Empirical analysis of isolated and complementarity effect of (non-)organizational external stakeholders on green product innovation
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Master thesis MSc BA – Strategic Innovation Management
Niels Nonnekens - S3141861 niels.nonnekens@gmail.com
University of Groningen Faculty of Economics and Business
Supervisor: prof. dr. J. Surroca Co-assessor: prof. dr. J.D.R. Oehmichen
25
thJune 2018
Wordcount: 12,436
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ABSTRACT
This study investigate the underexplored field of the driving forces for firms to engage in green product innovation. Prior research mainly focused on the effect of internal organizational stakeholders in relation to green product innovation. This study focuses on (non-)organizational external stakeholders and its effect on green product innovation. Therefore this study increase the understanding what effect firms orientation on isolated (non-)organizational external stakeholder has for green product innovation. In addition this study investigate complementary effects between (non-)organizational external stakeholders. This empirical analysis based on an original database including 325 firms of the United States presents firms which only orientate on customers has a positive effect on green product innovation. Contrary, firms which only orientate on shareholders or institutional factors do not have an effect on green product innovation. Moreover, the analysis presents there is no complementarity effect between customers, shareholders or institutional factors. Interestingly, there is substitutability effect for firms which orientate towards (1) customers and shareholders (2) shareholders and institutional factors and (3) customers, shareholders and institutional factors.
Keywords: (non-)organizational external stakeholder; customer orientation; shareholder orientation;
institutional orientation; green product innovation; complementarity effect; substitutability effect
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TABLE OF CONTENT
1. INTRODUCTION ... 4
2. LITERATURE REVIEW ... 6
2.1. External stakeholders and green product innovation ... 6
2.2. Organizational external stakeholders and green product innovation ... 7
2.3. Non-organizational external stakeholder and green product innovation ... 8
2.4. Complementarity effects and green product innovation ... 9
3. METHODOLOGY ... 11
3.1. Data collection ... 11
3.2. Research setting ... 11
3.3. Data sources ... 12
3.4. Measurements variables ... 12
3.5. Analysis technique ... 15
4. RESULTS ... 17
4.1. Descriptive statistics and correlations ... 17
4.2. Results regressions ... 20
4.3. Hypotheses testing ... 22
5. DISCUSSION ... 23
5.1. Theoretical implications ... 23
5.2. Managerial implications ... 26
5.3. Limitations and future research ... 26
6. CONCLUSION ... 27
7. ACKNOWLEDGEMENT ... 28
8. BIBILIOGRAPHY ... 28
9. APPENDIX ... 34
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1. INTRODUCTION
“Climate change is no longer some far-off problem: it is happing here, it is happening now.”
B. Obama (September 2015)
In the last decades climate change caused by firms and human behaviour affects the oceans, ice, atmosphere and land in important ways (Change, 2016; Denchak, 2016). Scientists acknowledge that firms play an important role in the environmental performance outcome (Porter & Van der Linde, 1995, Hart, 1995). Herewith firms are nowadays aware of the environmental impact it has and reconsider their business operation, production and product portfolio in order to look for solutions to become greener (Lee & Min, 2015; Porter & Reinhardt, 2007). In the past many firms thought investing in green innovation was an unnecessary expense and could hamper its development and growth (Porter & Van der Linde, 1995) whereas more recent studies showed green innovation could provide firms a first mover advantage (Chen, 2008).
One of the most widely used definitions of green innovation is “the improvement of products or processes about energy-saving, pollution prevention, waste recycling, green product designs, and corporate environmental management” (Chang, 2011, p.363). This definition clearly shows the distinction most scholars make regarding green innovation: (1) green process innovation and (2) green product innovation (Wong, 2013, Chang, 2011, Lee & Min, 2011). In the literature green process innovation has received increasing attention the last years (Chang & Chen, 2004; Ziegler & Nogareda, 2009; Yang & Chen, 2011) whereas green product innovation is nowadays an important research stream for scholars (Ar, 2002; Guoyou et al., 2013).
