Sustainability practices and financial performance for SMEs

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Sustainability practices and financial performance

for SMEs

22 June 2020

Maaike Romkje Hoekstra Student number: S3702979 Vlasstraat 16a, 9712KT, Groningen

m.r.hoekstra.4@student.rug.nl

MsC Accountancy and Controlling – track Controlling Faculty of Economics and Business

University of Groningen First supervisor: Dr. J. S. Gusc

j.s.gusc@rug.nl word count: 11.687

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Abstract

This survey-based study examines the relationship between the sustainability practices and financial performance for Small Medium Enterprises (SMEs). Literature proposed that for SMEs sustainable development (SD) has not a high priority, is poorly executed due to weak experience and is poorly documented and evaluated in the policies, management accounting practices or standards of SMEs. But, in order to activate entrepreneurs to work on SD and to work on the Sustainable Development Goals (SDGs), SMEs require more knowledge and a positive attitude towards sustainability. This study examined the three concepts of SD: environmental, social and the economic concept and the results are derived from 72 SMEs in the Netherlands.

There was no evidence was found whether sustainability practices resulted in a positive relationship with financial performance. However, this study provides a beginning for the formalization of SD for SMEs, which is utterly important to achieve the SDGs. In addition, this study confirms the importunacy of stakeholders for the sustainable development for SMEs, which is also substantiated by the stakeholder theory.

Keywords: Small and Medium-sized Enterprises (SMEs), Sustainability, Sustainable practices,

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Preface

This thesis has been written as the final product of the Master Controlling at the University of Groningen. The main of the study was to provide insight in the influence of the sustainable

practices on financial performance for SMEs and whether this had a positive relationship. The study that I conducted was challenging but gave me more knowledge, insight and a positive attitude about sustainability. This knowledge could be used for my future career in the controlling field.

But, I was not able to write this thesis without the help and support provided by several people. At first, I would like to thank my supervisor Dr. J. S. Gusc for her support and wonderful coaching during this thesis period. Especially during the difficult parts of this study, her feedback gave me new insights to cope with these difficulties.

Further, I would like to thank my family and friends for the loving support, especially during the COVID-19 pandemic. Also, I would like to thank my parents who are unfortunately no longer here, but will always have a place in my heart. They encouraged me since childhood to get the most out of myself and my study career. Furthermore, I would like to thank my colleagues from BDO, who made it possible to write my master thesis. Additionally, I would like to thank Stijntje Adriana Timmerman for her feedback on my English writing.

Finally, I would like to thank the respondents who filled in my questionnaire and for the people who shared the questionnaire to managers and owners of SMEs. Without them, I was not able to write this master thesis.

Maaike Romkje Hoekstra

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1. Introduction

In 2015, the members of the United Nations (UN) adopted an agenda for Sustainable Development (SD). All 193 members of the UN signed up to an ambitious package of goals: The Sustainable Development Goals (SDGs). Their goal is to balance the three concepts of SD: economic growth, environmental sustainability and social inclusion. According to the PBL (Planbureau voor de Leefomgeving) Netherlands Environmental Assessment Agency, 41 of the 169 SDG targets are already included in the relevant policy targets in the Netherlands (Lucas, Ludwing, Kok & Kruitwagen, 2016). Most of these policy targets are aimed for 2020, while most SDG targets are defined for 2030 (Lucas et al., 2016). But according to MKB Servicedesk ‘Three years after the United Nations (UN) drew up Sustainable Development Goals (SDGs), 72 percent of entrepreneurs of the Dutch Small Medium Enterprises (SMEs) are still unfamiliar with the sustainability goals of the UN. In order to activate entrepreneurs to work towards sustainability goals, more knowledge and, above all, a more positive attitude towards sustainability in business operations are needed’ (MKB Servicedesk, 2019).

SD has been a prevalent topic over the years (Johnson, 2015; Lee, Kwak, & Park, 2017) and in the literature around 300 definition can be found (Ehrenfield, 2008), which indicates the complexity of this topic. According to Busco, Fiori, Frigo, & Riccaboni (2017), SD was defined in 1987 by the United Nation Brundtland report as ‘development that meets the needs of the present without compromising the ability of future generations to meet their own needs’. Vijfvinkel, Bouman and Hessels (2011) states that environmental sustainability of our planet is defined as the preservation of the environment over a longer period and therefore has a profound impact on the economy.

Furthermore, a sustainable economy can be seen as essential for creating long term economic growth. According to Malesios et al. (2018), sustainability refers to the coherence of business strategies and practices that contribute to SD and supports the social and environmental practices of the enterprise in the long term while simultaneously meeting the economic interests, consisting of profitability and economic growth. Furthermore, in 2019, 99.8 percent of the total number of companies in the Netherlands consisted of SMEs, according to Centraal Bureau Statistiek (CBS) (Staat van het MKB, 2017, 2019). Therefore, SMEs should be the engine of SD. Further on, SMEs have a key role as they dominate the business sector of any country from a macro-level perspective, therefore their cumulative impact is far from negligible (Cassells & Lewis, 2011; Revell, Stokes & Chen, 2010).

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But many companies have difficulties dealing with SD (Bansal & Roth, 2000) due to the legislation, stakeholder pressure and financial performance pressure. Especially SMEs seem to have difficulties dealing with SD (Schaper, 2002; Battisti & Perry, 2011) for which there are various reasons. Firstly, SD is not a topic that has a high priority for SMEs. Secondly, SD is poorly executed due to the weak experience, for example, in dealing with multiple stakeholder pressures such as securing shareholder value for remaining the overarching tenet of for-profit organizations (Lewis, Cassels & Roxas, 2015). Thirdly, SD is poorly documented and evaluated in SMEs in policies, management accounting practices or standards (Schaper, 2002). A reason for that could be that the sustainability management literature has been too idealistic given the substantial implementation deficiencies with sustainability management tools (Dentchev 2009) and not sufficiently instrumental with regard to SMEs (Johnson & Schaltegger, 2015). Furthermore, research in the SME context default in the documentation and evaluation on SD (Schaper, 2002). Nevertheless, research into sustainability-oriented companies could help understand and support the development of more sustainable practices (Bos-Brouwers, 2010). Further, research into the roles accounting has expanded into furthering SD and has become more sophisticated since the concept of SD was proposed by the seminal Brundtland Report (United Nations World Commission on Environment and Development (UNWCED), 1987) (Bebbington & Unerman, 2018). But, according to the paper of Ates, Garengo, Cocca & Bitcici (2013) and Jansson, Nilsson, Modig & Hed Vall (2017), there is a call to meet more theory-building research for SME SD.

