The Influence of Corporate Environmental Ethics on Competitive Advantage: The Mediation Role of Green Innovation
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- Chang, C. J Bus Ethics (2011) 104: 361. doi:10.1007/s10551-011-0914-x
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This study utilizes structural equation modeling (SEM) to explore the positive effect of corporate environmental ethics on competitive advantage in the Taiwanese manufacturing industry via the mediator: green innovation performance. This study divides green innovation into green product innovation and green process innovation. The empirical results show that corporate environmental ethics positively affects green product innovation and green process innovation. In addition, this study verifies that green product innovation mediates the positive relationship between corporate environmental ethics and competitive advantage, but green process innovation does not. Therefore, corporate environmental ethics can not only affect competitive advantage directly, but also influence it indirectly via green product innovation in the Taiwanese manufacturing industry. Taiwanese manufacturing companies can increase their corporate environmental ethics and green product innovation to enhance their competitive advantages.
KeywordsCorporate environmental ethicsGreen product innovationGreen process innovationCompetitive advantage
Green innovation has become one of the important strategic tools to obtain sustainable development in manufacturing industries because of the increasing environmental pressure. In previous times, investing in environmental activities is an unnecessary investment. However, the strict environmental regulations and popular environmentalism have changed the competitive rules and patterns for companies (Porter and van der Linde 1995). Green innovation can be divided into green products and processes, including the innovation in technologies that are involved in energy-saving, pollution-prevention, waste recycling, green product designs, or corporate environmental management (Chen et al. 2006). If companies are willing to undertake green innovation enthusiastically, they can obtain the advantage from differentiation and low cost which can even change the existing competitive rules (Porter 1981; Porter and van der Linde 1995). Therefore, it is more widely accepted that green management is profitable nowadays (Porter and van der Linde 1995; Sharma 2000).
Being green is a catalyst for continuous innovation, new market opportunity, and wealth creation (Walley and Whitehead 1994). Green innovations may embody the concept of environmental protection into the design and package of products to increase their differentiation advantages (Chen et al. 2006; Hart 1995). Investing resources on environmental management would not only avoid the trouble of protests or punishment about environmental protection, but also enhance their production efficiency, develop new environmental markets, and thereby increase their capabilities of green innovation (Chen 2008a). Porter (1980) and Barney (1991) defined competitive advantages of a company as a condition under which competitors are unable to replicate its competitive strategies executed by the company. Previous research argues that the relationship between green innovation and competitiveness is positive in Taiwanese information and electronics industries (Chen et al. 2006). Green innovations can enhance the product value and, thus, offset the costs of environmental investments. Eventually, green innovations improve resources productivity and make companies more excellent (Porter and van der Linde 1995). Environmental management is getting important for companies in the dynamic global environment, and more companies are willing to put more efforts on developing green innovations. Therefore, developing green innovations is a win–win solution for the conflict between economic development and environmental protection.
Green innovation can improve the performance of environmental management to satisfy the requirement of environmental regulations in Taiwan (Chen et al. 2006). However, research which deals with the antecedent of green innovation is scant in professional literature. This study examines corporate environmental ethics as an antecedent of green innovation, thereby providing insight into green innovation which plays a mediating role between corporate environmental ethics and competitive advantage in Taiwanese manufacturing industry. Barney (1986) argued that if a firm’s culture is valuable, unique, and imperfectly imitable, then its culture can provide sustainable competitive advantages. Green management is not only as a defensive mechanism to retain legitimacy, but also as a centerpiece of an organization’s mission to attain sustainable development (Marcus and Fremeth 2009). Corporate environmental ethics is one of the key elements of organizational culture which is associated with innovativeness (Peng and Lin 2008). Corporate environmental ethics formalizes corporate value and expectation for ethical behavior, so it is a driving force for green innovation and competitive advantage.
The structure of this study is as follows. In the second section, a literature review is discussed and five hypotheses are also proposed in this section. In the third section, this study describes the methodology, the sample and data collection, and the measurements of the constructs. In the fourth section, the descriptive statistics, reliability of the measurement, factor analysis, correlation coefficients between constructs, and the results of measurement and structural model are shown. In the fifth section, this study mentions the discussions about the findings and implications, and possible directions for future studies.
