The effects of interlocking directorates on the
performance of green innovating firms
Guido Berends
MScBA Strategic Innovation Management Faculty of Economics and Business
s2709457
Supervisor: prof. dr. J. Surroca Co-assesor: dr. W.G. Biemans
ABSTRACT
This thesis examines the underexplored field of green innovation networks and their subsequent effect on the performance of green innovating firms. Based on the findings and suggestions of existing literature, I develop three hypotheses regarding the moderating effects of different types of board interlocks on the relationship between the engagement in green innovation and firm performance. These hypotheses are tested on a sample of 161 innovating European firms using multiple moderated regression analyses. Data for this thesis was obtained from multiple sources including Datastream, Orbis and annual reports. In line with recent literature, I show that the engagement in green innovation has a positive impact on firm performance. Moreover, the results show that both inbound board interlocks with a top 100 green innovating firm and environmental NGOs strengthen the positive relationship between the engagement in green innovation and firm performance. Interestingly, inbound board interlocks with a top 100 green innovating firm and firms from the knowledge intensive industries also showed to have significant direct effects on the financial performance of non-green innovators. The main contribution of this study is the increase in understanding of both the relationship between green innovation and firm performance, and the underexplored effects of networks on this relationship. Moreover, by showing the effects of board interlocks on the performance of green innovating firms, the understanding of the knowledge and connections needed during the development of green innovations is increased.
Keywords: Innovation; green innovation; green innovation networks; board interlocks; inbound board interlocks; firm
TABLE OF CONTENT
Introduction ... 4
Literature review ... 5
Green innovation ... 5
Green innovation and firm performance ... 6
The moderating role of interlocking directorates ... 7
Methodology ... 11 Data collection ... 11 Sample ... 11 Measures ... 12 Analysis ... 14 Results ... 15
Descriptive statistics and correlations ... 15
Regression results ... 17
Discussion ... 20
Theoretical implications ... 20
Practical implications ... 22
Limitations and future research ... 23
INTRODUCTION
“We have arrived at a moment of decision. Our home - Earth - is in grave danger. What is at risk of being destroyed is not the planet itself, of course, but the conditions that have made it hospitable for human beings.”
Scientific consensus exists on the argument that climate-warming trends over the past century are very likely due to human activities (NASA, 2016). Among others (Anderegg et al., 2010; Oreskes, 2004), the study of Doran and Zimmerman (2009) showed that 97%, or more, of climate scientist who actively publish agree on this. This climate-warming is altering the earth’s climate system, including its land, atmosphere, oceans, and ice in important ways (Denchak, 2016). The next few decades, thus, present an unprecedented challenge in which the nature of economic activity has to be altered, or we will irreversibly damage the planet’s basic ecological systems (Hart, 1995). In the midst of this challenge, firms face an increasing pressure to become greener (Ambec & Lanoie, 2008). Standing against this pressure is that managers have long associated environmental protection with additional costs imposed by government, leading to an erosion of a firm’s global competitiveness (Ambec & Lanoie, 2008). Recently, however, arguments have been made that the development of green innovations is a win-win solution for reducing the conflict between economic development and environmental protection (Chang, 2011; Chang, 2016).
Within the academic community, innovation is regarded as one of the key factors of sustainable competitive advantage (Standing & Kiniti, 2011; Bartel & Garud, 2009; Johannessen, 2008), ultimately leading to firms gaining more profit as compared to non-innovators (Atalay, Anafarta & Sarvan, 2013). Despite this, Gnyawali and Srivastava (2013) state that “firms often struggle to innovate partly because their internal resources and capabilities become inadequate to engage in sustained technological explorations and resource recombination’s” (p. 1). Here, collaborative networks play an important role (Bossink, 2002). Firms can utilize networks to share complementary resources and competencies in order to successfully innovate (Grandori & Soda, 1995; Powell, 1998). In the context of green innovations, these networks might bear an even more crucial role as “the environmental issues do not represent core competencies for most firms” (Messeni Petruzzelli et al., 2011, p. 294). Accordingly, Messeni Petruzzelli et al. (2011) indicate that firms should aim to create links with a wide range of external parties in the development process of green innovations, due to the complexity of environmental issues.
to increase understanding of the consequences of green innovations on firm performance by providing insight into the effect of director interlocks on the relationship between the engagement in green innovation and firm performance. Specifically, this study focuses on inbound board interlocks with certain types of organizations, that, based on the findings and arguments of prior research, might positively influence the aforementioned relationship.
By addressing the identified research gap, this thesis provides understanding into the underdeveloped field of green innovation networks and their subsequent effect on the performance of green innovating firms. Thereby increasing the understanding of the development of profitable green innovations. This understanding is important in order to motivate firms to actively engage in green innovations, as these efforts would contribute to the welfare of the environment and to social well-being (Kivimaa, 2008). To test the hypotheses of the study, multiple moderated regression analyses were performed on a sample of 161 innovating European firms. These 161 firms had a total combined number of 1823 directors that were affiliated with over 4500 firms. Data for this thesis was obtained from multiple sources including Datastream, Orbis and annual reports.
