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Exploring the relationship

between environmental

sustainability, innovation

and firm performance

An empirical analysis of manufacturing

multinational firms in developed countries

Student: Mark Esselink Student number: S2966913 Supervisor: dr. S. Castaldi Co-assessor: dr. J. Shin

Institute: University of Groningen, Faculty of Economics and Business Date: 17-7-2019

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Abstract

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Table of Contents

Introduction...3

Literature review and hypotheses...6

Environmental sustainability and MNE financial performance...6

The mediation effect of innovation...8

Conceptual model...11

Methodology...12

Research setting, data collection, and sample...12

Measurements...13 Dependent variable...13 Independent variable...13 Mediation variable...14 Control variables...14 Robustness check...16 Results...17 Descriptive statistics...17 Correlations...19 Regression models...20 Robustness check...22 Discussion...24 Theoretical implications...26 Practical implications...28

Limitations and future research...29

Conclusion...30

References...31

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Introduction

There is a rising demand all over the world for MNEs to develop more environmentally friendly products and processes, especially in developed countries (Dawkins and Lewis, 2003). For this it is crucial for a MNE that it does not only reduces its environmental footprint, but is also able to develop new and innovative products in order to deal with increasing international competition (Henderson, 2017). Take for example the Brazilian cosmetic company Natura. In efforts to reduce the company’s environmental impact it started to focus on how to include this in its products. This has resulted in new innovative products that are sustainably sourced to preserve the Amazonian environment (Violo, 2018). Although Natura has increased its competitive advantage in the market through the development of new environmental friendly products and processes, increased financial performance is not a given because the development of new sustainable products and processes may divert resources away from the main core practices (Allouche and Laroche, 2005). This is why it becomes increasingly important to understand the relationship between environmental sustainability and innovation and their impact on MNEs’ financial performance.

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environmentally sustainable MNEs than in MNEs that aren’t (Singhapakdi et al., 2015). As a result, investing in environmentally sustainable practices may help MNEs being abler to attract and retain valuable personnel (Singhapakdi et al., 2015), which is vital for the innovative capabilities and competitive position of MNEs (Verona and Ravasi, 2003).

Despite the importance of environmentally sustainable practices and innovations for firm financial performance, the literature considering the triangular relationship between environmental sustainability and innovation in relation to firm performance has been scarce.

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and financial performance for MNEs in developed countries, meaning that it does not yet pay off to invest in sustainable products for MNEs in developed countries.

This research makes the following contribution to the management field, and specifically to the literature on the relationship between environmental sustainability, innovation, and MNE financial performance: first, I contribute to the few studies that empirically investigate the relationship between environmental sustainability and MNE performance (Schrettle et al., 2014). I show that environmental sustainability can be profitable for MNEs, because it attracts stakeholder interests. Second, as opposed to previous research on SMEs (Martinez-Conesa et al (2017), my findings show that in a developed MNE setting innovation does not act as a mediator on the relationship between environmental sustainability and MNE financial performance. Paired with the first finding, I conclude that increased MNE performance as a result of environmental sustainability does not necessarily come from green innovation, but may come from communication efforts to important stakeholders. Managers should incorporate a good marketing strategy to promote their MNEs’ environmentally sustainable practices to generate financial benefits as a result of improved stakeholder interests.

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Literature review and hypotheses

Environmental sustainability and MNE financial performance

Investing in sustainability is a primary objective for most MNEs these days due to increasing pressure by stakeholders to act sustainably. Corporate social responsibility, henceforth called sustainability, is often described as a company going beyond what is required by law (Van Marrewijk, 2002). However, the concept of sustainability is defined in many different ways as sustainability on itself is a rather general concept. After analysing 37 definitions found in prior research, Dahlsrud (2008) came up with 5 different dimensions of sustainability. These are the environmental, social, economic, stakeholder, and voluntariness dimensions. Most definitions of sustainability include the dimensions of what is known as the triple bottom line, introduced by Elkington (1998). This concept states that companies should balance social, environmental, and economic practices as this could result in financial gains (Elkington, 1998). Elkington (1998) makes the distinction between environmental, social, and economical dimensions of sustainaiblity, with the environmental dimension focussing on ecological issues, social dimension on human wellbeing, and economical dimension on making sure the business is sustainable for the future. For the purpose of this study I mainly focus on the environmental aspect of sustainability, namely environmental sustainability.

