Sustainable induced innovation a driver of corporate financial performance

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University of Amsterdam

E x e c u t i v e P r o g r a m m e i n M a n a g e m e n t S t u d i e s M a s t e r T h e s i s

Sustainable Induced Innovation a Driver of

Corporate Financial Performance

Prepared by: Mohamed Abdelreheem Abomohamed (10730575)

Thesis Supervisor: Sebastian Kortmann Amsterdam Business School

Master of Science

Specialization: Strategy Track January 2016

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Statement of Originality

This document is written by Student [Mohamed Abomohamed] 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

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List of tables and figures

Tables

Page

Table 1: Cronbachs Alpha………. 28

Table 2: Means, Standard Deviations……… 29

Table 3: Variables Correlations………. 30

Table 4: Model Final Results Overview……… 32

Figures Figure 1: External & Internal challenges for factory with focus on sustainability by Müller, Engelmann, Löffler & Strauch (2009)………. 10

Figure 2: Conceptual Model linking Sustainability and Innovativeness to Performance and Regulations……… ₂₂

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Abstract

This study aimed to examine the influence of corporate sustainability orientation on the organization innovation capabilities and financial performance. Additionally, the research investigates the effect of regulations pressure as an external conditional factor on the corporate responsibilities and innovation activities. Data was collected from companies around the globe covering USA, Europe and others like Far and Middle East countries.

It is argued that corporate sustainability orientation act as a mechanism for Product, Process and system innovations capabilities across the organization. More precisely, corporate responsibilities toward society, environment and economics can subsist as a main driver behind firm creativity and innovative performance. This integrative potential constitutes the fundament for high firm financial performance as through the integration of environmental, social support activities and innovation programs a synergistic fusion emerges that translates to outstanding economic outcome. Furthermore, study goes to investigating the external polices influence on the corporate innovation capabilities as a conditional effect.

Significant evidence from a dataset of more than 50 medium and large global companies validate that innovation capabilities mediates the relation between corporate sustainability orientation and firm financial performance. On the other hands different kind of regulations’ pressure like, governmental, stakeholder and customer polices doesn’t show significant effect on firms’ innovation activates programs which needs further investigation to explain the reason of this result.

Key words: Innovation Capabilities, Sustainability Orientation, Regulations Pressure, Polices, Financial Performance, Corporate Responsibility, Corporate Social Responsibility, Eco-Design.

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1. Introduction

With the continuous depletion of natural resources along with incremental increase in global population, the need for economic effective utilization of renewable resources becomes urgent. Innovative solutions for sustainable manufacturing are essential to cope with the challenges of economic competitiveness, environmental impacts and social stability.

The principle of sustainability appeals to enlightened self-interest, which is mainly, based on three streamlines economic, social, and environmental performances. Organization’s strategy shall be drawn in a way to secure long-term economic performance by avoiding short-term behavior that is against society or pollute the environment as per Porter and Kramer (2006). Due to this importance of having sustainable organization orientations that react positively with regulations’ pressure can create a great positive impact on companies’ market value and financial performance. Technical innovation driven by sustainability principles has shifted the total industry production curve upwards, increasing output per unit of input while reducing the environmental and social impact. The innovation enables developing an integrated sustainable value system for sustainable manufacturing with great value-contributing factors: value propositions such as technological value, socio-environmental value, socioeconomic value, and other values can be derived from this integrated innovation system, as per Jawahir, Badurdeen and Rouch (2013).

Corporate Social Responsibility “CSR” is being used as a great notion to be related to strategic principle that strengthens company competitiveness. Toyota’s innovation for Hybrid system can be taken as a brilliant model of implementing strategic CSR which both fit society needs with reduced environmental emission to have full innovative driven program and results in

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a great economic outcome for the company, as mentioned in studies of Porter and Kramer (2006). Organization’s environmental performance has shown significant effect on the firm market value as intangible asset, Shameek and Cohen (2001) study found poor environmental performance has negative impact on the intangible-asset value of the firms.

Corporate orientation toward the environmental prospect is having positive link with the firm revenue which is indicated in Stefan and Lanoie (2008) study by highlighting seven improvement areas can give better position of the firm in the market by leveraging its friendly environmental strategy which can give better access to certain markets, differentiating products, selling pollution-control technology, better risk management, enhance the relations with external stakeholders; cost reduction of material, energy, and services, cost reduction of capital and cost reduction of labor.

Other view of corporate responsibility toward social and environmental prospects can be addressed in a framework as per Lankoski (2008), with three different dimensions as connectors with firm economic outcome were defined as, First, organization’s Learning with either regular or innovative, Second, organization’s reputation which with be false or valid and Third, sustainability orientation outcome with either observable or unobservable. The management decision of integrating sustainable environmental orientation with green products innovation shall be taken as strategic priority due to its great reward with several advantages like increased efficiency in the use of resources, return on investment, increasing sales, development of new markets, improved corporate reputation, product differentiation, and enhanced competitive advantages, which is discussed in Dangelico & Pujari (2010) study.

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Other important factor has been considered as influencer on sustainable manufacturing which is the regulation polices. Many studies emphasized appropriate regulations and policies as a key to stimulate revolutionary technological innovation while the basis of this research is exploring other dimension related to relationship between regulations pressures as a conditional effect on corporate responsibility toward sustainability prospects driving the organization innovation activities within the context of measuring the impact on firms’ financial performance. The study is seeking for emphasizing porter’s hypothesis related to environmental and safety regulation may induce radical innovations by emphasizing the cost savings due to induced innovation should exceed the cost of the regulation as addressed by Ambec, Coheny, Elgie, and Lanoie (2013) study.

The importance of the regulations as a support for sustainable energy has been highlighted in Kern and Smith (2008) article, which is showing how top management and policy makers are confronting the challenges of restructuring energy systems into more sustainable forms. The regulations program has been focused on six activities of transition platforms which being claimed to be ‘the heart’ of the project, Chain efficiency, Green resources, New gas, sustainable mobility and Build environment. The study was based on the Dutch market, even though innovation been implicitly mentioned but not being major measure of the research.

