Pursuing green innovation strategies boosts firms’ competitiveness but not performance

By Dr Bettina Becker, January 2024

Private sector companies have the power to create new solutions tackling climate issues. But do they have the incentive? Dr Bettina Becker, Associate Professor in Strategy and Innovation shares her findings. 

In today’s business world, you’d have to look hard to find a business that doesn’t have ‘becoming greener’ as one of its key strategies. Most companies understand the need to innovate their own practices so they’re more environmentally friendly, and the responsibility to not only their customers, but wider society, to look for greener versions of their current products. 

In fact, customers are increasingly concerned about the products and services they purchase being sustainable and environmentally friendly. Some would even refuse to buy from a specific company if they were deemed as having a detrimental environmental impact. 

While there’s clearly a want from customers and wider society for businesses to become greener, there’s also a need to. Governments typically aren’t equipped with the technology, availability or knowhow to produce new innovative solutions to environmental problems. Private sector companies are in a better position than governments to innovate and create new solutions tackling climate issues. 

Though many companies are in the position to innovate here, other than helping society, what incentives do they have to invest in tackling environmental issues in the light of the complexities, uncertainties, and costs surrounding green innovation? Businesses, of course, must earn some form of a profit in order to stay afloat – could pursuing green innovation strategies affect this? Is there a business incentive for a company to invest in green innovation strategies? 

That is what I looked into as part of a recent research paper. I studied a dataset of over 12,000 Spanish firms between 2008-2016, measuring two green innovation strategies that firms adopted over the nine-year period – a general green innovation strategy to reduce a firm’s environmental impact, and a green product innovation strategy to develop new green products – and matching these strategies to changes in firms’ performance, measured as turnover growth, employment growth, and labour productivity. 

I was particularly interested in reviewing the impact of the pursuit of these strategies both on the competitiveness of a firm within their current markets, and also the firms’ wider performance, understanding any potential impact on their productivity and growth. 

Firstly, the results show that the pursuit of either of the two green innovation strategies increases a firm’s innovation success – measured as an increase in turnover due to the launch of new-to-market products – compared with companies that don’t adopt a green innovation strategy, boosting their competitiveness as it allows them to enter new markets and build up ‘green’ capabilities. These firms see a 3-4% increase in turnover due to the launch of new-to-market products. 

Secondly, however, the study shows that adopting either of the two green innovation strategies doesn’t translate into a positive impact on firm performance in terms of turnover growth or employment growth. There’s also only a marginal positive effect on labour productivity for the general green innovation strategy, but not the green product innovation strategy, compared to firms that didn’t pursue either strategy. These results suggest that market incentives may not be enough to entice firms to adopt important green innovation strategies. 

So there’s a gap between the need for green innovation on the one hand, and the company reward for adopting related green innovation strategies on the other. This gap suggests that markets don’t sufficiently incentivise businesses to pursue green innovation strategies. 

Here, it’s important that policy makers look to fill this gap in terms of business incentives for investing in green innovation strategies, given it’s vital for the environment and society that businesses do so. 

Environmental and innovation policy intervention are critical to create the market incentives needed to encourage firms to invest in green innovation strategies. Specific policies should also offer direct stimulating support to enable successful green innovation. That way, firms would receive their financial incentive to invest in greener innovation strategies from the government rather than from the consumer. Firms developing green product innovation strategies may also be supported by the procurement of new green products by governments to stimulate demand. 

Rather than expecting that markets will provide ‘win-win’ situations, green industrial policy needs to shape markets and incentivise and support firms to increase their green production capabilities. This way, firms will be able to approach their full potential to capture green growth opportunities for the realisation of a sustainable economy.