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Firm Performance from the Lens of Comprehensive

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Business and Economy Recent Updates

Book Chapter

Firm Performance from the Lens of

Comprehensive Green Innovation and
Environmental Management System ISO
14001
Parvez Alam Khan and Satirenjit Kaur Johl*

Management and Humanities, Universiti Teknologi

PETRONAS, Malaysia

*Corresponding Author: Satirenjit Kaur Johl, Management and

Humanities, Universiti Teknologi PETRONAS, Malaysia

Published June 15, 2020

This Book Chapter is a republication of an article published by

Parvez Alam Khan and Satirenjit Kaur Johl at Cogent Business
& Management in November 2019. (Parvez Alam Khan &
Satirenjit Kaur Johl. (2019) Nexus of Comprehensive Green
Innovation, Environmental Management System-14001-2015
and Firm Performance, Cogent Business & Management, 6:1,
1691833)

How to cite this book chapter: Parvez Alam Khan, Satirenjit

Kaur Johl. Firm Performance from the Lens of Comprehensive
Green Innovation and Environmental Management System ISO
14001. In: Gerald Aranoff, editor. Business and Economy:
Recent Updates. Hyderabad, India: Vide Leaf. 2020.

© The Author(s) 2020. This article is distributed under the terms

of the Creative Commons Attribution 4.0 International
License(http://creativecommons.org/licenses/by/4.0/), which
permits unrestricted use, distribution, and reproduction in any
medium, provided the original work is properly cited.

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Business and Economy Recent Updates

Acknowledgements: The authors like to thanks to the

Management and Humanities Department of Universiti
Teknologi Petronas, Malaysia, for providing all facilities
throughout the research.

Funding: The author is very much thank full of YUTP-

015LC0-016, Institution of sustainable building and UTP-CGS
for funding this research.

Abstract
The massive influx of global warming, pollution, natural
resource depletion, waste, wastewater, climate change, and loss
of biodiversity are the primary sources of motivating firms to
innovate within their businesses. This has caused great concern
for academicians, policymakers and practitioners to find
solutions in dealing with the environmental issues. To provide
the answer to the exiting challenges this study propounds the
conceptual framework that explores the intervention of the new
amendment in environment management system (14001–2015)
towards innovation, comprehensive green innovation, and firm
performance. Therefore, the main objective of this study is to
find out the role and effect of ISO14001-(2015) on general
innovation and comprehensive green innovation. This study
combined the institutional theory, (environmental management
system) resource-based theory (general innovation,
comprehensive green innovation) and stakeholder theory (firm
performance) to maximise the resources utilisation though newly
amended EMS14001-2015 to meet the stakeholders demands
without compromising the ecological standards. The proposed
conceptual framework will provide a holistic view of the firm in
formulating strategies and implementing a comprehensive green
innovation to the industry. Implementation of a comprehensive
green innovation will enable businesses to reduce the cost of
production and end life cycle impact of the product, process,
service and organisational innovation on the environment. By
considering the end life cycle of innovation, including
minimisation of the resource consumption, waste, waste to water
and emission which will create a sustainable competitive
advantage for the firm. All in all, this study propounds the

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conceptual framework of a comparative study between nomal

innovation, comprehensive green innovation and organisation
performance with the moderation of environmental management
system (14001–2015).

Keywords
Environmental Management System; 14001-2015; Green
Innovation; Green Product Innovation; Green Process
Innovation; Green Service Innovation; Green Organisation
Innovation and ISO 14001

Introduction
The global concern of environment and sustainable innovation
has attracted the attention of industrialists, academia, local
governments, and other institution. In light of current business
practices, green innovation has emerged as a new way of solving
current environmental challenges [1]. Researchers believe that
the inclusion of green innovation in companies strategies will
boost firms to overcome barriers (environment challenges) and
create more sustainable innovation. However, still, there is a
serious concern of an increasing rate of emission, waste,
contaminated water, climate change, biodiversity loss, overuse of
limited resources which are directly affecting the environment
and society [2].