Within the context of an increasingly globalizing economy, recent researches investigates the importance to open up the appropriate regulations and policies as a key to stimulate revolutionary technological innovation has been increased, as addressed in Ashford & Hall (2011) article which is explaining the differences between incremental and radical innovation and their relationship with corporate performance. Both sustaining “evolutionary” which is incremental innovation and disrupting “revolutionary” which is radical innovation can occur

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without governmental intervention. However, the time of developing those innovations are too long. For this reason, in line with Porter’s hypothesis environmental and safety regulation can induce radical innovations by emphasizing the cost savings due to induced innovation should exceed the cost of the regulation. Additionally Ashford & Hall (2011) study indicates important difference between strong and weak regulation and their impact on induced innovation. Weak regulations may lead to incremental innovation while strong regulations may result in to radical innovations by other producers which impact negatively on organization.

In sum, this study focuses on opening up the problem space of sustainability orientation as a major focus of company’s strategy and measuring its influence on company’s innovation capabilities as a driver for high financial performance of the firm and measuring the regulation pressure on the sustainability driver and consequentially the innovation capacities. Accordingly, in continual of previous researches efforts, the author in this study grapples with the questions of, what is the impact of innovative organization driven by sustainability prospective on the corporate financial performance. And what is effect of external Regulations and policies pressure on the innovation capabilities of the organization. Also what is the influence of the regulations pressure on the companies’ sustainable strategic prospective.

2. Literature Review

Sustainability concept is the main driver of this research. As per Brundtland Commission (1987), definition of sustainable development that meets the needs of the present without compromising the ability of future generations to meet their needs. Looking at sustainability as economic, ecological, and social aspects of a given system added a new dimension to the discourse on the organisation’s scale. Technical innovation driven by sustainability has shifted

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the total industry production curve upwards, increasing output per unit of input while reducing the environmental and social impact.

There are some gaps and research interests have been identified in the previous studies. Particularly, study related to Dangelico & Pujari (2010), that identifies why and how companies integrate environmental sustainability into green products that will lead to high competitive advantages and consequently high economic performance. However, Dangelico & Pujari (2010) study is based on projects and it recommends future work to be focused on companies that support sustainable induced innovation. Additionally, Dangelico & Pujari (2010) study raises the need to investigate the impact of size and scope of investments in green product innovations and the breadth of green product portfolio on firm's overall environmental impact, while this study will touch upon as a control variable. Furthermore, Dangelico & Pujari (2010) research focus only on innovation driven by environmental prospective, while this study will investigate and integrate the link between companies’ innovation activities and the three parameters of sustainable orientations which are Corporate social responsibility “CSR”, Environment and economics. Every industry has different sustainable manufacturing challenges. As a simple ideal role, the most efficient industry is characterized by highly efficient machines with low emissions and minimal production cost. In order to analyze any industry there are two main focuses, internal and external challenges as illustrated in Figure 1 by Müller, Engelmann, Löffler & Strauch (2009).The internal challenges is driven by the manufacturing processes, starting from outsourcing the raw material, all other process inputs like energy and utilities needs and end by final product, product waste (scrap) and environmental emissions. Since there is enormous number of factors with complicated processes, to make it as a simple role Dombrowski &

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Riechel (2013) have classified the manufacturing process as value adding and non-value adding activities.

Figure 1: External & Internal challenges for factory with focus on sustainability by Müller, Engelmann, Löffler & Strauch (2009)

The value adding activities means the tangible gain which serves the final product, like row material, exact productivity time and final product activities while non-value adding activities are like machine waste, start-up & shutdown time and inefficient working time due to mal-function of equipment and all other related factors.

From practicality prospect, the non-value adding activities cannot be fully eliminated, but can be minimized as possible to leverage the gain of the process, like reducing the wastes (for instance product scrap) and emissions to the environment (for example CO2 emissions). Also non value added can be optimized by reducing the factory inputs (raw material for example) without sacrificing product quality. A good example from industry are taken from Unilever’s ( British-Dutch multinational consumer goods company) concept of reducing the deodorant bottle size by making compressed gas bottles, which is considered as right move toward enhancing sustainable product.

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In manufacturing systems production machinery is the major energy consumer, the higher efficient machinery the lower energy consumption, the more sustainable manufacturing process. Moreover, the optimization analysis shall adapt the industry external challenges which are related to the market and its conditions. Four challenges are identified by “The institute for advanced industrial management” as per Dombrowski & Riechel (2013):

First, Resources and Energy prices: Oil price and raw materials are major keys of estimating the product final cost and price. This factor is strongly related to the economic sustainability value.

Second, Climate changes: The environmental regulation and global warming are major players in the industry. For example, new development of combustion equipment and high energy consumption machines are a major player for the emissions limitations and plant efficiency as key parameter to fulfill the project environmental commitment.

Third, Political conditions: The political laws and regulations are another important external threat to the industry sustainability. For instance, when it is related to tax authority, energy cost (economic views), political disturbance and many other related issues are major in global industry challenges.

Forth, Image: Industry and business image is major factor of sustainability, especially the wide spread of the business’s reputation can be impacted easily due to booming of media platform technologies. Nowadays, individuals can have immediate access to any kind of information and news around the globe. For instance, environmental violation scandals are one of most negative sources of bad reputations.

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The main concern of this study will focus on identifying Corporate Responsibility toward sustainable induced innovation and its correlation with market value and organization financial performance. Additionally the study will measure the effect of governmental regulation on the innovation process in continual effort of Ashford & Hall (2011) research, which argues that industrial policies should be opened up‘ by expanding the practice of multi-purpose policy design that achieve co-optimization, or the mutually reinforcing, of social goals and these policies should be integrated as well. Sustainable development requires stimulating revolutionary technological innovation through environmental, health, safety, economic, and labor market regulation.

Out of these studies and concepts, the framework of this research has four categories of independent / dependent variables can be addressed per the following explanation with their connections and influence to each other.