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resource is extremely important for companies, especially for MNEs that face competition in multiple countries. With respect to environmental sustainability in MNEs I argue for a positive effect on MNE performance as in today’s society people are very aware of the environmental impact humans and companies have, and the potential increase in reputation might outweigh the investment costs in sustainable practices.

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need to show to their stakeholders that they comply with their demands. Investing in social sustainability, for example better work life quality for employees, is important but might not be noticed as easily by external stakeholders. Environmental sustainability might be noticed more easily as it can be measured better, for example by a reduction in greenhouse gas emission. Prove for the importance of awareness of environmental sustainable practices was provided when comparing the results of Lin, Tan and Geng (2013) and Selcuk and Kiymaz (2017). Selcuk and Kiymaz (2017) researched the effects of sustainability on companies in Turkey and found that they had a negative effect on the performance of the company. Lin, Tan and Geng (2013) researched the effects of green innovation on company performance in Vietnam and found a positive result because stakeholders tended to prefer more environmentally sustainable companies. This effect might be even stronger for MNEs in developed countries than companies in emerging countries as usually stakeholders are more aware of sustainable practices in developed countries as compared to emerging countries, resulting in developed MNEs facing relatively higher pressure (Schrettle et al., 2014).

Therefore, to broaden the knowledge about the importance of environmental sustainability for MNEs in developed countries the following hypothesis is proposed to enhance our understanding:

H1: Environmental sustainability has a positive effect on developed MNE financial performance.

The mediation effect of innovation

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firm financial performance as an indirect one as this relationship is mediated by the intangible resources the company has. They stated that the positive effects of implementing sustainable practices are a result of the improvement of other intangible resources of the company, which in turn lead to higher firm performance. Therefore, the positive effects of sustainable practices are due to interplay of other factors. In the case of environmental sustainability, I argue that innovation is a mediator on the relationship between environmental sustainability and MNE performance. However, as I have argued that environmental sustainability can have a direct effect on MNE performance due to increased reputation, I propose a partial mediation effect of innovation.

Firstly, environmental sustainability can have an effect on MNE financial performance due to the improvement of innovative capabilities and subsequent competitive position due to attracting and retaining valuable human resources. Besides increased competitive position due to an increase in reputation of MNEs from general stakeholders, MNEs also become more attractive for employees to work for. According to Singhapakdi et al. (2015) when an employee perceives that he values sustainability more than his company does, he experiences a lower level of perceived work life quality. If employees believe that other companies might provide a better work life quality they might decide to leave the current company to work elsewhere. In order to retain these employees companies should enhance its sustainable activities so it would be perceived as a sustainable company again (Singhapakdi et al., 2015).

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Secondly, besides resulting in higher levels of competitiveness through an increased reputation, I argue that environmental sustainability can result in lower costs through innovation. As was argued by other research that the implementation of sustainable practices leads to additional costs that do not directly add to the performance of a company (Allouche and Laroche, 2005; Friedman, 1970; Gallego‐Álvarez et al., 2011), I believe that specifically for environmental sustainability this is not the case when mediated by innovation. Environmentally sustainable practices can result in the more efficient use of resources in a MNE (Bocquet et al., 2013; Bocquet and Mothe, 2013; Rexhepi et al., 2013). Orlitzky, Schmidt and Rynes (2003) put forward the idea that sustainability could be used to more effectively utilize firm resources. Studies following this idea have stated that when sustainability would be implemented in the core strategy of the firm, it could result in the company finding more sustainable ways to align resources. This could especially be the case when companies focus on environmental sustainability as they search ways to reduce the use of or more efficiently use resources, which could in turn also lead to lower costs, but also in an increase in innovative capabilities and subsequently higher competitive advantages

