CHAPTER TWO: LITERATURE REVIEW

2.1 CONCEPTUAL FRAMEWORK

Corporate Social Responsibility (CSR) is widely known as a multidimensional strategic

concept that integrates social, environmental, ethical, and economic considerations into a

company's operations and decision-making (Nosike & Okafor, 2025). In the context of

this research focused on Malaysia’s manufacturing sector, CSR has advanced into a

systematic tool, for ensuring sustainable business practices, enhancing stakeholder trust,

and contributing to long-term profitability (Opoku Marfo, 2024; Joo, Jais, & Janang,

2024).

Overtime, through the use of the Environmental, Social, and Governance (ESG)

framework, Corporate Social Responsibility (CSR) has been conceptualized as follows:

 Environment: This aspect focuses on how companies or firms impact the

environment. The environmental initiatives broadly address sustainable resource

use, waste management, emissions control, and environmental conservation

efforts. Yu et al. (2024) in their empirical study examined how ESG performance

influences firms’ capital and environmental investment decisions where trade-offs

between financial profitability and environmental spending were highlighted

indepthly.

 Social: According to Lythouse (2024), social responsibilities within the ESG

framework include labor rights, diversity, and community welfare. This aligns

with academic perspectives emphasizing social equity and stakeholder

engagement as essential components of sustainable business models, as

models (Fobbe & Hilletofth, 2021).

 Governance: The Governance dimension focuses on transparency, accountability,

and ethical oversight. As Akinsola (2025) explains, corporate governance plays a

critical role in reinforcing compliance frameworks by establishing ethical

decision-making processes, effective board structures, regulatory adherence, and

risk management strategies, key mechanisms for ensuring legal compliance and

preventing corporate misconduct.

Financial performance, the dependent variable in this study, encompasses both

accounting-based and market-based indicators that reflect a firm’s economic health and

competitiveness. The commonly used measures include Return on Assets (ROA), Return

on Equity (ROE), and Net Profit Margin. These indicators are widely recognized in both

theoretical and empirical studies on firm performance and governance (Nguyen, Dung, &

Huyen, 2021).

The relationship between Corporate Social Responsibility (CSR) and financial

performance has been the subject of considerable academic debate. While some scholars

argue that CSR initiatives create long-term value through mitigation risks, enhancing

brand differentiation, and improving operational efficiencies, Harris (2024) provides

empirical evidence that sustainable firms with strong CSR commitments tend to

outperform in terms of profitability and market share. His findings support the view that

CSR is not only a social obligation but a strategic advantage that contributes to long-term

financial performance.

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On the contrary, other scholars emphasize the potential drawbacks, noting that CSR

implementation may involve significant costs and resource allocation challenges,

especially when assessed through a short-term financial lens (Lunardi, 2024).

This study adopts an integrated conceptual model where CSR engagement (broken into

ESG dimensions) serves as the independent variable, and financial performance is the

dependent variable. The moderating effects such as firm size and industry subsector may

influence this relationship. The conceptual framework is grounded in both theoretical

reasoning and empirical precedent, offering a testable structure for statistical analysis.

Figure 2.1: Conceptual Framework Linking CSR Dimensions and Financial Performance
with Moderating Effects

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2.2 THEORETICAL FRAMEWORK

This study is anchored in two interrelated theories Stakeholder Theory and Legitimacy

Theory which collectively explain why firms engage in Corporate Social Responsibility

(CSR) and how such engagement influences their financial outcomes.

2.2.1 STAKEHOLDER THEORY

Stakeholder Theory, originally proposed by Freeman (1984, as cited in Ntiamoah et al.,

2014), expands corporate accountability beyond shareholders to include various other

stakeholders such as employees, customers, suppliers, and communities in order to ensure

long-term success. Kalra (2024) reinforces this perspective, emphasizing that businesses

must strategically manage these stakeholder relationships to enhance legitimacy and

performance. In the emerging context such as Malaysia, where regulatory oversight and

cultural expectations are still evolving, firms that adopt proactive Corporate Social

Responsibility (CSR) strategies have been linked to stronger stakeholder relationships

and long-term value creation (Rajuroy & Liang, 2025).

2.2.2 LEGITIMACY THEORY

Legitimacy Theory posits that organizations must operate in accordance with societal

norms and values to gain and maintain their "license to operate" (Suchman, 1995;

Deegan, 2019). In line with Legitimacy Theory, firms facing environmental scrutiny

often respond through increased disclosure and sustainability efforts to preserve their

legitimacy and public trust. This further illustrating how Corporate Social Responsibility

(CSR) serves to secure legitimacy and reduce reputational risk (Zherri & Kalemi, 2025).

Supporting this, Al-Shaer and Zaman (2018, as cited in Mshana, 2024) emphasize that

companies can enhance both their legitimacy and reputation by reporting sustainability

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performance and demonstrating commitment to sustainable development. This reinforces

the view that CSR functions as a mechanism not only for compliance but also for

maintaining social approval and managing reputational risk.

