econimic incentives and small firms
TRANSCRIPT
Journal of Business Research
Economic incentives and small firms: Does it pay to be green?
Bruce Clemens *
MSC 0205, James Madison University, Harrisonburg, VA 22807, United States
Received 9 February 2005; accepted 23 August 2005
Abstract
This study investigates the relationships among green performance, financial performance and green economic incentives for small firms.
Surprisingly little research exists on the environment and small firms. The traditional view of the corporation argues that improving the
environment hurts firm performance. Recent green-oriented research argues that this is not the case for larger firms. This study found a positive
relationship between green and financial performance. That is, those small firms that perform better environmentally are also the most successful
financially.
This study also investigates green economic incentives that encourage green practice. The results indicate that the positive relationship between
green and financial performance is greater when few green economic incentives exist for small firms.
Although not hypothesized, the study found a positive relationship between green economic incentives and small firm performance, leading to
a recommendation that small firms should consider encouraging the government to adopt green economic incentives. The paper also offers
potential avenues for future research.
D 2005 Elsevier Inc. All rights reserved.
Keywords: Natural environment; Financial performance; Green economic incentives; Small firms
1. Introduction
This study first investigates the relationship between green
and financial performance for small firms. The two major
schools of thought are the ‘‘traditional view of the corporation’’
(Pava and Krausz, 1996: 322), and a more recent stream of
green-oriented literature. They disagree about the direction of
the relationship. The traditional view of the corporation argues
that investments in green issues are a drag on firms’ bottom
lines. A more recent body of green-oriented literature argues
that this is not the case for large firms. This paper will also
study the impact of green economic incentives on that
relationship for small firms.
Thus the goals of this research are twofold. First, the study
investigates the relationship between green and financial
performance to address the question of whether green
investments make financial sense for small firms. In this
study, green performance is the degree to which firms’ green
effectiveness, responsiveness, conscientiousness and invest-
ment strategy are better for the environment than those of
0148-2963/$ - see front matter D 2005 Elsevier Inc. All rights reserved.
doi:10.1016/j.jbusres.2005.08.006
* Tel.: +1 540 568 3026.
E-mail address: [email protected].
their competitors and financial performance is the degree to
which firms are more profitable than their competitors. The
traditional view of the corporation is that green expenditures
will have a negative effect on firm performance (Friedman,
1970; Mathur and Mathur, 2000; Supreme Court of Michigan,
1919; Walley and Whitehead, 1994). However, recent green-
oriented research has argued that this is not necessarily the
case for large firms (Aragon-Correa, 1998; Hills et al., 2004;
Rinehart and Van Fleet, 2000; Sharma and Vredenburg,
1998). The study will test if the more recent green-oriented
research also applies to small firms. With a few notable
exceptions (Cardskadden and Lober, 1998; Chilton and
Weidenbaum, 1982; Cook and Barry, 1993), remarkably few
studies deal with small firms and the environment. Green
regulations are more crucial to small firms because large firms
can more effectively address green regulations (Lynxwiler et
al., 1983). Furthermore, green regulations have included
substance bans, potentially more deleterious to small firms’
more limited markets (Chilton and Weidenbaum, 1982).
Public policy is reacting to increased public environmental
awareness by enacting new laws, regulations and ordinances.
Authors argue that small firms are not fully aware of this
situation (Hillary, 2000).
59 (2006) 492 – 500
B. Clemens / Journal of Business Research 59 (2006) 492–500 493
The study’s second objective is to investigate how green
economic incentives impact the relationship between green and
financial performance for small firms. In this study, green
economic incentives are institutional forces established to
provide financial incentives to improve green performance in
small firms, typical in the US manufacturing sector. Green
economic incentives are growing in importance and use
(Nijkamp et al., 1999) by business, government and environ-
mental interest groups (Brown, 1993).
1.1. The natural environment and the small firm
A substantial base of literature on large firms investigates
green impacts relative to firm size. Most of this research
indicates that the burden of green regulation is greater for
Fsmaller-sized, large_ firms (Greenan et al., 1997; Longenecker
and Moore, 1991). This could be driven by a number of factors.
Larger companies are better at challenging burdensome green
regulations (Lynxwiler et al., 1983), more insulated from bans
or reductions of inputs due to green concerns (Chilton and
Weidenbaum, 1982), better able to predict regulatory changes
allowing them to respond more effectively (Ungson et al.,
1985) and more likely to adopt corporate-wide socially
responsible green improvements (Chen and Metcalf, 1980).
