Corporate Social Responsibility, Firm Performance, and Environment: Evidence from Mandatory CSR in Indonesia

Abstract

Corporate social responsibility (CSR) is the integration of social, environmental, and ethical values into business practices. This paper studies its effects on firms’ profits, production, and environmental outcomes in Indonesia. To address endogeneity in CSR adoption, I exploit the country’s legal requirement that limited-liability firms in natural-resource–related industries implement CSR activities. A triple-difference design shows that the mandate improved environmental performance by reducing the use of polluting fuels. Effects are larger for firms with stronger community-based relational incentives, particularly those relying on locally sourced private capital. The fuel shift involved a reallocation of expenditures but did not affect profits, output, total revenue, or total expenses. Village–firm matched data corroborate a decline in reported pollution incidents around obligated firms. Even without strong enforcement, legal CSR requirements can complement traditional environmental regulation when firms are embedded in local networks that provide additional CSR incentives.