The chapter concludes highlighting emerging and future research directions. Similarly, citation counts between and November stand at 16, Academic interest in VI has been steadily growing. Such a steadfast interest has manifested in VI research being found in multiple disciplines, as well as theoretical traditions. VI literature can situated within several disciplinary domains such as strategy, marketing, international business, and corporate finance Grant, Furthermore, VI research spans through a myriad organizational issues; including inter-firm relationships, such as buyer-supplier relationships e.
The manifold research approaches have thus led to not only to a conceptual ambiguity in the field, but also to a bewildering array of empirical findings and theoretical claims. These exclude other document types e. Moreover, due to the lack of construct clarity, scholars may be limited in their ability to more effectively draw on the work of others to re-evaluate extant theory and further strengthen the conceptual foundations of the field Suddaby, It is within this backdrop, that this chapter takes stock of the literature guided by the following research questions: i what are the boundaries of the research field, that is, the dominant disciplinary, methodological, and contextual orientations of VI research?
Results shall help in synthesizing the literature that thus far has grown in disparate directions. This systematic review reveals three key insights. Furthermore, literature shows a developed market focus. The latter two insights relate to ways in which VI is defined, and to the major phenomena to which it is applied i. As far as definitions are concerned, the literature tends to coalesce around two main categories, rooted in the two most popular theoretical approaches deployed for the study of VI, namely, transactional cost economics TCE and the resource based view RBV.
Each of these themes have been deemed to be underpinned by a specific VI definition, as well as to focus on certain contexts or units of analysis i. Starting off the theoretical underpinnings of VI research, I derive the construct definitions most commonly used in the field. Around these major definitional categories, I proceed to classify the literature by identifying major themes that, in turn, help in identifying gaps for future research.
In sum, this effort not only intends to clarify the ambiguity about VI that emanates from a multiplicity of research approaches that characterize the extant literature, but also aims to guide future inquiry so that VI knowledge may cumulate more systematically. The rest of the chapter proceeds as follows. First, I describe the methodology employed to conduct the literature review. Second, I situate the field in terms of its disciplinary, methodological, and contextual orientation. Third, I identify conceptual divergence in VI research and key themes to organize the literature.
Fourth, I pinpoint emerging research directions and put forth suggestions for future research. Finally, I discuss my findings and conclude. The protocol followed for the present work has been modelled on similar reviews published in leading management journals e. The methodology entails three main stages -sampling, coding, and analysis -, which are described below.
Web of Science Social Sciences Citation Index 11 constitutes one of the most comprehensive repositories of peer-reviewed journals in social sciences. The feature of citation counts allows triage of a large pool of articles based on an objective measure of influence2. The algorithm includes the family of stemmed words e.
Results cover all research complying with the former criteria published as of 10 May In building the sample, a grouping strategy similar to Crossan and Apaydin was deployed. Considering that citation-based selection discriminates against recent publications, a second group of papers for the period which were published in the top 40 Financial Times Research Rank journals4 were retained, regardless of their citation count. Accessed 17 January After going through the abstracts and introduction sections of each of the articles, four articles were excluded because VI was not their main focus.
Final sample thus yielded relevant articles. The sample covers a majority of papers where VI was declared as the dependent variable or outcome of interest 65 articles, 59 percent of sample. In addition, the search algorithm captured studies that while VI continued to be the focus, the outcome of interest was the economic and non-economic5 performance implications of VI decisions 33 articles, 30 percent of sample.
Finally, a third group of articles had the synthesis of VI-related knowledge as its main concern 12 articles; 11 percent of sample. Content analysis aims at reducing data and facilitates analysis of a large quantum of text Krippendorff, Coding was done using a formalized and inductively derived codebook. To ensure plausibility and reliability, I conducted two rounds of coding, the second involving an independent researcher.
Differences were used as opportunities for either expanding or clarifying the codebook. In a third round of analysis, over a consensual codebook, within-theme and between-theme comparisons were employed to identify and elaborate themes e. Pattern matching consisted of gross matches and mismatches between each paper and the discrimination criteria. Explanation building, in turn, entailed comparing the findings from different studies on an iterative basis Yin, Overall, most influential papers on VI are published in 24 leading management publications and seven disciplinary domains general management, organizational behavior, 14 organizational theory, strategic management, marketing, finance, and international business , manifesting the interdisciplinary nature of the field Figure , see Appendix A for abbreviations.
Figure Articles per Publication Despite the multiplicity of disciplines converging on the study of VI, the bulk of the research accumulates under strategic management 64 percent , followed by marketing 14 percent , and organization theory 11 percent respectively. It can be concluded that VI has been typically subjected to quantitative inquiry. The third largest group of studies 12 percent have been conducted in Western European countries.
In terms of the range of economic sectors that served as contexts where leading research has been conducted, the distribution is far less concentrated. Over 25 different participating industries have been identified in the results. In fact, the largest portion of studies have been categorized as cross industries studies 17 percent, 19 out of The second largest group makes up to 7 percent of in-sample studies 8 out of Therein researchers have examined VI issues in the automotive industry.
I describe these below. These studies are concerned with supplier-buyer relationships e. In most cases, these theories were not used in the conceptual framework of the in-sample articles in a stand-alone basis, but in combination with others. Appendix B provides a definition of each, their seminal references, added to the in-sample frequency and applications from the results.
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However, when considering TCE or RBV in combination with other theories, this sub-sample yields 89 articles, representing 81 percent of the total sample. The primacy of TCE is explained by the fact that VI has been the foundational problem for this theoretical tradition Williamson, TCE research dates to the work of Ronald Coase in the early twentieth century. Coase's main purpose was to explain why economic activity was organized within firms Coase, , From a Coasean perspective, the firm was seen akin to a long-term employment contract through which an authority relationship is established Knudsen, A resource owner would grant an entrepreneur authority to decide what tasks the resource ought to perform, giving the firm certain flexibility to adapt to unforeseen events Coase, Relatedly, the concept of VI, was associated to the idea of a firm taking over or growing along a value chain.
Thus, VI referred to the vertically-linked activities that were performed under a single firm. Oliver Williamson , , building upon Coasean economics, formally proposed transaction cost economics TCE theory, becoming one of the mainstream frameworks to study VI. The latter involved determining when would partners rely on either market relationships, or authority-based 18 mechanisms i.