Ho, Wang, & Shieh, [3] point out the sustainable thinking is
essential to leverage both sides of the strategic integration for
enterprises correctly to achieve green innovation. In the same
way, the above-mentioned challenges need to develop
comprehensive green innovation paradigm to uproots the
environment problems, which is also lacking in most of the
existing innovation paradigm. This study defines comprehensive
green innovation as a combination of green product, green
process, green service innovation (Operational) and green
organisation innovation (Non-operational) which provide the
strategic vision of a comprehensive green innovation in research
and development activity. This study suggests that

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comprehensive green innovation may accelerate resource-saving,

creating more sustainable process, competitive advantage and
generate higher revenue for the business.

To address the environmental challenges, many improvements

and implementations were made for the betterment of the
environmental management system (EMS 14,001) from the year
1973 to 2004 The recent amendment, in the year of 2015 of EMS
(1SO-14,001) is leadership and their commitment to addressing
environmental challenges. Additional modifications were taken
in the area to protect the environment, taking initiatives to
address risk and opportunity of environment, considering
lifecycle perspective of the product and operational control, and
lastly establishing communication mechanisms for the
organisation to improve the environmental management system.

The EMS (14,001) is a set of rules, regulations, and guidance for

the business to abide during the operations. EMS has been
adopted by almost all companies around the globe. The primary
purpose of EMS-14,001 is to improve the environmental
performance of the firm by effective and efficient utilisation of
resources, reduction of wastage, developing competitive
advantage, and trust of related stakeholders.

Several studies [4,5] were conducted on sustainability and

environmental management system but a clear understanding of
the nexus and effect of environment management system EMS-
14,001-2015 on comprehensive green innovation not
investigated after the amendment in ISO14,001-2015.

Literature Review and Framework

Development
A framework model is a graphical and analytical tool that
rationally combines the different variation and context of the
notion to develop a method which will provide the immeasurable
probable elucidation of the subject at stake. Currently, literature
has coined various forms of innovation namely; user innovation,
disruptive innovation, green innovation, open innovation,
design-driven innovation, social innovation, common innovation,

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responsible innovation, convergence innovation, indigenous

innovation, total innovation, secondary innovation and
embracing innovation [6]. This study integrates green innovation
and holistic innovation to define comprehensive green
innovation. Comprehensive green innovation can also be
described as a combination of holistic innovation and sustainable
innovation to enhance innovation and operation activity of the
business. Comprehensive green innovation consists of two main
elements, namely general innovation and green innovation.
There are seven sub-elements, namely general product, process,
service, green product innovation, green process innovation,
green service innovation, and green organization innovation.

Innovation and Firm Performance

Companies that pursue innovation may reflect through the

improvement and creation of a new product, process, and
service, which will bring revenue for the business. Innovation
can be highly achieved by spending a high amount on the
adoption of new technology and research & development. These
expenditures may increase the market value and the number of a
patent of the business.

Several studies [7,8] were conducted in different contexts, and

countries that found business performance is positively
associated with innovation. On another hand, Santos, Basso,
Kimura, and Kayo [9] found there is no direct relationship or
short term effect on a firm’s financial performance.

Also, prior literature showed conflict and mixed results of

innovation and business performance relationship. In a recent
study conducted by de Oliveira, Basso, Kimura, and Sobreiro
[10] showed that innovation efforts had a positive effect in lieu
of product, but this impact of innovation does not necessarily
convert into financial business performance. On the contrary,
research conducted by González-Fernández and González-
Velasco [7] found that the level of innovation effort had positive
economic performance, especially in generating sales revenue.
The researcher also pointed out that innovation efforts and
generating sales revenues depends and differs according to the

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size of the business Bamfo and Kraa [11]. Also, González-

Fernández and González-Velasco [7] founds that the relationship
of innovativeness is more favourable among SMEs financial
performance.

Atalay, Anafarta, and Sarvan [8] found that out of four types of
innovation, (product, process, organisation, and marketing
innovation) product and process innovation indicated a
significantly positive relationship with financial performance and
creating a sustainable competitive advantage for the firm. In
longitudinal research conducted by Artz, Norman, Hatfield, and
Cardinal [12], it was found that product innovation and firm
performance in different industry in the US and Canada found
product innovation had substantial significant nexus of business
performance. This result seems to be consistent with the current
literature of innovation and firm performance [13-16]. Whereas
prior literature of service innovation, significant relationship
with firm performance and measurement are under-researched.

