National institutional antecedents to corporate environmental performance

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Journal of World Business journal homepage: www.elsevier.com/locate/jwb

National institutional antecedents to corporate environmental performance Julia Hartmann a,*, Klaus Uhlenbruck b,c,1 a

Department of Operations, EBS University of Business and Law, Burgstraße 5, D-65375 Oestrich-Winkel, Germany Department of Management and Marketing, School of Business Administration, The University of Montana, 32 Campus Drive, Missoula, MT 59812, USA c Department of Management and Economics, EBS University of Business and Law, Wiesbaden, Germany b

A R T I C L E I N F O

A B S T R A C T

Keywords: Corporate environmental performance Sustainability Varieties of Capitalism Multilevel modeling

Understanding what drives firms towards environmentally sound manufacturing practices is important. While we have learned in recent years about firm-level drivers of corporate environmental performance (CEP), we know little about country-level antecedents. Our objective is to investigate the extent to which firm-level variation in CEP is explained by country-level differences. We develop hypotheses building on the Varieties of Capitalism framework and find—using data on 2724 firms in 42 different countries—that CEP is driven by the degree of market freedom of a firm’s home country, the non-governmental organizations active in the country and its freedom of the press. ß 2015 Elsevier Inc. All rights reserved.

1. Introduction The protection of natural ecosystems is a global challenge and firms play a major role in the process of sustainable development. Firms may mobilize substantial resources and allocate them to environmental protection based on an assessment of risks and benefits. As a consequence, it is of high importance to expand our knowledge of the determinants of firm engagement in environmental protection as part of a more general understanding of firm behavior with regard to Corporate Environmental Performance (CEP). We define CEP as the set of firm policies and activities intended to protect the natural environment as well as their outcomes (Aguinis & Glavas, 2012). Previous studies examined determinants of CEP at the firmlevel (e.g., Buysse & Verbeke, 2003; Christmann & Taylor, 2001; Sharma & Henriques, 2005). Less is known about the role of country-level factors in shaping CEP. Across the globe, we can observe varying patterns of CEP in different countries (Emerson et al., 2010), suggesting that firm-level determinants alone do not fully explain firm behavior relative to CEP. In addition to the cultural context, a potential explanation may be that the importance attributed to the environmental cause differs across

* Corresponding author. Tel.: +49 611 7102 2188. E-mail addresses: [email protected] (J. Hartmann), [email protected] (K. Uhlenbruck). 1 Tel.: +1 406 243 6523.

societies depending on their political, economic, and social context. This notion is captured in the Varieties of Capitalism perspective proposed by Hall and Soskice (2001) that suggests that ‘‘firms are not essentially similar across nations’’ (p. 56). According to this perspective, firms are actors that seek to develop and deploy competencies to achieve profitability, and governments provide the regulatory context within which firm behavior unfolds. When governments differ in their policies relative to environmental issues, we expect this likely translates into differences in firm-level CEP. Relatedly, firm choices depend on the leeway allowed by the economic context, but we do not yet fully comprehend how markets affect CEP. Furthermore, the social context may also be important as it determines the role of non-governmental organizations and the media in shaping firm behavior. It is therefore critical that we study country-level in addition to firm-level determinants of CEP. Studying CEP determinants at the country level will allow for a more complete understanding of how institutions affect firms and how this plays out in different countries. Firms, in turn, may gain a comparative institutional advantage depending on their location when creating and implementing processes that improve their performance with respect to sustainability concerns. Governments too may better understand how to guide firm environmental performance. The related literature so far has either focused on firms from a single country, on national culture as the only country-level antecedent of CEP, or on corporate social responsibility (instead of CEP) as the outcome variable. We extend this literature in several ways. First, most prior studies infer about the role of national

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institutions in shaping CEP by collecting survey data from firms in one country (e.g. Buysse & Verbeke, 2003; Christmann & Taylor, 2001; Christmann, 2004; Murillo-Luna, Garce´s-Ayerbe, & RiveraTorres, 2008). Based on their design, these studies allow for important conclusions about firm behavior in one specific institutional context. However, these studies cannot examine empirically firm behavior based on variation in the institutional context across countries, as is our goal. Relative to these studies, we extend the level of analysis from the firm to the country level. Second, we shift the focus from cultural variables to include legal, market, and social institutions that are likely to play an important role for firm-level CEP. Earlier, Ringov and Zollo (2007) studied the effect of culture as a national-level factor influencing CEP, whereas we identify relevant institutions and develop associated hypotheses building on the Varieties of Capitalism framework (Hall & Soskice, 2001). Third, we provide for a more fine-grained understanding of cross-country variation in corporate environmental performance. Most international studies to date tend to examine nation-level effects on corporate social responsibility—a summative term that also includes environmental performance. Yet, social and environmental performance are conceptually different and, therefore, are likely driven by different national institutions (Fransen, 2013). Furthermore, related studies that draw on data from multiple countries employed standard regression analysis techniques (e.g., Haxhi & van Ees, 2010; Jackson & Apostolakou, 2010; Ringov & Zollo, 2007). However, firms located in the same country tend to be more similar to each other than to firms from other countries because of the specific governmental, market and social institutional background shared by these firms (Hall & Soskice, 2001). This so-called within-cluster dependence violates the assumption in regression analysis that observations at the firm level are independent given the covariates. Hence, traditional regression analyses produce incorrect standard errors and, thereby, provide for misspecifications about the true role of nation-level institutions. This problem can be overcome by using multilevel models that allow disentangling the effect of variables operating at different levels by attributing variability to the different levels (Rabe-Hesketh & Skrondal, 2012; Snijders & Bosker, 2012). Thus, we respond to a recent call for multilevel research in sustainability studies to account for the nested nature of corporate environmental activity within higher-level institutional contexts (Aguinis & Glavas, 2012). Our study aids in understanding how firm-level CEP differs across countries because of differences in country-level institutions. The specific multilevel model used in the present study differentiates the three levels, time (level 1), firm (level 2) and country (level 3), allowing us to trace effects of country-level institutions on firm-level CEP over time. We include a multitude of countries and country-types in our research, and use data that cover 2724 companies over a recent eleven-year time span. Finally, to the best of our knowledge, this study is the first that applies Varieties of Capitalism to examine corporate environmental performance. 2. Literature review 2.1. Research on national institutions and responsible firm behavior To date, a limited number of studies empirically examine the link between country-level variables and firm level engagement in responsible behaviors (i.e. ethical, social and environmental responsibility). This literature is summarized in Table 1. Table 1 allows for several important conclusions about the state of research in the area. First, the dependent variables examined in existing research are diverse and pertain to different dimensions of responsible firm behavior. Most studies seek to explain variation in