In line with prior research, the results of the study indicate that the engagement in green innovation has a positive impact on firm performance. Moreover, the results show that both inbound board interlocks with a top 100 green innovating firm and environmental NGOs strengthen the positive relationship between the engagement in green innovation and firm performance. Interestingly, inbound board interlocks with a top 100 green innovating firm and firms from knowledge intensive industries also showed to have significant effects on the performance of non-green innovators. The main contribution of this study is the increase in understanding of both the relationship between green innovation and firm performance, and the underexplored effects of networks on this relationship. Moreover, by showing the moderating effects of board interlocks on the performance of green innovating firms, more understanding is created into the knowledge and connections needed during the development of green innovations. Furthermore, the findings stress businesses to review their connections and be aware of the value that directors can bring to the board table when chosen carefully.
The structure of this thesis is as followed. The next section presents a literature review and the development of three hypotheses. After which, the methodology section justifies and describes the methodological choices made during this study. Then, the results of the moderated regression analyses are presented. Following this, is a discussion of the theoretical and practical implications of the finding and limitations and directions for future research. Finally, the conclusion of this study is presented.
LITERATURE REVIEW
Green innovation
The concept of green innovation is closely related to other notions, such as ecological innovation, environmental innovation and sustainable innovation, used by scholars (Schiederig, Tietze & Herstatt, 2012). Looking back, the first notion to be used was sustainable development. Schiederig, Tietze and Herstatt (2012) state that the term first came into use in 1980 in the World Conservation Strategy report by the International Union for Conservation of Nature and Natural Resources. In this report, sustainable development is defined as “the integration of conservation and development to ensure that modifications to the planet do indeed secure the survival and well-being of all people” (Schiederig, Tietze & Herstatt, 2012, p. 181). Among these other concepts of environmental management, green innovation is currently being pursued to address environmental pollution problems (Chen, 2008). Prior research identifies green innovations as the innovations in technologies involved in pollution-prevention, green product design, energy-saving, corporate environmental management, or waste recycling (Ambec & Lanoie, 2008). Subsequently, Aguilera-Caracuel and Ortiz-de-Mandojana (2013) identify green innovative firms as “firms that are involved in a process of change and continuous development that commonly results in tangible green developments” (p. 366).
The assertion of adopting environmental principles while simultaneously achieving economic prosperity has however been met with scepticism (Bansal, 2005). One reason is that it challenges the assumption of managers, who have long associated environmental protection with additional costs imposed by government eroding global competitiveness (Ambec & Lanoie, 2008). Nonetheless, Porter and van der Linde (1995) argue that the debate on environment-competitiveness has been framed incorrectly. They mention that in the last 20 to 30 years the paradigm defining competitiveness is changing towards one based on innovation.
Green innovation and firm performance
The debate on the impact of environmental performance on corporate financial performance is ongoing and corporate interest in these actions depend on the expected positive impact on financial performance (Cordeiro and Sarkis, 1997; Sarkis & Cordeiro, 2001). Russo and Fouts (1997) argue that this “inconclusiveness is primarily due to a key conceptual shortcoming, failure to carefully trace how the social policies examined directly influence firms' bottom line” (p. 535). They argue that it could be expected that profit will be driven down by additional compliance costs or external imposition of fines. However, as pointed out, there are conceptual flaws in this line of arguments, as the relationship between green innovation and firm performance is more than just a simple calculation equating higher costs with lower profits (Russo & Fouts, 1997). Previous research already found a positive relation between the engagement in green innovation and firm performance (Aguilera-Caracuel & Ortiz-de-Mandojana, 2013; Weng, Chen & Chen, 2015), and state that developing green innovations is a win-win solution for reducing the conflict between economic development and environmental protection (Cheng, Chang & Wu, 2012).
increase total revenue (Aguilera-Caracuel & Ortiz-de-Mandojana, 2013). Next, improvements in revenues can also be attained by outsourcing environmental expertise and selling waste products (Bansal & Roth, 2000). Furthermore, by focusing on the efficient use of raw materials, innovations in green products might lead firms to find new ways of converting waste in commercial products (Bernauer et al., 2007), producing additional streams of revenue (Ambec & Lanoie, 2008). Finally, Ambec and Lanoie (2008) argue that the engagement in green innovation might allow firms to pursue a differentiation strategy to “exploit niches in environmentally conscious market segments” (p. 49). The constant search for advances in green management processes also allows green innovative firms to reduce their operating costs by enhancing preventive pollution (Aguilera-Caracuel & Ortiz-de-Mandojana, 2013). Moreover, by engaging in green innovation firms can lower the costs of input and waste disposal (Bansal & Roth, 2000).