Pullman, Maloni & Carter (2009) suggests that sustainability practices and performance is utterly important and should be part of companies operational strategies, according to several empirical studies. (Madsen & Ulhøi, 2016). Furthermore, according to Cantele & Zardini (2018),

sustainability is important for the strategy in the survival and development of SMEs. Also, focusing more on sustainability strategies could allow companies to differentiate their products and earn above normal returns that would apply to both economic and other sustainable performance criteria (Pullman et al., 2009). Malesios et al. (2018) addressed that ‘sustainability is today highlighted as the key to long-range business planning to facilitate performance refinements and improvements for the common good. Therefore Malesios et al. (2018) states that there is need to develop a better and clear understanding of the moderating role sustainability has on SME financial performance. Also, SMEs often associate a change towards environmental sustainability with higher costs. Whether a

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sustainability issues and performance outcomes. However, they were most neglect to link the adoption of both social and environmental practices to performance. In addition, a few business researchers have developed effective performance-related measures as a result of the need for framing these measures (Shepherd and Gunter, 2006; Taticchi, Tonelli, & Cagnazzo, 2010). Bai, Sakris, Wei & Koh (2012) developed a decision support system with formal modeling to offer a win-win solution for the sustainability outputs and the economic results. However, Hoffman and Bazerman (2015) stated that (social and environmental) behaviors are sometimes profit-compatible and sometimes not. Therefore, an expanded view of sustainability practices and the result

performance outcomes are important topics for research’.

Malesios et al. (2018) examined the links between sustainability and the financial performance with SME economic growth in British, French and Indian SME firms, which showed that practices and performances focused on environmental, social and operational sustainability seem to benefit an SME's economic performance. Replicating their methodical approach in other countries or business sectors may provide additional insights and reinforce the results of their assessment. Therefore, this study will focus on SMEs in the Netherlands. The aim of this study is to address this gap and provide further insights in the relationship between sustainable practices and financial performance for SMEs. The research question that is central in this study is:

‘What is the relationship between sustainability practices and financial performance for SMEs?’ This study is expected to deliver a valuable contribution to the existing literature. My personal motivation for this study is that I’ve experienced a low motivation for SD due to the aforementioned motivates and struggles. Also, SMEs don’t have a clear understanding of ‘being sustainable’ or SMEs or do not formalized their SD practices. As a result, this study could give insight in the sustainability practices and their advantages, which are helpful for SMEs. These advantages can lead to a more positive attitude of entrepreneurs of SMEs towards sustainability also working towards fulfilling the SDGs of the UN. At last, it helps me to spread and gain knowledge about this topic for my current and future working field.

In the next chapter the literature review is presented and thereafter the methodology of this study. Finally, the results will be point out and in the conclusion these results will be summarized and the recommendations for future research will be discussed.

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2. Literature review

This chapter starts with the definition of SME in section 2.1. Thereafter, in section 2.2, the definition of SD and sustainability and their impact on SMEs will be discussed. In section 2.3 the relation between SD and Corporate Social Responsibility will be explained. In section 2.4 the performance for SMEs, the financial performance will be discussed. At last in section 2.5, the SD for SMEs and the stakeholder theory is explicated.

2.1 Small and medium enterprises

Small and medium enterprises (SMEs) comprise a very broad range of initiatives. From the established, traditional family businesses that employ more than a hundred people (medium-sized enterprises) to the mere survivalist and self-employed (micro enterprises) (Berry et al., 2002:1). According to Hillary (2006) SMEs are a heterogeneous group in terms of size and sector diversity. Different countries adopt different criteria (e.g. employment, sales, turnover) for the definition of SME. However, the most common definition of SME is, likewise described by Chong et al. (2018), ‘an enterprise that has less than 250 employees and should not be a subsidiary of a foreign

multinational enterprise’ (p. 3). Small enterprises employ less than 50 employees and medium-sized enterprises employ between 50 and 250 employees. For the statistical definition, according to OECD (2005) SMEs are non-subsidiary, independent firms which employ fewer than a certain number of employees, which differs across countries. In the European Union the most frequent upper limit designation of an SME is 250 employees (OECD, 2005). Also, Malesios et al. (2018) indicates that SMEs are companies with up to 250 employees.

2.2 Sustainable development and sustainability 2.2.1 Definition sustainability for the SME

As mentioned in the introduction, more knowledge towards sustainability goals is needed for the entrepreneurs of SMEs. The definition of sustainability is a key factor to obtain the desired

knowledge. The diversity of the definition of sustainability is also mentioned in the literature in the previous chapter (2.2.1.), therefore the definition also has a different meaning for various

entrepreneurs of SMEs. Roeland Verbeet van Claassen, Moolenbeek & Partners (CM&P)

mentioned that for entrepreneurs of SMEs the definition of sustainability is a catch-all term, in other words there is no concrete and precise definition (Franchiseplus.nl, 2019).

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2.2.2 Definition of sustainable development and sustainability

The literature shows over 300 definitions of SD (Ehrenfeld, 2008). The origin SD definition in the United Nation Brundtland report ‘development that meets the needs of the present without

compromising the ability of future generations to meet their own needs’ in 1987 (Busco et al. 2017). Porter & Kramer (2011) built on Brundtland definition explaining that in SD, the word

‘development’ pertains the notion of improvement, which is about the development towards being as fully sustainable as possible. According to Tonis (2015) ‘SD is very well captured by the phrase “Think global, act local”, with implication in regional strategy, economic-financial policies, environmental policies, research and innovation policies and social responsibility policies. We all have to get informed, understand, foster and apply the SD principles, because it is our moral duty to protect the environment for the future generation and get in the same time economical profitability’ (p. 41). According to Giddings, Hopwood & O’Brien (2002), SD is about working towards a society where the society and environment are not overpowered by the economy

Furthermore, according to Vijfvinkel et al. (2011) “sustainability originates from the verb ‘to sustain, which means keep (something) going over time or continuously”(p. 6). According to Van Marrewijk & Werre (2003), “sustainability in a business entity context indicates a company’s activities, voluntary by definition, demonstrating the inclusion of social and environmental concerns in business operations and in interactions with stakeholders” (p. 107). Ehfrenfeld (2008) addresses that sustainability is confused or conflated with ‘green’ in many places. Giddings, Hopwood & O’brien (2002) mentioned that for the complete view of sustainability, the stakeholder in the economy and society also need be considered.

Sustainability as contrasted with SD is very different (Ehrenfeld, 2008). SD is about managing the technocratic process of economic development so that the Earth will continue to support future generations in the same way it has for us. SD can never be achieved because it is categorically a continuing process. (Ehrenfeld, 2008). But according to Vijfvinkel et al. (2011), there is no consensus yet about the difference between sustainability and SD. Vijfvinkel et al. (2011) mentioned that sustainability is a final state where consumption is not higher than the natural growth and the natural absorption capacity of pollution. For this study the concept of SD will be used, because firms are not fully sustainable but instead undertake specific actions towards becoming more sustainable (Vijfvinkel et al., 2011).

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2.3 Sustainable development and Corporate Social Responsibility

The definition of SD in United Nation Brundtland report (UNWCED, 1987) is one of developments in the vision of Corporate Social Responsibility (Gevaert, 2017). According to Aguinis & Glavas (2012) the definition of CSR is ‘the context-specific organizational actions and policies that take into account stakeholders’ expectations and the triple bottom line of economic, social, and environmental performance’. Other developments in the vision of CSR are the SDGs (SDG Compass, 2015) and the Triple Bottom Line (Elkington, 1997)), which will be explained in the following sections.

