Proceedings of 8th Asia-Pacific Business Research Conference
9 - 10 February 2015, Hotel Istana, Kuala Lumpur, Malaysia, ISBN: 978-1-922069-71-9
Does Financial Performance Enhance the Transfer of
Environmental Management Practices to Overseas
Subsidiaries?
Tatsuo Kimbara1 and Kazuma Murakami2
Multinational enterprises (MNEs) play a significant role in the sustainable
development since they operate globally and have advanced environmental
technologies. In this paper, we analyze the relationship between financial
performance of MNEs and the international transfer of environmental
management practices. For this analysis, studies on the relationship between
economic performance and environmental performance, production system in
transplant, and supply chain management provide useful insight.
The data used are obtained from two sources. First, we use NEEDS of Nihon
Keizai Shinbun for financial data. On the other, transfer data from questionnaire
survey conducted in Vietnam is used. Ordinary least square (OLS) method is
used for analysis. We examine a hypothesis that higher performance of firm is
positively related with higher transfer of environmental management practices to
overseas subsidiary.
From the analysis, we found that green procurement is not significantly related
with return on assets and return on sales, and that environmental performance
system is significantly related with financial performance (ROS). The different
results suggest meaningful implications.
Track: Management
1. Introduction
For sustainable development, all actors need contribute to it. Especially, it is
required for multinational enterprises (MNEs) which operate globally. A number
of MNEs started to develop global supply chain management and
______________________________________________________________
1
Hiroshima Shudo University, 1-1-1, Otsuka-higashi,Asaminami-ku, Hiroshima,Japan 721-3195,
Email: kinbara@shudo-u.ac.jp, Phone/Fax: +81-82-830-1207
2
The University of Shiga Prefecture, 2500 Hassaka, Hikone, Shiga, Japan 522-8533, Email:
murakami.k@ses.usp.ac.jp
Proceedings of 8th Asia-Pacific Business Research Conference
9 - 10 February 2015, Hotel Istana, Kuala Lumpur, Malaysia, ISBN: 978-1-922069-71-9
management system. Although it is not so long before firms address environmental
management in domestic operations, they now have to cope with environmental
management in overseas operations. Corporate Value Chain (SCOPE3) Accounting and
Reporting Standard published in 2011 asks firms to be responsible for the greenhouse gas
emission in the whole supply chain.
In this paper, we examine the relationship between financial performance and
international transfer of environmental practices. In other words, this issue can be
expressed by the question whether economy and environment is achieved simultaneously
in overseas operations of MNEs. Global environmental management system is already
built in some of MNEs. But, it is not common for majority of firms. When firms tend to think it
is costly, the diffusion of such practices is not encouraged smoothly.
The study of relationship between economic performance of parent firms and
environmental transfer to overseas operations is a new research issue. Environmental
management includes a variety of aspects. There are researches on limited specific theme
of environmental management such as environmental innovation (Popp,2006). The study
of international transfer of environmental practices has just began. Before examining the
international transfer with our own data, we make a brief review of previous studies in the
second section. In the third section, data is explained. In the fourth section we explain
methodology of analysis. In the fifth section, the result of analysis is shown. In the sixth
section there is discussion of findings. Last section summarizes the conclusion.
2. Literature review
There is not, as far as we know, a research that directly analyzes the determinants and
process of international transfer of environmental management practices. Instead,we find
field reports or research on specific practices such as ISO14001 or green purchasing.
Analysis of environmental management in overseas operation is sometimes done as one of
environmental engineering issues. To understand theoretical bases behind the topic we are
concerned, we make a brief review of studies related with the transfer of environmental
management.
First, there are studies on whether economy and environment preservation can be
pursued at the same time. This is underlying study of compatibility of economic performance
of parent firm and environmental performance in international operations. The preceding
study of the relationship between economy and environment started in 1990s (Porter and
v.d. Linde 1995; Jaffe, et al. 1995; Palmer, et al.1995; Hart and Ahuja 1996; Russo and
Fouts 1997; Corderio and Sarkis, 2001; Konar and Cohen, 2001; Wagner et al.
