Environmental Innovation and Financial Performance: The Moderating Effect of Motives and Firm Size

Although evidence shows that SMEs display very different environmental behavior than large firms, there is limited understanding of how firm size affects the relationship between environmental innovation and firms' economic performance. In line with the resource based view, we hypothesize that the effect of environmental innovation on firm performance will decrease with firm size. Using survey data and annual account data on 1712 Flemish firms, we demonstrate how the moderating effect of firm size depends on whether these innovations are developed as a response to customer demand, to government regulation or subsidies, or due to voluntary codes of conduct in the industry. In particular, environmental innovations motivated by government regulation and subsidies have a positive effect on large firms' economic performance, but a negative effect on that of small firms. Environmental innovations introduced because of voluntary industry codes of conduct or because of customer demand, have the same effect in both small and large firms. This paper is the first to demonstrate important boundary conditions related to firms' size and motives under which environmental innovation results in higher firm performance. Its results have important implications for firms' environmental strategies and for environmental policy development.