Journal of Business Ethics

, Volume 111, Issue 4, pp 461–476

Institutional Environment, Managerial Attitudes and Environmental Sustainability Orientation of Small Firms


    • School of Management and MarketingDeakin University
  • Alan Coetzer
    • School of ManagementEdith Cowan University

DOI: 10.1007/s10551-012-1211-z

Cite this article as:
Roxas, B. & Coetzer, A. J Bus Ethics (2012) 111: 461. doi:10.1007/s10551-012-1211-z


This study examines the direct impact of three dimensions of the institutional environment on managerial attitudes toward the natural environment and the direct influence of the latter on the environmental sustainability orientation (ESO) of small firms. We contend that when the institutional environment is perceived by owner–managers as supportive of sound natural environment management practices, they are more likely to develop a positive attitude toward natural environment issues and concerns. Such owner–manager attitudes are likely to lead to a positive and proactive orientation of their firms toward environmental sustainability. The study uses survey data from 166 small manufacturing firms located in three Philippine cities. First, the study develops and tests the measurement models to examine the validity of the constructs representing the firm’s institutional environment, managerial attitudes toward the natural environment and the ESO of firms. Second, the study develops and tests the structural models examining the institutional environment–managerial attitudes–ESO linkages. Multi-sample invariance structural model analysis shows the mediating role of managerial attitudes in the institutional environment–ESO nexus. The findings show that ESO is a construct comprising three dimensions: knowledge of environmental issues, sustainable practices and commitment toward environmental sustainability. The cognitive, regulatory and normative elements of the institutional environment are strongly linked to positive managerial attitudes toward environmental sustainability, which in turn, positively influences the firm’s overall ESO. Managerial attitudes play a mediating role in the institutional environment–ESO linkages. The managerial, practical, research and policy implications of the research findings are discussed.


Business orientationCognitiveEnvironmental sustainabilityInstitutional environmentInstitutionsManagerial attitudesNormativePhilippinesRegulationSmall firmsSustainable development


Businesses around the world face increasing pressure to reconfigure their strategic orientations and capabilities in response to calls for sustainable development. In the Philippines, the 1996 Marcopper mining disaster was the country’s loudest wake up call for business leaders to be more environmentally sustainable in their business conduct. The Marcopper Mining Corporation’s unsafe management of toxic wastes, proclivity to circumvent a lax regulatory system and lack of accountability for business conduct were found to be causes of the Philippines’ worst industrial disaster. The disaster led to closure of the firm, hundreds of job losses and irreversible damage to the natural environment (Bravante and Holden 2009; Dashwood 2011). Since the accident, regulatory and legislative reforms have been implemented to strengthen the Philippine government’s capability to create an institutional environment that effectively mandates the business sector to adopt sustainable environmental practices.

However, questions arise about the nature and extent of the effects of various institutional environmental factors, such as government policies, regulations and industry practices, on the proclivity of firms to adopt environmental sustainability measures. There is paucity of research, especially in the small business context, about the interplay between various forms of institutions and the development of a firm’s strategic orientation toward environmental sustainability (Rettab et al. 2009; Muthuri and Gilbert 2011; Sinha and Akoorie 2010). In particular, little is known about how small firms adopt environmentally sustainable business practices in developing countries that have less-developed institutional environments in relation to developed countries (Belal and Cooper 2011; Ozen and Kusku 2009). While it has been established in the extant literature that various elements of the institutional environment and managerial characteristics have a significant influence on the environmental behaviour of firms, there is little empirical work that attempts to tease out these influences (Jackson and Apostolakou 2010; Muthuri and Gilbert 2011). In the context of small firms, managerial characteristics such as the owner–manager’s norms, beliefs, values, attitudes and mental models have been shown to influence his or her strategic choices and thus the behaviour of the firm (Banerjee 2002; Hambrick 2007; Hambrick and Mason 1984; Quinn 1997). However, our understanding of how the institutional environment (particularly in a developing country context) influences the strategic choices that owner–managers make and the practices that they adopt in relation to the natural environment is under-developed (Andres et al. 2009; Belal and Cooper 2011; Muthuri and Gilbert 2011; Ozen and Kusku 2009).

Against this background, the current study aims to contribute to a more nuanced understanding of how a firm’s institutional environment influences its proclivity to adopt a proactive orientation toward environmental sustainability. Building on institutional theory (North 1990; Scott 1995), we examine the direct impact of the firm’s institutional environment on the attitudes of the owner–manager toward the natural environment, and the direct influence of the latter on the environmental sustainability orientation (ESO) of small firms. We argue that when the institutional environment is perceived by owner–managers of firms to be supportive of environment management practices, these owner–managers are more likely to develop a positive attitude toward natural environment issues and concerns. Such owner–manager attitudes, in turn, are more likely to lead to the adoption of a positive and proactive ESO by their firms.

The rest of the paper is structured as follows. The following three sections of the paper provide an overview of the five core constructs in the study: three dimensions of the institutional environment; owner–manager attitudes toward the natural environment; and ESO. Next we present the conceptual model and hypotheses that guided the study. This is followed by an overview of the study setting, a detailed description of the data collection and analysis procedures and presentation of the results. The final part of the paper discusses the results, identifies practical implications of the findings and makes suggestions for future research.

Dimensions of the Institutional Environment

According to institutional theory, a firm’s external environment is governed by institutions manifested by a wide-range of social structures, including schemas, rules, norms and routines (Scott 1995). These social structures are well-established in society and have attained a high degree of reliance upon to provide authoritative guidelines for social behaviour (Scott 1995). Institutions lay down the rules of the game to which economic players such as business firms must conform to earn legitimacy that boosts their chances of economic survival and relative performance (North 1990; Scott 1995; Chen and Roberts 2010). These rules of the game may take the form of laws, regulations, norms, social conventions and other written or unwritten rules of conduct (Chen and Roberts 2010; Scott 1995). Legitimacy endows a firm with the right to exist and perform an activity in a certain way (Chen and Roberts 2010; Suchman 1995; Bruton et al. 2010).