In emerging economies like Malaysia, where public awareness and international scrutiny

are rising, CSR becomes a means for manufacturers to align with global expectations and

sustain investor confidence (Cardillo & Basso, 2025).

2.2.3 COMPLEMENTARITY OF THEORIES

Both theories provide complementary insights: while Stakeholder Theory explains the

motivations for CSR based on stakeholder interests, Legitimacy Theory explains the

societal pressures that shape CSR practices. Together, they provide a robust theoretical

basis for examining how CSR influences firm performance in the Malaysian

manufacturing industry.

2.3 EMPIRICAL REVIEW

The relationship between Corporate Social Responsibility (CSR) and financial

performance has attracted extensive empirical investigation across different industries

and geographical contexts. However, findings remain mixed, with studies reporting

positive, negative, or neutral relationships depending on the methodology, sample, and

CSR dimensions considered.

2.3.1 GLOBAL EVIDENCE ON CSR–FINANCIAL PERFORMANCE

RELATIONSHIP

Early meta-analyses, such as Orlitzky et al. (2003), established a generally positive

correlation between CSR and financial performance, suggesting that socially responsible

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firms tend to outperform their counterparts. More recent evidence from Chandratreya

(2024) reaffirms this positive association, particularly in environmental dimensions of

CSR, while also highlighting the influence of moderating factors such as firm size,

industry, and geographic context. His meta-analysis emphasizes that while CSR can be

strategically leveraged to improve financial outcomes, especially in larger firms and

developed markets, the relationship remains context-dependent and varies with specific

CSR dimensions and methodological approaches. This has been corroborated by studies

in developed economies that emphasize reputational gains, risk mitigation, and

stakeholder loyalty as mechanisms through which CSR enhances profitability (Antari,

Sbai, & Benaguid, 2024).

2.3.2 CSR RESEARCH IN EMERGING MARKETS

Studies in emerging markets paint a more complex picture due to differences in

regulatory environments, stakeholder expectations, and cultural values. Visser (2008), as

cited in Abdikafi (n.d., p. 21), observed that CSR in developing countries often focus on

addressing localized priorities such as poverty reduction, education, and basic

infrastructure.

Wahyuni et al. (2024) emphasized that in these contexts, CSR engagement is frequently

reactive, driven by external factors such as government mandates or reputational threats

rather than proactive strategic [Link] findings in Asia especially countries

such as India show that the effectiveness of CSR initiatives is often conditioned by

institutional voids, governance quality, and firm maturity (Cordeiro, Galeazzo, & Shaw,

2023). The study by Achim, Văidean, Sabău (Popa), and Safta (2022) also demonstrate

that firm-specific characteristics such as size, age, ownership structure, and industry type

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influence the CSR–performance relationship, underscoring the importance of contextual

analysis.

2.3.3 EMPIRICAL EVIDENCE FROM MALAYSIA

In the Malaysian context, CSR has gained prominence following regulatory reforms such

as the Bursa Malaysia Sustainability Reporting Framework and broader commitments to

the Sustainable Development (Din et al., 2025). However, empirical research remains

limited and fragmented, particularly within the manufacturing sector.

While in Giannarakis (2013) study, based on data from U.S. companies, found a positive

relationship between CSR disclosure and indicators such as asset size, return on sales,

and return on equity, his findings largely reflect the dynamics of developed markets. In

contrast, the study by Noor et al. (2021) which offers more contextually relevant insights

for Malaysia, revealing that larger firms tend to exhibit higher levels of sustainability

disclosure, largely due to increased public scrutiny. In a setting where public criticism

can significantly impact reputation, firms are compelled to enhance transparency in their

reporting practices. The contrast between these two studies highlights how local

institutional pressures and stakeholder expectations shape CSR and sustainability

practices. Therefore, in Malaysia, firm size and public examination emerge as key factors

influencing sustainability disclosure, reinforcing the notion that corporate accountability

is not only a matter of internal policy but also a strategic response to external pressures.

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2.3.4 RESEARCH GAPS AND JUSTIFICATION FOR CURRENT STUDY

Despite growing interest in CSR in Malaysia, several critical gaps remain:

 Limited sector-specific focus: Most studies aggregate findings across industries,

failing to account for unique CSR dynamics within the manufacturing sector.

 Lack of longitudinal analysis: Few studies evaluate CSR impact over multiple

years, making it difficult to capture long-term financial effects.

 Neglect of ESG components: Many analyses treat CSR as a monolithic variable,

without differentiating between environmental, social, and governance

dimensions.

 Weak integration of theory: Empirical studies often lack robust theoretical

grounding, reducing explanatory depth.

 Insufficient attention to moderating variables: Factors such as firm size, export

orientation, or market competition are often omitted, despite their potential

influence on outcomes.

This study addresses these gaps by employing a robust quantitative methodology,

grounded in Stakeholder and Legitimacy Theories, to evaluate the relationship between

CSR dimensions (environmental, social, governance) and firm-level financial

performance. Focusing specifically on Malaysia’s manufacturing sector from 2020 to

2024, the research also incorporates firm-specific moderators to provide a more nuanced

understanding of CSR effectiveness.

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