Accepted Manuscript

Does firm size matter? Evidence on the impact of the green innovation strategy on
corporate financial performance in the automotive sector

Woon Leong Lin, Jun-Hwa Cheah, Mohamed Azali, Jo Ann Ho, Nick Yip

PII: S0959-6526(19)31301-0
DOI: https://doi.org/10.1016/j.jclepro.2019.04.214
Reference: JCLP 16570

To appear in: Journal of Cleaner Production

Received Date: 27 January 2019

Revised Date: 2 April 2019
Accepted Date: 18 April 2019

Please cite this article as: Lin WL, Cheah J-H, Azali M, Ho JA, Yip N, Does firm size matter? Evidence
on the impact of the green innovation strategy on corporate financial performance in the automotive
sector, Journal of Cleaner Production (2019), doi: https://doi.org/10.1016/j.jclepro.2019.04.214.

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Authorship:

Mr.
Woon Leong Lin
[email protected]
Faculty of Economics and Management, Universiti Putra Malaysia, Serdang, Selangor,
Malaysia

Dr.

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Jun-Hwa Cheah (Corresponding Author)
Senior Lecturer
[email protected]

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Faculty of Economics and Management, Universiti Putra Malaysia, Serdang, Selangor,
Malaysia

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Professor
Prof. Mohamed Azali

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[email protected]
Faculty of Economics and Management, Universiti Putra Malaysia, Serdang, Selangor,
Malaysia
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Assoc. Prof
Jo Ann Ho
[email protected]
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Faculty of Economics and Management, Universiti Putra Malaysia, Serdang, Selangor,

Malaysia
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Professor
Nick Yip
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[email protected]
Norwich Business School, University of East Anglia, Norwich, UK
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 ACCEPTED MANUSCRIPT
Does firm size matter? Evidence on the impact of the Green Innovation Strategy on
Corporate Financial Performance in the Automotive Sector

Abstract:

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In the past few years, there has been increasing awareness regarding the significance of the

Green Innovation Strategy (GIS) in the academic and practical fields. Hence, it becomes

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important to determine the correlation between the GIS and the Corporate Financial

Performance (CFP). This study attempted to determine the dynamic correlation between the

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GIS and the CFP, with regards to the firm size. For this purpose, this study has collected data

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for 163 international automotive firms, from the CSRHub database, for the period ranging
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between 2011 and 2017. Furthermore, we also used the dynamic panel data system, i.e., the

Generalised Method of Moment (GMM) method, for estimating this relationship. The
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empirical results indicated that the GIS positively affected the CFP. Interestingly, we also

uncovered that the firm size moderated the negative correlation between the GIS and the
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CFP. The small-sized firms showed higher green innovation investments return than the
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larger-sized firms, which indicated that these smaller firms were more prone to seek variation
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and visibility, for accessing better resources. Furthermore, due to the extensive scrutiny of the

stakeholders, these small firms could generate higher profits. The implications for managers
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and the theories in this regard are then discussed.

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Keyword: Green innovation strategy; corporate financial performance; automotive industry;

GMM; firm size.

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1. Introduction

Currently, the automotive industry faces many obstacles. This sector generally relies on the

technological paradigm of volume production, which has gradually become more

unprofitable due to the increase in the segmented niche markets. Furthermore, this sector has

to undergo many social and regulatory pressures, which can improve the sustainability of all

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its products and production methods. Research conducted in this field showed that the

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automotive sector is facing these challenges and have to establish techniques for developing a

profitable and sustainable sector for future generations (Smith and Crotty, 2008) After the

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publication of KPMG’s report (2012) on environmental regulations in the automotive sector,

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various governments started imposing strict environmental regulations on the OEMs

(Original Equipment Manufacturers) for controlling the CO2 emissions. For example, the
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European Commission implemented legislation for testing fuel quality, reducing emissions,
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and fuel consumption as follows:

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• By 2021 the cars, which emit >95g of CO2/km, would be disallowed in the market.
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• By 2020, the greenhouse gas intensity of all automobile fuels must be reduced by 10%,

for improving the fuel quality.

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• By 2021, the automobile manufacturers should produce light-duty vehicles that

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consume <3.6 l/100 km of diesel or <4.1l/100 km of petrol.

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In the past, the transportation sector was seen to be responsible for 27% of the total

global energy consumption and 33.7% of all greenhouse gas emissions (Tie and Tan, 2013).

These trends would change in the future, due to the scarcity of fossil fuels and increasing

environmental pressure (Nilsson et al., 2012). Because of the increasing concern with regards

to the environmental issues, by the public, consumers, suppliers and the administration, a
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majority of the firms have begun the development of environmentally-friendly green products

(Green et al., 2012; Tseng et al., 2013). Hence, the techniques which save energy, or reduce

CO2 emissions and air pollution, in the automotive sector, are important challenges and issues

affecting the governments (Hui, 2010). In their study, Shrivastava (1995) stated that firms

must differentiate their products, lower production costs, improve product quality and

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develop more innovation processes. Therefore, continuous innovation was seen to be an

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important strategy which could help in overcoming the pressures implemented by the

competitors, customers and the regulators (Porter and Van der Linde, 1995).

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Due to the strict international rules, increasing consumer environmentalism, and the

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conventions regarding green innovation, the competition and the business-related tactics have

undergone a significant alternation in all global industries. These factors have also affected
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the business in the automotive industries. Hence, the Green Innovation Strategies (GIS) have
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played a vital role (Russo and Fouts, 1997). GIS is described as the development of green

process and green products-related innovation strategies and decisions, that associated with
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the application of green activities and environmental management systems (Eiadat et al.,
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2008; Tomomi, 2010; Dong et al., 2014). On the other hand, very few researchers have

investigated the effect of the GIS on the Corporate Financial Performance (CFP). CFP is
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defined as measuring the results pertaining to a firm's operations and policies in monetary
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aspects. The company's return on investment, value added and return on assets as depicted
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with these results. In this research study, CFP has been employed as an instrument to measure

economic performance as well as integrating accounting-based measures, which includes

asset utilisation, firm’s profitability, return on equity, the return of investment and return on

asset (Wu, 2006). An organisation’s internal efficiency is represented by the accounting-

based measures, which is impacted by the social performance of the organisation (Van and

Grossling, 2008). So, it is important to develop policies that can effectively implement GIS in
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the industries (Petts et al., 1998). In this study, we have attempted to bridge this gap and

described many novel green innovation-related concepts.

In the past few years, GIS was seen to one of the major factors that affected

environmental sustainability, financial growth and life quality (Porter, 1981; Bansal and Gao,

2006; Dangelico and Pujari, 2010). Implementation of the GIS is a vital tool which increases

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the sustainable growth of the manufacturing industries due to an increasing environmental

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pressure, especially in the automotive sector. Use of GIS embodies the idea of environmental

protection for designing and packaging products and improving the differentiation-related

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advantage (Hart, 1995; Chen et al., 2006). The implementation of GIS could significantly

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increase the resource productivity of the companies (Porter and van der Linde, 1995).

Therefore, the development of GIS would help in resolving the conflicts between
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environmental protection and economic development.
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In this study, we have also attempted to examine the connection between the GIS and

their effect on firm profitability in the automotive industry. Furthermore, this study also
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intended to determine the effect of firm size on the GIS and CFP in the automotive industry.
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This study collected the data from the CSRHub for a period ranging between 2011 and 2017

and investigated whether the green innovation investment would increase the shareholders’
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wealth. We also studied whether the significance of these activities varied based on the firm
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characteristics (like firm size) employing the dynamic panel data system GMM estimator.
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The empirical outcomes highlighted the significantly positive relationship between GIS and

CFP. This positive relationship was persistent when this study attempted to control the

endogeneity of GIS. We further noted that the effect of the negative relationship between the

GIS and firm size on the CFP could be due to the fact that the GIS spending by the company

provides an overall limited tangible benefit, and helps the company obtain better profits. A

small firm size showed higher efficiency than the larger firms. This indicated that the agency
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costs (like the ineffective use of the corporate funds) encountered while implementing the

GIS in the larger firms were the dominant factor that affected the strategic benefits which

these firms could derive after the green innovation investments. Implementation of GIS could

significantly upsurge the profitability of the smaller firms. Hence, the results indicated that

the total benefits derived by the implementation of the GIS were not a one-size-fits-all and

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were dependent on the firm characteristics.

