Elsevier

Journal of Cleaner Production

Volume 229, 20 August 2019, Pages 974-988
Journal of Cleaner Production

Does firm size matter? Evidence on the impact of the green innovation strategy on corporate financial performance in the automotive sector

https://doi.org/10.1016/j.jclepro.2019.04.214Get rights and content

Highlights

  • The relationship between firm-level green innovation strategy and corporate financial performance is investigated.

  • Green innovation strategy interacts with firm size to affect organisational performance.

  • The paper controlled for endogeneity that emerges from unobservable heterogeneity of firms using the dynamic method of moments estimator.

  • Green innovation strategy shows significant positive effect on corporate financial performance.

  • The small-sized firms shown GIS than the larger-sized firms, which more inclined to pursue variation and visibility, for accessing better resources.

Abstract

In the past few years, there has been increasing awareness regarding the significance of the Green Innovation Strategy (GIS) in the academic and practical fields. Hence, it becomes important to determine the correlation between the GIS and the Corporate Financial Performance (CFP). This study attempted to determine the dynamic correlation between the GIS and the CFP, with regards to the firm size. For this purpose, this study has collected data for 163 international automotive firms, from the CSRHub database, for the period ranging between 2011 and 2017. Furthermore, we also used the dynamic panel data system, i.e., the Generalised Method of Moment (GMM) method, for estimating this relationship. The empirical results indicated that the GIS positively affected the CFP. Interestingly, we also uncovered that the firm size moderated the negative correlation between the GIS and the CFP. The small-sized firms showed higher green innovation investments return than the larger-sized firms, which indicated that these smaller firms were more prone to seek variation and visibility, for accessing better resources. Furthermore, due to the extensive scrutiny of the stakeholders, these small firms could generate higher profits. The implications for managers and the theories in this regard are then discussed.

Introduction

Currently, the automotive industry faces many obstacles. This sector generally relies on the technological paradigm of volume production, which has gradually become more unprofitable due to the increase in the segmented niche markets. Furthermore, this sector has to undergo many social and regulatory pressures, which can improve the sustainability of all its products and production methods. Research conducted in this field showed that the automotive sector is facing these challenges and have to establish techniques for developing a profitable and sustainable sector for future generations (Smith and Crotty, 2008) After the publication of KPMG's report (2012) on environmental regulations in the automotive sector, various governments started imposing strict environmental regulations on the OEMs (Original Equipment Manufacturers) for controlling the CO2 emissions. For example, the European Commission implemented legislation for testing fuel quality, reducing emissions, and fuel consumption as follows:

  • By 2021 the cars, which emit >95 g of CO2/km, would be disallowed in the market.

  • By 2020, the greenhouse gas intensity of all automobile fuels must be reduced by 10%, for improving the fuel quality.

  • By 2021, the automobile manufacturers should produce light-duty vehicles that consume <3.6 l/100 km of diesel or <4.1l/100 km of petrol.

In the past, the transportation sector was seen to be responsible for 27% of the total global energy consumption and 33.7% of all greenhouse gas emissions (Tie and Tan, 2013). These trends would change in the future, due to the scarcity of fossil fuels and increasing environmental pressure (Nilsson et al., 2012). Because of the increasing concern with regards to the environmental issues, by the public, consumers, suppliers and the administration, a majority of the firms have begun the development of environmentally-friendly green products (Green et al., 2012; Tseng et al., 2013). Hence, the techniques which save energy, or reduce CO2 emissions and air pollution, in the automotive sector, are important challenges and issues affecting the governments (Hui, 2010). In their study, Shrivastava (1995) stated that firms must differentiate their products, lower production costs, improve product quality and develop more innovation processes. Therefore, continuous innovation was seen to be an important strategy which could help in overcoming the pressures implemented by the competitors, customers and the regulators (Porter and Van der Linde, 1995a, Porter and Van der Linde, 1995b).

Due to the strict international rules, increasing consumer environmentalism, and the conventions regarding green innovation, the competition and the business-related tactics have undergone a significant alternation in all global industries. These factors have also affected the business in the automotive industries. Hence, the Green Innovation Strategies (GIS) have played a vital role (Russo and Fouts, 1997). GIS is described as the development of green process and green products-related innovation strategies and decisions, that associated with the application of green activities and environmental management systems (Eiadat et al., 2008; Tomomi, 2010; Dong et al., 2014). On the other hand, very few researchers have investigated the effect of the GIS on the Corporate Financial Performance (CFP). CFP is defined as measuring the results pertaining to a firm's operations and policies in monetary aspects. The company's return on investment, value added and return on assets as depicted with these results. In this research study, CFP has been employed as an instrument to measure economic performance as well as integrating accounting-based measures, which includes asset utilisation, firm's profitability, return on equity, the return of investment and return on asset (Wu et al., 2006). An organisation's internal efficiency is represented by the accounting-based measures, which is impacted by the social performance of the organisation (Van Beurden and Gössling, 2008). So, it is important to develop policies that can effectively implement GIS in the industries (Petts, 1998). In this study, we have attempted to bridge this gap and described many novel green innovation-related concepts.

In the past few years, GIS was seen to one of the major factors that affected environmental sustainability, financial growth and life quality (Porter, 1981; Bansal and Gao, 2006; Dangelico and Pujari, 2010). Implementation of the GIS is a vital tool which increases the sustainable growth of the manufacturing industries due to an increasing environmental pressure, especially in the automotive sector. Use of GIS embodies the idea of environmental protection for designing and packaging products and improving the differentiation-related advantage (Hart, 1995; Chen et al., 2006). The implementation of GIS could significantly increase the resource productivity of the companies (Porter and Van der Linde, 1995a, Porter and Van der Linde, 1995b). Therefore, the development of GIS would help in resolving the conflicts between environmental protection and economic development.

