Testing non-linear relationships between environmental innovation and firm performance.

Abstract

Despite the growing interest in environmental innovations, there is still no consensus about their effect on firm performance. On the one hand, advocators of environmental innovations state that such innovations exert a positive influence on firm performance, as they can reduce production costs, open new markets and improve a firm’s corporate image, among other benefits. On the other hand, environmental innovations represent relevant drawbacks such as high development costs and uncertainty, which drives some authors to establish a negative link. We try to shed light on this debate by stating that this relation is more complex than a simple linear association; hence, we propose a U-inverted relationship between environmental innovations and firm performance. In addition, we claim that firm age plays a key role in that relationship, as more mature firms find it more difficult than younger firms to capitalize on environmental innovations to improve firm performance. Our longitudinal analysis of 4,634 environmental patents from 75 companies belonging to the electrical components and equipment industry worldwide confirms our hypotheses.