2.3.1 Sustainable Development Goals

The creation of the SDGs started with the Millennium Development Goals (MDG). Many countries incorporated the MDGs into their nationals plan and strategies, and implemented specific measures intended to achieve the associated targets. Nonetheless, the progress was uneven and many

countries missed one of more targets (Transitioning from MDGs, 2016).

The SDGs rely on the major role and value creation of enterprises in the process of SD (Busco et al, 2017) and the SDGs need support of the business organizations in delivering on the promise of SD. (Busco et al., 2017; Bebbington and Unerman, 2018). The SDGs define global priorities and aspirations for 2030 and seek to mobilize global effort around a common set of goals (SDG Compass, 2015). These goals are universally apposite in developing and developed countries alike and therefore governments must create the goals into national action plans, policies, and initiatives (Busco et al., 2017). For an overview of the goals, see appendix 1 (United Nations, 2016).

SDG Compass

To start with implementing SDGs into an organization the SDG Compass is served as a strategic tool and guide (SDG Compass, 2015). The SDG Compass was developed by the World Business Council for Sustainable Development (WBCSD), the Global Reporting Initiative (GRI) and the United Nations Global Compact (UNGC). The SDG Compass consists of five steps. First, companies must understand the SDGs, second, the priorities must be defined. The third step is setting goals including KPI’s and the fourth step is integrating these defined goals. The last and fifth step, reporting and communicating of the process. The SDG Compass initially focuses on large and multinational companies, but the SGD Compass also emphasizes the use of the SDG Compass for

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2.3.2 Triple Bottom Line

The SDGs are based on concepts of the Triple Bottom Line (TBL), which is delivered by the idea of Elkinton (1997) (Bos-Brouwer, 2010). The Triple Bottom Line is the accounting framework for SD, which consists of three concepts: economic, environmental and social. (Elkington, 1997; Lehtonen, 2004). The concepts of SDG are consistent with this. As mentioned in the introduction, the concepts are economic growth, environmental sustainability and social inclusion. The Triple Bottom line ensures the integration of environmental and social aspects with profit-seeking goals (Elkington, 2004; Malesios et al, 2018) and helps the managerial practice and decision making of business regarding redefining operation management and supply chains. (Drake & Spinler, 2013; Carter & Rogers, 2008). The Triple Bottom line often is called the three 3 P’s, which refers to People (social concept), Planet (environmental concept), and Profit (economic concept) (Elkinton, 1997; Slaper & Hall, 2011). For the business organizations, Busco et al. (2017) state ‘contributing to the SDGs through inclusive business models helps these organizations reinforce their awareness regarding the multiple and heterogeneous resources they use as well as the impact of the company’s activities on stakeholders’ (p. 5). Busco et al. (2017) also mentioned that implementing SDGs in the

organization’s activities, an integrated approach to planning, measurement and reporting is needed. However, as mentioned in the previous chapter 2.2.3, there must be gains made for SD reporting in SMEs.

2.4 Sustainable development in SMEs

As mentioned in the introduction, SD is a difficult topic for SMEs. Research indicates that SMEs are lagging behind the awareness of SD (Brammer, Hoejmose & Marchant, 2012; Cassells & Lewis, 2011; Revell et al., 2010; Jansson et al., 2017). According to Battisti & Perry (2011) environmental management tools and programs are be designed for large companies rather than being customized to the issues facing SMEs. Further, Schaper (2002) mentions that SMEs tend to be somewhat reactive to environmental issues compared to larger companies. In addition, larger companies tend to have a higher level of funds available, more (human) capital and formal structure and their consequences are significantly more visible than SMEs (Jamali, Zandhour & Kehisian, 2009). Moreover, SMEs are limited to small-scale, ad-hoc changes in business activities (Schaper, 2002) and their sustainable practices are nonsystematic, unstructured and less formalized compared to larger companies (Russo & Tencati, 2009). Bos-Brouwers (2010) mentions that SMEs are focusing on short term, have a resource poverty (capital, time, knowledge and skilled personal) and have a low degree in formalization, which are not in favor of creating SD.

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long-term focus of sustainability innovations.

As mentioned in the introduction, SD is poorly documented and evaluated in SMEs policies,

management accounting practices or standards (Schaper, 2002). According to Bos-Brouwer (2010), there are hardly SMEs that publish sustainability reports and there is no standard sustainability reporting design for SMEs yet available. Therefore, the data is scarce for sustainability performance of SMEs. Bos-Brouwer (2010) “The reasons for this lie in resource poverty, low degree of

formalization, lack of public visibility and low general reporting priorities of SMEs” (p. 421). ‘Large companies have the administrative systems, locus of control and corporate reputation and communication motives in place for sustainability reporting, spurring a number of studies on this matter’ (Kolk, 2008). On top of that, SMEs should asses, monitor, and potentially develop strategies for the overall sustainability demands to widespread reporting of sustainability. (Shields &

Shelleman, 2015; Parhankangas, McWilliams, & Shrader 2014; Nadim & Lussier, 2010; Avram & Kuhne, 2008). The reporting practice gives indicators on which sustainability themes activities can be developed (Bos-Brouwer, 2010).

2.5 SME’s performance and SD

Performance of a firm may have two strategic outcomes, that are often referred to in the literature as success of failure for a firm (Eniola & Entebang, 2015). Furthermore, financial performance is mainly used as an indicators of a firm’s financial health over a given period (Vijfvinkel et al., 2011). However, financial performance can be measured in different ways according to Vijfvinkel, et al. (2011). For example, measurements of commercial success like growth or market share, or measurements for financial success, such as profitability and liquidity. Profitability could be measured through Return On Investment or Return On Equity and liquidity through quick ratio or current ratio. An important notion hereby regarding to SD is that when looking at the relationship between financial performance and sustainability, a different relationship has been offered for the relationship between revenues and sustainability and between profit and sustainability (Porter & Van der Linde, 1995; Vijfvinkel, Bouman and Hessels, 2011). Along with it, according to

Vijfvinkel et al. (2011), “different firms have different financial goals and therefore one financial performance indicator need not measure the success rate as perceived by the firm itself” (p. 10). 2.6 SD for SMEs with the stakeholder theory

