The effect of environmental innovations on firms’ internationalization : the moderating roles of technological cooperation and governmental subsidies

The effect of environmental innovations on firms’

internationalization: The moderating roles of technological

cooperation and governmental subsidies

MSc Business Administration – International Management Track University of Amsterdam

Student: Kimberly Koch Student ID: 11403942 Supervisor: Dr. Niccolò Pisani Second Reader: Dr. Mashiho Mihalache

Date of Submission: June 23rd_{, 2017}

Statement of Originality

This document is written by Kimberly Koch who declares to take full responsibility for the contents of this document.

I declare that the text and the work presented in this document is original and that no sources other than those mentioned in the text and its references have been used in creating it.

The Faculty of Economics and Business is responsible solely for the supervision of completion of the work, not for the contents.

Abstract

Environmental concerns are growing worldwide. One opportunity for firms to respond to these challenges is the introduction of environmental innovations. Previous literature has extensively investigated the specific characteristics of this type of innovation as well as the consequences of environmental innovations on companies’ performance. However, findings regarding the implications of these innovations on firms’ internationalization are rather mixed. In light of this, the purpose of this study is to analyze the influence of environmental innovations on the scale and scope of firms’ internationalization. Moreover, this work examines the moderating effects of technological cooperation and home country governmental subsidies on the underlying relationship between environmental innovation and scale and scope of internationalization. Using cross-sectional data from the Spanish Technological Innovation Panel (PITEC) of the year 2014, the empirical results support the hypothesized positive effect of environmental innovations on both scale and scope of firms’ internationalization. Indeed, the findings do not provide evidence for moderating effects of neither technological cooperation nor governmental subsidies. Thus, this study contributes to the academic literature by shedding more light on the relationship between environmental innovation and internationalization. Moreover, this work provides implications for both public policy and managerial decisions as well as limitations and suggestions for future research.

Keywords: Environmental innovation; scale of internationalization; scope of

List of Contents

2.2 Innovation and Internationalization ... 11

2.3 Environmental Innovation ... 13

2.3.1 Definition and Characteristics ... 13

2.3.2 Implications for Firm Performance ... 15

2.3.3 Implications for Internationalization ... 17

2.4 Research Gap... 19

3. Theoretical Framework ... 20

3.1 Environmental Innovation and Scale and Scope of Internationalization ... 20

3.2 Technological Cooperation ... 25

3.3 Home Country Governmental Subsidies ... 28

4. Methods ... 31

4.1 Sample and Data Collection ... 31

4.2 Variables and Measures ... 32

4.2.1 Dependent Variables ... 32

4.2.2 Independent Variable ... 33

4.2.3 Moderating Variables ... 34

4.2.4 Control Variables ... 34

4.3 Statistical Analysis and Results... 36

5. Discussion ... 44

5.1 Academic Relevance ... 44

5.2 Practical Relevance ... 47

5.3 Limitations and Further Research ... 48

6. Conclusion ... 50

Acknowledgement ... 52

List of Figures

Figure 1. Conceptual model ... 31

List of Tables

Table 2. Operationalization of Variables ... 36

Table 3. Means, Standard Deviations, Correlations ... 42

1.

Introduction

Recently, concerns regarding ecological issues, such as heightened resource consumption and environmental degradation, have been growing (Adams, Jeanrenaud, Bessant, Denyer, & Overy, 2016). Stronger environmental expectations from governments, activist groups, consumers, and employees pressure companies to act more environmentally friendly (Santos, Pache, & Birkholz, 2015). By means of introducing environmental innovations firms can incorporate these environmental matters into their strategy (De Marchi, 2012). In this context, environmental innovations can be defined as “product, process, marketing, and organizational innovations, leading to a noticeable reduction in environmental burdens” (Horbach, Rammer, & Rennings, 2012: 119). Despite the increasing importance of environmental concerns worldwide, previous literature has mainly focused on a domestic context (Leonidou & Leonidou, 2011). Although the number of studies in the international context is growing, the relationship between environmental innovations and the scale and scope of firms’ internationalization – that is the extent of firms’ involvement in international operations – remains understudied (Hitt, Tihanyi, Miller, & Connelly, 2006; Leonidou & Leonidou, 2011).

The general innovation literature, which does not explicitly distinguish environmental innovations, mainly confirms that innovative firms are more successful internationally (Chiva, Ghauri, & Alegre, 2014; De Marchi, 2012; Filippetti, Frenz, & Ietto-Gillies, 2011). Innovations enable companies to improve, for example, their productivity as well as product differentiation, and thus facilitate firms’ internationalization (e.g., Cassiman & Golovko, 2011; Cerrato, 2009). However, environmental innovations differ in their characteristics from general innovations, especially with respect to their drivers and externalities (De Marchi, 2012). Rennings (2000: 325) points out the “double externality problem”, which describes the effect that environmental innovations also lead to positive spillovers in the diffusion phase in addition to those in the innovation phase. Therefore, regulation constitutes a distinctive driver, which plays a decisive role in increasing firms’ incentives to invest in such innovations (Rennings, 2000). While a

consensus exists in existing literature regarding the specific characteristics of environmental innovations (e.g., Horbach, 2008; Horbach et al., 2012), researchers have increasingly tried to understand the effect of such innovations on economic performance (Antonietti & Marzucchi, 2014). The traditional view argues that environmental innovations are related to higher costs (Ambec & Lanoie, 2008). However, Porter and Van der Linde (1995) point out their so-called ‘Porter Hypothesis’ according to which environmental regulations can encourage firms’ environmental innovativeness, which in turn enhances firms’ international competitiveness (Ambec & Lanoie, 2008). The authors assume that environmental innovations are associated with an increase in efficiency comparable to efficiency efforts of firms’ profit maximization (Porter & Van der Linde, 1995).

Consequently, existing literature has extensively discussed the question ‘whether it pays to be green’ by investigating the effect of environmental innovation and proactive strategies on firms’ competitive advantages and performance. Yet, studies have especially focused on performance in terms of financial performance and profitability (Antonietti & Marzucchi, 2014; Clarkson, Li, Richardson, & Vasvari, 2011; Ghisetti & Rennings, 2014). Regarding implications for firms’ internationalization, previous authors have started to investigate the relationship between environmental innovation and export (e.g., Antonietti & Marzucchi, 2014; Leonidou, Fotiadis, Christodoulides, Spyropoulou, & Katsikeas, 2015). Although evidence for a positive relationship between environmental innovation and export performance exists (Leonidou et al., 2015), however, researchers have also found support for a negative correlation (e.g., De Marchi, 2012; Del Río, Peñasco, & Romero-Jordán, 2015). Additionally, authors studying the influence of firms’ internationalization on the engagement in environmentally friendly activities also arrive at contrasting results (Chiarvesio, De Marchi, & Di Maria, 2015; Christmann & Taylor, 2001). De Marchi (2012) notes that different environmental standards across countries as well as the important role of trust, reputation, and direct communication efforts might negatively influence the correlation between environmental innovations and

international operations. On the whole, previous research on whether environmental innovators are more successful internationally are rather mixed. Furthermore, except for few studies, such as the one of Antonietti and Marzucchi (2014) according to which firms with environmental strategies are more likely to expand to countries with higher environmental regulations, the role of environmental innovations on the geographical reach of firms’ international operations has been relatively overlooked in existing literature.