Kuehner-Hebert (2003) found that private green advocacy
groups have considered small firms a significant threat. These
advocacy organizations apply additional pressure on small
firms to encourage green response. Improving green issues
requires slack in the short term to provide for interdisciplinary
expertise including specific scientific issues of testing, sam-
pling, chains of custody, toxicology, epidemiology and legal
court-room experience beyond the capabilities of the typical
small firm (Christmann, 2000; Eisenhardt and Martin, 2000).
Larger, more environmental-friendly firms argue that bad
practices by some hurt all firms in an industry. That is,
dominant larger firms that have already adopted improved
environmental practices can also increase pressure on small
firms to change and improve their environmental practices
through the supply chain (Hunt and Auster, 1990). Bansal
(2005) argues that larger firms can more easily vary their
portfolio of environmentally relevant resources to increase the
potential to create value. This makes the lack of studies on
small firms even more perplexing.
1.2. Theoretical development
1.2.1. Going green pays
In the 1980s the argument surfaced that green performance
could provide a competitive advantage (Clemens, 2001;
Hoffman, 1997). Politicians (Gore, 1992), chief executive
officers of major corporations (Hunt and Auster, 1990; Reilly,
1990) and prominent scholars (Hoffman, 2000; King and
Lenox, 2002; Porter, 1991; Rondinelli and Berry, 2000) argued
that improved green responsiveness does not necessarily
detract from firms’ financial performance.
Summarizing this school of thought, Hart (1995, 1997) and
Hoffman (1997) argued that a firm’s investments in the natural
environment, ipso facto, can produce a sustained competitive
advantage. Increasing evidence exists that green activities are
associated with improved financial performance for larger
firms. Hillary (2000), Crain and Hopkins (2001) and Dean et
al. (1998) suggest that these theories and findings could apply
to a small firm even more than to a large firm. The first
hypothesis will investigate this relationship.
Hypothesis 1. Green performance is positively related to
financial performance for small firms.
1.2.2. Green economic incentives
Green economic incentives benefit distinctive stakeholders
to varying degrees at different times. They can be carrots or
sticks depending on one’s vantage point. Economic incentives
such as packaging charges have benefited the general public in
waste management costs reductions in the longer term but have
been a financial burden to current consumers and industry
(Brisson, 1993). Bottle bills have helped consumers who are
willing to return bottles (Kahle and Beatty, 1987; Naughton et
al., 1990) but have cost current taxpayers and caused job loss
(Moore and Scott, 1983). Reductions in sewer charges, permit
fees and taxes have assisted recipients but have increased taxes
(Hudson et al., 1981). Firms have offered internal green
economic incentives to employees or divisions for environ-
mental-friendly decisions which have improved long-term
profitability while sacrificing short-term profitability (Moore,
2002; Nijkamp et al., 1999). Governments have granted green
economic incentives to public utilities in the form of increased
profit retention for environmentally advantageous decisions
which have increased utility rates temporarily (Nwaeze and
Mereba, 1997). International green economic incentives have
opened markets and increased quotas, which have reduced
entry barriers; this has helped new entrants move into markets,
improving net welfare at the detriment of firms already in the
market (Sand, 2001).
Governments can provide green economic incentives
(Hudson et al., 1981; Pospisil, 2002). Forces within supply
chains can also generate green economic incentives (Hakans-
son and Waluszewski, 2002; Zhu and Sarkis, 2004). Insurers
have found that environmental violations and liabilities have a
significant impact on firms’ bottom lines. Depending on the
contract, the insurer is typically liable to reimburse a portion of
these expenses. Therefore, insurance firms have championed
incentives to reward good green performance (Van Berckelaer,
1993).
Many researchers have demonstrated the positive impacts of
green economic incentives on green performance for energy
consumption (Heberlein and Warriner, 1983); packaging waste
and litter (Brisson, 1993); waste management (Pearce and
Turner, 1993); beverage container recycling (Kahle and Beatty,
1987; Moore and Scott, 1983; Naughton et al., 1990); and
electric utilities (Nwaeze and Mereba, 1997).
A broad literature search uncovered only two studies on
green economic incentives and financial performance for small
firms. The studies reached potentially contradictory conclu-
sions. Cook and Barry (1993) argued that when small firms are
B. Clemens / Journal of Business Research 59 (2006) 492–500494
aware of green economic incentives, they use them when it is
in their best interest financially. Tonning (1997) found that
small New Jersey firms did not take advantage of potentially
beneficial and significant green economic incentives: these
firms were either unaware of the incentives or underestimated
their value.