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SD (Lewis et al., 2015). Besides that, aligning the interests of organizations and stakeholders are important to achieve SDGs. The SDG Compass underscores that it is essential for companies to report and communicate on their progress against the SDGs continuously in order to understand and meet the needs of their stakeholders (GRI, UNGC and WBCSD, 2015; Jones, Hillier & Comfort, 2016). The relationship between the stakeholders and its organizations is called the stakeholder theory (Hörisch, Freeman and Schaltegger, 2014). As defined by Freeman (1984), a stakeholder is every group or individual who is affected can affect or by the achievement of an organization’s objectives, which usually includes shareholder, employees, customers, creditors, suppliers, public interest groups, governmental bodies, and the community (Chiu & Wang, 2015). Stakeholder theory is considered one of the most important conceptual frameworks in the field of Social Accounting (Gray, 2002) and one of the major, if not the most frequently used, approach in social,

environmental, and sustainability management research (Frynas & Yamahaki, 2016; Montiel & Delgado-Ceballos, 2014). Companies do not only have responsibilities for generating economic value but also for generating environmental and social value. (Argandoña, 2011; Jensen, 2001; Retolaza & San-Jose, 2011; Retolaza, Ruiz-Roqueñi & San-Jose, 2015; Porter & Kramer, 2011; Emerson, 2003). According to Johnson & Schaltegger (2016) “Stakeholder theory sheds some light on the reasons of implementing sustainability management tools, which usually stem from the relationships with internal and external stakeholders” (p. 496). This relationship is also significant in the case of SMEs, because the values of their managers pervade all types of organizational reasons among which the implementation of their social and environmental programs (Murillo and Lozano, 2006; Gueben & Skerratt, 2007). Furthermore, the stakeholder theory is also relevant to explain an environmental management system, because it involves both internal (employees) and external stakeholders (suppliers, local authorities) in safe environmental practices of a firm (Johnson & Schaltegger, 2015).

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3. Conceptual Model and research hypotheses

In this chapter the conceptual model and research hypotheses are presented in section 3.1, 3.2 and 3.3. A few research studies are focused on SD and financial performance, which address the SME context. The conceptual model is described in Figure 1.

Figure 1 Conceptual model

The sustainable practices, which are the independent variables, will be divided into three concepts of SD, as mentioned in chapter 2.3: social, environmental and economic. The independent variables are derived from the previous studies of Malesios et al. (2018), Vijfvinkel et al. (2011) and Cantele & Zardini (2018). In the appendix 2 there is an analysis of the independent and dependent variables and the concepts of these studies. The analysis will be further explicated in chapter 4.4.

3.1 Environmental concept and financial performance

The environmental concept consists of the process to reduce energy consumption, the process to reduce and recycle waste, the process to reduce water consumption and systems to reduce harmful emissions (Malesios et al., 2018; Vijfvinkel et al., 2011; Cantele & Zardini, 2018). According to Llach, Perramon, del Mar Alosno-Almeida & Bagur-Femenías (2013) the adoption of

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cost, since they do not need a particular investment but may provide a financial benefit (Zeng, Meng, Yin, Tam & Sun, 2010). But, according to Malesios et al. (2018) the waste reduction has a negative influence on turnover. Further, according to Vijfvinkel et al. (2011) when a firm decrease its costs, they could ask a lower purchase price and thereby increase their sales, a direct

relationship. This increase will influence the turnover is a positive way. Moreover, according to Aragón-Correa et al. (2008) there is a positive and direct relationship between the adoption of eco-efficient practices and financial performance in SMEs. But, the direct relationship is expected to be greater than the indirect relationship (Vijfvinkel et al., 2011). Further, a firm would have to make a trade-off between the costs to invest to engage in environmental practices and the benefits through costs reductions (Vijfvinkel et al., 2011). Nonetheless, firms engage in sustainable activities when they are sufficiently confident that these will have a positive influence on the financial performance (Vijfvinkel et al., 2011). Therefore, there is a positive relationship between the environmental concept and financial performance for SMEs expected and predicted in hypothesis one.

H1: The environmental concept is positively associated financial performance for SMEs

3.2 Social concept and financial performance

The social concept consists in this study of the health and safety procedures of the employees, the training for employees and fairly properly welfare of the employees (Malesios et al., 2018; Cantele & Zardini, 2018). According to Malesios et al. (2018) the practices of the health and safety

procedures have positive affect on turnover, because health and safety practices are publicized as a part of a company’s public relations initiatives. This will lead into a positive effect on the financial performance of companies (Malesios et al, 2018). According to Vijfvinkel et al. (2011) “a more sustainable image may increase the productivity of employees through a better morale and motivation” (p. 12). Thereby, employees prefer to work at a (more) sustainable firm due to the higher motivation for sustainable companies (Vijfvinkel et al, 2011). According to Halawi & Haydar (2018) a well-designed training and development programs can help employees gain more satisfaction while performing their jobs. This satisfaction level has a positive influence on the productivity and therefore the profitability of the enterprise (Halawi & Haydar, 2018). As a result, an equal treatment will lead to a better relationship with the employees, and thus, could contribute to a better alignment of the employees’ task with the enterprise’s strategy (Cantele & Zardini, 2018). Also, employees are more committed to an organization when the employees are fond of the organization, employees see their future tied to that of the organization and the employees are willing to make personal sacrifices for the business unit (Cantele & Zardini, 2018).

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Therefore, there is a positive relationship between the social concept and financial performance for SMEs expected and predicted. This is formulated in hypothesis two.

H2: The social concept is positively associated with financial performance for SMEs

3.3 Economic concept and financial performance

The economic concept consists of the Customer Relationship Management (CRM), Supplier Relationship Management (SRM), standardized business process and lean practices. Stakeholders, such as customers and suppliers, influences the financial performance, as suggested in chapter 2.5. When look at the customers, customer satisfaction is crucial to create repurchase intentions, positive word-of-mouth and customer loyalty. Which in the end can lead to an improved impact on financial performance (Susskind, Kaemar & Borhgrevink, 2007; Alonso-Almeida, 2012; Llach et al.,2013). Another positive impact for the long term on financial performance is that companies have a long-term relationship (longer than one year) with their customers. This will lead to customer loyalty and therefore long-term profit (Celep, Zerenler & Sahin, 2013). Also, Malesios et al. (2018) stated that the long relationship with customers is positively associated with turnover but negatively associated with business growth. Additionally, implementing sustainable practices can improve the image of a firm. This could lead to a new category of customers, or satisfy existing customers and overall, a better position for enterprise in the market (Llach et al., 2013). Furthermore, sustainable practices may reduce the costs of capital. Vijfvinkel et al. (2011) states “banks nowadays commonly screen firm on their environmental performance, which results in more sustainable firms being able to obtain credit with greater ease” (p. 12).

Another positive influence on the financial performance is standardized business process, according to Münstermann, Echthardt & Weitzel (2010). Standardized business process leads to cost reduce and better operative process performance (Swaminathan, 2001; Münstermann et al., 2010), which is also stated by the research of Ramakunar and Cooper (2004). Münstermann et al. (2010) state “the easier, it is to communicate about the ways in which a business as awhole and subdivided into its processes works, the easier it is for the working employeesto acquire a profound understanding of the business process at hand” (p. 36). Therefore, a better understanding of how benefits were distributed to the customers will lead to overall corporate saving through reducing waste and

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the financial performance of SMEs. According to Shah & Ward (2007) lean practices are the practices that minimize supplier, customer and internal variability through a multi-dimensional system with the central objective of waste elimination. Valente, Sousa & Moreira (2019) have concluded that lean practices help SMEs achieving better performance in a financial level.

