Innovative Application of O.R.Measurement of a linkage among environmental, operational, and financial performance in Japanese manufacturing firms: A use of Data Envelopment Analysis with strong complementary slackness condition
Introduction
Data Envelopment Analysis (DEA) has been long serving as a methodology to evaluate organizations in public and private sectors. Emrouznejad et al. (2008) summarized previous DEA contributions in the past three decades. Recently, many DEA studies have been paying attention to environmental assessment. For example, Cooper et al. (1996) provided a summary of more than 100 previous studies in the area of air pollution1. In a similar manner, Zhou et al. (2008) summarized more than 100 DEA applications for environment and energy studies.
A contribution of such previous DEA studies on environmental assessment was that they found the importance of an output separation into desirable (good) and undesirable (bad) outputs. That is a contribution, indeed. Such previous DEA research efforts in the past decade included Bevilacqua and Braglia, 2002, Korhonen and Luptacik, 2004, Kumar, 2006, Liang et al., 2004, Pasurka, 2006, Picazo-Tadeo et al., 2005, Sueyoshi and Goto, submitted for publication, Sueyoshi et al., 2010, Triantis and Otis, 2004, Zaim, 2004, Zhou et al., 2008.
To specify the position of this study more clearly in the current DEA studies, we review Sueyoshi et al., 2010, Sueyoshi and Goto, submitted for publication as examples. The first study (Sueyoshi et al., 2010) investigated the operational, environmental and both-unified performance measures of coal-fired power plants in the United States. After classifying outputs into a desirable output (i.e., the amount of electricity) and three undesirable outputs (i.e., the amount of CO2, NOx and SO2), their study investigated the policy implication of US Clean Air Act (CAA) and concluded that the CAA had been effective on controlling the amount of the three gas emissions. Meanwhile, the second study (Sueyoshi and Goto, submitted for publication) mathematically discussed how to measure the type of Returns to Scale (RTS) and the degree of Scale Economies (SE) on desirable outputs. Then, their study extended them further into the development of new economic concepts (e.g., DTS: Damages to Scale and SD: Scale Damages). The two new concepts (DTS and SD) on undesirable outputs correspond to RTS and SE on desirable outputs. Sueyoshi and Goto (submitted for publication) provided a theoretical foundation on the RTS/DTS measurement on desirable and undesirable outputs.
Acknowledging a contribution of such previous studies, we need to mention that they have never investigated whether firms can simultaneously attain both their environmental orientation and financial performance. The business concern is important because the financial performance of firms is the final and most important performance measure of their environmental management (Klassen and McLaughlin, 1996).
The purpose of this research is to investigate such a business linkage among environmental protection, operational and financial performance in Japanese manufacturing firms. We examine such a business linkage in the growth process of a corporate size. No study has investigated the research agenda.
The remaining structure of this research is organized as follows: the next section reviews underlying concepts used in the previous environmental studies. This section also describes our research strategy. Section 3 describes DEA models. Section 4 documents empirical results and business implications obtained from our DEA application. Section 5 summarizes this study along with future research agendas. Appendix describes a rank sum test. The combination between DEA and the rank sum test provides a statistical inference in this study.
Section snippets
Environmental protection and financial performance
Many scholars in business and economics argued in the past two decades whether firms could simultaneously attain both their environmental protection and financial performance. For example, the financial performance of firms could make a win–win situation with their environment protection (e.g., Esty and Porter, 1998). They also suggested that firms could attain both environmental consciousness and business competitiveness (e.g., Varma, 2003). Qualitative research identified numerous examples of
An original DEA model
Among the previous DEA efforts, Sueyoshi and Sekitani, 2007a, Sueyoshi and Sekitani, 2007b, Sueyoshi and Sekitani, 2009 theoretically discussed a use of DEA combined with SCSC (Strong Complementary Slackness Condition). An important finding of their studies is that there is no perfect DEA model from the perspective of TE (Technical Efficiency) desirable properties (Sueyoshi and Sekitani, 2009). Furthermore, all DEA models examined in their study suffer from an occurrence of multiple reference
Data sets
Table 3 documents descriptive statistics on a data set used for the operational performance measurement of Japanese manufacturing firms. This study selects the observed period (2004–2007) because Kyoto Protocol
Conclusion
This study examined a business linkage among operational efficiency, environmental efficiency and financial performance measures (ROA, ROE and Tobin’s q ratio) in the Japanese manufacturing industry. This study found three business implications related to the corporate strategy in the Japanese manufacturing industry.