It identifies the various dimensions -such as the frequency of interaction between partners, or the amount of uncertainty about an input an input and its related activities-, along which transactions differ from one another Williamson, Notably, Williamson emphasized the transactional risks related to specific assets or investments, which may be vulnerable to expropriation by an opportunistic partner Williamson, Hence, economic exchange would typically generate transaction costs Williamson, Overall, in terms of the VI decision, the basic argument emanating from TCE is that the greater the frequency of interaction between partners, the greater the uncertainty, the more specific the assets deployed in the relationship, and the more opportunistic the parties, the higher the transaction costs will be, such that would lead firms to vertically integrate.
Fundamental changes in the economic environment led to a significant decrease in transaction costs e. Accordingly, contemporaneous empirical studies suggested that VI would reduce firm value e. Teece contended that for a firm to efficiently engage in VI, economies of integration were not sufficient, but rather those based on the common and recurrent use of resources, and particularly, of proprietary know-how Teece, , Penrose then focused on the distinctive ways by which firms can manage their resources and capabilities to build up competitive advantages that would result in superior performance Penrose, ; This perspective laid in the fields of sociology e.
From this perspective, a general prediction concerning VI decisions is that higher levels of trust -generated as a result of personal relations that arise in the course of economic exchange-, create a sense of duty or obligation such that mitigates the associated hazards of using markets. Upon the whole, trust reduces the need to establish authority relationships within a vertically integrated firm to carry out effective exchanges. On the one hand, when used along TCE, studies typically focus on the role of repeated social interaction and trust in reducing hazards inherent to market exchange e.
Figure summarizes the evolution of the theoretical orientation of VI research. Still, these two broad categories allow for a useful classification of the literature. The herein proposed definitional categories that emerged from the data have been deemed to diverge not only in terms of the underlying theories of the firm -and the corresponding rationale for VI-, but also in terms of how the firm and the value chain are conceptualized. This distribution replicates across management disciplines, as per Table I describe each definition in detail below.
In addition, the firm is conceptualized as an adaptive institution, made up of contractual relationships among rational and opportunistic agents, emerging in response to uncertainty Knudsen, While categories may co-exist e. Moreover, each of these themes have been deemed to be underpinned by a specific VI definition. In addition, the analysis identified that each theme focuses on certain units of analysis i. For the first theme i , 83 percent of the articles employ the MAOB definition. Similarly, in the second theme ii , 67 percent of the study use the MAOB definition.
In these themes i and ii , the research focus is on dyadic or inter-firm relationships. Here, research has focused on more than one unit of analysis: while a largest group of studies concentrates of dyadic relationships 28 articles , a second group examines VI issues at the micro or individual level 4 articles. The fundamental unit of analysis in this theme is intra-firm relationships. Emerging themes and units of analysis, together with theoretical underpinnings and definitions, gather now all the input elements to map out the VI research field.
Figure summarizes the organizing framework. The forthcoming sub-sections shall be devoted to 9 The themes capture 98 out of in-sample papers. Figure VI Organizing Framework 26 Proponents of VI as a substitute of relational contracts borrow from SET and argue that social norms play a significant role in structuring market exchange. Moreover, it is contended that while TCE typically treats each transaction as discrete Gulati, , repeated interaction between partners can breed commitment, coordination, and trust, which, in turn, reduce market hazards that would otherwise call for VI e.
Collaborative inter-firm arrangements would be thus viable even when specific investments might be exposed in the relationship e. On the other hand, a second sub-group of articles under this theme offers a more nuanced view of relational contracts, as complements of VI. The combination or co-existence of governance forms can help firms address different needs. More recent studies highlight that partnering on the sole basis of relational contracts may require substantial time and effort to maintain a high level of cooperation and forestall deception among partners e.
Moreover, interpersonal relationships may not offer enough buffer against price and product competition Wathne et al. Therefore, firms would typically use a combination of contractual safeguards e. As a general trend, innovations in information technology and performance measurement in the late twentieth century and early s, as they reduced information processing costs and task complexity, have been conducive to enable higher specialization i.
Yet again, technology disruptions typically create both new firms and industries Baldwin, ; Jacobides, At inception, the growth opportunities of a new technology are uncertain Folta, Some scholars argue that at higher levels of 28 uncertainty, higher levels of commitment to a specific technology with VI might be less desirable e. Others contend, however, that VI may outperform specialization. They argue that VI may help firms to innovate over multiple cycles of technological innovation due to accumulated investments in integrative capabilities e. Another source of environmental dynamism considered in relation to VI has been the level of country risk in the context of foreign market entry decisions.
Research suggests that, for services firms, wholly owned operations i. Within this theme, the largest sub-group of studies concentrates on inter-firm relationships, whereas a second sub-group examines VI issues at the micro or individual level. I describe these in detail below.
Performance advantages economic and non-economic of VI have been deemed to be higher when tasks are ill-structured e. Conversely, outsourcing would be more advantageous when activities are well structured or simple Macher, In general, knowledge and resources complementarities both within the firm and with exchange partners , are argued to be at the root of performance disparity of VI decisions e.
Here, VI implies transferring the ownership of a productive team Williamson, Findings suggest that whereas using employees i. Hatch and Dyer find that firms that are superior at acquiring human capital may enjoy sustained learning and cost advantages. Studies have found grounds for partial or quasi-integration, both 31 at the firm and individual level. Herein, VI has been considered as a tool to achieve coordination across value-adding activities and functions by aligning incentives and reducing information asymmetries e.
Among this group of studies, team composition has been proposed as an influential moderator of the relationship between VI and firm coordination. Recent research highlights the role of generalist team members who are acquainted with the multiple functions, and can facilitate the coordination of the overall system. However, a balance between specialist and generalist members should be struck, since a broad focus of the latter may distract organizational attention from specialized, yet high-impact activities de Vries et al.
However, vertically integrated firms can realize higher performance benefits provided their members may adapt the configuration of their social capital to changing resource needs. In this context, it is of interest to determine whether an integrated organizational structure i. Recent studies find grounds for partial or quasi-integration. The complexity of vertical boundaries has intensified in recent years stimulated by increased competitive pressures, the velocity of technological change, and the dispersion of knowledge across different organizations and geographic markets; explaining the popularity of global outsourcing and offshoring practices Lahiri, In this regard, among the most recent publications in the sample, I identified an emerging strand of research within the second major theme i.