2.1 Sustainability Orientation

Organization Sustainability is considered as Corporate Responsibility towards environmental prospect, Corporate Social Responsibility “CSR” and Economics prosperity which is acting in the conceptual model as independent variable.

Environment Responsibility is driven by minimizing energy consumption, pollution reduction through support system, for example, ecosystem services such as pollution filtering. As identified by Kahn (1995), Environmental sustainability requires that natural capital to be maintained as a source of economic inputs and as a sink for wastes. Resources should be harvested no faster than they can be regenerated. Wastes should be emitted no faster than they can be assimilated by the environment.

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Social Responsibility by maintaining community (civic) capacity that fosters effective participation and equitable treatment of all stakeholders. Social sustainability encompasses notions of equity, participation, sharing, cultural identity, empowerment, accessibility and institutional stability. It seeks to preserve the environment through the alleviation of poverty and economic growth as per Kahn (1995).

Economic Responsibility by maintaining an economic system that provides a non-declining performance of the organization. Economic sustainability, by way of development, productivity and growth, has leaded conventional development of many companies in the past. Market allocation of resources, sustained levels of growth and consumption, an assumption that natural resources are unlimited and a belief that economic growth will ‘trickle down’ in which the poorest gradually benefit as a result of the increasing wealth of the richest as per Basiago (1999). 2.2 Organization Innovation Capabilities

In the modern industry, Innovation is a significant aspect for developing sustainable manufacturing. Creating manufacturing sustainable value requires product, process and systems level innovations to cover all production plans (material flow). Sustainable products and processes are known to be innovative, and they contribute to social and environmental benefits, too as per Jawahir, Badurdeen and Rouch (2013) article. Innovative product can significantly lead the organization to dominate the market or create a new role with creative view which can direct the market focus from traditional technology to new brilliant direction.

For example, American oil service company “Halliburton” has developed an innovative extraction technique of gas rocks, by using what is called “Shale Gas Technology”. Shale Gas is an emerging technology made a breakthrough in the oil and gas market by using hydraulic

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fracturing of the underground rocks. This new technology increases the oil reserves dramatically for country like United States. For the first time in the history, United States became an exporter of the natural gas instead of being one of the biggest importers. Such innovation can be categorized under manufacturing process innovation. On the other hand this technology is somehow against the environment, which makes its sustainability at risk.

Another tangible example related to product innovation is the smart phone. Apple introduced the smart phone to the market as destructive innovative product which is considered as breakthrough in information and communication technology of our daily life. Other traditional mobile phone has no place in the market anymore.

Innovative sustainable manufacturing can be considered as the engine for sustainable growth by not only enhancing economic performance, but also improving social and environmental conscious practices. Corporate innovation capabilities can be categorized in to three integral elements to deal with sustainable manufacturing parameters: products, processes and systems, Jawahir, Badurdeen and Rouch (2013). Developing innovative products, processes and systems is a significant aspect of sustainable manufacturing to achieve industrial improvements by minimizing or even eliminating environmental pollution, improve energy and resources consumption efficiency, minimize the industrial wastes quantity and enhance personal health and operational safety, reference to Jawahir, Badurdeen and Rouch (2013). These sustainable manufacturing measures offer new, deep indicators of producing functionally superior products using sustainable technologies or what is called “sustainable induced innovation”. This research will use those measures, System, Process and Product innovations items as indicators for organization innovation capabilities.

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Process innovation is defined as implementation of radically new improved production and/or delivery method including significant changes in techniques, equipment and/or software, which can be applied in manufacturing and non-manufacturing businesses as per Jawahir, Badurdeen and Rouch (2013) .

Manufacturing process is identified in to production stages; component design, tool/work material selection, metal removal/forming, finishing, packaging, transporting, storage, dispatching an all other processes as stated on Jawahir, Badurdeen and Rouch (2013) study. Each of these stages is contributing in manufacturing sustainability, like for example the processing cost is highly depends on the production method of the component and the selected work material. Also as part of manufacturing process includes the use of coolants, lubricants, emission of toxic materials or harmful chemicals, this poses environmental, safety and personnel health problems. In general, six innovative areas are identified to make a manufacturing process sustainable, which are Energy consumption, Manufacturing cost, Environmental impact, Operational safety, Personnel health & safety and Waste reduction, as indicated in the article of Jawahir, Badurdeen and Rouch (2013). Those innovative areas can be implemented for different business sectors, like design & interactivity, human resources management and business management.

Product innovation

Product sustainability evaluation can lead to big reduction in consumption costs over the entire life-cycle time of products. The overall economic benefits and the technological advances involve greater functionality and sustained quality enhancement of products. As indicated in many previous studies, product sustainability elements can be summarized in six elements as

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following, Environmental Impact, Societal Impact “Safety & Health”, Functionality, Resource Utilization, Manufacturability and Product’s Recyclability as indicated in Jawahir, Rouch, Dillon, Joshi, Venkatachalam and Jaafar (2006) article.

System Innovation

Innovation in sustainable manufacturing system and supply chain design should consider a variety of interactions between the methods and technical models between these aspects and the natural environment.

Raw materials transformation into more sustainable products through sustainable manufacturing processes requires careful coordination of various activities across companies that span the closed-loop supply chain. Thus sustainable business systems and supply chains shall be designed and managed as integrated socio-techno-environmental systems from a total life-cycle view by considering the interactions among different sub-systems as per Soderquist and Overakker (2010) article.

2.3 Policies & Regulations

Regulations & polices is acting as external force of sustainability-innovation model which is considered as moderator variable in the conceptual model. Polices pressure can be initiated from different sources, regulatory bodies and government are the most significant external stakeholders when it comes to environmental matters (Freeman, 1984; Backer, 2007) and they are typically associated with compelling pressures (Zhu and Sarkis, 2007). Businesses must comply with environmental policies otherwise face the threat of regulators condemning legal action. Such pressures and threats will negatively impact a firm’s public reputation and customer relations.