In order to facilitate the adoption of green process innovation and green product innovation, firms need to consider important drivers (Routroy, 2009). Numerous studies attempted to identify the drivers why firms participate in green innovation. Most scholars focus on the internal and external drivers which force firms to innovate in a green way (Cheng et al., 2014). Internal drivers addresses aspects such as employees and the organizational culture the firm is embedded in (Porter-O’Grady &
Malloch, 2010) and the external drivers addresses aspects as shareholders and customers (Klewitz et al.,
2012). Recent studies acknowledge firms incorporate green innovation in its operations because of
customer pressure (Thögersen et al., 2012) or governmental regulations (Kammerer, 2009). The results
of these studies provide some evidence of the effect of (non-)organizational external stakeholders on the
adoption of green innovation practices (Lin & Ho, 2010; Cordano et al., 2010). Nonetheless the results
of the effect of (non-)organizational external stakeholders as drivers are still inclusive and sometimes
contradicting. Some scholars argue (non-)organizational external stakeholders (e.g. customers or
shareholders) are drivers of green processes innovation and green product innovation because of the
awareness of environmental pollution (Huang et al., 2014; Sharma et al., 2010) whereas other scholars
argue (non-)organizational external stakeholders are not drivers of green process innovation or green
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product innovation because of the higher investments needed (Noci & Verganti, 1999) and green products are more expensive in comparison with the conventual substitutes (Rehfeld et al., 2017).
As previously elaborated, scholars already investigated drivers for firms to participate in green product innovation. Most scholars focus on the internal stakeholders (i.e. employees, managers) and its effect on green product innovation (Chang, 2011; Weng et al., 2015). Less scholars focus on the external stakeholders (i.e. customers, shareholders) and its effect on green product innovation. In addition the results of the studies which focused on external stakeholders are sometimes inclusive and contradicting (Huang et al., 2014; Sharma et al., 2010; Rehfeld et al., 2017). Moreover, to the best of my knowledge, no study investigated complementarity effects between external stakeholders for green product innovation (Guoyou et al., 2013).
Therefore the purpose of this study is two folded. Firstly to provide more understanding on which (non-)organizational external stakeholders a firm needs to orientate to effectively engage in green
product innovation. Secondly to investigate the possibility of complementarity effect between (non-)organizational external stakeholders. This study aims to address this literature gap by empirically
assessing the drivers of green product innovation and the complementarity effect between the drivers.
Based on this literature gap I have formulated a research question:
“What isolated and complementarity effect do (non-)organizational external stakeholders have on green product innovation?”
Although green product innovation is an increasing research stream, scholars still see this as a relative new area to investigate (e.g. Guoyou et al., 2013). Therefore, I conducted a theory testing approach and empirically analysed data from ASSET4, Orbis and WalletHub of firms which are located in the United
States (US). In order to answer the research question, I analysed the isolated effect of (non-)organizational external stakeholders and the interaction effect between (non-)organizational
external stakeholders to investigate complementarity. In line with prior research, the results indicate firms which only orientate towards customers positively affects the engagement in green product innovation. The relationship between firms which only orientate towards shareholders or institutional factors is not found to have an effect on green product innovation. Moreover, the main contribution of this study is to investigate complementarity effect between (non-)organizational external stakeholders.
This study presents there is no complementarity effect between customers, shareholders and / or
institutional factors on green product innovation. Interestingly, the results show a substitutability effect
on green product innovation for firms which orientate on (1) customers and shareholders only (2)
shareholders and institutional factors only and (3) customers, shareholders and institutional factors.
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2. LITERATURE REVIEW
In this chapter previous literature is reviewed and has been used in order to construct four hypotheses.
Firstly this chapter explains the relationship between external stakeholders and green product innovation. Hereafter the effect of organizational external stakeholders and non-organizational external stakeholders have been investigated which resulted into four hypotheses. Hypotheses 1, 2 and 3 investigate the isolated effects of (non-)organizational stakeholders on green product innovation whereas the fourth hypothesis is separated into four sub-hypotheses which investigate complementarity/substitutability effect (H4a-H4d). In addition a conceptual model is made which visually show the relationships between the dependent, independent and control variables.
2.1. External stakeholders and green product innovation
Managers of firms continually encounter demands from different stakeholder groups to devote resources in green innovation practices (McWilliams & Siegel, 2001). One of the first scholars who investigated stakeholders is Freeman and Reed (1983). He defined the wide sense of stakeholders as “group or individual who can affect or is affected by achievement of the organization’s objective” (p.91). In addition Freeman and Reed (1983) made a distinction between internal and external stakeholders.
Internal stakeholders are stakeholder which directly contribute to the product or service such as employees. External stakeholders are stakeholders which have an indirect effect on the product or service. However the firm is dependent on external stakeholders for continuous survival. Therefore the external environment of the firm needs to be managed in order to assure revenues, profits, returns for shareholders and environmental, societal impacts for other stakeholders (Berman, 1999; Freeman &
Reed, 1983; Phillips et al., 2003). Freeman and Reed (1983) defined four (non-)organizational external stakeholders as part of the environment: customers, shareholders, suppliers and government. Some other scholars argue society is an (external) stakeholder as well however the definition of ‘society’ is not defined in a scientific context which makes it difficult to measure. The society is mostly seen as the general environment stakeholders are operating in (Phillips et al., 2003).