2002,;Al-Tuwaijri et al. 2004). These studies suggest two contrasting conclusions. First
group insists that there is the trade-off between economic performance and environmental
performance, because investment for environmental preservation incurs an increasing cost.
Proceedings of 8th Asia-Pacific Business Research Conference
9 - 10 February 2015, Hotel Istana, Kuala Lumpur, Malaysia, ISBN: 978-1-922069-71-9
Therefore, the increased cost for compliance means the disadvantage in cost competition.
Second group indicates that improved environmental performance enhance the
competitive advantage and, in turn, economic performance (Hart and Ahuja,1996;
Wagner,2002). This is possible because the improvement of environmental performance
often brings efficient production, higher productivity and/or low compliance cost.
Even though Porter is regarded as a one of pioneering researchers in the field of
environmental management study, he suggested the so called Porter Hypothesis based on
the insight of anecdotal evidence (Porter, 1991; Porter and v.d.Linde,1996). As an empirical
research, there are several researchers we mentioned above. Hart and Afuja(1996) show a
new finding. They used, as explaining variable, the change rate of emission of toxic
chemicals in 1988-89 based on Toxic Release Inventory ( TRI ) data. On the other hand,
they used return on sales (ROS), return on assets(ROA) and return on equity (ROE) as an
explained variables. Control variables are R&D intensity, advertising cost ratio to sales,
capital intensity, debt ratio, growth rate of industry. Their analysis shows that pollution
prevention is positively related with economic performance in a time lag of 1 or 2 years.
Next, Russo and Fouts (1997)
analyzed the relationship by using indicator of
environmental rating as a environmental performance and ROA as economic performance.
Their analysis revealed the relationship between two performances is statistically significant
and positive.
Then, analysis of Japanese manufacturing industry found the statistically significant
positive relationship between economy and environment. This study used eco-efficiency in
terms of CO2 and PRTR emission as environmental performance, and ROA /ROS are used
as economic performance.
As such, preceding studies tends to support the compatible relationship between
economy and environment. This may reflect a fact that big firms are doing more efforts for
environmental management to respond to the requirement of social responsibility. Therefore,
when it is expected that firms achieve better economic performance caused by improving
environmental performance, environmental management may spread in the overseas
operations. We expect when firms attain competitive advantage by environmental
investment, firms will be more positive in transferring environmental management to
overseas operations.
Second, there is a study on the transfer of management system and production
system(Abo,1988,1994;Yamaguchi,2006; Florida=Kennedy,1991)。In1950s and 60s, US
firms obviously strengthened competitive advantage in a world economy and intensively
increased direct investment in Europe. Under the situation, the reasons of foreign direct
investment was analyzed by Hymer, Buckley and Casson (1976) and Dunning (1988).
Besides, the validity of US management system in overseas conditions was also argued
(Koontz,1969 ). Then in the 1980s, Japanese firms obviously increased competitive
advantage in electric, automobile and iron and steel industries. After Plaza Accord of G5 in
Proceedings of 8th Asia-Pacific Business Research Conference
9 - 10 February 2015, Hotel Istana, Kuala Lumpur, Malaysia, ISBN: 978-1-922069-71-9
1985, drastic yen appreciation was triggered. Under the circumstances, there was the rapid
increase of Japanese foreign direct investment and the transfer of its management system
in overseas operations.
For example, Florida=Kennedy (1991) investigated Japanese transplants in the US
whether firms successfully transfer the production system and inter-organizational network
to US operations. The results of analysis indicate that in the US transplant of Japanese firms,
team based work organization and close assembler-supplier relationship are transferred to
subsidiary. They point out that in the US transplants, specific production system is
transferred within organization of MNEs and within inter- organization. It is also recognized
that end-user and supplier relation works as determinants of the adoption and diffusion of
innovate production practices (Florida,et al.1997).
In relation to this, there is a study of mother factory system which implies that domestic
factory becomes a mother factory for the overseas factory (Yamaguci,2006). Mother factory
is the source of skills and practices for subsidiary firms in terms of technology, skill and
practices. Practices, skills, procedures, and knowledge are transferred from mother factory
of MNEs to overseas subsidiary. Mother factory system presumes organizational capability
which enables the transfer of organizational routine from main factory in the headquarters to
subsidiary firms. Combined with organizational capability concept, the model of mother
factory system explains the transfer of capabilities from MNEs to subsidiary operations.