Therefore, this study contributes to the academic literature by clarifying the relationship between environmental innovations and the extent of firms’ involvement in international operations. In order to add new insights to the current gap in the literature this study investigates the research question: How do environmental innovations influence the scale and scope of firms’ internationalization? In addition, moderating effects of technological cooperation and home country governmental subsidies are included. While previous research has emphasized the important role of technological cooperation and governmental support with regard to environmental innovations (e.g., De Marchi, 2012; Del Río et al., 2015), so far researchers have not focused on moderating effects of these constructs on the relationship between environmental innovations and respectively scale and scope of firms’ internationalization. The presented theoretical framework is empirically tested using cross-sectional data from the Spanish Technological Innovation Panel (PITEC) of the year 2014, comprising an extensive sample of Spanish innovative companies. The findings of this study support the hypothesized positive effect of environmental innovations on both scale and scope of firms’ internationalization. However, this work does not provide evidence for moderating effects of technological cooperation or home country governmental subsidies. Based on the results obtained, the study also highlights implications for public policy and managerial decisions.

The remainder of this study is organized as follows. The subsequent section reviews the relevant literature regarding internationalization, innovation, and environmental innovation. Thereafter, different hypotheses are specified and the developed conceptual model is presented.

Section 4 describes the data source as well as the variables used in this empirical analysis. Subsequently, the methodology and the statistical findings are presented. The following section 5 discusses the results, draws attention to limitations of this study, and provides indications for further research. Finally, the paper draws a conclusion.

2. Literature Review

2.1 Theories of Internationalization

In today’s increasingly globalized environment, companies are more and more engaged in activities beyond their home markets (Cavusgil & Knight, 2015; Faeth, 2009; Hitt et al., 2006). Several terms such as internationalization, level of internationalization, multinationality, and international diversification are used interchangeably in existing literature, relating to the same strategic construct (Hitt et al., 2006; Papadopoulos & Martín Martín, 2010). This study focuses on the scale and scope of firms’ internationalization that is the extent of firms’ involvement in international operations (Hitt et al., 2006). While the scale of internationalization refers to the degree of firms’ dependence on foreign markets, the scope of internationalization indicates the international geographical reach (George, Wiklund, & Zahra, 2005; Lu & Beamish, 2001). Due to the complexity of internationalization, a differentiation between scale and scope is appropriate (Hitt et al., 2006). Besides, regarding the scope of firms’ internationalization Rugman and Verbeke (2004) investigate the global versus home region orientation of large multinational enterprises. Considering North America, the European Union, and Asia as triad regions, their findings illustrate that most of those firms have a clear majority, about 80 per cent, of their total sales within their home region. In contrast, only a small number of firms has a real global orientation, which is associated with having at least 20 per cent but not more than 50 per cent of sales in each of the triad regions (Rugman & Verbeke, 2004).

Internationalization not only provides a crucial opportunity for value creation but also implicates an increasing level of uncertainty for the operating firm (Hitt et al., 2006; Lu &

Beamish, 2001). On the one hand, internationalization enables firms to benefit, for example, from economies of scale, a spread of research and development (R&D) costs, a more effective use of resources and capabilities as well as an opportunity to grow (Hitt, Hoskisson, & Kim, 1997; Hitt et al., 2006). On the other hand, firms are confronted with liability of foreignness (LOF), referring to costs associated with operations in foreign, unfamiliar markets (Zaheer, 1995).

Several researchers have investigated the drivers behind the international expansion of firms (e.g., Buckley & Casson, 1976; Dunning, 1977; Hymer, 1976). In order to overcome LOF and to compete with competitors in foreign markets firms can build upon their firm-specific advantages (Zaheer, 1995). An extensive number of studies considers ownership advantages, such as R&D and advertising expenses, technology, labor skills, managerial resources, firm size, capital intensity, economies of scale, and experience, as important determinants for operations of multinational companies across borders (Faeth, 2009).

While Hymer (1976) early emphasizes monopolistic advantages as explanation for international expansion, internalization theorists Buckley and Casson (1976, 2009) base their explanation on the importance of market imperfections and transaction costs. The authors argue that firms internalize intermediate markets to avoid external market imperfections and associated transaction costs as well as intend to reduce costs of their activities by means of their location choice. Furthermore, firms’ profitability as well as growth dynamics result from constant R&D and innovation activities (Buckley & Casson, 2009). This exploitation of intangible assets across international borders constitutes a major driver of firms’ internationalization (Cerrato, 2009). The Uppsala Model developed by Johanson and Vahlne (1977) determines firms’ internationalization as a gradual process with increasing commitment to foreign markets. Crucial in this stage process is firms’ level of international experience. While starting international expansion in nearby markets with similar characteristics as firms’ home markets, increasing international experience enables companies to gradually enter

markets with a higher commitment as well as markets that are less proximate (Johanson & Vahlne, 1977).

The resource-based view of the firm adds to these theories (Wang, Hsu, & Fang, 2008). According to Barney (1991), firms can generate a sustained competitive advantage by means of resources and capabilities that are valuable, rare, inimitable, and non-substitutable. This implies that competitors can neither implement this advantage simultaneously nor reproduce the benefit resulting from this advantage (Barney, 1991). In addition to ownership and internalization advantages, Dunning’s (1977, 2000) eclectic paradigm of foreign direct investment further points out the importance of location advantages as drivers for firms’ international activity. These location advantages include, for example, access to markets, distinctive tax conditions, lower risks, lower production and transportation costs, and favorable competitive environments (Faeth, 2009).

More recently, the emergence of so-called born global firms, which internationalize in their early ages and generate a significant share of their revenues abroad, challenges traditional internationalization theories. This early internationalization of young firms is driven by unique capabilities and strengths such as innovation and entrepreneurial orientation, enabling these firms to operate internationally despite deficiencies in tangible resources (Cavusgil & Knight, 2015). However, the central role of innovativeness concerning firms’ internationalization pertains not only for born global firms but also for established companies. Additionally, both technology and marketing skills such as reputation also represent key elements for firms’ internationalization (Cerrato, 2009; Kotha, Rindova, & Rothaermel, 2001).

