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Working Paper Series 2018/13/STR

Institutions and Corporate Social Responsibility Michael A. Witt INSEAD, [email protected] Christof Miska WU Vienna, [email protected]

This is a draft of a chapter that has been accepted for publication by Oxford University Press in the forthcoming Oxford Handbook of Corporate Social Responsibility: Psychological and Organizational Perspectives, edited by Abagail McWilliams, Deborah Rupp, Donald Siegel, Günter K. Stahl, & David Waldman, due for publication in 2018 or 2019. As it has not been copyedited, the final published version may vary in phrasing and punctuation. Please cite as: Witt, Michael A., & Christof Miska (forthcoming). In Abagail McWilliams, Deborah Rupp, Donald Siegel, Günter K. Stahl, & David Waldman (Eds.), The Oxford Handbook of Corporate Social Responsibility: Psychological and Organizational Perspectives. Oxford, UK: Oxford University Press.

We provide an overview of existing research on CSR and institutions and suggest avenues for future development. We begin by laying out how the three major forms of institutionalism have approached CSR, what kinds of institutions and levels of analysis have been used, and how this has been linked to various domains of CSR. Based on this overview, we derive implications for research and directions how work at the intersection of CSR and institutions might advance. Specifically, it seems to us that the field should stop viewing institutional conformity as CSR and instead apply insights from comparative institutional analysis to voluntary (“explicit”) forms of CSR, leverage configurational methods, and explore the co-evolution of CSR and institutional norms. Keywords: Corporate Social Responsibility; CSR; Institutions

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Institutional influences play an important role in shaping Corporate Social Responsibility (CSR) (e.g., Aguilera, Rupp, Williams, & Ganapathi, 2007; Aguinis & Glavas, 2012; Hafenbrädl & Waeger, 2017; Miska & Mendenhall, 2018). In this chapter, we provide an overview of how existing research has approached this linkage. In particular, we lay out how the three major forms of institutionalism have approached CSR, what kinds of institutions and levels of analysis have been used, and how this has been linked to various domains of CSR. Based on this overview, we derive implications for research and directions how work at the intersection of CSR and institutions might advance. We suggest to stop studying institutional conformity under the false label of “CSR” and instead to apply insights from comparative institutional analysis to voluntary (“explicit”) forms of CSR, to leverage configurational methods, and to explore the co-evolution of CSR and institutions.

THE INTERSECTION OF INSTITUTIONS AND CSR In this section, we provide an overview of the interlinkages between institutions and CSR in the prior literature. We first explore the CSR literature through the lenses of three approaches to institutions: sociological, historical, and rational choice institutionalism. We then outline patterns in the types of institutions and levels of analysis evident in the literature. We conclude this section by considering the definitional variability of CSR as a concept and how it is reflected in research linking institutions and CSR.

Types of Institutionalisms

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The literature on institutions and CSR mirrors the variance in conceptualizations of institutions visible in the social sciences. Broadly speaking, three types of “new institutionalism” have evolved: sociological, historical, and rational choice institutionalism (Hall & Taylor, 1996). As each of these approaches draws on different assumptions and mechanisms, with concomitant implications for understanding the impact of institutions, we briefly review their core themes below. For a more comprehensive review, we refer the reader to Hall and Taylor (1996). Sociological institutionalism defines institutions as “regulative, normative, and culturalcognitive elements that, together with associated activities and resources, provide stability and meaning to social life” (Scott, 2014: 56). Central to this approach is the phenomenon of isomorphism, that is, similarities across organizations in terms of both form and practice (Hall & Taylor, 1996). The mechanism underlying this convergence is held to be social legitimacy—that is, actors adopt certain structures and practices not because they best serve their rational selfinterest, but because they are seen as “appropriate” (March & Olsen, 1989). Isomorphism may arise as the result of mimetic copying, of normative pressures emanating from institutions such as professional standards, or of coercive force requiring certain forms or behaviors based on formal regulations or societal expectations (DiMaggio & Powell, 1983). Sociological institutionalism is the most commonly used type of institutionalism in the study of CSR as well as in the business and management literature in general. For instance, Sharfman et al. (2004) suggested that multinational enterprises (MNEs) develop environmental management systems in response to international institutional pressures. Marquis et al. (2007) argued that institutional pressures at the level of the community shape CSR. Doh et al. (2010) linked the CSR-based legitimacy and reputation of firms, as seen through the judgment of third parties, to financial performance. Rathert (2016) argued that MNEs adopt CSR abroad to signal legitimacy in their host markets. And Miska et al. (2016) proposed that Chinese firms were subject 2 Electronic copy available at:

