Result of Moderated Regression Analysis

Table 6.5 presents the results of moderating effect of RDI between the relationship of environmental practices and short-term financial performances (ROA and ROS). For each dependent variable, the regression analysis proceeds attentively in order to compare the explanatory power of models with and without interaction term. The hypothesis is supported if the regression coefficients for the interaction terms are significant and the explanatory power (R-squared) of the model with interaction term is higher than the baseline model. Overall, Model 1-6 are significant at 5% significance level (Model 3 is significant at 1% significance level), all the Model 3-6 exhibit greater explanatory power in comparison to the baseline Model 1 and 2.

Hypothesis 1a suggested that regional diversification negatively moderates the relationship between environmental scanning and short term financial performances. The result partially supported this hypothesis where the interaction term in Model 3 is negative and significantly associated with ROA at 10% significance level. The R-squared of baseline model without the interaction term increases from 0.297 to 0.337 when the interaction term is incorporated. The F-statistic test reveals that the increment in R-squared is significant (p<0.01). In contrary, the interaction term in Model 4 is insignificant associated with ROS, although it shows negative association.

Hypothesis 2 suggested that regional diversification positively moderates the relationship between process-related pollution abatement practices and short term financial performances. The relationships between pollution abatement and both the financial performances are in inverted-U shape. Model 5 shows that RDI-squared-pollution-abatement interaction is positive and significant at 10% level. Hence, Hypothesis 2 is partially supported. The increment in R-square for both Model 5 and 6 is significantly greater than Model 1 and 2 respectively.

Table 6.5 Regression analysis on short term financial performances

Note: Standard errors in parentheses

∗ p < 0.10; ^∗∗ p < 0.05; ^∗∗∗ p < 0.01

Table 6.6 presents the results of moderating effect of RDI between the relationship of environmental practices and long term financial performances (Tobin’s Q ratio and revenue growth). Amidst Model 7-12, Model 7, 8, and 9 are significant at 10%

significance level, Model 12 is significant at 5% significance level. Since p-values for the F-test of Model 10 and 11 is above significance level 10%, there is no evidence that the independent variables incorporated in these models improve the fit.

Hypothesis 1b suggested that regional diversification negatively moderates the relationship between environmental scanning and long term financial performances. The

result partially supported this hypothesis where the interaction term in Model 9 is negative and significantly associated with Tobin’s Q ratio at 10% significance level. Model 9 is significant at 10% and has greater explanatory power as compared with baseline Model 7.

Table 6.6 Regression analysis on long term financial performances

Model 7 8 9 10 11 12

Standard errors in parentheses

∗ p < 0.10; ^∗∗ p < 0.05; ^∗∗∗ p < 0.01

Hypothesis 3 suggested that regional diversification negatively moderates the relationship between environmental innovation and long term financial performances.

Both the linear term and square term of environmental innovation are significantly associated with dependent variable Revenue Growth in Model 12. The negative coefficient of square term environmental innovation denotes a potential inverted-U shaped relationship. The statistically significant (p<0.05) and negative effect of the square interaction term in model 12 provide support for hypothesis 3. Yet, this relationship only proven on revenue growth, Model 11 shown no significant interaction effect and the model is not supported at 10% significant level.

6.4 Discussion

The results provide ample evidences on the moderating effects of international diversification towards the relationship between environmental management practices and firm financial performances. Although not a significant effect in all models, the moderating role attributed to a firm’s investments in environmental management provides evidence that the financial values of these practices would augment or dwindle in geographic expansion. Overall, the empirical results support the study proposition where internationalization moderates the relationship between environmental management practices and financial performances. Nonetheless, the moderation effects revealed so far are mixed and depend on types of environmental management practices.

Multinationality of a firm not necessarily enhances return from environmental management practices. It would be detrimental for a firm if the coordination and transaction cost of internationalization exceed benefit of deploying such environmental management practices. This study provides guidance to managers to allocate suitable

resources to develop the firm environmental capabilities in line with firm’s degree of internationalization, specifically regional diversification.

To continue with this line of inquiry, the configuration of how regional diversification moderates the curves and influence its slopes and inflection points of environmental management practices and financial performances are further depicted.

Figure 6.1 to 6.4 illustrate the moderating effect of RDI on environmental-financial performances. Three curves are depicted in each figure, the curves are plotted based on -1.5, 0, and +1.5 standard deviation of RDI. Bearing in mind, the actual models are too complicated to present with chart, these illustrations are partially represented the relationship of moderator, environmental practice variables and financial indicators, where the effects of other independent variables, ceteris paribus, are not accounted.

Therefore, the main purpose of these charts is only attempted to expound moderating effect on the relationship between environmental practices and financial performances, caution should be taken when interpreting the final financial outcome of the models.

As shown in Figure 6.1, a firm should implement proper pollution abatement practices which aligned with their global expansion. For low international diversified firms, moderate level of pollution abatement activities would realize better financial performance (ROA) than low and high pollution abatement. The positive slope at the initial stage is attributed to the increasing competitive advantages acquired, such competitive advantages include improve efficiency, reduce waste and lower the costs of construction. However, diminishing return will impair the profit obtained and the net marginal benefits from environmental protection will decline with increasing costs of pollution prevention activities.

When a firm is highly geographic diversified, it gains better financial performances than less geographical diversified firm at low and high level of pollution

abatement, as compared with less geographic diversified firm. The capability to access and integrate innovative pollution abatement process that learned from its multiple global markets would translated into greater financial performances for firm that implement low and high pollution abatement level. However, for highly internationalized firm, diminishing return of pollution abatement, impaired learning effect that would slower the adoption experience of pollution abatement activities across regional or country borders, would have hampered the financial benefit. Therefore, the curve does not exhibit a clear inverted-U shape as shown in low RDI curve.