To measure the financial and non-financial performance,

researchers and industrialists have used different measurement
techniques; such as registration of patents and trademarks, R&D
investment and sales outcomes, ROI and gross margin from the
sale of new products. Also, McKinsey & Company [17] recently
published an article on “How to take the measure of innovation,”
in which McKinsey provided the easiest way to measure
innovation and R&D output that is considered reliable and
watermark. McKinsey [17] claimed that to measure innovation;
one must first find out the return from every dollar spent on
R&D to invent new products from their sales. Secondly, one
must compare gross margin performance against fellow peers in
the industry. Therefore, this study proposes the following
hypotheses:

H1: Innovation has a positive nexus with firm performance

H1a: Product innovation has a positive nexus with firm

performance

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H1b: Process innovation have positive nexus with firm

performance

H1c: Service innovation has a definite link with firm

performance

Green Innovation (GI) and Firm Performance (FP)

The concept of green innovation proposes modification or

introduction of a new product, process, service, and system,
which can minimise the emission and burden from the
environment and contribute towards a green environment [18].
Green innovation has proved to be a popular problem-solving
concept in recent decades of global warming and environmental
challenges. The term green innovation is a synonym for
environmental innovation, eco-innovation, and ecological
innovation has used by a different author, context and counties
stated by Tariq, Badir, Tariq, and Bhutta [19] which aim to blend
environmental and economic performance, thus creating value
for all stakeholders in strengthening the firms.

Green innovation literature has evolved over the past two

decades with mounting environmental threats [19]. Scholar
Albort-Morant, Leal-Millán, and Cepeda- Carrión [20] claimed
that firms are given an avenue to increase competitive advantage
when they apply green innovation and green management [3],
while also enjoying numerous benefits such as goodwill,
stakeholder trust, and high price. This is especially true if the
firm is the first mover. Chen, Yin, and Mei [6] stated that
effective and efficient performance and profitability of the firm
could be achieved by implementing green innovation.

Green innovation may consider the chance for firms to include

environmental issues into their strategies, along with
consolidating another strategy, including implementation. Many
companies fail to take up the aforementioned opportunities to
create competitive advantage and make an effort to solve
environmental problems [21]. Green innovation contributes in
two ways, ecological and financial performance of the business.
Many researchers have introduced forms of green innovation-

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green product innovation ([18,19,22], green process innovation

[22] and green service innovation [23]. This study includes the
utmost aspect of green innovation found in the current literature,
which is all operational outlook of business but non-operational
is missing that is green organisational innovation. Therefore, the
following hypothesis is:

H2: Green innovation has a positive relations//hip with firm

performance

Green Product Innovation (GPI)

Green product innovation has shown more benefits among

stakeholders throughout their lifespans. However, the
development of the green product is sluggish in meeting future
expectations, as stated by Ilg [24]. Green product innovation
emboldens the efficient and effective use of limited resources,
and it minimises waste to generate additional revenue and cash
flows [25].

Green product innovation also generates corporate goodwill,

build a unique market position, obtain a competitive advantage,
and build green leadership reputation. It is becoming a huge
profit source for businesses and will be able to create goodwill in
the minds of the customers. Furthermore, Ar [25] explains that if
the organisation focuses on product innovation and
environmental repercussions, it can gain a competitive advantage
over its competitors.

Reinhardt [26] and Chen, Lai, and Wen [27] found that GPI is
wholly linked with the competitive advantage of the
organisation. GPI is more effective in attracting external
stakeholders than internal stakeholders. GPI depicts the vision
and mission of the firm along with green mindfulness of
employees at every level of management.

H2a: GPI (Product) has positive nexus with firm performance

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Green Process Innovation (GPI)

Green process innovation is initiated by adopting clean

technology and eco-saving equipment to enhance energy
efficiency and maximise resource utilisation along with
eliminating the emission of greenhouse gases [28]. GPI is the
second imperative element of green innovation, which mitigates
the negative environmental impact through waste management,
water management, and green raw material [22]. It also enhances
the operational efficiency and financial performances of the
organisation and creates trust among internal stakeholders. This
is because GPI provides a safe work environment for the
employees by eliminating environmental effect within the firm’s
premises. By minimising water wastage and recycling waste, it
can also attract external stakeholders for future investment.