While research has shown that green economic incentives
impact green performance and may also impact financial
performance directly, the more interesting issue is the impact of
green economic incentives on the hypothesized positive
relationship between green and financial performance for
small firms. The next section will address the specific impacts
of green economic incentives on the relationship presented in
Hypothesis 1 and develop the final hypothesis.
1.2.3. Impact of green economic incentives on the positive
relationship between green and financial performance for
small firms
Green economic incentives from the green insurers could
dampen the positive relationship between green and financial
performance for small firms. Green liabilities and the costs to
address green claims are rising significantly. Insurers provide
green economic incentives to reduce claims. For example, a
typical green economic incentive in the insurance industry is
premium reduction for ‘‘good’’ green practices — ones that
avoid future claims (Van Berckelaer, 1993). Insurers will only
offer and continue to provide such incentives if firms reduce
their green liabilities. The goal of the incentives is to increase
firms’ green performance, not to improve firms’ financial
performance. As a result, the presence of the green insurance
industry-developed green economic incentives tends to dampen
the positive relationship between green and financial perfor-
mance. This effect could be multiplied for small firms because
small firms have less negotiating power with insurers.
The optimal goal of green regulatory economic incentives
developed by regulatory agencies is to have a positive impact
on the environment. However, the outcomes for financial
performance can vary from a minimal to negative impact on
financial performance according to the type of economic
incentives used. This could also serve to decrease the positive
relationship between green and financial performance.
As discussed previously, extensive research has shown the
positive effects of green economic incentives on green
Green Performance
Green EcoIncentiv
Hypothesis
Fig. 1. Theoretica
performance for energy consumption, packaging waste and
litter, waste management, beverage container recycling and
electric utilities (Brisson, 1993; Heberlein and Warriner, 1983;
Kahle and Beatty, 1987). The incentives are increasing green
performance with little or no impact on financial performance.
This outcome also lessens the positive relationship between
green and financial performance. The second hypothesis will
investigate how green economic incentives impact the rela-
tionship between environmental and financial performance.
Hypothesis 2. Green economic incentives will dampen the
positive relationship between green performance and financial
performance for small firms.
Fig. 1 describes the relationships between the constructs.
2. Methods
2.1. Sample
The majority of this study’s data flow from a 2003 survey of
scrap yards in the steel industry (Dillman, 1978, 2000). The
steel industry is a good choice for four reasons: relevancy to the
natural environment; national economic importance; signifi-
cance of existing and emerging green regulations, including
green economic incentives; and the differential impact on small
firms as follows. The metals industry is the largest contributor
to green emissions in the US (EPA, 2003). Steel contributes
12% of the gross domestic product of all manufacturing in the
US (Bureau of Economic Analysis, 2003). The EPA has
imposed significant new requirements on the steel industry
(Cushman, 1997). Moreover, the potential of new green
regulations could have a significant potential impact on the
US steel industry. The EPA and the US Nuclear Regulatory
Commission (NRC) are considering requiring scrap yards to
install additional state-of-the-art, expensive monitoring equip-
ment and could significantly slow the recycling process
(Clemens and Gallagher, 2003). Finally, Crain and Hopkins’
(2001: 3) study on all regulatory burdens of small firms found
that ‘‘the disproportionate cost burden on small firms is
particularly stark for the manufacturing section’’ (including
steel).
Industry experts from the largest trade association in the
scrap steel industry – the Institute of Scrap Recycling
nomic es
Financial Performance
1 (+)
Hypothesis 2 (-)
l constructs.
Table 1
Descriptive statistics — Cronbach’s alphas in parentheses
n =76 Mean S.D. 1 2 3 4 5
1. Firm size 4.0 0.92 (0.99)
2. Effectiveness of current
standards
3.65 1.62 �0.08 N/A
3. Financial performance 3.32 0.79 0.07 0.01 (0.97)
4. Green performance 4.95 1.18 0.23 �0.04 0.42** (0.87)
5. Green economic incentives 0.81 1.14 0.15 0.25* 0.32* 0.19 (0.78)
* p <0.05 (two-tailed test).
