported Supported
Opposite sign than expected.
insurance and energy, are more likely to focus on compliance than other industries; however, collaborative approaches can result in innovative new service offerings. For example, Allstate mentions that by working closely with state officials, they are able to provide better insurance protection against hurricanes. Duke Power reports that working with regulators provides for favorable outcomes for customers and the company. A number of firms mention access to market segments as positive outcome of collaborations with government or nonprofit organizations. FedEx Express attributes its competitive advantage in the Chinese market to ‘‘a very good relationship with the Chinese government . . . to ensure we are continuously balancing market demands with government regulations’’ (FedEx Corporation 2004). Colgate-Palmolive partners with the Royal Society for the Prevention of Cruelty to Animals in Australia to counsel pet adopters on the importance of nutrition and the benefits of Science Diet pet food. Aetna sponsors a public education campaign with the Financial Planning Association to help women understand how to choose and use their health benefits better. Especially for consumable products, collaborative approaches with the government and nonprofit organizations focus on achieving a reliable supply of high-quality materials for production. Starbucks is known for its work with organizations to help coffee farmers to improve their quality of life, including collaborating with farmers to implement new and sustainable farming techniques. Pepsi shares its expertise about potato farming with the Chinese Ministry of Agriculture to ensure materials for snack foods marketed in China. Similarly, Pepsi has improved the water supply for the Kerala area of India. Hershey works with the World Cocoa Foundation to ensure that cocoa is grown responsibly and to support income improvement for cocoa-growing families. Increasing demand for a firm’s product and services is a stated outcome of collaborative approaches within the computer industry. Hewlett Packard states that their ‘‘engagements in underserved communities are strategic to our business as much as they are philanthropic. By introducing digital solutions in emerging economies, we learn how our portfolio might be leveraged in ways we never imagined’’ (Hewlett Packard Company 2004). The computer firm has a number of collaborative projects in Africa, including one with the South African government to train residents of a local community in PC
literacy. Intel also has a number of programs to help enable a worldwide computing ecosystem. They state, ‘‘We are working with governments in several countries on programs aimed at increasing PC and Internet literacy, and making computing more accessible to larger segments of the population’’ (Intel Corporation 2004). Some projects include collaboration with government and other industry partners, such as a Jordanian government initiative to develop a knowledge economy by partnering with HP, Microsoft Corporation, and Cisco Systems to develop curricula, provide technology support and equipment, and work with local companies to enhance the country’s information technology industry. Other benefits of collaborative approaches include lowering costs and regulations within the industry that can change the competitive environment of the firm. General Electric, Cinergy, and Bechtel are working on solutions to substantially change the coal emissions game and help bring down the cost of power from these plants. Altria Group discusses their ‘‘success working with governments to secure fair excise tax structures in many of its key markets, with numerous countries adopting minimum excise taxes and several considering the adoption of minimum reference prices’’ (Altria Group Inc. 2004). Local phone companies participate in a coalition to reform federal telecom law to allow them to compete with cable, wireless, and other communications platforms in the marketplace. Bellsouth states, ‘‘Through the Future . . . Faster coalition, we are working with like-minded industry constituents who believe that competition and consumer choice will do a far better job of driving telecom to its full potential for our nation than heavy government regulation’’ (BellSouth Corporation 2004).