Literature Review and Hypothesis Development
Corporate Environmental Management
Companies may determine to adopt environmental management because of external environmental pressures. Although neoclassical economists think maximizing shareholders’ wealth as companies’ main goal (Friedman 1970), institutional theory pays attention to the impacts of external institutions about firms’ strategies (Hoffman 1997). It indicates that companies’ social objective is not always profit maximization, and their activities usually meet external pressures for legitimacy. To gain the trust of external institutions, companies have a good reason to green their products and to undertake green innovations.
According to resource-based view (RBV), competitive advantage results from the key resources and capabilities of companies (Barney 1991; Orsato 2006). RBV argues that environmental social responsibility can become a key capability that leads to a sustained competitive advantage (Hart 1995). There are several environmental forces impacting firms’ operation which are stakeholder activism and environmentalism, competitive pressures, national environmental policies, and international environmental regulations (Rugman and Verbeke 1998). Thus, companies have to carry out environmental management to comply with international environmental regulations and consumer environmentalism (Berry and Rondinelli 1998). Hence, environmental management can be an important element of a firm’s strategies, and it should be considered as a unique capability of firms from the RBV logic (Hart 1995).
Prior literature on corporate social responsibility posits that companies have social responsibilities that may reinforce their economic objectives (Wood and Jones 1995). Companies undertake environmental management because they hope to be socially responsible. Although corporate environmental management may not probably increase profits in the short term, it could have economic payoffs in the long term (Hart and Ahuja 1997). Additionally, stakeholder theory argues that firms should take into account the interests of their multiple stakeholders to formulate their strategies to gain the trust and support from their key stakeholders (Freeman 1984; Mitchell et al. 1997). If firms only pay attention to economic goals, incorporating environmental management into their strategies may be impossible (Drumwright 1994). Firms should undertake a long-term sustainable thinking that relies on non-economic goals as well as institutional and stakeholder pressures (Prakash 2002).
Corporate environmental management allows companies to shape environmental competitive rules and thereby to reap first-mover advantages (Peattie 1992; Peattie and Ratnayaka 1992). Adopting environmental management usually forces firms to apply strict environmental standards into their green products or processes which can create high-entry barriers (Barrett 1991). Firms could get support from external institutions and key stakeholders and further obtain competitive advantages (Vogel 1995). Hence, the positive relationship between competitive advantage and corporate environmental activities can be supported from the previous literature about institutional theory, stakeholder theory, RBV, and corporate social responsibility (Prakash 2002).
The Positive Effect of Corporate Environmental Ethics on Green Product and Process Innovation
Green innovation is the improvement of products or processes about energy-saving, pollution-prevention, waste recycling, green product designs, and corporate environmental management in the field of environmental management (Chen et al. 2006). This study divides green innovation into green product innovation and green process innovation. Green innovation can enhance the performance of environmental management to satisfy the requirements of environmental protection. A company devotes to develop green innovation can not only meet the environmental regulations, but also build up the barriers to the other competitors (Barney 1991; Chen et al. 2006). Previously, many companies thought investing in environmental management was an unnecessary investment (Porter and van der Linde 1995). Recently, there are more positive associations between corporate environmental ethics and green innovation. Companies should change their strategies and operations so that they can comply with the trend of environmentalism. Companies with high-environmental ethics are prone to increase resource productivity through green innovation to make up the environmental costs (Chen et al. 2006). Green innovation can improve product value and, thus, offset the costs of improving environmental impact. Ultimately, green innovation can further raise resources productivity and make companies more competitive (Porter and van der Linde 1995).
