The Virtuous Cycles between Environmental Innovations and Financial Performance: Case Study of Japanese Automotive and Electronics Companies

ABSTRACT The Japanese automotive and electronics industries are significant to the issue of environmental sustainability considering its impact on global production, trade and product use. Following literature on the links between corporate social performance and financial performance, we attempt to validate if the relationship between environmental innovations and financial performance is not just unidirectional but likewise bi-directional. This comparative case study of Japanese automotive and electronics companies aims to: (1) determine if environmental innovations positively impact financial performance in prior years; (2) alternatively explore if financial performance in prior years positively impact environmental innovations; (S) establish if virtuous cycles exist in the relationships of variables; and (4) probe further if the directions, impacts or relationships hold consistently over a longitudinal period. Panel data regression analysis was performed for ten automotive and ten electronic companies listed in the Tokyo Stock Exchange, to determine the impact of the variables on each other for both directions from 2001 to 2009. Granger causality tests were performed to establish virtuous cycles. Finally, the same statistical techniques were employed on disaggregated data sets for the periods, 2001 to 2006 and 2004 to 2009, to capture any longitudinal differences. Our findings which point to the stark contrasts between the automotive and electronics companies, allow us to support earlier theorization and propose rival theories for results contrary to expectations. The automotive companies exemplify the resource-based view perspective as positive impacts of environmental innovations that are observed on revenues, profits, assets, long-term debt and equity, and vice-versa. However, these impacts seem to weaken over time. The electronics companies show only revenues and long-term debt as significantly controlled by environmental innovations and vice-versa. There are, likewise, longitudinal differences as a result of the recent global economic crisis in the industry. Virtuous cycles for all variables of financial performance have only been established for a number of automotive companies, and for one electronics company. INTRODUCTION Sustainability research has stirred a debate on its business rationale. Scholars have earlier determined that there is a positive relationship of sustainability practices through enhanced revenues, increased profits, reduced risks and significant cost reductions. However, recent literature reveals that there could be no effect or relationship amongst the constructs of corporate social performance (CSP) through environmental innovations and financial performance. In fact, some have even countered that the relationship is negative. Therefore, we join the discussion by presenting more evidence from the Japanese automotive and electronics companies, through a comparative case study. Using eight automotive and ten electronics manufacturing companies listed on the Tokyo Stock Exchange, we perform a panel data regression analysis with firm specifics and fixed effects to establish the relationship. We aim to answer the question: Do environmental innovations positively impact financial performance? Or is it the other way around: Does financial performance in recent years positively impact environmental innovations? Sustainability scholars have also determined that there could be virtuous cycles amongst the constructs, leading us to hence explore this: Do these constructs mutually reinforce each other? Finally, we examine if the relationships hold true over the long run. The first direction of the relationships is based on the resource-based view (RBV) which explains that investments in internal capabilities bring measurable benefits. Alternatively, the slack availability of resources perspective exhibit the other direction of relationships - if not for available resources, firms would not be able to perform environmental innovations. …