** p <0.01.
Table 2
Hierarchical regression analysis (standardized regression coefficients, t-values
in parentheses) R-centred variables
(n =76) Model I Model II
Financial performance
Effectiveness of current standards �0.01 (�0.06) 0.04 (0.29)
Firm size �0.06 (�0.49) �0.01 (�0.11)
Environmental performance 0.40*** (3.28) 0.36**
Green economic incentives 0.25* (2.03) 0.33** (2.63)
Environmental performance*green
economic incentives
� .26* (�2.12)
Adjusted R2 0.25** 0.31***
Change in R2 0.06*
F significance 0.003 0.001
* p <0.05.
** p <0.01.
*** p <0.001.
B. Clemens / Journal of Business Research 59 (2006) 492–500 495
Industries (ISRI) – and managers and owners of individual
scrap yards helped develop the survey instrument. The survey
instrument was presented to an expert panel, improved and
pilot tested. The final survey included a postcard announce-
ment and two sets of mail surveys sent to the highest-ranking
firm representative responsible for green decisions.
The level of analysis for this study is the firm. However,
the analysis only includes one respondent from each firm —
the highest-ranking available environmental decision maker
(Clemens and Douglas, 2005; Gardner, 2005; Hoang and
Rothaermel, 2005). Of the respondents, 46% were owners,
12% were operations managers and 14% were green
managers. The remaining respondents included technical
managers, project engineers, green coordinators, and health
and safety officers. The response rate was 46%.
2.2. Variables and measures
2.2.1. Green economic incentives
An expert panel including representatives of the steel
industry and EPA reviewed and improved a list of green
economic incentives (Williams, 1989; Wasserman, 1992). The
survey was subsequently pilot-tested resulting in a list of four
green economic incentives, which is included in Appendix A.
The coefficient of reliability (Cronbach’s alpha) was 0.78.
2.2.2. Green performance
Respondents rated the extent to which they agreed that their
firm’s green program improved green performance in compar-
ison to their competitors. The survey used a Likert scale
anchored from one for strongly disagree to seven for strongly
agree. Appendix A lists the specific items. The coefficient of
reliability (Cronbach’s alpha) was 0.87.
2.2.3. Financial performance
Judge and Douglas (1998) was the basis of the five item
measure for financial performance. Specific items are in
Appendix A. Measuring perceived financial performance has
been used successfully in the literature (Covin et al., 1994;
Dess, 1987; Miller and Friesen, 1994). The coefficient of
reliability (Cronbach’s alpha) was 0.97.
2.2.4. Control variables
The study used two control variables. The first controlled
for firm size. Even though the study focused on small firms,
differences could exist between the sizes of small firms. In
addition to the number of employees, scholarly research has
evaluated and compared several methods to measure size.
Research shows that the best measure for size is the log normal
average of annual output (Singh, 1986). Industry experts also
offered that output is a better measure of scrap yard size than
the number of employees. Therefore the study used the log
normalized average annual output for the 3 years prior to the
study. Cronbach’s alpha was 0.99.
Second, the study controlled for respondents’ confidence in
existing green standards. The study was designed to determine
the degree to which each firm was exposed to green economic
incentives. The study did not want to confound the analysis by
including the degree to which the respondents felt existing
green standards were effective (produced environmentally
advantageous results). The respondents rated the degree to
which they found existing standards effective. The Likert-
scaled responses ranged from one for not effective to seven for
very effective.
3. Results
Table 1 displays the descriptive statistics. The Kolmo-
gorov–Smirnov and Shapiro-Wilk’s tests for normality and the
variance inflation factors indicated normal data and no multi-
collinearity (Neter et al., 1990). The study centred variables
and used hierarchical linear regression to test the hypotheses
(Aiken and West, 1991). Table 2 provides the results of the
regression.
Hypothesis 1 predicted that green performance is positively
related to financial performance for small firms. The results
support this hypothesis ( p <0.001). The direction of the
relationship is as predicted. The standardized regression
coefficient was positive (0.40 in step one and 0.36 in step
two). That is, higher levels of green performance are related to
higher levels of financial performance for small firms. While
the study did not address causality, the results demonstrate that
positive green benefits are not antithetical to positive financial
performance. This lends some support to the concept that
Fgoing green pays_ for small firms, a concept that is addressed
in a subsequent section.