Companies require the motivation and ability to produce creative and innovative ideas to develop new products or processes (Chen and Huang 2009). Previous studies pointed out that the well-defined policies and processes in companies have positive effect on their innovation (Stewart 1994). Therefore, well-defined environmental policies can facilitate and integrate the operations among different departments in companies and solve the environmental problems (Porter and van der Linde 1995). Corporate environmental ethics highlights the role of proactive environmental management (Weaver et al. 1999b). The environmental ethics in a company can influence innovation of environmental technology and business operation (Greeno and Robinson 1992; Schlegelmilch et al. 1996). This study argues that corporate environmental ethics plays an important role in the green innovation of a company. Top management concerns relate positively to the scope and speed of a firm’s responses to environmental issues (Eiadat et al. 2008). The role of management is crucial in establishing a company’s norms and expectations about ethics (Tushman and O’Reilly 1997). Based on RBV, outstanding corporate culture which is typically valuable, rare, inimitable, and non-substitutable can be viewed as one of key resources to generate sustainable competitive advantage (Barney 1986). Corporate environmental ethics is regarded as one kind of superior corporate culture to attain sustainable development. Hence, corporate environmental ethics of companies can stimulate their proactive environmental actions that can facilitate their green innovations (Chen et al. 2006; Porter and van der Linde 1995). Consequently, this study implies the following hypothesis:
Hypothesis 1 (H1)
Corporate environmental ethics is positively associated with green product innovation.
Hypothesis 2 (H2)
Corporate environmental ethics is positively associated with green process innovation.
The Positive Effect of Green Product and Process Innovation on Competitive Advantages
Competitive advantages is defined as a condition which competitors are not able to replicate its competitive strategies executed by the company, nor are competitors able to acquire the benefit that the company obtains by means of its competitive strategies (Barney 1991; Coyne 1986; Porter 1980). Value, rareness, imitability, and unsubstitutability are the characteristics of resources of companies which are helpful for innovation and companies can exploit them to gain competitive advantages (Learned 1969; Porter 1981). Innovation can create “isolation mechanisms” which protect profit margins and allow benefits to be gained for companies. Innovation is a key source of competitive advantage in the era of knowledge economy (Daghfous 2004; Prajogo and Ahmed 2006). Innovation enables companies to create and deploy their capabilities that support the long-run business performance (Teece 2007). Successful innovation can make external imitation more difficult and allow firms to sustain their advantages better (García-Morales et al. 2007).
Companies pioneering in the green innovation can obtain the competitive advantages and enable them to sell their environmental technologies or services, to improve their corporate images and even to create new markets (Chen et al. 2006; Hart 1995, 1997; Peattie 1992; Porter and van der Linde 1995). Companies investing more commitments in environmental management and green innovation actively can not only minimize production waste, but also enhance the overall productivity, increase corporate reputation, and thereby increase corporate competitive advantages under the trends of the popular environmentalism of consumers and severe international regulations of environmental protection (Berry and Rondinelli 1998; Chen et al. 2006; Porter and van der Linde 1995). Moreover, green innovation can create “isolation mechanisms” which protect profit margins and allow benefits to be gained for companies.
In this study, green innovation is divided into green product innovation and green process innovation. There are two sources of competitive advantage: differentiation and low cost (Porter 1980). A company can use differentiation strategies to create unique features for its new products. Differentiation strategy can facilitate companies to pay off ecological investments (Orsato 2006; Chen et al. 2006). Green product innovation of a company can improve product design, quality, and reliability with respect to environmental concern which can yield a better chance to differentiate its green products such that the company can charge higher prices and make better profit margins for their green products (Chen 2008a). A company can adopt green product innovation to enhance its green image (Chen 2010). Therefore, the company can obtain competitive advantage through green product innovation (Chen et al. 2006). On the other hand, green process innovation can reduce the cost for companies. Previous literature argues that pollution is the concrete evidence of inefficient uses of resources (Porter and van der Linde 1995; Chen 2011). Investing more resources in green process innovation can not only minimize production waste, but also enhance resource efficiency (Porter 1980; Porter and van der Linde 1995). Companies can adopt green process innovation to enhance resource productivity by means of material saving, energy decreasing, waste recycling, and resource reducing (Chen 2008a). Green process innovation can not only prevent costly pollution, but also reduce resource expense and overall cost (Orsato 2006; Berrone 2009). Companies can continue to undertake green process innovation to raise their manufacturing efficiency and productivity such that they can obtain low cost advantage (Chen 2008a). A company can adopt green process innovation to satisfy its stakeholders (Chen 2008a). Thus, companies can enhance its competitive advantage through green process innovation (Chen et al. 2006). Based on the statements above, this study implies the two following hypotheses:
Hypothesis 3 (H3)
Green product innovation is positively associated with competitive advantages.