Limitations and Future Research
The current study contributes to the overall understanding of the voluntary inclusion of stakeholder interests within the competitive calculus of the firm. This research also delves into compliance versus strategic approaches for responding to pressures from regulatory stakeholders. In so doing, it has allowed a comparison of both approaches on firm outcomes of innovation and CSR. Such comparisons contribute to our understanding of the regulation–innovation paradox that while regulations may
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402 seek to encourage innovation, the costs of compliance can detract from firm innovation. Strategic approaches to regulatory stakeholders can lead to greater innovation and CSR when managed effectively. One study suggests that the quality of implementation for voluntary environmental certification varies among firms as they strategically select the extent to which they comply with the standard’s requirements (Christmann and Taylor 2006). Likewise, collaborative efforts with government and NGOs may not always generate positive social benefits. Polonsky and Wood (2001) highlight issues with implementing cause-related marketing partnerships with nonprofit organizations that could apply to regulatory collaborations. They argue that such partnerships must be examined regarding their impact on society. While this research provides insight into the benefit of a strategic regulatory approach, the question of benefits to society prompts further research. Further research is needed to examine the antecedents for effective strategic regulatory approaches. Compliance with the UN Global Compact or industry guidelines are difficult to gauge from self-reports (Grein and Gould 2007). Collaborative partnerships may be unsuccessful in meeting the objectives of the firm and the governmental agency. For example, many pharmaceutical company efforts to develop and distribute drugs in developing countries fall short of meeting needs in resource-poor nations that lack an adequate health and distribution infrastructure (Hale, Woo, and Lipton 2005). Additionally, the ability to respond to external stakeholders is a function of top management commitment and is affected by the industry in which the firm operates (Banerjee, Iyer, and Kashyap 2003). While type of industry was not significant on the innovation of the firm, further research should incorporate competitive intensity and the firm’s position in the industry in relation to competitors. The research is not without limitations. Although the study incorporates a selection of industries, it is limited to a nationwide sample of public companies that may inhibit its applicability to international contexts and alternate ownership structures. For example, a recent study suggests that regulatory effects vary by the economic development of a nation, finding negative effects of regulatory complexity on entrepreneurship only in low-income countries (Bowen and De Clercq 2008). Future studies could incorporate information from databases similar to those used in this study that are available in Europe. Including privately owned companies would require extensive collection procedures through surveys or analysis of corporate communications. Either approach would significantly contribute knowledge by determining whether and how these results differ between geographical regions or ownership structure. The use of the KLD database as the major data source may contribute to common method variance. While relying on prior studies, the classification of KLD items by stakeholder group could influence results, thereby further validation would strengthen the KLD database as a reliable measure. Additionally, measures for innovation and CSR from other sources could substantiate the findings. However, a combination of
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Journal of Macromarketing 29(4) methods incorporating quantitative and qualitative techniques was used for examining outcomes from regulatory approaches of the firm. Primary data collection through surveys or interviews would strengthen our understanding of the phenomenon. The study was cross-sectional, using secondary data and content analysis of annual reports for the year 2004, with lagged outcomes for the year 2006. Cross-sectional research only enables the examination of relationships at one point in time. As a result, while there is support for a relationship between a strategic regulatory approach and greater firm innovation and CSR, causality could not be definitively determined. The relationships may be recursive, because some studies find that more innovative firms engage in voluntary programs (Koehler 2007). A replicated study with longitudinal data would be beneficial to increase confidence in measures and models assessed in this study.
Conclusion
In conclusion, this study provides evidence that firms can enhance their own objectives by internalizing the objectives of most stakeholder groups. That suggests that society’s objectives, as defined by stakeholders to the firm, can be augmented by the self-interest motivation at the heart of a market system. Specifically, the impact of stakeholder responsiveness on innovativeness, particularly new product development, was examined. Other studies have demonstrated the relationship between innovativeness and firm success in achieving the sustainability and competitiveness that is so important to larger societal objectives. The second objective of this study was to explore the impact of compliance versus strategic firm regulatory approaches on firm innovativeness and CSR. Specifically, the research allows understanding of how firms can alleviate the negative effect that attention to regulatory stakeholders has on innovation. Findings suggest that regulatory responsiveness decreases innovation when firms expend resources only on compliance. Firms adopting strategic regulatory approaches demonstrated not only greater innovativeness but also greater CSR overall. This study presents empirical tests that provide a strong first step in understanding how society’s goals can be internalized into the engine of the market system. The implication is that both firms and regulators can find areas of win–win, with society as the beneficiary. The logical extension of this work is to strengthen these promising findings with additional study and to refine the contexts of investigation to specific firm and regulatory operational theatres. Declaration of Conflicting Interests
The authors declared no conflicts of interest with respect to the authorship and/or publication of this article.
Funding
We appreciate the financial support from the Center for International Business Education and Research at Michigan State University.
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Bios
Tracy L. Gonzalez-Padron is an assistant professor of marketing at the University of Colorado at Colorado Springs, with research interests and publications in corporate social responsibility, marketing strategy, and international business. Robert W. Nason is professor of marketing at Michigan State University; was editor of the Journal of Macromarketing, 1987 to 1997; and was elected the first president of the Macromarketing Society, 2003 to 2007.
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