I discuss these in detail below. First, a publication by Kim and Davis , examines the question of what makes a firm capable to vouch for its value chain. Moreover, supplier complexity i. Authors argue that, during the latest subprime crisis in the United States , vertically integrated banks with better corporate governance practices showed better loan performance since they had adequate incentives to avoid overaggressive lending and fraud. This emerging line of inquiry underscores that, as production moves to locations where regulatory institutions may be weak or even absent e.
Specifically, the advent of CSR may nuance formerly predicted relationships or even predict VI in ways that are not yet examined. For instance, socially responsible firms might want to take greater control over previously outsourced elements that reside in developing markets. Additionally, these insights resonate with some of the earlier findings of this review, pertaining to VI research strong developed market focus. Whereas empirical evidence is yet missing, I acknowledge these issues have received partial treatment in the TCE literature.
Williamson suggested that we should observe more VI in developing countries where rule of law and enforcement are relatively more deficient, granted that weaker institutions would increase the likelihood of more incomplete contracts. Furthermore, the above identified emerging research directions hold promise in terms of new theoretical lenses, aside from TCE and RBV, starting to gravitate to the study of VI.
By adopting an organizational institutionalism lens, future research may help broaden the conceptualization and operationalization of the external environment so that it can better reflect the complexity of the strategy construct by incorporating more layers or dimensions e. In sum, promising avenues for future VI research would include: i a broadening of focus to encompass emerging countries with lower levels of institutional development; ii an in-depth investigation of the relationship between CSR and VI; iii the adoption of organizational institutionalism lenses to the study of shifting vertical boundaries.
The present work attempted a transparent review method followed by meaningful synthesis of VI research. Despite efforts to rigorously synthesize the literature, I acknowledge that the scope of this review is limited to a specific sample of this broad body of literature. The review was structured around four research questions that intended to gather the main input elements to map out the research field. Namely: i the dominant disciplinary, methodological, and contextual orientations in the field; ii the major theoretical lenses that 36 underpin VI research; iii the VI definitions across the literature; and iv the major emerging themes and findings.
As far as disciplinary and methodological orientations concern, the VI field has shown strong roots in the strategic management discipline, which arguably follows from its origins in Economics with the work of Ronald Coase. Moreover, VI has been chiefly subject to quantitative inquiry, with correlational designs as the most popular method of choice. These insights resonate with extant research on the development of strategic management, suggesting that this discipline paradigmatically adopted the style and the language of economics i.
In relation to VI research contextual orientation, results present a developed market focus. In addition, regarding units of analysis, results indicate that VI issues have been studied at three different levels: i how firms interface with other independent firms inter-firm relationships , ii how different units within the same firm interface with one another intra-firm relationships , and iii how firms deal with individual human resources micro-level relationships.
The relative adoption of these paradigms among VI researchers have been argued to underpin a conceptual divergence in the field. This review offered a novel typology of VI definitions being employed across the literature. While I do not claim mutual exclusivity between the two proposed categories i. The analysis further revealed that the received literature revolves around four major themes.
VI constitutes one such tool in that strategic toolbox. If firms integrate the wrong activities, the may grow bloated and inefficient. At the same time, if they outsource core activities that heavily draw from their wealth of know-how, firms may lose the very sources of their competitive advantage. Finally, the review allowed to derive important knowledge gaps and point out promising avenues of future research. Notably, in the context of modern global value chains, as socially and environmentally concerned stakeholders exert pressure on firms to remain accountable over elements along the value adding process, VI decisions may be predicted by non-economic factors, such as CSR, that have thus far been only partially considered.
As suggested, the integration of CSR with VI research may offer good prospects for the continued vibrancy of the field. Two competing hypotheses are entertained. Transaction cost economics TCE , in contrast, predicts that CSR would increase transaction costs pertaining to vertical coordination and monitoring, leading to higher VI. Controlling for endogeneity, panel data results show that higher CSR performance is associated with higher levels of VI. Results are thus consistent with a TCE logic. Findings suggest that high CSR performers would face growing outsourcing costs, increasing the attractiveness of VI to keep supply chain operations under control.
Many studies have concluded that vertically disintegrated firms those that typically outsource their activities can reap significant economic gains from improvements in the bottom line as production shifts to more cost-efficient vendors and locations; while also benefitting from the knowledge of their suppliers worldwide e.
Global firms are required to justify their decisions and actions for sourcing, production and distribution to external stakeholders, to ultimately remain accountable for all upstream and downstream activities Parmigiani et al. Moreover, while firms slice their value chains into smaller pieces through outsourcing, their risk of negative reputational spillovers associated with potential third-party misconduct may increase Short et al.
Take for example the recent case of Ferrero, a global player in the confectionery industry. In September , in order to advance their goal of achieving an ambitious CSR target -i. The fundamental goal of this chapter is to shed light on this question. On the other hand, TCE suggests that CSR may increase transaction costs pertaining to the vertical coordination and monitoring of the value chain, leading to higher levels of VI instead Heide et al.
The objective of this study is to reconcile this theoretical dilemma. To do so, I use competing hypotheses as my research framework. After controlling for endogeneity, I find that higher levels of CSR 41 performance are associated to higher levels of VI. Results suggest that high CSR performers would face growing costs from outsourcing, increasing the attractiveness of VI to keep supply chain operations under control.
More broadly, findings about a positive relationship between CSR and VI have important implications for the management of value chains that deserve further research. Notably, the fact that to be able to trade with high CSR performance buyers, suppliers must credibly signal their CSR engagements at low costs to prevent buyers pursue VI. If suppliers do not show high levels of CSR performance, or if they do but are not able to signal their CSR commitments, they would be constrained to partner with buyers that do not prioritize CSR. As a result, different coalitions of buyers and suppliers in terms of their CSR engagement may emerge.
Buyers with higher CSR performance would seek to trade with high CSR performance suppliers, whereas buyers with low CSR standards would be more willing to trade with external partners regardless of their CSR performance, most likely favoring low cost suppliers. The remainder of the chapter is organized as follows.
Following this introduction, I first introduce the relevant conceptual background. Second, I develop the research framework using 42 competing hypotheses. Third, I present the empirical strategy and analyses. After presenting the results, I discuss the implications of my findings for theory, practice and future research. As firms undertake a larger number of vertically-linked activities in-house, it is said that they increase the level of VI, or their vertical scope. For example, CSR critics e. CSR proponents, in contrast, present arguments that range from ethical e.