(Bocquet et al., 2013; Bocquet and Mothe, 2013). This was also supported by Rexhepi et al. (2013), which concluded that sustainable practices help companies to develop new and innovative ways to conduct their business. This in turn would result in better utilization of resources and therefore lower cost and higher company performance. Similar research on the effects of environmental performance on the financial performance of a company has been conducted by Iwata and Okada (2010). Their study based on Japanese firms found evidence that reduction of greenhouse gasses and waste emission as a result of green process innovation would result in an increase in financial performance as it results in lower disposal costs, resulting in the company having more available resources. Therefore, contrary to what other research have stated that sustainable practices leads to extra costs, I argue that the investments in sustainable innovation as a result of the push for environmental sustainability have resulted in a higher financial performance due to lower costs. This would result in MNEs having to spend less time and money on resource management and resource usage due to these developments, which enables them to allocate more resources to innovative practices.

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financial performance as a result. For example, when a developed MNE donates fast sums to charity foundations this might increase its good name without the interference of other factors. Environmental sustainability can therefore have a direct effect on a developed MNE financial performance. However, in the case of environmental sustainability, I do propose that innovation, amongst other factors, can have a mediation effect on this relationship as well as attracting valuable personnel can result in increased innovative capabilities and higher competitiveness. Furthermore, the push for more sustainable innovation can result in fewer costs due to more efficient processes and resource usage. I therefore propose a partial mediation effect of innovation and to gain further insights in the relationship between environmental sustainability, innovation and developed MNE financial performance the following hypothesis is proposed:

H2: Developed MNE innovation mediates the relationship between environmental sustainability and MNE financial performance.

Conceptual model

The following model portrays the three hypotheses and the potential relationship between environmental sustainability, innovation, and MNE financial performance.

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Methodology

The following section provides further insights on how the overall research has been constructed; what the sample consists of; how data has been gathered; how the various variables have been measured; and finally what kinds of analytical techniques have been used to test the hypotheses and analyse the data.

Research setting, data collection, and sample

I test the hypothesized relationships in the context of Western manufacturing MNEs.

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Multiple sources have been used to collect data for this study. The Asset4 database was used to collect data on manufacturing MNEs’ environmental sustainability performance. The Asset 4 database is a data base dedicated to assessing and ranking companies’ sustainability practices and it is comprised of over 7000 companies (Refinitiv.com, 2018). Its sustainability score is made up from environmental, social and governance sustainaiblity scores, with scores on individual dimensions also provided. As this research focuses on environmental sustainability only the environmental dimension of the Asset4 database is used. Furthermore, the Orbis database has been used to collect firm-level data, for example MNE financial performance indicators, MNE size, and innovation data. Orbis is a database consisting of secondary firm-level and country-level data of over 125 million companies around the world. It includes many different kinds of data, including financial, managerial, and ownership data.

The sample consists of MNEs operating in a variety of developed countries. The final sample consists of 237 MNEs originating from 17 Western countries which are active in 5 different manufacturing industries over the period of 2015-2018, with a total of 930 observations. An overview of the number of observations per country and industry is provided in a table in appendix A.

Measurements Dependent variable

The dependent variable of this research is MNE financial performance. MNE performance can be measured by a variety of ways, however there is no perfect measure (Hagel, Brown and Davison, 2010). One measure that is widely used is return on assets (ROA). ROA is a better measure of MNE performance than regular profitability as it takes the assets used for business practices into account (Hagel et al., 2010), which fits the focus on innovation as the development of new products and processes requires substantial allocation of resources. Using ROA managers focus more on which assets they require for their company to be profitable. This is in line with the idea that the profitability of a company depends on the resources it can obtain. Therefore, as the sample mostly focuses on manufacturing companies, which usually have a high reliance on assets, ROA is how firm performance will be measured.