to legitimacy pressures from home country, international, and host country standards in selecting their international CSR strategies. Historical institutionalism, by contrast, is more common in political science and socioeconomics, but to some extent also in parts of economics. Institutions here are seen as “humanly devised constraints that structure human interaction” (North, 1990). These come in both formal and informal shape. Unlike its sociological sibling with emphasis on similarities, historical institutionalism tends to focus on differences in practices across institutional contexts (Hall & Taylor, 1996). Institutions are seen as political projects, that is, they result from the interplay of actors with varying interests and power and are not necessarily efficient (North, 1990). At the same time, this interplay is constrained by the existing set of institutions, which gives rise to path dependency: what is possible in the now depends on the institutional structures inherited from the past (Hall & Taylor, 1996). In addition to path dependency, historical institutionalism also embraces the notion that institutions often have unintended consequences (Hall & Taylor, 1996). CSR-related works using historical institutionalism tend to draw on the literature on comparative institutional analysis, most often the Varieties of Capitalism school associated with Hall and Soskice (2001). For example, in developing the well-known distinction between implicit and explicit CSR, Matten and Moon (2008) specifically built on the dichotomy between coordinated market economies (CMEs) such as Germany and liberal market economies (LMEs) such as the United States, as advanced by the Varieties of Capitalism approach. Jackson and Apostolakou (2010) found that firms in LMEs tend to score higher in terms of CSR metrics than firms in CMEs, suggesting that CSR may substitute for otherwise institutionalized patterns of social solidarity. Given the existence of further varieties of capitalism among the world’s major economies (Witt & Redding, 2013; Witt et al., 2017), subsequent work has both extended (Kang


& Moon, 2012; Ioannou & Serafeim, 2012) and challenged (Witt & Redding, 2012) the dichotomy of implicit versus explicit CSR. The third type, rational choice institutionalism, is most commonly found in economics and in political science. Though the definition of institutions is consistent with that by historical institutionalists, rational choice institutionalists differ in that they conceive of institutions as social structures for solving market failures by lowering transaction costs (Hall & Taylor, 1996; Williamson, 1975, 1985). This arguably results in a functionalist tendency: institutions exist because they lower transaction costs. CSR-related works in this vein are relatively rare, possibly because the basic assumption underlying rational choice institutionalism is that actors are opportunistic (cf. Williamson, 1985). Examples include the pieces by Christmann and Taylor (2006), who argued that companies in China strategically self-regulate compliance with environmental standards based on market characteristics, and by El Ghoul et al. (2017), who proposed that firms in countries with weak market-supporting institutions use CSR to reduce transaction costs and increase access to resources. In this conceptualization, engaging in CSR is a matter of self-interest rather than a concern with legitimacy or the result of rules of the game created through political processes. To the extent we see a trend toward more self-regulation, rational choice institutionalism may gain relevance.

Types of Institutions and Levels of Analysis Research linking institutions and CSR has drawn not only on different kinds of institutionalisms but has also focused on varying kinds of institutions at different levels of analysis. One dividing line is the distinction between formal and informal institutions (cf. North, 1990). Formal institutions are usually codified in written form, as in the case of laws. By contrast, informal 4

institutions generally represent unwritten norms and standards, such as professional norms of appropriate conduct. Interest in formal institutions is a strong theme in CSR-related research, with most pieces building at least part of their analysis around laws and legal regulations. Common are pieces on environmental regulations, but also labor standards and consumer or product safety (Table 1). Others, especially works drawing on historical institutionalism, tend to take a holistic approach that involves formal institutions across several realms, such as finance, corporate governance, education, and labor relations. *** Insert Table 1 about here *** Much, but by no means all, research also incorporates informal institutions. One area of attention has been the influence of voluntary regulatory frameworks, such as the United Nations Global Compact and international certification schemes. In addition, a number of pieces have explored themes like the impact of informal institutions such as ethics, cultural norms and institutional logics, industry norms and perceived “best practice”, community norms, and religion (Table 1). A second dividing line is the level of analysis at which the institutions of interest are located. Common options include the level of the industry, the country, as well as the international and transnational level (Table 2). A number of these works also incorporate multiple levels of institutions, though works that are explicitly constructed as multilevel analyses seem to continue to be relatively rare. *** Insert Table 2 about here ***