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Other external regulations’ pressures originate from Non-Governmental Organizations “NGO” (Eesley and Lenox, 2006). These stakeholders include environmental groups, the media and labor unions. Each of these communities can mobilize public opinion in favor of or against a firm’s environmental approach (Sarkis,Gonzalez-Torre and Adenso-Diaz, 2008).

Supply chain stakeholders, specifically customers may influence a firm’s decision to implement environmental regulations. Client as a stakeholders force the suppliers to follow certain practices to improve their environmental impacts (Sarkis,Gonzalez-Torre and Adenso-Diaz, 2008).

Firms that yield to employee pressures to implement proactive environmental management tools create a virtuous cycle that leads to additional pressures from internal stakeholders. Employee’s pressure can be formalized in the applicable health and safety regulations of the factory or plant which is considered as a major pressure for many critical industries. These arguments suggest that firms will implement environmental audit programs to address their internal stakeholder, employee pressures (Fernandez et al., 2003; Sharma, 2000).

To sum up, different sources of regulations & polices are articulated in this study to measure their impact on innovation capabilities of the organizations, Client regulation pressure, Government regulation pressure, Employees regulation pressure, Stockholders regulation pressure and Non-government Organizations “NGOs” / society pressure.

2.4 Financial Performance

Performance measurement has been identified by Neely, Adams and Kennerley (2002) as the process of quantifying the efficiency and defines it as the process of evaluating how well firms are managed and identifies the value that firm can deliver to customers and other stakeholders.

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Good performance is the criterion whereby a firm determines its capability to prevail. Performance measurement determines the parameters under which strategy programs and investments are reaching the targeted results.

Nowadays, several performance measurement systems are followed and each has its own group of supporters. Based on the strategic management, marketing, and operations management studies, Kaynak (1997) identified and validated some dimensions of firm’s performance. Financial and market performance indicators include return on investment (ROI), sales growth, profit growth, market share, and market share growth (Kaynak 1997). In addition market value was added to give one extra dimension to the firm’s market performance indicators.

2.5 Research Model

This study examines the validity of the conceptual model as shown in Figure 2 that describes the innovativeness capabilities of organizations driven by corporate social and environmental responsibilities and their effect on corporate financial performance. Sustainability will be verified by carefully identifying and articulating the drivers of social and environmental performances and measuring the broad effects of both good and bad performance on the organization. In reference to Muñoz and Dimov (2015) article, Organizations which are driven by sustainability orientation shall strongly believe in the business power by contributing to solve society problems with full obligation toward society benefits that extends beyond gaining money. Those sustainable believer firms have to give back to society since it derives its profits from society. The perception of an enabling business context, and conveying strong orientation towards sustainability, regardless of business nature, firms have to trade fairly with customers and suppliers and make a responsible use of natural resources which is environmental concern.

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This more careful understanding of both the applicability of social, environmental performance and the impacts of that performance on the various innovative programs permits better integration of that information into overall operational decisions and the institutionalization of sustainability concerns throughout the organization strategic innovation development programs.

The conceptual model includes the details of the organization innovation capabilities through products and processes measures that are necessary to change all organizational innovativeness strategy to improve efficiency and performance of the process and systems and to achieve competitive advantages of the product. The model is like the Balanced Scorecard does provide valuable insights into the general implementation process with focus on innovation as the heart of the mechanism and pay the attentions of its payoff. Thompson (1965) defines innovation capability as the generation, acceptance, and implementation of new ideas, processes, products, or services. While Amabile, Conti, Coon, Lazenby and Herron (1996) define innovation as the successful implementation of creative ideas within a company through process involves the acquisition, dissemination, and use of new knowledge.

According to many scholars, Organizations must be innovative to survive in a highly turbulence environment as per Johnson, Meyer, Berkowitz, Ethington and Miller (1997). Firm innovativeness is conceptualized from two views. The first prospect is as a behavioral variable, which is, the rate of adoption of innovations by the company. The second prospect is as an organization’s willingness to change (Hurt, Joseph and Cook 1977). As per Cahill 1996, there are many crucial environmental factors affect the innovation process and capabilities, like customer demand uncertainty, technological turbulence and competitive uncertainty.

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Therefore, many scholars like Roger. Calantonea, Cavusgila and Zhaob, (2002), stress the importance of organization’s orientation to enhance innovation capability in three ways. First, it is more likely to be oriented to innovation by having latest technology, and utilize that technology in innovations and achieve market technological breakthrough. Second, by full understanding of latent customer needs that is gained through interaction with customer what is called lean customer driven product. Such organization is likely to capture the opportunities created by emerging market demand because it has the ability and knowledge to anticipate customer needs as per Urban and Hauser (1993). The Third factor is firm should be committed to learn, that is likely to have greater innovation competitive advantages than competitors (Damanpour 1991).

As an outcome of these different studies and researches, innovative organization shall frequently tries out new ideas in to their processes and systems and they shall seeks out new ways to do things. Creativity shall be the corner stone of innovative firms’ operational methods. Innovative companies are so often the first to market with new products and services and their perception of innovation is not taken as too risky and not being resisted by the management. The conceptual model presented in Figure 2 as a sustainability linkage map including both innovation capabilities and financial consequences of company activities. The drivers (boxed) show sustainability orientation actions producing innovations actives and thus financial performance and market value. The main streamline of the model shows sustainability orientation as a driver to innovation capabilities as mediator and impacts on corporate financial performance. In parallel to the model main streamline, corporate sustainability orientation direct influence on the economic performance is examined, bypassing the innovation activities. In short, reference to McGUIRE (1988) a firm being socially and environmentally responsible has

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an investment in reputation. An increase in perceived social and environmental responsibility may improve the firm's image. In contrast, a decline in the level of managements' view of a firm's responsibilities toward society and environment may reduce its reputation and result in a reduction in sales and market shares.

Figure 2: Conceptual Model linking Sustainability and Innovativeness to Performance and Regulations

The outcome variable of the model is the firm financial performance (profitability) was measured using six accounting variables: return on investment (ROI), sales growth, profit growth, market share, market share growth and market value, which are providing a range of measures used to assess corporate financial performance by the investment community.