But, there is a limitation in the model of mother factory system since MNEs have to expect
self-reliance of subsidiary firms in the long run. MNEs have limited resources that they can
provide to all operations spreading globally. However, the mother factory model is effective
as far as environmental management is concerned. It is because that the capability of
subsidiary firms in environmental technology substantially depends on the capability and
practices of parent firms.
In addition, we recognize the importance of study of assembler- supplier relation in
production system (Asanuma,1988; Dyer,1996, Dyer and Nobepka,2000). This relational
view proved the fact that the close relationship between assembler and supplier improves
the competitiveness of supplier and group firms in the automobile industry. Dyer (1996) and
Dyer and Nobeoka(2000) point out that there is the improvement of supplier capability in
terms of productivity, product quality, and cost. Particularly, suppliers in the network are
superior in learning through information sharing, face to face communication, and guest
engineer system so that they have better opportunity to enhance organizational capability.
Environmental capability, that implies the ability to reduce environmental burden and solve
issues, is part of organizational capabilities. When environmental management system and
practices are transferred to other organization or subsidiary, we presume that environmental
capabilities are transferred from one organization to other organization.
Proceedings of 8th Asia-Pacific Business Research Conference
9 - 10 February 2015, Hotel Istana, Kuala Lumpur, Malaysia, ISBN: 978-1-922069-71-9
3. Data
How firms transfer environmental management to overseas operation and what relation
exists between economic performance and transfer of environmental practices. Issues
remain to be analyzed. About the determinants of environmental management, Schaltegger
and Synnestvedt,2002) point out that environmental management of a firm depends on the
state of management, environmental interest of society and government. It is recognized
these are important determinants of the transfer.
Based on preceding studies in environmental management and strategic management,
we develop a framework consists of external factor, environmental strategy, organizational
practices and environmental performance of subsidiary. With this framework, we examine
the relationship among variables and the influence of individual factor on the transfer.
The questionnaire survey was used for obtaining the data on the transfer of environmental
practices in the subsidiary. Our focus is Japanese manufacturing subsidiaries in Vietnam.
We prepared a structured questionnaire. Research assistants visited firms and interviewed
in early 2011 with managers who are responsible for the environmental matter. We gained
96 effective responses from 400 firms we listed. We used Likert type 5 points scale to
measure the behavior of the firm. The higher the score, the stronger the proactiveness.
For the indicators of ISO 14001 and environmental report, original score is measured by the
3 point scale as: 3 is for implemented, 2 is for preparing, and I is for no implementation.
Then, scores of ISO14001 and environmental report are summed up to make environmental
management system (MANA) with maximum 6 points. Environmental report means the data
will be provided for environmental report by parent firms. Formal publication of
environmental report by individual subsidiary firm is quite rare. Ownership ratio (JOWN) by
Japanese parent firms is shown in the percentage of the ownership.
On the other, financial data is obtained from NEEDS data of Nihon Keizai Shinbunsha that
is the largest economic newspaper company in Japan. Then two datasets are matched to
obtain 34 effective samples for analysis.
4. Methodology
We examine the following hypothesis on the international transfer of environmental
practices in Japanese subsidiaries in Vietnam..
Hypothesis: Firms with higher financial performance are likely to transfer environmental
practices to overseas operations.
The basis of this hypothesis is that when firm’s financial performance is better, they have
more resources to invest into environment preservation so that they are likely to transfer
related practices. On the contrary, firms, that regard environmental investment is cost
increase, are reluctant to invest into environment and slow to transfer the practices since
Proceedings of 8th Asia-Pacific Business Research Conference
9 - 10 February 2015, Hotel Istana, Kuala Lumpur, Malaysia, ISBN: 978-1-922069-71-9
they think it incurs additional cost.