Therefore, there is a positive relationship between the economic concept and financial performance for SMEs expected and predicted in hypothesis three.

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4. Methodology

As discussed in the previous chapter, the literature suggests a positive relation between the environmental, social and economic concept and the financial performance. In section 4.1 the research design and data collection will be discussed. Further, in section 4.2 the research sampling will be described and in section 4.3 the survey instrument will be explained. In section 4.4 the variables, that has been used for this study, will be elucidated. Concludingly, in section 4.5 the data-analysis will be explained.

4.1 Research design and data collection

This research aims to explore the relationship between sustainability practices and financial performance for SMEs. The empirical data for this paper is collected by a survey among

managers/owners of SMEs in the Netherlands in the period between April and May in 2020. The SMEs have a key role in the economy of the Netherlands, as they dominate the business sector from a macro-level perspective (Cassells & Lewis, 2011; Revell et al., 2010).

4.2 Research sampling

For this study the sample consist small and medium sized enterprises (SMEs) with maximum of 250 employees, as mentioned before in chapter 2.1. The SMEs are located in the Netherlands, in a developed economy and derive from various industries. The size of the sample is 72 SMEs. To ensure the validity of the results, a random sample of the population of SME in the Netherlands is used. To ensure the validity the level of the data level, the author clearly communicated the

requirements of the SME size. Also, the subject of SD can be interpreted differently from enterprise to enterprise. However, this is covered through the proper design and construction of the survey. After all, the author collected 75 responses from 75 enterprises in The Netherlands. However, three enterprises were not identified as a SME because they had more than 250 employees, therefore the responses resulted in a total of 72. In the appendix 3 presents the list of SMEs that responded. 4.3 Survey instrument

Quantitative research

The research method that has been used is a questionnaire survey, with questions about the sustainable practices and the financial performance. The survey was constructed from using

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sustainable practices and financial performance of the enterprise. The title ‘sustainability’ in the survey is replaced by ‘business operations and -processes’ to avoid aversion or prejudices about sustainability by the respondents. Also, to avoid different meanings of sustainability for various entrepreneurs of SMEs, due to the diversity of the definition of sustainability (as mentioned in chapter 2.2.1.).

Further, the title financial performance is neither mentioned in the survey to avoid aversion by the respondents due to sensitive information. The variables and measurement scales used in the questionnaire survey were derived from the extant literature, therefore the survey include closed-form questions on a number of sustainability indicators of SME practices and financial

performance. The survey was developed in English and then translated into Dutch because the survey was distributed among Dutch SMEs. Further on, a pilot survey was conducted to resolve for example, misunderstanding issues and interpretations. The pilot survey is tested by 11 persons who were managers and employees of a SME. After the trail, the survey was adjusted based on the feedback and comments. The survey took approximately 8 to 10 minutes to complete and contains 28 questions (2 open questions and 26 closed questions). The survey is included in the appendix 5, in English (5A) and Dutch (5B). The software program Qualtrics was used to create the survey, to record the online administration, to keep track on the responses of the participants and at last to combine the answers into a database of Qualtrics.

4.4 Variables

Independent variables

For this paper, the independent variables, the sustainable practices, is divided into three different concepts: environmental, social and economic. The independent variables are derived from the previous studies of Malesios et al. (2018), Vijfvinkel et al. (2011) and Cantele & Zardini (2018). Malesios et al. (2018) divided the independent variables into three concepts: operational,

environmental and social. Vijfvinkel et al. (2011) used the follow independent variables; a policy on the reduction of pollution, a policy on the recycling of waste and additional pollution efforts in the environmental concept. Cantele & Zardini (2018) used four concepts for the independent variable, the social, environmental, economic and formal practices concepts. However, the variables of the policies of Vijfvinkel et al. (2011) and the formal practices of Cantele & Zardini (2018) are not included in the variables of this study. As mentioned in section 2.3.1, SD is less formalized in SMEs (Schaper, 2002) and SD is weak documented and evaluated in SMEs their policies (Schaper, 2002). Therefore, following the theory, the formal practices and policies will hardly or even not be present in SMEs their sustainable practices and will not contribute to the aim of this study. Also, to

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follow the TBL-approach and the SDG concepts, this study selected the social, environmental and economic concepts. In the appendix 2 presents an analysis of the independent and dependent

variables and the concepts of these studies. From each of the previous studies (Malesios et al., 2018, Vijfvinkel et al., 2011 and Cantele & Zardini, 2018) the independent and dependent variables are presented in the figure and per concept the variables are grouped together for this study.

Furthermore, in the appendix 4 presents the differences between the measurements of the variables, the difference in the samples and data analysis with this study and previous studies (Malesios et al., 2018, Vijfvinkel et al., 2011 and Cantele & Zardini, 2018). This study combined and adjusted the different measurements of the previous studies so it could be applicable, operational, and to illuminate it for wide variety of industries of the Dutch SMEs.

To investigate the independent variables, this paper used the questionnaire survey as a research instrument. Each independent variable was transformed into question. Firstly, the variable was measured through the number of hours the enterprise pays attention to the subject of the variable per month, with a range between 0 and 1000 hours. Then the variable was transformed into a statement. The statement was measured using a seven-point Likert scale: 1 = Strongly disagree, 2 = Disagree, 3 = Somewhat disagree, 4 = Neither agree nor disagree. 5 =Somewhat agree, 6 = Agree and 7 = Strongly agree.

Dependent variables

The dependent variables are business growth and turnover, which reflect the Financial Performance. The business growth and turnover are directly connected to capital cost, operating cost and

cashflow (Malesios et al, 2018). Therefore, the financial performance of the SMEs, is measured by the answers and rating of the managers and owners on the variables of turnover and business growth. The turnover is measured through a six-point scale, from €0 to higher than €800.000 and the option ‘not known’. The business growth is measured through the growth in the turnover and the growth in employees in the last 5 years in a three-point scale: 1= Decreased 2= (Approximately) remained the same disagree and 3= Increased. The research of Malesios (2018) also used the

turnover and business growth in 5 years as financial performance indicator. The research of Vijfvinkel et al. (2011) used the revenue development and profit development. This research replicated the dependent variable of the research of Malesios (2018).

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Control variables

To offer an accurate model to identify the relation between the dependent and the independent variables, control variables play an important role in regression research. The control variables will avoid bias in the research, which capture the effect of other potential factors influencing financial performance. Firstly, the control for firms’ size because larger firms are expected to perform financially better than smaller firms due to efficiency gains or market power (Lee, J. 2009). This control variable is measured by the number of employees. Thereby, size was found to be

empirically significant predicators of financial performance in different studies. This also applies to age. Both negative and positive (Audretsch, Klomp, Santarelli & Thurik, 2004; Variyam and Kraybill, 1992; Niskanen & Niskanen, 2007; Vijfvinkel et al., 2011). Further on, the indicators of financial success arguably differ substantially per industry. Also, it is expected that the variation in the degree of sustainable activities per industry differ (Vijfvinkel et al., 2011).