Institutions and the Various Domains of CSR


The concept of CSR has a long and varied history (Carroll, 1999). In the past, CSR research emphasized economic, ethical, and legal responsibilities (Schwartz & Carroll, 2003). More recently, scholars have focused on the linkages to and overlaps with the concept of sustainability (Bansal & Song, 2016) and, relatedly, companies’ responsibilities within the triple-bottom line logic of economic, social, and environmental aspects. The multitude of overlapping and competing CSR conceptualizations and frameworks is also evident in research on the connections between institutions and CSR. Below, we discuss two such research areas as examples: first, the comparative CSR literature, which tends to frame CSR rather broadly and investigates how variation across countries affects the relevance of various domains of CSR; and second, perspectives that emphasize institutional characteristics within single countries and their interrelationships with specific CSR domains. The relatively encompassing approach in the comparative CSR literature reflects the variability in relevance of CSR practices according to country institutional characteristics. For instance, Matten and Moon (2008) acknowledged the umbrella-concept nature of CSR by relating their framework of implicit and explicit CSR to workers’ rights, environmental protection, education, and corporate irresponsibility to show differences in embeddedness of CSR between the United States and Europe. Later works (El Ghoul, Guedhami, & Kim, 2017; Ioannou & Serafeim, 2012; Jackson & Apostolakou, 2010; Kang & Moon, 2012) similarly considered and addressed various domains of CSR including economic, social, and environmental aspects in relation to institutional variation across countries. While the comparative capitalism literature including Hall and Soskice’s (2001) Varieties of Capitalism and Whitley’s (1999) National Business Systems does not provide the foundation for all pieces in this vein, these frameworks are important bases for comparative perspectives. Recent comparative institutional research and the new types of


business systems it has suggested (cf. Witt et al., 2017) offer potential for generating a deeper understanding of how institutional variation across countries shapes various domains of CSR. Research that takes indigenous perspectives on the linkages between institutions and CSR often incorporates distinct institutional dynamics relevant within a given country as well as select domains of CSR. Examples include Carrete, Arroyo, and Trujillo's (2014) study with a focus on environmental performance from a Mexican perspective, Muthuri and Gilbert's (2011) analysis of CSR in Kenya, and See's (2009) examination of China’s Harmonious Society policy. Indigenous perspectives often tend to explore emerging economies and aspects of CSR that are particularly relevant in these contexts. This indicates the potential of this area for theory extension (cf. CuervoCazurra, 2012) linking institutional particularities of emerging economies—such as institutional voids, government involvement, and diverse governance mechanisms (Stahl, Miska, Puffer, & McCarthy, 2016)—to CSR. For example, analyzing CSR orientations in the Lebanese context, Jamalie and Neville (2011) developed a framework based on Scott’s (2008) multi-level model of institutional flows and Matten and Moon’s (2008) explicit-implicit CSR framework. By contrast, Muthuri and Gilbert (2011) concluded on the basis of their analysis of Kenya that there is no overarching institutional logic that explains why companies in Kenya engage in CSR. Taken together, these indigenous perspectives can be insightful for both the CSR and the institutional literature.

IMPLICATIONS FOR RESEARCH AT THE INTERSECTION OF INSTITUTIONS AND CSR In this second section of the chapter, we outline implications for research focused on institutions and CSR. Specifically, we discuss the impact of institutions on CSR, but also the effect CSR has on institutions and institutional change. 7