In a comprehensive review, Carroll and Shabana , identify four broad categories of benefits that firms can reap from their CSR commitments: 1 cost and risk reduction; 2 strengthened legitimacy and reputation; 3 competitive advantages from stronger relationships and support from key stakeholders; and 4 enhanced financial performance.
In terms of VI, anecdotal evidence suggests that firms CSR engagement might be a relevant factor in consideration, affecting such strategic decisions. Notwithstanding, such evidence is, at best, mixed, as it lies on both possible sides of the argument concerning the link between CSR and 44 VI. Namely, some pieces of evidence suggest that CSR might negatively affect VI, whereas other suggest the reverse.
On the one hand, a recent case study on Barilla, one of the most important pasta producers worldwide, concerned by the declining quality of their food products, initiated in a sustainable farming program that consisted of partnerships with small-holder farmers. This initiative aimed at helping small-holders replacing monoculture with crop rotation by means of supporting their decision-making, and generating widely-accessible guidelines for sustainability-oriented cropping practices.
This way, the latter would offer an example of how CSR engagement might decrease the need of VI, fostering collaboration among value-chain partners. On the other hand, Taylor Guitars, concerned by the quality and sustainability of their products, decided to acquire an ebony mill in Cameroon in , given that the endangered wood is preferred for guitar fingerboards. The company has since been actively engaged in sustainable ebony harvesting and processing in their wholly-owned mill Similarly, in , IKEA, the Swedish furniture giant, backward vertically integrated into forest land in Romania to secure a long-term access to sustainably managed wood, marking the first time the company manages its own forest operations In the following section, I propose competing hypotheses to address this inquiry.
Here, economic exchange is understood in a larger context of social interactions that relies on cooperation among partners Granovetter, More specifically, CSR may enable supplier-buyer collaboration via two main mechanisms: 1 shared norms; and 2 the use of network ties. First, as global firms operate in a context of interconnectedness, where their performance depends critically upon their linkages to 46 other firms Oliver, , it becomes incumbent upon them to signal their trustworthiness.
High levels of CSR performance would help firms not only to attract, but also retain suppliers who want to associate with reputable customers Chen, As suppliers share professional norms with their buyers, the more likely high-trust cooperation would arise between partners Husted, Yet again, the latter increases the incentives to outsource activities.
In sum, the RG perspective argues that in improving their CSR performance, firms develop valuable relational capital that mitigates information-gathering problems and conflicts, and increases trust and collaboration. This would lead to trust-based inter-organizational exchange, with increasing incentives to favor market exchanges. If there is no specificity in the relationship, then the buyer can shift to a different supplier without much penalty which, in turn, would eliminate the credibility of future rewards to the external supplier.
In other words, credibility is enhanced when the buyer risks losing value from defection Williamson, This interaction may also be rationalized from a different angle: higher incentives for collaboration are most useful when the risk of opportunism is higher, that is, when specificity is present in the transaction. This way, higher CSR performance and geographic diversification would have a mutually reinforcing, weakening effect on VI.
TCE posits that it is calculation and not trust what, at the end of the day, will determine the extent of cooperation in buyer-supplier relationships Williamson, , , I thus argue that, if the enforcement of these CSR standards is weak, then monitoring will be needed as a mechanism to economize measurement transaction costs Barzel, Monitoring efforts, nonetheless, may come along with higher transaction costs Ouchi, Incorporating these new actors increases transaction costs, given that firms need to identify reliable partners, craft contracts and enforce compliance mechanisms Acquier et al.
Second, monitoring can be perceived as a signal of distrust from the side of suppliers Heide et al. Moreover, under high monitoring levels, a common reaction of the distrusted party i. In sum, from a TCE perspective, higher levels of CSR performance increase the comparative costs of outsourcing via 1 the incorporation of new actors along the supply chain i. To reduce reputational risks of offshore outsourcing, global firms typically require overseas suppliers to comply with globally recognized standards on environmental sustainability, working conditions, and human rights, which their adherence will be monitored Montiel et al.
Buying firms, however, lack embeddedness in the information networks of the host country. As transaction costs pertaining to enforcing compliance rise, incentives to perform activities internally increase. I thus argue that the positive link between CSR and VI will be stronger for more geographically diversified firms.
This approach intends to contribute to a general understanding of vertical boundaries, overcoming the inherent limitations of cross-sectional, case, sector-specific surveys, or field data. Based on the inherent difficulties in quantitatively measuring VI in the financial and media sectors e. I 54 draw from Global Compustat database to measure VI as it provides panel data for a large population of global firms. The sample includes firm-year pairs from 49 industries, belonging to 19 major industry groups as per Global Industry Classification GIC Standard, across 11 countries.
Sample distribution across industry groups and countries is described on Tables and , respectively. Hybrid methods are unsuitable for cross-industry research as it is my purpose here. To calculate the 12 Following Tucker and Wilder , I measure value added for each firm -year pair as the sum of the following items, which were obtained from Global Compustat: depreciation and amortization, interest expense, labor and related expense, pension and retirement expense, incentive compensation expense, income taxes, net income and rental expense.
Thomson Reuters ASSET4 provides an objective, relevant, auditable, and systematic information tool for investors, who can integrate environmental, social, and corporate governance elements into their investment analysis and decisions. Since , ASSET4 has offered a comprehensive dataset for the assessment of corporate performance within the three CSR pillars: 1 environmental performance; 2 social performance; and 3 corporate governance.
Every firm receives a score on each of these pillars every year. Indicatively, I note that for: 1 environmental performance, data would typically include resource e. Accessed 19 February Following the convention established by extant CSR literature that has assigned equal importance i. Consistent with previous research suggesting that vertical scope would be contingent to boundary conditions in the broader political and macroeconomic environment Peng, , models control for year and country fixed effects as well.
I anticipate that an increase in the receivables to sales ratio, reflects a decrease in the availability of short-term financial resources that, in turn, reduces the likelihood of increasing the level of VI. Lastly, the dependent variable i.
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I thus control for firm business diversification, using the logarithm of the number of business segments as reported in Global Compustat. The nature of the longitudinal data required to run a series of diagnostic tests. However, I rejected the null hypothesis for the Wooldridge test for autocorrelation in panel data, indicating no evidence of first order auto-correlation. To identify the relationship between CSR and VI, I proceeded in a step-wise fashion using a three-pronged approach towards addressing endogeneity concerns. I describe the empirical strategy in detail below.