Independent variable

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dimension of the Asset 4 sustainaiblity score is itself made up from three different factors, namely resource use, emission reduction and innovation. This score ranges from 0-100 with a higher number indicating better sustainable practices (Refinitiv.com, 2018). The Asset4 scores have been used in the past to research the effects of environmental sustainability on firm performance and value (Aouadi and Marsat, 2016; Halbritter and Dorfleitner, 2015). This indicates that the dimensions on themselves are suitable tools to research the effects of different aspects of sustainability. As it might take time for the effects of investments in environmentally sustainable practices to develop financial advantages, a lagged environmental score from Asset4 was used. To clarify, environmental scores from Asset4 from the previous year were paired to financial data from the following year (i.e. data from 2017 was paired to financial data from 2018 etc).

Mediation variable

The mediation variable of this research is innovation. This has been measured by R&D investments, a common proxy for innovation (Acs and Audretsch, 1989; Camelo-Ordaz, et al., 2005; Chen, et al., 2016; Héroux and Fortin, 2016), which measures the total resources allocated to the innovation process. R&D investments have been chosen as it shows the dedication of MNEs to innovate practices, which is needed to develop benefits through environmentally sustainable innovation.

Control variables

To make sure the results are not being influenced by other factors several control variables will be used. First of all, several scholars argue the importance to control for MNE age. Loderer and Waelchli (2009) have found empirical evidence that older firms experience a decreasing profitability and a reduction in R&D activities. Balasubramanian and Lee (2008) also found evidence of a reduction in effectiveness of R&D expenditure when a firm ages. This could have a negative effect on the MNE’s innovative capabilities and financial performance. To control for this, MNE age is measured as the number of years a company is in operation.

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Furthermore, research suggests that the Debt to Equity ratio of a MNE can have an impact on its financial performance. Opler and Titman (1994) stated that a higher debt ratio results in higher financial risks and therefore less financial performance. To control for these effects the MNEs’ Debt to Equity ratio has been used. This measure divides total liabilities by total shareholders’ equity to see how much of the MNE’s operations are funded through external financing and therefore what the potential financial risks are.

Research also suggests that access to slack resources results in companies investing more which can result in higher levels of financial performance (Galbreath, 2012). Slack resources are here defined as spare or extra liquid resources, for example cash. MNEs with higher levels of liquidity also have less financial risk as they are more able to counter financial setbacks, which can have an influence on the MNE’s financial performance. To control for the liquidity of MNEs the Current Ratio is used, which is calculated by dividing the MNE’s current assets by its current liabilities.

Additionally, as the sample consists of companies from a variety of 17 countries it is expected that they are influenced by different levels of economic development. As research has shown, MNE performance is affected by macroeconomic factors, for example GDP growth (Issah and Antwi, 2017). Furthermore, as the sample consists of a variety of countries it is important to control for the potential impact their cultures might have on the results. To control for these factors a country categorical variable will be used providing a category number to each country.

Lastly, building further on this notion, the industry-specific factors are taken into account. All companies included in the sample are manufacturing firms; however, they do not all operate in the same industry. There are five different industry groups included in the sample. Because the sample consists of several different industries it is important to control for industry-specific factors as for some industries innovation might be more important as compared to others. Therefore, an industry categorical variable will be used to control for potential industry-specific effects. Just as for the country categorical variable, each of the 5 industries was assigned a categorical number.

Analysis techniques

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model was most appropriate for the data. The test turned out to be insignificant (chi2=4,99; p=0,2884), indicating that a random effects model is most appropriate. Furthermore, the Sobel test will be used to test the potential mediation effect of innovation on the relationship between environmental sustainability on MNE financial performance (Antheunis, Valkenburg and Peter, 2007; (Steg, Dreijerink and Abrahamse, 2005). The Sobel test looks if the effect of environmental sustainability on MNE financial performance is reduced when adding the mediator variable of innovation, and whether this effect is significant. STATA will be used to process and analyse the data.