First, large manufacturing firms have technology and capital to enhance their environmental and operational performance. The improvement in the two efficiency measures increases
Acknowledgement
The authors thank Dr. Robert Dyson (University of Warwick) and two anonymous reviewers whose comments have improved the quality of this study. We dedicate this research to Professor William W. Cooper (University of Texas at Austin). Professor Cooper was the first researcher who discussed the importance of OR/MS applications to various environmental issues from 1950s. He is well known as the father of DEA who has been developing DEA from the beginning to the current moment.
References (39)
- et al.
Environmental efficiency analysis for ENI oil refineries
Journal of Cleaner Production
(2002) - et al.
Revisiting the relation between environmental performance and empirical disclosure: An empirical analysis
Accounting, Organization and Society
(2008) - et al.
The impact of environmental performance on firm performance: Static and dynamic panel data evidence
Structural Change and Economic Dynamics
(2005) - et al.
Evaluation of research in efficiency and productivity: A survey and analysis of the first 30 years of scholarly literature in DEA
Socio-Economic Planning Sciences
(2008) - et al.
DEA models for ratio data: Convexity consideration
Applied Mathematical Modeling
(2009) - et al.
Contributions of Professor William W. Cooper in operations research and management science
European Journal of Operational Research
(2009) - et al.
Eco-efficiency analysis of power plants: An extension of data envelopment analysis
European Journal of Operational Research
(2004) Environmentally sensitive productivity growth: A global analysis using Malmquist–Luenberger index
Ecological Economics
(2006)- et al.
Stochastic multicriteria acceptability analysis using the data envelopment model
European Journal of Operational Research
(2006) Decomposing electric power plant emissions within a joint production framework
Energy Economics
(2006)
Directional distance functions and environmental regulation
Resource and Energy Economics
Can environmental investment and expenditure enhance financial performance of US electric utility firms under the clean air act amendment of 1990?
Energy Policy
Performance analysis of U.S. coal-fired power plants by measuring three DEA efficiencies
Energy Policy
Measurement of returns to scale by a non-radial DEA model: A range-adjusted measure model
European Journal of Operational Research
The Measurement of returns to scale under a simultaneous occurrence of multiple solutions in a reference set and a supporting hyperplane
European Journal of Operational Research
An occurrence of multiple projections in DEA-based measurement of technical efficiency: Theoretical comparison among DEA Models from desirable properties
European Journal of Operational Research
UK’s climate change levy: Cost effectiveness, competitiveness and environmental impacts
Energy Policy
Dominance-based measurement of productive and environmental performance for manufacturing
European Journal of Operational Research
Measuring environmental performance of state manufacturing through changes in pollution intensities: A DEA framework
Ecological Economics
Cited by (92)
Investigating the marginal impact of ESG results on corporate financial performance
2022, Finance Research LettersCan environmental innovation be a conventional source of higher market valuation?
2022, Journal of Business ResearchEffects of energy management practices on environmental performance of Indian small- and medium- sized enterprises
2022, Journal of Cleaner ProductionA DEA approach for evaluating the relationship between energy efficiency and financial performance for energy-intensive firms in Korea
2020, Journal of Cleaner ProductionCitation Excerpt :As shown in Fig. 2, the firms in the food industry were generally spread out but crowded in Groups C and D in the aggregated-period model. Different from the work by Sueyoshi and Goto (2010) wherein the largest group reported both high environmental and high operational efficiency, the largest group in both industries was Group B in this study, with high pure-energy efficiency and low economy efficiency, followed by Group A with high efficiency scores in both categories. To identify changes of firms among the groups across periods, the efficiency results by period were tracked; Fig. 3 graphically summarizes the changes in efficiency scores.