Existing literature argues external stakeholders encourage firms to innovate in green products
(Weng et al., 2015). More specifically organizational external stakeholders (i.e. customers,
shareholders) expect firms to be aware and implement the newest trends regarding green products. On
the other hand non-organizational external stakeholders (i.e. government) expect firms to comply to the
existing governmental regulations, for example the changing regulations which force firms to decrease
the carbon footprint of its product (Weng et al., 2015; Bocken & Allwood, 2012). This increasing
environmental awareness amongst both (non-)organizational external stakeholders resulted in the fact
that firms need to orientate more on the changing needs of each stakeholder and innovate in green
products.
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2.2. Organizational external stakeholders and green product innovation Customer orientation and green product innovation
Most scholars define customer orientation as “the set of beliefs that puts the customer’s interest first, in order to develop long-term profitability” (Despandé et al., 1993, p.27). In the current literature little empirical attention has been given to the fact that customers are drivers of green product innovation (Deshpandé et al., 1993). However some scholars argue customers are nowadays more aware of the environmental issues and affect firms behaviour towards green product innovation effectively (Huang et al., 2014; Sharma et al., 2010). Therefore firms need to adapt to the changed customer needs (innovate more in green products) since customers have the power the favour, reject or criticize firms which fail to maintain the environmental balance in its product portfolio (Huang et al, 2014). Herewith small- medium firms are incorporating this external force of customers and orientate more on them by innovating in distinctive environmental friendly products (Holt et al., 2001).
Interestingly, research has proven firms which orientate towards customers results in higher levels of green (product) innovation practices (Pekovic et al., 2016). The main reason for this, firms identify customer satisfaction as one of the most important drivers of the implementation of green (product) innovation practices in its business operation. Herewith customer satisfaction results from the positive attitude, feeling or responses customers have towards businesses with strong corporate social responsibility (e.g. green products) (Handelman & Arnold, 1999). Moreover firms which do not environmentally innovate its product portfolio and still sell the less environmental-friendly conventual substitute results in a refuse of customers to buy these products (Weng et al., 2015).
Based on these arguments, I argue firms which orientate on customers will have a positive effect on the engagement in green product innovation. The hypothesis is formulated as:
H1: Isolated customer orientation exerts a positive effect on green product innovation
Shareholder orientation and green product innovation
There is one particular group which the firm’s goal is the advancement of interests: shareholders (Berman et al., 1999). Nowadays shareholders are paying more attention to the environmental and sustainability aspect (Gadenne et al., 2008). Because of the environmental awareness of shareholders they are increasingly interested to participate in innovating in green products (Rose, 2013). However the individual financial rewards the shareholders receive promotes the success of the green product innovation of a firm (Fellnhofer, 2017). Thus, shareholders are interested in innovating in green products in case financial rewards are still of an acceptable level. This argument is in line with a research of Kelm et al. (1995) where these scholars found in order to satisfy shareholders, a firm needs to orientate on two aspects: environmental risk management (e.g. innovate in green products) and economic opportunities.
Based on this assumption that economic opportunities (i.e. financial rewards) are important for
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shareholders, research has proven firms which innovate in green products results in superior financial performance (Schaltegger & Figge, 1997; Kiernan, 2001).
In addition, firms which have ISO 14001 certification results in a positive effect on the share price of shareholders (Jacobs et al., 2010). Herewith the ISO 14001 refers to an international accepted standard of environmental management systems (González-Benito & González-Benito, 2005). Existing literature argues shareholders are more willing to invest in firms that obtained 14001 certification which lead to an increase of green product innovation (Chen et al., 2006). In addition the green products that obtained the ISO 14001 provide customers an environmental assurance which in turn delivers higher returns for the firm and its shareholders (Stein, 2009).
Based on these arguments presented above, I expect firms which orientate on shareholders will have a positive effect on the engagement in green product innovation. The hypothesis is formulated as:
H2: Isolated shareholder orientation exerts a positive effect on green product innovation
2.3.Non-organizational external stakeholder and green product innovation Institutional factors and green product innovation
Institutional factors are factors outside of a firm which may enable and stimulate firms to participate in green product innovation. Scholars investigated the institutional factors in many different ways, for example on the aspect of political (regulations), socio-cultural, economic development or well-being of a country (Rupasingha et al., 2002; Kirby, 1988). These factors affect firms behaviour by shaping the external environment it is operating in and could differ between states and industries (Kammerer, 2009).