social or ethical firm behavior across countries, while only three studies (Ioannou & Serafeim, 2012; Parboteeah, Addae, & Cullen, 2012; Ringov & Zollo, 2007) explicitly address environmental firm behavior. This difference is important as social, governance and environmental performance are different in nature: Firms, governments and other stakeholders likely need to adopt different measures, policies and activities to improve social, governance or environmental performance and, therefore, drivers for each of these likely differ too. For instance, the adoption of regulation to mitigate climate change would be expected to foster firm efforts to reduce carbon emissions, but is unrelated to corporate philanthropy, a typical social activity. Conversely, labor protection rights are designed to improve employee working conditions rather than carbon emissions. Studies that employ a composite measure of corporate social responsibility cannot make inference with respect to such differences (Fransen, 2013). Our second critical conclusion based on Table 1 is that cultural differences are among the most prominent independent variables used to explain country-level differences in responsible firm behavior whereas those legal, market, and social factors that may more directly affect firm behavior received comparatively little attention—in particular when the dependent variable is CEP. For example, governments endorse regulations that force firms to improve their CEP, but whether these regulations lead to desired results has not been addressed in any of the previous studies. Similarly, customers are likely to influence firm behavior, but country differences with respect to customers’ role in shaping CEP have not yet been studied. Ioannou’s and Serafeim’s (2012) conception of ‘‘promotion of competition’’ is a first step in this direction, yet they measure regulatory rather than market conditions. Social institutions, for instance non-governmental organizations (NGOs), have also been conceptually proposed to be drivers of CEP (Hendry, 2003), but extant empirical studies have focused on the impact of such social institutions on corporate social responsibility only (Lim & Tsutsui, 2012; Toffel, Short, & Quellet, 2012) rather than CEP. Hence, we do not yet have empirical evidence whether—across countries—social institutions also affect CEP. In the present study, we seek to contribute to closing these gaps. Drawing on the Varieties of Capitalism framework (Hall & Soskice, 2001), we identify country-level institutions relevant to explaining cross-country variation in CEP. We assess the role of these institutions in shaping CEP across more than 40 developed, emerging, and transitioning economies during an 11 year period. 2.2. The Varieties of Capitalism framework The Varieties of Capitalism perspective (Hall & Soskice, 2001) is a recent extension of institutional theory. Varieties of Capitalism was developed in political economy to understand institutional differences and similarities among economies while at the same time bringing firms into the center of analysis and recognizing what governments can and cannot accomplish. The framework seeks to explain why and how national legal, market, and social institutions shape firm behavior and performance. Hall and Soskice (2001) perceive firms as actors that develop and use core competences (Prahalad & Hamel, 1990) and dynamic capabilities (Teece, Pisano, & Shuen, 1997) for profitable development, production and distribution of goods and services. The authors also argue that firms’ capacity to establish resilient relationships with governments, customers, social actors and other stakeholders is critical for firm success. However, firms’ capacity to coordinate effectively across a range of different actors differs between countries resulting from differences in national institutional conditions. The concept of comparative institutional advantage, on which the authors draw, asserts that particular legal, social,

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Table 1 Overview of past empirical research relating country-level variables to corporate responsibility. Reference

Objective

Variablesa

Theory, data & methodb

Findings

Haxhi and van Ees (2010)

To analyze the cultural determinants of the diffusion of codes of good governance

T: Cultural differences D: 237 codes, 67 countries, cross-sectional M: Poisson regression

Ho et al. (2012)

To examine how cultural values affect corporate social performance

IV: Individualism, uncertainty avoidance; power distance, masculinity DV: Number of codes of good governance IV: Power distance, individualism, masculinity, uncertainty avoidance DV: CSR

 Significant positive effect of individualism  No effect of uncertainty avoidance, power distance, masculinity  Significant negative effect of individualism  Significant positive effect of power distance, masculinity, uncertainty avoidance

Ioannou and Serafeim (2012)

To explore the extent to which variation in corporate social performance can be explained by national institutions

IV: Promotion of competition, shareholder protection, corruption, leftist ideology, union labor density, availability of skilled labor, marketbased financial system, socially responsible stock market, individualism, power distance DV: CSR

Jackson and Apostolakou (2010)

To examine how institutional factors influence corporate social responsibility practices

Lim and Tsutsui (2012)

To understand how national institutions drive commitment to socially responsible initiatives

Ringov and Zollo (2007)

To investigate the effect of differences in national cultures on corporate social and environmental performance To understand the impact of national institutions on adherence to private codes of conduct

IV: Coordinated market economies; liberal market economies; investor protection laws; employment protection laws DV: CSR IV: Number of NGOs, number of international treaties, signature of UN Global Compact, democracy, public sector transparency, level of education, past UN Global compact participants, UN Global launch, bilateral investment, bilateral export DV: Baseline, ceremonial, and substantive commitment to CSR IV: Power distance, individualism, masculinity, uncertainty avoidance DV: Social and environmental performance IV: Protection of labor, number of labor treaties, number of NGOs, press freedom, issue salience DV: Adherence to codes of conduct

To explore how cultural and leadership variables are associated with corporate social responsibility variables in decision making

IV: Institutional collectivism, ingroup collectivism, power distance, leadership vision, leadership integrity DV: CSR values

Toffel et al. (2012)

Waldman et al. (2006)

a b

T: Cultural differences D: 3680 observations, 49 countries, crosssectional M: 2-stage least squares regression T: National business systems D: 2330 firms, 42 countries, panel M: OLS regression

T: Institutional theory D: 274 firms, 16 Western European countries, crosssectional M: OLS regression T: Institutional and political economy approaches D: 99 countries, panel M: Binomial regression

T: Cultural differences D: 463 firms, 23 countries, cross-sectional M: OLS regression T: Institutional theory D: 14,922/689 firms, 43/33 countries, cross-sectional M: Binomial regression T: Cultural differences D: 561 firms, 15 countries, cross-sectional M: Hierarchical regression

 Significant negative effect of promotion of market competition, shareholder protection, presence of corruption, leftist ideology, marketbased financial system  Significant positive effect of union labor density, availability of skilled labor, individualism, power distance  No effect of socially responsible stock market  Significant effect of market economy type, investor protection and employment protection laws

 Significant negative effect of number of international treaties  Significant positive effect of number of NGOs, UN Global Compact launch  No effect of past UN Global compact participants, democracy, public sector transparency, level of education, bilateral investment  Significant negative effect of power distance, masculinity  No effect of individualism, uncertainty avoidance  Significant positive effect of labor treaties, press freedom, issue salience  No effect of protection of labor, number of NGOs  Significant negative effect of power distance  Significant positive effect of institutional collectivism, leadership vision, leadership integrity  No effect of in-group collectivism

IV = independent variable; DV = dependent variable. T = theory; D = data; M = method.

economic and political institutions confer certain capabilities to firms: ‘‘The basic idea is that the institutional structure of a particular political economy provides firms with advantages for engaging in specific types of activities there. Firms can perform some types of activities, which allow them to produce some kinds of goods more efficiently than others because of the institutional support they receive for those activities in the political economy, and the institutions relevant to these activities are not distributed evenly across nations’’ (Hall & Soskice, 2001Hall & Soskice, 2001: 37). This framework is particularly suitable for the investigation of cross-country differences of firm-level engagement in environmental preservation (Gjølberg, 2009). For instance, the framework emphasizes firm capacity to coordinate challenges with key stakeholders for firm success. Stakeholders—individuals or groups who affect or may be affected by a firm’s activities (Freeman,

1984)—control critical resource flows to firms and have discretion in how they choose to allocate these resources (Donaldson & Preston, 1995; Jones, 1995). Similar to the Varieties of Capitalism framework, the sustainability literature views stakeholder coordination capabilities as key ingredient for successful CEP (Barnett, 2007). Furthermore, the framework points out that there is variation in country-level institutions and their capacity to influence firm behavior. While the sustainability literature acknowledges that CEP varies across countries (e.g., Fransen, 2013; Matten & Moon, 2008), the factors that drive these differences are only weakly understood. The Varieties of Capitalism framework helps in identifying relevant institutions and their relationship to CEP. Varieties of Capitalism points to three institutional domains most relevant to explain cross-national variation in CEP: legal,