2.2 Innovation and Internationalization

Successful international operating firms are characterized by their capacity to continuously innovate and improve (Porter & Van der Linde, 1995; Teece, 2014). Thus, several studies within the innovation literature have investigated the relationship between R&D, innovation activities, and internationalization (e.g., Cassiman & Golovko, 2011; Kafouros, Buckley,

Sharp, & Wang, 2008). Innovations can generally be described as processes that boost firms’ competitiveness by enabling firms to create and license new technologies, to increase the efficiency of production routines, and to develop new products and processes (Kafouros et al., 2008). According to Kyläheiko et al. (2011), innovations are associated not only with a company’s ability to apply its internal knowledge base but also with its ability to acquire additional external knowledge from sources such as partnerships or licenses. Companies that possess internal and external generated knowledge assets, optimally in equal shares, are able to enhance their international performance (Denicolai, Zucchella, & Strange, 2014). A firm’s absorptive capacity, which is related to routines and processes enabling the firm to generate value out of its knowledge base, strengthens this relationship (Denicolai et al., 2014; Zahra & George, 2002).

Concerning the decision to enter foreign markets a firm’s R&D activities as well as innovations are crucially important (Cassiman & Golovko, 2011). Cassiman and Golovko (2011) relate their findings to Vernon’s (1979) product cycle theory, according to which advantages based on home-based innovations provide firms with the possibility to enter foreign markets starting with export through to foreign direct investment. A positive relationship between innovation and firms’ export decision is based on the result of both that innovations increase firms’ productivity and that international markets might offer not only a higher demand for the new introduced products but also an opportunity to spread R&D costs (Cassiman & Golovko, 2011). Ganotakis and Love (2011) find a similar positive relation for small firms, revealing an increased likelihood to export due to innovations. Moreover, innovations enable firms to overcome LOF, and thus increase the level of global expansion (Cerrato, 2009). By means of investments in innovations firms can improve their product differentiation and are able to react appropriately to pressures concerning greater efficiency. Therefore, a greater level of R&D intensity, which is related to firms’ innovations, is associated with an increasing global orientation of firms (Cerrato, 2009).

However, internationalization and innovation influence each other reciprocally (Filippetti et al., 2011; Golovko & Valentini, 2011). International operations allow firms to benefit from new experiences and knowledge generated through learning from alternative business cultures and innovation contexts in foreign markets. While increasing the innovativeness companies become more competitive internationally and can embrace emerging market opportunities with new innovations. Therefore, the relationship between innovation and internationalization can be described as a virtuous circle where both constructs complement one another (Filippetti et al., 2011; Golovko & Valentini, 2011). Further, Kafouros et al. (2008) ascertain that firms are required to possess a minimum of international activity in order to benefit from innovations.

While previous research has confirmed that innovative firms are more successful internationally and that internationalization is spurred by innovation, authors have paid less attention to the linkage between a distinctive form of innovation, namely environmental innovations, and internationalization (Chiarvesio et al., 2015; Chiva et al., 2014; Filippetti et al., 2011).

2.3 Environmental Innovation 2.3.1 Definition and Characteristics

Environmental innovations possess distinct characteristics compared to other innovations, hereinafter referred to as general innovations (De Marchi, 2012). While this study uses the term environmental innovation, different terms such as eco-innovation and green innovation are used interchangeably in academic research (Hojnik & Ruzzier, 2016). Besides, several definitions of environmental innovation exist in the literature. According to Kammerer (2009: 2286), for example, environmental innovations include “all innovations that have a beneficial effect on the natural environment regardless of whether this was the main objective of the innovation.” Horbach et al. (2012: 119) define environmental innovations “as product, process, marketing, and organizational innovations, leading to a noticeable reduction in environmental burdens.”

This positive effect occurs either within the innovative firm or during the utilization of the product or service (Horbach et al., 2012). Moreover, Del Río et al. (2015: 362) specify that environmental innovations have to “contribute to the general objectives of the firm, including cost reductions and/or revenue increase.” All the different definitions have in common that they highlight the reduction of a negative environmental impact as well as the use of resources in a more efficient way (Hojnik & Ruzzier, 2016).

Major aspects regarding the distinctive characteristics of environmental innovations compared to general innovations are their externalities as well as their drivers (De Marchi, 2012). Environmental innovations produce positive spillovers not only in the phase of innovation, as it is the case for general innovations, but also in the phase of diffusion due to the positive impact on the environment (De Marchi, 2012; Rennings, 2000). This distinctive effect is named “double externality problem” (Rennings, 2000: 325). Due to this problem firms have a lower incentive to develop environmental innovations compared to general innovations (Rennings, 2000).

Drivers of environmental innovations can be categorized as technology-push, demand-pull, regulation push/ demand-pull, and firm-specific effects (Horbach, 2008; Horbach et al., 2012; Kesidou & Demirel, 2012; Rennings, 2000). In contrast to general innovations, regulation push/ pull effects constitute the main driver for environmental innovations (Del Río et al., 2015). Due to the double externality problem, regulations are important to stimulate the development and implementation of environmental innovations (Rennings, 2000). Moreover, not only current but also expected future regulations are important (Horbach et al., 2012). On the contrary, technology-push effects are related to a firm’s technological capabilities, which enable firms to create new products and processes (Horbach, 2008). These internal technological capabilities are more important for environmental innovations compared to general innovations due to higher market uncertainties associated with environmental innovations (De Marchi, 2012; Del Río et al., 2015). Thus, when analyzing environmental innovations it is also important to

consider firms' organizational structure (Horbach et al., 2012). Since the awareness of environmental issues increases, the demand for environmentally friendly products and processes also influences firms in their decision to invest in environmental innovations (Kesidou & Demirel, 2012). However, this demand-pull effect is stronger for environmental product innovations where the customer clearly conceives the added value (Kammerer, 2009). Indeed, Horbach (2008) notes that environmental innovations are less demand-driven than general innovations. In addition to these drivers, Horbach (2008) argues that cost savings also play a significant role in the context of environmental innovations. Considering that the positive environmental impact of environmental innovations is often only a side benefit while firms pursue their main objective of higher competitiveness and productivity, cost savings are more important for environmental than for general innovations (Horbach, Oltra, & Belin, 2013).

As mentioned previously, not only internal but also external knowledge assets are important for innovative activities. Particularly, both companies’ R&D resources and external cooperation are further complementary factors that increase the likelihood of firms to develop environmental innovations (Del Río et al., 2015). Compared to other innovative companies, environmental innovators are more likely to engage in R&D cooperation, especially with external partners such as suppliers, universities, and knowledge intensive business services (De Marchi, 2012). This is related to the findings of Horbach et al. (2013), pointing out that environmental innovative activities exhibit a higher requirement of external knowledge and information sources than other innovative activities.