Considering the results of initial diagnostic tests, I conducted the analysis using panel-corrected standard errors Results, robust to heteroskedasticity, are presented on Table Model 2 tests moderation. I did not find significant main effects of business diversification, and only marginally significant in the case of geographic diversification. A key concern herein 62 is that my former results may be spurious, if driven by measurement errors or omitted variables bias.
The latter pertains to the fact that managers may decide upon CSR based on factors that may be unobservable, and may also affect how vertically integrated or dispersed their value chains are Bascle, I address concerns on potential endogeneity using instrumental variables estimation. To conduct the test, I generated two instruments for CSR. Having more than a single instrument is important towards being able to run a number of diagnostic tests to better assess their validity and relevance. Meanwhile, instrument relevance implies the existence of a strong correlation between the endogenous regressor and the instrument in question Bascle, Instrument exogeneity and relevance are pre-requisites for robust inference using instrumental variables estimation Wooldridge, I generated exogenous variation of CSR at the firm level creating an additional instrument by calculating the average CSR i.
I used two-stages least squares 2SLS estimation robust to heteroscedasticity and autocorrelation. Following Bascle , I implemented the analysis specifying a generalized method of moments option that allows for clustering errors at the firm level. This specification is deemed to yield efficient estimates and valid inference Wooldridge, Results are presented on Table A first baseline model Model 3 contains industry, country and year fixed effects, along main effect variables, and firm level controls. In a subsequent step, I introduced moderating variables Model 4. I report the results of three post-estimation tests to show that instruments satisfy the conditions of exogeneity i.
First, the rejection of the null hypothesis of the underidentification test Kleibergen-Paap LM statistic, robust under heteroskedasticity indicates that the model is identified for the data. Second, the F-Statistic of Kleibergen-Raap rk Wald is over Model 3 and over 49 Model 4 , showing instruments are relevant and strong. Finally, the over-identification test Hansen J Statistic, robust under heteroskedasticity assesses whether instruments comply with the orthogonality condition.
If the p-value is small, this suggest the instruments are not exogenous. Model 4 tests moderation effects. Towards treating any remaining endogeneity concerns, this time those resulting from simultaneity bias i. I use three-stage least squares 3SLS as the estimation method to produce consistent estimates Wooldridge, In implementing the analysis, I used the same instruments for CSR as in 3. Table shows simultaneous equation results, which are presented in a step-wise fashion: Model 5 contains industry, country and year fixed effects, along main effect variables and firm level controls; Model 6 tests for moderation effects.
However, a close inspection of the estimated coefficients shows that CSR performance has a higher economic effect compared to VI This is equal to 35 percent of the standard deviation of VI. This is equal to 27 percent of the standard deviation of CSR. I present these analyses in the Appendix C. Furthermore, Hypothesis 4a and Hypothesis 4b are supported. The latter proposed positive moderation effects of asset specificity and geographic diversification, strengthening the positive relationship between CSR and VI.
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Hence, data offer support to the TCE perspective. However, CSR has been traditionally associated with the voluntary integration of social and environmental aspects into corporate activities Vogel, I thus ran additional analyses considering the distinct effects of the social and environmental performance pillars, excluding corporate governance. I first ran instrumental variables regression using the average social and environmental scores for each industry-year pair, excluding the contribution of the focal firm, as my instruments for social and environmental performance respectively.
I therefore 69 proceeded by the analysis using panel-corrected OLS regression. Results are reported on Table In contrast, environmental performance shows no significant effect in relation to VI. In fact, when industry fixed effects are removed, the coefficient of environmental performance becomes positive and significant.
The literature presents a theoretical dilemma that this work aimed to reconcile. This dilemma relates to whether firms with higher levels of CSR tend to integrate more operations inside their boundaries to keep further control of their supply chain, or outsource more activities to take advantage of the additional trust with external suppliers. Results provide evidence that higher CSR performance would expand firm boundaries, as is it associated with higher levels of VI. Confidence in results relies on an identification strategy attentive to endogeneity concerns. I have proceeded in a step-wise fashion in order to address three main sources of endogeneity: errors-in-variables, omitted variables, and simultaneous causality Bascle, The former two were tackled using instrumental variables estimation; whereas the latter concerns were dealt with using a simultaneous equations specification.
Despite my efforts and consistent results, I remain cautious about inferring causality. First, transaction costs of market exchange increase because high CSR performers, as they value the social and environmental performance of their suppliers, would engage new actors i. I believe these findings contribute to the TCE literature. This way, my empirical analyses enrich TCE theory by developing a more explicit understanding 72 of the link between institutional environments and the institutions of governance Williamson, , In addition, I have considered global firms in their political role added to their economic position in society, as they operate value chains where value creation is organised among legally independent suppliers based in different countries Acquier et al.
Private governance refers to the ability of private actors such as global firms to self-regulate the processes and outcomes of their operations Rathert, That said, these findings also shed light into important areas of management practice. Undoubtedly, these are days when running global firms is not an easy task. Results indicate that high CSR performing firms would tend to increase their level 73 of VI to mitigate business risk.
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CSR managers are thus encouraged to pursue their agendas at the highest corporate level, given that a stronger synergy between CSR and corporate strategy would allow firms to be more effective in complying with increasing societal expectations on firms to support human rights, uphold environmental standards, and run their business on an ethical fashion. Even firms with the highest CSR standards will need to outsource some activities. These activities should be those in which the additional costs of undertaking them in-house surpasses the additional benefits accrued to monitoring the CSR performance of suppliers.
Hence, outsourced activities will tend to be those in which there are higher costs differentials in favor of third parties e. Finally, I recognize a number of limitations to my work. In this chapter, and consistent with important previous work in this area e. Nevertheless, data did not allow for a more disaggregated operationalization of CSR performance into its component activities e. Follow up studies should help in building up a more itemized understanding of the links between CSR activities and corporate strategies. Additional sources that Thompson Reuters utilizes to triangulate information include NGOs, independent news sources, as well as stock exchange filings.
Furthermore, the dataset has been validated by previous studies e. Moreover, having instrumentalized our CSR using the D-Social-KLD scores, which by construction are robust to measurement error, I maintain confidence in the data and results. Third, and as it has been mentioned, I remain cautious about inferring causality from the results.