In table 1 on the next page, there is an overview presented with the concepts of this study, the variables, the measurements of the variables, corresponding variable code and survey question.

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4.5 Data analysis plan

Descriptive statistics for each item on the survey should be examined as a first step in the data analyses process. In order to analyze the data, SPSS software was used. The items of the responses should be normally distributed, and deviations from normality will result in attenuated relationships (Nazari, Kline & Herremans, 2006). To analyze the collected data, a quantitative research is

conducted. Descriptive statistic was performed to determine frequencies, central tendency and variability. Further, the validity and reliability are tested for valid inferences about the research questions and to rely on the statistical results. To discover whether sustainable practices can predict financial performance for SMEs, a multiple regression analysis was performed for ratio and ordinal data. Based on statistical criteria, the multiple regressions technique identifies predictors ‘elements of dependent variables. The statistic procedures measures the level of influence of each independent variable towards the dependent variables. Further on, there are two approaches for the multiple regression analysis: stepwise regression and hierarchical regression. This study performed a hierarchical regression, because is more suitable for social sciences since it will eliminate

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Table 2 Descriptive statistics independent variables

5. Results

This chapter presents the results of this study. In the first section, 5.1, the descriptive statistics of this study will be discussed. Thereafter, in section 5.2 the reliability and validity will be discussed. Section 5.3 shows the correlation of the data and section 5.4 presents the testing of the normality of the data. At last, in section 5.5, the hypotheses will be tested.

5.1 Descriptive statistics

The descriptive data of the independent variables, dependent variables and control variables are presented below respectively. Table 2 below present the descriptive statistics for the independent variables. There were no missing values except for the questions regarding ‘Standardized Business Process’. The SMEs didn’t have to answer those questions because not all processes and protocols are standardized for each SME, which result in different N per standardized processes and protocols item.

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The variables of the hours had extreme outliers (e.g. 480, 500 and 1000 hours) for energy consumption, reduce and recycle waste, systems to reduce harmful emission, health and safety practices and training and education. The outliers belong to SMEs who operate in the Industry and Logistics. However, to avoid errors in the data analysis outliers of 480 hours and more were

removed. Further, table 2 shows that for each of the independent variables the minimum, maximum, mean and standard deviation for the hours per variable. Noticeable, SMEs spend on average least hours on the process to reduce water consumption and the most hours on average training and education for employees. Additionally, remarkable is that SMEs spend on average more hours per variable on the social concept than on the environmental concept.

Also, per variable the effectiveness is rate from 1 (strongly disagree) to 7 (strongly agree). For the effectiveness of the process to reduce energy consumption (mean=4.60) and process to reduce and recycle waste (mean=4.93), SMEs responded on average somewhat agree. However, for effectiveness of the process to reduce water consumption (mean=4.44) and systems to reduce harmful emissions (mean=4.29) SMEs stated neither agree nor disagree. Further, for training and education was the minimal of 2 (disagree). Therefore, no SME choose strongly disagree for the effectiveness for training and education. Furthermore, SMEs somewhat agree over the effectives of health and safe practices for the employees and training (mean=5.49), education for the employees (mean=5.35) and welfare of the employees (mean=4.61). Further on, SMEs responded for the CRM: long relationship with customers (mean=6.07) and SRM: long relationship with suppliers (mean=6.03), which indicates that in general SMEs agree that the relationship with suppliers and customers are on average longer than one year. SMEs responded for the effectiveness of the standardized business process, the PDCA process (mean=5.74) for agree. The effectiveness of the standardized business process: Agile (mean=4.67), Scrum (mean=4.70) and standardized process and protocols (mean=5.44) is rate on average somewhat agree. The last standardized business process – Other (mean=6.25). The other standardized business process consists of ISO9000, SMART, 5S and X-matrix. On average, SMEs agree over the effectiveness of the other

standardized business process. Lastly, the effectiveness of the Lean process (mean=5,27) is on average rate with somewhat agree.

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Further, in table 3,4 and 5 the data for the dependent variables are presented which present the financial performance of the SMEs.

Table 3 Net turnover 2019

Table 4 Net turnover growth between 2014 and 2019

For the question regarding ‘Net turnover 2019’ 5 respondents answered ‘not known’, therefore the N is 67 here. Further, the answer options for question regarding ‘Net turnover 2019’ is transformed from six to three options. In the appendix 6 the descriptive statistics ‘Net turnover 2019’ is

presented with six categories.

Table 3 shows that most SMEs had a Net turnover in 2019 higher than €600.001 and the fewest SMEs between €200.001 and €600.000. Further, table 4 shows than most SMEs had an increase in their Net turnover growth between 2014 and 2019 and 4 SMEs a decrease. Lastly, table 5, on the next page, presents that most SMEs increased their amount of employees between 2014 and 2019.

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Table 5 Employee growth between 2014 and 2019

Furthermore, in table 6 and 7 the data of the control variables are presented.

Of the 72 companies, 52 companies (72,2%) consists of 1 to 25 employees and 20 companies (27.8%) consists of 26 to 250 employees. Small companies are overrepresented in the sample and there is thus a small indication that there is a bias for companies of 1 to 25 employees in this study, which can form a limitation in this study. Also, of the 72 companies, the age of the companies is widespread with the youngest being 0 years and the oldest 175 year, what means that both young and older companies are present in this study. However, this variable had extreme outliers (e.g. 101, 120 and 175 years). These outliers are excluded in the data analysis to avoid errors, therefore all the SMEs of 100 years and older are removed from the analysis. This resulted in a N of 69 companies, with a range between 0 till 96 years and on average the age of 25 years.

The age and the sizes of the companies are presented in table 6 below. Noteworthy, the group from the age from 0 till 20 years and 1-5 employees is the largest group of 24 companies and the second largest group of 11 companies is from the same age range and 6-25 employees. Further, remarkable is that 41 companies are between 0 and 20 years and only 1 company is between 61 and 80 years.

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Furthermore, in the table 7, the distribution of the industries of the SMEs is showed. Markable is that the largest industry presented is the Business Services Industry with 36,1% of the total companies and the second largest is the industry Care with 16,7%. Further noticeable is that the industry Agricultural consists of 2 companies and Hospitality industry represents only 1 company.

In addition, table 8 and table 9 presents the questions regarding the environmental and social approach. for customers and from the government.

Table 7 The distribution per industry of the SMEs

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Table 9 Environmental and/or social approach by the government

Notable, in table 8, is that most SMEs are already paying attention to the environmental and/or social approach to their customers and that most SMEs agree over that their customers need an environmental and/or social approach. This means that, in order to maintain and satisfy customers, SMEs are generally becoming more aware of the social and environmental requirements that have to be met. Further, the group SMEs who are not paying attention at this moment to the

environmental and/or social approach somewhat agree over the need of environmental and/or social approach of their customers. Furthermore, remarkable in table 9, is that most SMEs are not paying attention at this moment to the environmental and/or social approach stimulated by the government and that most SMEs are neutral over that the government are stimulating them from the

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5.2 Reliability and validity

To make valid inferences about the research question and to have confidence in the statistical results, it is important that the used measurements of the variables are reliable and valid (Nazari, Kline & Herremans, 2006).