2.3.2 Implications for Firm Performance

While researchers have mainly achieved consensus regarding the distinctive characteristics of environmental innovations, less clarity exists concerning consequences of environmental innovations. The assumption that environmentally friendly related investments are associated with costs, which negatively contribute to companies’ global competitiveness, has been challenged (Ambec & Lanoie, 2008). Porter and Van der Linde (1995) hypothesize that

environmental regulations enhance firms’ innovativeness, which in turn reinforces firms’ competitiveness. The authors conjecture that the maximization of profits and the reduction of negative environmental externalities share similar principles regarding efficiency efforts (Porter & Van der Linde, 1995). Several studies provide support concerning the weak version of this so-called ‘Porter Hypothesis’ referring to the argument that strict environmental regulation is able to induce environmental innovations (Constantini & Mazzanti, 2012; Doran & Ryan, 2012; Horbach, 2008; Kesidou & Demirel, 2012). However, the discussion concerning consequences of environmental innovations is still controversial, and thus several researchers consider the question “whether it pays or not to be green” (Ghisetti & Rennings, 2014: 107). Yet, these studies focus more on the effect of environmental innovations on firms’ general performance, especially considering financial and profitability effects (Antonietti & Marzucchi, 2014; Clarkson et al., 2011; Doran & Ryan, 2012; Ghisetti & Rennings, 2014).

In this context, Doran and Ryan (2012) find a positive effect of environmental innovations on firms’ performance, associated with even higher returns than for non-environmental innovations. Moreover, non-environmental innovations can facilitate a win-win situation for both firms and governments (Doran & Ryan, 2012). Similarly, Clarkson et al. (2011) ascertain that improvements in the environmental performance, partially based on environmental innovations, enable firms to increase their financial performance in the subsequent period. Indeed, firms need to possess adequate financial resources as well as management capabilities to benefit from these improvements (Clarkson et al., 2011).

Nonetheless, authors have also found opposite results. Ghisetti and Rennings (2014) find only partially support for a positive relation regarding firms’ profitability. While environmental innovations intending to increase efficiency and cost savings are positively related to firms’ competitiveness, those innovations intending to reduce negative externalities are negatively related to firms’ competitiveness due to their high cost burden (Ghisetti & Rennings, 2014). Moreover, Riillo (2017) notes that firms engaged in environmental activity

do not perform better than firms without such activities. Only regarding firms that are already engaged in such activities those with a more advanced environmental management outperform firms with a less advanced management (Riillo, 2017). Ambec and Lanoie (2008) investigate several opportunities related to environmentally friendly investments to increase revenues or reduce costs. The former contains improved market access, product differentiation, and selling pollution-control technology, while the later includes relations with external stakeholders and risk management, material, energy, and services costs, capital costs, and labor costs. Their findings show that firms are able to partly or completely compensate regulative costs associated with environmental innovations. However, the likelihood to benefit from these opportunities differs among different types of firms, and little evidence exists that it indeed pays to be green (Ambec & Lanoie, 2008).

2.3.3 Implications for Internationalization

In addition to the studies focusing more on general performance implications, researchers have started to empirically investigate the relationship between environmental innovations, international competitiveness, and firms’ internationalization. Building upon the Porter hypothesis, Costantini and Mazzanti (2012) investigate the influence of environmental regulation and innovation on the export performance of the European Union. Their results show that regulation and environmental innovation enhance production efficiency, which facilitates net benefits and promote environmentally friendly export (Constantini & Mazzanti, 2012). On the firm-level, Leonidou et al. (2015) examine the impact of environmentally friendly business strategies, which include environmental innovations, on firms’ export performance. The findings reveal a positive relationship between such strategies and firms’ product differentiation advantages in the foreign country. These advantages facilitate not only firms’ export market performance but also its export financial performance (Leonidou et al., 2015). Chen et al. (2016) also find evidence for a positive relationship between proactive environmental activities and internationalization. Furthermore, Antonietti and Marzucchi (2014) ascertain that

investments in environmental oriented equipment further improves a firms’ productivity, which in turn leads to higher export performance. Moreover, some studies also suggest that companies possessing environmental capabilities, such as environmental innovation, are more likely to export to countries with higher environmental regulations rather than lower regulations (Antonietti & Marzucchi, 2014; Bu & Wagner, 2016). While finding similar results, Chen et al. (2016) indeed note that the global implementation of environmental strategies requires further empirical research.

As opposed to the results discussed above, other research studies reveal a negative correlation between environmental innovations and export (De Marchi, 2012; Del Río et al., 2015). A plausible explanation for this negative correlation is that environmental regulative frameworks differ across countries and no common standards regarding environmental features exist. Furthermore, environmental attributes are associated with trust, reputation, and direct communication, which are more difficult to establish in more distant markets (De Marchi, 2012). Moreover, Leonidou et al. (2015) find no effect of environmentally friendly business strategies on cost leadership advantages of exporting firms.

In addition, Chiarvesio et al. (2015) study the impact of firms’ degree of internationalization on the propensity to introduce environmental innovations. On the one hand, their results support a negative link between export and environmental innovations. Also, the relationship between firms’ propensity to innovate environmentally and firms’ interaction with non-local suppliers is negative. On the other hand, knowledge exchange and resource consolidation within international networks, such as multinational firms, enhance both the likelihood to innovate environmentally and the approach to different environmental regulations (Chiarvesio et al., 2015). Furthermore, Christmann and Taylor (2001) investigate the relationship between internationalization and environmental self-regulation of firms based in emerging markets. These firms are more likely to act environmentally friendly when serving

international customers within the firm’s home markets as well as serving developed foreign markets (Christmann & Taylor, 2001).

2.4 Research Gap

Based on the results of the literature review discussed above, the effect of environmental innovations on the extent of firms’ involvement in international operations remains a subject for discussion. Previous research has largely confirmed the positive impact of general innovation on firms’ internationalization (e.g., Filippetti et al., 2011), generally achieved consensus about the specific characteristics of environmental innovations (e.g., Horbach, 2008; Horbach et al., 2012), and extensively discussed consequences of environmental innovations on firms’ profitability and financial performance (e.g., Clarkson et al., 2011; Ghisetti & Rennings, 2014). With respect to internationalization research still debates on the consequences of environmental innovations. While Leonidou et al. (2015), for example, find a positive effect of environmentally friendly export strategies on firms’ export performance, the findings of De Marchi (2012) and Del Río et al. (2015) reveal a negative correlation. Also, studies considering the effect of internationalization on firms’ propensity to innovate environmentally show mixed results (e.g., Chiarvesio et al., 2015; Christmann & Taylor, 2001). Moreover, apart from few studies revealing that firms engaged in environmental practices are more likely to expand to foreign markets with stricter environmental regulations (Antonietti & Marzucchi, 2014; Bu & Wagner, 2016), the influence of environmental innovation on the geographical reach of firms’ activities remains empirically understudied (Chen et al., 2016).