Alternative interpretations cannot be ruled out. This evidence is consistent with the monitoring mechanism associated with the TCE perspective. However, it is open to alternative interpretations. For instance, more geographically diversified firms may have greater levels of integration because it is harder to find local suppliers in certain places, making a centralized integrated function relatively more attractive.
More generally, this illustrates the caveat of not using experiments to tease out the effects of interest. In particular, I have not explicitly tackled the relationship between global and local i. In sum, I submit that the joint analysis of CSR at the firm level and vertical boundaries provides important pieces and motivation for developing a more comprehensive theory of the firm. Indeed, CSR has been considered a driver of product innovation. Whereas extant literature has examined the overall effect of CSR on innovativeness, we still lack an understanding of which CSR elements may affect the rate of new product introductions NPI more than others.
The present chapter bridges this gap. Drawing from the knowledge based view, I theorize about how distinct CSR dimensions affect the organizational processes through which knowledge is absorbed and ensues NPI. Different theoretical mechanisms are hypothesized by which informal and formal CSR engagement may be associated with an increase in the rate NPI.
The implication of these findings is that while informal CSR would make a firm more innovative, formal CSR would not render NPI in itself, yet it would keep the firm accountable to secure necessary inputs to innovate. These studies argue that CSR may help firms in overcoming organizational inertia and, in turn, foster innovation and NPI Berrone et al.
The extant literature in this realm, however, considers CSR as a unidimensional construct and thus a fine-grained understanding of how various forms of CSR and associated activities may affect NPI has not yet been developed. I argue that the previous literature treatment of CSR as a unidimensional concept may have obscured the individual effects of its different elements on the rate of NPI.
This study attempts to bridge such gap. Different theoretical mechanisms are hypothesized by which informal and formal CSR engagement may affect the rate NPI. In addition, it can help in exerting effort devoted to innovative projects, since better monitoring and performance evaluation may mitigate agency problems associated with management engagement in value-destroying activities. Additionally, the positive effect of informal CSR on the rate of NPI is deemed stronger for firms that are more vertically integrated. The main implication of these findings is that while informal CSR would make a firm more innovative, formal CSR would not render NPI in itself, yet would keep the firm accountable and perceived as trustworthy to secure necessary inputs to innovate.
My empirical strategy relies on negative 79 binomial regression, suitable for the estimation of count dependent variables i. A generalized population-averaged model was employed, robust to the correlation structure of the panel. After running robustness checks, data provided either full or partial support to the proposed hypotheses. The contribution of this study is twofold. This knowledge, in turn, may be useful to build competitive advantages through NPI. The chapter is organized as follows. Following this introduction, I first introduce the conceptual background within which I define CSR as comprising informal and formal activities.
Second, I develop the conceptual framework and propose study hypotheses. Third, I present my empirical strategy and analyses. In the end, I present the results and discuss the implications of the findings for theory, practice and future research. CSR has been considered one such driver Nidumolu et al. Nonetheless, we still have not developed an explicit understanding of how its individual components may affect the rate of NPI.
For this reason, they have established employee programs, such as paid volunteering opportunities, where staff members may use their skills to make a social or environmental impact for the community, and this way enhance their sense of reward around their jobs CSR has been traditionally associated with the voluntary integration of social and environmental aspects into corporate activities e. However, the intensification of public scrutiny and governmental regulation in the aftermath of a series of corporate scandals in the late s and early s e.
Whereas foundational CSR and corporate governance literatures evolved in a relatively independent way due to apparently divergent foci - i. Moreover, the broadening of corporate governance, requiring firms to promote fairness, transparency, and accountability before both investing and non-investing stakeholders, has led to the adoption of a holistic approach that integrates company, shareholder, and wider stakeholder concerns under CSR e.
As a result, corporate governance is currently deemed an integral element of CSR e. It materializes into procedures to enforce legal compliance with external monitors e. As a whole, corporate governance activities aim to offer guides for decision making and reinforce discipline across the organization, to ultimately provide solid templates to run the business Jamali et al.
While acknowledging that a global institutional infrastructure of CSR has emerged -notably, with public and civil society sectors playing a key role in the uptake of CSR reporting Sandra Waddock, -, added to the fact that CSR is increasingly grounded in organizational protocols, and, in a number of cases, dedicated corporate functions Baumann-Pauly et al. Arguably, informal CSR emphasizes the emergent pattern of social interactions within the firm and with its stakeholders; whereas formal CSR emphasizes regulatory compliance, as well as the set of rules and structures for coordinating and controlling activities.
An additional concern that may arise regarding the informal-formal CSR classification, here introduced pertains to the characterization of formal activities. Should the latter be only circumscribed to compliance to laws and regulations, we would not likely observe any variability among firms along this dimension. This way, whereas the definition of the rights and responsibilities that need to be governed may largely stem from regulation notably, from the adoption of the Sarbanes-Oxley Act of , in the case of public firms , it is reasonable to assume that the implementation of governance structures to direct those objectives would vary from firm to firm Walls et al.
The forthcoming section connects formal and informal CSR with NPI, towards developing a finer-grained understanding on how each CSR element may serve as a catalyst for product innovation. The theoretical framework is summarized on Figure Accessed 28 June Thus, what makes firms more competitive is not only the specific knowledge and skill that employees bring with them, but also the tacit knowledge derived from continued interaction among organizational members Araujo et al. Second, informal CSR has been regarded an important relationship-based incentive for existing i. In addition, informal CSR as a relationship-based incentive has been deemed to have important implications for the knowledge absorption process i.
Upon the whole, informal CSR would prompt processes of organizational learning within the firm, such that they involve experimentation and the development of different commercial exploitation ideas that draw on both existing and new knowledge Fiol, Such learning processes have been deemed to develop into firm-level capabilities that may drive innovations e. The above discussion suggests that informal CSR is instrumental to an increased organizational identification Carmeli et al.
Recent research supports this conclusion as it is argued that interpersonal relationships and constructive dialogue within the firm - i. Conversely, a firm that more heavily relies on external contractors i. The economic value of contractors tends 88 to increase in the longer run, as they become familiar with the communication system among organizational members, as well as the peculiarities of their own specific task Kor and Mahoney, As workers walk out the firm, they typically take with them valuable skills and firm specific knowledge, eroding the firm knowledge base. The former discussion leads to the following conditional hypothesis: Hypothesis 2: The positive relationship between informal CSR performance and the rate of NPI is positively moderated by the level of VI.