Scott (1995) contends that a firm’s institutional environment has three dimensions. The regulatory dimension refers to the formally codified, enacted and enforced structure of laws in a community, society, or nation which promote certain types of behaviour and restrict others (Kostova 1997; North 1990; Williamson 1991). The normative dimension refers to social norms, values, beliefs and assumptions that are socially shared and direct behaviour through a web of social obligations and expectations (Beliveau et al. 1994; Kostova 1997; Scott 1995). The cognitive dimension refers to the socially mediated construction of a common framework of meaning or axiomatic beliefs that provide the templates and scripts for action (Scott 1995). Firms achieve legitimacy from its institutional environment if their behaviour and practices conform to specific regulatory, normative and cognitive standards.

Several studies have noted the influence that institutions have on the practices of firms in relation to the natural environment, sustainability and social responsibility. Previous studies have noted the role of regulatory, economic, social, industrial and competitive structures and their enforcement mechanisms in the adoption of various types of environmental management practices (Albareda et al. 2007; Andres et al. 2009; Baughn et al. 2007; Campbell 2007; Moffat and Auer 2006; Owen and Videras 2006; Petts et al. 1999; Rettab et al. 2009; Sarkar 2008). However, these studies tend to examine the direct effects of institutions on firm-level environmental management practices. For instance, Baughn et al. (2007) attributed the variations in corporate social responsibility practices among 8,700 firms in 104 countries to national social, political and economic institutions. Other studies have examined firm compliance, voluntary actions and proactive practices of firms in relation to the policies and regulations of government institutions (Chua and Rahman 2011; Petts et al. 1999; Williamson et al. 2006).

However, little is known about the impact of the institutional environment, particularly in a developing country-context, on the attitudes of owner–managers of small firms, and consequently on the proclivity of these firms to adopt and implement a wide range of environmental management practices (Belal and Cooper 2011; Jackson and Apostolakou 2010; Muthuri and Gilbert 2011). Previous institutional analyses tend to ignore the dominant role of owner–managers on the overall strategic configurations and practices within their firms. In the small business context, the beliefs, values, attitudes and strategic mental models of the owner–managers ultimately determine the strategic direction, configurations and practices of the firm (Banerjee 2002; Carpenter and Fredrickson 2001; Duarte 2010; Hambrick 2007; Hambrick and Mason 1984; Quinn 1997). Hence, examining how owner–managers respond to a wide range of institutional pressures could provide a deeper understanding of the variations in environmental management practices among small firms. Examining the attitudes, values and beliefs of owner–managers should provide insights into why some firms are more proactive than others in their environmental management practices, despite their similarity in size and business operations and being embedded in the same institutional environment.

Rutherford et al. (2000) showed the strong influence that managerial attitudes has on the firms’ adoption and implementation of environmental practices in their study involving 40 business executives in the United Kingdom and the Netherlands. Similarly, Stern (2000) has noted that attitudinal factors including norms, beliefs and values affect one’s overall predisposition to act with pro-environmental intent which in turn influences all behaviours an individual considers to be environmentally important. Furthermore, Cummings (2008) argues that improvement of responsible environmental behaviour of firms rests largely with managerial attitudes.

Managerial Attitudes Toward the Natural Environment

The current study examines the attitudes of small business owner–managers toward the natural environment. It builds on Schultz et al.’s (2004) work on natural environment attitudes, which refers to the collection of beliefs, affect and behavioural intentions a business owner–manager holds regarding environmentally related activities or issues. An owner–manager’s attitudes toward the natural environment (ANE) represent one’s overall stance to ignore or respond with pro-environmental intent to important issues and problems concerning one’s immediate natural environment (Stern 2000). It is argued that positive owner–manager ANE has profound effects on the extent of adoption and implementation of environmental management practices in their firms (Banerjee 2002; Milfont and Duckitt 2004; Quinn 1997; Rutherford et al. 2000; Stern 2000).

Firms with managers holding strong ANE will be more focused on natural environment issues (Dibrell et al. 2011). The more emphasis top management puts on environmental issues, the greater their effort to respond to these issues (Barr 2007; Stone et al. 2004). The positive ANE of the owner–manager of the firm are crucial for the development and sustenance of proactive environmental strategies of the firm for two major reasons. First, the owner–manager has full control over resource generation and deployment, including that of resource allocation for environmental practices (Benito and Benito 2006). Second, the owner–manager becomes a staunch ‘champion of the cause’ as well as the linking pin to coordinate all the environmental management practices within the firm (Benito and Benito 2006).

While previous studies have examined the direct influence of managerial attitudes on firm-level adoption and implementation of environmental management strategies and practices, some commentators contend that the relationship is not straightforward. For instance, Tilley (1999) argues that a direct relationship between owner–manager attitudes and the environmental behaviour of small firms is rather presumptuous as previous studies have shown that small firms regardless of the attitudes of their owner–managers have trouble translating managerial pro-environmental attitudes into actual behaviour. There might be other confounding variables that could explain how managerial attitudes translate to actual environmental management practices at the firm level. The current study explores this issue by examining the direct impact of proactive ANE of owner–managers on the strategic orientation of firms toward the adoption and implementation of environmental practices.