Regulation is a key tool to accomplish government’s and non-government’s policies objectives and its failure can be costly, as verified most recently by the consequences of the

Sustainable Orientation (Corporate Responsibility) - Environmental - Social (CSR) - Economical Innovation Capability - Product innovation - Process innovation - System Innovation (New ideas, new

product, creativity…etc)

Polices & Regulations

(Governmental, Customer, NGO Pressures, …etc)

Financial Performance

(Sales, Profit, ROI …etc.)

Market Value

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global financial crisis (Jaffe and Palme 1997). As a common understanding corporate responsibility, particularly related to environmental prospect is related somehow with the regulations and policies. Due to this view, regulations is considered in the conceptual model as an external factor need to be verified as conditional effect on firm innovation capacities and sustainability orientation. Different policies proponents, like customers, governments and other stakeholders of strict and new environmental regulations have argued that increasing the stringency of environmental regulations provides an incentive for companies to develop more efficient new methods of production by less emission and reduce cost (Jaffe and Palme 1997). For these reasons, the other aim of this research is quite modest. The study is attempted to verify Porter hypothesis. Professor Michael Porter of Harvard Business School has developed a hypothesis, that if one country imposed stricter regulations than its competitors, innovation will increase and enable that country to become a net exporter of the newly developed technologies in comply with the new environmental regulation which will result in market differentiation of the new product and great potential competitive advantages. This prospect of the relationship between regulation and economic performance has come to be known as the "Porter hypothesis” (Porter 1991). So this research attempt to have statistical relationships that exist among different regulations pressures and measures of innovative activity and financial performance across different industries and locations.

The study attempts to integrate with other research by Oates (1993), exploring the relationship between stringency of environmental regulation and induces the corporate researches programs. By use of simple role, a profit-maximizing company in highly competitive business to emphasize that increasing the level of emission tax rate increases the company incentive to support and adopt efficient abatement technology.

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Using the above general relationships, some hypotheses can be developed based on different organizations social and environmental strategic orientations. Corporate innovation can be viewed into many different dimensions, ranging from those that are very proactive (eco-design) to those that are relatively reactive (compliance to regulations) as per Wagner (2010) article. Eco-design is defined as design for the environment, targets to create systems, processes and products that have minimal impact on the environment. This encompasses many innovation activities, from preliminary design, to detail engineering and to broader lifecycle assessment practices (Kurk and Eagan, 2008). Building knowledge of these competences in the innovation of eco-design initiatives is a capability that can provide firms with a significant competitive advantage. While the technical aspects of eco-design innovation have been well developed, still society innovation related programs are hard to adopt. Also there are some implementation barriers still existing which include difficulties in adopting the idea from most traditional old management (Boks, 2006). There is no doubt that innovation driven by social and environmental strategic prospects is challenging from different dimensions that does require a different mindset and focuses on creative practices that engineers may not easily handle due to a traditional focus on economic design and ignore the future benefits. Accordingly the first hypothesis is posited as below:

H1: Financial Performance is expected to be the highest among firms whose innovative capabilities are high driven by Corporate Responsibility toward environmental and social sustainability items.

As per Gann, Wang & Hawkins (1998), Conventional economic theory suggests that policies and technological innovation are contradictory. Regulations are viewed by many industries as an

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additional burden with which they have to comply. Products imposed by regulations and policies can be so restrictive that it limits freedom of researches to only certain direction. Perhaps the worst case scenario occurs where mandatory regulations imposed on the detail both product design and production methods, without scope for change. Poor timing through premature imposition of industry regulations can also delay or eliminate innovative activities by locking-in companies to old technologies where they cannot compete (Reddy, 1990).

On the other hand, as mentioned before other scholars sees regulations & polices as an opportunity to mandate companies to develop new technologies infrastructure to support economic, environment and social welfare as indicated in Gann, (1997) article. This technological infrastructure includes engineering, science and best practices knowledge as per Tassey (1991). Gann, Wang & Hawkins (1998) indicated three areas where the regulations and policies may contribute in developing emerging targeted technologies which will enhance the technological infrastructure, by codification of existing technology, which will facilitate knowledge accessibility, also through codifying emerging nonproprietary technology that can be utilized to enhance industry’s investments in innovation programs to develop new technology and lastly by helping to create demand to innovate new technologies as per Tassey (1991) article. Customers, local authorities, stakeholders and government and non-governmental regulators provide the instruments with which product specifications are maintained. However, there is a continuous debate about the relationship between regulation and innovation capabilities. Some industries emphasize that the regulations hurdle for innovation and creativity since they force business in to one direction of compliance. Others believe that recent shifts in regulatory may create a mechanism within which organization’s technological innovation can prosper. For example, industries in Japan benefit from strict product quality specifications set by the

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government in middle twentieth century, by achieving highly developed products which could strongly compete in the global market. Same happened in Germany in 1960s by developing DIN standards have been beneficial in creating high completive product quality, reference to Gann, Wang & Hawkins (1998). Based on these insights, the following hypothesis can be stated about the moderating role of Regulations and Polices on companies’ innovation capabilities:

H2: Market driven regulation policies are the conditional factor in the relationship between Sustainability Orientation and Financial Performance of the firm. The effect of Sustainability Orientation on innovative capabilities, and consequently on the financial performance of the firm, will be stronger among market driven regulation policies, comparing to the ones without such policies.

3. Analysis

3.1 Research Method

To test the introduced hypotheses, cross sectional data was gathered through an online survey. This data is related to a research program executed by the Qualtrics online survey tool using reflective construct. The stratified demographic sample of the research included 52 companies in a broad range of businesses like industrial, Tourism, Energy and others. The companies are located worldwide, not restricted to one country. This sample covered small, medium and large enterprises. Respondents were mainly senior executives and managers as they are expected to have the best knowledge about the variables of interest.

