The Inverted U‐Shaped Hypothesis and Firm Environmental Responsiveness: The Moderating Role of Institutional Alignment

Date01 September 2018
Published date01 September 2018
DOIhttp://doi.org/10.1111/emre.12135
The Inverted U-Shaped Hypothesis and Firm
Environmental Responsiveness: The
Moderating Role of Institutional Alignment
YOUSEF EIADAT
1
and ALEJANDRO M. FERNÁNDEZ CASTRO
2
1
University CollegeDublin, National University of Ireland, UCD Michael Smurfit Graduate Business School, Carysfort Ave,
Carrysfort, Blackrock, Co., Dublin, Ireland
2
CESUGA Centro de Estudios Superiores Universitarios de Galicia, C/ Obradoiro 47, Edificio CESUGA, 15190, La Coruna,
Spain
The impact of regulatory coercionon firm environmentalresponsiveness is well discussedby institutional theorists.
The intuitive nature of the relationship is positive and monotonic, that is, the continuous strengthening of regulatory
coercionprompts top managementto be more environmentallyresponsive. Thispaper shows that: (1) overall,there is
an inverted U-shaped relationship between regulatory coercion and firm environmental responsiveness, that is, the
continuous strengthening of regulatory coercion induces top management to bring their firmsenvironmental
responsiveness up to a certain optimum level beyond which its ability to trigger more proactive and substantive
environmental responsiveness begins to decelerate, while reactive and symbolic strategic conformity accelerates;
(2) perceivedinstitutional (mis)alignmentmoderates the inverted U-shapedrelationship betweenregulatory coercion
and firm environmental responsiveness. Finally, results show that the moderated inverted U-shaped hypothesis
advances the long-standing and contentious debate about the relationship between regulatory coercion and firm
environmental responsiveness.
Keywords: institutional theory;firm environmental responsiveness; regulatory coercion; and moderatedinverted U-
shaped hypothesis
Introduction
Institutional regulation in the environmental sphere has
been growing in complexity, stringency, and
extensiveness over the last few decades, not only in
industrialized countries, but also in developing nations
(Kraft and Vig, 2006). It typically takes two forms:
command-and-control and economic instruments.
Command-and-control form of regulatory coercion
typically takes pride of place among policy makers and
environmentalists as the most powerful source affecting
firm environmental responsiveness (Hoffman, 2001).
Economists, on the other hand, advocate an economic
style of regulatory coercion such as emission charges,
production charges, subsidies, and tradable permits
(Pearce et al., 1989).
For the purpose of this study, regulatory coercion is
defined as pressures exerted on a firm from the
government or related agencies, with the intent of
requiring firms to adopt specific green behaviour
(Fineman, 1997).It isalsodepicted as being either light
(i.e., coercivedemands are interpretedby top management
as inappropriately designed, weakly enforced, and as
such placing no significant burden on firms); moderate
(i.e., coercivedemands are interpretedby top management
as appropriately designed, strongly enforced, and not
placing unfair burdens on firms as such); or stringent
(i.e., coercivedemands are interpretedby top management
as excessive, and as such sufficiently radical to affect the
entire organizational structures and routines and render
firmsexisting environmental knowledge base obsolete).
As with institutional regulation, firm environmental
responsiveness takes two general forms: environmental
reactiveness and proactiveness. On the one hand,
environmental reactiveness is usually associated with so-
called end-of-pipeenvironmental responsiveness that
is, the addition of filtering devices to a firms existing
Correspondence: Alejandro M. Fernández Castro, CESUGA Centro de
Estudios Superiores Universitarios de Galicia, C/ Obradoiro 47, Edificio
CESUGA, 15190, La Coruna, Spain.E-mail afernandez@cesuga.com
European Management Review, Vol. 15, 411426, (2018)
DOI: 10.1111/emre.12135
©2017 European Academy of Management
portfolio of environmental practices, which typically
symbolizes conformity (Jamali, 2010) but without the
need for the development of new skills or expertise(Russo
and Fouts, 1997). On the other hand, proactive
environmental responses are intangible managerial
innovations and routines (Hart, 2015) that can increase
organizationsexternal legitimacyand survival (Suchman,
1995). It is frequently associated with voluntary firm
environmental responsiveness, which very often exceeds
minimum regulatory standards and substantially reduces
energy and material use at source (Aragón-Correa et al.,
2008). Examples include the development of
environmental plans (Henriques and Sadorsky, 1996),
environmental performance goals (Hart, 2005), and
environmental audits (Welford, 1998).
