Corporate Philanthropy, Research Networks, and Collaborative Innovation

• Author: Po‐Hsuan Hsu,Terry L. Campbell,Frederick L. Bereskin
• DOI: http://doi.org/10.1111/fima.12078
• Published date: 01 March 2016
• Date: 01 March 2016

Corporate Philanthropy, Research

Networks, and Collaborative Innovation

Frederick L. Bereskin, Terry L. Campbell II, and Po-Hsuan Hsu∗

Using a unique data set of corporatephilanthropic activities, we find that direct giving activities are

positively associated both with higher levels of innovation and innovation that is moreinfluential,

collaborative, and original. Our results suggest that much of what is ostensibly promoted as

philanthropy actually reflects research-related networking activities. The effect of direct giving

on innovation is more pronounced in more opaque firms and more innovative and competitive

industries. These findings provide evidence of the distinct motives by which firms choose between

direct giving and foundation giving. Our study suggests that firms can use direct philanthropy to

expand firm-boundaries by developing innovation with research partners.

“If, instead, corporations were to analyze their prospects for social responsibility using the same

frameworks that guide their core business choices, they would discover that CSR (corporate

social responsibility) can be much more than a cost, a constraint, or a charitable deed—it can be

a source of opportunity, innovation, and competitive advantage.”—Porter and Kramer (2006)

Corporate giving, either through corporate-sponsored foundations (foundation giving) or

through direct giving, is significant. According to the Committee Encouraging Corporate

Philanthropy (2011), the median firm in the Fortune 100 gave $53 million in 2010. The Givin-

gUSA Foundation (2011) finds that approximately 69% of corporate giving in 2010 was through

direct giving programs. Both the recipient identity and the amount of foundation giving must be

disclosed through mandatory Internal Revenue Service (IRS) filings, while neither is disclosed

through any official filings for direct giving. Moreover, it has been reported that firms were

opposed to disclosing their direct giving activities (Bryant, 1998), which is surprising, given the

typically positive publicity associated with philanthropy.

Wethank Raghu Rau (Editor) and an anonymous refereefor their comments with this paper. Wealso thank the participants

at the Hong Kong Polytechnic University, Lehigh University, University of Delaware, University of Guelph, University

of Hong Kong, the 2014 FMA Asia Meeting, the 2014 FMA Meeting, the 2013 Global Perspectiveson Entrepreneurship

Conference,Heitor Almeida, Qi Chen, Charles Elson, Paolo Fulghieri, Michael Fischer, Melissa Frye,Jacqueline Garner,

Chuan Yang Hwang, Sofia Johan, Simi Kedia, Yongtae Kim, Margaret Kyle, Bill Latham, Baruch Lev, Paul Laux, Kai

Li, Gustavo Manso, Ron Masulis, Micah Officer,Saumya Prabhat, Jay Ritter, David Robinson, Wendy Rotenberg, Mark

Schankerman, Neal Stoughton, Francis Tapon, Wenrui Zhang, Yan Feng Zheng, and Xianming Zhou for their helpful

comments. Wealso thank Noelle Barton and Christine Petrovits for sharing their philanthropy data and fortheir helpful

insights. Po-Hsuan Hsu acknowledges the support from the General Research Fund sponsoredby the Research Grants

Council in Hong Kong (ReferenceNo.790913).

∗Frederick L. Bereskin is an Assistant Professor in the Lerner College of Business & Economics at the University of

Delaware in Newark,DE. Terry L. Campbell II is an Associate Professor in the Lerner College of Business & Economics

at the University of Delaware in Newark, DE. Po-Hsuan Hsu is an Associate Professor in the Faculty of Business and

Economics at the University of Hong Kong in Hong Kong.