Thus, the purpose of this study is to shed light on the specific relationship between environmental innovation and internationalization and to contribute to existing literature by determining whether it pays to be green when internationalizing. Stated otherwise, the aim of this work is to provide an answer to the following research question: How do environmental innovations influence the scale and scope of firms’ internationalization? Furthermore, the study discusses moderating effects of technological cooperation as well as home country

governmental subsidies on this relationship. Previous studies have confirmed the importance of both constructs with respect to environmental innovations (e.g., De Marchi, 2012; Del Río et al., 2015). However, the moderating impact on the present relationship has been neglected so far, which is why further research is appropriate.

3. Theoretical Framework

3.1 Environmental Innovation and Scale and Scope of Internationalization

As already explained in the literature review, operations in foreign markets not only offer opportunities for value creation but also confront firms with uncertainty and risks (Hitt et al., 2006; Lu & Beamish, 2001). Firm-specific advantages enable companies to face challenges associated with internationalization, and thus facilitate greater international success (Zaheer, 1995). Extending the resource-based view, Hart (1995) develops the natural-resource-based view according to which competitive advantages can also be grounded on firms’ environmentally oriented resources. Firm-level green resources and capabilities, such as environmental innovations, have the ability not only to strengthen firms’ performance in both current and new markets but also to advance firms’ absorptive capacity, which in turn can be further leveraged (Rugman & Verbeke, 1998). De Marchi (2012) supports the idea that environmental innovations enable firms to respond to worldwide increasing environmental concerns while simultaneously strengthen firms’ competitive advantages. Moreover, environmental innovations have the potential to contribute to firms’ global competitiveness (Porter & Van der Linde, 1995). Due to a more efficient usage of inputs, the substitution of less expensive materials, and the avoidance of unnecessary activities, environmental innovations can increase firms’ efficiency (Porter & Van der Linde, 1995). In addition, such innovations offer opportunities not only to decrease costs but also to increase firms’ revenues (Ambec & Lanoie, 2008). Consequently, these advantages are expected to facilitate firms’ activities beyond their home markets.

Especially highlighted in the resource-based view of the firm is the possession of firm-specific intangible assets, which constitute potential drivers of firms’ internationalization (Cerrato, 2009). A positive reputation, presumed it is valuable, rare, inimitable, and non-substitutable, represents such an intangible resource that can facilitate a sustained competitive advantage, and thus improve firms’ international performance (Barney, 1991; Cerrato, 2009). By means of introducing environmental innovations firms are enabled to improve both their corporate reputation and their company image (Hojnik & Ruzzier, 2016; Xie, Huo, Qi, & Zhu, 2016), which in turn might be beneficial for firms’ international activities. Besides, environmental innovations also help firms to reduce reputation risks as well as to avoid additional costs related to the compensation of environmental damages (De Marchi, 2012; Dowell, Hart, & Yeung, 2000).

The general innovation literature reveals that advantages resulting from innovative activities, such as higher productivity, new developed products, and greater product differentiation, can facilitate firms’ international performance (Cassiman & Golovko, 2011; Cerrato, 2009). Existing research shows that environmentally friendly investments enhance firms’ productivity, which in turn enables companies to counter sunk costs that are associated with international operations (Antonietti & Marzucchi, 2014). Furthermore, an environmentally friendly strategy facilitates firms’ product differentiation, responsiveness to eco-conscious consumers as well as differentiation from competitors. Therefore, such a strategy positively influences firms’ operations in foreign markets (Leonidou et al., 2015). Due to these advantages, such as greater competitiveness, efficiency increases and cost reductions, higher productivity, reputation and company image improvements as well as greater product differentiation, firms are expected to be able to increase the scale of their operations in foreign markets. Therefore, this study proposes the following hypothesis:

H1: Firms’ level of environmental innovation is positively related to the scale of internationalization.

While the arguments discussed above are indicative of the proposed positive relationship between environmental innovation and firms’ scale of internationalization, the effect of such innovations on the scope of internationalization is less accessible. From a theoretical perspective, a positive as well as a negative relationship is conceivable, which is why this study proposes two alternative hypotheses. First, arguments in favor of a potentially positive relationship are presented. As already mentioned previously, companies that deal with environmental innovations face the challenge of a high cost burden associated with this type of innovation, especially regarding those innovations that aim to reduce negative environmental externalities (Ghisetti & Rennings, 2014). However, from both general innovation literature and internationalization literature it is known that internationalization presents an opportunity to face such cost burdens. Cassiman and Golovko (2011) argue that internationalization enables firms to spread their invested R&D costs across foreign markets. Following this argumentation, it is conceivable that this effect also applies for environmental innovations. In addition, cost savings constitute an important driver for the introduction of environmental innovations (Horbach, 2008). Such cost advantages and the opportunity to spread costs related to environmental innovations across foreign markets could encourage firms to increase the geographical reach of their operations.

In the context of expanding the scope of foreign activities, a firm’s reputation plays also an important role as it facilitates firms’ entry into foreign markets (Kotha et al., 2001). Moreover, an environmentally friendly reputation even enables companies to expand to countries with lower environmental standards (Bazillier, Hatte, & Vauday, forthcoming 2017). These countries with lower environmental standards are often associated with a higher risk regarding negative influences on firms’ image and reputation. By investing in a positive

environmental reputation companies can possibly outweigh this negative image effect (Bazillier et al., forthcoming 2017). Differences in regulative standards are expected to especially occur across regions rather than within regions (Rugman & Verbeke, 2007), whereby a region refers to “a group of geographically proximate countries” (Asmussen & Goerzen, 2013: 131). Consequently, environmental innovations might enable companies based in countries with higher environmental standards to expand beyond their home region to regions with lower standards without risking their environmental reputation, and thus benefit from potential location advantages in such countries.