Though less numerous, some studies found that green innovations do not always lead to improved financial performance. For instance, Sarkis and Cordeiro (2001) found that environmental performance and short-term corporate financial performance are negatively correlated. The study of Aguilera-Caracuel and Ortiz-de-Mandojana (2013) argue, after presenting the benefits firms can obtain from engaging in green innovation, that they do not always produce higher levels of financial performance. They present a case in which customers were not willing to accept the new products, moreover they state that green innovating firms might be confronted with increased training and safety costs. Thus, while existing literature presents strong arguments as to how green innovation can lead to an increase in financial performance, some evidence still contradicts these statements. Russo and Fouts (1997) came to the conclusion that “one conspicuous research implication is that if superior environmental performance drives higher returns, researchers need to identify the full chain of variables connecting the end links” (p. 552). Accordingly, Messeni Petruzzelli et al. (2011) state that the value of green innovations is dependent on organizational factors such as the establishment of inter-organizational linkages. A possible explanation is that these types of innovations frequently imply knowledge and skills not possessed internally, thus cooperating with external partners when engaging in, for instance, green innovation becomes even more important (De Marchi, 2012).
The moderating role of interlocking directorates
In the first part of this literature review, I argue that the financial performance of firms is positively influenced by the
engagement in green innovation. Messeni Petruzzelli et al. (2011), however, state that a fundamental issue of green innovation is the complexity it involves. Current research also argues that while engaging in green innovation, firms face high uncertainty and risks (Tseng et al., 2013). Considering these circumstances faced by firms engaging in green innovation, I argue one interesting avenue for research on green innovation is to study the effects of board interlocks on the relationship between the engagement in green innovation and firm performance.
firms in a credible and low-cost way (Shorpshire, 2010). However, prior research pointed out that as the individuals creating the board interlocks differ from each other, it is expected that some ties matter more than others in helping the firm (Tuschke, Sanders, & Hernandez, 2014). Accordingly, researchers found that inbound interlocks showed the greatest importance (Hung, 2003; Pennings, 1980). Thus, the focus of this study is on the effects of inbound board interlocks.
Haunschild and Beckman (1998) and Shropshire (2010) state that among others, board interlocks are a source of legitimacy and information about business practices. Wincent, Anokhin and Örtqvist (2010) present one could expect, in the network context, “a positive influence of board relational capital on innovation and the drawbacks do not outweigh the advantages” (p. 268). They argue that for firms facing tasks characterized with high uncertainty and
complexity the value of this relationship is especially strong. These arguments are supported by Martin, Gözübüyük
and Becerra (2015), they found that, in the presence of high uncertainty, interlocks have a strong positive effect on firm performance. An explanation as to why board interlocks enhance performance is that they provide firms with communication channels and serve as conduits of information between the firm and external organizations that give a firm timely and valuable information, possibly reducing the transaction costs of dealing with uncertainty in the environment (Hillman & Dalziel, 2003).
Moreover, for firms engaging in green innovations, board interlocks are a way to establish or enhance legitimacy (Geletkanycz, Boyd & Finkelstein, 2001; Martin, Gözübüyük & Becerra, 2015; Shropshire, 2010; Wincent, Anokhin & Örtqvist, 2010). This legitimacy, as posited by the institutional theory, is necessary in order for firms to successfully introduce innovative products or management techniques to the market (Snihur & Zott, 2013). Accordingly, Tseng et al. (2013) state that due to the constantly changing green technology and the short life cycle of products, firms must continuously improve their green innovations in order to strengthen their competitiveness. Furthermore, interlocks give a firm the ability to scan the broader environment for new trends and developments, they increase the firm’s attractiveness among key stakeholder groups and interlocks could even attract potential strategic partners and new alliance opportunities (Geletkanycz, Boyd & Finkelstein, 2001). Finally, inbound board interlocks can also help support the launch of innovations by facilitating access to resources that are of strategic value to the firm (Wincent, Anokhin & Örtqvist, 2010).
Board interlocks with top 100 green innovating firms
& Shropshire, 2008; Shropshire, 2010). In line with this, Wincent, Anokhin and Örtqvist (2010) state that director interlocks with strategically related organizations provide better advice and counsel, which in the case of their study would likely improve the innovative performance of members of the strategic SME network. Based on these arguments, I could hypothesize that firms engaging in green innovation can gain benefits from inbound board interlocks with other green innovating firms. However, as prior research indicates, the development of complex and high-technology products often requires allying with firms that possess partially overlapping knowledge (Norman, 2002). Accordingly, Stuart (2000) found that firms allying with technologically advanced firms showed a significantly higher innovation rate as compared to firms that did not have these partners. As technologically advanced firms are among the most innovative (OECD, 2004), this study views technologically advanced firms as those with the highest number of patents (Hellmann & Puri, 2000). Based on these arguments, firms with the highest number of patents or, as I identify them in this study, top innovators can contribute to the performance of green innovating firms due to the advanced technological know-how they possess (Stuart, 2000). Specifically, for this hypothesis the focus is on the top 100 green innovating firms, identified based on the number of green patents.