Financial Management •Spring 2016 •pages 175 – 206

176 Financial Management rSpring 2016

Weargue that managers are hesitant to disclose their direct giving initiatives due to their desire

to keep their strategies for corporate innovation proprietary.1Technological innovation serves as

an important dimension of firm-level competitive strategies and plays an increasingly influential

role in the knowledge economy era (Dierickx and Cool, 1989; McGrath, Tsai, Venkataraman, and

MacMillan, 1996). However, firms engaging in innovative projects are often subject to various

risks, such as high failure rates, imitative activities of competitors, and accelerated product life

cycles (Bhattacharya and Ritter, 1983; Cohen, Nelson, and Walsh, 2000; Hall and Lerner, 2010;

Aggarwal and Hsu, 2014; Chen, Chen, and Chu, 2014). The goal of this study is to empirically

examine whether firms use corporate philanthropic programs to promote innovation.

Regulators are aware of the largediscrepancy in disclosure between corporate-sponsored foun-

dations and direct giving, and have sought to improve the level of disclosure for charitable giving.

In 1997, Representative Paul Gillmor and Senator Mike Oxley sought to require firms to disclose

their charitable giving (this proposal wasultimately dropped). The comment letters were generally

opposed to the legislation, often noting the role of giving in corporate strategy. As one example,

the letter from Adolph Coors Company (1997) notes that, “in this specialized area, we believethe

Gillmor requirements would have a devastating impact on these marketing and sales strategies,

and the very worthy charitable endeavors they fund.”

Philanthropic giving mayaffect innovation through two different mechanisms. The first, termed

the “research networking” mechanism, posits that when firms establish connections with research

organizations that expand the firms’ scope of knowledge and opportunity set to explore, the

associated funds are sometimes officially referred to as “philanthropic.” Haley (1991), Smith

(1994), Kahn (1997), and Lev, Petrovits, and Radhakrishnan (2010) all suggest that firms can use

philanthropic programs to outsource research and development (R&D).2In addition, since R&D

activities may lead both to highlysuccessful projects as well as many unsuccessful projects (Mata

and Woerter, 2013), this subjects managers to a high level of private risk and motivates them to

promote some activities that are actually external R&D investments as “corporate philanthropy.”

Thus, managers have the incentiveto innovate through an official corporate giving program, likely

entailing fewer organizational hurdles than proposing a new project. Finally, nonprofit research

organizations could be wary of pursuing a project that directly and explicitly benefits a particular

company, but could more readily justify a project associated with philanthropic support (Porter

and Kramer, 2002, 2006).3

The second mechanism, which we term the “advertising mechanism,” helps firms facilitate

innovation in various ways. Researchers note that there is a consistently positive relation between

firms’ CSR ratings (corporate philanthropy is generally associated with CSR ratings) and the

employment attractiveness of these firms, as well as general efforts to improve firm reputation.

These workforce characteristics should benefit innovative firms to a greater extent (Turban and

1The GivingUSA Foundation(2011) notes that of large gifts by corporations or corporate-sponsored foundations, 32% of

those gifts went to higher education, 11% to other educational organizations, and 11% to the health subsector,suggesting

that a significant amount of corporate giving is associated with research partnerships. We present anecdotal evidence for

the link between corporate philanthropy and innovationin the Appendix.

2Czarnitzki and Hottenrott (2012) suggest that firms are able to utilize R&D collaborations to attenuate financing

constraints. Chai and Shih (2013) examine public-private research partnerships. Controlling for selection issues by

examining firms just above and just below thresholds for funding cutoffs, they find very large increases in innovationfor

firms that receive government funding for their projects in collaboration with public research organizations.

3In one recent study of research organizations pursuing industry partnerships, D’Este and Perkmann (2011) provide a

discussion as to the reasons that academics engage with industry (and the relative importance of research-related motives

and of commercialization). Additionally, Francis, Hasan, and Wu (2015) note the role of academics on firms’ board of

directors, and how their presence is associated with higher levels of innovation.