Due to an increasing awareness regarding environmental issues worldwide, environmental regulations are expected to rise in both developed and developing countries (Dowell et al., 2000). Firms with a higher level of environmental standards do not need to invest in additional environmentally friendly activities to adjust to stricter regulations. Moreover, companies that possess higher levels of environmental standards could accelerate the process of increasingly stricter regulations, for instance, by collaborating with governments. As a result, firms with higher standards achieve a competitive advantage compared to firms that still need to adjust to such stricter environmental regulations (Dowell et al., 2000). While regulations within a region are rather similar, this competitive advantage towards less environmentally developed companies might especially occur when firms expand beyond their home region into markets with lower environmental standards. On the contrary, lower environmental capabilities could impede companies to expand globally as these firms might face difficulties such as entry barriers, LOF, environmental legitimacy issues, and lower competitiveness (Chen et al., 2016). Consequently, higher levels of environmental innovations are expected to increase firms’ adaptability to countries with different regulations as well as facilitate competitive advantages in different geographical markets, particularly considering increasing environmental expectations worldwide. These advantages might be especially conceivable when expanding inter-regionally since the above-mentioned differences might be greater across regions. Hence:

H2a: Firms’ level of environmental innovation is positively related to the scope of internationalization.

However, firms that enter foreign markets also face challenges due to the existence of LOF (Zaheer, 1995). According to Qian et al. (2013), it is important to differentiate between LOF between countries and LOF between regions. While the former refers to costs associated with activities across different countries, the later refers to costs associated with activities across regions. Consequently, firms that expand beyond their home region not only have to face LOF between countries but also must deal with increasing liabilities of regional foreignness (Qian et al., 2013). Previous studies have shown that many international firms indeed operate regionally rather than globally (e.g., Rugman & Verbeke, 2004). Rugman and Verbeke (2007) also note that expansion within a region is associated with much lower liabilities compared to expansion across regions. This is also related to the concept of distance, which refers to cultural, administrative, geographic, and economic differences across countries and which is especially substantial across different regions (Ghemawat, 2001; Rugman & Verbeke, 2007). Consequently, exploiting and deploying firm-specific advantages is easier within a region than across regions (Qian et al., 2013; Rugman & Verbeke, 2007).

As discussed previously, regulations are especially important with respect to environmental innovations (Del Río et al., 2015). However, no generally established standards regarding environmental features exist, which in turn might negatively influence the correlation between environmental innovations and firms’ internationalization (De Marchi, 2012). This effect of distance regarding differences in environmental regulations might be even stronger across regions than within a region. Additionally, applying higher environmental standards in countries with environmental regulations that are less stringent might be wasteful for the operating company (Dowell et al., 2000). Therefore, it could be more beneficial to stay within the home region, where countries are more likely to have similar regulative standards with the

ones encountered by the focal firm in its home country. In addition, positive attributes of environmental innovations such as reputation and trust are more difficult to establish in countries that are less proximate to firms’ home markets (De Marchi, 2012). Findings of Rugman and Verbeke (2007), for example, show that advantages at the downstream side of a firm’s value chain are especially affected by inter-regional effects. All told, it is conceivable that positive advantages associated with environmental innovations are easier to exploit and deploy intra-regionally rather than globally. Therefore, it is also possible that firms with a higher level of environmental innovation might operate rather in countries that are closer to firms’ home markets in order to leverage advantages resulting from environmental innovations. Stated otherwise, these firms might be more likely to internationalize within a region rather than across different regions. Accordingly, this study also proposes the following competing hypothesis:

H2b: Firms’ level of environmental innovation is negatively related to the scope of internationalization.

3.2 Technological Cooperation

Previous literature and theoretical approaches have extensively investigated the importance of external knowledge as a source for innovative activities of companies (Vega-Jurado, Gutiérrez-Gracia, & Fernández-de-Lucio, 2009). Opening firms’ boundaries towards external knowledge sources enables firms to face challenges in today’s fast-changing environment (Berchicci, 2013). A firm’s openness is related to its relationships with external actors (Dahlander & Gann, 2010). With that said, technological cooperation can be defined as an inter-organizational “cooperation for which a combined innovative activity or an exchange of technology is at least part of [the] agreement” (Hagedoorn, 1993: 372). In addition, a technological cooperation consists of two or more organizations that remain economically independent while

collaborating and sharing parts of their R&D operations (Hagedoorn, 2002). Building upon transaction cost theory, cooperation represents a transaction opportunity between hierarchies and markets (Williamson, 1998). Moreover, technological cooperation goes beyond simple economic exchange and presents a rather long-term strategic relationship (Hagedoorn, 1993). In this context, technology can be understood in broader terms, including R&D, know-how, information, location as well as negotiation power (Bahel & Trudeau, 2013). Besides, companies can engage in technological agreements with different types of partners, such as customers, suppliers, competitors, universities, business consultancies, research institutions as well as technology and research organizations (Tether, 2002).

Environmental innovations are associated with high complexity as well as systemic characteristics. When developing and introducing environmental innovations companies face the challenge of great technological and market uncertainty due to the lack of accepted standards concerning both technological solutions and measurements of environmental performance evaluation (De Marchi, 2012). In addition to uncertainty regarding industry standards, firms also face the challenge that it is uncertain not only how governmental regulation will change in future but also how consumers react to environmental developments (Rugman & Verbeke, 1998). Therefore, De Marchi (2012) argues that environmental innovations constitute a setting where both firms’ internal R&D and firms’ cooperation strategies are significantly important. The findings of her study show that environmental innovators are even more likely to engage in cooperation with external partners than other innovative firms (De Marchi, 2012). Due to alternative processes, inputs or materials, environmental innovations frequently require new competences, which is why firms are likely to engage in technological cooperation to develop these innovations (Horbach et al., 2013).

According to Hagedoorn (1993), firms can share and advance their research, diffuse knowledge, and get access to additional competences by entering technological agreements, which facilitate firms to face high complexity and cross-sectoral characteristics of new

technologies. Moreover, such agreements also help to reduce, minimize, and share costs, risks, and uncertainty related to R&D (Hagedoorn, 1993). Consequently, inter-organizational cooperation facilitates increasing effectiveness as well as efficiency of firms’ innovation strategies (Faems, Van Looy, & Debackere, 2005). It is conceivable that these effects also apply for environmental innovations, which are therefore expected to become more beneficial by means of technological cooperation. Furthermore, companies engaged in technological cooperation might be able to leverage competences from partners. These additional competences could enable firms not only to increase advantages of environmental innovations, such as higher efficiency, competitiveness, and product differentiation, but also to reduce risks related to environmental innovations with respect to internationalization. Accordingly:

H3a: Technological cooperation positively moderates the relationship hypothesized in H1.