However, many firms are lagging in the adoption of green

process innovation. Dai and Zhang [28] found that this is due to
the lack of complete customer awareness, risk of huge
investment promotion, and enforcement of green innovation by
the government. If the firm adopts green process innovation, GPI
can benefit firms in terms of revenue and directing the external
stakeholders’ attention towards their firm performance.

H2b: GPI (process) has positive nexus with firm performance

Green Service Innovation (GSI)

Green service innovation is the third element of green

innovation. It has attracted section of the academia and
industrialists on the demand of competitiveness, which is under-
researched [29]. It is after sales operational activity that is highly
considered as a deciding factor in purchasing behaviour. Green
service innovation after sales is less scrutinised by the
environmental regulators. Further, that can also minimise the
cost of capital of the business.

In addition, companies must not only look for minimising costs

from the green service innovation aspect but also the
environmental perspective, that can make the firm stand out

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among its competitors. Due to increasing awareness of

customers and investors, companies must not only focus on other
green innovation elements but also, pay attention to green
process innovation which advocates the elimination of
environmental effects along with winning the confidence of
investors and customers [29]. Green service innovation can
equally contribute to achieving economic, social, and sustainable
development, just like every element of green innovation. This
study thus hypothesises that green service innovation positively
affects the performance of the business.

H2c: GSI (Service) has positive nexus with firm performance

Green Organization Innovation (GOI)

Green organisation innovation is a non-operational innovation

element of green innovation. It may indirectly save the capital
cost and enhance the revenue of the business if the non-
operational activities are sustainable. Sustainable non-
operational activities of the business refer to minimising the
electricity consumption, indirect and direct emission, waste
management, and water management in non-
production/manufacturing innovation.

Also, green organisational innovation can be another practical

element in generating revenue of the business and attracting the
responsible investment, boost confident of related stakeholders
to create competitive advantage. Therefore, this research thus
hypothesizes;

H2d: GOI (organisational) has positive nexus with firm

performance

Firm Performance
Firm performance is almost objective of every related
shareholder of the firm. Measuring firm performance is
significantly imperative as it provides entropy on the goal and
objective of the business that how well they have been achieved
in the financial year. Well, performing business attracts

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investors, as prospect investor monitors business in making an

investment decision on whether to initiate, to wait or not to
invest.

Business performance measured though financial outcome is not

the only one way to asses in this industrial revolution, but by
incorporating the environmental social and governance (ESG)
factors in business reporting has become another compelling way
to assess the firm performance.

The incorporation of ESG and introduction of sustainable

development goals has attracted investors to consider the
investment decision on ESG and SDG parameters, but due to
limited resources this study will adopt the financial measure to
assess the effect of ISO 14,001 on innovation, green innovation
and firm performance

In this study, business performance can be measured through

mainly three metrics namely return on capital employed
(ROCE), net profit after tax (NOPTA), and total shareholder
return (TSR).

Return on capital employed is financial ratio which measures

company efficiency and profitability on capital invested. ROCE
will clarify the ability of profit generation and sustainability of
the firm.
EBIT
ROCE 
CapitalEmployed

Whereas net profit after tax (NOPT) measures the core operating
efficiency without any influence of debtors, merger and
acquisition. This ratio will refine the finding of the ISO14,001
effect on innovation and firm performance. On the other hand,
total shareholder return will provide this study more refine
performance of the firm in terms of capital gain and dividend to
the investor.

Therefore, using these three accounting ratios will provide a

more precise performance of the business.

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Moderating Effect of Environment

Management System (EMS)
The environment management system is a set of rule, regulation,
and guidance for the business to be followed during the
operational and non-operational activity [30].

Since the introduction of EMS, it has been adopted by business

around the world and but due to a recent amendment in the year,
2015 EMS (1SO-14,001) added risk & opportunity, including
environmental aspects in the product, product life cycle,
environmental requirements for purchasing, leadership and
commitment toward the environment brings into the discussion
of investors.

The primary purpose of EMS-14,001 to improvise the ecological

performance by effective and efficient utilisation of resources
and reduction of wastage. Numerous research has found similar
sets of findings that environment standard 14,001 enables the
business to reduce the impact of their operational and non-
operational activity on the environment [31-33].