B. Clemens / Journal of Business Research 59 (2006) 492–500496
The second hypothesis predicts that the presence of
additional green economic incentives would weaken the
positive relationship between green and financial performance
for small firms. The results in Table 2 support the second
hypothesis for three reasons. First, the standardized regression
coefficient was negative (�0.26). Second, the standardized
regression was significant ( p =0.01). Third, the change in R2
was significant ( p =0.03). That is, higher levels of green
economic incentives will dampen the positive relationship
between green and financial performance for small firms
(Aiken and West, 1991).
In order to further investigate the interaction, the study split
the sample into cases where economic incentives were above
and below their median value of 0.25. For the cases exhibiting
lower economic incentives, the standardized beta coefficient
measuring the relationship between environmental and finan-
cial performance was 0.57 (significant to the 0.001 level). The
standardized beta for those cases of higher economic incentives
was 0.02 (significant to the 0.05 level). Thus the slope of the
regression line was steeper for those firms exhibiting low
economic incentives. Therefore, as hypothesized, the relation-
ship between environmental and financial performance is
greater for those cases of low economic incentives, further
supporting the second hypothesis.
3.1. Limitations
3.1.1. Generalizability
By focusing on the steel industry to obtain accuracy, the
study sacrificed a degree of generalizability. The potential for
generalizability depends largely upon how one views the
context of the sampled population. This study focused on the
steel industry for the four reasons described in the Sample
section: relevancy to the natural environment; importance to
the economy; significance of emerging green regulations,
including green economic incentives; and the importance to
small firms. One way to increase external validity is to sample
for heterogeneity (Cook and Campbell, 1979). The study
investigated the type of respondent (owner, operations manag-
er, etc) and the firm’s history of environmental problems.
Including both as control variables did not change the results.
This leads to the conclusion that the results are not necessarily
idiosyncratic.
The average size of the firm that responded was 62
employees. The largest firm had 275 employees. The mean
size for scrap yards in the US is within the 95% confidence
intervals of the sampled firms (US Census Bureau, 1997).
Therefore the sample represents the population of US scrap
yards to some degree. Further, in order to evaluate potential for
non-response bias, the principal investigator contacted non-
respondents. The size of all non-respondent firms contacted fell
within the 95% confidence interval of the sample, assuaging
some additional concerns regarding non-response bias.
3.1.2. Causality
The study did not address causality. Even though the
conclusions indicate a positive relationship between green and
financial performance, one cannot conclude that improved
green performance leads to financial performance. One can
legitimately argue that the slack generated in good financial
performance will provide the ability to invest in green
improvements. Additional longitudinal studies – always a rich
field for further research – and studies to control for other
potential factors could help address this limitation.
3.1.3. Mono-method bias
This study attempted to evaluate the degree to which the
firm perceived the use of green economic incentives. Studies
investigating perceptions rely to a large degree on survey
data. Studies using survey data run the risk of mono-method
bias. One test of mono-method bias is the Harman one-factor
test (Podsakoff and Organ, 1986). If a substantial amount of
mono-method variance is present, either a single factor will
emerge or one general factor will account for the majority of
the covariance between the independent and dependent
variables. In this sample, the Harman test generated five
factors explaining 76% of the variance. The first factor
explained only 38% of the variance. Thus, based on the
Harman one-factor test, some concerns of mono-method bias
are minimized. Further, in surveys on such social issues, one
potential concern is that respondents’ answers can be a
function of personal perceptions. Green economic incentives
are very difficult and costly for the regulators to develop
(Sparrow, 1994). In order to estimate the budget allocated to
develop such expensive standards in a state, the study
obtained archival data on the state per-capita expenditures on
the natural environment (Environmental Council of the
States, 2003). The two variables were correlated (Pearson
correlation of 0.36, significant to the 0.001 level). These
results, coupled with the results of the Harman one-factor
test, should help allay some concerns about mono-method
bias.
3.1.4. Measurement of constructs
Jacobsen (1987) identified the difficulties in measuring
financial performance for large, publicly traded firms due to the
multidimensional nature of performance. This study faced an
additional hurdle by focusing on small, private firms. Pava and
Krausz (1996) identified four of the typical measures for
financial performance: market-based, including market return,
price-to-earning ratios and market value-to-book value; ac-
counting-based measures, including return on assets, return on
equity and earnings per share; measures of risk, including
current ratio, quick ratio, debt-to-equity ratio, interest coverage,
Altmans Z-score and market beta; and other firm-specific
characteristics, including capital investment intensity, size,
number of business lines and dividend pay-out ratios. Measures
related to stock are not available for private firms and not
appropriate for the sole-proprietorships typical in the scrap
metal industry. Accounting-based measures are confidential for
private firms. The only remaining measure – firm size – was
compared to the self-report of financial performance in this
study. The significant correlation (Pearson’s correlation coeffi-
cient of 0.29, significant to the 5% level) between tons
B. Clemens / Journal of Business Research 59 (2006) 492–500 497
processed and the self-reporting measure assuages some
concerns.