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Based on the study results, we have put efforts to make three key contributions to the

literature with regards to this topic. First, as per our knowledge, we are the first to examine

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the unique setting of GIS’s role pertaining to firm size interactions. Also, prior studies have

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not considered longitudinal aspect pertaining to GIS (e.g., Aguilera-Caracuel and Ortiz-de-

Mandojana, 2013; Gluch, Gustafsson and Thuvander, 2009; Chen et al., 2006; Ge et al.,
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2018). This research offers insight regarding the growing need to understand the impact of
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firm size in justifying that the enhancement in green innovation improves firm-level financial

performance.
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Second, we put forward a significantly positive relationship that exists between CFP
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and GIS, which was crucial as it could help to solve the existing perspective defining the

relationship. Our finding offers a holistic means to examine the firm’s conditions that allow
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organisations to create green innovation initiatives as well as simultaneously enhance their

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financial performance. Moreover, we have stressed on the importance of the combination or

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configuration pertaining to the firm size, which could cast an impact on the automotive sector

employing GIS. In this research study, we have provided in-depth insights by considering all

the factors that could have a role in simulating the GIS of an organisation. Also, we have

made an effort to aid governments and policymakers in designing impactful mechanisms and

guidelines (instead of just creating regulations), thereby allowing the development of

environmentally responsible attitudes.

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Finally, many of the corporate finance and empirical management researchers

recognise at least two potential sources of endogeneity: simultaneity and unobservable

heterogeneity (Wintoki et al., 2012). However, one source of endogeneity that has usually

been ignored (explicitly or implicitly) comes from the possibility that the current values

pertaining to firm performance variables are regarded as a function of previous performance

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of the organisation. Overlooking this source of endogeneity could cast serious impacts for

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inference. This study has applied a system GMM estimator (Arellano and Bover, 1995;

Blundell and Bond, 1998) on the dynamic panel data to resolve the issue pertaining to

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endogeneity between the CFP and GIS, which offers evidence confirming their relationship.

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Moreover, employing this technique has allowed gaining an understanding of the

unobservable heterogeneity as well as a better depth pertaining to this study.

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This study was structured as follows: Section 2 provided a brief overview of the
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related literature with regards to the theoretical foundations. Section 3 describes the method,

data sample collection techniques and the measurements for all variables. Section 4 presents
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the descriptive statistics, all correlation coefficients between the variables, and also the
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outcomes of the interactive effect of the firm size. Section 5 discusses all results and offers

directions for future studies. Finally, Section 6 presented the conclusions and implications of
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this study.
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2. Literature Review and Hypotheses Development

2.1 Ecological Modernization Theory (EMT)

The ecological modernisation (EMT) theory deals with analysing how contemporary

industrialised societies handle environmental crises (Mol and Sonnenfeld, 2000). The EMT

theory that defines environmental innovation is put forward as a possible solution to resolve

the conflict between environmental protection and industrial development (Murphy and
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Gouldson, 2000). As there is a need to achieve environmental performance and profitability

simultaneously, as envisaged under EMT, green management has emerged as a key

management practice for organisations seeking to gain competitiveness via environmental

innovation (Hall, 2001). EMT postulates that continued industrial development, instead of

inevitably continuing to degrade the environment, provides the best choice to avoid the global

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ecological challenge (York and Rosa, 2003). The perspective central to EMT can be

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attributed to the era of modernity that provides a promise that technology development,

industrialisation, capitalism and economic growth are not just potentially compatible with

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that of ecological sustainability but also could act as the major drivers to bring environmental

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reforms (Mol, 1995). EMT also implies the chance of it being inherent to the process of late

modernisation which could be self-referential mechanisms (e.g. the requirement to internalise

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environmental effects to guarantee future production inputs) that could possibly result in
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ecological sustainability (York and Rosa, 2003).

EMT provides a theoretical lens to examine the relationship existing between

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innovation and environmental performance (Jänicke, 2008). It also motivates organisations to

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employ sustainable technology that allows decreasing the environmental impact on their
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business. EMT focuses on the chance of achieving ecological-economic ‘win-win’ solutions,

above all, by ensuring cost minimisation as well as competition for innovation. As per EMT,
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the aim of the firm is to modify the direction of technological progress and to establish the
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compulsion pertaining to innovation benefitting the environment (Jänicke, 2008). Even

though EMT offers a wide concept, in this study, we have emphasised on the impact cast by

environmental performance on financial performance. The theoretical insight pertaining to

EMT states that technological innovation would aid firms in enhancing both their economic

and environmental performance. To this extent, EMT implies that firms can address

environmental issues as barriers when technological change is complemented with

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organisational change (Park et al., 2010). We have contested that EMT needs to be regarded

as a pertinent management theory that allows understanding and guiding management

innovation and change that is ecologically oriented, at the level of firm analysis. The core

theoretical underpinning that surrounds the EMT states that organisational technological

innovation, like GIS, will aid the firms in enhancing both economic and environmental

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dimensions.

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2.2 Green Innovation Strategy

Driessen and Hillebrand (2002) defined the concept of ‘green innovation strategy’ and stated

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that this concept may not be developed with an aim to reduce the environmental burden.

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However, it yields several important environmental benefits. In their study, Chen et al. (2006)
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defined GIS as the software or hardware innovative activities related to the green processes or

products, like innovative technologies involved in preventing pollution, energy-saving,

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waste-recycling, designing green products, or even corporate environmental management.

Organisation for Economic Co-operation and Development (OECD, 2009) defined GIS as the
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implementation or creation of novel, better-quality services/ goods, processes, marketing

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techniques or institutional arrangements, that intentionally or unintentionally, can offer better

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environment compared to their other alternatives. This innovation includes many

technological innovations required for preventing pollution, energy-saving, waste-recycling,

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designing green products, or even environmental management (Lai et al., 2003). It is seen to
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extend beyond regulatory compliance (Aragón-Correa et al., 2013). Hence, green innovative

companies include those companies which are needed for implementing a process of

improvement and constant growth which can lead to better and concrete green strategies

engagements (i.e., green technologies and products) (Marcus and Fremeth, 2009).
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2.3 Green Innovation Strategy and Corporate Financial Performance

GIS is described as the development of green process and green products-related innovation

strategies and decisions that associated with the engagement of green activities and

environmental management systems (Eiadat et al., 2008; Tomomi, 2010; Dong et al., 2014).

The ecological modernisation theory has encouraged companies to implement novel

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technological and scientific processes, which would help them strengthen the green processes

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and green products (Mol et al., 2009; Zhu et al., 2012). Here, this study has applied the

definition presented by Huber (1985), who stated that ecological modernisation was a major

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economic theme involved in the eco-social switchover, as it could lead to the modernisation

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of the production and consumption cycles using intelligent and novel technologies.

GIS helps in decreasing the negative effect on the environment and also enhance the
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competitive advantage of the various industries. The companies that advocate the
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implementation of environmental innovation strategies would lead to the development of a

novel business model and alter the rules which help in generating a better business
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opportunity (Chiou et al., 2011; Chen et al., 2012; Chang and Chen, 2013; Dong et al., 2014).
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Earlier studies showed that the implementation of GIS offered positive firm benefits and

economic developments. In one study, Huang and Wu (2010) observed that environmental
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innovation in high-tech firms could significantly improve the organisation’s financial

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performance. Furthermore, Tomomi (2010) investigated many small or medium-sized

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Japanese companies and noted that the environmental strategies offer better opportunities to

these companies to improve their business activities and provide them with a competitive

advantage. Chiou et al. (2011) stated that if all suppliers implemented a green supply chain,

they could easily fulfil the environmental design requirements and display a green innovative

performance. Fraj et al. (2013) mentioned that the use of the GIS positively affected the

environmental and economic performance in a business-to-business context. Dong et al.

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(2014) noted that the application of eco-innovative activities by the companies helps in the

determination of their competitiveness and environmental performance. In their study, Yang

et al. (2016) validated a new model which indicated that GIS offers several firm benefits.