Before starting to analyse the data, the dependent variable was checked for outliers. After calculating the associated z-scores values scoring higher than 3,00 or lower than -3,00 have been omitted. This resulted in 20 outliers being omitted from the sample out of a sample size of 1044. The sample was also checked for multicollinearity. The largest correlation found was 0,613 between MNE size and Innovation, which is considered to be a moderate correlation level according to Vatcheva and Lee (2016). However, to be sure there was no multicollinearity the VIF scores of the variables were calculated. These scores all lay in between one and two with the highest being 1,84 and lowest being 1,02. These scores indicate that there is no multicollinearity in the sample. Furthermore, the sample was tested for heteroskedasticity using the Breusch Pagan test (Breusch and Pagan, 1979). This test turned out to be significant (chi2=89,49; p=0,000), indicating that the dataset was not largely normally distributed due to heteroskedasticity. To balance this out the dependent and independent variables were logged transformed, which is a common measure to deal with heteroskedasticity (Ai and Norton, 2008). Furthermore, the robust standard errors of the variables were used in the panel regression to assure a better fit of the model as well (Hoechle, 2007).

Robustness check

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Results

Descriptive statistics

The descriptive statistics have been visualized below in table 1. The panel data spanned 4 years, namely 2018, 2017, 2016, and 2015 for the dependent variable. This resulted in a total sample of 930 observations spanning 237 different MNEs used in the analysis.

MNE financial performance had a mean of 8,34 with a standard deviation of 7,59. This indicates that on average most MNEs in the sample have a healthy ROA. However, the lowest ROA was -20,95, indicating a high financial loss and low financial performance. Furthermore, the mean of the environmental sustainability score was 59,58 out of 100, with a standard deviation of 22,21. This indicates that the MNEs in the sample score just above average in 4 years of measurement and that the sample is somewhat evenly distributed with high and low scoring MNEs, with the sample ranging from 6,05 to 99,24.

Innovation, measured here by R&D spending, had a mean of 649024 with a standard deviation of 1571378. This indicates that on average a single MNE in the sample spent 649024 US Dollar on R&D per year. However, the standard deviation being larger than the mean shows that the distribution of the variable is highly skewed. This indicates most MNEs spend on average way less on R&D than indicated by the mean, and that a small amount of MNEs spend way more on average. This is shown by the max score of 13 million US dollars, more than 20 times larger than the mean.

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operations than shareholder equity, indicating a significantly unhealthy financial situation and great financial risk.

MNE size had a mean of 40746 with a standard deviation of 65878, showing that on average a single MNE had 40746 employees. However, just as with innovation the MNE size has a rather large standard deviation, one larger than the mean. As a MNE cannot have 0 employees this would indicate that there are considerably more relatively smaller MNEs in the sample and just a few large ones that have a large influence on the mean. This is shown by the max score of 664500 which is over ten times larger as the mean. The minimum score of 628 employees indicate that indeed the sample does not contain any SMEs (Eur-lex.europa.eu, 2003). Furthermore, MNE age had a mean of 70,15 years with a standard deviation of 54,40. This shows that on average the companies were almost 70 years old. However, here again the standard deviation is quite large. This again shows that there are a considerable amount of relatively younger MNEs and that there are several relatively old MNEs that influence the mean substantially, with the oldest being 353 years.

Table 1

Descriptive Statistics

Variables Observations Mean Std. Dev. Min Max

MNE financial performance 930 8,34 7,59 -20,95 34,46 Environmental sustainability 930 59,58 22,21 6,05 99,24 Innovation 930 649024,5 1571378 0 13035000 Current ratio 930 2,23 1,53 0,71 13

Debt to Equity ratio 930 2,24 10,33 -79,74 209,04

MNE size 930 40746,37 65878,27 628 664500

MNE age 930 70,15 54,40 0 353

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Correlations

Below in Table 2 the correlation and complementing significances have been provided for each of the variables. The independent variable of environmental sustainability has a small positive correlation of r=0,049 with the dependent variable MNE financial performance, however this is not significant. The mediation variable of innovation does not have a significant correlation with MNE financial performance, r=-0,058, ns. Contrary to what was expected, this correlation is negative, indicating that higher investments in innovation could result in a lower financial performance, however, because this correlation is insignificant it shows that innovation does not have an effect on MNE financial performance.

