Institutional effects and the decision to make environmental investments

Abstract

An unstated assumption in most business research is that a primary goal of managers is profit maximisation. Recently, managers have faced additional pressure to also address environmental issues, while maintaining profits. The literature (Russo, M. and Fouts, P., 1997. A resource-based perspective on corporate environmental performance and profitability. Academy of Management Journal, 40 (3), 534–559 and Pagell, M. and Gobeli, D., 2009. How plant managers' experiences and attitudes towards sustainability relate to operational performance. Production and Operations Management, 18 (3), 278–299) suggests these goals are compatible and that organisations can and indeed need to address environmental issues as part of their profit maximisation efforts. However, institutional theory suggests that managers may have other goals that drive their decisions, beyond the desire to maximise profits. This research explores two institutions, the nation or country and industry, and their effects on the decision to make environmental investments. The results indicate that managers do indeed respond to institutions when making these decisions and that in some countries there is a general level of underinvestment in the environment, which is likely harming both organisational and environmental outcomes.

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