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market, and social institutions. With respect to legal institutions, a strong state is perceived as having comprehensive policies and regulation on environmental preservation and thus firms located in such countries are better prepared to meet and even exceed regulatory prescriptions. Further, market conditions, for example the degree of market freedom, induce firms to develop strong competencies in handling customer relations with a view of securing stable or growing demand for its products at home or abroad. Institutional scholars argue that culture is one of the most important social institutions (e.g. Scott, 2008). Although the Varieties of Capitalism framework acknowledges the importance of culture in building a reference frame for behavior, it ascertains that culture cannot be assumed to operate effectively forever. Rather, to remain viable, cultural beliefs ‘‘cannot be taken for granted but must be reinforced by the active endeavors of the participants’’ (Hall & Soskice, 2001: 14). As noted in earlier studies at the country level, we suggest that non-governmental organizations (e.g. Henriques & Sadorsky, 1999; Rueda-Manzanares, Arago´n-Correa, & Sharma, 2008) and the press (e.g. Eiadat, Kelly, Roche, & Eyadat, 2008; Peloza & Shang, 2011) are two such active and major social participants that have the capacity to reinforce shared understandings about environmental protection. A strong civic culture in terms of public debate forces firms to interact with non-governmental organizations and helps them in developing strong ties with activists. Likewise, vigorous investigative journalism creates incentives for firms to respond to societal issues such as environmental protection and to develop sophisticated partners among external stakeholders (Gjølberg, 2009, 2010). Moreover, social organizations, such as non-governmental organizations and a free press, often compensate for shortcomings of governments in implementing its policies (Hall & Soskice, 2001). These institutions are all normative in character, i.e., they are prescriptive, evaluative, and obligatory in nature and assist in framing norms of behavior (Scott, 2008). Accordingly, for our study, we propose as proxies for crosscountry variation in legal institutions the number of environmental treaties signed and ratified by a country because of the documented link between such international treaties and countrylevel laws and regulations (Hafner-Burton & Tsutsui, 2005; Jira & Toffel, 2012). Likewise, we identify variation in market institutions by the degree of market freedom as it is related to the diffusion of best practices and market norms (Herrera-Echeverri, Haar, & Este´vez-Breto´n, 2014; Mahmood & Rufin, 2005). Further, we follow previous research to assess variation in countries’ social institutions by the number of NGOs active in that country (e.g., Kourula & Laasonen, 2010) and the degree of press freedom (Margolis & Walsh, 2003; Nikolaeva & Bicho, 2011). Building on the Varieties of Capitalism perspective, we propose that differences in these country-level institutions help explain variation in CEP of firms across countries. 3. Hypotheses development 3.1. Legal institutions and corporate environmental performance Differences in legal institutions across countries pertain to variance in the valuation of the natural environment (Christmann & Taylor, 2001) and to the power of governments to enforce compliance with existing regulation (Matten & Moon, 2008). Environmental legal prescriptions should affect CEP positively as they usually provide financial and reputational incentives for compliance. Regulations mandate firms for environmental improvements (Eiadat et al., 2008). Regulation may even unleash the potential for environmental innovation if it is designed in such

a way as to leave sufficient freedom about how to attain environmental objectives (Porter & van der Linde, 1995). Regulations should also support CEP if they are designed in such a way as to complement rather than contradict economic objectives (Rugman & Verbeke, 1998). International treaties are an important instrument of global norm diffusion and compliance with internationally agreed-upon standards (Lim & Tsutsui, 2012; Meyer, Boli, Thomas, & Ramirez, 1997). The rationale is that countries that have ratified such international environmental treaties will endorse corresponding laws and regulations (e.g., Hafner-Burton & Tsutsui, 2005; Jira & Toffel, 2012). Further, governments often use international treaties to enforce policies domestically that suffer from internal political resistance and attempt to affect the language of a treaty to meet their country’s needs (Hall & Soskice, 2001). Empirical research has started to address the question whether treaty adoption by host governments is associated with corresponding behavior of firms within those states (Toffel et al., 2012). To date, this literature produced mixed results. Hafner-Burton and Tsutsui (2005), for instance, find that human rights treaties do not reduce the amount of human rights violations. Lim and Tsutsui (2012) hypothesize that the more countries are inter-linked through international treaties, the higher will be firm participation in corporate social responsibility. In terms of regulation for environmental preservation, we argue that when governments adopt and ratify international environmental treaties, firms in these countries expect to face greater pressure to comply with treaty provisions (Lim & Tsutsui, 2012). Countries that have committed internationally and therefore quite visibly to environmental preservation through treaties are likely to translate associated norms and expectations into national laws and regulations and, at the same time, develop monitoring mechanisms to ensure compliance. Firms will anticipate those pressures once the treaties are signed and might seek to improve their CEP even before treaty stipulations are transferred into specific regulation. The Kyoto Protocol is a good example. The Kyoto Protocol was established in December 1997 as an amendment to the United Nations Framework Convention on Climate Change (UNFCCC) and aims uniquely at reducing global greenhouse gas emissions. Even though it took until 2005 for the protocol to enter into force, many countries developed corresponding regulations earlier in anticipation of the protocol (Kumazawa & Callaghan, 2012). Governments provide a strong signal about future regulation when they sign and ratify the Kyoto Protocol. Firms often adopt environmental strategies in anticipation of these future legislations (Doh & Guay, 2006). Signature countries are expected to adopt more comprehensive and stringent rules to enforce corporate climate mitigation strategies than countries that do no sign the treaty (Kumazawa & Callaghan, 2012). In fact, Jira and Toffel (2012) show that firms in Kyoto Annex 1 countries, i.e. countries which explicitly formulate greenhouse gas reduction targets, are better prepared to provide information about their greenhouse gas emissions. They explain this finding by the fact that in Annex 1 countries the structures and systems necessary to collect, analyze and share information about greenhouse gas emissions are more developed. Therefore, we hypothesize that firms located in countries that have signed and ratified more environmental treaties will be more likely to adopt environmental strategies to respond to and comply with regulatory demands than firms in countries having signed a lesser number of such treaties. Hypothesis 1. Firms located in countries with higher numbers of international environmental treaties signed and ratified will have higher levels of CEP.