A total of 30 questions were generated based on previous tested models’ questionnaires in order to validate this study conceptual model’s correlations. An online survey questionnaire was conducted to collect the empirical data. the questionnaire are implementing five points Likert

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scale, ranging from 1 strongly disagree or very low, 2 disagree or low, 3 Neutral response, 4 agree or high, 5 strongly agree or very high. A neutral response, “neither disagree nor agree” is adopted to reduce uninformed response, since it assures respondents that they need not feel compelled to answer every questionnaire item (Wilcox, 1994). Five control variables are considered in survey questionnaire which are companies’ location, size, age, business type and environmental turbulence.

3.2 Statistical procedure

To perform the statistical analyses, the Statistical Package for Social Sciences IBM SPSS software was used. Many steps were processed to prepare the collected data for regression analysis in order to test the hypothesized moderation and mediation effects between the variables. Data preparation process starting with handling missing values, recoding the reverse coded items, scale reliabilities, descriptive statistics, skewness, kurtosis and normality tests were computed.

Missing Values

All model variables were checked for missing data. A frequency test was run for all variables. The amount of missing data was less than 1% for all variables, missing data were specifically for values related financial performance measures corresponds to market share growth and market value measures. All other questions were completely fulfilled. Missing responses was inserted with identifier of values 999.

Recoding

Only one question in the construct related to innovativeness capability need to be recoded as counter-indicative item. This question purpose is to detect acquiescence bias, also known as the

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yes-saying bias, which is the tendency to respond in an indiscriminately positive way. So in order to enable use of this question’s answer to be in line with the rest of questions scale, recoding of counter-indicative items applied. The question statement is “Innovation in our company is perceived as too risky and is resisted.” which tends to indicate negative results unlike rest of questions, So we needed to adapt the scale of this question from 1 (strongly disagree) to 5 (strongly agree) and from 1 (Strongly agree) to 5 (Strongly disagree).

Reliability Check

Reliability enables to examine the consistency of measurements. Construct validity is the degree to which an instrument measures the construct (Cronbach & Meehl, 1955). Reliability checks were run for all construct responses, sustainability orientation, innovativeness capabilities, regulations pressure, and corporate financial performance. The Cronbach’s alpha, which represents the estimator of the internal consistency, has been tested to verify the questions validities. As shown in table 1, based on collected data, three variables (sustainability orientation, innovativeness capabilities and regulations pressure) have a Cronbach’s alpha higher than 0.7, which indicates high level of internal consistency, reference to Cortina J (1993). However, one financial performance variable shows very low Cronbachs alpha equal to 0.2 which need to be revaluated to enhance its reliability.

The normality of financial performance results data was checked and found the normal distribution have skewness and kurtosis close to 0 for four questions’ results related to Return on investment “ROI”, Sales growth, Profit growth and Market share which are acceptable, reference to Andy Field, 2009 Discovering statistics using SPSS. On the other hand, two questions measures relevant to Market share growth and Market value have skewness and kurtosis values

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between 51 and -7 which are far away from 0, The further the value is from zero, the more likely it is that the data are not normally distributed as per Andy Field, 2009 Discovering statistics using SPSS. Additionally, when these two questions results related to (Market share growth and Market Value) are removed, the Cronbach’s Alpha value of the financial performance for the other four questions’ answers goes up to 0.931 which indicates excellent reliability. As a result four criteria are considered as indicators for financial performance in this study, which are (ROI, Sales growth, Profit growth and Market share).

Variable Cronbachs Alpha

Sustainability 0.837

Innovativeness Capabilities 0.806 Regulation Pressure 0.750 Financial Performance 0.931

Table 1: Cronbachs Alpha Adjusting the Control Variable Data

Five control variables were adjusted to represent binary data that takes the value of 0 or 1 to indicate the absence or presence of the item for easy handling. Starting with corporate Business Types are divided in two categories, industrial business including Oil & Gas field and other businesses. The second control variable is the Firms Sizes which are divided in two classes, companies with less than 250 employees and others with more than 250 employees. The third one is the Firms Ages are divided in two groups, less than 10 years and more than 10 years experience. Companies Locations are categorized in to three main locations, companies located in United States “USA”, others located in Europe and the rest are located worldwide outside USA and Europe. In order to have them as binary data, the three locations are classified in two

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dummy variables. The companies located in the United States were taken as a reference and first dummy variable is comparing European companies with the rest locations and second dummy variable is comparing the firms located worldwide with European and USA companies. The fifth control variable which is environmental turbulence, measured differently using Likert scale from 1 (very low) up to 5 (very high) to be used as interval data.

Computing Scale Means

As final preliminary step, the scale means of the major four variables were computed for hypothesis testing. Means and standard deviations of all variables are exhibited in table 2

Variable Mean Std. Deviation

Sustainability 4.0385 .72657 Innovativeness Capabilities 3.8808 .74332

Regulation Pressure 3.3692 .71223 Financial Performance 3.6394 .94508

Table 2: Means, Standard Deviations Computing Variables Correlations

SPSS provided us with table 3 of correlation coefficients, called correlation matrix for all of the combinations of variables. From the correlation carried on, Innovation capabilities is strongly related to corporate responsibilities toward sustainability with a Pearson correlation coefficient of r = 0.625 and significance value of P < 0.01. Also correlation matrix indicates strong correlation between financial performance from one side and corporate sustainability and innovation capabilities from the other side with r = 0.537, p < 0.01 and r = 0.601, p < 0.01 respectively.

