Think at London Business School
What are the trade-offs policymakers must strike to successfully coax life from the UK economy?
By Will Grahame-Clarke
When a disaster strikes somewhere in the world, relief aid follows. Whatever form the aid takes – money, food, water, clothing – it tends to come from a few sources.
Traditional sources include governments, humanitarian groups and individual philanthropists. And increasingly, multinational enterprises (MNEs) are another. In fact, over the last two decades, MNEs have become the single largest category of donors to relief efforts. For some disasters, companies gave more than foreign governments, multilateral agencies and private charities combined.
Why do MNEs donate so much to recovery efforts? A few obvious reasons come to mind. Maybe firms are seeking to build or improve their reputations. Maybe they’re hoping to hedge against political risk. Maybe they’re responding to social norms around giving. Maybe it’s to offset their tax bills. Or maybe they’re just being altruistic.
Previous research has found that all of these are, indeed, reasons for company philanthropy – in stable business environments. In other words, under normal market conditions, when nothing out of the ordinary has happened, these are all reasons that firms donate.
But what about after a hurricane or a terrorist attack, or during an epidemic? There has been much less research on whether a disaster changes the reasons for corporate philanthropy. That’s what we wanted to find out.
Our research has two main branches. The first is the substantial amount of data we collected about donations to relief efforts from 1990 to 2018. Using Factiva, Google, and LexisNexis, we searched newspapers, corporate websites, TV and radio transcripts, press releases, government reports and more. For every major disaster, we logged every reported donation; who gave it (MNE, government, charity, and so on); what was given (either cash or in-kind donations); and when. As you might expect, our search yielded quite a few results – more than 2.3 million – so we used differential language analysis to code information and make the reports computationally tractable.
With our results, we built what we call the Global Database of Disaster Responses, arguably the most comprehensive resource ever assembled on relief donations. We compared our data with that held by several other groups, including the Chilean government, the United Nations Office for Coordination of Humanitarian Affairs, and the U.S. Chamber of Commerce Foundation, to find out what we missed. These comparisons helped us fine-tune our results and spot discrepancies and the reasons for them.
“On average, corporate donations speed up the recovery by 260%”
The other branch of our research is the interviews we conducted with leaders and employees at S&P 500 firms in which we sought to understand how these companies plan for and respond to sudden catastrophic events. The firms represented a range of industries and company sizes, with revenues of $1 billion to $400 billion and workforces of a few thousand employees to more than two million.
These interviews let us hear directly from the companies donating to relief efforts. We assured our interviewees their statements would remain confidential, so we could hear their honest, unvarnished comments. Strategy and decision making around donations were of particular interest to us, since many firms have plans in place for reacting to disasters.
Analysing our data and interviews, what we discovered is that the overarching reason firms donate to relief efforts is both simple and practical: they give to support the recovery of countries that are economically important to them. The logic makes sense. If a natural disaster devastates one of your top markets, restoring that market is in the country’s interests, as well as your firm’s.
Our analysis of MNE donations focused on events that were sudden and unpredictable, that had country-level rather than regional-level effects, and whose level of severity passed a certain threshold. We controlled for a number of factors that could influence MNE donations: the firm’s total assets, total revenue and number of employees; the firm’s R&D, advertising and administrative expenditures; the firm’s reputation and visibility; donor fatigue; the firm’s customer orientation and industry; a country’s size, GDP, population and corruption level; and the scale and category of the disaster.
1. Market concentration
The first is market concentration, or how much market share an MNE has in the affected country. The bigger the MNE’s slice of the market, the more severe the consequences of the disruption are to it, and the more the firm is likely to donate to the recovery. (Conversely, when a market is split among more companies, per-firm giving tends to be lower.)
This dynamic was apparent in our interviews with managers from a large mining company whose operations in Chile were affected by the 2010 earthquake. They told us the company’s presence in Chile represented around 3% of the country’s GDP; the firm donated $30 million to the recovery.
2. Amount of public aid a country receives
The second factor is how much public aid a country receives after a disaster. When more public aid was available to fund recovery, MNEs tended to donate less. This is akin to the crowding-out effect seen in individual philanthropy – as more people donate to a cause, others feel less need to give. This was reflected in our interview with the vice president of a soft-drink manufacturer whose operations in Japan were disrupted by the 2011 tsunami. The thinking, he explained, was that his company was part of the Japanese economy and if the Japanese government wasn’t able to rebuild on its own, his company would help.
3. Regulatory quality
The final factor is how well a government coordinates and distributes aid, which we call regulatory quality. When regulatory quality is high, MNEs donate more, because they believe their donations will be put to good use. They donate less when they don’t believe a government will use the resources effectively. While this makes intuitive sense, it is counter to the prevailing view that firms are more likely to step in when governments are ineffective.
Our findings about the reasons for MNE donations to relief efforts are not entirely surprising, but they are notably distinct from the reasons why firms give in stable environments. The interviews backed this up: again and again, executives post-disaster told us they aren’t thinking about boosting their firm’s reputation – they’re thinking about their customers, suppliers and employees. (Our analysis, which controlled for reputational factors, supported their statements.) Understanding that distinction is important because MNE donations have far-reaching implications.
For one, they directly influence the speed of the recovery. Research has found that how long it takes a country to rebound from a disaster is directly proportional to how much aid it receives from MNEs. On average, corporate donations speed up the recovery by 260%. And speed is especially important to small businesses, which are crucial parts of local economies.
In China, for example, many small and midsize firms have been forced to suspend operations because of the coronavirus epidemic. A significant number of these firms will go out of business. Of those that stay closed for a month, 30% do not have sufficient cash to cover their expenses; another 33% of small and midsize firms do not have sufficient cash to cover their expenses if closed for two months.
Another implication comes from the globalisation of the economy. Broadly speaking, everything is connected to everything else. An MNE with headquarters in one country may have suppliers and customers in many others, so even a distant disaster can affect both whether a company can continue producing its product and whether people can continue to afford to buy it.
A third implication has to do with money and resources – which, in some cases, MNEs have more of than governments. (Sixty-nine of the top 100 economies in the world are companies.) Disasters often cause severe infrastructure damage and governments don’t always have the funds to respond. MNEs can help to fill those gaps and many of them have offices and employees in multiple countries, which lets them gather information and mobilise quickly. It also gives them further incentive to help local economies rebound.
When governments and researchers study MNE donations with our methods, they can follow useful threads, such as whether firms are giving money or resources, whether they’re giving directly to the public, and how soon after a disaster the donations arrive. Of particular interest is how firm giving unfolds across countries. Governments usually coordinate the donations received, and while non-profits and aid agencies often help, there isn’t always effective communication between them all. When they act independently of each other, it can reduce donations’ effectiveness.
That’s a big problem, because the costs of large-scale disasters are increasing exponentially over time. The connectedness of the global economy twines the fates of firms and countries and we need to ensure those with more resources can help those with fewer. If donations don’t reach those who need them, and in a timely fashion, recoveries will be longer, slower and more arduous than they have to be.
Catherine Magelssen, Assistant Professor of Strategy and Entrepreneurship at London Business School, studies multinational firm strategy, with particular interests in intra-firm structure, internal versus external firm contracting relationships, and firm response to environmental shocks.