In this study, we have also attempted to examine the connection between the GIS and their effect on firm profitability in the automotive industry. Furthermore, this study also intended to determine the effect of firm size on the GIS and CFP in the automotive industry. This study collected the data from the CSRHub for a period ranging between 2011 and 2017 and investigated whether the green innovation investment would increase the shareholders’ wealth. We also studied whether the significance of these activities varied based on the firm characteristics (like firm size) employing the dynamic panel data system GMM estimator. The empirical outcomes highlighted the significantly positive relationship between GIS and CFP. This positive relationship was persistent when this study attempted to control the endogeneity of GIS. We further noted that the effect of the negative relationship between the GIS and firm size on the CFP could be due to the fact that the GIS spending by the company provides an overall limited tangible benefit, and helps the company obtain better profits. A small firm size showed higher efficiency than the larger firms. This indicated that the agency costs (like the ineffective use of the corporate funds) encountered while implementing the GIS in the larger firms were the dominant factor that affected the strategic benefits which these firms could derive after the green innovation investments. Implementation of GIS could significantly upsurge the profitability of the smaller firms. Hence, the results indicated that the total benefits derived by the implementation of the GIS were not a one-size-fits-all and were dependent on the firm characteristics.

Based on the study results, we have put efforts to make three key contributions to the literature with regards to this topic. First, as per our knowledge, we are the first to examine the unique setting of GIS's role pertaining to firm size interactions. Also, prior studies have not considered longitudinal aspect pertaining to GIS (e.g., Aguilera-Caracuel and Ortiz-de-Mandojana, 2013; Gluch et al., 2009; Chen et al., 2006; Ge et al., 2018). This research offers insight regarding the growing need to understand the impact of firm size in justifying that the enhancement in green innovation improves firm-level financial performance.

Second, we put forward a significantly positive relationship that exists between CFP and GIS, which was crucial as it could help to solve the existing perspective defining the relationship. Our finding offers a holistic means to examine the firm's conditions that allow organisations to create green innovation initiatives as well as simultaneously enhance their financial performance. Moreover, we have stressed on the importance of the combination or configuration pertaining to the firm size, which could cast an impact on the automotive sector employing GIS. In this research study, we have provided in-depth insights by considering all the factors that could have a role in simulating the GIS of an organisation. Also, we have made an effort to aid governments and policymakers in designing impactful mechanisms and guidelines (instead of just creating regulations), thereby allowing the development of environmentally responsible attitudes.

Finally, many of the corporate finance and empirical management researchers recognise at least two potential sources of endogeneity: simultaneity and unobservable heterogeneity (Wintoki et al., 2012). However, one source of endogeneity that has usually been ignored (explicitly or implicitly) comes from the possibility that the current values pertaining to firm performance variables are regarded as a function of previous performance of the organisation. Overlooking this source of endogeneity could cast serious impacts for inference. This study has applied a system GMM estimator (Arellano and Bover, 1995; Blundell and Bond, 1998) on the dynamic panel data to resolve the issue pertaining to endogeneity between the CFP and GIS, which offers evidence confirming their relationship. Moreover, employing this technique has allowed gaining an understanding of the unobservable heterogeneity as well as a better depth pertaining to this study.

This study was structured as follows: Section 2 provided a brief overview of the related literature with regards to the theoretical foundations. Section 3 describes the method, data sample collection techniques and the measurements for all variables. Section 4 presents the descriptive statistics, all correlation coefficients between the variables, and also the outcomes of the interactive effect of the firm size. Section 5 discusses all results and offers directions for future studies. Finally, Section 6 presented the conclusions and implications of this study.

Section snippets

Ecological modernisation theory (EMT)

The ecological modernisation (EMT) theory deals with analysing how contemporary industrialised societies handle environmental crises (Mol and Sonnenfeld, 2000). The EMT theory that defines environmental innovation is put forward as a possible solution to resolve the conflict between environmental protection and industrial development (Murphy and Gouldson, 2000). As there is a need to achieve environmental performance and profitability simultaneously, as envisaged under EMT, green management has

Data collection and samples

In this study, we compiled all the data from two datasets, i.e., the CSRHub (https://www.csrhub.com/csrhub/), which consists of all information regarding the measures of GIS. CSRHub is a leading research company that consists of the Environmental, Social and Governance (ESG) data. This approach is more advantageous as it addresses the limitations seen in other methods like the Viego and KLD. The CSRHub1

Results and discussion

In Step 1 of the empirical study, we aimed to offer direct empirical evidence for describing the dynamic correlation between GIS and CFP. We used the ROA as a CFP measure (Table 3) and thereafter, replicated these estimates using the ROE and ROS measures (Table 3) for assessing if the results were sensitive to the particular CFP indicators. Lastly, we tested the interactive effect of the GIS and firm size on the CFP (Table 4).

Conclusions

In this study, this study has developed a novel theoretical model which examined the relationship between the GIS, firm size and the CFP. The results obtained from this study could make important contributions to the existing literature regarding the sustainable development into the innovation and the strategy management (Zhu et al., 2012; Dong et al., 2014; Fargnoli et al., 2014; Pekovic et al., 2016). In the past few years, many companies have begun developing and implementing ecological

Acknowledgments

This research was supported by Grant Universiti Putra Malaysia (GUPM) (GP-IPS9536600).

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