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30 Significance, Correlations Variables 1 2 3 4 5 6 7 8 9 10 1. Sustainability Correlation 1 Significance 2. Innovation Correlation .625** 1 Significance .000 3.Regulation Correlation .041 .013 1 Significance .770 .926 4. Finance Correlation .537** .601** -.014 1 Significance .000 .000 .922 5. Environment Turbulence Correlation -.146 -.156 .483** -.245 1 Significance .300 .270 .000 .079 6. Location (USA Vs. EU) Correlation .362** .322* -.072 .515** -.362** 1 Significance .008 .020 .613 .000 .008 7. Location (USA Vs. globe) Correlation -.097 -.160 -.072 -.277* .158 -.479** 1 Significance .495 .257 .612 .047 .265 .000 8. Business Type Correlation .059 .157 -.158 .273 -.134 .048 .213 1 Significance .677 .265 .264 .050 .345 .736 .130 9. Business Age Correlation -.218 -.058 -.016 .038 .037 -.200 .154 .351* 1 Significance .121 .680 .912 .791 .797 .154 .276 .011 10.Business Size Correlation .229 .257 -.088 .380** -.286* .235 -.042 .294* -.118 1 Significance .103 .066 .534 .006 .040 .094 .769 .034 .406

**. Correlation is significant at the 0.01 level (2-tailed). *. Correlation is significant at the 0.05 level (2-tailed).

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On the other hands regulation didn’t show significant correlation with other variables with P > 0.05. From the control variables side business location, specifically related to USA in compare with Europe is strongly correlated with financial performance with r = 0.515, p < 0.01, while has a tendency to a positive relation with firm sustainability with r = 0.362, p < 0.01. Also the business size has a tendency to positive relation with financial performance with r = 0.389, p < 0.01. Other control variables didn’t indicate any significant correlations with other main conceptual model parameters.

3.3 Moderated Mediation Regression

Moderated Mediation regression was performed using PROCESS "SPSS” to investigate the two study hypotheses. It examines the relation between independent variable which is Corporate Responsibilities toward society and environment sustainability and the outcome variable which is firm financial performance mediated by firm’s innovation capabilities, moreover it measures the effect of regulation and polices as a moderator in the model which corresponds to model 8 in PROCESS guideline. Table 4, provides an overview of the Moderated Mediation regression analysis effect on the outcome variable.

The analysis of the data shows significant effect (P=0.0193 < 0.05) of the relation between Corporate responsibility toward sustainability as independent variable and innovation capability as mediator with coefficient value 1.4818 and value of R2 = 0.439 which indicates 43.9 % explained by the model and bootstrap confidence interval that is entirely above zero (0.2520 to 2.7115). This means strong positive relation between corporate sustainability orientation and innovation capabilities.

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Model Summary of variables in relation with innovation capabilities

R R2_{MSE F df1 df2 p}

0.6627 0.4391 0.3436 7.2031 5 46 0.00 Model Results

Coefficient SE t p LLCI ULCI Constant -2.7138 2.6727 -1.0154 0.3152 -8.0938 2.6662 Sustainability 1.4818 0.6109 2.4254 0.0193 0.2520 2.7115 Regulation 1.1524 0.7695 1.4977 0.1410 -0.3965 2.7013 Interaction -0.2661 0.1766 -1.5073 0.1386 -0.6215 0.0893 Model Summary of variables relation with financial performance

R R2_{MSE F df1 df2 p}

0.7246 0.5251 0.4807 8.2920 6 45 0.00 Model Results

Coefficient SE t p LLCI ULCI Constant -0.3693 3.1968 -0.1155 0.9086 -6.8080 6.0695 Innovation 0.4445 0.1744 2.5485 0.0143 0.0932 0.7958 Sustainability 0.3359 0.7675 0.4377 0.6637 -1.2099 1.8818 Regulation 0.1655 0.9321 0.1776 0.8598 -1.7119 2.0430 Interaction -0.0347 0.2139 -0.1622 0.8719 -0.4656 0.3962

Table 4: Model Final Results Overview

Also the results indicates, A significant effect of P=.0143 < 0.05, of the relation between Financial performance as a model outcome and innovation capabilities as a mediator with coefficient value of 0.4445 and value of R2 = 0.525 which means that 52.5% are explained by the

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model and bootstrap confidence interval that is entirely above zero (0.0932 to 0.7958), which indicates positive proportional between companies innovativeness and their economic performance. Also results shows significant conditional indirect effect of corporate responsibility toward sustainability mediated by innovation capability on the corporate financial performance with indirect effect = 0.2601, SE = 0.1638, with bootstrap confidence interval is entirely above zero (0.0033 to 0.6399).

From the model data, shows no significant effect between the regulation as moderator and both innovation capability and financial performance with, P = 0.1410 > 0.05, P= 0.8598 > 0.05 respectively and the bootstrap confidence interval that is crossing zero (- 0.3965 to 2.7013) and (-1.7119 to 2.0430) respectively. The result shows also no significant conditional direct effects between sustainability and financial performance moderated by regulation with P= 0.2247 > 0.05 (effect=0.2190, SE=0.1779), and the bootstrap confidence interval that is crossing zero (-0.1393 to 0.5774). Which means that the regulations has no influence neither on sustainability orientation nor the innovations capabilities and as consequence there is no impact on the corporate financial performance. Also there is no significant interaction between corporate responsibility and regulations’ pressure on Companies’ financial performance by effect of -.1183, SE= 0.1590 and the bootstrap confidence interval that is crossing zero (- 0.5852 to 0.0788).

As per SPSS “PROCESS” results only one control variable shows significant effect on the financial performance as an outcome variable which is the company’s location, particularly USA in compare with Europe P = 0.0107 < 0.05, Coefficient = 0.5665, SE = 0.2128, t = 2.6623 and with bootstrap confidence interval is entirely above zero 0.1379 to 0.9950, which indicates that,

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the American companies are more responsive to sustainability strategy in form of financial performance outcome than the European ones.

4. Discussion

Below, the most evident findings are discussed, together with the implications of these findings with respect to the literature and management practice. Furthermore, the limitations regarding the conclusions of this study are outlined. Finally a number of suggestions for further research will be given.

In line with relatively more comprehensive studies for example, Dangelico & Pujari, 2010, This study found a significant relationship between Corporate Responsibility (CR), defined as the responsibility of enterprises for their impacts on society to fully meet their social responsibility and organization innovativeness competences which is more in using and applying new process ideas, seeks creative operation, targeting to be the first in the market with new product and many other faces of innovation capabilities can be counted. Enterprises should have a process in place to integrate social, environmental, ethical human rights and consumer concerns into their core strategy and business operations in close collaboration with their stakeholders.