Cronbach’s Alpha

To confirm the construct of the reliability in the data set of the data-analysis, a Cronbach’s alpha measuring is conducted. Due to the Cronbach’s alpha measuring, the reliability of the measurement was reflected through the inter-correlations between the variables. (Hair, Hult, Ringle, Sarstedt & Thiele, 2017). The Cronbach‘s alpha is considered as a coefficient of reliability. Further, the data should present the reliability coefficient or Cronbach‘s alpha of 0.70 or higher to be acceptable. Cronbach‘s alphas (α) was calculated in SPSS.

Independent variables

Environmental concept: the environmental concept is measured by means of 4 items (EN_1,

WAS_1, WAT_1 and HA_1). First on a Likert-scale of 7, the scale was reliable (α=0.795). Further, the environmental concept is also measured by hours of by 3 items (ENH_1, WASH_1, WATH_1 and HAH_1). The scale was reliable (α=0.917).

Social concept: the social concept is measured by means of 3 items (HS_1, TE_1 and WE_1), all on

a Likert-scale of 7. The scale was reliable (α=0.712). Further, the hours of the social concept are also measured by means of 3 items (HSH_1, TEH_1 and WEH_1). Hereby, the scale was reliable (α=0.712).

Relationship concept (economic concept): the economic concept was measured by means of 4 items

(CRM_1, SRM_1, SB_1-SB_5 and LE_1) on a Likert-scale 7. The scale was not reliable (α=0.375) and could present a different concept. Therefore, the Lean practices (LE_1) and Standardized Business Process (SB_1-SB_5) were deleted. This resulted in a Cronbach’s alpha of α=0.683, which is not the desired Cronbach’s alpha of 0.70 or higher.

However, according to Hair, Black, Babin, Anderson & Tatham (2006) values near 0.60 can be accepted, especially if the factor consists of a few items. Also, pilot testing these items did not led to comments of these items. Hence, the Cronbach alpha of α=0.683 is acceptable (Hair et al., 2006). Further, the name economic concept is replaced by relationship concept, because it includes the

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Dependent variables

Financial performance: the financial performance was measured by 3 items, on a scale of 3. The

scale was not reliable (α=0.649), however deleting one of the questions did not result in a higher the Cronbach’s alpha. But, as mentioned before values near 0.60 can be accepted (Hair et al., 2006) and according to Brown (2006) and Kline (2005) it is advised to have minimum set of 3 items (Hair et al., 2006). Further, this instrument had in another study a sufficient Cronbach’s alpha (e.g. Malesios et. al, 2018) and pilot testing did not result in comments for these items. Therefore, the Cronbach’s alpha of α=0.649 is acceptable.

To conclude, all variables had relatively high internal consistency and they were considered to be ‘acceptable’ in social science research.

Control variables

Industry: the control variable ‘industry’ was divided into nine types of industries. Including a large

number of covariates into a regression model will make the independent association more reliable (Babyak, 2004). However, the reliability of the control variable industry was low due to the small sample size of 72 cases and therefore the control variable industry is overfitting the regression analysis. Hence, the control variable is not included in the analysis.

Factor analysis

To test the construct validity of the questionnaire survey, an exploratory factor analysis was

conducted. (Bornstedt, 1977; Rattray & Jones, 2007). If the construct of the questionnaire survey is valid, then all items together represent the underlying construct. The aim of a factor analysis is to detect constructs. The constructs are the factors which underlie a dataset based on the correlation between variables. (Field, 2009; Tabachnick & Fidell, 2001; Rietveld & Van Hout, 1993). The underlying constructs representing the factors that explain the highest proportion of variance the variables share. However, compared to commonly used principal component analysis, factor analysis does not have the presumption that all variance within a dataset is shared (Costello & Osborne, 2005; Field, 2009; Tabachnick & Fidell, 2001; Rietveld & Van Hout, 1993). The factor analysis is desirable for research where there are large numbers of observed variables, that ruminate a few hidden variables, therefore it is suitable for this study.

First, the factor analysis is conducted with the hours from the environmental and social concept. The suitability of the factor analysis tested through the KMO test. The test had a statistic of 0.544, which correspond to be miserable. Hence, this condition is unsatisfied. Therefore, the factor

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analysis is conducted with the environmental, social and economic concept and the financial performance without the hours of the environmental and social concept. Hereby, the suitability of the factor analysis is confirmed through the KMO test. The test had a statistic of 0.632, which correspond to be mediocre. Hence, the condition of the sample size is satisfied. Four factors were extracted using the principal component analysis, as seen in table 1 on the next page. The rotated component matrix was used to examine the rotated factor loading of each item. First, the table 10 shows that four questions related to the environmental concept load on the first factor. Second, for the three questions related to the social concept load on the second factor. Third, for the questions related to the economic concept, load on the third factor. However, two variables, the ‘Lean practices’ and ‘Standardized Business Process’, were removed from the analysis due to their low coefficients in the correlation Matrix. A low coefficient could imply that the two variables might not measure the same dimension of the latent variable of the other variables. Lastly, the three questions related to the financial performance load on the fourth factor. To conclude, the result indicated that these items had measured one construct and therefore, the convergent validity was satisfied.

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5.3 Correlation analysis

Table 5 presents the correlation matrix between the factor scores of the variables.

The purpose of the matrix is to determine relationships between the variables. Therefore, this matrix helps to ensure that there was no high correlation between the variables. High level of correlation between two independent variables could cause autocorrelation problem, which could damage the regression model. In addition, the correlation matrix in table 11, does not show any risk of

multicollinearity. Multicollinearity means that there is a high intercorrelation or inter-association between two independent variables. However, there is no correlation between the independent variables (including the control variables) higher than 0.9 because the highest correlation between the independent variables = 0.39.

In addition, in the appendix 7 the correlation between the independent variables for the effectiveness and the hours is presented. However, due to the low validity of the items of the variable hours (as shown in section 5.2) they will be excluded from the regression model.

Table 11 Correlations of the factor scores

1. 2. 3. 4. 5. 1. Financial performance 2. Environmental concept -.02 3. Social concept -.03 .39** 4. Relationship concept -.08 .10 .15 5. AC_1 .21 .32* .12 .16 6. FS_1 .46** -.03 -.12 -.14 .36** Note: *p<.05, **p<.01.

As shown in table 11 there was a significant positive relationship between the financial performance and firm size, r=.46, p<.01. This suggests that larger companies have a higher financial

performance. Furthermore, at a significance level of , there was a significant positive relationship between environmental concept and the social concept, r=39, p<.01. This implies that SMEs with more practices in the social concept, have also more practices in the environmental concept.