Environmental Sustainability Orientation

For purpose of this study, ESO is defined as the overall proactive strategic stance of firms towards the integration of environmental concerns and practices into their strategic, tactical and operational activities. Firms with higher levels of ESO are likely to have institutionalised in their overall strategies structures, processes and activities a wide range of measures designed to reduce their negative impact on the natural environment. The study builds on a number of studies dealing with sustainable business practices (Sinha and Akoorie 2010), corporate sustainability (van Marrewijk and Werre 2003), sustainability orientation (Kuckertz and Wagner 2010), eco-orientation (Miles and Munilla 1993), sustainable entrepreneurship (Masurel 2007) and eco-sustainability orientation (Branzei and Vertinsky 2002). The definition of sustainability in business is discussed in more detail in the work of van Marrewijk (2003).

Conceptually, ESO is viewed as a business orientation that reflects the firm’s philosophy of doing business in an environmentally sustainable way. A firm develops and demonstrates its ESO by integrating environmental concerns into its culture, decision-making, strategy and business operations and through its interactions with stakeholders (Linnenluecke and Griffiths 2010; Zwetsloot and van Marrewijk 2004). ESO broadens the scope of business goals to include those goals that minimise the negative natural environmental impacts of firms (Branzei and Vertinsky 2002; Zwetsloot and van Marrewijk 2004). The firm is considered as having a high level of orientation and commitment to preservation of the natural environment when it implements sustainable business activities triggered by an organisational-wide sense of responsibility and accountability for the firm’s conduct and its potential impact on the natural environment (Branzei and Vertinsky 2002). ESO is considered a firm-level strategic construct that takes into account the organisation-wide manifestations of the firm’s awareness, engagement and commitment to issues, activities and programs related to business environmental responsibility and sustainable development (Black and Härtel 2004; Carroll 1991). As a firm-level strategic orientation, ESO must be ingrained in the grand business philosophy of the firm and form part of the firm’s overall strategic configurations that guides business or operational plans, programs and activities.

Conceptual Model and Hypotheses

We argue that the institutional environment can influence the owner–managers’ ANE. When owner–managers of firms perceive that the institutional environment requires, promotes and supports sound environmental management practices in business, they are more likely to develop positive ANE. The development of such attitudes is influenced by the need to conform to and gain legitimacy from the regulatory, normative and cognitive dimensions of the institutional environment (Cummings 2008; Stern 2000; Tilley 1999). We also contend that ANE influence and nurture the firm’s proactive orientation toward environmental sustainability. Figure 1 presents the conceptual model of the study.
Fig. 1

The conceptual model

The regulatory dimension of the institutional environment primarily refers to the demands of governments and regulatory bodies for firms to comply with various environmental laws and regulations or to participate in environmental management programs (Albareda et al. 2007; Bello et al. 2004; Grewal and Dharwadkar 2002). This dimension also includes the reliability, predictability and efficiency of enforcement mechanisms such as the interpretation and implementation of laws and the functioning of government agencies and courts of law. Regulatory institutions can shape the attitudes of owner–managers toward the natural environment through imposition and inducement (Grewal and Dharwadkar 2002). Imposition refers to the coercive power of institutions to impose restrictions directly through authoritative orders and indirectly through rules. Inducements are incentives in the form of subsidies, tax, tariff or other concessions provided to influence the values, beliefs, attitudes and behaviour of owner–managers and their businesses (Bello et al. 2004; Grewal and Dharwadkar 2002).

Regulatory institutions impose or prescribe the standards of acceptable behaviour and set the legal penalties for non-observance of those standards. Petts et al. (1999) argue that regulatory compliance remains a key driving force behind environmental performance of firms. Inducement mechanisms provide owner–managers with market signals that they can have access to a wide range of resources to support certain types of activities. When owner–managers assess these regulatory pressures as threats or opportunities, they also adopt, strengthen or adjust their ANE (Delmas and Toffel 2004; Sharma and Nguan 1999). Hence, the current study examines the hypotheses that:


A regulatory institutional environment that promotes environmental sustainability is associated with positive attitudes of owner–managers toward the natural environment.

The cognitive dimension of the institutional environment shapes the axiomatic beliefs of owner–managers about expected standards of behaviour (Scott 1995). These social standards are typically learned through social learning processes within a community or society (Scott 1995; Grewal and Dharwadkar 2002). As such, owner–managers are likely to develop positive attitudes toward the natural environment if environmental preservation, protection and re-generation are well-ingrained in the mental models and script of behaviour in the communities in which they live and engage in business (Chua and Rahman 2011; Grewal and Dharwadkar 2002; Scott 1995). These cognitive dimensions of the institutional environment can imprint upon the owner–managers past knowledge and practices that are considered sacrosanct and must be upheld. On the other hand, cognitive dimensions may also allow people in a community or society to bypass formally instituted standards of behaviour in favour of habitual practices that are highly socialised in their role expectations (Bello et al. 2004; Chua and Rahman 2011; Grewal and Dharwadkar 2002). Owner–managers are likely to have positive ANE if environmental management issues and concerns are considered important to the local community and form part of the normal way of doing business. Hence, we advance the argument that:


A cognitive institutional environment that promotes environmental sustainability is associated with positive attitudes of owner–managers toward the natural environment.

Small business owner–managers are likely to have close ties with the local communities where they do business. This high degree of local embeddedness strengthens the impact of social values and norms on the owner–managers’ inclinations, attitudes and behaviour by way of social obligations and expectations (Scott 1995). Normative expectations prescribe how specified actors are to behave, imposing constraints as well as empowering social action (Beliveau et al. 1994; Chua and Rahman 2011; Grewal and Dharwadkar 2002). Social norms and values within a complex web of social reciprocity act as ‘authorising mechanisms’ that define unwritten codes of conduct (Beliveau et al. 1994; Chua and Rahman 2011). If caring for the natural environment forms part of the set of norms or values strongly held by the local community, owner–managers are likely to gain legitimacy and support if they conform to these norms. Violations of these social codes of conduct attract social protestations, ostracism and social isolation. Small business owners and managers may find it socially and financially rewarding to conform to the social norms observed in the local community. Hence it is argued in this study that:


A normative institutional environment that promotes environmental sustainability is associated with positive attitudes of owner–managers toward the natural environment.