Additionally, this research is proving the link between innovativeness driven by sustainability orientation and Company’s financial performance by resulting in high return of investment “ROI”, increase in the sales, increase in profit growth and high market share which validates

Hull and Rothenberg (2008) argument that the association of sustainability with economic performance depends on organizations' ability to differentiate their offerings, that is mediated by

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environmental activities is one important determinant of innovation activities that create environmental benefits and may lead to high competitive advantage in the market and improve

companies’ profitability. Other view is coming from Turban and Greening (1997) indicate that

adapting high levels of corporate sustainability orientation enables companies to recruit more innovative employees, which can positively impact on economic performance.

This study contributed to recent researches by examining the effect of regulations polices on pushing the firm’s strategy toward sustainability orientation and company’s innovation activities. The results shows that the regulations and polices pressure has no effect and no correlation with corporate sustainability orientation, innovation capabilities and financial performance which makes it in line with the prevailing view, that there is an inherent and fixed trade-off, environment versus the economy as stated in Porter and Linde, 1995 article, on one hand, the trade-off are the social reward that result from strict environmental policies. On the other hand, implementation of the regulations impact on industrial costs for prevention and cleanup costs that lead to higher prices, reduced competitiveness and causing a drop in the financial performance as a result.

However, Porter and Linde (1995) strongly argue that, properly designed environmental policies can enhance corporate innovations that lower the total cost of a product or improve its competitive advantage. Such innovations trigger companies to utilize their resources productively from raw materials to energy consumption thus offsetting the costs of improving environmental impact. Ultimately, enhancing resource productivity drives firm to be more competitive, not less, that is supported in the same study of Porter and Linde, 1995, with the Dutch flowers companies’ success story. The farming of flowers in small areas was contaminating the soil with herbicides, and fertilizers, facing increasingly strict environmental

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regulations on the damage of the environment. The Dutch companies looked for innovative solution to overcome the environmental regulation restriction of releases of chemicals to the soil by developing a closed-loop system in the greenhouses. Flowers now grow in water and rock wool, not in soil. This lowers the risk of infestation, reducing the need for fertilizers. Such innovative approach eliminated the cost of using fertilizers which is major factor of production cost and in the same aligns the business with the environmental regulations.

However not every industry is able to follow the regulations requirements, due to their difficulties to be achieved and also the required cost of investments is sometimes quite high to overcome such regulations’ challenges. Not every business is able to innovate to fulfill the strict environmental polices of some countries. A recent example of this case is the Volkswagen emissions scandal in United States. End of 2015 the United States Environmental Protection Agency issued a notice of environmental violation to automobile manufacturer Volkswagen, because it was found that in reality the car emits up to 40 times more NOx than the American emission standards allowance which was not in line with the Company’s announced value. Volkswagen’s programmed turbocharged direct injection diesel engines to activate certain NOx emissions controls only during laboratory emissions testing to meet US standards during regulatory testing. Volkswagen has suffered a significant drop of about a fifth in their market value shares. And it was sanctioned billions of dollars to be paid to US authority because of this case, as announced by The Guardian newsletters.

As an outcome in accordance with Ashford and Hall, 2010 study, the most crucial problem in achieving sustainability is lock-in due to the failure to envision, design, and implements regulations that achieve co-optimization between social goals and current industry trend. While some business can meet the regulations in innovative way and achieve competitive advantages

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and market differentiation, some other cannot implement the policies in profitable and lose some markets especially if the polices are challenging and difficult to meet.

Therefore, due to significant correlation exists between innovation capability and corporate responsibilities toward sustainability from one side and financial performance from the other side, which conclude Corporate Responsibilities toward society, environment and economic sustainability is positively affect firm’s innovative capabilities, which in consequence positively influence financial performance, as a result hypothesis one is validated. The study’s second Hypothesis is rejected, because results shows no significant correlation could be found between regulations pressure with both corporate responsibility toward sustainability and firm’s innovation capabilities and consequently no effect on financial performance.

5. Practical Implications

Environmental and social driven sustainable strategy driving organization’s innovation activities have been central themes in applied research for the sake of high economic performance. To substantiate this, this study provided ample evidence for management staff on the positive effect of adapting green, social friendly product, in their research and development programs in order to differentiate in the market and achieve competitive product that arise the organization economic performance. Moreover, sustainable induced innovation can be extended to business’s processes and systems, in order to leverage the sustainability concept in all business activities in creative way, for example optimizing the resources utilization with creative approach. This study presents a framework confirming that well developed sustainable orientation driven companies are profitable, when being oriented to eco-design and social research programs.

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Of course, study conceptual model will need to be customized from one business type to another to reflect their particular industry or business context, mapping a corporate performance framework underlying their specific motivation for corporate responsibilities and research programs direction with their relevant regulations. The organization using this framework begins with corporate and business unit strategy and moves from there to the second component, sustainability actions. Once the company has decided what sustainability actions it wants to explore, it can begin to establish the links from the actions to inject their vision in to engineering, design and development programs. Companies aim to consistently reap the fruits of simultaneously exploring and inventing social and environmental friendly products, processes and services should develop smart profitable program.

An appropriate set of measures should be developed to test the foundation of the customized corporate strategic model. Managers must evaluate how one variable drives another until the link to profit is guaranteed. This argues for explicitly linking corporate strategy and sustainability actions to research innovation programs and economic performance. For example, senior managers might believe that a given set of explicit management actions can lead to improved social and environmental performance (Dombrowski & Riechel 2013), which will enhance the firm’s public image and encourage customers to purchase and increase firm’s sales. These increased purchases should then lead to improved long-term profitability. These relationships can be tested to provide guidance to future corporate actions to improve both sustainability and financial performance.

As being argued in many studies, most of the companies have not being oriented to count the financial gain out of sustainability actions taken by the firm by quantifying the link between them. And firms have not focused on making the “business case” for corporate responsibility

Sustainable induced innovation a driver of corporate financial performance