Judge and Douglas (1998) evaluated the successful use of
performance measures including self-reporting (Dess, 1987;
Lawrence and Lorsch, 1990; Powell, 1992). In support of
Judge and Douglas (1998), Miller and Cardinal (1994) found
that self-reporting data are better than archival data. In order to
provide context, Judge and Douglas (1998), upon which this
study was designed, asked respondents to rate their perfor-
mance as compared to their competitors to avoid introducing
confounding factors.
While green literature is expanding quickly, the develop-
ment of financial performance measures dwarfs attempts to
measure green performance. Green performance arguably is
even more multidimensional than financial performance as it
encompasses flora, fauna, the globe and humans alike
measured in terms of a wide range of disciplines, from
organic-chemistry to sociology. The archival measure com-
monly used successfully in the US green literature, the Toxic
Release Inventory (King and Lenox, 2001), does not include
data on small firms. Further, Klassen and Whybark (1999)
highlight some problems with the confidentially, non-
response bias and accuracy of TRI environmental data.
Several studies evaluated individual components of envi-
ronmental performance without relying on TRI data and
obtained mixed success. A comprehensive search of the
literature produced only one study that attempted to measure
comprehensive green performance without the use of TRI data:
Karagozoglu and Lindell (2000), who obtained an alpha of
0.82. This study also was designed to measure green
performance comprehensively. Recognizing the potential for
lower reliability typical of normative measures (Flannery and
May, 2000), this study followed Karagozoglu and Lindell’s
(2000) example of self-reporting of environmental data by
having firms measure their environmental performance using a
scale comparing their green performance to that of their
competitors.
In order to investigate the validity of the self-reporting
measures of green performance, the principal investigator
contacted the expert panel used in the development of the
scales. The experts rated the environmental performance of the
respondents for which they had personal knowledge. The
ratings of the expert panel correlated with the self-reporting
estimates (Pearson’s correlation coefficient=0.56, p =0.015),
providing some evidence of convergent validity.
In comparison to state-of-the-art measurement of financial
and even green performance, the development of measures for
green economic incentives is in its infancy. A thorough
literature search identified only 19 studies that empirically
evaluated green economic incentives. The previous Green
economic incentives section listed these studies. Seventeen of
the 19 studies used one-item measures. Of the two remaining
studies, Nijkamp et al. (1999) measured reasons for adopting
environmental-friendly technologies (arguably a type of
economic green incentive) rather than the technologies
themselves. The authors did not report reliabilities. Zhu and
Sarkis (2004) developed the most comprehensive measures,
but the study only focused on one type of green economic
incentives: green supply chain management. The expert panel
for this study reported that the green economic incentives
described in Zhu and Sarkis (2004) were not typically
available in the US steel industry. Therefore, this study was
forced to develop its own more comprehensive items
specifically for the US steel industry.
The survey included responses from green managers as well
as owners. Potentially, green managers could feel that their
firms’ green performance was superior to what the owners’ felt.
Likewise, owners could consider their firms’ financial perfor-
mance superior to what the green managers felt. An ANOVA
explored this potential problem. The type of respondent was
not related to their views on their firm’s green performance
(F =1.15, p =0.34), their financial performance (F =1.36,
p =0.23) or their understanding of green economic incentives
(F =0.796, p =0.61).
4. Conclusions and discussion
One must avoid the risk of going beyond the specific results
of this study. However, this section will attempt to identify and
discuss questions and potential benefits for firms and
researchers.
4.1. Benefits for small firms
While the study did not address causality, it did find a
positive relationship between environmental and financial
performance for small firms. These results may encourage
small firms to look for competitive advantages in improving
their environmental performance. Firms could seek out
improvements that have spin-off benefits to other parts of their
operations. For instance, decreasing waste should prove
beneficial and generate many cost savings. Small firms could
also consider marketing their green products to larger
customers.
