Main Drivers and Performance of EcoInnovation.doc

Main Drivers and Performance of Eco-Innovationby Mi Kyung Lee and Zong-Tae Bae _The purpose of this paper is to identify influencing factors of eco-innovation activities and performance. This paper is composed of two phases: case studies and statistical analysis. Case studies on five successful eco-innovation projects drew several preliminary findings on eco-innovation drivers. Based on literature review and case studies, the research model and six hypotheses were generated for statistical testing with 83 samples. The results from statistical analysis supported hypotheses on drivers of eco-innovation activities and performance, such as regulation severity, perceived regulation advantage, diversity of market demands, technological capability, environmental system capacity, and environmental marketing capacity. A firms motive for eco-innovation corresponding to regulations was a crucial influencing factor both on innovation activities and performance. Market demands and environmental marketing capability have stronger relationship with innovation activities, while technological capability and environmental system capability have stronger relationship with innovation performance. _IntroductionRecently, green innovation, also known as eco-innovation, is getting more interests among governments and companies. The main reason for this is its contribution not only to the environmental protection but also to the sustainability in their society. Since 1970s, governments of major industrialized nations had their focus on pollution control of major companies. In 1980s, governments encouraged companies to develop eco-friendly processes and recycling technologies as well as the development of products that can reduce environmental pollution from its product design stage (Kemp and Arundel, 1998). _Mi Kyung Lee is Assistant Manager at Technology Strategy Group of POSCO, Korea.Zong-Tae Bae is Professor of Innovation Management at KAIST Business School, Korea.Corresponding Author: Zong-Tae Bae, ztbaebusiness.kaist.ac.kr South Korea added a question on the current situation and the motivations on green innovation to its annual survey of Korean Innovation Survey in 2009 and this exactly shows the increase of interests on eco-innovation. According to a survey of McKinsey in 2008, 22 percent of Korean consumers answered that they would purchase an environmentally friendly product even though its price is higher. In this context, major Korean companies are now launching various eco-friendly products that can catch the attention of customers who are aware of environment. From a resource-based view, these corporate actions are based on the following three environmental strategies: i) pollution prevention, ii) product stewardship, and iii) sustainable development (Hart, 1996). While there have been many studies on identifying the relationship between a companys eco-friendly management activity and its performance (Hart, Ahuja and Arbor, 1996; Klassen and Mclaughlin, 1996; Russo and Fouts, 1997; Christmann, 2000; Melnyk, Sroufe and Calantone, 2003), or the factors affecting the pollution control of companies (Eiadat, Kelly, Roche and Eyadat, 2008), few studies tried to identify the influence of “innovation.” Even those studies show some limitations. First, they are only dealing with companies in EU and USA (Baumann, Boons and Bragd, 2002). Besides, they did not try to identify the drivers of eco-innovation at the company level. To identify the drivers more precisely, however, the relationship should be identified at a more microscopic level, that is, at the project level. Furthermore, a study with a focus on “innovation activities” would be more meaningful to identify the way to promote eco-innovation, compared to those encompass all the activities.Therefore the purpose of this paper is to identify influencing factors of eco-innovation activities and performance. It focuses on how innovation activities and performance are affected by the drivers with case studies and a statistical analysis. This paper is organized as follows. Based on literature reviews, it establishes the related concepts and propositions. Case studies (Phase 1) on five successful eco-innovation projects are carried out and drew preliminary findings. Next section describes research methods and the results of statistical analysis (Phase 2). This paper ends with the conclusion and discussion on the limitation of the current research.Theoretical Background and PropositionVarious terminologies have been used to represent companies environmentally friendly innovation activities. In the early 2000s, it was widely accepted to use the term “environmental innovation,” and its abbreviated form, “eco-innovation,” was also used occasionally (Rennings, 2000). Recently, more companies are concerned about product innovation and supply chain innovation as well as environmental innovation. They also have interests in sustainable development. Therefore, the term “eco-innovation” is now used more widely instead of environmental innovation (Kemp and Oltra, 2009). In this study, we followed the definition of eco-innovation from the study of Kemp and Foxon (2007) Production, application or exploitation of a good, service, production process, organizational structure, or management or business method that is novel to the firm or user and which results, throughout its life cycle, in a reduction of environmental risk, pollution and the negative impacts of resources use (including energy use) compared to relevant alternatives. , and we define the term, a green product, as a product that is developed through the eco-innovation. According to this definition, any innovation that can reduce the environmental impact of a product regardless of its purpose is considered to be eco-innovation. While the main factors that affect technological innovations are either alternative technologies or market demands, it is government policies that have a great effect on eco-innovation. Existing studies show that firm-specific characteristics are influential to take a different action from others under the similar situation (Rubik, 2002; Türpitz, 2004). In particular, Kammerer (2009) introduced and utilized the concept of “green capabilities” using the five following determinants: i) environmental attributes of products in marketing, ii) voluntary environmental targets for products, iii) a systematic environmental analysis of products, iv) product developers training in environmental issues, and v) a certified environmentally friendly management system. Recently conducted empirical studies at the company level verified that the more severe the government regulations, the harder companies try to perform eco-innovation (Rehfeld, Rennings and Ziegler, 2007; Wagner, 2007, 2008). However, there are also some findings that show a negative relationship between the severity of regulations and innovativeness; the more severe the government regulations get, the less innovative companies become (Kammerer, 2009).Proposition 1: The intensity of eco-innovation activities will be higher with the motive for eco-innovation is strong and diverse.Although most of the existing studies are focused on the motives of eco-innovation, there are few studies on a companys financial performance (Klassen and McLaughlin, 