Cultural Inclusivity and Corporate Social Responsibility in China

Corporate Social Responsibility (CSR) is increasingly valued by governments and society, yet research often overlooks the influence of geographical-level informal institutions, such as culture. This study addresses this gap by examining the impact of cultural inclusivity on CSR in China, a nation with a diverse cultural landscape and a unique blend of formal and informal institutional influences. The authors highlight instances of unsanitary practices in prominent Chinese companies, emphasizing the need to explore the role of informal institutions in shaping CSR behavior. Building on institutional economics theory, which posits that firm behavior is influenced by both formal and informal institutions, the study focuses on cultural inclusivity as a key informal institution. Cultural inclusivity, defined as the degree of respect and acceptance of diverse individuals and cultures within a region, is argued to influence firm management's tolerance, respect, and humanistic spirit, leading to more prosocial corporate governance behaviors. China's unique cultural context, with its blend of Confucian and clan cultures and significant regional variations, makes it an ideal setting for this research. The study uses a sample of A-share listed firms in China to investigate the relationship between cultural inclusivity and CSR, considering the moderating roles of firm size, ownership structure, and board independence. A mechanism analysis explores how cultural inclusivity promotes CSR through "gender equality" and reduces the "power gap". The use of relief amplitude as an instrumental variable helps address endogeneity concerns.

The literature review categorizes existing research on CSR determinants into two groups: firm-level factors (size, financial status, executive characteristics, board characteristics) and institutional factors (legal provisions, political regulations, government institutions). Regarding firm-level factors, the review highlights the influence of firm size, financial performance, executive characteristics (e.g., CEO hubris), and board diversity on CSR. For institutional factors, the review discusses studies showing the positive effects of democratic states and diverse legal systems on CSR. However, the review points to a gap in research exploring the impact of informal institutions, particularly cultural inclusivity, on CSR. The authors contrast the prevalent focus on national-level cultural analysis in finance with the study's focus on regional cultural differences within China, aiming to avoid endogeneity issues and to clarify the micro-mechanisms of cultural effects on CSR.

The study utilizes data from a sample of A-share listed firms in China between 2010 and 2019, excluding financial and real estate firms. The dependent variable is a CSR index from Hexun.com, supplemented by alternative measures and sub-indicators (CSR for shareholders, employees, consumers, environment, and society). The independent variable is a cultural inclusivity index (CI) constructed by the authors, measuring the degree of dietary taste deviation from local cuisine. An alternative cultural inclusivity indicator (Out_diet), based on the proportion of non-local cuisines, is also employed for robustness checks. The study controls for various firm-level factors (size, leverage, profitability, book-to-market ratio, analyst following, return, asset turnover, ownership concentration, state-owned enterprise status, board size, board independence, managerial compensation) and regional-level factors (CEO duality, GDP per capita, GDP growth, population growth, per capita consumption). To address endogeneity, the authors utilize relief amplitude as an instrumental variable, arguing that complex terrain hinders cultural exchange and thus inclusivity. A two-stage least squares (2SLS) method is employed using this instrumental variable. A mechanism analysis further investigates the mediating roles of "gender equality" and "power gap" indices using 2SLS. Heterogeneity analysis examines the differential effects of cultural inclusivity across different firm characteristics (size, ownership, board independence). All models include industry and year fixed effects, and robust standard errors are clustered at the firm and year levels. Data are winsorized at the 1% level to mitigate the influence of outliers.

The baseline regression results confirm Hypothesis 1: a positive and significant relationship exists between cultural inclusivity and CSR. A one standard deviation increase in cultural inclusivity is associated with a 1.56 standard deviation increase in CSR. This positive relationship remains consistent when using the alternative cultural inclusivity measure (Out_diet). Further analysis of CSR sub-indicators shows that cultural inclusivity significantly impacts CSR towards shareholders, employees, consumers, and the environment, but not significantly towards society. The instrumental variable analysis (using relief amplitude) confirms a causal relationship between cultural inclusivity and CSR. Robustness tests using an alternative measure of cultural inclusivity (number of regional arts performing groups) and alternative CSR measures (Hexun.com rankings and RKS database data) yield consistent results. The mechanism analysis (Table 7) supports Hypothesis 2, showing that cultural inclusivity significantly increases "gender equality" and decreases the "power gap," both of which positively affect CSR. Heterogeneity analysis (Table 8) reveals that the positive impact of cultural inclusivity on CSR is stronger in larger firms, state-owned enterprises, and firms with higher board independence. The effects on larger firms and state-owned enterprises are statistically significant at the 1% level, while the effect on firms with higher board independence is significant at the 5% level.

The findings support the hypothesis that cultural inclusivity positively impacts CSR in China. The study's focus on regional cultural variations within a single country, unlike many cross-national studies, enhances its ability to isolate the influence of culture while controlling for institutional differences. The instrumental variable approach helps establish causality, strengthening the study's conclusions. The mechanism analysis provides insights into the pathways through which cultural inclusivity affects CSR, highlighting the importance of gender equality and the reduction of power gaps. The heterogeneity analysis reveals the nuanced effects of cultural inclusivity across different firm contexts, suggesting that the impact is not uniform across all companies. The study's findings contribute to the understanding of the influence of informal institutions on corporate behavior and emphasize the importance of considering cultural context in studies of CSR.

This study provides the first empirical evidence of a positive relationship between cultural inclusivity and CSR in China. It emphasizes the importance of considering informal institutions, particularly cultural factors, when studying CSR determinants. The findings highlight the mechanisms through which cultural inclusivity influences CSR and reveal significant heterogeneity in its effects across different firms. Future research could explore the long-term impacts of cultural inclusivity on firm sustainability and examine the effectiveness of policies aimed at promoting cultural inclusivity to enhance CSR practices.

The study's reliance on a specific CSR index from Hexun.com may limit the generalizability of findings. While alternative measures are used, the selection of indicators could influence the results. The study focuses on China, and the findings might not be directly transferable to other cultural contexts. Further research could explore the interplay between cultural inclusivity and other informal and formal institutional factors that may influence CSR.