Many researchers argued that the implementation of the GIS can slightly increase the

firm innovation portfolios (Hull and Rothenberg, 2008). However, a lack of these GIS could

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be due to hindrances affecting this innovation, like the presence of a knowledge gap,

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inadequate governmental support and an aversion to the risks in the capital markets (Runhaar

et al., 2008). For instance, many green firms or ventures were seen to be vulnerable as they

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were developed based on the expectation that the constant governmental subsidies would

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soon diminish. These issues have made the managers difficult to achieve competitive and

environmental improvements in their firms (Hull and Rothenberg, 2008). Though the firms
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can overcome all the barriers and develop GIS, these innovations are unable to get translated
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to a higher financial performance level (Link and Naveh, 2006). For instance, Ringer is a

manufacturer of nontoxic and natural pesticide, which decreases the ecological harm,
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however, it is more expensive and less effective compared to the conventional pesticides.
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Hence, customers do not easily accept these novel products. Furthermore, the firms that apply

GIS can increase their product-quality, training and safety-related costs (Gelb and Strawser,
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2001). However, there will be more cost incurred during the preventive of risk and research
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and development (López et al., 2007).

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Conversely, many researchers believe that the GIS helps the firms improve their

overall life quality, are profitable and efficient (Hart, 1995; King and Lenox, 2002). They

also increase the requirement for the products amongst the environmentally-sensitive

customers (Marcus and Fremeth, 2009). The implementation of the GIS helps in determining

the performance of all green processes and products so that they compete in the market,

which can be achieved by reducing the company’s environmental effects (Chen, 2008; Chiou
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et al., 2011; Yang et al., 2016). The GIS helps in enhancing preventive pollution, which

enables a company to save the operational costs and enable material reuse by recycling (Hart,

1995). Furthermore, a company that shows better environmental initiatives can gain better

optimistic ecological image (Christmann, 2004), advantage from the premium pricing and

higher revenues, because of a higher societal endorsement (Bansal, 2005). This societal

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endorsement helps the companies distinguish their services/products from their rivals

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(Rivera, 2002). Hence, the ethical (environmental) and responsible initiatives were seen to be

a source of better and valuable opportunities (Porter, 2006; Porter and Reinhardt, 2007).

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Also, GIS helps the firms to increase their efficient use of raw materials for decreasing the

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environmental costs and increasing their waste recycling (Chiou et al., 2011; Zhu et al.,

2012). Innovative activities cause the firms to develop new processes for converting waste
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products into greener products which provide an alternative income source. Along with the
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green products, the GIS helps the firms to integrate the green concepts for reorganising and

improving their business tactics.

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Additionally, the GIS is able to fundamentally alter the competition in the industry.
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When the competition is fiercer, the firm is able to capitalise on the advanced technology for

environmental innovation and address the environmental issues in the market. The GIS helps
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the firms to develop and reconfigure better and innovative processes for improving the
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competition and differentiating them from their competitors (Eiadat et al., 2008; Tomomi
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2010; Dong et al., 2014). Hence, the subsequent hypothesis was developed:

Hypothesis 1 (H1): Green innovation strategy positively affects the corporate financial

performance.
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2.4 The Moderating Role of the Firm Size

As shown in the above section, GIS positively affects the CFP. However, this effect is an

intricate and multi-faceted issue. Several factors can affect the firm performance such as the

contextual and environmental variables like firm size (Johnson et al., 2007; Yeung, 2008;

Ramaswami et al., 2009). The firms with varying sizes use different data management

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strategies and can achieve a differing level of governmental benefit, thereby showing a

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different corporate performance.

It is generally believed that the larger firms are more visible, and are more socially

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responsive. In contrast, the smaller firms have to attain lesser pressures or acquire lesser

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environmental-related recognition, based on their lower visibility. It is also stated that the

larger firms are less socially responsive and are more resistant to other effects (Meznar and
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Nigh, 1995), which is very contradictory. The effect of the firm size on the GIS is based on
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the access to all resources (Brammer and Millington, 2006). The large organizations are

related to a superior financial or resources, and significantly influence their environmental

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initiative commitment (Johnson and Greening, 1999). The smaller companies have
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inadequate or constrained resources, which affects the GIS application. The final attribute is

related to firm size. The larger organisations display advanced management processes
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(Donaldson, 2001) and perceive or handle the exterior situation differently, based on their
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experience (Miles, 1987). Thus, the internal system necessary for handling the issues is more
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advanced, which shows better receptiveness to the environmental issues (Brammer and

Millington, 2006).

This is further summarised to indicate that the size of the firm highlights the more

complex phenomena which affect the green innovation participation. Thus, broader

conclusions can be derived from the firm size, provided the interrelation between all related

attributes is also considered. This leads to the development of many theories that are
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investigated using integrative contributions. In this study, we have made a small effort to

scrutinize the influence of the firm size on the correlation between the GIS and the CFP.

The different firm-level attributes can affect the engagement of the GIS. Hence, it is

significant to comprehend these effects, as these firms can develop strategic value from the

GIS. Apart from these effects, the firm size was considered to be important and unexamined

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(Madden et al., 2006; Hörisch et al., 2015). The firm size affects the strategic motivation,

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which can positively affect the GIS (McElroy and Siegfred, 1985; Adams and Hardwick

1998). The larger firms showed a significant social effect, based on the scale of all their

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activities (Cowen et al., 1987); hence, they are required to be more socially responsible than

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the small firms. On the other hand, studies showed that small firms are involved in GIS

activities, especially by giving donations (Madden et al., 2006). Therefore, the query that
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rises is what inspires the small firms to apply GIS activities, and also if this was economically
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justified?

The firms which have to undergo financial or slack resource constraint are likely to
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use the existing capitals for improving their competitive advantage using traditional ways of
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competition. The organizations with a higher cash flow show a better response to the

stakeholder pressure, using discretionary activities like the GIS activities (McGuire et al.,
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1988), while the organisations with a low-profit-margin cannot participate in this

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discretionary behaviour, based on the creditor and shareholder requirements (Brammer and
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Millington, 2006). This inhibits the implementation of these companies in GIS actions. The

resource-rich firms face a comparatively lesser constraint and are more likely to discharge

their social responsibilities.

The firm operations can affect their green innovation involvement, at the functional

and administrative level. The companies with an established decision-making process or

organization structure are more probable to participate in such activities since they consist of
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developed systems that can handle the external issues (Miles, 1987; Bhambri and Sonnenfeld,

1988; Donaldson, 2001). Due to their organisational maturity, these firms display clear

structures, especially related to their ability and expertise, and were able to implement

effective GIS activities. Furthermore, the firms make use of their firm’s competencies for

framing the GIS activities (Hess et al., 2002). These companies are facing greater pressure to

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warrant that their environmental commitments do not increase the organisational costs (Van

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de Ven and Jeurissen, 2005). Thus, they are seen to be specialists in implementing the GIS

activities, based on their firm’s competencies. The firms with a higher operational scale are

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able to efficiently re-allocate and re-organise their resources. These companies are very likely

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to initiate GIS activities and show a distinguishable environmental transformation. The scale-

economies can increase the corporate environmental performance (Brammer and Millington,
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2006), and the GIS activities are more effective if they are implemented on a larger scale.
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This could deter the firms with a small-scale operation to implement such activities.

Furthermore, these firms could be dissuaded based on the probability that their involvement
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was not prominent and would not generate benefits. The firms also tend to avoid any
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participation in GIS activities, since ineffective or inadequate participation could negatively

affect their reputation. Hence, the subsequent hypothesis was proposed:

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Hypothesis (H2): Firm size moderates the relationship between green innovation strategies
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and corporate financial performance, especially when the firm size is big, the relationship

between the GIS and the CFP becomes stronger.

To test these hypotheses, the research framework (Figure 1) demonstrates the relationships of

GIS as part of the company vital strategy that effects on the CFP. This study also delves the

moderating role of firm size in order to assess their influence between the GIS to CFP path.
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Insert Figure 1 here

3. Methodology

3.1 Data Collection and Samples

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In this study, we compiled all the data from two datasets, i.e., the CSRHub

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(https://www.csrhub.com/csrhub/), which consists of all information regarding the measures

of GIS. CSRHub is a leading research company that consists of the Environmental, Social

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and Governance (ESG) data. This approach is more advantageous as it addresses the

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limitations seen in other methods like the Viego and KLD. The CSRHub1 database comprises

data from more than 18,424 organisations from 132 countries in 10 regions. Thus, the
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CSRHub provides data from nine sources from the premier Socially Responsible Investment
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(SRI) firms, known as the ESG analysis firms, like the EIRIS, Carbon Disclosure Project

(CDP), ASSET4 (Thomson Reuters), Governance Metrics International (merged with the
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Corporate Library), IW Financial, MSCI (ESG Intangible Value Assessment and the ESG
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Impact Monitor), Trucost, RepRisk, and Vigeo. Thereafter, the data collected from 265

NonGovernmental Organisations (NGOs) like the publications, associations, foundations,

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activist groups, union groups, governmental databases, and research reports, was augmented
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using data from other data sources. Hence, the CSRHub schema was seen to be associated
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with the firm’s achievement and was based on the 0-100 rating scale. A higher score indicates

a positive rating score (100 = very positive rating). Though the CSRHub updates all the

values monthly, the Datastream updates all the financial data quarterly or annually. Thus, it

could be seen that if the changes in the GIS significantly affected the firm performance, the

Datastream data undergoes an annual change. Here, this study estimated the annual changes

1
See detail of the CSRHub Ratings Methodology: https://esg.csrhub.com/csrhub-ratings-methodology
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occurring in the GIS by taking an average of all the GIS scores for the consecutive 12

months, and thereafter combined the value with the Datastream data. All the industries were

classified based on their 2-digit SIC codes and the companies with less than 7 observations

were eliminated. The final data sample consisted of 163 firms and annual 1194 observations

between 2011 and 2017.