According to Rugman and Verbeke (1998) the negative environmental impact of products the firms sold have led to strengthen the environmental regulations. These environmental regulations developed by institutions force firms to reduce the environmental impact products have during the entire life cycle (Sharma et al., 2010; Darnall, 2009). In case firms fail to meet the environmental regulations it could lead to fines or lawsuits (Sarkis et al., 2010). Therefore firms need to respond on this by innovating in green products. Existing literature provide evidence that environmental regulations are an important determinant for firms to incorporate green product innovation (Kammerer, 2009; Rehfeld et al, 2007). This innovation activity regarding green products triggered by regulations mainly focus on (1) less use of material (2) lower use of energy consumption by the product and (3) pollution reduction of the product (Dangelico & Pujari, 2010).
On the other hand, research has proven that the effect of environmental regulations on green
product innovation varies across industries (Kammerer, 2009). To illustrate, regulatory stringency has a
positive effect in the pharmaceutical and chemical industry (Seijas-Nogareda, 2007), whereas it has no
effect in the beverages and food industry (Engels, 2007). The main assumption is industry characteristics
influence the effect of regulations on the adoption of green product innovation for firms.
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Based on these arguments presented, I expect firms which orientate on institutional factors will have a positive effect on the engagement in green product innovation. The hypothesis is formulated as:
H3: Isolated institutional orientation exerts a positive effect on green product innovation
2.4. Complementarity effects and green product innovation
Firstly complementarity effects means the potential that two or more (non-)organizational external stakeholders mutually positively reinforce each other (Schmidt, 2003).
Firms need to establish relationships with its different stakeholders in order to achieve higher levels of trust and loyalty (Hillman & Keim, 2001). These relationships with primary stakeholders could be seen as a hard to imitate and valuable resource. From resource-based perspective higher levels of trust and loyalty results in a long term competitive advantage (Barney, 1991). In order to create a competitive advantage it would be more effective for firms to simultaneously orientate across its relevant stakeholders (Garcia-Castro & Francoeur, 2016). In addition these cumulative effect of complementary investments facilitates firms to invest in the development of superior green products.
From the theoretical foundation of complementarity it is shown that a combination of a set of investments and practices results in higher performance than individually done (Whittington et al., 1999). Thus, orienting on one particular (non-)organizational external stakeholder is less beneficial for the level of green product innovation than combining the orientation on a set of (non-)organizational external stakeholders. However what is important to take into account for the existence of complementarity effect is the subcultural overlap between the stakeholders (Gyrd-Jones & Kornum, 2013). The existing literature shows that complementarity is enhanced when cultural values between the stakeholders are incorporated in the (direct interaction) processes (Broude, 2007; Gyrd-Jones &
Kornum, 2013). Overall I expect orientating on multiple (non-)organizational external stakeholders generate complementarity effect. The sub-hypotheses are formulated as followed:
H4a: The interaction between customer orientation and shareholder orientation generate complementarity effect on green product innovation
H4b: The interaction between customer orientation and institutional orientation generate complementarity effect on green product innovation
H4c: The interaction between shareholder orientation and institutional orientation generate complementarity effect on green product innovation
H4d: The interaction between customer orientation, shareholder orientation and institutional
orientation generate complementarity effect on green product innovation
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Interestingly, existing literature also argue the possibility of substitutability effect between (non-)organizational external stakeholders (Garcia-Castro & Francoeur, 2016; McWilliams & Siegel, 2000). Substitutability effect is the opposite of complementarity effect which lead to a trade-off amongst the (non-)organizational external stakeholders. Previous studies presented firms try to build synergies between the (non-)organizational external stakeholders otherwise it will prioritize in order to obtain higher levels of green product innovation (Henriques & Sadorsky, 1999). Nonetheless firms have difficulties building synergies because of the divergent needs of (non-)organizational external stakeholders that needs to be satisfied (Bridoux & Stoelhoerst, 2014; Gyrd-Jones & Kornum, 2013).
2.5. Conceptual framework
This study focus on the (complementarity) effect (non-)organizational external stakeholders have on
green product innovation. Although previous studies investigated isolated effects of (non-)organizational stakeholders and green product innovation, to the best of my knowledge, no
research investigated the complementarity effect between (non-)organizational external stakeholders.
Therefore this study provide more understanding of the effect of three (non-)organizational external stakeholder orientations on green product innovation. In addition this study investigate complementarity effects for firms which orientate on customers, shareholders and / or institutional factors. In figure 1 the conceptual framework is presented. Below the conceptual framework an explanation is provided what
‘complementarity effect’ means.
Figure 1: conceptual framework