Hypothesis 4 (H4)
Green process innovation is positively associated with competitive advantages.
The Positive Effect of Corporate Environmental Ethics on Competitive Advantages
Corporate environmental ethics is the total ethical belief, value, and norm of environmental concerns within a company (Ahmed et al. 1998). Corporate environmental ethics includes six elements: ethics codes, ethics committees, ethics communication systems, ethics officers, ethics training programs, and disciplinary processes (Weaver et al. 1999a). In the concerns about global environmental impacts, corporations should invest resources to achieve their goal of sustainable development. Corporate environmental ethics formalize company values and expectations for ethical behavior. Companies that have high environmental ethics standards can not only avoid the troubles that come with environmental protection protests, but also improve their corporate images (Chen et al. 2006). Therefore, environmental management may lead to long-term economic gains. Competitive advantage is a condition under which companies occupy some niche positions where their competitors cannot imitate their successful environmental strategies and they can gain the sustainable benefits (Porter 1980; Porter and van der Linde 1995). A company devoted to develop its corporate environmental ethics can not only meet the environmental regulations, but also build up the barriers to the other competitors. Companies can enhance competitive advantage through improving their intangible assets (Chen 2008b). Environmental ethics can be regarded as companies’ intangible assets. Companies can occupy some positions about environmental protection where competitors cannot copy their successful environmental strategies and gain the sustainable benefits from these successful environmental strategies. Therefore, this study proposes the following hypothesis:
Hypothesis 5 (H5)
Corporate environmental ethics is positively associated with competitive advantages.
The Research Framework of the Study
Methodology and Measurement
Data Collection and the Sample
The unit of analysis in this study is the business level. This research employed an empirical study, which collected data from companies in the manufacturing industry of Taiwan. The sample is randomly selected from “2008 Business Directory of Taiwan.” The respondents of the questionnaires are the CEOs or the managers of environmental protection, marketing, production, human resource, or R&D departments in Taiwanese manufacturing companies. To heighten the valid survey response rate, the research assistants called to each company which is sampled, explained the objectives of the study and the questionnaire contents, and confirmed the names and job titles of the respondents prior to questionnaire mailing. The respondents were asked to return the completed questionnaires within 2 weeks through mailing.
The study refers to the past literatures to design questionnaire items for the survey. Prior to mailing to the respondents, seven experts and scholars were asked to modify the questionnaire in the first pretest. Subsequently, the questionnaires were randomly mailed to 12 CEOs or the managers of environmental protection, marketing, production, human resource, or R&D departments in different Taiwanese manufacturing companies, and they were asked to fill in the questionnaire and to identify the ambiguities in terms, meanings, and issues in the second pretest. High-content validity is a necessary requisition for the questionnaire in this study. To avoid common method variance (CMV), the respondents of different constructs in this study were different. The respondents of “corporate environmental ethics” are managers of environmental protection or human resource departments; those of “green product innovation” are managers of marketing or R&D departments; those of “green process innovation” are managers of R&D or production departments; those of “competitive advantage” are top managers or CEOs in Taiwanese manufacturing companies.