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3.2 Definition of Variables and Measurement

3.2.1 Green Innovation Strategy

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In this study, we defined the GIS performance evaluation” based on the ISO 14031 standards,

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similar to that used in earlier studies by Chen et al. (2006), Campos et al. (2015), and Nguyen

and Hens (2015). Thus, the performance of a GIS was defined as the performance of the
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hardware and software involved in any innovative activity that was implemented by the
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company with regards to the use of green processes or products. These also include the

technologies required for preventing pollution, energy-saving, recycling of wastes, designing

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green products and corporate environmental management. Hence, in this study, we measured
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the GIS using three main CSRHub databases as follows:

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Energy and climate change subcategory scores:

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This parameter measures the company’s effectiveness while addressing the climatic changes
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using appropriate energy-efficient operations, strategies and policies, the development of

better and renewable energy sources and alternative environmental technologies. This

subcategory includes the energy usage, emission of CO2 and other greenhouse gases.
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Environmental policies and reporting the subcategory scores:

This subcategory includes the company’s intentions and policies for reducing its

environmental effect and value streams to the levels which are healthy for the environment,

in present and in future. This data comprises the firm’s environmental reporting performance,

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its adherence to the environmental reporting standards like the Global Reporting Initiative,

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and its compliance with the investors’, regulatory or stakeholders’ request for transparency.

This compliance data comprises of a breach of the accidental releases and regulatory limits.

C
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Resource Management Subcategory Scores:

This category determines how effectively the company uses all resources for manufacturing
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or delivering the products and services, like the company’s suppliers. This also includes the
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firm’s ability to decrease the usage of materials, water and energy and the determination of

effective solutions for improving the supply chain management. Furthermore, this
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subcategory also contains the environmental performance with respect to its production size
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and the manner in which it is monitored using the operation linked Eco-Intensity Ratios

(EIRs) for the energy and water resources, well-defined as the resource consumption per
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released/ formed unit. The resources contain the raw materials and the packaging materials
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used for production and packaging of products and similar other processes. The Resource
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Management data includes waste and recycling performance. Furthermore, the recycling data

was associated with the ratio of the amount of waste that is recycled to the total amount of

waste. The data also includes the manner in which the company manages all the operations

for benefiting the local watershed and air shed and the manner in which the company affects

the land usage and local ecological stability. All water resource-related data also comprises
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the consumption of drinking water, industrial waters and steam. For deriving the GIS data,

this study calculated the mean scores for the three subcategories as follow:

GIS = [ ]

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3.2.2 Corporate Financial Performance (CFP)

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The CFP was measured using the accounting measures described below:

1. Return on Assets (ROA): It is defined as the percentage for determining the profitable

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nature of the company, related to the total assets. For calculating the ROA, we collected

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all data from the DataStream regarding the total earning of the company before the
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interest taxes, repayments and also the total assets of every company during the study

period. Thereafter, we computed the Return on Assets as follows:

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'()*$ (',!"-". ( /#! *,0, )" ! % ,"2 $3#! -%, -#")

!" #" $%% % =
*# ,5 $%% %
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2. Another measure of profitability includes the Return on Equity (ROE). This parameter is

expressed as a percentage and defined as the net income which is returned as the
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percentage of the shareholder’s equity. This factor was manually calculated by collecting

all the data from the DataStream based on the earnings before the interest taxes,
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amortisations and shareholder equity, as follows:

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'()*$ (',!"-". ( /#! *,0, )" ! % ,"2 $3#! -%, -#")

!" #" '6 - 7 =
*# ,5 '6 - 7

3. The last accounting measure includes the Return on Sales (ROS), which refers to the

ratio which is used for measuring the operational efficiency. This factor was also
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expressed as a percent value and was manually computed by collecting all data from the

DataStream for the total revenue and net income as follows:

9 )":#3
!" #" 8,5 % =
*# ,5 ; "

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3.2.3 Control Variables

Here, this study included a set of variables for controlling the potential effects on the

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relationship between the GIS and the CPF. The various control variables described in earlier

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studies included the firm size, firm risk, research and development intensity, advertising

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intensity, and slack resources. Firm size was seen to be a significant control variable and used

the total assets of the company as the indicator variable regarding its size. In their study,
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McWilliams and Siegel (2000) stated that an omission of the advertising and R&D factors

from the model which studies the relationship between the social and financial performances
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of a company could lead to erroneous results. This could be because of the following reasons:
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First, the process of the product differentiation includes the investments in all those R&D

projects that add to the social or environmental attributes of a product, which can be easily
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acknowledged by the customers. Second, the advertising helps in increasing consumer

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awareness regarding the environmentally-friendly products and the manner in which they

differ from the other products. Thus, advertising was seen to be an indicator of the
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environmental responsiveness of the company to the market. Here, we have computed the
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R&D factor using the ratio of the R&D expenditures to the total sales, whereas advertising

refers to the ratio of the advertising expenses to the total sales. Several studies attempted to

control the firm risk. This study investigated many reports (Waddock and Graves, 1997;

McWilliams and Siegel, 2000), before measuring the risk, which was calculated as the ratio

of the total debts to the total assets. This study also included the slack resource, which was

calculated as the ratio between the free cash flow and the company’s total assets.
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3.3 Empirical Model

3.3.1 System Generalisation Method of Moment (GMM)

According to this study, two major issues have to be resolved in this study. First, we

exploited the dynamic data structure and studied the past CFP for determining the current

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CFP (Surroca et al., 2010). Secondly, while investigating the relationship between the GIS

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and the CFP, the existing CFP could be correlated with the unobservable and the observable

factors (like the unobservable and observable heterogeneity), which helps in determining the

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GIS-related decisions. Specifically, the firms which relied on the high-quality products or

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processes showed a higher GIS commitment. However, the contribution of the GIS to the

CFP would be overstated if the endogeneity issues were not properly calculated.
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This study used the system Generalised Method of Moments (GMM) estimator,
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proposed earlier by Arellano and Bover (1995) and Blundell and Bond (1998). This

estimator is particularly formulated for circumstances with 1) “small T, large N” panels,

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meaning fewer time periods and various individuals; 2) a linear functional relationship; 3) a
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single left-hand-side variable that is dynamic, depending on its own past realizations; 4)

independent variables that are not strictly exogenous, meaning correlated with past and
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possibly current realizations of the error; 5) fixed individual effects; and 6) heteroskedasticity
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and autocorrelation within individuals, but not across them. This estimator helped in
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overcoming issues like the dynamic panel bias and the potential endogeneity of the

regressors. Hence, this estimator was used rather than the traditional panel OLS or Within

Group estimations approach (Arellano and Bover, 1995; Blundell and Bond, 1998; 2000;

Blundell et al., 2001; Bond et al., 2001; Hoeffler, 2002). Furthermore, the OLS levels and

Within Groups estimations were inconsistent and biased, since (i) OLS levels often neglect

the unobserved time-invariant firm effects; and (ii) The Within Groups approach considers
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the unobserved country-specific effects within a specific time period using the dynamic panel

data model (Nickell, 1981; Hsiao, 2014). Furthermore, the coefficient estimates of the lagged

dependent variables derived from the OLS levels and Within Groups estimators were

considered to be the approximate upper and lower limits, respectively (Bond et al., 2001;

Hoeffler, 2002).