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3.2. Market institutions and corporate environmental performance Firms seek to develop capabilities that allow them to produce goods and services that create more value than those of competitors. To attain superior performance, firms also need to develop strong ties with customers, suppliers and other stakeholders (Teece et al., 1997). According to the Varieties of Capitalism framework, firm capacity to develop resilient stakeholder relationships is also conditioned by market institutions. Inter-firm relations with suppliers, clients, and employees secure firm access to supplies of input materials, products and technology. The capacity to develop such stakeholder ties is substantially influenced by the degree of market freedom. In countries with liberal market economies, economic institutions such as supply and demand efficiently guide the behavior of actors. In other countries, coordination of economic actors depends on nonmarket relationships, which tend to be less efficient (Hall & Soskice, 2001). Gwartney and Lawson (2003, p. 406) define market freedom as the combination of ‘‘individual choice, voluntary exchange, freedom to compete and protection of persons and property.’’ They continue to state that ‘‘institutions and policies are consistent with economic freedom when they provide an infrastructure for voluntary exchange, and protect individuals and their property from aggressors seeking to use violence, coercion, and fraud to seize things that do not belong to them.’’ In freer market economies, novel concepts and ideas spread more easily as there are less limitations imposed on the behavior of economic actors (Hall & Soskice, 2001). Manufacturing practices that decrease negative impacts on the natural environments by using new methods for treating emissions, recycling waste, etc. are characterized as innovative concepts (Berrone, Fosfuri, Gelabert, & Gomez-Mejia, 2013). In free markets, information flows faster and more directly among economic actors. Recent empirical research confirms that market freedom is positively associated with innovative entrepreneurial activity across developed and developing economies (Herrera-Echeverri et al., 2014). As ideas spread fast and easily, the pool of knowledge firms can draw on increases and there will be richer ways of recombining existing know-how and generate new ideas providing for a virtuous cycle (Mahmood & Rufin, 2005). In liberal markets, customers have more influence on firm behavior (Hall & Soskice, 2001). Customers, in turn, increasingly request responsible firm behavior from the economic actors they are associated with (Christmann, 2004; Klassen & Vachon, 2003). IBM, for instance, implemented an Environmental Management System that includes comprehensive assistance for its approximately 30,000 direct suppliers to improve their CEP (Environmental Leader, 2010). If suppliers do not comply with this system, IBM will replace them. Hence, many firms have a strong incentive to satisfy such customer expectations. Relatedly, economies in which market freedom is high tend to be more international as they impose fewer restrictions on international trade (Gwartney & Lawson, 2003). As a result, firms in liberal markets are faced with a greater variety of customers demanding more or less in terms of environmentally responsible firm behavior. This, in turn will be associated with higher levels of CEP among firms in liberal economies as they will rationalize their environmental behavior towards the expectation of the most demanding customers for reasons of efficiency and effectiveness (Christmann & Taylor, 2001; Sharfman, Shaft, & Tihanyi, 2004). It is likely that firms in freer market economies face less bureaucracy and administrative hurdles in their effort to improve CEP (Lehrer, 2001). Such hurdles could be prescriptions in terms of the type of technology to use or the necessity to apply for special

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permissions to do things outside the norm. Empirical research supports that less behavioral restrictions in freer markets are positively associated with development (Akhter, 2004). Market freedom facilitates access to financial investors (Herrera-Echeverri et al., 2014). Financial investors, in turn, may benefit financially from CEP through higher returns (Hillman & Keim, 2001) which should foster the diffusion of CEP. Hypothesis 2. Firms located in countries with higher market freedom will have higher levels of CEP. 3.3. Social institutions and corporate environmental performance In countries where civic culture is strong, non-governmental organizations and the media exert pressure on organizations to consider other stakeholder interests in their dealings rather than only stockholder interests. The Varieties of Capitalism framework therefore indicates that firms located in countries with a strong civic culture should exhibit a stronger CEP. Activist groups are a major source of normative pressure on firms (Doh & Guay, 2006; Hendry, 2003). Non-governmental organizations (NGOs) seek to alleviate problems that tend to be underserved by governments (Vogel, 2010) or that governments find difficult to address (Hall & Soskice, 2001). In the 1950s and 1960s, the main goal of NGOs was poverty alleviation. In the past decades, however, their focus has changed and is now increasingly on environmental protection and sustainable development (Riddel & Robinson, 1996), defined as the tripartite pursuit of environmental, social and economic objectives (Elkington, 1994). Today, NGOs are defined as not-for-profit organizations that serve particular societal and environmental interests by focusing efforts on social, environmental, political and economic goals (Teegen, Doh, & Vachani, 2004). NGOs employ different tactics to influence firm behavior that range from adversarial litigation and boycotting to more cooperative interactions such as lobbying and partnerships (Kourula & Laasonen, 2010). Swiss multinational Nestle´, for instance, was urged to change its corporate buying behavior as NGOs found that the firm sourced palm oil from farmers who deforested rainforests to increase harvesting capacity (The Economist, 2010). Today, Nestle´ works actively with several NGOs to anticipate environmental issues and preserve legitimacy. Firms that establish successful cooperation with NGOs can avoid negative reprisals and leverage the experience and expertise of these potentially valuable partners (Christmann & Taylor, 2001; Kourula, 2010). Firms may leverage the NGO’s networks to gain access to relevant stakeholders and, through stakeholder integration, enhance firm legitimacy (Oetzel & Doh, 2009). At the country level, NGOs inform about firm impact on the natural environment and diffuse ideas and conceptions about how to solve these. NGOs also have the knowledge and capabilities to help firms improve their CEP and, thereby, shape change processes ˜ o & Mixon, 2004). For instance, within firm boundaries (Trevin Yaziji (2004) suggests that NGOs accumulate well educated experts who often have superior technological know-how such as new technologies with environmental impact. Even if NGOs themselves may not always be powerful stakeholders (Mitchell, Agle, & Wood, 1997), they usually have the capacity to influence the behavior of other, more powerful firm stakeholders, for instance customers, to act in the interest of the NGO. NGOs can encourage different corporate stakeholders to take action and, thereby, increase pressure on firms to decrease their negative impact on the natural environment (Frooman, 1999). Hypothesis 3. Firms located in countries with higher numbers of NGOs will have higher levels of CEP.

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Fig. 1. The conceptual framework.

The media represent the values and sentiments of a nation’s society and civic culture (Nikolaeva & Bicho, 2011). Media are a source of external information about environmental best practices which speeds up environmental innovation adoption by firms (Deephouse & Heugens, 2009; Strang & Soule, 1998). Margolis and Walsh (2003) assign an important role to the media because the press monitors and reports on firm behavior and, at the same time, acts as watchdog for firms by using the threat of public exposure. Biochemical companies such as Monsanto, for instance, were driven out of European food markets as the media fueled a debate about the negative environmental effects of genetically modified food (Yaziji, 2004). The press discloses information about a firm’s environmental (mis-)behavior and, thereby, contributes to public opinion about a firm (Henriques & Sadorsky, 1996). For instance, the aforementioned role of NGOs in eliciting CEP actually depends on the public being informed about firm behavior. The media can become crucial in mobilizing consumer boycotts (Braunsberger & Buckler, 2011) and similar social movements targeted at firms and their environmental behaviors (Nikolaeva & Bicho, 2011). The public opinion, in turn, is crucial to a firm’s profitability and long-term survival as it shapes firm legitimacy and reputation in the eyes of different stakeholder groups (Freeman, 1984; Suchman, 1995). For instance, negative publicity can damage trust and loyalty among customers (Vogel, 2010) and financial investors (Low & Arumugam, 2001) and may affect firm revenues and access to financial resources. The mere threat of negative publicity may already be sufficient for CEP to improve as firms want to prevent the negative consequences from public disclosure of non-sustainable practices (Dyck & Zingales, 2002). Several empirical studies confirm a role of the media in shaping CEP (Bansal & Clelland, 2004; Bansal & Roth, 2000; Nikolaeva & Bicho, 2011). At the country level, there is substantial variation in opportunity of the media to support the development of a comprehensively informed public opinion. The extent to which the press is free and

willing to disseminate knowledge varies across countries (Themudo, 2013). Furthermore, demand for transparent firm behavior differs (Nikolaeva & Bicho, 2011). These country-level differences will affect CEP. Campbell (2007) suggests that firms are more likely to support environmental preservation if different constituents monitor firm behavior and have the capacity to mobilize forces against a firm. If press freedom is low, the press is muted by governments, firms or other actors thereby weakening the quality of public debate and potential solutions to a contested problem (Jackson & Stanfield, 2004). Hypothesis 4. Firms located in countries where press freedom is higher will have higher levels of CEP. Fig. 1 displays the multilevel nature of our hypothesized model, in which country-level factors shape firm-level behavior.

