Corporate Social Responsibility as a Strategic Means to Attract Foreign Investment: Evidence from Korea

Abstract

This study examines how foreign investment can be driven by corporate social responsibility (CSR). By specifying the underlying mechanism of foreign investors’ stock picking behavior, we argue that CSR can attract foreign investment. Given that CSR actions are taken to meet various needs of its stakeholders, the host firm can convey a reliable signal to foreign investors as well as the stakeholders. As such, foreign investments can be increased in the host firm. This idea is examined in a sample of Korean firms. We hypothesize that Korean firms, as host firms, will have more foreign investments, instantiated by foreign ownership, if they are more actively engaged in CSR. To test this argument, we collected a panel dataset of the Korea Economic Justice Institute (KEJI) Index between 2004 and 2009 to measure CSR performance of the firm. We estimated foreign ownership with respect to CSR performance. As a result, we found a positive effect of CSR performance on foreign ownership. Given the importance of foreign investment in host countries, this study opens an avenue that can account for foreign investors’ stock-picking behavior.