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This system GMM is seen to yield efficient and consistent estimates in the regression

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model, wherein the independent variables were not strictly exogenous, i.e., these estimates

were correlated with the past and the existing realisations of error, if the autocorrelation and

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heteroscedasticity in the estimates are existent (Roodman, 2009a). Furthermore, this

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estimator controls the endogeneity issues by instrumenting all lagged dependent and other

endogenous variables with the variables that are believed to be unrelated to the fixed effects
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(Nickell, 1981; Roodman, 2009a). Compared to the difference GMM estimator, proposed
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earlier by Arellano and Bond (1991), the System GMM was more efficient as it assumed that

the initial differences between the instruments were uncorrelated with all fixed effects, which,
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included additional instruments (Roodman, 2009a). Furthermore, the System GMM yielded
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effective estimates in the cases where the series were similar to random walks, while the

Difference GMM estimator was subjected to large sample bias, in such scenarios (Blundell
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and Bond, 1998). The Difference GMM estimator was more biased downwards than the
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Within Groups estimator if all instruments were weaker (Blundell and Bond, 2000; Hoeffler,
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2002).

Tables 3 and 4 present the System GMM regression results for the automotive

companies, derived using Eq. (2) and (5) in the 7-year period, between 2011 and 2017. It was

believed that the two-step system GMM estimator yielded efficient estimates compared to a

1-step system GMM approach. It was noted that the efficiency gain was very small and the

asymptotic standard errors related to the two-step GMM estimators were seriously biased
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downwards in the finite samples (Blundell and Bond, 1998; Hoeffler, 2002). Since there are

extra groups in this study, we used a two-step system GMM estimation method. In the case of

all the estimates, the lagged dependent variables were presumed to be predetermined, while

the control variables were considered to be endogenous.

The stability of the System GMM estimators was dependent on the assumptions that

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the error terms do not show serious correlation issues, the validity of all instruments and

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additional moment restrictions. For verifying the validity of all assumptions, we further

applied the Arellano-Bond test for determining a no serial correlation between the error

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terms, while we applied the Hansen test for all instruments, and a Difference-in-Hansen test

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for the additional moment restrictions. The table also reports the specification test results for

all System GMM estimations. Based on all the tests, the System GMM equations were
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appropriately specified. Furthermore, the Arellano-Bond test results need a lack of AR (2)
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serial correlation between all error terms. The Hansen test also assesses if the instruments

were uncorrelated with an error term; while the Difference-in-Hansen test determines the
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validity of the additional moment restriction in Eqs. (2) and (5).

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3.3.2 Model
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The empirical model which was used in this report was an extension of the model described
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earlier by many researchers (Jo et al., 2014; Li et al., 2017; Wong et al., 2018). Thereafter, it
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is a common activity to examine all empirical relationships between the GIS and the CFP,

with the help of the following linear growth equation. Based on various models, the CFP

relationship for the firm, i, in time, t, was a function of GIS and control variables as follows:

<#!=#!, >-",":-,5 ? !/#!3,": = @ A! " )""#;, -#" 8 !, .7

(1)
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We estimated the relationship between CFP (ROA, ROE or ROS), based on its lagged value,

CPFit-1 , and the GIP variables (rating or scores defined earlier), GIP and a set of firm-level

control variables (i.e., in total assets, leverage, R&D, advertisement costs, free cash flow and

annual dummies), labelled CONTROLit, using the following regression equation:

CFPit = α + βCFPit-1 + γGISit + PQ ∑UVWX <S9* STit + μi + εit

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(2)

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where |β|<1. The disturbances, µ it and εi, were not cross-correlated and showed the properties:

E (εi) = 0; E(μit) =0; E(εiμit) =0 (3)

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All time-varying errors were presumed to be uncorrelated:

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E(µitμis) = 0 with t d s (4)

i = 1, …, 163; t = 2011…, 2017.

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Based on the study by Soto (2009), no additional conditions were imposed on the it variance,

since the moment conditions needed for model estimation, requires no homoscedasticity. CFP
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represents the existing firm performance, GIS refers to the total GIS scores for firm, i, in the
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period, t; CFPt-1 denotes the firm performance with 1 period lag; CONTROL refers to the

control variables (ln total assets refer to the log of total assets; leverage, free cash flow and
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time dummies); µ i refers to unobserved firm-specific fixed effects; while, εit.was an error
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term. A robustness test was carried out using other dependent variables like ROE and ROS.
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For confirming the moderating role of the firm size in the automotive sector, we established

some models and also studied the relationship between the GIS and CFP. The model which

studied the effect of the interactions between the GIS and firm size on CFP was:

CFPit =α+ βCFPit-1+ γGISit+ fg A)?hi ∗ 8)k'hi + PQ ∑UVWX <S9* STit + i + εit (5)
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The above-mentioned variables accounted for all probable interactions between GIS and firm

size, while the affiliation of the product of variables with GIS was included as the regressor.

4. Results and Discussion

In Step 1 of the empirical study, we aimed to offer direct empirical evidence for describing

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the dynamic correlation between GIS and CFP. We used the ROA as a CFP measure (Table

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3) and thereafter, replicated these estimates using the ROE and ROS measures (Table 3) for

assessing if the results were sensitive to the particular CFP indicators. Lastly, we tested the

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interactive effect of the GIS and firm size on the CFP (Table 4).

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4.1 Descriptive Statistics and Correlation Results
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Tables 1 and 2 present the descriptive and correlation results noted in the study. Table 1

describes the mean and median values of the main and control variables. The average GIS
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scores for the companies investigated in the study during the time period between 2011 and
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2017, was 55.12, which indicated that the GIS performance was even and all GIS initiated by
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the automotive sector was optimistic. This result was consistent with that observed by Vaz et

al. (2017). With regards to the financial variables, the maximal and the minimal ROA values
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were 0.58 and −2.20, respectively; while those for ROE were 29.04 and −4.5, respectively

and ROS were 14.00 and -7.33, respectively. Furthermore, the respective average values were
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0.13, 0.48, and 0.72. In comparison, the effect of the mean firm size on the total assets and
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revenue was seen to be 8.41 and 8.37, which indicated that there was no significant difference

between the 2 proxies. For determining the likelihood of the presence of multicollinearity

between the variables, we investigated the degree to which every variable was explained

using other model variables, using the Variance Inflation Factor (VIF) (Hair et al., 1998). The

results showed that the VIF values were below the maximal acceptable value of 10, with the
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values ranging between 1.03 and 7.74, and the tolerance ranged between 0.96 and 0.12. Also,

the mean VIF value of 3.43 suggested that the data points showed no multicollinearity-related

issue in the study.

Insert Table 1 here

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Insert Table 2 here

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.2 GIS-CFP Relationship

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Table 3 presents the system GMM estimates for Model 1. CFP was measured using ROA.

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Table 3 also presents the CFP results that were determined using the ROE and ROS

measures, for Models 2 and 3. Using the system GMM estimator, we validated the standard
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tests for misspecification, i.e., a 2nd-order serial correlation test (i.e., AR (2) test); Hansen test
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for other-identifying restrictions and a Difference-in-Hansen test that determines the validity

of additional moment restrictions. We also controlled the no. of instruments against the
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group. The positive coefficient of the lagged dependent variables showed that the CFP was
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persistent, i.e., CFP was dependent on its earlier realisation. Results indicated that

irrespective of the estimation techniques, the control variables showed no difference. We

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noted that the total assets (e.g., firm size) and slack resources positively affected CFP. Factors
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like RnD, leverage or advertising ratio did not affect the ROA.
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This study compared the ROA, ROE and ROS values, and noted that these values

were similar, except the ROE and the ROS negatively affected the R&D intensity. This could

be due to the fact that a higher R&D expense negatively affected the CFP, as it also increased

the finances required for implementing the new strategies (Hall and Weiss, 1967). However,

only the ROE showed a positive correlation with the leverage, which indicated that the debt

played a positive role in decreasing the agency issues as it discouraged the free cash flow
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over-investment by the self-serving managers (Jensen, 1986; Stulz, 1990; Harvey et al.,

2004).

For testing Hypothesis 1, we applied the regression Model 1 in Table 3, which

showed a positive correlation between GIS and ROA (γ = 0.000666, p<0.05). This confirmed

Hypothesis 1 that GIS positively affected CFP. Table 3 also indicated that the GIS coefficient

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positively affected the ROS and the ROE estimates (γ = 0.0033, p<0.001; γ = 0.0016,

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p<0.05). These findings were not based on the reverse causality and were consistent with

Hypothesis 1. Thus, all results supported the earlier evidence regarding the synergistic

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correlation between GIS and CFP (Hart, 1995; Porter and van der Linde, 1995; King and

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Lenox, 2002). Implementation of GIS activities increases the CFP, which helps the

companies display a better corporate reputation, thereby highlight their social responsibility
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(Cordano and Frieze, 2000; Cronin et al., 2011; Sheng et al., 2011). Also, the proactive green
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innovators attract several clients, which further increase the market share of all companies.