4. Method 4.1. Data and sample To assess our hypotheses, we constructed a database with information from different sources. We collected firm-level CEP information from the ASSET4 database and complemented the data with accounting information from Thomson Reuters WorldScope. The country-level variables stem from multiple sources including the United Nations, World Bank, the Fraser Institute and Yearbook of International Organizations. Table 2 provides an overview of our variables, their measurement and corresponding data sources. We obtained CEP data from Thomson Reuters ASSET4 database. ASSET4 provides systematic environmental, social and governance information for publicly-traded companies. The database is primarily used by professional investors to support investment

Table 2 Variable definitions, measurements and data sources. Variable

Definition

Source

Level

Environmental treaties

Number of international environmental treaties ratified by a given country Index of the extent to which acquired property is protected and individuals are engaged in voluntary transactions. Number of international NGO memberships per country in terms of Cluster I organizations (categories A–D) Annual survey on the degree of print, broadcast, and internet freedom Individualism versus collectivism index measured as of 1973 Gross domestic product Gross domestic product per capita Extent to which a firm manages or not its impact on the natural environment; includes 3 sub-dimensions: emission reduction, environmental product innovation and resource reduction Number of full time employees Past performance Cash flow to sales ratio

United Nations (2013)

Country

Fraser Institute (2013)

Country

Smith and Wiest (2012)

Country

Freedom House (2014) Hofstede (1980) OECD (2010) OECD (2010) Thomson Reuters, 2013 ASSET4

Country Country Country Country Firm

Reverse coded

WorldScope WorldScope WorldScope

Firm Firm Firm

Log transformed

Market freedom NGOs Press Freedom Individualism GDP GDP per capita CEP

Firm size ROA Slack

Note

Log-transformed

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strategies related to sustainable business practices, but it has also been used in academic research on country level antecedents to sustainability (e.g., Ioannou & Serafeim, 2012). ASSET4 is a relatively new source of data on sustainability including CEP. There are a variety of CSR ratings that have traditionally been used in academic research. However, relative to ASSET4, the alternatives are restricted in terms of their methodology and coverage. For example, Sustainable Asset Management is based on subjective survey data (Delmas, Etzion, & Nairn-Birch, 2013). Instead, the Kinder, Lydenberg, and Domini (KLD) index (now a part of MSCI) differentiates areas of strength and concern across a range of environmental, governance, and social dimensions. KLD is limited to firms that are publicly traded on US stock markets. ASSET4 draws from a broader array of firms across the globe than KLD. Similar to KLD, ASSET4 compiles information on CEP from public data sources and includes CEP information in several dimensions: emission reduction, environmental product innovation, resource reduction and total environmental performance, which is the average of the other three dimensions. ASSET4 is therefore more detailed and granular than the KLD index. Earlier research has shown that the environmental metrics used in KLD and ASSET4 are correlated and provide consistent information when comparing firms (Semenova, 2010). For these reasons, ASSET4 is not only a suitable alternative to KLD, but arguably, a more comprehensive data source for the context of the present study. ASSET4 started to compile environmental, social and governance information in 2002 with an initial sample of almost 1000 mostly US-based and European firms and gradually extended the database to also include companies from other continents. Specially trained research analysts collect objective and publicly available information for each firm and rate the firms based on specified guidelines. Typical data sources include stock exchange filings, sustainability reports, non-governmental organizations’ websites, and various news sources. According to Thomson Reuters, ASSET4 information is verified in a multi-step process control procedure including data entry checks, automated quality rules and historical comparisons to ensure a high level of accuracy, timeliness and quality. Subsequently, information is transposed into quantified data which are used as inputs to a default equalweighted framework to calculate various key performance indicators. As we want to explain variation in CEP of firms located in different countries, we selected firms with a similar industrial background and, therefore, concentrated on manufacturing firms. Manufacturing firms tend to have a stronger impact on the environment as their business operations emit emissions, consume resources and generate waste. Overall, their impact on the natural environment is expected to be higher than that of service firms. We compiled information for the years 2002 until 2012. We removed all those firms from the sample for which we could not obtain complete information on the country level predictors. In addition, we dropped all dead or delisted firms from the sample. These firms either went bankrupt or became the target of a merger or acquisition. The specific economic conditions of these firms prior to bankruptcy or acquisition may bias our findings and, therefore, we decided to exclude them from the analysis. The final sample is an unbalanced panel including 16,419 observations for 2724 firms from 42 countries for a total of 11 years. Table 3 displays the distribution of the sample across countries. 4.2. Measures 4.2.1. Dependent variable The dependent variable for this research, corporate environmental performance (CEP), is measured at the firm level with the

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Table 3 Distribution of sample firms across countries. Country (1) Australia (2) Austria (3) Belgium (4) Brazil (5) Canada (6) Chile (7) China (8) Czech Republic (9) Denmark (10) Egypt (11) Finland (12) France (13) Germany (14) Greece (15) Hong Kong (16) Hungary (17) India (18) Indonesia (19) Ireland (20) Israel (21) Italy (22) Japan (23) Malaysia (24) Mexico (25) Morocco (26) Netherlands (27) New Zealand (28) Norway (29) Philippines (30) Poland (31) Portugal (32) Russian Federation (33) Singapore (34) South Africa (35) South Korea (36) Spain (37) Sweden (38) Switzerland (39) Thailand (40) Turkey (41) United Kingdom (42) United States Total

Number 125 11 17 47 190 12 62 3 16 1 25 78 69 14 122 3 58 20 10 9 32 333 17 19 1 25 7 18 13 15 8 13 26 50 79 35 36 45 4 15 244 806 2733

% 4.57 0.40 0.62 1.72 6.95 0.44 2.27 0.11 0.59 0.04 0.91 2.85 2.52 0.51 4.46 0.11 2.12 0.73 0.37 0.33 1.17 12.18 0.62 0.70 0.04 0.91 0.26 0.66 0.48 0.55 0.29 0.48 0.95 1.83 2.89 1.28 1.32 1.65 0.15 0.55 8.41 29.49 100.0

environmental score from Thomson Reuters ASSET4. The environmental score is based on the three performance dimensions emission reduction, environmental product innovation, and resource reduction. The definition provided by ASSET4 is as follows: ‘‘The environmental pillar measures a company’s impact on living and non-living natural systems, including the air, land and water, as well as complete ecosystems. It reflects how well a company uses best management practices to avoid environmental risks and capitalize on environmental opportunities. . .’’ For every year, each firm receives a score ranging from 0 to 100 regarding its overall environmental performance and its performance in the three subdimensions (Thomson Reuters, 2013). 4.2.2. Independent variables Following the goals of our research, all independent variables are measured at the country level. The effect of legal institutions was measured by the accumulated number of international environmental treaties ratified by a country in a given year and we obtained the information from the United Nations environmental treaty collection (United Nations, 2013). The variable was lagged by one year to account for the time it takes to integrate treaties’ stipulations into corresponding national legislation and regulation and firms to respond to them. The two most frequently used measures for market freedom so far have been the Economic Freedom of the World Index

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level, we controlled for size of the economy in terms of its annual gross domestic product (GDP) and obtained corresponding data from the OECD (OECD, 2010). Furthermore, as Table 1 revealed, previous literature found that cultural variables explain part of the variation in CEP across countries. Several cultural dimensions have been identified to significantly affect CEP (Haxhi & van Ees, 2010; Ho, Wang, & Vitell, 2012; Ioannou & Serafeim, 2012). Therefore, we included Hofstede’s measure for individualism, power distance, masculinity and uncertainty avoidance as a control variables (Hofstede, 1980). At the firm level, we controlled for firm size as it may influence CEP (Johnson & Greening, 1999). We included the log of the number of employees to control for firm size (e.g., Surroca, Tribo´, & Waddock, 2010). Additionally, we controlled slack of resources measured as cash flow to sales ratio (log transformed) and financial performance in terms of return on assets (ROA) as the availability of financial means may determine investments in environmental protection (Seifert, Morris, & Bartkus, 2004). All control variables were lagged by one year. Apart from the two variables that were log transformed (firm size and slack of resources), all control variables were standardized. Table 4 summarizes descriptive statistics and correlations of all variables. Given the elevated correlations among several measures, we checked tolerance statistics to determine whether the results might be influenced by multicollinearity. Following the recommendation by Hox and van de Schoot (2013), we computed the condition number for each variable in the single level model. The condition number is the square root of the largest eigenvalue divided by the smallest eigenvalue. Thus, the condition number tends to infinity when multicollinearity increases. The highest condition number in our model was 24.74, which is below the generally accepted threshold indicator of 30 (Gujarati & Porter, 2009).