When companies attempt to leverage environmental innovations by expanding beyond their home region these firms need to overcome liabilities of regional foreignness. Moreover, firms that operate inter-regionally might face difficulties in deploying and exploiting environmental innovations (Rugman & Verbeke, 2007). In this context, cooperative activities could play an important role as they facilitate firms’ internationalization as well as entry to foreign markets by overcoming constraints such as a lack of economic control, competence or experience that exacerbates separate international activities of these firms (Hagedoorn, 1993). Such additional competences and experience provided by partners within a technological cooperation, especially with respect to inter-regional differences in environmental characteristics and standards, might be beneficial for companies that aim to leverage the effect of environmental innovations in foreign regions. By means of technological cooperation firms could thus overcome liabilities of regional foreignness, which impede firms’ global expansion.

Moreover, a technological cooperation provides not only additional competences but also the possibility to share costs and risks associated with environmental innovations (De Marchi, 2012; Hagedoorn, 1993). These advantages could be particularly beneficial for companies that attempt to deploy environmental innovations in foreign regions characterized by lower environmental standards compared to firms’ home regions. As a result, firms might be able to not only benefit from potential competitive advantages compared to firms with lower environmental standards but also prevent reputational damages, which can occur when operating in regions with lower environmental standards. By potentially facilitating firms to overcome LOF across regions, technological agreements in turn also allow companies to spread costs related to environmental innovations even further across foreign countries. Therefore, this study hypothesizes as follows:

H3b: Technological cooperation positively moderates the relationship hypothesized in both H2a and H2b.

3.3 Home Country Governmental Subsidies

More recently, literature increasingly investigates the role of technology policy intervention regarding firms’ innovation performance. In order to correct market failures and to prevent underinvestment in R&D activities governments can use different public innovation policy tools (Afcha & García-Quevedo, 2016). Major reasons for market failures are knowledge-spillovers and asymmetric information. Besides, sunk costs further constitute a barrier for companies to engage in R&D investments (Busom, Corchuelo, & Martínez-Ros, 2014). Tools such as direct subsidies, tax incentives, targeted credit, and systems to protect intellectual property rights are supposed to prevent these problems (Un & Montoro-Sanchez, 2010). Among the different tools, the use of public funding in form of subsidies has a long tradition. Besides, subsidies are also able to reach companies that are young and knowledge-intensive or that do

not possess previous R&D activity (Busom et al., 2014). In this work, subsidies refer to financial support provided by public institutions (Horbach et al., 2013). The goal of public funding is not only to spur firms’ innovativeness and facilitate innovation activity in specific sectors but also to multiply privately introduced resources for innovation. Moreover, public funding is sometimes even used to support firms in receiving private funding, which is especially the case for small- and medium-sized firms (Un & Montoro-Sanchez, 2010).

As previously discussed in the literature review, regulations and public policies have a significant impact on environmentally innovative activities of firms by constituting a main driver of such innovations (Del Río et al., 2015). This is based on the specific characteristics of environmental innovations as firms are confronted with the double externality problem when developing and introducing this type of innovation (Rennings, 2000). Horbach et al. (2012) especially highlight the importance of subsidies for CO2 emissions. Since many environmental activities, such as the establishment of clean energy systems, are often not economically profitable, governmental subsidies are needed to encourage the establishment and to increase firms’ motivation to act environmentally friendly (Kim, Lim, Kim, & Hong, 2012). De Marchi (2012) further notes that the effect of public grants is even stronger for environmental innovations than it is for general innovations. Besides, comparing home country governmental subsidies and public subsidies from international sources, Peñasco et al. (2017) find that only national sources promote environmental innovations due to a lower associated complexity when receiving them. While environmental regulation moves companies to recognize opportunities to save costs by introducing environmental innovation, subsidies can represent a direct cost saving opportunity (Horbach, 2008; Horbach et al., 2012; Xie et al., 2016). Based on these previous results, home country governmental subsidies are expected to enable companies that invest in environmental innovations to leverage the associated benefits of these innovations even further. Since subsidies reduce the high cost burden related to environmental innovations firms might be able to use their own resources more efficiently and to increase

benefits of environmental innovations, such as higher efficiency and productivity, which in turn positively influence the effect on internationalization. This multiplying effect of subsidies on firms’ innovation efforts might positively affect the relationship between environmental innovation and firms’ scale of internationalization. Hence:

H4a: The reliance on home country governmental subsidies positively moderates the relationship hypothesized in H1.

Moreover, subsidies encourage internationalizing companies to overcome financial constraints as well as risks that are associated with operations across borders (Bannò & Piscitello, 2010; Zaheer, 1995). When firms increase the scope of foreign operations and enter countries with less strict environmental regulations compared to the firm’s home country firms with a high level of environmental innovation might act uneconomically (Dowell et al., 2000). However, to benefit from the above described advantage according to which firms might have a competitive advantage in countries with less strict regulations against other companies, which still need to adjust to increasingly stricter environmental regulations, governmental subsidies could possibly outweigh the risk of a temporary inefficiency. The same might imply for the effect that environmental innovations possibly help firms to expand globally by preventing reputational damages, whereby subsidies could support firms to undertake such investments. Thus, subsidies might encourage firms to benefit from advantages associated with a greater scope of internationalization. In addition, the reliance on home country governmental subsidies might allow companies to use their own resources more efficiently, which in turn could help companies to overcome LOF that negatively affect the relationship between environmental innovation and firms’ geographical reach. Since such LOF especially appear when companies expand beyond their home region, the positive effect of subsidies might be even stronger regarding inter-regional activities. Therefore, this study proposes the following hypothesis:

H4b: The reliance on home country governmental subsidies positively moderates the relationship hypothesized in both H2a and H2b.

The proposed hypotheses of this study are represented in the following conceptual model (Figure 1).

Figure 1. Conceptual model

4. Methods

4.1 Sample and Data Collection

The empirical study is based on the Spanish Technological Innovation Panel (PITEC), a panel survey that provides information about innovation activities of Spanish companies. PITEC is conducted annually by the National Statistics Institute (INE), working in cooperation with the Spanish Foundation for Science and Technology (FECYT) as well as the Spanish Foundation for Technological Innovation (COTEC). At present, the database is available for the periods 2003 to 2014. In 2003, PITEC contained two samples, one sample of large companies with at least 200 employees and one sample of companies with intramural R&D expenditures. Indeed, PITEC increased in size not only through the extension of the second sample in 2004 and 2005

Technological Cooperation Governmental Subsidies Environmental Innovation Scale of Internationalization Scope of Internationalization H1+ H2a+, H2b-H4a+ H4b+ H3a+ H3b+

but also through the integration of two additional samples in 2004, including firms with less than 200 employees. These further samples comprise firms with external but no intramural R&D expenditures on the one hand, and firms without innovation expenditures on the other hand. In addition, the questionnaire has also changed over time. For example, since 2008 firms are asked for their objective behind the introduction of innovations, allowing a more detailed differentiation between general and environmental innovations. To avoid a problem of disclosure the data is subject to an anonymization method (see PITEC, 2017, for more details). The changing characteristic of PITEC over time regarding both its samples and its questionnaire constitutes a limitation of the data source (De Marchi, 2012). Therefore, to avoid temporal inconsistency this study uses only cross-sectional data from the year 2014.