Use of GIS activities helps the firms increase productivity, avoid environmental
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protests/ penalties, enhance corporate reputation, develop new markets, foster a green
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awareness-related image, and achieve a 1st-mover based competitive advantage (Chen et al.,

2006; Mu et al., 2009; Lau et al., 2010). Zhu et al. (2012) stated that these eco-innovative
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activities help the firms decrease their waste and increase brand promotion, which stimulates
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their market shares and generate new business opportunities. This was supported by the
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Toyota Prius Hybrid case, which was a status symbol vehicle and used green-labelling

product strategies (Bonini and Oppenheim, 2008). Based on a resource-based view, the

corporate reputation was an intangible asset and source of competition, as it was rare,

inimitable and valuable (Aragon-Correa and Sharma, 2003). Based on a financial view, the

market investors offered a higher premium to the firms with a good image (Konar and Cohen,

2001).
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Insert Table 3 here

4.3. Moderation Effect of the Firm Size on the Correlation between the GIS and CFP:

Table 4 presents the model, which describes the interaction between the GIS and firm size

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(SIZE*GIS). Brambor et al. (2006) stated that the variables need not be individually

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interpreted, as they were not important. Table 4 showed that the coefficient values related to

GIS and firm size were negative, while the interactive terms were seen to be statistically

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significant determinants of the CFP for all 3 models. For example, in the case of Model 1, the

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interaction coefficient value between the firm size and GIS showed a significantly negative

moderating effect on ROA (β = -0.000598, p<0.01). Such empirical results showed that the
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firm size played a vital role in moderating the effect of GIS on the CFP. However, if the
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interactive term showed a negative sign, and was significant, the moderating effect of the GIS

on the CFP weakened with increasing firm size. Thus, the GIS showed a higher detrimental
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effect on the CFP. Hence, this result supported the view that smaller firms could easily
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recognise better opportunities. They were seen to be more flexible while adjusting their

research plans or during the implementation of their GIS activities. Furthermore, the smaller
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firms were better able to adjust the employee incentives for providing optimal innovative

efforts, and they also allowed a lesser rigid management structure which helped the important
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employees devote more time for innovative activities, and not for management-related

activities (Rogers, 2004). This disproved Hypothesis 2.

Insert Table 4 here

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For interpreting and understanding the nature of this interaction, this study presented

the moderating correlation graphically (Figure 2) (Aiken and West, 1991). As shown in the

figure, the slope of GIS on the ROA for the larger firms was negative and significant (–

0.0036, p<1), however, it was still positive and slightly significant for the smaller firms

(0.0164, p<1). Hence, compared to the larger firms, the smaller firms could derive a higher

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financial benefit after implementing their GIS which Figure 3, and Figure 4 also displayed

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the same results. Figure 2, 3 and 4 also indicated that the smaller firms, which implemented

GIS, lowered the damage inflicted onto the organisation, and also helped in increasing the

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support from the high-identification stakeholders. Furthermore, the small firms were probably

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close-structured, which indicated a differing governance structure compared to the larger

firms (Demsetz, 1983). Though a majority of the smaller firms face a performance-based
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issue, they offer better benefits than the larger firms. Their size also makes them more
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flexible and independent from the institutional bureaucracy (Leal-Rodríguez et al., 2015).

These results were in direct contrast to those presented by the Schumpeterian hypothesis
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(Scherer, 1970), which stated that the larger firms showed higher technological progress than
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the smaller firms, and therefore, displayed a better firm performance.

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Insert Figure 2 here

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Insert Figure 3 here

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Insert Figure 4 here

Here, this study noted that the firm size significantly affected the performance of the

automotive companies. Thus, the firm size was an external environment indicator and

affected the business performance. Even though GIS can drive firm’s sustainability and

growth, despite the fact GIS is implemented, an incur of higher cost is unavoidable and an
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alteration in organizational normal practises will transform an organization becoming more

fragile, and even tarnish the sustainable competitive advantages. The traditional economic

trade-off debate suggests that companies impose higher costs to enhance better environmental

performance and that these costs surpass the monetary benefits gained from them (e.g.,

Friedman, 1970; Greer and Bruno, 1996). Moreover, by improving environmental

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performance a firm is simply transferring societal costs to the firm (e.g., Bragdon and Marlin,

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1972). Consequently, this approach proposes that engaging environmental initiatives might

be both lossmaking money and unsuitable for firms.

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Many researchers stated that the larger firms were effective innovators. Any firm,

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which already possesses monopoly power, was less motivated towards innovation, as it felt
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threatened by its competitors (Scherer, 1980), or due to the fact that the sale of new products

could affect the sale of the existing products. Some studies (Mansfield, 1968; Mansfield et
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al., 1971) indicated that the larger firms, which included many people in the decision-making

process and consisted of a long chain of command, showed lower flexibility and inefficient
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managerial coordination. It was stated that as the firm size increased, the firms became very
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bureaucratic. Furthermore, this study would also be less motivated to investigate the larger
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firms, since their efforts would not yield a higher personal benefit as the smaller firms. Also,

the unexpected results would be lost in the shuffle, in the larger firms than the smaller firms.
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Thus, the relative strength of the smaller firms was based on their behavioural characteristics.
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For example, higher the motivation displayed by the management and workers, the better the

variation and improvisation in all tasks performed by the workers, tacit knowledge resulting

in specialised skills, and higher the flexibility and communication (Nooteboom, 1994;

Rothwell and Dodgson, 1994). As the advantages displayed by the larger firms were the

limitations of the smaller firms and vice versa, they could be summarised as the advantages

offered by the smaller and larger firms.

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A majority of the empirical findings showed that the small and the medium-sized

firms conducted more efficient R&D than the larger firms. The small firms and the

independent investors were disproportionately responsible for the major innovations (Acs and

Audretsch, 1990; 1991), which was similar to the observations made by Vossen (1996), who

stated that the smaller firms were more cost/profit efficient. The smaller firms showed a

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higher innovative output compared to their innovative inputs due to many reasons. Firstly, the

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R&D activities of small firms are usually underestimated in several standard surveys, since

the formal R&D carried out in different R&D departments is generally measured

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(Kleinknecht and Reijnen, 1991). Many researchers investigated the different components of

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the innovation costs and noted that the large firms showed a higher R&D investment

compared to the small firms (Archibugi et al., 1995; Felder et al., 1996). If this was different
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from the manner in which it was measured, the R&D activities cannot appropriately estimate
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the innovative input of the small firms. Secondly, Acs et al. (1994) showed that small firms

could effectively take better advantage of the knowledge spill-over from the corporate or
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university R&D departments. Thirdly, the economic value of all the innovative activities
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differed between the smaller and larger firms, as noted by Cohen and Klepper (1992), who

noted that under specific stochastic conditions, the large firms produce lesser innovations for
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every dollar spent on the R&D activities; however their innovations were of a better average
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quality.
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Furthermore, due to the fact that the small firms generated more innovations

compared to their input, Zenger (1994) stated that the apparent organisational diseconomies

of scale far outweighed the technological economy of scale in the R&D. Based on the above-

mentioned explanations regarding the organisational characteristics depending on the firm

size, it was concluded that the small or large firms were not better innovators. Rather, the

small or the larger firms were better at differentiating the various innovations, or their role
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varied in the industry cycle, in a “dynamic complementary” manner (Nooteboom, 1994). The

larger firms were better at innovating as they made good use of economy of scope or scale, or

consisted of a large team of experts and specialists, for conducting basic, science-based

innovations or large-scale applications, which were of a higher economic value (Cohen and

Klepper, 1992). The smaller firms were better innovators since their effect of scale were not

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(yet) vital and they could make good use of their proximity and flexibility to the market

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demands, like developing new products or new market combinations, modifying the existing

products for the niche markets, or developing small-scale applications. Furthermore, their

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efficiency in generating these innovative products was also improved by their capability to

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take advantage of the knowledge spill-over from the larger company’s R&D departments

(Acs et al., 1994).