Impact of Institutions on CSR Much of the literature linking institutions with CSR has been related to “implicit CSR” (Matten & Moon, 2008)—that is, most research has explored the impact of formal and informal institutions governing the role of the firm in society. CSR, in these papers, is an expression of conformity with legal (formal) and social (informal) norms. Non-conformity is usually punished, be it through the legal system or through social mechanisms such as boycotts. Punishment is costly for firms, which implies that firms have an incentive to conform, or at least not to be seen as exceptionally deviant. The key question for this literature is thus to what extent it sheds light on actual CSR, rather than on plain conformity. In the more recent CSR literature, few would classify companies’ conformity with corporate governance, accounting, or penal codes as CSR, even though these aspects are highly socially relevant. So why would conformity with environmental, product and consumer safety, or labor relations norms be any more of an expression of responsible acts towards society, given that firms have a self-interest in avoiding punishment attendant to violating these institutions? To the extent this concern is valid, most of the works purporting to explore CSR through an institutional lens may in effect merely document forms of institutional conformity. It seems to us that there are three possible responses to this conundrum. First, one could try to make an argument why certain areas of conformity are more “responsible” than others. It seems unlikely that this would be a fruitful avenue unless clear, objectively defensible criteria for making such distinctions can be devised. Second, one could widen the scope of CSR to include a wide range of conformity with legal and societal norms; in effect, this is what much of the literature reviewed above seems to have done. In our view, however, this would be essentially meaningless because CSR would then be equivalent to institutional conformity of firms in general, an


explanandum already covered by the three forms of institutionalism. CSR research would become a choice of dependent variable in institutional research rather than a separate field of study. Third, the CSR literature could focus on the level of explicit CSR—that is, voluntary behavior of firms that goes beyond legal and societal expectations and produces social benefits. We believe that this is the most promising of the three options, at least as viewed from an institutionalist perspective. The role of institutions in this approach to CSR would be different from most of what we have seen in the literature to date. Institutions in this interpretation would no longer be proximate causes of CSR (as this would produce implicit CSR). Rather, they would mediate or interact with the impact of other variables, such as industry characteristics or competitive intensity, to produce similar or different kinds of CSR behavior and outcomes in different institutional contexts. For instance, it is at least imaginable that firms in industries requiring high levels of labor skills would use CSR activities in the form of training programs for employees to substitute for a weakly developed skills formation and training system in a given country. In other industries, high competitive intensity might lead firms to seek ways to differentiate themselves as employers, with institutions shaping how firms might use CSR activities to this effect—e.g., providing training in countries with weak educational systems such as emerging markets or engaging in community charity projects in countries with weak social protection like the United States. Implicit in this notion are also the possibilities of equifinality—different institutions produce similar behavior and outcomes—and path dependency—similar institutions produce different behavior and outcomes. This further suggests that historical institutionalism and especially the various approaches to comparative institutional analysis including Varieties of Capitalism (cf. Witt et al., 2017) may have a privileged role to play in the way forward, relative to the other kinds of institutionalism. Provocatively put, it does not seem particularly interesting for future research to show once more 9

that firms conform with institutions requiring CSR so they retain their legitimacy; this has been done. It is also not particularly interesting to illustrate once more that firms can build institutions on a voluntary basis to further their economic self-interests; this has been done as well. What would be interesting is how institutions that per se have no direct connection to CSR influence firms to engage in various forms of explicit CSR. Comparative institutional analysis is uniquely positioned for this endeavor. In addition to accommodating path dependency and equifinality, the literature has conceptualized how institutions governing varying parts of the economy, such as labor relations and finance, link to firm behaviors and economic outcomes such as comparative advantages (Hall & Soskice, 2001; Witt & Jackson, 2016). Applying similar logics to explicit CSR would, in our view, constitute a promising road forward for understanding the linkage between institutions and CSR. Ideal for the pursuit of this question would be a configurational approach. Equifinality implies that the impact of a given set of institutions on CSR is contingent on other factors, be they other institutions or non-institutional variables. In simple cases involving few variables, it may be possible to model these interactions using traditional regression techniques. When multiple variables interact, however, this can become extremely complex. In addition, the underlying assumption of regression is that each variable will be linear and symmetric in its effects, which is not necessarily the case (Ragin, 2000, 2008). Contingent on other variables, the same institution may help produce a given outcome by being present in combination with some variables and by being absent in others. For instance, Witt and Jackson (2016) showed that essentially opposite values of the same types of institutions can produce the same kind of outcome. Regression models would have missed this. Empirically, this suggests the wider adoption of configurational analytical methods such as fuzzy-set qualitative comparative analysis (fsQCA) (Fiss, 2007; Ragin, 2000, 2008). Based on 10

