The impact of external institutional drivers and internal strategy on environmental performance

Abstract Purpose – Environmental sustainability literature provides extensive evidence that business organizations, societies, and governments all have a stake in green operations management. Despite the importance of a firm's effort to alleviate environmental damages and provide economic benefits to organizations, little is known about the external institutional drivers that enable firms to adopt internal proactive environmental strategies. This purpose of this study is to examine the extent to which an internal proactive environmental strategy (eco‐design) and external institutional drivers (government regulations and incentives, customer pressures) motivate firms to adopt eco‐deigns that influence environmental performance. Design/methodology/approach – Hypotheses are tested using data from a sample of 132 EMS ISO 14001 – certified manufacturing firms in Malaysia. Specifically, this study uses survey data to validate the major premises in our proposed model. Findings – Empirical tests of the hypotheses with structural equation modeling (SEM) support the posited explanation that external institutional drivers influence a firm's environmental performance both directly and indirectly through its internal proactive environmental strategy. These findings extend prior research by establishing the importance of the relationships among regulations/incentives, customer pressures, eco‐designs, and environmental performance. Research limitations/implications – Although the research design incorporates extensive literature reviews, it does not capture every aspect of underlying constructs characteristics. Future efforts should establish a valid, reliable instrument for these constructs. Practical implications – This research provides rigorous empirical support of the contribution of eco‐design to environmental performance. This finding helps managers recognize how to leverage their internally developed eco‐designs capabilities by responding to external pressures and institutional concerns. The response to external institutional pressures provides a basis for creating an inimitable eco‐design resource base, which is critical to environmental sustainability. Originality/value – This study examines a key factor, eco‐design, that may transmit the influence of regulations/incentives and customer pressures to firm's environmental performance. The findings provide strong support for the main thesis, as well as valuable insights about predictors of firm environmental performance.