The strategic orientations, configurations and behaviour of firms are mere reflections of their leaders (Hambrick 2007; Hambrick and Mason 1984). This is particularly true in the case of small firms where the owner–managers have direct and full control of the strategic, tactical and operational activities of the firm. The beliefs, attitudes, intentions, biases and prejudices of the owner–manager of a small firm largely determine the strategic stance, direction and operations of the business. Resource generation for and allocation to specific business projects or activities are determined and undertaken mainly by the owner–manager. Thus, the extent to which a firm adopts or maintains an environmentally responsible strategic stance and practices depends largely on the personal beliefs, attitudes and behaviour of the owner–manager (Banerjee 2002; Benito and Benito 2006; Carpenter and Fredrickson 2001; Hambrick 2007; Hambrick and Mason 1984; Quinn 1997).

Attitudes have been shown to be the primary predictors of behavioural intentions and overt behaviour (Ajzen 2001). An individual’s ability to adapt to the external environment is a function of attitudes (Eagly and Chaiken 1998). Successful adaptation to the environment follows the process of formation of behavioural intention which then leads to overt behaviour (Ajzen 2001). In this context, we view the attitudes of the owner–manager of a small firm as strong predictors of the overall proclivity or strategic orientation of the firm to pursue environmental sustainability (Quinn 1997). While ESO is a firm-level phenomenon, the dominant and strategic role of the owner–manager in a small firm set-up ultimately determines the overall strategic intentions and configurations of the firm. Hence it is argued that:


Positive owner–manager attitudes toward the natural environment are associated with higher levels of environmental sustainability orientation.

The foregoing discussion on the linkages among the institutional environment, owner–manager ANE and the ESO of firms suggests mediated relationships. That is, the institutional environment can have an impact on the firm’s ESO, but only through shaping the ANE of owner–managers. Whilst the institutional theory suggests that the wider institutional environment does indeed have a significant influence on the firm’s ESO, we argue that the relationship may not be direct. The upper echelon theory suggests that a firm’s ESO is primarily driven by the personal characteristics and attitudes of the firm’s owner–manager (Banerjee 2002, Carpenter and Fredrickson 2001; Hambrick 2007; Hambrick and Mason 1984). Given the primordial role of the owner–manager in the small business context, we argue that small firms will adopt and maintain a proactive ESO as a matter of compliance to, voluntary conformity with or avoidance of institutional standards, only when the owner–managers are attitudinally inclined to do so.

Previous studies have shown that perceptions of the external environment shape the attitudes, values, norms and personal biases of strategic decision-makers in organisations, such as the owner–managers of small firms (Dibrell et al. 2011; Duarte 2010; Rettab et al. 2009). When owner–managers perceive the institutional environment to be supportive of environment management practices, their perceptions are likely to foster a positive ANE. A positive ANE is more likely to lead to a strategic decision to adopt a proactive ESO. The mediating role of ANE helps to explain why small firms with similar resource configurations that are embedded in the same institutional environment have varying environmental stances and practices. Hence we contend that:


The attitudes of owners-managers toward the natural environment fully mediate the institutional environment–environmental sustainability orientation relationship.

Study Setting

The study involves a cross-sectional survey of 214 SMEs in the food processing sector. The SMEs are located in three cities in the Philippines. More than 90% of registered businesses in the Philippines are classified as micro (up to 9 employees), small (10–99 employees) and medium (100–199 employees) enterprises (DTI 2005). The food processing sector is one of the country’s top three manufacturing sectors in terms of employment and value of output. In 2009, there were close to 11,000 food and beverage manufacturing firms in the country. In 2008, the food processing sector contributed more than US$4.3 billion (6.5%) to the total manufacturing output of the Philippines (NSO 2010). It contributed 7.8% (60,000 employees) of the total employment in the manufacturing sector. With an 8–10% annual growth, the food processing sector is one of the most dynamic, vibrant and promising manufacturing sectors in the Philippines (NSO 2010).

A sample of 214 firms identified from the local government’s business registry and membership registry of local trade associations was first targeted. A number of fieldworkers were used to personally deliver and collect the survey questionnaires along with the signed informed consent forms to and from participants to ensure a high response rate. From the returned questionnaires, a total of 166 responses (78%) were deemed fully complete and were utilised for purposes of the present analysis. All 166 firms were micro-enterprises with 5–50 employees (mean = 17.15) and the firm age ranged from 1 to 54 years (mean = 14.25 years). More than 90% of the respondents were owner–managers of the firms that constitute the sample of the study.

Analysis and Results

Response Bias Analysis

Despite generating a retrieval rate of 78%, which is considered above average, non-response bias was examined to further enhance the rigour of this study (Babbie 2007). Non-response bias occurs when respondents and non-respondents differ in the major variable(s), in which case the population parameters of these variables can be over- or under-estimated (Armstrong and Overton 1977; Rogelberg and Stanton 2007; Ullman and Newcomb 1998). To determine if the data contained non-response bias, a comparison between early and late respondents on key variables was performed as a non-response bias impact assessment strategy (Rogelberg and Stanton 2007). Late respondents are more likely to be similar to the non-respondents in the context of the present study (Armstrong and Overton 1977; Groves 2006). This non-response bias impact assessment strategy is known in the literature as wave analysis (Lankford et al. 1995).