Several motives drive the choice of PITEC for this empirical study. First, Spain constitutes an appropriate environment to investigate environmental innovations. This is the case not only because environmental concerns become increasingly important in Spain but also because the unique national innovation system allows meaningful cross-national comparisons (De Marchi, 2012). Furthermore, since PITEC is based on the Community Innovation Survey (CIS), one of the most used surveys for innovation research, the use of PITEC increases the comparability of this study (De Marchi, 2012; Kunapatarawong & Martínez-Ros, 2016; Laursen & Salter, 2006). Lastly, the choice of PITEC is in line with several previous studies on environmental innovation (e.g., De Marchi, 2012; Del Río et al., 2015; Kunapatarawong & Martínez-Ros, 2016).

4.2 Variables and Measures 4.2.1 Dependent Variables

The dependent variables used in this study are the scale and scope of firms’ internationalization. Previous studies frequently used the foreign sales ratio as a proxy for internationalization (Kyläheiko et al., 2011). However, due to the complexity of internationalization it is appropriate to use a multidimensional measurement, which is why this study differentiates between the

scale and scope of firms’ internationalization (Hitt et al., 2006). Scale is defined as the ratio of foreign sales to total sales, which constitutes a common measurement in existing literature (Cerrato, 2009; Tallman & Li, 1996). Regarding the measurement of scope several previous studies used the number of countries in which a firm’s subsidiaries operate (e.g., Jiménez, Luis-Rico, & Benito-Osorio, 2014; Tallman & Li, 1996). Yet, due to the available data in PITEC this study uses the ratio between global sales to total sales as an alternative appropriate proxy for scope (Cerrato, 2009). In this context, global sales are defined as sales generated outside of the European Union, which represents the home region of Spain (Cerrato, 2009; Rugman & Verbeke, 2004).

4.2.2 Independent Variable

The independent variable used in this study is the level of environmental innovation. Several previous studies have used environmental R&D expenditures or R&D patents to measure environmental innovations (e.g., Kesidou & Demirel, 2012; Nameroff, Garant, & Albert, 2004). However, these measurements perhaps result in an over- or under-estimation of innovative activities (De Marchi, 2012). Therefore, this study uses self-reported information on companies’ objectives behind their innovations. This approach is in line with several recent studies on environmental innovations (e.g., Chiarvesio et al., 2015; De Marchi, 2012; Horbach, 2008; Kunapatarawong & Martínez-Ros, 2016). The variable is based on the question in PITEC that reports the degree of importance of a lower environmental impact as objective behind firms’ innovations. PITEC uses a 4-point Likert-scale from ‘high’ to ‘not relevant’. Following De Marchi (2012), both medium and high degree of importance can be considered as environmental innovations. To measure the level of environmental innovation, this study uses a Likert-scale that takes four values from 1 equaling no environmental innovation (degree of importance ‘not relevant’) to 4 equaling high level of environmental innovation (degree of importance ‘high’).

4.2.3 Moderating Variables

In this study, firms’ engagement in technological cooperation as well as firms’ reliance on home country governmental subsidies are considered as moderating effects. In PITEC firms are asked about their engagement in a cooperation for technological innovation activities in the period 2012 to 2014. Based on that, this study measures technological cooperation as a dummy variable that equals one if the firm indicates a cooperation and zero if not. To measure the impact of home country governmental subsidies this study uses information of a question in PITEC, which reveals the amount of public financing of firms’ internal R&D expenditures in 2014. These subsidies of the Central State Administration and dependent entities as well as of regional and local authorities presented in PITEC are transformed into a dummy variable. The variable equals one if a firm receives national, regional or local subsidies and zero otherwise. Contractual public financing is not included.

4.2.4 Control Variables

The study also includes several control variables that might have an impact on the scale and scope of internationalization other than the independent and moderating variables. Firstly, the study controls firm SIZE, measured as number of employees, since larger firms are supposed to reveal a higher foreign sales intensity (Denicolai et al., 2014; George et al., 2005). Besides, larger firms are associated with a higher number of resources facilitating internationalization. Secondly, the variable firm AGE is added, defined as number of years since foundation until 2014 as year of this study (George et al., 2005). Older firms are expected to possess the required infrastructure for internationalization and to have more experience that positively influences internationalization (Kirca, Hult, Deligonul, Perryy, & Cavusgil, 2012; Singla & George, 2013). Thirdly, a dummy variable is added that equals one if the company is PUBLIC and zero otherwise in order to control for the type of firm (Kunapatarawong & Martínez-Ros, 2016). Fourthly, the dummy variable FOREIGN controls for the effect of foreign participation in a firm, which is likely to affect firms’ international operations and knowledge of foreign markets

(Fernández & Nieto, 2006). The variable counts one in case that foreign capital is included. The fifth control variable is the level of INNOVATION, which is measured as total expenditures on innovation divided by total turnover. Controlling for firms’ overall level of innovation helps to explicitly investigate the effect of environmental innovations. Following De Marchi (2012), the variable EQUIPMENT is added to control for effects of firms’ investment in advanced machinery, equipment, hardware or software that is used to either produce new products and processes or to improve existing ones. In this study, the variable is measured as percentage of firms’ total innovation expenditures. Lastly, the study controls for INDUSTRY effects since innovation and internationalization characteristics vary across industries (George et al., 2005; Kafouros et al., 2008). The 44 sectors included in PITEC are divided into seven broader groups following the industry classification NACE Rev.2 provided by the European Communities (2008). The industry categories, the corresponding NACE Rev.2 components, and the corresponding PITEC categories are presented in Table 1. Furthermore, frequencies as well as percentages for the available data regarding industries are given. Consequently, six dummy variables are included, while manufacturing is considered as baseline group.

Table 1. Industry Distribution

Industry NACE Rev.2 PITEC Frequency Percentage

Agriculture, Mining, Construction A, B, F 0, 1, 2, 28 335 4.7

Manufacturing C 3-25 3,544 50.1

Electricity, Water, Transportation D, E, H 26, 27, 30 289 4.1

Trade G 29 560 7.9

Information, Communication J 32-34 620 8.8

Finance, Real Estate K, L 35, 36 181 2.6

Services and Others I, M-U 31, 37-43 1542 21.8

Total - - 7,071 100

The following Table 2 gives an overview of the variables used in this study as well as the corresponding operationalization of each variable.