This hypothesis assumes the influence of economic performance to environmental
performance. In the previous studies on the relationship between economy and environment,
most of them use economic performance as explained variable and environmental
performance as explaining variable. However, it is recognized that the interaction actually
exists in two ways. Typically, causal relation from economy to environment is assumed in
the Environmental Kuznets Curve. In fact, large firms with large financial resources afford to
conduct environmental investment more than firms with less financial resources.
About reasons for international investment, internalization by Buckley and Casson(1976)
insisted that firms get advantageous transaction cost by internalization. Then, a
resource-based view points out that the organizational capabilities are basis of growth, and
cumulative and path dependent (Barney , 1991; Hart, 1995). When we apply these theories
to environmental management, we suppose that MNEs transfer their organizational
capabilities, which parent firms own, to overseas operations to strengthen competitive
advantage of overseas operations. Therefore, subsidiary firms with new environmental
capabilities have possibility to improve competitive advantage.
We analyze the transfer of environmental management by following models.
GREN=βi1GOV+βi2COM+βi3CUS+βi4LDS(GOAL)+βi5JOWN+βi6ROA(ROS)
+βi7Dummy
(1)
MANA=βg1GOV+βg2COM+βg3CUS+βg4LDS(GOAL)+βg5JOWN+βg6ROA(ROS)
+βg7Dummy
(2)
In the models, explained variable are environmental management system (MANA) and
green procurement (GREN). The hypothesis is divided into 2 sub-hypotheses that one uses
MANA and the other uses GREN as explained variable, as shown in model (1) and (2).
On the other, explaining variable is return on assets (ROA) or return on sales(ROS).
Control variables are external factor, environmental strategy, ownership ratio by parent firm,
and firm size of subsidiary. External factor includes government regulation (GOV),
community (COM), and customer (CUS). Environmental strategy of subsidiary is measured
by priority of environmental goal (GOAL) and top leadership for environment (LDS). Strategy
has been examined in the previous studies as an important determinant of management
transfer (Hart and Afuja,1996). It integrates a various activities and resources, and directs
decision-making. So, the strategy works as a framework integrating a series of
organizational activities toward goal of organization. When the strategy is clear to
organization members, the goal to be achieved and issues to be solved become clear. Then,
the strategy is useful for motivating organizational members to work for organizational goal.
Proceedings of 8th Asia-Pacific Business Research Conference
9 - 10 February 2015, Hotel Istana, Kuala Lumpur, Malaysia, ISBN: 978-1-922069-71-9
We estimate the relationship by using ordinary least square (OLS) method. As the
correlation between LDS and GOAL is high (r=0.527, p<0.001), we estimate models with
separate strategic indicator. Dummy variable means that size of employee less than 300 is 0,
and more than 300 is 1.
5. Result of analysis
From the analysis, several findings are emphasized. First, the transfer of green procurement
(GREN) is not significantly related with return on sales (ROS). The relation is negative even
though it is not significant. The relation of ROS to GREN shows same direction in both
variables of LDS or GOAL.
Second, however, GOV, COM, and JOWN have significant relation with GREN when we
use ROS and LDS variables. GOV shows negative significant relation to GREN. COM has
significant positive relation to GREN. But, GOV and JOWN did not show significant relation
when we use ROS and GOAL as independent variable.
Third, when we use MANA as an explained variable, ROS has positive significant
relation to MANA under LDS as indicator of strategy. So, it is shown that financial
performance in terms of ROS is significantly related with the transfer of environmental
management system (MANA). Although the relation of financial performance to
environmental performance is limited and not significant except the case above mentioned,
the relation of ROS to MANA indicates same positive impact.
Fourth, when we use ROA in place of ROS, we did not find the significant relationship
between green procurement (GREN) and ROA. Besides, environmental management
system (MANA) is not significantly related with ROA.
In the model with ROA as explaining variable, MANA is significantly related with COM
under GOAL variable. But there is not significant relation to MANA under LDS. Thus, when
we use MANA as an explained variable, the result shows weak relation with ROA,
depending on the indicator of strategy.
In summary, financial performance in terms of ROA and ROS has negative relation to
GREN. ROS to MANA is significantly positive. But the relation of ROA to MANA is not
significant. From this result, it is pointed out that financial performance is not strongly related
with the transfer of environmental practices. Financial performance is related with MANA
when we use ROS. In this sense, our hypothesis is partly supported.
