Environmental innovation or financial performance: Which comes first?



Now on sabbatical leave from Japan, I recently returned to the Philippines. My ‘home’ university, De La Salle University (DLSU) is hosting me as visiting professor.

I used to write economic research with my professor Dr. Tereso S. Tullao Jr., but our most googled and cited topics are on migration and trade in services economics. Over the past years, however, I developed an interest in the environment because of many catastrophes that have hit the Philippines. And also on innovation, since Japan is a significant source of automotive and electronic products. Financial performance analysis is like second nature to me, an accountant by profession, a former professor of accounting at DLSU, and now teaching in Japan.

I developed a very specific interest in cars and electronics, the prime movers of the Japanese economy. Together, they comprise 60 percent of manufacturing output and influence thousands of parts suppliers from all over the world. Japanese products for Generation X-ers would mean Voltes V, and we automatically see the value of innovation and technology. But nowadays, does it matter if we drive a Japanese car or use a Japanese gadget? America’s Apple Inc. has taken the lead in electronics together with Korean giant Samsung Electronics. Likewise, other Korean manufacturers have significant market shares in the automotive and electronic markets. Do these products harm the environment?

At the turn of the century, the Ministry of Environment of Japan enacted a law on Environmental Accounting Reporting in consultation with the academe, manufacturing engineers, and other key players from the automotive and electronics industry. A format has been prescribed so manufacturers simply have to follow the guidelines. For the past 14 years, I compiled the reports of 10 automotive and 10 electronic companies and performed some statistical analyses with their financial performance. I wondered: “Do they perform environmental innovations because it is financially viable for them? Or is it the other way around?” After all, it is conceivable that since they are financially viable, they can afford environmental innovations.

Most time series analysis, particularly sustainability studies, involves long periods and my initial results show that it works both ways on a virtuous cycle collectively for the automotive companies and particularly for big-sized Toyota and relatively small-sized Suzuki.

For the first seven years (2001 to 2007), most virtuous cycles happened but dissipated towards the last seven years (2007 to 2014). While it can be quickly concluded that environmental innovations have matured and hence, not much investments can be observed, I say that it is most likely that companies have invested a certain asset threshold and that environmental processes are now fully functional and beneficial to the companies.

As far the Japanese market is concerned, there is premium given to environmental innovations of cars, as statistics reveal for Toyota and Honda. Nissan is also an emerging player with their innovation for electric cars. However, with the decline in performance of the Japanese electronics industry, it can easily be inferred that American and Korean manufacturers are more preferred regardless of the environmental components of their products and processes.

Nevertheless, electronics companies comply with environmental regulations and report these even if it is not profitable or does not generate revenues for them. More than regulation, they are part of the green supply chain management of the Japanese manufacturing industry.

As observed by sustainability scholars, virtuous cycles of CSR and financial performance must have started with a large asset base and positive results measured in financial performance motivate companies to do more in a cyclical and mutually reinforcing pattern.

I wish to replicate some of my academic research for Philippine businesses, but we are constrained with resources and probably have to improvise based on available technology. Given the influence of Japanese manufacturing on their subsidiaries, it is quite interesting to see how the private sector will promote sustainability in the Philippines.

Dr. Michael Angelo A. Cortez is a CPA, a conference organizer, and a journal editor. He is a visiting professor and researcher at De La Salle University, Manila, Philippines. He is an associate professor at the Graduate School of Management, Ritsumeikan Asia Pacific University, Japan. You may email him at cortezm@apu.ac.jp.The views expressed in this article are the author’s and do not necessarily reflect the official position of DLSU, its faculty, and its administrators.


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