By combing the two lines of argumentation presented above, I argue that inbound interlocking directorates with a top 100 green innovating firm will have a positive effect on the relationship between the engagement in green innovation and the focal firms financial performance. Since board interlocks with a top 100 green innovating firm provides the firm with better advice and council, as both are engaging in green innovation and can relate to each other (Wincent, Anokhin & Örtqvist, 2010). Additionally, when this advice and council comes from a highly skilled innovator, such as a top 100 green innovator, it can contribute to a firms ability to develop new technologies, as these firms possess advanced technological know-how that might be of benefit to development of these technologies (Stuart, 2000).
H1: Inbound board interlocks with a top 100 green innovating firm will strengthen the positive relationship that exists
between the engagement in green innovation and the financial performance of a firm
Board interlocks with knowledge intensive industries
that firms providing knowledge-intensive business services possess up-to-date information and skills for strategic reasoning (Ortiz-de-Mandojana et al., 2012). Moreover, due to their strong relation with knowledge, knowledge-intensive business services can greatly improve innovation (Shi, Wu & Zhao, 2014). Subsequently, Ortiz-de-Mandojana et al. (2012) argue that KIBS-directors can exceed the ordinary requirements of board service as their experience can generate deeper knowledge improving their potential to contribute value in the board room.
Based on these arguments, I argue that inbound interlocking directorates with firms providing knowledge intensive services will have a positive effect on the relationship between the engagement in green innovation and the focal firms financial performance.
H2: Inbound board interlocks with firms providing knowledge intensive business services will strengthen the positive
relationship that exists between the engagement in green innovation and the financial performance of a firm
Board interlocks with environmental NGOs
As previously argued, while firms are engaging in green innovations, they are often faced with high uncertainty and risks (Tseng et al., 2013). Accordingly, the degree to which a firm can foresee future regulations and properties can exert a positive influence on the innovations as it reduces the risk and uncertainty involved (Bernauer et al., 2007). Thus, in order to reduce uncertainty and risk it would be beneficial to have outsider directors who possess regulatory expertise or knowledge on the board (Hillman, Cannella & Paetzold, 2000). In this sense, non-governmental organizations (henceforth referred to as NGOs) could offer substantial benefits (Stafford, Polonsky & Hartman, 2000). NGOs are “private, non-profit, professional organizations, with a distinctive legal character, concerned with public welfare goals” (Clarke, 1998, p. 36). However, as this study is concerned with green innovations, the focus is narrowed down to environmental NGOs (ENGOs). These ENGOs can provide firms with ecological, scientific and legal expertise (Stafford, Polonsky & Hartman, 2000). Stafford, Polonsky and Hartman (2000) argue that partnerships with ENGOs can result in operational efficiencies, new technologies and marketable green products. Additionally, Hillman, Cannella and Paetzold (2000) suggest that directors in this sector can reduce transaction costs associated with the regulatory agency by for instance supplying information about the appropriate personnel to contract or the bidding process for government contracts, and also the influence they might exert over proposed regulations. As their knowledge mainly stems from experience and connections to community groups and organizations, in the board room these directors could provide valuable non-business perspectives (Hillman, Cannella & Paetzold, 2000; Hoffman & Bertels, 2009) and, due to their experience and influence with community forces, they might help firms avoid engaging in actions that are in conflict with interests of community groups (Hillman, Cannella & Paetzold, 2000).
Based on the arguments presented above, I argue that inbound interlocking directorates with environmental NGOs will have a positive effect on the relationship between the engagement in green innovation and the focal firms financial performance.
H3: Inbound board interlocks with environmental NGOs will strengthen the positive relationship that exists between
METHODOLOGY
The methodology section is used to justify and describe the methodological choices that were made during this study. To analyse the moderating effects of different types of inbound board interlocks on the relationship between the engagement in green innovation and firm performance a moderated regression analysis is used.
Data collection
The data for this study was collected the following way. First, the list containing all the European firms in the ASSET4 database (LA4RGNEU) was obtained through Datastream. Next, using ISIN codes, the list was uploaded to Orbis. To create a population of innovating European firms from ASSET4, patent data from Orbis was used to select firms with one or more patents publicated between 01/01/2013 and 31/12/2013. Through this process a list containing 243 innovating European firms was created. Next, using Orbis, firms that did not meet the following criteria were removed from the list. First of all, information on the board of directors must be available, removing firms with no available information on the board of directors left 204 firms. Second, in order to control for size, information on the number of employees for 2013 must also be available, adding this criterion left 201 firms. Finally, to measure firm performance, information needs to be available on the net profit and total assets for 2014 (1-year lag) in order to calculate return on assets (ROA). After checking the list and removing three double entries, a sample of 169 firms was left.