(EFWI) provided by the Fraser Institute and the Index of Economic Freedom by The Heritage Foundation. We use the EFWI because it is considered to be based on more precise and transparent information than the Heritage Index (Gwartney & Lawson, 2003). However, both indices are highly correlated (Hanke & Walters, 1997). The EFWI measures market freedom in five dimensions: size of government (expenditures and taxes, enterprises), legal structure and security of property rights, ease of access to financial capital, freedom to trade internationally, and regulation of credit, labor and business. The market freedom index ranges between 0 and 10 with higher values indicating more freedom. Yearly values for this variable were obtained from the 2013 EFWI edition (Fraser Institute, 2013) and were lagged by one year. Information about the number of NGOs in a country was obtained from the Yearbook of International Organizations (Union of International Organizations, 2001–2009). Following examples from previous literature studying the effect of NGOs on corporate responsibility (Lim & Tsutsui, 2012; Toffel et al., 2012), we used Cluster I (Categories A–D) organizations as defined by the Union of International Associations’ categorization. Cluster I organizations include federations of international organizations, universal membership organizations, intercontinental membership organizations, and limited or regionally defined membership organizations and excludes, for example, inactive or dissolved organizations. The variable was lagged by one year. Countries’ press freedom was measured with the annual Press Freedom Index compiled by Freedom House (Freedom House, 2014). Information for the Freedom of the Press index is collected annually through a survey of media independence in 197 countries and territories. The index assesses the degree of print, broadcast, and Internet freedom in every country in the world, analyzing the events of each calendar year. We reverse coded the index such that higher values denote higher press freedom and lagged it by one year. We standardized each independent variable by transforming the variables to z-scores of zero mean and unit variance. This was done to make findings comparable across all indicators. This is the recommended approach when the type measurement of the independent variables differs substantially as it facilitates interpretation (Gujarati & Porter, 2009, p. 157).

4.3. Analysis This study examines the relationships of time series data structures of yearly observations of firms nested in countries. The dependent variable is measured repeatedly at the firm level, the independent variables are measured at the country level, and control variables are measured at the country and firm levels. These complex data structures require an analytical technique that takes into account this nested data structure. Conventional statistical techniques such as analysis of variance or linear regression allow the aggregation of data at the highest level of

4.2.3. Control variables To isolate country level effects on firm level CEP, we included control variables at both the country and firm level. At the country

Table 4 Descriptive statistics and correlations. Variable

Mean

SD

Min

Max

1

2

3

4

5

6

7

8

9

10

11

12

1. CEP 2. GDP 3. Individualism 4. Power distance 5. Masculinity 6. Uncertainty Avoidance 7. ROA 8. Size (log-transformed) 9. Slack (log-transformed) 10. Treaties 11. Market freedom 12. NGOs 13. Press freedom

0.04 0.04 0.05 0.04 0.03 0.01 0.02 9.31 2.55 0.03 0.02 0.08 0.05

1.00 1.01 0.96 0.96 1.01 1.01 0.92 1.60 0.86 0.99 0.99 0.94 0.94

1.37 1.01 2.33 2.48 3.01 2.24 18.07 0 3.91 1.65 4.31 2.77 5.00

1.41 1.75 0.88 4.02 1.80 2.54 16.39 14.60 11.51 2.15 2.70 1.58 1.12

0.03* 0.13* 0.10* 0.09* 0.13* 0.09* 0.38* 0.18* 0.28* 0.03* 0.30* 0.22*

0.24* 0.03* 0.27* 0.07* 0.07* 0.10* 0.05* 0.39* 0.04* 0.22* 0.03*

0.63* 0.02* 0.22* 0.12* 0.01 0.09* 0.35* 0.28* 0.69* 0.68*

0.10* 0.28* 0.09* 0.12* 0.12* 0.26* 0.41* 0.36* 0.66*

0.23* 0.05* 0.02 0.02 0.32* 0.01 0.11* 0.21*

0.08* 0.06* 0.04* 0.19* 0.43* 0.12* 0.05*

0.08* 0.36* 0.13* 0.08* 0.18* 0.15*

0.25* 0.05* 0.11* 0.11* 0.10*

0.14* 0.12* 0.22* 0.18*

0.01 0.66* 0.48*

0.13* 0.42*

0.61*

n3 = 42 countries at country level, n2 = 2733 firms at firm level, n1 = 19,152 observations at year level. To compute correlations, country-level variables were assigned to each firm in that country. Because of unequal sample sizes in the country-clusters, each country was counterweighted by sample size. Counterweighting ensures that country-level correlations are equivalent to correlations based on country-level sample size. Except for the size and slack variables, all variables were standardized by transforming the variables to z-scores of zero mean and unit variance. * p < 0.01.

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analysis (i.e. country) or the disaggregation of country level information to the lowest level (observations). Aggregation of data implies that meaningful variance of lower-level variables is lost. Disaggregation in turn means that important statistical assumptions are violated (Hitt, Beamish, Jackson, & Mathieu, 2007; Peterson, Arregle, & Martin, 2012). For example, firms within one country are subject to the same environmental regulations they need to comply with. This violates the assumption of independence of observations. In addition, statistical tests of higher-level variables are based on larger numbers of lower-level subsamples which can influence standard errors (Hox, 2010; Snijders & Bosker, 2012). Therefore, these analysis techniques are inadequate for this study. Instead, we used multilevel modeling with Stata. Multilevel modeling has been recommended as an appropriate analysis technique to assess complex cross-level relationships (Bryk & Raudenbusch, 1992; Hox, 2010; Rabe-Hesketh & Skrondal, 2012; Snijders & Bosker, 2012). Multilevel modeling has received wide acceptance in the literature and has been used in earlier international comparative studies on social and environmental issues (e.g., Cullen, Parboteeah, & Hoegl, 2004; Parboteeah et al., 2012). The multilevel model in this study includes three levels: the yearly observations of a firm’s environmental performance (level 1) are perceived to be nested within the respective firm (level 2) and the firms are in turn nested within countries (level 3). Through multilevel modeling the variance of the outcome measure (CEP) is partitioned into three variances: level 1 variance across observations within firms, level 2 variance across firms within countries and level 3 variance across countries. It is important to note that multilevel data structures do not require balanced data to obtain efficient estimates, i.e. it is not necessary to have the same number of lower-level units within each higher-level unit and it is not necessary to have the same number of observations (level 1) per firm (level 2) (Rasbash, Steele, Browne, & Goldstein, 2009). By using shrinkage estimators, multilevel models avoid mis-estimation problems by small numbers (e.g. only one or two firms within a country) and sampling fluctuations (e.g. missing observations across years) (Duncan & Jones, 2000). These shrinkage estimators provide that unreliable (i.e. with a very small number of observations in a sub-sample) country specific estimates are shrunk towards the overall estimate across all countries. The final model takes the form of a typical regression model as follows: Y i jk ¼ b0i jk cons þ b1 jk X 1 jk þ b2k X 2k þ v0k þ u0 jk þ e0i jk where Yijk is the dependent variable, i.e. CEP for year i of firm j located in country k; b0ijk is the random intercept; b1jk the random slope of the value of the firm-level predictor X1jk; b2k the random slope of the value of the country-level predictor X2k; the final three elements are the residuals at level 1 (yearly observations, e0ijk), level 2 (firms, u0jk), and level 3 (countries, v0k). As we are interested in the between effects of country-level variables on level 1 outcomes, we used an intercept-as-outcome model with restricted maximum likelihood (REML) estimation based on the grandmean of independent variables. We used REML because the results based on this estimator are less biased when the number of higher level units is small as is the case in our model. The disadvantage of REML is, though, that REML removes fixed effects when estimating likelihood means and, therefore, a model comparison based on the likelihood ratio test is not possible (Bryk & Raudenbusch, 1992). In multilevel models, endogeneity might occur when betweencountry effects differ from within-firm level effects because of omitted explanatory variables at the country level. For instance, in countries with corrupt public officials, there may not only be less environmental treaties signed and ratified, but there may also be less effective inspection of companies to ensure their compliance

