The themes of technological innovation, entrepreneurship, and organizing

Environmental Innovation and Firm Performance: An Approach to Direct and Indirect Effects

The environmental factor provides opportunities to foster innovation and develop technologies to improve efficiency. According to Hart and Milstein (2003), problems associated to industrialization like material consumption, waste and emissions represent an opportunity for companies to develop skills and capabilities in the fields of pollution prevention and ecological efficiency (Nidumolu et al., 2009).

Russo and Fouts (1995), referring to dif­ferent environmental strategies as mentioned by Hart (1995), emphasize that companies that carry out pollution prevention strategies (beyond compliance with the law) focusing on process environmental innovation, have a resource base that enhances their ability to generate profits and also makes them able to protect themselves against future risk arising from resource depletion or fluctuating cost of energy (Shrivastava, 1995). Dechant and Altman (1994, in Karagozoglu & Lindell, 2000), in the same vein, argue that en­vironmental innovations enables companies to position themselves ahead of their competitors in meeting environmental regulations, which in turn helps them to protect their markets

Therefore, the importance of incorporating environmental considerations in strategic decision making is increasing (Sharma and Vredenburg,

1998) . Thus, through environmental innovations the firm can improve its efficiency, achieve sig­nificant cost reductions and meet the demands of those consumers especially sensitive to the environmental factor.

Firms can save costs through a better use of raw materials and energy, selling the surpluses of the production process or reducing the control and waste treatment cost (Murillo et al., 2008), idea that is shared by Berrone and Gomez-Mejia (2009, in Lopez Gamero et al., 2009) for whom proactive environmental management, character­ized by innovation, can minimize waste disposal costs, reduce unnecessary steps and optimize the use of inputs in the production process. Klassen and Whybark (1999) relate pollution prevention technologies to the existence ofgreater opportuni­ties for innovation and improvement in production efficiency. In the same line, Wagner (2005) shows that environmental strategies based on pollution prevention (as opposed to the additive and control strategies or “end of pipe”) result in improved economic performance ofthe company. Rennings et al., (2006) show evidence of the relationship between Environmental Innovation and increased
turnover ofthe plant, while according to Radonjic and Tominc (2007), the new, cleaner technologies lead to the optimization processes and result in increased productivity.

Therefore, with appropriate skill sets and capabilities, companies that carry out prevention strategies and reduce waste emissions are able to reduce costs and increase profits (Sharma & Vredenburg, 1998; Christmann, 2000).

In addition, besides the cost factor, the respect for the environment can also be a key element to meet the demands of those conscious customers who specially value the environmental perfor­mance of products, packaging and sustainable forms of business management. These customers will be willing to pay and additional price for such environmental features (Sharma et al., 1999).

Although by 2001, Hamschmidt and Dyllick argued that the market for environmentally in­novative products was reduced, the development of new products more “green” or sustainable has been also studied by the researchers. Among the beneficial effects of designing new and more sustainable products we can mention increases in sales and corporate image enhancement (Tien et al., 2005; Chen, 2007), increased market share (Cleff & Rennings,1999) and company growth (Chen et al., 2006). Likewise, environmental marketing activities positively affect the busi­ness performance of companies (Fraj-Andres et al., 2009). These are what we call the “direct effects” between Environmental Innovation and firm performance.

However, if technical and organizational pos­sibilities for sustainable businesses are available for all the firms in the market, the achievement of some degree of cost reduction, improved efficiency or product differentiation may not be enough to obtain a significant improvement in the economic performance of the firm. Therefore, it may be necessary the existence of competitive advantage in terms of cost or differentiation. In this sense, competitive advantage can play a mediating role in the achievement of business results and better firm performance. In short, attention must be paid to what we call the “indirect effects” (Figure 3).

According to Christmann (2000), Environ­mental Innovation practices can result in different types of competitive advantage. In the same line, Chen et al., (2006) argues that environmental innovation in both product and process is posi­tively related to the achievement of competitive advantage.

Thus, starting from the distinction of Porter (1980) between differentiation and cost leader­ship and in line with the relationship between strategy and competitive environmental strategy (Shrivastava, 1995), cost advantage can result from incorporating best environmental practices on the production process (Hart, 1995). These process oriented environmental innovations include the redesign of production processes or the use of productive inputs that are less polluting and re­cycling of byproducts of processes, among other measures (Hart, 1995; Porter & Van der Linde, 1995). Other broader approaches to environmental management also contribute to the cost advantage. Such is the case of the Sustainable Management of Product Life Cycle (Hart, 1995, 1997), Eco - centric Management (Shrivastava, 1995), Design for Disassembly (Shrivastava, 1995) or Design for the Environment (Hart, 1997).

In regard to environmental differentiation, innovations related to the packaging design or environmentally friendly product development must be mentioned. Raw materials utilization and business process modifications can be used as differentiation factors when selling products and services on the market (Murillo et al., 2008). As pointed out by Reinhardt (1998) through environ­mental innovations seeking product differentiation is that consumers pay a higher price because of the ecological attributes ofthe products sold. Also playing an important role in terms of differentia­tion we can find the environmental management systems like ISO 14001 or EMAS. According to Johnstone and Labonne (2009), environmental management systems are very important to send signals to regulators and play a role in differentia­tion against other competitors from the market.

This argument is consistent with what has been described by Fombrun and Shanley (1990), for which the fact of producing according to criteria of social responsibility (in our case by providing an environmental argument to products and pro­cesses) may contribute to product differentiation and enhanced reputation, though, according to Barin and Dirk (2008), also should be noted that this kind of product differentiation will be effec­tive if is adopted by the value chain as a whole.

However, there are also more critical perspec­tives in relation to Environmental Innovation in terms of differentiation and cost. Some studies find no relationship between the certification of environmental management systems and eco­nomic performance of companies (Link & Naveh, 2006). Some authors doubt about the potential of environmental management systems to produce differentiation because not all markets are familiar with and value these certifications and it is also controversial the fact that eco efficient activities are a way to gain cost advantages because firms aren’t punished in proportion to the damage caused (Aragon-Correa & Rubio-Lopez, 2007). In a similar vein, according to Frondel et al.,

(2008) there is a negative relationship between cost reductions and the adoption of environmental management systems.