Early respondents were identified as those owner–managers from whom the field enumerators collected the duly filled out questionnaire by visiting the firm site only twice—once for dropping off the questionnaire and the second visit for collecting the completed questionnaire. Late respondents were those which the enumerators had to visit more than twice—one visit to drop off the questionnaire and two or more visits to collect the filled out questionnaire. This method of differentiating early and late respondents is consistent with methods used in previous studies (Biemer 2001; Lankford et al. 1995). Accordingly, there were 98 (59%) early respondents and 68 (41%) late respondents identified in the study. Results of independent sample t test showed that the two groups did not differ significantly in terms of age and education of owner–managers, as well as age and size of firms. The results suggest that non-response bias does not appear to be an issue in this study.

Common Method Bias Analysis

Because of the mono-methodological nature of the study, Harman’s single factor test was performed to detect common method bias (Harman 1976; Podsakoff et al. 2003). This test explains that common method bias is present when a single factor emerges or one factor accounts for more than 50% of the variance of all the items that were loaded simultaneously in factor analysis (Harman 1976). The results of factor analysis showed that no single factor emerged and no factor accounted for more than 50% of the variance. A further test was performed using a three-item marker variable (Lindell and Whitney 2001; Podsakoff, et al. 2003) called ‘variety seeking behaviour’ (Homburg and Giering 2001). The three items were included and randomly spread in the questionnaire to account for common method variance because of the items’ theoretical, conceptual and empirical irrelevance to the current study. Results of the partial correlation of the variables used in the analysis after controlling for the effects of the marker variable indicate that common method bias per se, could not explain the results of the study.


Institutional Environment

We measured the regulatory, cognitive and normative dimensions of the institutional environment by asking respondents to indicate on a scale of 1–5 the extent of their agreement or disagreement with a given set of items. The items were specifically developed for the study based on the earlier works of Busenitz et al. (2000), Kostova (1997) and Parboteeah et al. (2008) on institutions. We concur with Kostova (1997) that items to measure a particular construct such as the institutional environment must be domain-specific and relevant to the particular phenomenon under investigation. In the current study, the items were developed to assess dimensions of the institutional environment that are particularly relevant to management of the natural environment in the context of small business. The items were designed to capture the owner–managers’ perceptions of the extent to which the three dimensions of the institutional environment exert significant influence on firms to integrate environmental sustainability measures into their business operations. An example item states, “In this city, severe penalties are imposed on businesses that violate environmental laws and regulations”.

Attitudes Toward the Natural Environment

Five items were used to measure managerial ANE based on the work of Dibrell and Craig (2006). The items measure the attitudinal proclivity of a firm’s owner–manager towards willingness to allocate firm resources to business endeavours and natural environmental initiatives to protect the natural environment (Dibrell et al. 2011). Respondents were asked to indicate their extent of agreement with each of the items on a 5 point Likert scale (1 = not at all; 5 = to an extreme extent). A higher composite score indicates that the owner–manager has a strong positive attitude toward the natural environment (Dibrell et al. 2011). An example item states, “Businesses need to spend more resources on environmental protection”.

Environmental Sustainability Orientation

We developed a set of items that capture the stance or strategic orientation of small firms toward the adoption and implementation of sustainable natural environment management practices. Following Bagozzi et al.’s (1991) process of scale development we identified 18 items that describe the ESO of small firms. Respondents were asked to indicate whether they agree or disagree with each of the statements on a 5 point Likert scale. Preliminary analysis from the pilot testing revealed that six items measure the ‘knowledge’ within the firm about environmental issues and practices. Eight items describe the current ‘practices’ of the firm that are related to sustainable environmental management. Four items describe the ‘commitment’ of the firm to pursuing and nurturing a proactive stance toward sustainable environmental management. We argue that a firm develops a proactive ESO if it has sufficient knowledge of natural environment issues and management practices, is implementing actual environment management practices, and is committed to sustainable environmental management in the long-term. An example item states, “In my firm, training on environmental awareness is part of our training program for managers and employees”.

Control Variables

The size and age of firms are considered control variables. The size of the firm can potentially explain variations in the intensity of the firm’s ESO. The age of the firm can potentially explain variations in the firm’s perceptions of the institutional environment.

Data Analysis

Structural equation modelling (SEM) was used to test the hypotheses, aided by a software called EQS 6.1 (Bentler 1995) using Anderson and Gerbing’s (1988) two-step approach. Confirmatory factor analysis (CFA) was performed on all of the constructs using maximum likelihood technique (Brown 2006). Details of the CFA are summarised in Tables 1 and 2. Table 1 shows the CFA of the items measuring the three dimensions of the institutional environment and ANE. Table 2 shows the CFA for the first- and second-order factor of the ESO.
Table 1

Confirmatory factor analysis: dimensions of the institutional environment and attitudes toward the natural environment

Constructs and their corresponding items

Standardised factor loadings

Cronbach α/Joreskog ρ/average variance extracted

Regulatory dimension



 Compliance with regulatory requirements



 Strict enforcement of laws and regulations



 Support for businesses to comply with laws



 Severe penalties for violations



 Government recognition for good practices



Cognitive dimension



 Knowledge sharing in local business community



 Concern for environmental issues



 Finding information about good practices



 Knowledge of benefits



Normative dimension



 Community support



 Active promotion



 Encouragement from business associations



 Encouragement from civic organisations



Attitudes toward the natural environment



 Spend more resources on environment



 Resources should be devoted to environment



 Environmental protection as part of bottomline



 Business leaders as environment leaders



 Protect environment at all costs



 Goodness-of-fit measures

χ2 = 185.25, df = 115 (p = .10); CFI = .96; NFI = .95; RMSEA = .03

χ2 Chi-square value, df degrees of freedom, CFI comparative fit index, NFI normed fit index, RMSEA root mean square error of approximation

