Forging links between innovation and sustainability:An empirical examination of the effects on a firm’s financial performance

Abstract

Greenhouse gas (GHG) emissions from the North American energy and energy-intensive materials production sectors account for more than 50 percent of total GHG emissions. Based on the argument that CO2 emissions need to be reduced by more than 50 percent by 2050, energy sector and energy-intensive materials production processes that cause environmental harm are considered a key contributor that cannot be neglected. The challenge is to reduce greenhouse gas emissions from both sectors consistent with corporate sustainability goals and government policy objectives. Energy firms have been auctioning aggressively on carbon-free alternatives to minimize their current footprint. Reducing energy demand and consumption along with related GHG emissions decrease in the production processes of the five key materials: steel, cement, plastic, paper, and aluminum; can have a considerable impact on the environment. Therefore, this research studies the role of innovation and sustainability in the evolution and co-evolution of the energy and energy-intensive materials production firms’ sectors within North America. A quantitative understanding of the causal significance of the association between corporate innovation and corporate sustainability and their combined effects on corporate financial performance would be of great value to decision-makers. Previous academic literature has focused on the importance of innovation, but relying solely on innovation will not guarantee a firm’s success. Sustainability is becoming an increasingly central feature of business operations. Because firms are more likely to apply financial resources to programs that directly affect their profitability, the study offers an analysis of the combined impact of innovation and sustainability on a firm’s financial performance as an aid to support the decision calculus for allocation of scarce resources. This study presents a synthesis of the literature broadly described as the resource-based view, the capability approach, institutional theory and the stakeholder’s theory. A structural equations model is developed with corporate innovation and corporate sustainability as the exogenous (independent) latent constructs and corporate financial performance as the endogenous (dependent) latent construct. The study uses the structural equation modeling (SEM) technique to analyze the hypothesized theory using archived data extracted from different publicly- and privately-available reports. All financial information was obtained from Compustat, an accounting, and financial database for more than 25,000 publicly held companies, as well as research and development expenditures for 2014. All environmental stewardship, social responsibility, and community involvement information was retrieved from public corporate responsibility reports and corporate citizenship documents. All patent information was acquired from the Lens database, an open public resource for innovation cartography, the USPTO, short for, United States patent and trademark office, and the CIPO, short for, Canadian intellectual property office. The structural equation model provides evidence that exogenous (independent) latent constructs have strong, significant positive associations with the endogenous (dependent) latent construct. The model shows that corporate sustainability has a significantly greater association with corporate financial performance than corporate innovation. Based upon key innovative characteristics consisting of R&D expenditures, R&D prior, patent applications, patents granted, and R&D expenditure as a proportion of total revenues, namely R&D intensity, the model displayed a positive association with corporate financial viability. The data analyzed showed a strong and positive association between different sustainability themes’ indicators and the firms’ financial prosperity. Further, it was proven empirically that there is a strong positive association among the innovation manifest variables chosen with the corporations’ financial viability different indicators. Analysis of results indicates a strong reciprocal association between corporate innovation and corporate sustainability which is valid in both directions. Sustainability can drive innovation, and innovation can foster and prompt sustainability. The research illustrates how environmental stewardship, social responsibility, and community involvement manifest indicators can be combined to reflect an organization’s level of sustainable development as well as innovation indicators that describe economic performance. Research results provide insights on how businesses respond to societal demands while maintaining long-term business viability. This study offers a clear understanding of different relationships and capability to evaluate the potential impact of key factors. Results of this study will assist corporate managers to better understand the impact of innovation and sustainability expenditures, therefore, improve the allocation of scarce resources. This dissertation outlines new empirical evidence of North America’s energy and energy-intensive materials production sectors with time dependency of performance. The research outlines the theoretical and practical basis for improved corporate financial performance and offers recommendations for additional studies. The qualitative components of this study provide a greater understanding of the concepts multidisciplinary and linkages, of the relationship between sustainability and innovation. The study has created an instrument that can help shape organizational transitions and evolution. Stakeholders can use this comprehensive document to aid organizations’ response to environmental, social, and economic challenges and issues.