Do Firms Spend More on Suppliers That Have Environmental Expertise? An Empirical Study of U.S. Manufacturers’ Procurement Spend

• Published date: 01 June 2020
• Author: Curtis M. Grimm,Isaac Elking,Prabhjot S. Mukandwal,David E. Cantor,Christian Hofer
• Date: 01 June 2020
• DOI: http://doi.org/10.1111/jbl.12248

Do Firms Spend More on Suppliers That Have Environmental

Expertise? An Empirical Study of U.S. Manufacturers’

Procurement Spend

Prabhjot S. Mukandwal

1

, David E. Cantor

2

, Curtis M. Grimm

3

, Isaac Elking

4

, and

Christian Hofer

5

1

Michigan Technological University

2

Iowa State University

3

University of Maryland—College Park

4

University of Houston—Downtown

5

University of Arkansas

Stakeholders expect focal firms to improve their environmental performance. While firms may be able to accumulate the environmental

expertise needed to achieve this goal internally, doing so may require significant time and resource commitments. Alternatively, buyer

firms can leverage their suppliers’existing environmental expertise and gain access to such expertise when they purchase products and services

from these suppliers. The purpose of this study was to develop and test theory regarding under what conditions suppliers’environmental exper-

tise influences a buying firms’procurement spend with these suppliers. We ground our study in transaction cost economics and agency theories

and empirically test our hypotheses using a unique buyer–supplier dyadic data set. We find that buyer firms are willing to increase their overall

business spend with suppliers that have strong environmental expertise, particularly when the buyer firms are more profitable and have higher

levels of absorptive capacity. However, we find the opposite effect when the buyer firm’s executive compensation is linked to the firm’s envi-

ronmental, social, and governance (ESG) performance. Likewise, we also find that the buyer firm’s environmental concern ratings negatively

moderate the relationship between the supplier’s environmental expertise and the buyer’s procurement spend with the supplier.

Keywords: environmental expertise; procurement spend; TCE and agency theory

INTRODUCTION

Many stakeholders are increasingly expecting focal firms to con-

tinue to improve their environmental performance (Eroglu et al.

2016). Firms are under pressure both from customers, to manu-

facture environmentally sustainable products, and from regulatory

agencies, to comply with environmental standards and regula-

tions (Carter and Jennings 2004; Hofer et al. 2012). While a firm

may be able to develop environmental expertise internally, it is

risky for the firm to do so because of the uncertain payoff from

the physical and human resource investments needed to support

such environmental activities (Teece 2007). Given that significant

economic risks exist, buyer firms are motivated to source inputs

from suppliers with strong environmental management expertise

as a means to satisfy stakeholder expectations (Carter and Carter

1998). In our study, we define environmental expertise as a firm-

specific capability in the environmental domain that gives a firm

a competitive advantage (Dibrell et al. 2015). Stronger business

ties between buyers (also referred to herein as “buyer firms”) and

environmentally competent suppliers enable buyer firms to

acquire ecofriendly products and capabilities. Hence, buyer firms

are effectively outsourcing the development of environmental

management expertise. For instance, Boeing, one of the largest

aircraft manufacturers, selected General Electric (GE) to supply

fuel-efficient engines for the 777X family of aircraft because of

GE’s expertise in developing ecofriendly products (Boeing

2013). Relatedly, Walmart sources environmentally friendly

products such as energy efficient LED lighting and refrigeration

systems from suppliers like General Electric. In so doing, Wal-

mart has been able to reduce its carbon footprint and operating

costs (Walmart 2014). We theoretically investigate and empiri-

cally test the association between supplier environmental exper-

tise and buyer procurement spend.