Bereskin, Campbell, & Hsu rCorporate Philanthropy, Research Networks, and Collaborative Innovation 177

Greening, 1997; Albinger and Freeman, 2000; Werbel and Wortman, 2000; Backhaus, Stone,

and Heiner, 2002; Peterson, 2004). In addition, corporate giving enables firms to improve their

ability to interact positively with governmentregulators. A positive relationship with regulators is

helpful for an innovation-intensivef irm that needs governmentsuppor t or subsidies for innovative

activities. Moreover, corporate giving functions as a form of insurance from activists, providing

security to shareholders and managers (Baron, 2001; Godfrey, 2005; Cespa and Cestone, 2007),

thus increasing the likelihood that innovative firms are able to exploit their inventions. Finally,

philanthropy functions as a form of advertising leading to higher product prices.4Since both the

research networking and advertising mechanisms suggest positive effects of corporate giving on

innovation, we hypothesize that corporate charitable giving programs promote innovation.

Unlike the research networking mechanism, the advertising mechanism does not depend on

direct giving per se, and can occur through either firms’ direct giving or their foundations.

Different motivations and real effects between direct giving and foundation giving may lead to

different innovation performance. We propose that the research networking mechanism relies

primarily on direct giving, and not foundation giving, due to the managerial flexibility, direct

access, and lack of disclosure associated with direct giving. Moreover, we argue that firms are

able to explore unique technology fields using research partnerships with nonprofit organizations

given their own limited pool of expertise and human capital (Jaffe, 1989; Henderson, Jaffe,

and Trajtenberg, 1998; Cohen, Nelson, and Walsh, 2002). Thus, these activities may lead to

more original inventions that result from combining diverse technologies(Jaffe, Trajtenberg, and

Henderson, 1993; Fleming, Mingo, and Chen, 2007; Singh, 2008).

In contrast to direct giving, foundation givingsuffers from a number of limitations that prevent it

from being used as a mechanism to support corporate innovation. First, foundations must disclose

how much is given to each recipient on IRS Form990-PF. In addition, foundation directors have a

fiduciary duty to the foundation itself, rather than the sponsoring corporation (although the f irm

appoints the directors to the foundation and, as such, effectively controls the foundation’s board).

Moreover, foundations have generally faced restrictions on venture capital-related activities.

Finally, direct giving is more efficient and effective than foundation giving in terms of forging

research networks and collaborations, as the latter channel requires more disclosure and involves

more layers of administration. Consequently, we hypothesize that direct giving is more effective

in promoting innovation than foundation giving because it drives more collaborative and original

innovations.

To examine the proposed hypotheses, we construct a data set consisting of the financial,

philanthropic, and innovation data of all US public firms from 1989 to 2004. We combine

our innovation data with a sample of direct giving and foundation giving beginning in 1989.

Our sample separates direct giving from foundation giving and is composed of IRS disclosures

for corporate-sponsored foundations and surveys for direct giving from Petrovits (2006), the Taft

Group’s Corporate Giving Directory,the Chronicle of Philanthropy, the FoundationCenter, and the

National Center for Charitable Statistics (NCCS).5Our patent data are from the National Bureau

for Economic Research (NBER) patent data set, and our financial data are from Compustat.

4For advertising, see Schwartz (1968), Fry,Keim, and Meiners (1982), Navarro (1988), and Boatsman and Gupta (1996).

For CSR leading to higher product prices, see Goett, Hudson, and Train (2000), Roe, Teisl, Levy, and Russell (2001),

Loureiro and Hine (2002), Loureiro (2003), Loureiro and Lotade (2005), and Eichholtz, Kok, and Quigley (2013). The

ability to set higher prices would be especially relevantfor newly innovative products.

5For our sample of direct giving, The Chronicle of Philanthropy notes that some of the firms decline to respond due

to company policy not to publicly release data that have not already been made public. We recognize the potential for

selection issues in the disclosure of direct giving data, and report the results from Heckman (1979) selection models to

mitigate this bias in Section II.B.