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5. Conclusions

In this study, this study has developed a novel theoretical model which examined the
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relationship between the GIS, firm size and the CFP. The results obtained from this study
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could make important contributions to the existing literature regarding the sustainable

development into the innovation and the strategy management (Zhu et al., 2012; Dong et al.,
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2014; Fargnoli et al., 2014; Pekovic et al., 2016). In the past few years, many companies have
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begun developing and implementing ecological modernisation techniques which helped them
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conduct their operations in an environmentally-innovative manner. This study noted that the

application of the GIS activities positively affected the CFP. The results could also contribute

to the existing green management literature and offer more empirical support to the

ecological modernisation theory, which stated that the companies must recognise the issues

which hinder the environmental adaptation of the industrial development and the economic

growth. The ecological modernisation theory was seen to be an important theory for the
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environmental innovation as it could offer solutions for resolving the conflicts between the

industrial development and the environmental protection (Zhu et al., 2012). The ecological

modernisation theory stated that the green enterprises consider the implementation of the

environmental innovative activities as an effective opportunity for asserting their social role

and responsibilities (Dong et al., 2014; Pekovic et al., 2016). Furthermore, an environmental

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commitment was seen to stimulate the green activities and the environmental innovation

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strategies. These results were in line with other studies which observed that the

environmental GIS activities help the firms derive many benefits, like economic

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performance, corporate reputation, and novel product-related success (Chiou et al., 2011; Fraj

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et al., 2013; Dong et al., 2014; Yang et al., 2016). The firms can incorporate green concepts

into their processes and products for improving resource efficiency, reducing waste and
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increasing resource recovery for improving performance and sustainability.
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Furthermore, this study could make significant contributions to the literature since it

applied the concept of firm size to the GIS activities. The results offer empirical evidence
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which highlights the correlation between the firm size and CFP. This study emphasised the
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moderating role of the firm size. The larger firms showed a higher negative effect of the GIS

and the CFP. Hence, the companies must always consider their firm size before transitioning
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from the GIS to the firm performance.

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5.1 The Implications of the Study

This new trend of the environmental legislation for novel product development has been

increasing. The automobile manufacturers are under high pressure for developing appropriate

strategies for meeting the challenges occurring due to an uncertain business environment

(Huang and Wu, 2010; Cheng et al., 2014). Many environmental regulations like WEEE,

RoHS and REACH, have triggered the firms to increase the environmental sustainability of
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their processes and products (Fargnoli et al., 2014). The car manufacturers need to constantly

comply with environmental standards (Cheng et al., 2014). There is a higher demand for

developing novel car parts based on the green services and products; hence the car

manufacturers must implement GIS activities for complying with the regulations and

legislation for environmental protection (Chiou et al., 2011; Dong et al., 2014; Fargnoli et al.,

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2014). This study showed that the GIS played a vital role in the automotive industry. The

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results also indicated that this study fulfilled the objection and showed that the

implementation of GIS activities could help the companies show a superior performance by

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managing the environmental risks and developing better capabilities for a constant

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improvement of the green processes and products.
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5.2. The Implication for the Managerial Staff
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This study offered several managerial implications. The implementation of GIS activities

affected the competitiveness and firm profits. The managers can resolve many environmental
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management problems during the strategic planning stage, i.e., managers can develop better
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environmental GIS for integrating the ecological activities in their business operations

(Eiadat et al., 2008; Zhu et al., 2012; Fraj et al., 2013; Cheng et al., 2014). The managers
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have to identify the ecological issues and implement environmental innovative activities for
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addressing these issues. The managers need to understand the manner in which the
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environmental incentive programs can be executed, which would help them promote the

sustainable development of the green processes and products. The environmental innovation

can help the firms achieve a waste reduction or elimination, recovery of resources and

dematerialisation and reuse of resources. These factors can positively affect the GIS.

This study also highlights that the firm employing a GIS enjoys performance as long

term and perpetual and not short lived. It is crucial for organisations to acknowledge that
 ACCEPTED MANUSCRIPT
there is a rise in cost or the short-term loss pertaining to advantages led by GIS

implementation in the early stage that result in long-term advantages. Also, this paper shows

that the implementation path pertaining to a GIS would aid enterprise managers to gain a

better understanding regarding the change brought by GIS in the original organisational

practices and structure. Thus, enterprise managers need to focus on organisational practices,

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which include integrating flexible organisational practices and constantly depending on new

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information to diversify practices further, thus laying down the foundation for enterprises that

allows them to implement green activities efficiently.

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Finally, this study considers firm size to be a situational variable and examines the

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action path as well as the impact of a GIS on an organisation’s sustainable performance that

were of various sizes, and a comparison was made for the different results for these different
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levels. At the micro-level, this study considers firm size since it can influence GIS and
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moderate the association among GIS and CFP. For example, small firms and large firms

might vary in GIS perceptibility and decision-making preferences. GIS need considerable
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investment and might be a high cost (Hull and Rothenberg, 2008). Larger firms are usually
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the main target of environmental complaints from government, societies, social media and

customers, and they regularly become distinctive cases and references in dealing with
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environmental matters (Welch et al., 2002; Nishitani, 2009). Therefore, better understanding
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of whether and under what circumstances GIS improves CFP is monetarily meaningful to
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managers who have been engaging or are being advised to adopt GIS. This study claims that

firms practices GIS activities to convey a good message and send green signals to external

stakeholders, resolve the information asymmetry, and obtain positive feedback from various

stakeholders. For example, public listed firms (larger organisations) are required to declare

their CSR reports annually.

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This study can be of significant practical value by allowing enterprises to understand

how and when to implement a GIS. The conclusion can aid enterprise managers in

understanding the meaningfulness of context-based green innovation. This means that

enterprise managers should not engage in green innovation blindly, and GIS implementation

needs to be done appropriately for each of the specific situations.

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5.3. Implications for the Policy Developers

The implementation of GIS activities can prove to be advantageous to the firms and even the

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society at large. These activities must be encouraged by all policy-makers and governmental

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bodies. Though the GIS at every level could positively affect the CFP, this was not

universally true for the large firms. In this study, we stated that interactive term (GIS*Size)
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showed a negative sign, and was significant, the moderating effect of the GIS on the CFP
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weakened with increasing firm size. Thus, the GIS showed a higher detrimental effect on the

CFP. Hence, the policymakers should take care both side of the firms either large or small,
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the governmental policies must encourage green innovations strategies in the firms that due
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to the development of progressive measures like rebates, grants or other punitive measures

like quotas or tariffs. These activities increase the significance of green innovation strategies
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amongst the managers, who can help in resolving environmental management-related issues.
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For instance, The Paris Climate Agreement was signed by many countries who pledged to
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decrease the emissions and environmental pollution. Development of GIS was seen to be an

important step in reducing emissions. More effective tools need to be established by the

government that go beyond green subsidies or grants to support and encourage green

strategies. They also need to assess if these green subsidies were not as effective as

anticipated – for example, access to cheaper capital to conduct green projects (notably via

direct participation by the government and subsidised loans), subsidies to green R&D,
 ACCEPTED MANUSCRIPT
consumer mandates, feed-in tariff policies pertaining to renewable energy and green public

procurement rules. Firms that have received grant or green subsidies need to be put under

scrutiny to improve the probability of subsidies being utilised effectively (Lin et al., 2015).

Next, as an alternative to framing policies derived from a particular theory, government

authorities need to focus on listening to practitioners to gain a better understanding regarding

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what issues firms are facing when employing green strategies, particularly those large firms

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that can perform well even when GIS is in place.

A consequential practical implication is that if smaller companies decide to gain

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greater CFP through GIS, formerly they will need also to pay attention to priority in resource

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distribution to the GIS engagement. This study results also propose that such strategic

resource allocation is not incompatible with the pursuit of CFP objectives that many smaller
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companies face the resource and knowledge constraints and understate the problems small
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firms can meet in managing the inconsistent pressures involved in the concurrent pursuit

financial and environmental objectives. The environmental policy-makers necessity identifies

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the limitations which resource and knowledge constraints enact on the attainment of
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environmental performance goals controlled for smaller companies and offer suitable funding

and training support programs that help in the development of the capability for smaller
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companies to innovate and enhance their environmental and CFP.

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5.4 Limitations and Future Suggestions

Some limitations were noted during the interpretation of all the results of this study. Firstly,

the self-reporting data could lead to a common method variance. This study recommends that

future studies must adopt objective data for evaluating green innovative performance.

