I was invited to talk about my previous research in GCSF 2019 last month. Based on my study, I found that generally, the statement “ it pays to be green” also applied in SMEs. The result motivated me to investigate further around the motivations of these enterprises behind being green. It seems that being more proactive rather than reactive is more likely to contribute to firm growth.
Being Proactive
By being proactive, companies can benefit from the improved evaluations of the customers. Meanwhile, proactive firms tend to consider environmental protection as a source of opportunity. Hence, proactively-motivated eco-innovation may contribute benefits to firms.
1. Market Demand
Firstly, market demand has been proved to be an important factor for firms’ decision, but it does not significantly encourage firms a large amount of eco-innovation investment. If firms invest in eco-innovation because they are expecting an emerging green market, they tend to stay ahead before the new demand emerges.
2. Collaboration or spilt-over?
It may be too ambitious for a single SME to engage in eco-innovation. Since proactive firms tend to act by comprehensive consideration and long-term planning, they are likely to develop long-lasting corporation and relationships with other bodies such as NGOs. Partnering with other organisations also gives SMEs access to vital knowledge. This implies that cooperation improves the internal abilities of firms by providing access to more comprehensive knowledge, which SMEs tend not to be able to develop by themselves. Furthermore, when the firms are more open to external resources, they tend to have better innovative performance since openness expands the opportunities. Despite the advantages of cooperation, this openness may hinder the performance if it leads to ‘over- search’ or knowledge spillovers. In short, partnering with other organisations improve the capabilities of SMEs, but the development has to comply with their capabilities and long-term business plans.
3. Future Regulations
Regulation has been proved to be the most effective driver of investment. Stricter environmental regulation is associated with a higher eco-innovation investment. Environmental stringency is particularly effective in most firms. Hence, the difference between proactive and reactive EI maybe if the firms stay ahead of environmental stringency. Proactive firms tend to start complying with higher standards before the standards are implemented, so their investment is less likely to have a crowding-out issue with other investments as they prevent a suddenly increased cost of regulatory compliance. This may be the key to adopt eco-innovation without suffering from financial loss. The effectiveness of regulation may also rely on whether firms are looking forward to being ahead of other peers. Adopting eco-innovation to meet future standards allows firms to stay ahead of existing environmental policy and not to struggle to cope with the current stringency.
Why Negative to be Reactive?
Some firms only invest in eco-innovation to comply with the current regulation. However, this kind of investment may not have a very positive result for a company. Reactive firms are prone to react immediately to comply with the regulations to avoid getting fined. Given the nature of financial constraints which SMEs generally have, the immediate reaction to comply with regulations which imply a sudden increase in cost, which is not likely to be offset in the short term.
Companies which are failing to meet regulatory standards are very likely to face negative effects. Customers are generally responding negatively to reactive actions. When an investment is in the direction of internalising the negative externalities to comply with current regulations, it is less likely to contribute to profitability. Hence, I argue that firms adopting eco-innovation reactively may have to face the risk of profitability decrease or insignificant growth.
Since eco-innovation can be more difficult or costly than its non-green counterparts. In fact, if properly managed, the investment could spur turnover growth and SMEs could contribute to the green growth. However, the positive association between eco-innovation and turnover growth is not automatic. Just following the existing regulations does not lead to better performance. Instead, introducing eco-innovation to stay ahead of regulation increase the possibility of turnover growth. This implies that regulations should follow a path that can be anticipated and allow firms to plan ahead.