6. Discussion
From the analysis, we find that financial performance has not clear relation to GREN. This
is presumed that green procurement is often compulsory for transactions regardless of
financial performance of firms. Green procurement practice is mandatory or required as
Proceedings of 8th Asia-Pacific Business Research Conference
9 - 10 February 2015, Hotel Istana, Kuala Lumpur, Malaysia, ISBN: 978-1-922069-71-9
corporate social responsibility. Green procurement is done to respond to such external
pressure or assessment rather than determined by the financial performance. Green
procurement works stronger when it is mandatory for firms.
On the contrary, the relation of financial performance to environmental management
system (MANA) is positive even though the significant relation is limited. Thus, we regard
that financial performance show higher possibility of transfer of environmental management
(MANA). Environmental management system without clear emission standard is
discretionary and dependent on financial performance. Thus, environmental practices are
intensified depending on conditions such as legitimate regulation or discretionary conduct.
However, both ROA and ROS are financial performance indicators. We need to clarify the
meaning of their results that they are different in the transfer. Our results show that ROA
and ROS have common direction of influence on MANA. We do not suppose a
fundamentally different influence of ROA and ROS on MANA.
From this result, we come to find the two logical paths to the transfer. The result of our
analysis provides specific conditions relative to the transfer. Stage model of environmental
management development suggests that environmental management proceeds forward
according to the resource accumulation of organization(Kolk and Mouser, 2002). Large firms
with big resources show relatively advanced environmental management system.
There seem to be two different paths to environmental management system and green
procurement. In terms of resource size, the result of analysis indicate that environmental
management system has positive relation with economic performance, but green
procurement has not clear positive relation with economic performance because it is more
responsive to regulation and must be guaranteed as prerequisite of transaction with
customer.
So, the analysis of this paper points following implications. First, to evaluate the
consciousness of social responsibility promotes the establishment of environmental
management system and leads to voluntary effort. Second, policy which intensifies direct
regulation such as RoHS directive, functions as a necessary condition of business
transaction. It becomes a prerequisite and firms has to comply with the regulation. Third, the
reduction of greenhouse gas emission, for which clear emission standard or strict regulation
is difficult to be set, increasingly depends on discretionary effort of the firm. In this sense, it
is important to foster the consciousness of corporate social responsibility. This implies that
the role of infrastructure for environment becomes fundamental.
Proceedings of 8th Asia-Pacific Business Research Conference
9 - 10 February 2015, Hotel Istana, Kuala Lumpur, Malaysia, ISBN: 978-1-922069-71-9
Table 1
Variable
GOV
External factor COM
CUS
ROA
Organization of
ROS
parent firm
JOWN
Environmental LDS
strategy
GOAL
ISO
Management
REP
system
GREN
Basic statistics
Mean
Government environmental regulations and mandates are strict
3.667
Community demand for environmental performance in Vietnam is strong
3.026
Customer demand for environmental performance in Vietnam is strong
3.947
Parent company's ROA（return on assets） [average of 2001-2009]
17.930
Parent company's ROS（return on sales） [average of 2001-2009]
20.182
The ownership ratio of Japanese parent firms
94.436
Leadership on environmental issues by top management is strong
4.139
Your company has specific goals for reducing environmental burdens
4.103
Your company has obtained ISO14001 certification
2.658
Your company emission data is reflected to parent company’s environmental report
2.949
The green procurement level of your company is equal to those of companies in Japan
3.222
SD
(0.838)
(1.203)
(0.899)
(11.316)
(10.814)
(14.158)
(0.723)
(0.788)
(0.669)
(0.320)
(0.989)
Note: The items are measured in a Likert type 5 point scale, except for ISO and REP, which are measured
at 3 points.