To collect information on the inbound board interlocks of these 169 firms in 2013, I studied the annual reports for 2013 of each of these firms in order to identify the members of the board of directors and their affiliations with other firms. Most annual reports already contained information on the affiliations of the members of the board of directors with other firms. However, to make sure there was no missing or incomplete data, the contacts of each director for 2013 was checked using Orbis. Using the information that was gathered through the annual reports and Orbis I created separate Excel sheets for each firm containing their board interlocks. Using this method, I identified over 4700 board interlocks for these 169 firms. In order to identify which of these inbound board interlocks were with a top 100 green innovating firm, firms in the KIBS-sector and ENGOs, two methods were used. First, for the identification of board interlocks with firms in KIBS-sector, each Excel sheet was uploaded separately to Orbis and the two-digit SIC codes of these firms were examined. Next, a simple tool in Excel was created to cross-reference each Excel sheet with the list of top 100 green innovating firms and the list of ENGOs. The data that was gathered using these methods was added to the dataset. STATA14 was selected in order to statistically analyse the dataset.
Sample
However, as this study uses regression analyses, it is important to take outliers into account, as they can interfere with the results of a regression analysis (Blatná, 2006; McClelland, 1989; Osborne & Overbay, 2004; Su, et al., 2011). To detect outliers the DFBETA-case statistics was used on the sample, which is a widely employed measure to detect the influence of the observation (Choi, 2009). Following Choi (2009), I use the threshold ïDFBETAï > 2/Ön to identify influential outliers. Using this threshold 8 observations within the sample were identified as influential outliers. Based on the suggestions of Judd, McClelland and Ryan (2009), two samples were created, one sample including outliers (169 observation) and one sample without outliers (161 observations), in order to identify whether the regression results for the two samples were different. As these results were different and would potentially impact the findings of the study, they were removed from the sample (Judd, McClelland & Ryan, 2009; Osborne & Overbay, 2004). The removal of outliers left the total sample size at 161 firms.
Measure
This section presents the measures used in the study. These were selected and formulated based on previous literature and include the dependent variable, independent variable, moderating variables and control variables.
Dependent variable
Firm financial performance
The financial performance of firms in this study was measured using return on assets (ROA). As mentioned by Russo and Fouts (1997), in the environmental management literature, ROA is the generally accepted and often used measure for firm performance. Existing literature suggests using a 1-year lagged ROA (Randøy & Goel, 2003), due to the phenomenon that when factors of production change, some time is usually needed for the output to adjust (Nickell, 1996). As the observation period of this study is 2013, the financial performance of a firm is measured using the ROA for 2014. The ROA for 2014 was calculated using the net profit and the total assets of 2014.
Independent variable
Engagement in green innovation
Moderators
The measures for the moderating variables in this study are presented below. All the moderating variables were coded as dummy variables.
Board interlocks with top 100 green innovating firms
Board interlocks with top 100 green innovating firms is measured by the number of inbound board interlocks a firm had with a top 100 green innovating firm in 2013. These board interlocks were counted using a list of top 100 green innovating firms generated in Orbis. This list was based on the population of green innovating firms in Orbis, which for 2013 were a total of 14727 firms. The top 100 green innovating firms were selected based on the number of green patents (Y02 patent classification) in 2013 ranking the firm with the highest number of patents number one. Green patents were used as it is an established measure of green innovation (Aguilera-Caracuel & Ortiz-de-Mandojana, 2013).
Board interlocks with firms in the KIBS-sector
Board interlocks with firms in the KIBS-sector is measured as the number of inbound board interlocks with firms in the knowledge intensive business services-sector in 2013 (Aguilera-Caracuel & Ortiz-de-Mandojana, 2012). These board interlocks were counted using the two-digit SIC codes of the firms with which the firms in the sample were (inbound) interlocked. Following Aguilera-Caracuel and Ortiz-de-Mandojana (2012), the SIC codes referring to firms within the KIBS-sector are SIC 73 and SIC 87.
Board interlocks with environmental NGOs
Board interlocks with ENGOs is measured as the number of inbound board interlocks with ENGOs in 2013. In order to count the number of board interlocks a list of ENGOs was created. Following Bloodgood (2011), this list was compiled using the Yearbook of International Organizations for 2013 by the Union of International Associations.
Control variables
Industry type
Prior research indicated that the differences in firms’ environmental performance can be explained by industry related factors (Guoyou et al., 2013). Following de Villiers, Naiker and Staden (2011), the two-digit SIC codes are used to control for the industry type.
Firm size
Innovation level
Existing research argues that higher levels of innovation can lead to greater firm performance (Bukhamsin, 2015). In order to control for the level of innovation, the number of patents in 2013 is used. Number of patents is a widely used measure of innovation (Hellmann & Puri, 2000). However, as suggested by existing research, I use the natural logarithm of the number of patents due to the skewed nature (Mohammadi, Basir & Beyhaghi, 2015).
Board size
Existing research argues that larger boards were shown to be associated with better performing firms (Siciliano, 1996). Moreover, Siciliano (1996) also states that a firms access to external resources increases with larger boards. Thus, this study controls for board size using the number of board members.