Table 2

Confirmatory factor analysis: environmental sustainability orientation

Dimensions of ESO and corresponding items

1st Order standardised factor loadings

2nd Order standardised factor loadings






 Knowledge about climate change



 Waste management issues in the city



 Issues about sources of drinking water



 Issues concerning source of electricity



 Role of businesses in environmental protection



 Environmental protection programs







 Practice recycling of wastes



 Water and electricity conservation



 Training on environmental awareness



 Participation in environmental programs



 Low impact manufacturing technology



 Communicate with customers/buyers



 Deal with environment-friendly suppliers



 Sustainability is an integral part of our business plans and operations







 Environmental protection is part of business



 Practices are good for my business



 Gain more customers



 Proud to do business in local community



Cronbach α/Joreskog ρ/average variance extracted


Goodness-of-fit measures

χ2 = 245.25, df = 182 (p = .12); CFI = .94; NFI = .93; RMSEA = .04

χ2 Chi-square value, df degrees of freedom, CFI comparative fit index, NFI normed fit index, RMSEA root mean square error of approximation

The items loaded highly on their pre-determined constructs with no path estimate less than the 0.5 minimum acceptable value (Brown 2006). All constructs showed acceptable levels of reliability as evidenced by the high internal consistency coefficients (i.e. Cronbach α and the Joreskog ρ). Convergent validity was indicated by the fact that the items loaded highly and significantly on their corresponding construct with no factor loading less than .50 (Bagozzi et al. 1991; Chin 1998). Further evidence of convergent validity were the average variance extracted (AVE) values which were all above the threshold of .50 indicating that the constructs contained less than 50% error variance (Fornell and Larcker 1981). Table 2 suggests that ESO is a multi-dimensional construct composed of items describing the knowledge, practices and commitment to sustainability within the firm.

Table 3 shows the descriptive statistics, correlation and square root values of the AVE of the constructs. The discriminant validity of each construct is indicated by the square root value of the construct’s AVE which should be larger than its correlations with other constructs (Fornell and Larcker 1981). The correlation coefficients were all below the .85 maximum threshold recommended by Kline (2005) which further suggests an acceptable level of discriminant validity. Overall, the results of the test of the measurement model-data fit suggests that the constructs used in this study have a satisfactory level of construct validity, internal consistency (i.e. reliability), convergent and discriminant validity.
Table 3

Correlation and descriptive statistics of the variables











Regulatory (Reg)





Cognitive (Cog)






Normative (Nor)







Attitudes toward the natural environment (ANE)








Environmental sustainability orientation (ESO)









Firm age










Firm size










Diagonal figures in bold show the square root of average variance extracted (AVE) values

SD standard deviation, n/a not applicable for AVE computation due to single item measures

* Significant at p < .05

Hypothesis Testing with Mediation Models

The second step of Anderson and Gerbing (1988) approach to SEM requires the development and testing of the structural models to test the posited hypotheses. Using EQS’s maximum likelihood technique with robust function for error correction, three nested structural models were developed and tested following the procedures suggested by Kelloway (1998) and James and Brett (1984) on mediation analysis using SEM. The various path coefficients are summarised in Fig. 2. The first model (model A) shows full mediation such that ANE fully mediates the relationships between the institutional environment and ESO. The second model (model B) is a partially mediated model whereby ANE partially mediates the institutional environment–ESO relationships. This model identifies some other direct effects which cannot be accounted for by ANE. The last nested model (model C) indicates that there is no mediation in any of the relationships tested in the model.
Fig. 2

The structural models

Among the three nested structural models, only Model A shows an acceptable level of goodness-of-fit as indicated by the non-significant χ2, NFI, CFI and RMSEA values which were all above the minimum acceptable threshold (Chin 1998; Kline 2005). The results suggest that ANE fully mediates the relationships between the three dimensions of the institutional environment and ESO. In Model A, all the constructs had variances (i.e. v) that were statistically different from zero which indicate that each construct was highly distinguishable (i.e. distinctive) from one another (Bentler 1995). The regulatory, cognitive and normative dimensions of the institutional environment explained 57% of the variations in the owner–managers’ ANE. On the other hand, ANE explained 68% of the variations in the ESO of firms.

The path coefficients were all significant at .05 level of confidence. The empirical evidence as shown in Model A suggested that the three dimensions of the institutional environment are positively related to higher levels of ANE which in turn positively influences the proactive ESO of the firms. The empirical evidence supports the hypotheses of the study. Given the r2 values of .57 and .68, the indicators of effect size along with the path coefficients ranging from .15 to .82 suggest that the results could be considered practically significant and meaningful from which inferences could be drawn (Cohen 1992; Field 2005; Pedhazur 1982). To account for multicollinearity due to the relatively high correlation amongst a number of variables, multiple regression using EQS was performed with ESO as the dependent variable to check the tolerance and variance inflated factor (VIF) values. VIF values over 10 or tolerance value less than .10 suggest multicollinearity. The results show that the average VIF value is 2.14 with VIF values ranging between 1.56 and 3.05 while tolerance values range between .33 and .42 which suggest that multicollinearity does not appear as a major issue in the structural models.