Incentives are particularly important to supporting long-term value creation through NPI in publicly traded companies. Second, higher formal CSR performance is partly related to higher institutional ownership, which has been deemed to promote greater innovativeness Aghion et al. Third, higher formal CSR performance would allow for better monitoring and performance evaluation of managers such that they avoid shirking or engaging in other value-destroying activities Atanassov, To the extent that firms can contract with stakeholders based on trust and cooperation, firms will benefit from reduced agency and transaction costs Jones, The board of directors would offer valuable experience and advice on different technologies that would both 92 lead into more successful NPI, and assure investors an appropriate return on their investment Ho et al.
NPI was measured as a count reported in newspapers, magazines, scientific and industry journals. Product count is considered a robust measure of rate of NPI over a wide range of research settings e. To identify NPI, I use the Dow Jones Factiva database that includes news information from multiple sources, including industry-specific, technological, and scientific publications. The database offers over 35, sources, from countries, in 26 languages. Furthermore, Dow Jones Factiva allows for searches of results at the corporate level, allowing to capture NPI activity from all subsidiary companies, as well as from mergers and acquisitions which may have taken place during the period of reference.
This criterion yielded firms from 27 GICS industries. In terms of the time span, I collected data on our independent variables from to and on the rate of NPI data from to I ensured that independent variables are based on a temporal frame just prior NPI data and, by means of such time separation, the study design would allow for a stronger causal claim. This further restricts the sample to include firms that were at least 1 year old by The final sample consists of an unbalanced panel of firms, headquartered in 6 different countries, across 12 major industry groups, along 7 years, totaling observations.
Sample distribution across countries and industry groups is summarized on Tables and , respectively. Two independent coders checked headlines to ensure the content is about NPI rather than other company information. While their primary activity pertains to provide services to other firms, they engage in manufacturing activities. To cite but one example, Cintas designs, manufactures and implements corporate identity uniform programs, and provides entrance mats, restroom cleaning and supplies, tile and carpet cleaning, promotional products, first aid, safety, fire protection products and services and document management services for more than 1 million businesses Source: Factiva.
Thomson Reuters ASSET4 provides an objective, relevant, auditable, and systematic information tool for investors who want to integrate CSR with economic criteria into their investment analyses and decisions. Since , ASSET4 has offered a comprehensive dataset for the assessment of corporate performance within three CSR pillars: 1 environmental performance; 2 social performance; and 3 corporate governance performance. Figure depicts the categories included in these three pillars Consistent with the theoretical framework, I measured formal CSR engagement using firms corporate governance score for each year.
Informal CSR, on its part, was conceptualized as encompasing both social and environmental performance. After mean-centering predictors to avoid any non-essential multicollinearity, I first inspected the resulting pairwise correlations between the social and environmental CSR dimensions. I observed that social and environmental scores are highly co-lineal, showing the highest pairwise correlation 0. In addition, the environmental pillar includes product innovation as one of its constituent categories as per 24 Source: Thompson Reuters, ESG Data Fact-sheet. To measure these variables, I relied on secondary data from Global Compustat.
I describe each measure in detail below. Financially healthy organizations, with higher levels of available financial slack, are better able to fare with losses when innovations are not successful, and are therefore able to take on greater risks by investing in NPI-related efforts Damanpour, I measure the availability of slack resource using the debt to equity ratio.
Given that the dependent variable measures the average count of NPI in the last three years, I also controlled for industry growth in t-3 as a measure of market structure and the state of competition that would influence the likelihood of firms investing in preemptive NPI Ahuja et al. I measured industry growth as the growth rate of the global industry value added, which was extracted from the OECD World Input-Output tables I include country fixed effects to account for the latter sources of variance.
Data encompass the global financial crisis years National Bureau of Economic Research, see www. For this reason, models control for year fixed effects to capture upturns and downturns in the broader business environment. Thus, a Poisson model is rejected in favor of a generalized version, that is, negative binomial regression Wooldridge, Hausman specification test rendered no fixed effects.
In addition, predictors were lagged to provide temporal separation and exogenous variation I modelled a generalized population-averaged model. These models are robust and allow for the correlation structure in the data, presenting repeated measurements on the same subjects i. Furthermore, Freund and colleagues found that this specification is an effective strategy to deal with excess zeros, endogenous treatment effects and attrition bias issues Freund et al. Model 1 includes the control variables only; Model 2, adds the main effects of informal and formal CSR 26 It is worth noting that the independent variables are yearly variables, whereas the dependent variable NPI3 considers three years of NPI.
However, the measurement of NPI3 is ahead of the independent variable year. For instance, our first observation in the data for the dependent variable for each firm is in where NPI3 is computed as the average of NPI of , , and Accordingly, the independent variables for that NPI3 observation are measured in Moderation was tested using a multiplicative approach Aiken et al. Furthermore, I provide interaction plots to offer a richer understanding of these effects on the rate of NPI. Vertical int. The dependent variable is a count variable, and my specification models the logarithm of the expected count as a function of the predictor variables.
Table presents exponentiated coefficients, and thus the effect is presented on a multiplicative scale. Coefficients can be interpreted as follows: for a one-unit change in the predictor variable, the difference in the logarithms of expected counts of NPI i. By taking logarithms of the model coefficients, I obtain the incident rate ratios IRR for each of the variables, which provide the rate at which the events of interest i.
Moreover, it varies with the values of all model variables. Accordingly, I calculate average marginal effects i. The coefficient shows that, for each unit increase27 on informal CSR performance, firms are expected to have a rate of NPI 1. Hence, hypothesis 1 is supported. The interaction plot shows that while both lines trend upward, as the level of VI increases, the effect on the predicted rate of NPI shifts outward, implying a stronger positive effect.
The AME of the interaction is also positive and significant, thus lending support to hypothesis 2. The result is therefore a relative measure of performance, z-scored and normalized to position the score between 0 and percent. Thus, a unit increase entails a one percent increase in the z-score, which entails an increase above the mean performance of the CSR pillar being measured.
Hence, hypothesis 3 is not supported. Therefore, hypothesis 4 is supported. However, the latter moderation effect is lower than that of the interaction between informal CSR and VI 1. In sum, data provided support for hypotheses 1, 2, and 4; while not so for hypothesis 3. Specifically, I tested the sensitivity of the former regression models by employing alternative measures of CSR, NPI, and industry-level effects.