Social desirability bias (SDB) which means the tendency of respondents to fill in questionnaires in a manner that is viewed favorably by others would affect the validity of questionnaire survey (Nederhof 1985). In order to reduce SDB for the four constructs, this study utilizes the following three ways which include being anonymity, promising of confidentiality, and asking to be honest (Nancarrow et al. 2001). First, the respondents in this study do not have to reveal their names, titles, and company names in the questionnaires. It is meaningless for the respondents to overstate or to exaggerate the four constructs in the questionnaires. The levels of SDB vary with the level of anonymity in the questionnaires. The more anonymity seems to be assured, the less SDB is detected (Randall and Fernandes 1991). Second, this study keeps confidentiality all the time. In the questionnaire, this study does not only address the empirical results are only for the academic purpose, but also promise of confidentiality for the questionnaire survey. Third, the respondents were asked to fill in the questionnaire honestly. The more honesty seems assured, the less SDB is detected (Phillips and Clancy 1972). Hence, there is no SDB in this study. 500 questionnaires are sent to CEOs or the managers of environmental protection, marketing, production, human resource, or R&D departments. There are 106 valid questionnaires, and the effective response rate is 21.2%.
Definitions and Measurements of the Constructs
The measurement of the questionnaire items in this study is by use of “five-point Likert scale from 1 to 5” rating from strongly disagreement to strongly agreement. The questionnaire comprises five parts. The first part of the questionnaire is the measurement of the descriptive data of companies (including the number of employees, year founded, industry sector, etc.); the other four parts are corporate environmental ethics, green product innovation, green process innovation, and competitive advantage, respectively. The measurements of the constructs are further defined as follows.
Corporate Environmental Ethics
The measurement of corporate environmental ethics includes four items: (1) the company has clear and concrete environmental policies; (2) the company’s budget planning includes the concerns of environmental investment or procurement; (3) the company has integrated its environmental plan, vision, or mission to its marketing events; and (4) the company has integrated its environmental plan, vision, or mission to company’s culture (Henriques and Sadorsky 1999).
Green Product Innovation
The measurement of green product innovation includes three items: (1) the company chooses the materials of the product that produce the least amount of pollution for conducting the product development or design; (2) the company uses the fewest amount of materials to comprise the product for conducting the product development or design; and (3) the company would circumspectly deliberate whether the product is easy to recycle, reuse, and decompose for conducting the product development or design (Utterback and Abernathy 1975).
Green Process Innovation
The measurement of green process innovation includes three items: (1) the manufacturing process of the company effectively reduces the emission of hazardous substances or waste; (2) the manufacturing process of the company reduces the consumption of water, electricity, coal, or oil; and (3) the manufacturing process of the company reduces the use of raw materials (Utterback and Abernathy 1975).
The measurement of competitive advantage includes six items: (1) the quality of the products or services that the company offers is better than that of the competitor’s products or services; (2) the company is more capable of R&D than the competitors; (3) the company has better managerial capability than the competitors; (4) the company’s profitability is better; (5) the corporate image of the company is better than that of the competitors; and (6) the competitors are difficult to take the place of the company’s competitive advantage (Barney 1991; Coyne 1986; Porter and van der Linde 1995).
This study utilizes structural equation modeling (SEM) to verify the research framework and hypotheses, and applies Amos 7.0 to obtain the empirical results. SEM is a statistical technique for testing and estimating causal relationships in a more powerful way which takes into account the modeling of interactions, nonlinearities, correlated independents, measurement error, correlated error terms, multiple latent independents each measured by multiple indicators, and one or more latent dependents also each with multiple indicators. The antecedent of the research framework in this study is corporate environmental ethics, and the consequent is competitive advantage, while green product and process innovation are mediators between corporate environmental ethics and competitive advantage. SEM of this study includes two levels of analysis—the measurement model and the structural model.
The Results of the Measurement Model
Means, standard deviations, and correlations of the constructs
(A) Corporate environmental ethics
(B) Green product innovation
(C) Green process innovation
(D) Competitive advantage
Factor analysis of this study
Number of items
Number of factors
Accumulation percentage of explained variance (%)
Corporate environmental ethics
Green product innovation
Green process innovation
The items’ loadings (λ) and the constructs’ Cronbach’s α coefficients and AVEs
The square root of AVE
Corporate environmental ethics
Green product innovation
Green process innovation
The Results of the Structural Model
The results of the structural model
H1 is supported
H2 is supported
H3 is supported
H4 is not supported
H5 is supported
Conclusions and Implications
This study utilizes SEM to explore the positive effect of corporate environmental ethics on competitive advantage in the Taiwanese manufacturing industry via the mediator: green innovation performance. In this study, green innovation is divided into green product innovation and green process innovation. Although many previous studies explored the issues of innovation and competitive advantages, few researches explored the relationship between corporate environmental ethics and competitive advantage and discussed the mediation role of green innovation.