To account for possible variations due to the age and size of the firm (i.e. micro vs. small and medium), a multi-sample path analysis was performed using the fully mediated model (Model A in Fig. 2) as the generic basis for structural modelling. The sample firms were grouped in terms of age (up to 10 years vs. over 10 years) and size (up to 21 employees vs. more than 21 employees) using the median age (10 years) and number of employees (21 full time employees), respectively. The generic model in Fig. 1 (Model A) was first applied to the data representing young and mature firms and then to that of small and larger firms to determine if the model fits the data within the sub-groups of the sample firms. The results shown in Table 4 indicate that the generic structural model fits the data well across the subgroups based on age and size of firms. The results suggest that the identified significant relationships in the institutional environment–ANE–ESO linkages apply to all the sample firms regardless of their size and age. However, the regulatory dimension of the institutional environment tends to have the strongest association with ANE among the younger and smaller firms as shown by the larger path coefficients (.35 and .39) relative to the older and larger firms. On the other hand, the normative dimension tends to have the strongest influence on ANE among older and larger firms as indicated by the path coefficients (.70 and .71). ANE shows a consistent pattern of strong association with ESO across firms in all subgroups.
Table 4

Multi-sample analysis

Independent variables

Firms 10 years or younger: n = 75

Firms over 10 years: n = 91

Dependent variables

Dependent variables





r2 = .45

r2 = .59

r2 = .52

r2 = .65


.35* (.09)


.09* (.05)



.20* (.11)





.29* (.06)


.70* (.09)




.75* (.11)


.79* (.09)


χ2 = 12.25, 3 df, p = .66; CFI = .94, NFI = .94, RMSEA = .05

χ2 = 13.52, 3 df, p = .36; CFI = .95, NFI = .95, RMSEA = .04

Independent variables

Firms with 21 employees or less: n = 98

Firms with more than 21 employees: n = 68

Dependent variables

Dependent variable





r2 = .52

r2 = .80

r2 = .55

r2 = .79


.39* (.11)


.11* (.09)



.18* (.09)


.40* (.08)



.15* (.10)


.71* (.05)




.80* (.05)


.81* (.06)


χ2 = 14.52, 3 df, p = .23; CFI = .95, NFI = .94, RMSEA = .06

χ2 = 15.25, 3 df, p = .14; CFI = .94, NFI = .95, RMSEA = .05

* Significant at p < .05


The findings of the study support the argument that the institutional environment significantly influences the attitudes of owner–managers towards the natural environment. Positive ANE, in turn shapes the overall ESO of the sample firms. It can be argued that the sample firms are deeply embedded in the local communities where they operate. As a result, managers in the sample firms strongly feel the need to achieve legitimacy by meeting the constraints or by conforming to the expectations of the institutions that govern the local community (Kostova 1997; Scott 1995). Among the three dimensions of the institutional environment, the regulatory dimension has the lowest impact on the ANE of owner–managers in the sample firms. This finding contradicts findings of previous studies which suggest that environmental attitudes and behaviours of firms or that of the firms’ top management are primarily driven by government regulatory frameworks (Kusku 2007; Ozen and Kusku 2009; Sarkar 2008). This novel finding may be attributed to the relatively loose systems that have been put in place by national and local government agencies in developing countries such as the Philippines to monitor the environmental impact of businesses (Baughn et al. 2007; Belal and Cooper 2011; Cummings 2008).

The sterile regulatory quality associated with the implementation of environmental protection and management laws and regulation, especially those that apply to small businesses, may explain the lesser explanatory power of the regulatory dimension on the ANE of owner–managers of the sample firms. In a developing country such as the Philippines, the regulatory dimension of the local institutional environment may not be as developed and advanced as those found in developed economies. If there were regulatory institutional structures in place, the poor implementation and enforcement by resource-constrained government agencies may have explained the benign effects of these formal institutional mechanism on owner–managers and their firms (Belal and Cooper 2011; Bello et al. 2004). Effective enforcement of the coercive and punitive powers of regulatory institutions ultimately determines institutional impact on positive ANE of owner–managers and the ESO of the sample firms. This particular finding is consistent with the view of Cummings (2008) that despite the wide array of environmental regulations, the environmental quality throughout the Asia-Pacific region continues to deteriorate to alarming levels. Hence, it can be argued that there are more critical external environmental factors apart from regulation that could explain why firms are more proactive than others in their ESO.

The findings suggest that community norms and values that form part of the normative institutional environment have the strongest impact on the ANE of the owner–managers relative to the other institutional dimensions. This particular finding underscores one of the novel contributions of the current study in terms of gaining a more nuanced understanding of institutional antecedents of ANE of owner–managers in a small business context.

On the other hand, the significant impact of ANE on the ESO of the sample firms supports the view that in the small business context, the beliefs, attitudes and personal expectations of the owner–managers largely shapes the strategic orientation of their firms (Banerjee 2002; Benito and Benito 2006; Duarte 2010). The attitudes of owner–managers toward the natural environment determine the strategic decisions and resource generation and allocation relevant to the development and implementation of a proactive ESO of the sample firms (Rutherford et al. 2000). The firms in the sample are relatively small firms. It can be expected that the owner–manager will have a substantial role in the formation and implementation of the firm’s overall strategic configurations, a view that is well ingrained in strategy-manager alignment perspective of strategy development (Hambrick 2007; Hambrick and Mason 1984). This particular finding highlights another novel contribution of the current study in understanding how attitudes translate to actual environmental behaviour. Tilley (1999) suggests that ANE has no direct impact on firm behaviour. The findings of the current study offers a more nuanced explanation by showing that ANE does not directly impact actual environmental management behaviour, but does influence the overall strategic proclivity or orientation of the firm (i.e. ESO). The empirical evidence supporting the link between ANE and ESO is more consistent with the literature on the role of owner–managers in the strategic choices of their respective firms (Hambrick 2007; Hambrick and Mason 1984).

Moreover, the current findings on the impact of institutions on ANE and ESO offers a more nuanced understanding of Cummings’ (2008) view that socio-economic development determines the progressive attitudes of individuals toward environmental issues. Cummings (2008) compared the attitudes of people in three countries with different levels of economic development. The current study offers a more in-depth explanation on why attitudes such as ANE would differ within a country and potentially across countries with similar levels of socio-economic development. By accounting for three specific dimensions of institutional environment which are likely to be a function of the country’s socio-economic development (North 1990), the current study offers a more substantive explanation on why some owner–managers are more attitudinally inclined to develop a proactive ESO in their business than others.