Previous performance
Geletkanycz and Boyd (2011) present that a common predictor for future performance is previous performance. In addition, existing research argues that the attention given to environmental issues might be affected by profitability (Aguilera-Caracuel & Ortiz-de-Mandojana, 2013). Following prior literature, previous performance is measured as the average ROA of the three years previous to the observation period of the dependent variable (Aguilera-Caracuel & Ortiz-de-Mandojana, 2013; Geletkanycz & Boyd, 2011). Thus, previous performance is measured as the mean ROA of the years 2011, 2012, 2013.
Analysis
To test the hypothesized moderating effects of board interlocks, a moderated regression analysis was the chosen analytical method (Aydin & Arasil, 2005). With a moderated regression analysis, the moderating variable plays a central role (De Ruyter, Wetzels & Bloemer, 1998). Prior research states that moderator variables can be defined as variables that specify the form and/or magnitude of the relationship between an independent variable and a dependent variable (De Ruyter, Wetzels & Bloemer, 1998; Sharma, Durand & Gur-Arie, 1981). Sharma, Durand and Gur-Arie (1981) present two basic methods used to identify a moderating variable: subgroup analysis and moderated regression analysis. A moderated regression analysis is the suggested analytical method by existing research, as subgroup analysis is characterized by several shortcomings (De Ruyter, Wetzels & Bloemer, 1998). Based on the approach that was suggested by Zedeck (1971), the moderated regression analysis performed in this study involved the comparison of four regression models for each of the three moderating variables. This study examined the following four regression equations for the equality of the regression coefficients (Sharma, Durand & Gur-Arie, 1981):
[1] y = a + b1c1 + b2c2 + b3c3 + b4c4 + b5c5 [2] y = a + b1c1 + b2c2 + b3c3 + b4c4 + b5c5 + b6x [3] y = a + b1c1 + b2c2 + b3c3 + b4c4 + b5c5 + b6x + b7z
In these equations, the y represents the dependent variable regarding the ROA, ci are the five control variables of the study, bi the regression coefficients, x the independent variable regarding a dummy variable of the engagement in green innovation and z is the moderating variable referring to a dummy variable of the board interlocks. Sharma, Durand & Gur-Arie (1981) argue that z is a pure moderator if equations 2 and 3 do not differ from each other but do significantly differ from equation 4. If, however, equations 2, 3 and 4 all significantly differ from each other z can be classified as a quasi moderator. In the case that only equation 2 and 3 significantly differ from each other, z is classified as an independent variable. To measure whether the equations significantly differed from each other, in STATA, the log likelihood was compared using a likelihood ratio test (lrtest).
RESULTS
This section presents the results of the study. In the first part, the descriptive statistics and correlations are shown. The second part presents the results from the moderated regression analyses used to test the hypotheses.
Descriptive statistics and correlations
In table 1 the descriptive statistics, showing the mean, standard deviation and correlations of the variables in the study, are presented. The descriptive statistics of the sample consists of a total of 161 observations. As can be seen in table
1, no high values of correlations (r < 0.7) are present between the variables. Next, the Variance Inflication Factors
(VIF) for the sample were examined using STATA to test for multicollinearity. Alin (2010) describes multicollinearity as a data problem that can interfere with the reliability of the estimators of the model parameters (bi). Previous research (O’brien, 2007) argues that the general rule is that the VIF value should not exceed 10 (Robinson & Schumacker, 2009) or the mean of all the VIF’s is considerably larger than 1 (Alin, 2010). The variable with the highest VIF for testing the hypotheses in this study is innovation intensity, which is the natural logarithm of the total number of patents in 2013, with a VIF of 1.63. For all the variables, the mean VIF-score is 1.32. This means that the potential for multicollinearity is eliminated.
Nu m b er o f fi rm s
sample are very large. The maximum number of employees is 367000 and the minimum is 35. The board size ranges from 5 to 32, with a mean size of 11.32. The mean of previous firm performance, the three-year previous average ROA (2011, 2012, 2013), is 4.82. With a minimum previous firm performance of -35.97 and a maximum of 26.38.
Regression results
As presented earlier, for each hypothesis four regression equations were examined for the equality of the regression coefficients. Table 2 provides an overview of the results of the three moderated regression analyses. Model 1 only includes the control variables. As displayed by this model, industry, innovation level, board size and previous firm performance all significantly influence firm performance at a 0.05 significance level. In model 2 the independent variable, which is the dummy variable of the engagement in green innovation, is included. As shown by model 2, in line with what I posit based on prior research, the engagement in green innovation has a positive relationship with firm performance (B = 1.578, p < 0.05).