The results of this study indicate that corporate environmental ethics of companies is positively related to green product and process innovation. The empirical results also demonstrate that corporate environmental ethics positively affects corporate competitive advantage. This study suggests that companies should invest more resources to enhance corporate environmental ethics because it is positively associated with green innovations and competitive advantages. If companies want to develop their green innovations and competitive advantages, they should raise their corporate environmental ethics.
This study also explores the mediation effect of green innovation which can be divided into green product and process innovation. Green product innovation plays a mediation role with respect to the positive relationship between corporate environmental ethics and competitive advantage, but green process innovation does not. For Taiwanese manufacturing companies, green product innovation is a differentiation strategy which enables them to create new businesses. Green product innovation is able to seize opportunities or to lead in the market. Environmental consciousness of consumers facilitates the companies to redesign existing products or to develop new ones which meet the environmental regulations (Nidumolu et al. 2009). If companies are willing to undertake green product innovation, they can obtain the advantage of differentiation and even change the existing competitive rules to become one of successful companies (Porter 1981; Porter and van der Linde 1995). Furthermore, the design and package of green products can increase their differentiation advantages (Chen et al. 2006; Hart 1995; Shrivastava 1994, 1995). If companies want to develop their competitive advantage, they should raise their green product innovation.
On the other hand, green process innovation does not play a mediation role between corporate environmental ethics and competitive advantage in this study. Green process innovation is regarded as a low-cost strategy in the Taiwanese manufacturing industry. Companies develop eco-friendly raw materials and components to reduce waste. However, it is hard for consumers to understand how much effort that the companies put in the process improvement. Hence, there is no positive relationship between green process innovation and competitive advantage. Corporate environmental ethics can not only affect competitive advantage directly, but also influence it indirectly via green product innovation in the Taiwanese manufacturing industry. Taiwanese manufacturing companies should enhance their corporate environmental ethics and green product innovation to increase their competitive advantages.
The subject of this study covers the issues of corporate environmental ethics, green innovation, and competitive advantages, which respond to the new concept of “green management” caring both aspects of environmental protection and economic development. Most of Taiwanese manufacturing companies have few resources to deploy and thereby often fail to meet the requirements and regulations of environmental protection. This would bring Taiwanese manufacturing companies serious damages that resulted from the failure to comply with the international environmental regulations. However, this study finds that investing many resources and efforts in the corporate environmental ethics could eventually enhance their green product innovation and competitive advantages in the Taiwanese manufacturing industry. Therefore, this result can contribute to Taiwanese manufacturing companies as reference. Businesses should not shirk their duties under the trends of strict environmental conventions and the popular environmentalism of consumers. These environmental trends could be turned into the momentum that drives them to carry out environmental ethics, green innovation and further create competitive advantages. The research object of this study is the manufacturing industry of Taiwan, so the future studies can focus on other industries or areas and compare with this study. This study is conducted in the Taiwanese context. It is an interesting issue to test whether the hypotheses are supported in other countries. In order to verify whether the hypotheses can be generalized to the rest of the world, future studies can select other countries as the research object and compare with this study. This study verifies hypotheses by use of questionnaire survey, only providing cross-sectional data, so that this study cannot observe the dynamic changes of environmental ethics, green innovation, and competitive advantages in the different stages of the development of the Taiwanese industry through longitudinal data. Therefore, future studies can set forth toward the longitudinal study to find out the differences of environmental ethics, green innovation, and competitive advantages in the different stages of the development of the manufacturing industry of Taiwan. Finally, this study hopes the research results are beneficial to managers, researchers, or policy makers in the manufacturing industry of Taiwan and contribute to relevant studies and future researches as reference.