Literally, thousands of institutional studies have cited
the importance of regulatory coercion for firm
environmental responsiveness (cf. Oliver, 1991) and
emphasized the role of regulative, normative, and
cognitive legitimacies (cf. Suchman, 1995) as the central
guarantor of survival (Shah, 2011; Child and Tsai,
2005). However, the phenomenon of proactive
environmental responsiveness has been of low key
interest to institutional research. Oliver (1991), for
example, identified five possible institutionally driven
managerial responses to regulatory coercion:
manipulation, defiance, avoidance, compromise, and
acquiescence. Although this has dominated institutional
ideas of firm environmental responsiveness for decades,
Olivers (1991) model tends to focus solely on reactive
firm environmental responsivenessas being manipulative,
imitative, and defensive, and discounts the possibility that
top management can be strategically proactive (Child,
1972), as in going beyond the requirements of coercive
regulatory demands voluntarily. By focusing only on
environmental reactiveness as a condition of
organizational legitimacy (Suchman, 1995) and survival
(Child and Tsai, 2005), Olivers (1991) model reflects
an institutional view that top management only plays a
passive role, a conception that has remained dominant in
institutional theorizing (e.g., Lounsbury, 2007; Strang
and Macy, 2001).
Equally important is an emerging shift in institutional
theory towards a more complex and misaligned
institutional environment (Greenwood et al., 2011) an
emerging shift that Olivers (1991) model is not able to
explain. Indeed, firms often struggle to deal with (in)
compatible prescriptions from multiple institutional
logics(Greenwood et al., 2011: 317) as they wrestlewith
simultaneous conflicting demands trying to resolve
tensions as they appeal to different bases of legitimacy
in different situation(Bertels and Lawrence, 2016: 339).
We use institutional misalignment to reflect a more
contested, nonmonolithic (Scott, 2004), and mutually
incompatible (Kostova and Zaheer, 1999) institutional
forces while institutional alignment to reflect the mutual
reinforcement among institutional forces (Lu and Xu,
2006). Empirical research has demonstrated that when
faced with institutional misalignment, top management
usually exercise some discretion in compliance, focus
more on solving immediate problems (Smets et al.,
2012; McPherson and Sauder, 2013), delay the adoption
of new innovations (Raaijmakers et al., 2015), reinterpret
normative forces in line with their identity (Dhalla and
Oliver, 2013), and where regulatory pressures are weak
or institutionalfields are fragmented or contested (Durand
and Jourdan, 2012),they could easily make a virtue out of
deviating from institutional regulations (Quirke, 2013).
In this paper, we seek to contribute to the institutional
research on environmental responsiveness by looking
further into the relationship between regulatory coercion
and environmental responsiveness. More specifically, we
ask the question: how does perceived continuous
strengthening of regulatory coercion affect firm
environmental responsiveness? And, perhaps more
importantly,under what institutional alignmentconditions
should top management pursue environmental proactive
strategies?
We build on three key ideas to answer the above
research question. First, instead of limiting the discussion
to the frequent use of linear modelling, we propose an
inverted U-shaped relationship between regulatory
coercion and environmental responsiveness. There is a
growing body of research that very often ignores the
potential non-linearity in that relationship without
providing compelling rationales for that (c.f. Bansal and
Roth, 2000; Sharma, 2000; Clemens and Douglas, 2005;
Colwell and Joshi, 2013; Delmas and Toffel, 2008). Our
position is that the continuous strengthening of regulatory
coercion may not be associated with concomitant
increases or decreases in firm environmental
responsiveness, at least not along the entire relevant
continuum. More specifically, there is more
proactivenessin the middle of the spectrumof perceived
regulatory coercion, thus proposing an inverted-U-shaped
hypothesis between perceived regulatory coercion and
firm environmental responsiveness. Therefore, the non-
linearity assumption, we argue, allows a comprehensive
examination of the set of environmental responses, be
they reactive or proactive, and thus better captures the
complexity of environmental responsiveness to
institutional regulatory coercion. To our knowledge, such
non-linearity has not been tested before.
Second, we recognize that, within a given perceived
level of institutional alignment, firmsenvironmental
responses may range from being substantially proactive
to minimally reactive. More specifically, because it
reflects complexity (Greenwood et al., 2011), institutional
misalignment may trigger firms to adopt reactive and
ceremonial environmental practices. Those reactive and
412 Y. Eiadat and A.M. Fernández Castro
©2017 European Academy of Management

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