Also, there was a significant positive relationship between the age of the company and the firm size, r=.36, p<.01. This suggests that larger companies are older companies.

Lastly, there was a significant positive relationship between the environmental concept and the age of the company, r=.32, p<.05. This means that older companies have more practices in the

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5.4 Testing normality

Before analyzing the data, the normality of the residuals in a regression was tested by

using the standardized residuals. The financial performance is analyzed, and Max Cook’s distance and Komogorov-Smirnov test are performed.

The Max Cook’s Distance=.35. There are no cases that have too much influence on the regression. Further, the Kolmogorov-Smirnov test is performed with Lilliefors significance correction D(62) = .10 , p = .200. Therefore, the assumption of normality of residual is met.

In addition, the multiple linear regression model requires that there is a linear relationship between the dependent and dependent variables. This is examined through a scatterplot, which is shown in figure 2. The assumption of linearity and homoscedasticity are met according to the standardized predicted value on standardized residual plot.

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5.5 Testing Hypotheses

In order to test the influence of sustainable practices on the financial performance, multiple linear regression model is carried out. The multiple linear regression analysis is performed through the hierarchical regression.

Table 12 Hierarchical regression output for the dependent variable

Financial performance Model 1 Model 2 B B Constant -.91 -.92 AC_1 -.10 -.13 FS_1 .44** .42** Environmental concept -.01 Social concept -.13 Relationship concept .04 N 62 62 Δ R2 _.02 Total R2 _.22** _.24** F 8.26 3.47 Note: *p<.05, **p<.01, ***p<.001

It was hypothesized that the environmental concept, social concept and economic concept will predict the financial performance.

First, the effects on the variable financial performance will be discussed. Within model 1 the control variables are added. Results show that 21,9% of the variance in financial performance can be

accounted for by the control variables, collectively, R2 _{= .22 , F(2,59) = 8,26 , p=.001. Hence, the}

control variables together have a significant influence on financial performance.

In model 2 the predictor variables are added. The results show that 23,6% of the variance in financial performance can be accounted for by the control variables and predictor variables, collectively, R2_change_{= .02 , F(3,56) = .14 , p =.732. Hence, they are together not significant.}

Within the model 2, there could be seen that the variable environmental concept does not have a significant influence on financial performance. B=-.01, t(56)=.-0.08 , p=.937. Therefore, there is not enough evidence that hypothesis Ha is true.

Further, in the model there could be concluded that the variable social concept either does not have significant influence on financial performance. B=-.13, t(56)=-.10, p=.335. So, there is not enough evidence that hypothesis H2 is true. Lastly, in the model 2 could be seen that the variable

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.64 , p =.721. Important to notice is that the relationship concept is part of the economic concept. Therefore, there is not enough evidence that hypothesis H3 is true.

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6. Discussion

The purpose of this study was to examine the relationship between the sustainable practices and financial performance for SMEs in the Netherlands. A multiple linear regression was performed in order to test this.

Firstly, the literature suggested that environmental concept has a positive influence on the financial performance (Vijfvinkel et al., 2011; Zeng et al., 2010; Aragón-Correa et al., 2008). Yet, the multiple linear regression in this research shows there is no evidence for the relationship between environmental concept and the financial performance for SMEs in this study.

Secondly, based on the literature review, it was expected that the social concept would have a positive influence on the financial performance (Malesios et al., 2018; Vijfvinkel et al., 2011; Halawi & Haidar, 2018, Cantele & Zardini, 2018). Despite this, there is no evidence for the relationship between social concept and the financial performance for SMEs.

Lastly, the previous literature suggests that there is a positive influence of the economic concept on the financial performance (Valente, Sousa & Moreira, 2019; Malesios et al., 2018; Alonso-Almeida, 2012; Llach et al.,2013; Münstermann, Echthardt & Weitzel, 2010; Susskind et al., 2007). Due to establishing the reliability and validity of the data of the economic practices, only the relationship of CRM and SRM were questioned and determined. Therefore, the economic concept was renamed to the relationship concept. As the result of the test, there is no evidence for a relationship between the relationship concept and financial performance of SMEs.

To conclude, the results are contrasting from the previous research Malesios et al. (2018), Vijfvinkel et al. (2011) and Zardini & Cantele (2018), which concluded a positive influence of sustainability practices and financial performance for SMEs.

An explanation could be the choice of different concepts and including different variables in this study rather than the previous studies. This study included the environmental, social and economic concept, whereas previous studies also included the formal practices concept (Cantele & Zardini, 2018). The study of Vijfvinkel et al. (2011) only investigated the environmental concept.

Secondly, different results could arise from different measurements techniques that were used in this study compared to previous studies. This study used the 7 Likert-scale to measure the effectiveness for the concepts of SD and the hours for the environmental and social concept. Previous studies used 5 or 10 Likert-scale for the sustainable practices (Malesios et al., 2018; Cantele & Zardina, 2018) or asked open questions in their questionnaire (Vijfvinkel et al., 2011). Thirdly, the previous mentioned studies of Malesios et al (2018), Vijfvinkel et al (2011) and

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Lastly, this study had a smaller sample size than the previous studies. However, the sample size was confirmed through a satisfied KMO test.

Further on, this study has used the stakeholder theory to analyze the relationship between sustainable practices and financial performance for SMEs. As mentioned in the literature, the stakeholder theory includes both internal (employees) and external stakeholders (customers,

government and suppliers) and SMEs have additional challenges to response reactively to emerging and pressing stakeholder expectations or demands in SD (Lewis et al., 2015). The results of this study shows that a large part of the SMEs are paying attention to the environmental and social approach from customer perspective, and less from government perspective. SMEs find that their customers require an environmental and/or social approach, but are neutral from the need of stimulating an environmental and/or social approach from the government. According to previous study of Lubin and Esty (2010) trends such as demographic changes, digitalization and

sustainability, influence the mind-set and behavior of customers. This will lead to customers who deeply care about social and environmental issues (Müller, 2014). Therefore, companies need to respond to these trends (Müller, 2014). In this study, it is shown that most SMEs care and are aware of the social and environmental issues from customers.

Over the course of this research there were a few restrictions that need to be considered when interpreting the results of this study.

Firstly, the Cronbach’s alpha of two variables were too low to measure the sustainable practices. Therefore, it was decided that the questions in the survey, related to variables, were deleted. The distinction method has some limitations as the answers regarding the ‘standard business process’ and ‘lean practices’ for the economic concept could not be used during this study. However, asking a variety of questions about one variable gives a higher reliability rather than one question. The reliability should increase when the variables measured with more items. Also, the results of the questions are not or less reliable when the question were wrong interpreted. Another explanation of the low Cronbach’s alpha score can be the low number of respondents as other studies have more often a higher research sample. However, the survey has been thoroughly tested beforehand to prevent that ambiguity emerged during answering the questions by the respondents.

Sustainability practices and financial performance for SMEs