Boolean algebra, this approach explicitly seeks to identify the combinations of causal conditions (variables) sufficient to produce a given outcome. While a number of CSR-related works have used or proposed to use fsQCA (e.g., Aguilera & Desender, 2012; Crilly, 2013; Crilly, Zollo, & Hansen, 2012; Miska et al., 2016), the application of fsQCA in the context of comparative institutional analysis of CSR is still rare (e.g., Gjølberg, 2009). Whereas empirical exploration of the possibility of different configurations producing equifinal outcomes is thus methodologically relatively straightforward, theory building and hypothesizing around configurations remains challenging. In the ideal case, theory and hypotheses would provide clear expectations about specific combinations of causal conditions likely to be associated with a given outcome. In practice, arriving at these expectations is extremely difficult. Even reducing each causal condition to only two possibilities—present or absent—one would need to account for 2k different combinations, where k is the number of causal conditions. Five variables would thus require up to 32 hypotheses, or alternatively the ability to rule out at least some of them as unlikely to occur. To our knowledge, research predicting the precise combinations expected to produce a given outcome remains a rarity (e.g., Witt & Jackson, 2016). For configurational methods to deliver their full value, the social sciences need to develop new ways of making theoretical sense of equifinal configurations. The literature on CSR and institutions could be a testbed for efforts in this direction.

CSR and Institutional Change All three approaches to institutionalism—sociological, historical, and rational choice—treat institutions as relatively stable and enduring, as the very idea of stability is inherent in institutions. Mahoney and Thelen (2009) remark that the three institutionalisms provide answers to what sustains institutions over time and permit for the possibility that exogenous shocks and shifts 11

promote institutional change. However, these approaches do not provide a general model of change. Perhaps as a result, few works have investigated how companies’ CSR initiatives, practices, and approaches affect and change institutional settings and environments. The emphasis has been on the institutional antecedents of CSR engagement. For example, Campbell (2007) offered an institutional theory of CSR with a focus on the conditions under which companies are likely to behave socially responsibly. Berrone, Fosfuri, Gelabert, and Gomez-Mejia (2013) argued for greater regulatory pressures to increase companies’ propensity to engage in environmental innovation, and Fransen (2013) analyzed the gaps in understanding how national institutions affect CSR practices and proposed a number of suggestions on how these gaps may be addressed. By contrast, much less work (e.g., Karam & Jamali, 2013) has considered the effects of companies’ CSR practices on institutional arrangements or the co-evolution of institutions and CSR. This lack of recognition of human agency in the institutional context of CSR puts unnecessary constraints on the ability of CSR scholars to shed light on important topics. For instance, to the extent CSR activities and the institutional context co-evolve (Lewin & Volberda, 1999)—that is, they mutually constitute each other—the types of CSR firms undertake may have important implications for the sustainable development of society more generally. This possibility is consistent with recent efforts in the literature to elucidate complementarities between CSR and sustainability (Bansal & Song, 2016). Two approaches in particular seem promising to us for further exploration of the role of institutional agency and co-evolutionary dynamics in CSR. First, recent years have seen the emergence of a stream of research on political CSR. Works in this area presume that companies are not isolated from political systems but form part of them, inasmuch as they assume a political role (Scherer, 2017). The literature on political CSR acknowledges initiatives like the United 12

Nations’ Sustainable Development Goals (SDGs) (e.g., Voegtlin & Scherer, 2017), and in this vein underlines the call for companies to actively contribute to sustainable development. The SDGs are defined as a broad sustainability agenda which, due to its ambitious targets, requires collaboration and partnerships between governments, companies, and multiple stakeholders. Under the theoretical lens of political CSR, the SDGs are an interesting avenue for future research to study the co-evolution of CSR and institutions. On the one hand, they provide a framework for examining the types of sustainability targets companies consider applicable in terms of their contributions to sustainable development. From this perspective, it will be relevant to understand the rationales for firms to prioritize certain goals over others, and investigate how they incorporate them into their CSR activities. Such research has the potential to delineate the extent to which companies through their CSR assume true political roles and actually contribute to sustainable development. On the other hand, closer examination of these dynamics will help understand better the extent to which companies shape institutional co-evolution. Thus, under the assumption that firms through their CSR activities assume political responsibility, partly generated by initiatives like the SDGs, we would expect that their agency to some degree affects established institutional arrangements as well. Second, the field may benefit from greater attention to the CSR activities of MNEs. The role of MNEs in shaping institutional arrangements is comparably under-researched, most likely due to the frequent notion of CSR as a means for MNEs to gain legitimacy through adaptation to host-country institutional arrangements (e.g., Park & Ghauri, 2015; Rathert, 2016; Yang & Rivers, 2009). Studies have tended to be limited to and focused on non-governmental organizations (NGO) and “actors on the ground” (Mair, Marti, & Ventresca, 2012) rather than large-sized MNEs that operate simultaneously within and across diverse institutional settings. Since MNEs have come to play an increasingly important role in public policy (Scherer, Palazzo, & Matten, 2014), it seems 13