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Table 2 Variable 1 2 3 4 5 6 7 MNE financial performance 1 Environmental sustainability ,049 1 Innovation -,058 ,281** 1 Current ratio ,142** -,278** -,109** 1

Debt to Equity ratio ,004 ,034 ,065* -,096** 1

MNE size -,109** ,288** ,613** -,271** ,067* 1

MNE age -,061 ,137** ,011 -,247** ,084* ,164* 1

Notes. The variables of ‘MNE financial performance’ and ‘environmental sustainability’ have been logarithmic transformed in the main models. N = 930, ** p < .01, * p < .05.

Regression models

In the following tables the results of the regression analyses of the hypotheses will be portrayed. Model 1 of table 3 shows the results of the analysis of the control variables on the dependent variable. The model is significant with a Chi2 of 18,72, p=0,005 and R2 of 0,046. This means that 4,6% of the total variation in the dependent variable can be explained by the control variables. The constant is significant with b=2,564, p=0,000. However, none of the control variables are significant in this model.

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Table 3

Results of Random Effect Panel Regression

Variable Model

1

Model 2 Model 3 Model 4

Environmental sustainability 0,458**(0,002) 0,448**(0,003) 85343**(0,001) Innovation -0,000 (0,527) Current ratio 0,093 (0,091) (0,044)0,109* 0,107*(0,049) 6048(0,597)

Debt to Equity ratio -0,000

(0,888) 0,000 (0,989) 0,001 (0,654) 375 (0,363) MNE size -0,000 (0,269) (0,067)-0,000 -0,000(0,401) 15**(0,000) MNE age -0,000 (0,863) (0,683)-0,001 -0,001(0,4556) -1861(0,113) Constant 2,564** (0,000) 0,673 (0,345) 0,717 (0,348) -552940 (0,077) Number of observations Chi2 P-value R2 overall 971 18,72 0,005 0,046 971 33,71 0,000 0,0652 930 30,27 0,000 0,064 942 106,26 0,000 0,408

Notes. The variables of ‘MNE financial performance’ and ‘environmental sustainability’ have been logarithmic transformed. ** p < .01, * p < .05,

Robustness check

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Discussion

Today’s business environment is experiencing a shift towards more sustainable practices and a focus on a smaller environmental footprint. This is a direct result of stakeholders expecting MNEs to act in a sustainable and responsible manner with an eye on the environment (Dawkins and Lewis, 2003). Besides this in a highly globalized world MNEs have to compete with home as well as host country competitors. For this it is crucial for a MNE that it is able to keep on innovating in order to deal with increasing international competition as it can give a MNE an edge over its rivals (Henderson, 2017). According to Rexhepi, Kurtishi and Bexheti (2013) sustainability and innovation are the main drivers of business growth as it improves the competitiveness of a company. However, despite today’s focus on environmental practices most prior research has focused on regular forms of sustainability when relation to innovation and MNE financial performance. This relationship between sustainability and firm performance has been researched extensively in the past, with conflicting results as some found a positive effect (Arendt and Brettel, 2010; Chaudhuri and Holbrook, 2001; Du, Bhattacharya and Sen, 2010; Peloza, 2006), while others propose a negative effect (Allouche and Laroche, 2005; Gallego‐Álvarez et al., 2011; Selcuk and Kiymaz, 2017). I argue that the focus on general forms of sustainability is a cause of the conflicting findings of several studies on the effects of sustainability on firm performance. Many studies that propose a negative effect of sustainability focus on the extra costs that it brings without sufficient benefits (Allouche and Laroche, 2005; Friedman, 1970; Gallego‐ Álvarez et al., 2011; Selcuk and Kiymaz, 2017). I believe that, because of the increasing awareness of our impact on the environment, environmental sustainability becomes increasingly important for MNEs and that therefore the benefits, as a result of increased reputation, of investing in environmentally sustainable practices outweigh the costs.