First, previous studies have suggested that discretionary CSR activities i. To address these concerns, I used a latent variable measurement of informal CSR. Each firm-year score is estimated as a latent variable, and in this way, accounts for measurement errors that may bias results Carroll et al. After running the corresponding negative binomial regressions, I obtained comparable results.
The latter are reported on Table I also employed different measures of the dependent variable, NPI. I ran regressions using one, two, and four-year averages of NPI, instead of a three-year average as per my original formulation. Results were consistent with the main models. Finally, I tested sensitivity trying different measures to control for industry level effects. First, I run regressions using industry fixed effects, grouping firms by GIC industry group codes.
Once again, results were consistent with those of the main models. I ran the analysis using the partition proposed by Lev et al. The latter did not render a significant regression coefficient. CSR has been considered one such capability Nidumolu et al. Nevertheless, its treatment in extant literature as a unidimensional construct has provided a limited understanding of the relative effect of different CSR dimensions on the rate of NPI. This study presented a finer-grained conceptualization of CSR as encompassing both formal and informal aspects.
Accordingly, the positive link between informal CSR and the rate of NPI was deemed stronger the more the firm relied on employees relatively to external contractors. The fact that this result holds with more force as firms are more vertically integrated provides support to the claim that informal CSR engagement enables a social context that would foster behavioral attitudes conducive to innovativeness among organizational members. Notwithstanding so, there should be some boundary conditions for such moderating effect. Arguably, some employee groups are more instrumental to innovation-based advantages than others.
Given dual pressures for efficiency and flexibility, firms would most likely depend on external contractors for generic work; while relying upon employees for strategic tasks that draw on the wealth of their proprietary know-how Wright et al. Notwithstanding so, failure to deliver high levels of formal CSR performance can lead firms to a situation where they cannot fully realize the benefits of the knowledge and resources they can acquire and control, should the governance system forsake to incentivize and monitor innovation-driven behaviors Atanassov, ; Barney et al. I believe these findings contribute to the KBV literature.
Specifically, the conceptual framework proposed theoretical mechanisms by which different types of CSR engagement congeal into capabilities that firms can employ to alter their knowledge base, and, in turn, build sustainable competitive advantages through NPI. In addition, the informal-formal CSR conceptualization contributes to the CSR literature on a descriptive and an instrumental level. On a descriptive level, I consider how CSR has evolved into a multidimensional construct encompassing dimensions concerning both discretionary i. Furthermore, results indicated that both the mechanisms and magnitudes of the contribution of each component differ from one another.
These findings also have relevant implications for management practice. This study offers evidence that informal CSR engagement may serve as an important employee governance tool, such that firms may better attract and retain knowledgeable talent that would engage in innovative projects and contribute to overall organizational success. Finally, I acknowledge a number of limitations of my work. First, as discussed on Chapter 3, concerns pertaining to the possibility of firms gaming social and corporate governance scores, can be mitigated by noting that Thompson Reuters ASSET4 relies on multiple sources to triangulate their data.
Moreover, this dataset has been validated by previous studies Malik, Additionally, robustness analyses using alternative measures of CSR were conducted to enhance confidence in the results. In addition, the type of negative binomial estimation employed has been considered an effective strategy to deal with excess zeros, endogenous treatment effects and attrition bias issues Freund et al, Furthermore, robustness analyses were conducted incorporating informal CSR measured as a latent variable. Nonetheless, while the above mentioned cautionary measures were intended to control for potential endogeneity bias, I remain cautious about inferring causality from results.
Quasi Natural experiments offer great potential to address the caveats of the present study. Often times, data would more easily capture specific CSR initiatives or dimensions e. Third, NPI decisions are core to the horizontal boundaries of the firm Grant, However, results should be interpreted with caution in what regards to the horizontal scope of the firm. In the analyses, I have only focused on NPI, while not considering product exits. Relatedly, the NPI data does not yet allow to determine how these are related to the current portfolio of firm products.
An important area of future inquiry involves the construction of measures of portfolio dis similarity. Hopefully these limitations can be taken up by the scholarly community as promising avenues for future research. The overall motivation for this thesis was to develop an explicit understanding how CSR affects fundamental strategic decisions, specifically those concerning VI and NPI. This thesis makes three theoretical contributions. First, through systematically reviewing the extant VI literature, it clarifies the ambiguity around this important construct.
Furthermore, the review substantiates the novelty of integrating CSR with the analysis of vertical boundaries. Third, while extant literature on strategic CSR has been prevalent on anecdotal evidence, conflicting theoretical arguments, and the availability of cross-sectional firm-level data Malik, , this thesis offers a systematic empirical examination of the implications of CSR on corporate scope that draws from panel data, accounting for dynamic effects.
The findings of this thesis also shed light into important areas of management practice. Chapter 2 showed that VI would constitute one such tool in the strategic toolbox. The systematic literature review suggested that, whereas firms may profit from flexibility and efficiency gains of outsourcing practices, de-integrating core activities might erode the very sources of their competitive advantages. In addition, as societal expectations of CSR grow, managers feel compelled to rethink organizations as mere devices for structuring economically efficient transactions, and govern value chain activities considering their engagement with CSR.
Findings suggest that formal CSR activities pertaining to corporate governance - which typically stem from regulatory requirements -, would not directly affect NPI. In this regard, results indicate that informal CSR engagement would serve as an employee governance tool, such that firms may better attract and retain talent that would engage in NPI activities that would aid in promoting overall firm competitiveness.
The concept of CSR encompasses broad symbolic, cultural, and firm-level identity traits Suddaby et al. Hence, CSR content or meaning is expected to vary from firm to firm. They also evaluate and rank safety and security measures, benefits, flexible work options and importantly the company culture and management accountability. The rankings are based on opinions of 2, investment professionals from financial services firms.
The award announced in May , celebrates the best and innovative tax and transfer pricing work in an ever challenging, complex and uncertain tax environment across Asia-Pacific region. This is the third time in a row that Infosys has won an award from Euromoney. The survey was based on polls by portfolio managers and buy-side analysts who expressed their views on leading Indian companies. The award is a testimony and recognition of the manner in which tax complexities are managed in an ever challenging and uncertain tax environment across the globe Infosys wins the Platinum Award at the Asset Corporate Awards, the longest running Environmental, Social, and Governance ESG awards in Asia.
This award is based on an evaluation of financial performance, management, corporate governance, social and environmental responsibility and investor relations Infosys wins the Responsible Business and the Indo-U. Trending Infosys.