likely that their CSR activities may help shape the evolution of the institutional fabric in their numerous host markets—rather than merely fill institutional voids. Particularly interesting in this context would be whether and how MNEs contribute to institutional convergence. While some MNEs adopt a locally responsive CSR posture abroad, others prefer to pursue globally integrated CSR strategies (Miska et al., 2016). To the extent firms in the latter group may pursue similar strategies—for instance, following similar guiding principles—they may contribute to the global diffusion of institutional practices.

CONCLUSION In this chapter, we have provided an overview of how existing research has approached the linkage between CSR and institutions. We suggested implications for research and directions how work at the intersection of CSR and institutions might be advanced further. Specifically, it seems to us that considerable mileage may be gained by applying insights from comparative institutional analysis to voluntary (“explicit”) forms of CSR, and that the co-evolution (Lewin & Volberda, 1999) of CSR and institutional norms may be a second worthwhile avenue of further exploration. In pursuing these paths of exploration, future CSR research may generate valuable insights not only in its own right, but also contribute to the institutional literature more broadly.


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Table 1. Overview of formal and informal institutions used in the CSR literature

Type of Institution Formal


Specific Institution

Exemplars in the Literature

environmental regulations

Bansal & Roth, 2000; Chiu & Sharfman, 2011; Flammer, 2013; Henriques & Sadorsky, 1999; Muthuri & Gilbert, 2011; Sharfman et al., 2004 labor standards Henriques & Sadorsky, 1999; Ioannou & Serafeim, 2012; Levy, 2008; Perez-Batres, Doh, Miller, & Pisani, 2012 consumer or product safety Carroll, 1991; Henriques & Sadorsky, 1999; Park & Ghauri, 2015 institutions across several Brammer, Jackson, & Matten, 2012; realms, such as finance, Ioannou & Serafeim, 2012; Jackson corporate governance, education, & Apostolakou, 2010; Kang & and labor relations Moon, 2012; Matten & Moon, 2008 voluntary regulatory Bartley, 2007; B. G. King, 2014; frameworks, such as the United Lim & Tsutsui, 2012; Marquis, Nations Global Compact and Toffel, & Zhou, 2016; Miska et al., international certification 2016; Muthuri & Gilbert, 2011 schemes ethics Carroll & Shabana, 2010; Jeurissen, 2004; Wettstein, 2010 cultural norms and institutional Lee, 2011; Miska et al., 2018; Witt logics & Redding, 2012; Yang, Colvin, & Wong, 2013; Yin & Zhang, 2012; industry norms and perceived Campbell, 2006; A. A. King & “best practice” Lenox, 2000; Muthuri & Gilbert, 2011 community norms Henriques & Sadorsky, 1999; Marquis et al., 2007 religion Mazereeuw-van der Duijn Schouten, Graafland, & Kaptein, 2014


Table 2. Levels of Institutions Used in the CSR Literature Level of Institutions industry country

international, transnational multi-level

Exemplars in the Literature Beliveau, Cottrill, & O'Neill, 1994; Lee, 2011; Sharma, 2000; Van Buren III & Patterson, 2012 Brammer et al., 2012; Ioannou & Serafeim, 2012; Jackson & Apostolakou, 2010; Kang & Moon, 2012; Matten & Moon, 2008; Witt & Redding, 2012 Bartley, 2007; B. G. King, 2014; Lim & Tsutsui, 2012; Miska et al., 2016 Lim & Tsutsui, 2012; Miska et al., 2018; Miska et al. 2016