In model 3 and 4 a moderated regression analysis is performed to test the first hypothesis. Model 3 includes the dummy variable of the board interlocks with top the 100 green innovating firms as a direct effect on firm performance. As shown by model 3, having one or more inbound board interlocks with a top 100 green innovating firm positively influences firm performance (B = 1.442, p < 0.05). In model 4, the moderating variable of board interlocks with a top 100 green innovating firm is included. This moderating variable is calculated by multiplying the engagement in green innovation with board interlocks with a top 100 green innovating firm. In support of the first hypothesis, model 4 shows that having inbound board interlocks with a top 100 green innovating firm positively influences the relationship between the engagement in green innovation and firm performance (B = 1.778, p < 0.05). Subsequently, green innovating firms that have one or more inbound board interlocks with a top 100 green innovating firm perform significantly better than green innovating firms without these interlocks. Furthermore, the positive effects of having one or more inbound board interlocks with a top 100 green innovating firm also affect non-green innovators, as the results show a direct positive effect on firm performance over the whole sample. Based on the results of model 2, 3 and 4, board interlocks with a top 100 green innovating firm can be classified as a quasi moderator, as model 3 significantly differs from model 2 (LRX2 = 4.71, df = 1, p < 0.05) and model 4 significantly differs from model 3 (LRX2 = 4.21, df = 1, p < 0.05).
board interlocks with firms from the KIBS-sector does not moderate the relationship between the engagement in green innovation and firm performance, it does directly affect firm performance. As only model 5 significantly differs from model 2 (LRX2 = 5.42, df = 1, p < 0.05), board interlocks with firms from the KIBS-sector can be classified as an independent variable.
Model 7 and 8 show the results of the moderated regression analysis for the third hypothesis. Model 7 includes the dummy variable of the board interlocks with ENGOs. As shown, this variable does not directly affect firm performance. Model 8 includes the moderating variable of board interlocks with ENGOs, calculated by multiplying the engagement in green innovation with board interlocks with ENGOs. As shown by model 8, in support of the third hypothesis, having inbound board interlocks with ENGOs positively influences the relationship between the engagement in green innovation and firm performance (B = 3.446, p < 0.05). Accordingly, green innovating firms that have one or more inbound board interlocks with ENGOs perform significantly better than firms that do not have these interlocks. Based the results of model 2, 7 and 8, board interlocks with ENGOs can be classified as a pure moderator, as model 2 and 7 do not differ from each other but model 8 does significantly differ from model 7 (LRX2 = 4.34, df = 1, p < 0.05).
Regarding the control variables, type of industry, based on the two-digit SIC codes, showed a significant effect on firm performance across all models, except model 5 and 6 (p < 0.05). Innovation level, as the natural logarithm of the number of patents, only showed significant positive effect on firm performance in model 1 (p < 0.05). Firm size showed no significant effect on firm performance in any of the models. Interestingly, board size negatively affects firm performance in models 1-6 (p < 0.05). Previous firm performance showed significant positive effect on firm performance only in models 1 and 2 (p < 0.05).
DISCUSSION
Recent years have shown an increase in the importance of green innovation in both academia and practice (Schiederig, Tietze & Herstatt, 2012). However, the effects of green innovations on financial performance still raises discussions due to empirical shortcomings. Subsequently, the increasing body of literature on green innovation has neglected the effect of the most widely employed measures of networks, board interlocks, on the performance of green innovative firms. Therefore, the aim of this thesis was to study the effect, specifically the moderating effect, of inbound board interlocks with different types of organizations on the financial performance of green innovative firms. Multiple moderated regression analyses were performed on a sample of 161 firms to test the hypotheses. Combined, these firms had over 4500 inbound board interlocks in 2013. The results show that different types of inbound board interlocks have significantly different effects on the relationship between the engagement in green innovation and firm performance. These results provide important implications for both theory and practice as discussed in the following sections. Furthermore, after the main theoretical and practical implications, this discussion addresses the main limitations of the study and provides a number of possible directions for future research.
Theoretical implications
The findings of this study provide a number of important implications for existing research. First of all, I tested whether the engagement in green innovation was significant and positively related to financial performance. Prior research found contradicting results, arguing that environmental performance and short-term corporate financial performance are negatively correlated (Sarkis and Cordeiro, 2001). However, in line with recent articles (Aguilera-Caracuel & Ortiz-de-Mandojana, 2013; Weng, Chen & Chen, 2015), I found that the engagement in green innovation positively influences firm performance. An explanation for this phenomenon is that green innovations can reduce operating costs through enhancements in preventive pollution, lowering costs of input and waste disposal (Aguilera-Caracuel & Ortiz-de-Mandojana, 2013; Bansal and Roth, 2000). Moreover, it can an increase revenue by enhancing reputation and legitimacy (Bernauer et al., 2007) and enabling firms to pursue a differentiation strategy to exploit niches in environmentally sensible market segments (Ambec & Lanoie, 2008).