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with environmental regulation. Between-country effects of environmental treaties are thus confounded with omitted variables, such as corruption. Endogeneity in multilevel models leads to a correlation of the random intercept with higher level covariates (Rabe-Hesketh & Skrondal, 2012). We performed a Durbin-WuHausman endogeneity test as recommended by Rabe-Hesketh and Skrondal (2012) to compare two alternative random and fixed estimators of our coefficients, both of which are consistent if our model is true. If the random intercept of our model is correctly specified, it should not be correlated with any of the country level coefficients (i.e., there is no country level endogeneity). As the result of the Durbin-Wu-Hausman test was not significant (x2 = 0.20; Prob > x2 = 0.654), the random intercept of our model should not be correlated with any of the country-level coefficients, indicating no concern for endogeneity. 5. Results To assess our hypotheses, we calculated three models with CEP as dependent variable. The first model is a so-called empty model which allows us to understand how the total variance is partitioned across years, firms and countries. Model 2 includes the control variables and Model 3 adds the independent variables. In addition, we computed three separate Models 4–6 in which the dependent variable CEP is split up into its three constituent components emission reduction, environmental product innovation and resource reduction. Table 5 summarizes the results for all models. Hypothesis1 predicted a positive relationship between the number of environmental treaties ratified by a country and the CEP of manufacturing firms from that country. The hypothesis is not supported as the coefficient is significant but negative (H1: b = 0.928, S.E. = 0.175, p < 0.01). Hypothesis 2, however, is confirmed as there is a significant positive relationship between market freedom and CEP (H2: b = 0.167, S.E. = 0.085, p < 0.10). In Hypothesis 3, we predicted a positive relationship between the number of NGOs in a country and CEP and we find support for this hypothesis (H3: b = 0.497, S.E. = 0.109, p < 0.01). Finally, in Hypothesis 4, we predicted a positive relationship between press freedom and CEP. The findings suggest that press freedom in a country positively relates to CEP (H4: b = 0.271, S.E. = 0.129, p < 0.05), providing support for Hypothesis 4. ASSET4 computes CEP as a summative assessment of a firm’s environmental performance in three areas: the capacity to reduce emissions, the capacity to develop environmental product innovations and the capacity to reduce resource consumption in production. In addition to our previously formulated hypotheses, we wanted to understand whether country-level institutions affect firm’s environmental performance differently on these three dimensions. As can be seen from the findings reported in Table 5, there is one notable difference. While country-level market freedom positively relates to a firm’s resource reduction capacities, it does not significantly relate to emission reduction and environmental product innovations. 6. Discussion The objective of this study is to account for the multilevel nature of CEP and examine the extent to which national institutions explain variance in firm-level CEP. Building on the notion that a diverse set of institutions at the country-level influence the behavior of firms (Hall & Soskice, 2001; Judge, Douglas, & Kutan, 2008), this study employs the Varieties of Capitalism framework to identify, describe and examine countrylevel institutional antecedents of CEP with comprehensive, international data. We draw on panel data from 2724 firms in

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Table 5 Multilevel modeling results for corporate environmental performance. DV: Corporate environmental performance

Fixed part Control variables Constant Year GDPa Individualism Power distance Masculinity Uncertainty Avoidance ROAa Firm sizea Slacka

Model 1

Model 2

Model 3

Model 4

Model 5

Model 6

Estimate

S.E.

Estimate

S.E.

Estimate

S.E.

0.656** 0.071**

0.077 0.001

4.337** 0.075** 1.711** 0.351** 0.018 0.052 0.049 0.069** 0.261** 0.086**

0.228 0.001 0.181 0.177 0.110 0.120 0.110 0.023 0.011 0.021

Independent variables Treatiesa Market freedoma NGOsa Press freedoma Random part Country Firm Residual Variance explained Notes for model Countries Firms Observations 2 X /Likelihood-ratiob a b * ** y

0.441 0.817 0.448 0.737

42 2733 19,152 22,168.70

0.057 0.012 0.002

0.763 0.714 0.433 0.773

0.137 0.011 0.003

42 2724 16,419 15,037.15

DV: Emission reduction

DV: Product innovation

DV: Resource reduction

Estimate

Estimate

Estimate

3.342** 0.075** 1.634** 0.106 0.151 0.031 0.100 0.060** 0.247** 0.078**

0.260 0.002 0.226 0.204 0.115 0.118 0.118 0.023 0.011 0.021

3.616** 0.074** 2.117** 0.181 0.251y 0.028 0.083 0.084** 0.233** 0.148**

2.368** 0.063** 0.518** 0.126 0.044 0.065 0.036 0.050* 0.206** 0.025

3.484** 0.077** 1.721** 0.135 0.152 0.016 0.094 0.029 0.249** 0.090**

0.928** 0.167y 0.497** 0.271*

0.175 0.085 0.109 0.129

1.016** 0.133 0.460** 0.353*

0.405** 0.072 0.386** 0.126y

0.876** 0.168* 0.490** 0.227y

0.694 0.707 0.433 0.764

0.137 0.011 0.003

0.845 0.705 0.466 0.769

0.333 0.701 0.554 0.651

0.668 0.688 0.479 0.739

42 2724 16,419 14,673.84

42 2724 16,419 13,377.11

42 2724 16,419 9947.14

42 2724 16,419 12,189.80

Variable is lagged by one year. Model fit comparison is not possible for models based on restricted maximum likelihood estimation. p < 0.05 p < 0.01. p < 0.10.