Secondly, the cross-sectional data could cause the occurrence of the firm-specific effects

(Fraj et al., 2013; Pekovic et al., 2016). In future, the researchers must use a longitudinal
 ACCEPTED MANUSCRIPT
research design for validating the causal inferences. Furthermore, this study only focused on

the automotive sector in the world, which could have many limitations. However, focusing

only on the automotive sector could ensure positive innovation-related results. On the other

hand, in future, the researchers must focus on different industries in other countries, for

deriving additional insights and comparing all the results.

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Table 1 Descriptive Statistic

Variable Obs Mean Std. Dev. Min Max

ROA 1,129 0.1253 0.1152 -2.2000 0.5774
ROE 1,129 0.4847 1.3588 -4.5000 29.0400
ROS 1,119 0.7183 2.2555 -7.3333 14.0000
GIS 1,129 55.1327 9.1333 28.1767 79.0690
R&D Intensity 1,129 0.0191 0.1035 0.0000 1.5131

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Advertisement Intensity 1,129 0.1087 0.0962 0.0000 0.5536
ln total assets 1,129 8.4112 1.8941 2.7801 13.0843
Leverage 1,129 1.2382 4.6004 -0.6341 90.4000

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Free Cash Flow 1,129 0.0387 0.0800 -0.4533 0.5177
ln revenue 1,119 8.3706 1.8334 0.1310 12.4798

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Table 2. Bivariate Correlation Matrix

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1 2 3 4 5 6 7 8 9 10
ROA 1

RI
ROE 0.1804 1

SC
ROS -0.0189 -0.0115 1
GIS 0.0383 0.0267 -0.0205 1

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R&D Intensity 0.0399 0.0318 -0.0072 -.01202 1
Advertisement Intensity 0.0303 0.0236 -0.0431 -0.0510 0.0550 1

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ln total assets -0.0318 -0.0235 0.0404 0.0789 -0.0429 -0.4651 1

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Leverage -0.0037 0.9206 -0.0102 0.0137 0.0232 0.0118 0.0060 1

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Free Cash Flow 0.2004 0.0879 -0.0200 0.0651 0.0361 0.1857 -0.2306 -0.0278 1
ln revenue 0.0582 0.0112 -0.1533 0.0014 0.0014 -0.3295 0.6942 0.0158 -0.01320 1
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Table 3: The Effect of GIS on CFP

Dynamic system GMM

Panel 1 Panel 2 Panel 3
Variables ROA ROS ROE
ROAt-1 0.627***
(0.0926)

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ROSt-1 0.791***
(0.000835)
ROEt-1 0.00246***

RI
(0.000951)
GIS 0.000611** 0.00325*** 0.00158**
(0.000242) (0.000600) (0.000712)

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R&D Intensity 0.0285 -0.0440 11.24***
(0.191) (1.475) (1.617)

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Advertisement Intensity -0.153 -0.223 -0.251
(0.100) (0.535) (0.245)
ln total assets 0.0251*** 0.0942* 0.0690**
(0.00575) (0.0660) (0.0276)
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Leverage 7.61e-05 0.000124 0.289***
(0.000239) (0.00188) (0.00313)
Free cash 0.300*** 0.477** 0.745***
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(0.0672) (0.823) (0.188)

Dummy R&D Intensity 0.0489 -1.908*** -1.956***
(0.0716) (0.639) (0.398)
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Dummy Advertisement Intensity -0.00424 0.0410 0.375**

(0.0334) (0.207) (0.177)
Constant -0.216*** -0.423 -0.432
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(0.0731) (0.695) (0.320)

Year Dummy Yes Yes Yes
Observations 966 955 966
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Number of firms 163 162 163

No of Instruments 26 26 26
AR1 -2.87(0.004) 0.30(0.062) -2.07(0.039)
AR2 1.124(0.263) 0.26(0.797) 0.02(0.984)
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Hansen Test 16.45(0.422) 13.76(0.744) 30.49(0.116)

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Different in Hansen Test 4.052(0.853) 9.02(0.341) 22.26(0.104)

Notes: All models are estimated by using the Blundell and Bond (1998) dynamic panel data system GMM estimations and
Roodman (2009) - Stata xtabond2 command. The standard errors are reported in parentheses, except for Hansen test, AR (1),
AR (2) and Difference-in-Hansen which are p-values. ***, ** and * indicate significance at 1%, 5% and 10% levels,
respectively. Time dummies are included in the model specification, but the results are not reported to save space. The
instruments employed in the first-differenced equation are two or more lags of the levels of the endogenous variables, while
one lag of the first-difference of the endogenous variables is used as instrument in the difference equation.

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Table 4: The Contingency Effect of Firm Size on GIS – CFP Link

Dynamic System GMM

Model 1 Model 2 Model 3
Variables ROA ROS ROE

ROAt-1 0.540***
(0.0853)
ROSt-1 0.735***

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(0.00983)
ROEt-1 0.00404*
(0.00215)

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GIS 0.00571*** 0.300*** 0.517***
(0.00140) (0.0725) (0.0799)
Size 0.0730*** 1.656*** 3.329***

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(0.0125) (0.634) (0.569)
Size*GIS -0.000598*** -0.0350*** -0.0612***

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(0.000153) (0.00905) (0.0101)
R&D Intensity 0.00259 -0.550 -0.308
(0.179) (0.496) (0.344)
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Advertisement Intensity -0.127 -0.650 -1.278
(0.0799) (4.083) (1.892)
ln total assets -0.0111 -0.0164 -0.538***
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(0.0145) (0.314) (0.201)

Leverage -0.000230 -0.00101 0.286***
(0.000249) (0.00127) (0.00776)
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Free cash 0.280*** 0.756 1.240***

(0.102) (0.829) (0.429)
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Dummy R&D 0.0131 -0.197 -0.335

(0.0668) (2.256) (0.340)
Dummy Advertisement Intensity 0.0233 0.457 -0.244
(0.0322) (2.403) (1.619)
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Constant -0.530*** -14.33*** -22.91***

(0.105) (4.034) (4.401)
Year Dummy Yes Yes Yes
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Observations 957 955 957

Number of Firms 162 162 162
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No of Instruments 29 29 29
AR1 -2.73(0.006) -2.51(0.012) -2.90(0.004)
AR2 0.73(0.468) 0.37(0.712) 1.68(0.093)
Hansen Test 22.82(0.198) 17.44(0.425) 13.37(0.717)
Different in Hansen Test 8.74(0.462) 8.75(0.364) 5.82(0.667)
Notes: All models are estimated by using the Blundell and Bond (1998) dynamic panel data system GMM estimations and
Roodman (2009) - Stata xtabond2 command. The standard errors are reported in parentheses, except for Hansen test, AR (1),
AR (2) and Difference-in-Hansen which are p-values. ***, ** and * indicate significance at 1%, 5% and 10% levels,
respectively. Time dummies are included in the model specification, but the results are not reported to save space. The
instruments employed in the first-differenced equation are two or more lags of the levels of the endogenous variables, while
one lag of the first-difference of the endogenous variables is used as instrument in the difference equation.

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Figure 1: Research Framework

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ROA-SIZE-GIS
0.25
SIZE high med low
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0.2 0.20 0.19 0.19
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0.15
ROA

0.13
0.12
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0.11
0.1
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0.06
0.05 0.05
0.03
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0
low med high
GIS
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Figure 2: Effects of GIS on ROA: Contingent on Firm Size

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ROS-SIZE-GIS
1.5 SIZE high med low

1.07
1

0.5
0.42
ROS

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0 -0.02
-0.06 -0.08
-0.14
-0.23

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-0.5
-0.58

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-1
-1.10

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-1.5
low med high
GIS
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Figure 3: Effects of GIS on ROS: Contingent on Firm Size
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ROE-SIZE-GIS
7
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SIZE high med low

6.37
6 6.11
TE

5.17 5.30
5.22 5.26
5 5.13
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4.23 4.15
4
ROE

3
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2
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0
low med high
GIS

Figure 4: Effects of GIS on ROE: Contingent on Firm Size

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Highlights
• The relationship between firm-level green innovation strategy and corporate financial
performance is investigated.
• Green innovation strategy interacts with firm size to affect organizational
performance.
• The paper controlled for endogeneity that emerges from unobservable heterogeneity
of firms using the dynamic method of moments estimator.
• Green innovation strategy shows significant positive effect on corporate financial

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performance.
• The small-sized firms displayed advanced green innovation strategies than the larger-
sized firms, which more inclined to to pursue variation and visibility, for accessing

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better resources.

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