interlocks with environmental NGOs significantly strengthen the positive relationship between the engagement in green innovation and firm performance. A possible explanation, offered by existing research, why board interlocks with a top 100 green innovating firm seem to help green innovative firms reap higher profits, is that director interlocks with strategically related organizations seem to provide better advice and counsel (Wincent, Anokhin & Örtqvist, 2010). Furthermore, this positive effect found might also be explained by the spillover of advanced technological know-how that the highly skilled green innovators might possess (Stuart, 2000). While both of these explanations are empirically grounded and could both individually (positively) influence the aforementioned relationship, an interesting interpretation of the results might be to view them as complementary. For example, a top 100 green innovating firm is more likely to possess advanced technological know-how, that, due to their strategic relatedness to the green innovating firm, will more likely spillover. Yet, there might also be other factors at play here, such as that these board interlocks reduce costs of dealing with uncertainty as they provide firms with timely and valuable information about for instance
new technological advancements (Hillman & Dalziel, 2003). Interestingly, the results also show that the effects of
having inbound board interlocks with a top 100 green innovating firm was not just significant for green innovating firms but also for non-green innovating firms. Similar to the explanation provided for green innovating firms, this phenomenon might be explained by the advanced technological know-how the highly skilled green innovator possesses, spilling over to the non-green innovating firm. As the majority of top 100 green innovating firms also hold large amounts of non-green patents, they are also likely to possess advanced technological know-how not related to green innovations thus being beneficial for non-green innovators (Stuart, 2000). These findings suggest that having inbound interlocks with highly skilled green innovators are beneficial for both green and non-green innovating firms, yet, it seems that due to strategic relatedness, these benefits will be more profound for green innovating firms. Regarding the inbound board interlocks with environmental NGOs, prior research indicated that for the development of environmental innovations it is important to also create links with actors such as NGOs (Messini et al., 2011). However, to date existing research has, to my knowledge, not yet provided empirical evidence toward the financial benefits of having ties with ENGOs. Here, the results of this study show that for green innovating firms, having ties with ENGOs seems to have a significant positive effect on firm performance. An explanation why these ENGOs might have a positive influence is that they can provide the firm with valuable non-business perspectives (Hillman, Cannella & Paetzold, 2000) such as ecological, scientific and legal expertise (Stafford, Polonsky & Hartman, 2000). Moreover, they can generate support from other stakeholders for the green innovations (Stafford, Polonsky & Hartman, 2000).
as it is likely that non-green innovators receive as much benefit from having directors of KIBS firms in the board room as green innovators.
I contribute to the increasing body of literature on green innovation in a number of ways. First of all, in support of recent findings by scholars, I show that the engagement in green innovation has a positive effect on the financial performance of firms. Next, I advance the literature on green innovation networks by introducing board interlocks as a moderator for the relationship between the engagement in green innovation and firm performance and show that both inbound board interlocks with a top 100 green innovating firm and ENGOs strengthen the positive relationship between them. These findings suggest that the knowledge and perspectives directors with these types of affiliations bring to the board table can be of great importance to a green innovating firm. Possibly explained by the fact that these green innovating firms often face high uncertainty and risk and thus especially value these types of relations. Furthermore, the results show that the benefits of having inbound board interlocks with a top 100 green innovating firm stretches beyond green innovating firms and also have a direct positive effect on the performance of non-green innovators. In line with existing research, the results also indicate the importance of KIBS firms in the board room. While not moderating the effect of green innovations on firm performance, the knowledge and perspectives they provide do significantly impact the performance of both green innovating and non-green innovating firms. These findings are important for scholars because, in line with suggestions of prior research (Russo & Fouts, 1997), if green innovations drive higher profits, the full chain of variables connecting the end links need to be identified by researchers. While this study only covers a few of these variables, it does stress to scholars the importance of networks and their subsequent effect on the performance of green innovating firms.
In this line, an interesting and important direction for future research could be to study what specific factors explain the increase in performance as observed in this study. While I provide a number of explanations for the observed effects of inbound board interlocks based on prior research, this is just the second article addressing board interlocks within green innovation literature, so other mechanisms not yet identified might be at play. Addressing this could add to the understanding as to what types of knowledge sources and ties prove to be especially beneficial when engaging in green innovations. Moreover, future research could focus on the characteristics of the interlock itself and differentiate between indirect and direct board interlocks. As prior research showed that direct board interlocks, that is when a manager of a firm sits on the board of another firm, have a stronger influence than indirect board interlocks, when an individual serves on the board of the focal firm as well as on the board of another firm but is not a manager of either firms (Tuschke, Sanders, & Hernandez, 2014).
Practical implications
The findings of this study also have important implications for practitioners. First of all, while scepticism on the profitability of green innovations is still evident among managers, this study supports the increasing amount of literature arguing that the development of green innovations can significantly increase profitability. This understanding is important in order to motivate firms to actively engage in green innovations. Moreover, while engaging in green innovations, businesses should take into account the effects of board interlocks, as they can significantly affect performance. Specifically, the nominating committees of the board of directors as well as managers of green innovating firms should aim to create inbound board interlocks with top 100 green innovating firms and ENGOs. Beside the benefits for green innovating firms, this study also showed that having inbound board interlocks with a top 100 green innovating firm or firms from the KIBS-sector are beneficial for non-green innovators as they possess knowledge and advanced technological know-how that could also be of value during the development of non-green innovations. An interesting interpretation of the results is that this knowledge of the effects of different types board interlocks illustrates that different directors have access to different resources and do not all have the same capabilities. Being aware of these differences is important as it allows firms to more specifically choose their directors.
Limitations and future research
CONCLUSION
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