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MNEs with regards to environmental sustainability investments and innovation capabilities (Mousiolis et al., 2015). Moreover, MNEs usually experience higher pressure from stakeholders to adhere to environmentally sustainable practices (Mousiolis et al., 2015), which might result in environmental sustainability having a larger impact on the performance of MNEs than SMEs. Even though scholars have been researching the relationship between sustainability and innovation there has been a lack of focus on the specific relationship between environmental sustainability and innovation in relation to performance in the MNE setting. This has resulted in the following research question: ‘What is the linkage between environmental sustainability, innovation and firm performance in developed MNEs?

To test the main focus of this thesis, namely to shine more light on the triangular relationship of environmental sustainability, innovation and MNE financial performance, 2 hypotheses were proposed. The first hypothesis suggested that environmental sustainability had a positive effect on MNE financial performance. The environmental sustainability score of a MNE was found to have a positive significant influence on both the ROA and ROE of a MNE, finding support for hypothesis 1. This shows that the specific focus on environmental sustainability can indeed result in higher firm performance. One explanation is the increase in company reputation as a result of environmental sustainable practices. According to Hall (1992) company reputation is an example of an intangible asset, which Chaudhuri and Holbrook (2001) found can lead to a higher degree of brand loyalty by customers and a subsequent higher MNE financial performance as a result of a better competitive position. MNEs are expected to conduct more sustainable practices by stakeholders (Mousiolis et al., 2015). As a result they must act accordingly to uphold brand reputation as they might otherwise lose legitimacy from their stakeholders, which could even harm their profits in the long turn (Waddock and Graves, 1997). It could therefore be expected that a focus on environmentally sustainable practices could result in more legitimacy by stakeholders and in turn more intangible assets and financial performance.

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MNE financial performance, which goes against most of the literature on this topic as they propose a positive mediation effect of innovation and other intangible resources (Surroca et al., 2010). According to the results of hypothesis 1, environmental sustainability does have a positive effect on MNE financial performance. However, the positive effects of environmental sustainability are not the result of the increased competitiveness due to attracting higher skilled personnel or from cost savings due to sustainable innovation. MNEs, therefore, do not necessarily need to invest in environmentally sustainable innovation as this does not lead to benefits for their financial performance. Subsequently, the relationship between environmental sustainability and MNE financial performance might be affected by other factors or intangible resources. MNEs must act according to stakeholder demands to uphold brand reputation as they might otherwise lose legitimacy from their stakeholders, which could even harm their profits in the long turn (Waddock and Graves, 1997). According to Mousiolis et al. (2015) and Dawkins and Lewis (2003) MNEs are more and more expected to act in an environmentally sustainable way. Furthermore, Du, Bhattacharya and Sen (2010) argued that it is important for a company to communicate its sustainable efforts to stakeholders in order to generate reputational and goodwill benefits. Therefore, instead of focussing on benefits through costs savings due to investments in sustainable innovation, MNEs could potentially mostly gain benefits through communicating their environmentally sustainable efforts to their stakeholders. I argue therefore that the relationship between environmental sustainability and MNE financial performance could be mediated by a MNE’s marketing efforts or marketing expenses as this help the MNE to increase awareness and show its stakeholders its sustainable practices (Du, Bhattacharya and Sen, 2010).

Theoretical implications

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performance is mediated by intangible resources, including innovation. Martinez-Conesa et al. (2017) did incorporate both innovation and sustainability in a triangular relationship with firm performance, but only included SMEs, which inherently differ from MNEs with regards to pressure for sustainability investments and innovation capabilities (Mousiolis et al., 2015).

