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The Impact of Environmental Innovations on Financial Performance: The Case of Japanese Automotive and Electronics Companies

By Cortez, Michael Angelo A.; Cudia, Cynthia P. | Journal of International Business Research, March 2010 | Go to article overview

The Impact of Environmental Innovations on Financial Performance: The Case of Japanese Automotive and Electronics Companies


Cortez, Michael Angelo A., Cudia, Cynthia P., Journal of International Business Research


BACKGROUND OF THE STUDY

With the rapid pace of globalization and internationalization of multinational enterprises come social issues of environmental neglect and depletion of natural resources. Issues on sustainability, social responsibility and governance practices call for highlighting activities multinational enterprises (MNEs) engage in to preserve and repair its natural environment.

While sustainability has a triple bottom line--environment, society and economy, environmental concerns seem to predominate value adding reports of Japanese companies. Arguably, without the environment, there will be no society; and without society, there will be no economy. Therefore, concerns for the environment encompasses societal and economic factors (Senge, 2008).

Environmental innovations started early in Japan in response to pollution problems in the 1970s due to rapid industrialization and economic growth. Product design and process improvements have since been institutionalized to be environmentally compliant. Porter (2008) updates his views on competitive advantage with green solutions on resource productivity to societal problems. He cites that product and process improvements has related benefits of cost savings and other income.

In 1997, the Ministry of Environment in coordination with various stakeholders and manufacturing companies came up with the guidelines for environmental reporting with the objective of standardizing reporting practices in Japan. This is in response to the absence of international environmental reporting guidelines, cognizant of the provisions of the Kyoto Protocol, and a move to advance the Global Reporting Initiative (GRI) of 1997. Four years after the initial implementation, the Japanese guidelines were revised and since then, environmental reporting has been a standard value adding non-financial report accompanying the annual report or internal revenue report of Japanese publicly listed companies in the New York Stock Exchange and Tokyo Stock Exchange. It is not surprising, therefore, that the highest adoption of sustainability reporting globally has taken place in Japan as a result of government initiative; followed by France, the U.K. and Germany (Kolk 2003).

The KPMG International Survey of Corporate Social Responsibility (CSR) 2005 revealed that 80% of the 250 companies examined are reporting in the electronics and computers, utilities and automotive and gas sectors (Hopkins 2007). Japanese automotive and electronics companies are most relevant in sustainability studies because of the carbon emissions in the upstream and downstream processes. In its manufacturing activities, companies aim to reduce their carbon emissions while eliminating toxic substances through eco-friendly product designs and energy-efficient process improvements. At the end-user or customer level, products of these companies are subject to energy consumption efficiency, thereby doubling the carbon emissions concerns.

The growing and varied concerns of stakeholders of a Japanese multinational enterprise in recent times highlight non-financial reports and disclosures that determine the quality or manner of financial performance. For almost a decade now, sustainability or environmental reports accompany financial reports to signal social responsibility and governance practices. It is in this light that the researchers investigate the question: how do environmental innovations impact financial performance of Japanese automotive and electronic companies?

This study aims: (1) to present the benefits of environmental innovations to include cost savings and opportunities for other income; (2) to determine the impact of environmental innovations on financial performance of Japanese automotive and electronics companies; (3) and to conclude with lessons learned for countries where subsidiaries and manufacturing companies have not yet adopted the practice of sustainability reporting.

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