While not hypothesized, the study found a significant
positive relationship between green economic incentives and
financial performance for small firms ( p=0.02). This makes
conceptual sense. Green economic incentives could be
financially beneficial to small firms. Scherer et al. (1993)
found that small firms have more bargaining power with the
regulators than larger firms in light of coercive forces,
providing more room to propose green economic incentives.
They found that smaller firms are more willing and able to
bargain informally and effectively with regulators, as well as
that smaller firms are less of an overall problem to the
government. Accordingly, smaller firms would be able to
make a case more easily for special considerations of or an
exclusion from coercive regulations by using green economic
incentives.
4.2. Avenues for future research
The relationship between green and financial performance
is one of the most important in the field. The results of the
Green economic incentive
Respondents rated the degree to which they had witnessed each in the past 3
years. The Likert scale was anchored from a zero for never to a six for very
often or constantly. The study averaged the results for each respondent on
each of the following items.
1. Manufacturers of radioactive sources rewarded firms that reported finding a
lost radioactive source.
2. Insurers used a portion of insurance premiums to reward firms for
extraordinary efforts to improve the environment.
3. Firms were rewarded for adopting effective practices to identify environ-
mental problems.
4. The insurance industry reduced premiums if firms installed improved
detection or other environmental control systems.
Green performance
Respondents rated the degree to which they agreed or disagreed with the
following statements. The Likert scale was anchored with a one for strongly
disagree, a four for neither agree nor disagree and a seven for strongly agree.
The study averaged the results for each respondent on each of the following
items.
5. Your firm’s environmental policy is much more effective than your
competitors’.
6. Your firm invests much more in environmental responsiveness than your
competitors.
7. Your firm places a high value on environmental consciousness.
8. Your firm is more environmentally conscious than your competitors.
9. Your firm invests more than your competitors in environmental
responsiveness.
Financial performance
Respondents answered on a Likert scale. A one indicated much worse, a two
indicated worse, a three indicated similar, a four indicated better, a five
indicated much better. The study averaged the results for each respondent on
each of the following items.
10. As compared to your competitors, your growth in earnings has been _____.
11. As compared to your competitors, your growth in revenue has been _____.
12. As compared to your competitors, your change in market share has been
_____.
13. As compared to your competitors, your return on assets has been _____.
14. As compared to your competitors, your long run level of profitability has
B. Clemens / Journal of Business Research 59 (2006) 492–500498
relationship between green and financial performance for
small firms are noteworthy. Given such findings, the lack of
literature is even more surprising.
As discussed, the role of green economic incentives on the
relationship between green and financial performance has not
been comprehensively studied for small or large firms. Further,
the presence and importance of green economic incentives are
growing (Hoffman, 1997; Nijkamp et al., 1999). It is hoped
that these findings will encourage future researchers to sow
their seed on these fertile fields — for large and small firms
alike.
The study focused on one industry to increase accuracy.
Different sets of economic incentives could be more effective
both environmentally and financially in other industries. For
instance, regulators could reduce permit fees for pulp and
paper mills, landfill operators, or sewer charges for restau-
rants. Dry cleaners could be rewarded for using specific
solvents. The strength of the dampening effect could be
industry specific as well, arguing for future research.
Furthermore, additional research on contingency models of
green economic incentives, beyond industry-specificity, could
add to our understanding of underlying mechanisms. The
government could investigate which economic incentives are
most effective and lead to sustainability. In these days of tighter
public sector budgets, governments have difficulty developing
new and innovative regulatory approaches such as economic
incentives. For this reason, traditional command and control
approaches are still most commonly used in the US (Delmas,
1999). This could embolden industry to take the lead and
consider what type of research would encourage government to
adopt which types of green economic incentives. Furthermore,
industry could investigate which types of green economic
incentives are actually carrots and not sticks.
5. Summary
This study offers that firms, especially small firms, could
benefit from increased consideration of the environment.
Further, small firms could benefit from developing and
proposing green economic incentives. Investments in the
development and proposal of green economic incentives
could help firms avoid more litigious, costly and inflexible
command and control regulations. It is hoped that this and
future research on the relationship among green economic
incentives, green performance and financial performance will
aid business managers, in both small and large firms, and
policy makers in their ongoing debate on the natural
environment and help advance the cause of effective
environmental management.
Acknowledgements
The author thanks James Madison University’s Center for
Entrepreneurship and the College of Business’s Summer
Grant program for funding this research. The author also
thanks Paul Bierly, Jean B. McGuire, and three anonymous
reviewers.
Appendix A. Measures for constructs
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