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Figure 6.1 Moderating effect of RDI on the relationship between pollution abatement and ROA

Regional diversification negatively moderates the relationship between environmental scanning and both the short and long term financial performances (ROA and Tobin’s Q ratio respectively). The interaction effects are depicted in Figure 6.2 and 6.3. The interactions shown similar trend for both the linear models. For low international diversified firms, the performance is subordinate to highly international diversified firms, while the performances continuously ratchet up and eventually outperform highly international diversified firms as the firm conduct more business and risk surveillance on green market.

The result indicates that low international diversified construction firms are more likely to benefit at high level of scanning than highly international diversified construction firms. Multinational construction firms able to seize the opportunities and avoid threats by scanning on the environmental issues. Nonetheless, when a firm has greater global operation, the incremental governance, information processing and coordination cost to achieve or balance both global coordination and local market responsiveness would exhaust the managerial capacity as well as erode the potential profitability. After all, it is not advisable for highly international diversified construction firms to conduct lesser environmental scanning. In fact, highly geographical diversified firms are particularly salient to the legitimacy spillover over their environmental management issues due to their high global exposure. Foreign affiliates would encounter difficulty maintaining legitimacy if MNE as a whole or any of its other subunits experience legitimacy problems (Kostova and Zaheer, 1999). Therefore, they need to conduct environmental scanning and examine the pro and con of their environmental responses based on sufficient information gathered to prevent escalating public scrutiny and company image tarnishing.

Figure 6.2 Moderating effect of RDI on the relationship between environmental scanning and ROA

Figure 6.3 Moderating effect of RDI on the relationship between environmental scanning and Tobin’s Q ratio

Low Scanning High Scanning

ROA

Low RDI Mid RDI High RDI

The result suggests regional diversification negatively moderates the relationship between environmental innovation and long term financial performances (revenue growth). The interaction effects are depicted in Figure 6.4. Low regional diversified firms perform better in low and high level of innovation. On the flip side, high regional diversified firms are less performed in low innovation stage but slowly increase and excel in moderate level of innovation, then the growth rate gradually soften as the level of innovation increased. The results also denote that highly geographical diversified firms gain better financial performance at moderate level of innovation in comparison with low geographical diversified firms.

The study answers whether the reward would outweigh the costs associated with introducing environmental innovation for multinational construction firms. For less geographical diversified firms, Kleinschmidt and Cooper (1991) argument is tenable, where non-innovative products perform well due to close-to-home effect, highly innovative products are conducive to financial performance since they offer opportunities for product advantage and differentiation, while moderate innovative products thwart revenue growth because neither they produce competitive product differentiation products nor they beneficial from the close-to-home effects.

Since the costs of developing new innovation are similar whether the product or service is offered to one market or to many, being more international allows a firm to achieve greater returns from innovation by economies of scale (Hitt et al., 1997).

Therefore, when construction firms expand globally, their innovative environmental products or services would strengthen their revenue growth. However, transaction, coordination and communication costs escalated with degree of internationalization (Hitt et al., 1997; Lu and Beamish, 2004). The ability to offset associated costs would key to financial success of firms with moderate level of innovation and highly geographical

diversified firms. Nevertheless, with greater level of firms’ innovation and internationalization, the complexity to manage both product and geographically diversity increases considerably and would resulted in inferior financial performance. The result does not suggest to reduce firm’s investment in environmental innovation. Although they may not receive any direct economic payoff for their investments, innovation is necessary for firms to remain competitive (Kafouros et al., 2008; Teece, 1986).

Figure 6.4 Moderating effect of RDI on the relationship between environmental innovation and revenue growth

This study provides guidance for multinational construction firms to allocate resources for environmental strategy across multiple regions. MNEs that engage heavily in foreign operations must carefully monitor the costs and the benefits of environmental management practices when launching in different global market regions. There is no

simple answer whether a firm should deploy their resources to develop their environmental competency in line with their expansion into international business, yet managers and researchers should delve into the potential downside of excessive environmental management practices and degree of internationalization to keep firm’s financial performance at an optimal level.

Although the curves in Figure 6.1 to 6.4 shown that firms’ regional diversification might attenuate financial profit generated from environmental management practices, some firms may be able to shift the curve upward and to the right if they have the absorptive capability to create and maintain their competitive advantage in different regional markets. The generation of competitive advantage from proactive environmental strategy is largely fuelled by the firm’s absorptive capacity (Delmas et al., 2011).

Besides, care must be taken in interpreting the calculation to achieve optimal financial performances as shown in Table 6.5 and 6.6. These performances are calculated based upon the average environmental management variables for all the firms in the sample, which comprised of top multinational construction firms in the world. Thus, the coefficients of the formula are sensitive to the samples, and the findings are more suitable to imply on large construction firms that actively seek international expansion.

6.5 Summary of Findings

This chapter reveal the moderating effect of regional diversification RDI on the relationship between environmental management practices and financial performance of multinational construction firm. Stemmed on RBV, transaction cost and learning perspective, two hypotheses have been examined, and the findings are shown as below:

1. Regional diversification negatively moderates the relationship between environmental scanning and both short term financial performances ROA and long

term financial performance Tobin’s Q ratio. When RDI increased, the slope of the curvature ROA-scanning and Tobin Q-scanning will drop.

2. Regional diversification positively moderates the relationship between squared term of pollution abatement on-site and short term financial performance ROA.

3. Regional diversification negatively moderates the relationship between squared term of environmental innovation and long term financial performances revenue growth.

4. MNEs that engage heavily in foreign operations must carefully monitor the costs and the benefits of environmental management practices when deploy in multiple global market regions.

CHAPTER 7