1996; Pujari, 2006) or on the success of occupying new market with environmentally friendly products (Kammerer, 2009). In innovation studies, technological innovation consists of radical innovation and incremental innovation (Garcia and Calantone, 2002). As more executives at a company believe that it is beneficial to have environmental considerations, it is more likely to increase the product innovativeness and to manufacture more eco-friendly products (Banerjee et al., 2002).Proposition 2: The Innovativeness of eco-products will be increase with strong and diverse motive for eco-innovation.Case Study (Phase I)An exploratory case study has been performed to identify the relationship among drivers (motive), activities (process), and its performance in eco-innovation among some Korean companies. A case study is a useful method to find an answer to research questions on why and how (Yin, 1994). It has been popular among many existing studies on eco-innovation and environment products (Hanssen, 1999; Türpitz, 2004; Triebswetter, 2008; OECD, 2009; Carrillo-Hermosilla, Del Rio and Könnölä, 2010; Dijk and Kemp, 2010; Dangelico and Pujari, 2010).In this study, five eco-products from five companies among the winners of South Koreas leading awards programs (National Eco-Management Award for Product, Energy Winner Award, and Global Green Management Award for Green Winner) were chosen as shown in Table 1. Data were collected from interviews, newspapers, and internal corporate materials.Table 1Overview of Cases in This StudyCompanyEvezaryDongwha Jayon MaruSugar BubbleLG HausysSamsung Electronics Co. Case ProductNatural material bed-clothing(Case 1)Improved air quality flooring(Case 2)Vegetable kitchen cleanser (Case 3)High-efficiency double window(Case 4)Environmental design ofLED TV (Case 5)PeculiarityAdoption of natural material (antibacterial, charcoal fiber)Material and construction method that reduce the emission of formaldehydeSubstitute surfactant (2030 %) to vegetable material (100 %)80 % increase of insulation rate with new technologies such as large area vacuum heat-treatIncrease the efficiency of manufacturing LED, while reducing harmful materialsMaterialOOOOEnergyOOPollutionOOOVariables Analyzed in the Case StudyTo identify the drivers of eco-innovation, following factors were investigated: i) the nature of governmental regulations (the degree of difficulty to meet the environmental regulation related to its products, the degree of environmental attribute that is assigned), ii) market demand (the customer requirements on exports and market situation), iii) technological capability (the degree of product development through research and development and related examples), and iv) corporate characteristic (introduction of EMS, the development of environmentally friendly products, and CEOs will of development and marketing of environmentally friendly products). In general, many indexes are being used to measure the level of innovation. Since R&D input index reflects only the input on innovative activities, it is hard to consider it as an actual process of innovation. Patent as an R&D output index also cannot be used to measure the actual amount of innovative activities in that not all the R&D efforts of a company turn out to be a patent (Acs and Audretsch, 1987). In this context, we measure the intensity of innovative activities by the degree of product/ process innovation performance. Innovativeness is measured by its domestic and international market preoccupancy.The Impact of Motives (Drivers) on Eco-Innovation Activities A double window (Case 4) of LG Hausys is the only product that has been affected by the proposal of the Building Energy Efficiency Rating System, In Korea, all the public building will be obliged to meet the Building Energy Efficiency Rating System starting from 2012, which used to be forced to only new buildings. Related laws are being modified. which will be initiated in 2012. LED TV of Samsung Electronics Company (Case 5), which has a huge export market, is actively promoting its innovation activities in the field of material, energy, and pollution. This is mainly due to the overseas international regulation rather than domestic one. The others are targeting Korean domestic market and the fact that the regulations in Korea are not severe, the companies believe that this can be a chance to have a competitive advantage rather than a crisis. In this context, these companies are willing to innovate actively to meet the regulation in near future. To meet the international market demands, Samsung Electronics Company has been introducing innovative products. Since the company could develop a few improved materials such as materials that can improve energy efficiency, or can substitute harmful materials, it is getting more positive responses. Sugar Bubble (Case 3), meanwhile, is a good example of trying to meet its domestic market needs. In the technological capability perspective, Samsung Electronics Company, LG Hausys, and Dongwha Jayon Maru (Case 2) have been accumulated their own capabilities while introducing various new products, and therefore could be successful on Eco-Innovation.It can be also mentioned that the introduction of environmentally friendly management system, or a support system for manufacturing environmentally friendly products, have positive effects on eco-innovation. By setting an enterprise project to achieve their environmental objectives or adding a step to meet the environmental standards, these firms have innovated their products and processes. In particular, Samsung Electronics Company and LG Hausys are considered to be successful in improving their environmental attributes through Life Cycle Analysis (LCA) on their products. Although it may be considered that Sugar Bubble lacks its technological capability due to its size, it is judged that the executives commitment has crucially contributed to its increase of innovative activities. Since all the companies in this case study believed their effort on developing environmentally friendly products were beneficial in terms of its comparative advantage, they also showed their continuous efforts on its marketing. Key observations on the relationship between motivation and innovation activities are as follow. First, the industry-leading companies are active to meet any possible future regulations. They are also willing to innovate in their products and processes. They believe this regulation would make their own competitive advantages. Second, as the market demands get diverse, innovation activities get more active due to the enlarged range of improvement for environmental attributes both in the process and its products. Third, companies with higher technological capabilities tend to perform innovation more actively for their products and processes. Fourth, companies that have more environmentally friendly strategies tend to perform innovation more actively. Finally, executives commitment to the development of environmentally friendly products reveals with the support system for the products, separate brand, and environmental marketing. The level of innovation depends on the level of commitment. The Impact of Motives (Drivers) on Eco-Innovation Performance Motivations of eco-innovations can affect not only the innovation activities but also its performan