Another noteworthy finding of the study is the strong influence of the regulatory dimension on the ANE of owner–managers of young and very small firms that were included in the sample. A plausible explanation could be that these firms are likely to be at the early stage in the life cycle of a firm and therefore operating in ‘survival mode’. Compliance with basic regulatory requirements is a major goal of newly established or young small firms given the need to maximise their limited resources to sustain the business (Williamson et al. 2006). More established and larger firms are likely to have surpassed this ‘minimum regulatory compliance approach’ and are beginning to pay more attention to the cognitive and normative dimensions that shape managerial attitudes and organisational strategic orientation toward environmental sustainability. The findings of the study offer a more nuanced understanding of the institutional determinants of social responsibility of business in the context of small firms in a developing economy setting. Jones (1999) for instance underscores the conceptual and theoretical basis of the institutional factors that shape the social responsibility of firms. The current study extends Jones (1999) argument by generating empirical evidence using a different elaboration of institutions.

The methodological contribution of the study is the development and testing of the measurement models of ESO, regulatory, cognitive and normative dimensions relevant to the management of the natural environment of small manufacturing firms in the Philippines. Previously developed measurement models, such as Banerjee’s (2002) corporate environmentalism construct, are generally applicable to large firms with a corporate set-up.

The study’s findings indicate that ESO in the context of small firms in the Philippines has three facets, namely: (1) knowledge of environmental sustainability issues; (2) practices aimed at environmental sustainability; and (3) commitment to environmental sustainability. This suggests the multi-dimensionality of the ESO construct. The first facet, knowledge of sustainability issues captures the extent to which firms are aware of the pressing environmental issues which may have profound actual or potential impacts on all residents of the locality, including the business firms. Knowledge of environmental issues is a basic but important component of a firm’s strategic orientation and is a precondition for the identification, adoption or implementation of measures in response to those issues.

The second facet, practices aimed at environmental sustainability, captures the nature and extent of sustainable business activities that a firm has actually implemented. A firm’s ESO as a strategic stance must be manifested through actual conduct or behaviour within the firm. This action-based component indicates that ESO does not only measure the firm’s tendency, proclivity or inclination toward environmental sustainability, but also the actual behaviour of the firm which provides substantive value to the construct.

The third facet, commitment to environmental sustainability, encapsulates the extent to which the firm enjoys the tangible benefits of being proactive in reducing the negative impact of business activities on the natural environment. Firms are likely to commit to and sustain activities that demonstrate their ESO if they recognise the benefits of these endeavours in the long term. The three facets of ESO synergistically drive the firm’s overall strategic stance towards environmental sustainability.

Practical Implications

The practical implications of the results include the important roles that the cognitive and normative dimensions of the institutional environment play in encouraging small firms and their managers to adopt and implement sound environmental management practices in their businesses. For instance, the government policies and programs for environmental sustainability in business can highlight the efficient provision of accessible information about environmental management practices to businesses as well as opportunities for knowledge sharing of managerial or organisational tools and best practices in environmental management. Government engagement with professional, trade and industry associations such as the local chamber of commerce may be an effective tool to influence the local business culture toward environmental management. Likewise, the owner–managers should be the focus of any attempt to influence businesses to adopt environmental management systems. While implementing government regulations is important, changing the attitudes of owner–managers, for instance, by helping them understand the business case for adopting sound environmental management is equally effective in the campaign for environmental sustainability in the business sector.

Limitations and Suggestions for Further Research

The current study has a number of limitations which suggest areas for future investigation. Institutional theory in its contemporary form (North 1990; Scott 1995) suggests that institutions lie in a continuum which ranges from formal to informal institutions. Formal institutions include written rules such as laws and regulations while informal institutions refer to those unwritten codes of conduct that govern behaviour. The current study did not take this typology of institutions into account as well as the interaction of these two types of institutions. The sample size needs to be expanded to include firms of more diverse sizes, such as medium size firms, to uncover further variations in the firm’s ESO. In future studies it would be important to examine the validity of the measurement and structural equation models developed and tested in the current study in a larger group of firms in different sectors or industries. The definition of ESO used in this study is limited to issues concerning business activities in relation to the natural environment. Needless to say, the current study recognises that sustainability encompasses not just natural environmental issues but also cultural and social environmental concerns which are beyond the scope of the current study. Finally, future studies need to examine the potential effects of social desirability bias on the results of studies dealing with sustainability issues in business. The need to take a triangulated approach to data-gathering and analysis requires the use of multiple sources of primary and secondary information to examine complex research questions about environmental sustainability in business.


The proclivity of small firms in a developing country like the Philippines to know, to practice and to commit to a wide range of natural environmental sustainability measures is largely driven by their owner–managers and that of the wider institutional environment. The owner–managers determine the overall strategic configurations of their firms including that of the overall organisational propensity to be environmentally sustainable. The current study highlights the importance of the formation of positive attitudes by the firm’s owner–managers to influence the firm’s overall stance towards environmental sustainability. However, the formation of attitudes is heavily influenced by the external institutional environment. Regulations, norms and social or communal mental models profoundly impact the formation of positive or negative attitudes of owner–managers towards natural environmental issues. These macro–micro linkages offer a more nuanced understanding of the strategic orientation towards environmental sustainability of small firms in a developing country context.


We thank Doren Chadee of Deakin University for the useful comments on the initial versions of the paper. We thank the two anonymous reviewers and the section editor, Thomas Clarke for their comments which contributed to the improvement of the quality of the paper.

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© Springer Science+Business Media B.V. 2012