42 countries during a recent 11-year period. By using multi-level modeling techniques we find that the degree of market freedom (market institution), the number of non-governmental organizations located in a country and press freedom (social institutions) are significantly and positively related to CEP. Contrary to our assumption that the number of international environmental treaties ratified by a country (as our proxy for legal institutions), would relate positively to CEP, our data suggest that the two variables are negatively related. This somewhat counterintuitive finding adds to the mixed results in previous studies with respect to the effect of international treaties on behavior. HafnerBurton and Tsutsui (2005), for instance, find that human rights treaties do not reduce the amount of human rights violations. Perhaps, because governments sometimes engage in international treaties to overcome domestic resistance to certain issues (Hall & Soskice, 2001), implementation of the treaty on the national level is much more difficult. An international treaty might thus rather be an indication for weak public support or even resistance instead of an indication for broad regulative adoption on the local level. Furthermore, our finding might be explained by the fact that, across countries, the implementation of such treaties is too rigid, thereby impeding ecological improvement rather than supporting it. For instance, regulations resulting from environmental treaty ratification can be quite strict and specify not only target levels to be attained but, frequently, also determine the type of technology to be used by manufacturing firms (Porter & van der Linde, 1995). In addition, governments might employ monitoring and control systems to ensure firm compliance with legal stipulations. Such systems can bind financial and human resources at the firm level,

leaving less freedom for creativity and innovation. To the extent that environmental treaties and resulting regulation makes firms more dependent on relationships with public officials as opposed to market stakeholders, their CEP could be affected negatively (Hall & Soskice, 2001). This latter point might also help explain the positive relationship we find between market freedom and CEP, as predicted in Hypothesis 2. Economies that leave more freedom to market players seem to be able to draw on more diverse and richer relationships with other market stakeholders. They benefit from more freedom to choose which novel concepts, ideas, and technologies to implement in order to decrease harmful emissions and effluents. In addition, firms in economies where market freedom is high have more options to integrate suppliers and customers as key partners in the value creation process in efforts to decrease the burden on the natural environment. Social institutions seem to have strong effects on firms with respect to their environmental performance, as the relationship was significant for all three subcategories of CEP. In fact, among all independent variables, the effect of our measure for NGOs was the strongest. Hence, our findings support previous literature at the firm level that suggests that NGOs help to diffuse, monitor and enforce legitimate corporate behavior (Sabel & Simon, 2012; Toffel et al., 2012; Vogel, 2010). Similarly, a free press seems to support and enable CEP by diffusing information about best practices in environmental protection activities (Deephouse & Heugens, 2009), and by providing a credible threat to firm reputation and legitimacy in case stakeholder expectations are violated (Nikolaeva & Bicho, 2011).

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7. Implications, limitations and future research This study offers several new insights to the environmental sustainability literature. First, in this study we adopted a multilevel perspective on CEP viewing it embedded in national contexts. While recognizing that institutional environments have profound influence on firm’s support of sustainability, studies that identify relevant country-level institutions and provide empirical evidence about their impact are still scarce. Our study includes variables from more than one level of analysis and across a recent elevenyear period. More importantly, we provide indication for causal mechanisms through which national institutions affect firm-level CEP. Second, this study contributes to the Varieties of Capitalism framework, a recent extension within institutional theory. A basic assumption of institutional theory is that firms adjust their behavior based on contextual norms (DiMaggio & Powell, 1983; Scott, 2008). The Varieties of Capitalism framework goes one step further and adopts a relational perspective to explain how firms react to institutional arrangements. The framework adopts a firm perspective and suggests that firms’ capacity to build resilient relationships with institutional actors is central for firm success. The context bestows on firms the capacity to perform certain activities. In this paper, we extend the application of Varieties of Capitalism to the interface between country-level institutions and firm-level CEP by showing that institutions assist firms in developing more resilient relationships with economic and social stakeholders. In contrast, the Varieties of Capitalism assigns less importance to the cultural context as compared to traditional institutional theory and, in fact, we could not find a significant effect of culture on CEP once our independent variables were added to the model. The Varieties of Capitalism perspective and the idea of comparative institutional advantage provides a concise and direct rationale for the mechanisms through which national institutions affect capability-building at the firm-level. To the best of our knowledge, this study is the first that applies Varieties of Capitalism to examine corporate environmental performance. Third, we refine and extend the environmental sustainability literature by considering macro-level institutional forces that shape CEP. We find that economic and social institutions foster environmentally responsible firm behavior. Hence, our findings underline the importance of country-level antecedents for CEP above and beyond the often studied cultural system variables. We find that the presence of NGOs in a country had by far the strongest positive effect on CEP. This finding illustrates that societal activist groups increasingly take on the role of governments in successfully eliciting desired firm behavior that responds to the expectations of diverse stakeholders. Finally, as depicted in Table 1, scholars engaged in related research were facing challenges in combining different levels of analysis in their empirical research. Studying national institutions and relating them to firm-level outcomes is usually achieved by converting all data at one level, usually the firm level. Multilevel modeling enables the specification of variables at different levels and allows for investigations at the appropriate level of analysis (Hofmann, 1997; Hox, 2010; Peterson et al., 2012) as is done herein. In fact, Aguinis and Glavas (2012) have called for more multilevel research on CEP across space and time. Clearly, our findings have substantial practical implications for managerial decision makers throughout the world and particularly for those managers who steer globally interconnected supply chains. First, large Western firms are increasingly held responsible for socially and environmentally sound behavior of their upstream supply chain partners (Klassen & Vereecke, 2012; Parmigiani,

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Klassen, & Russo, 2011). It is quite helpful for those decision makers to understand the factors that likely increase CEP of their supply chain partners above and beyond claims to commit to codes of conduct (Toffel et al., 2012). Decision makers can use the knowledge generated by our study to choose suppliers in line with their environmental strategy and the location of supply chain partners. Second, our findings also help decision makers to make better inferences about the type and degree of engagement in environmental preservation expected from their own firm in decisions involving the (re-)location of own subsidiaries. The Varieties of Capitalism framework suggests that country-level institutions and their capacity to influence firm behavior support the development of valuable capabilities at the firm level. The results of our study confirm that certain institutions support the development of more effective environmental management capabilities. Third, CEP has often been found to be associated with better financial performance (Chan, 2010; Gupta & Kumar, 2013; Melewar, Gupta, & Czinkota, 2013; Orlitzky, Schmidt, & Rynes, 2003). Hence, firms may strategically decide to locate own plants in countries that support CEP in order to reap additional economic benefits from engaging in environmental protection. Fourth, the findings from our study further suggest that it can be important to have good relationships with representatives from national governments, regulating bodies, and social activists in order to be able to better understand their expectations and areas of concern and to design more successful environmental strategies based on this knowledge. Despite these contributions, our findings must be interpreted with some caution. Our variable for CEP is an aggregated measure including both environmental strategies such as the adoption of an environmental system and outcome variables such as the amount of carbon emissions (Thomson Reuters, 2013). Clearly, this aggregation allows for a comprehensive evaluation of firms’ environmental performance, but it may also mask further variation between countries in terms of the effectiveness of specific national institutions in reducing manufacturer’s undesirable environmental impact. Additionally, an eleven-year period might still be too short to capture substantial change of nationlevel institutions and their effect on CEP and future studies might draw on different data sources to further examine the robustness of our findings. In the present study, we focused on country-level predictors to infer about CEP. CEP may, however, also vary across industries because of specific industry characteristics. Future research could address this issue by integrating industry-level predictors to the study of firm level CEP such as, for instance, industry maturity, business-to-business versus business-to-consumer contexts or industry munificence. Additionally, future research could extend our understanding of other country-level antecedents not examined here. Examples include the effectiveness of governments to enforce regulation, the level of corruption among economic institutions or the roles of other social interest groups apart from NGOs. As our study clearly shows the importance of national-level studies to better understand the environmental performance of firms, more research in this area seems warranted. Notes for models Stata applies shrinkage estimators to avoid model misestimation that may arise from unequal sample size of firms within countries. These shrinkage estimators provide that unreliable (i.e. with a very small number of observations in a sub-sample) country-specific estimates are shrunk towards the overall estimate across all countries (Duncan & Jones, 2000).

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