The growth of the number of certified organisations worldwide

increases at an increasing rate of 10% annually which is the
evidence of popularity amongst investors and organisations.
Researcher. Several scholarly studies have described the positive
impact of the standard on various aspects such as corporate
image [34] regulatory compliance and waste minimisation [35].
Other studies have questioned the positive impact of the standard
on environmental performance [36], claiming that the adoption
of ISO 14,001 does not lead to significant improvements.
Generally speaking, various studies have shown that the growth
of management practices and standards such as ISO 14,001 can
be driven by various institutional pressures and is not indicative
of their real effectiveness [37].

In the same way implementation of the environmental

management system will affect the firm innovation and green
innovation activity.

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The adoption and outcome of ISO 14,001 are inconclusive be it

in operating activities or organisational activities.

Therefore this study intends to analyze the effect of ISO 14,001

in organisational innovation and green innovation activity with
the assumption of a positive effect. Below hypothesis is
developed on the assumption of ISO claims of positive effect
over firm performance.

H3: Does the environment management system moderate the

positive nexus between innovation and firm performance

H4: Does the environment management system moderate the

positive nexus between GI and firm performance

Conceptual Framework
A proposed conceptual framework is an analytical tool or study
design which is designed to guide the entire research; theories
are constructed to explain the relationship between variables. A
conceptual framework is backed by two main philosophies:
Stakeholder theory, pertinent with the innovation and
comprehensive green innovation and institutional theory with an
emphasis on the pressure or hindrance of environment
management system on emphasising of selecting investment at
the effective and efficient frontier line to enhance the overall
performance.

The proposed framework model is composed of three variables:

independent as innovation and comprehensive innovation,
moderator as EMS-14,001-2015 and dependent variable as firm
performance as shown in Figure 1.

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Figure 1: Firm Performance.

It has been theorized that certification and implementation of

EMS 14,001–2004 have a positive effect on business
performance. So does the updated EMS 14,001 2015 have
accelerated the innovation and comprehensive innovation
activity which will have a positive impact on the firm
performance? This moderating variable namely EMS 14,001–
2015 will help efficient use of resources, adoption of clean
energy, technologies, as well as EMS 14,001–2015 will be able
to guide top-level managers to respond the expectation of
stakeholder without affecting the future generation needs and
wants.

Also, to measure each variable, there is the main critical element

namely; waste, water consumption, emission management,
electricity consumption, responsible investment, and
certification, which will be considered in collecting primary and
secondary source.

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Future Research
Future researches may empirically examine and validate the
propounded conceptual framework. The authors anticipate future
research to explore the theoretical framework of various
industries and nations. For instance, the propounded research
model can be examined in different domains and with larger
sample size. This study will encourage to generalised the
framework of EMS-14,001-2015 innovation and comprehensive
green innovation in future business activity to sustainable
competitive advantage.

Furthermore, quantitative methodologies could be tested and

validate the nexus of innovation, comprehensive innovation, and
organisational performance with the moderating effect EMS
14,001–2015. Additionally, this research could be useful for
academia to conduct research and analysis to find out EMS
14,001–2015 on environment and society.

Conclusion
This study is at the initial stage, presenting a research model that
investigates the moderating effect of the environmental
management system (14,001–2015) onto the nexus between
comprehensive green innovation, general innovation and
business performance measured through financial ratios. The
objective of the proposed study is to investigate the
positive/negative pressure of EMS (14001–2015) on eco-friendly
innovation which could save the firm resources (cost of
operation, product and process) natural resources (energy, water,
waste and emission minimisation) that ultimately leads to
increase in firm revenue generation and performance.

The study can be conducted on the public listed firms as there is

a requirement to adopt and follow the ecological standards
proposed by ISO14001. The expected finding of this research
framework model is expected to be different as this study is
intended to see the effect of newly amended EMS14001-2015 on
green innovation and general innovation.

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On the other hand, this research framework will be helpful to

senior-level management to apprehend the impact of
comprehensive green innovation framework for public listed
companies of Malaysia. Apart from this proposed model may
also provide a reference to public listed companies Bursa
Malaysia to apprehend and identify the decisive factors and
serve as an imperative channel to improve their financial value.
Secondly, the integration of comprehensive green innovation and
EMS (14001–2015) certification will assist the business in the
improvement of return on capital employed (ROCE), net profit
after tax (NOPTA) and total shareholder return (TSR).

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