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Practical implications

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Limitations and future research

No research is without limitations and so neither is this one. One of the main points of limitation is the measure for innovation used in this study. As was said before, R&D investments only focus on the resources allocated to the innovation process and not on the actual results of these allocations (Acs and Audretsch, 1989). One solution could include information on number of patents spanning several years, which, due to data unavailability, could not be done by this study. Furthermore, as this research showed no significant effect of innovation on MNE financial performance, which went against most literature on the topic, for future research different lagged periods could be used, as this research made use of a 1 year lagged period which resulted in insignificant results. Usman et al. (2017) showed that different periods of lag can result in different results when analysing the effects of innovation on firm performance because investments sometimes take time to develop any real benefits. A one-year lagged period might be too short for any investments in innovation to develop substantial benefits.

Moreover, this research main focus was the test a potential mediation effect of innovation which resulted in insignificant results. As this study showed that environmental sustainability does in fact have a positive effect on MNE financial performance future research could test if other intangible resources or factors do act as a mediator. As I propose that managers should focus their marketing strategy on their environmentally sustainable practices future research could include some marketing measurement tool as mediator to test this relationship. Furthermore, as Siregar and Bachtiar (2010) have shown for emerging market companies disclosing their sustainable practices can result in financial benefits, future research could test whether this could also result in increased benefits for developed MNEs disclosing their environmentally sustainable practices as they usually experience higher pressure by stakeholders.

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Future research could try to include a more balanced sample as to make sure the results were not specifically for a single country or industry.

Conclusion

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Appendix

Appendix A

Country and industry overview (930 observations)

Country Observations Industry Observations

Austria 4 Chemicals, rubber, plastics, non-metallic products

55

Belgium 4 Machinery, equipment, furniture, recycling 772

Bermuda 8 Metals and metal products 60

Canada 26 Textiles, wearing apparel, leather 39

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Appendix B1

Descriptive Statistics

Variables Observations Mean Std. Dev. Min Max

MNE financial performance 911 24,93 56,94 -248,71 926,15 Environmental sustainability 911 59,36 22,13 6,05 99,24 Innovation 911 648453 1584752 0 13035000 Current ratio 911 2,25 1,54 0,713 13

Debt to Equity ratio 911 2,28 9,48 -61,11 209,04

MNE size 911 40797 66329 628 664500

MNE age 911 69,96 54,45 0 353

The variables of ‘MNE financial performance’ and ‘environmental sustainability’ have been logarithmic transformed.

Appendix B2

Notes. The variables of ‘MNE financial performance’ and ‘environmental sustainability’ have been logarithmic

Variable 1 2 3 4 5 6 7 MNE financial performance 1 Environmental sustainability ,137** 1 Innovation ,049 ,282** 1 Current ratio -,108** -,270** -,109** 1

Debt to Equity ratio ,185** ,024 ,058 -,096** 1

MNE size ,047 ,287** ,612** -,271** ,055 1

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Appendix B3

Results of Random Effect Regression

Variable Model 1 Model 2 Model 3 Model 4

Environmental sustainability 0,543**(0,002) 0,553**(0,002) 85343** (0,001) Innovation -0,000 (0,626) Current ratio -0,080 (0,179) -0,064 (0,267) (0,256)-0,065 6048 (0,597)

Debt to Equity ratio 0,016**

(0,004) 0,016**(0,002) 0,016**(0,003) 375 (0,363) MNE size 0,000 (0,404) 0,000 (0,662) (0,531)0,000 15** (0,000) MNE age 0,001 (0,534) (0,684)0,001 (0,619)0,001 -1861 (0,113) Constant 4,550** (0,000) 2,318** (0,006) (0,017)2,160* -552940 (0,077) Number of observations Chi2 P-value R2 overall 949 29,02 0,000 0,064 949 39,09 0,000 0,085 911 38,10 0,000 0,089 942 106,26 0,000 0,408

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