Table2 Correlations among vairavles
1
1 GOV
1.00
2 COM
0.56 **
3 CUS
0.01
4 ROA
0.19
5 ROS
-0.07
6 JOWN -0.40 *
7 LDS
0.31
8 GOAL
0.45 **
9 MANA 0.31
10 GREN
0.04
2
1.00
0.17
0.19
0.13
-0.25
0.33
0.30
0.31
0.33 *
3
1.00
-0.21
-0.10
0.14
-0.03
0.01
-0.08
0.18
4
1.00
0.74 **
-0.24
0.35 *
0.25
0.17
0.05
5
6
7
8
9
10
1.00
-0.03
1.00
0.47 ** -0.38 * 1.00
0.30
-0.35 * 0.66 ** 1.00
0.19
-0.23
0.26
0.59 ** 1.00
0.07
0.14
0.42 * 0.30
0.15
1.00
Note: ISO and REP are combined and summed up as MANA.
**p <0.01, * p <0.05
Table 3
GOV
COM
CUS
ROS
JOWN
LDS
GOAL
D_scale
Constant
Adj R2
F value
DW
Result of analysis(ROS）
Coefficient
-0.090
0.290
-0.171
0.352
-0.068
0.126
0.302
4.818
Model 1 (MANA)
ｔ-value
Coefficient ｔ-value
-0.453
-0.208 -1.229
1.539
0.331
2.117 *
-1.063
-0.175 -1.306
2.148 *
0.199
1.442
-0.390
0.029
0.204
0.673
0.519
3.329 **
1.934
0.243
1.868
3.642 **
3.776
3.825 **
0.263
0.450
2.681 *
5.214 **
1.418
2.248
Note: **p <0.01, * p <0.05
Model 2 (GREN)
Coefficient ｔ-value
Coefficient
-0.372 -2.115 *
-0.390
0.526
3.019 **
0.549
0.062
0.439
0.084
-0.212 -1.376
-0.020
0.427
2.775 *
0.286
0.679
4.102 **
0.378
0.019
0.140
-0.046
-2.867 -1.721
-0.384
0.438
4.563 **
1.808
ｔ-value
-1.836
2.725 *
0.514
-0.123
1.688
2.012
-0.286
-0.222
0.207
2.268
1.868
Proceedings of 8th Asia-Pacific Business Research Conference
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Table 4 Result of analysis（ROA）
GOV
COM
CUS
ROA
JOWN
LDS
GOAL
D_scale
Constant
Adj R2
F value
DW
Coefficient
-0.106
0.319
-0.192
0.113
-0.019
0.242
0.307
4.589
Model 3 (MANA)
ｔ-value
Coefficient ｔ-value
-0.491
-0.228 -1.304
1.574
0.351
2.182 *
-1.094
-0.190 -1.355
0.641
0.067
0.478
-0.102
0.051
0.350
1.254
0.596
3.971 **
1.827
0.232
1.736
3.214 **
3.717
3.603 **
0.145
0.416
1.802
4.657 **
1.482
2.337
Model 4 (GREN)
Coefficient ｔ-value
Coefficient
-0.322 -1.826
-0.383
0.502
2.805 **
0.543
0.068
0.465
0.086
-0.095 -0.651
0.004
0.388
2.495 *
0.284
0.595
3.849 **
0.370
0.004
0.031
-0.046
-2.563 -1.500
-0.406
0.406
4.118 **
1.955
ｔ-value
-1.864
2.697 *
0.526
0.024
1.683
2.071 *
-0.288
-0.232
0.207
2.265
1.882
Note: **p <0.01, * p <0.05
7. Conclusion
As an advanced research issue of the relationship between economy and environment,
this paper analyzed the relation of financial performance of MNEs to the international
transfer of environmental management practices.
The result of the analysis partly supported hypothesis we indicated. Financial
performance of parent firms enhances the environmental management system of
subsidiary firms under certain condition. But, we cannot conclude that financial
performance always enhances the establishment of environmental management system.
Especially, the relation of financial performance to green procurement is not significant.
This result is consistent with empirical observation that bigger firms strongly recognize
the corporate social responsibility tends to show the transfer of environmental practices
in overseas operations.
We could point out a meaningful finding from the analysis on the transfer of
environmental management practices. However, our study has limitations. Analysis
was done on the small number of samples. And the samples are obtained from country
under specific economic stage of development. Although these limitations should be
overcome, our study suggests useful logical relationship between financial performance
and the transfer of environmental management practices to overseas operation.
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