A steady stream of purchasing literature points out that firms

incorporate environmental sourcing requirements into their pur-

chasing practices. Some scholars have theorized about a firm’s

ability to develop green capabilities by sourcing from ecofriendly

suppliers (Carter et al. 2000; Bowen et al. 2001). Other research-

ers have investigated the types of environmentally friendly inputs

that buyer firms can source from suppliers (Carter and Carter

1998). A related emphasis of purchasing research has been on

the negative implications associated with procuring environmen-

tal harmful materials and the costs associated with the disposal

of hazardous materials (Min and Galle 1997). Supply chain

scholars have also developed various methods for evaluating sup-

pliers from an environmental perspective (Enarsson 1998). In this

vein, Carter and Jennings (2002) found that firms employ life-cy-

cle analysis when evaluating supply options and consider sour-

cing from suppliers with environmentally sound processes and

products. Carter and Carter (1998), in turn, highlighted the

importance of evaluating a supplier’s willingness to develop

close, collaborative relationships and engage in early-stage

Corresponding author:

David E. Cantor, Department of Supply Chain Management, Debbie

and Jerry Ivy College of Business, Iowa State University, 2340 Ger-

din Business Building, Ames, IA 50011, USA; E-mail: dcantor@

iastate.edu

Journal of Business Logistics, 2020, 41(2): 129–148 doi: 10.1111/jbl.12248

© 2020 Council of Supply Chain Management Professionals

design initiatives. Based on insights from a focus group of mate-

rials managers, Walton et al. (1998) determined that the public

disclosure of a firm’s environmental record is the most important

environmental criteria used in supplier evaluations, followed by

second-tier supplier environmental monitoring as well as haz-

ardous waste and pollution management.

While the above-mentioned studies represent important contri-

butions to the purchasing literature, there is a need for further

research on the role of a supplier’s environmental expertise in a

buying firm’s procurement decisions. In a related vein, Grigoriou

and Rothaermel (2017) suggest that it is important to examine

how a firm’s internal knowledge stocks motivate a firm to

expand or contract its procurement decisions. We therefore

investigate the relationship between an individual supplier’s envi-

ronmental expertise and a buyer’s procurement spend. In addi-

tion, this study examines how a buying firm’s characteristics

moderate this relationship. We draw on transaction cost eco-

nomics (TCE) and agency theories to develop hypotheses about

these relationships. Further, we test our hypotheses using a multi-

level model that is based on dyadic buyer–supplier data derived

from the Bloomberg, US Patent and Trademark Office, MSCI

ESG STATS, and Compustat databases.

This research makes multiple theoretical and empirical contribu-

tions to the environmental management and purchasing literatures.

First, drawing from the TCE literature, we develop theoretical

insights as to why a supplier’s environmental expertise influences

a buyer firm’s procurement spend on the supplier. Thus, our study

adds to the TCE literature by providing an increased understand-

ing of how a supplier’s environmental capabilities influence a

firm’s decision to source from the market. Second, based on

insights from TCE and agency theories, this study identifies the

moderating factors that affect the magnitude of this relationship.

As such, our study contributes to the agency literature by extend-

ing the utility of the theory to a buyer–supplier environmental

management context. In so doing, the current study builds on

Schoenherr et al. (2014), Carter and Carter (1998), and Bowen

et al. (2001) by showing how buying firms value and source from

suppliers that have environmental expertise.

Our research also offers meaningful managerial implications.

Our findings highlight the importance that buyer firms place on a

supplier’s environmental expertise in their sourcing decisions.

Moreover, our findings suggest that it may behoove suppliers to

increase their environmental capabilities in situations where they

recognize that buyer firms can benefit from an improvement in

this domain. We offer guidance to managers at buyer firms in

regard to the conditions under which a firm is likely to have the

capability and motivation to integrate a supplier’s environmental

expertise into its organization. Specifically, we offer insight into

the effects of profitability, absorptive capacity, executive com-

pensation, and environmental performance on this underlying

relationship.

THEORY AND HYPOTHESIS DEVELOPMENT

We develop our theoretical model based on the transaction cost

economics (TCE) perspective. Building on the work of Coase

(1937), Williamson’s (1975) TCE theory elucidates the specific

conditions that will lead firms to outsource the production of

goods and services rather than produce them in-house. Indeed, a

substantial amount of prior outsourcing and supplier selection

supply chain research has leveraged the theoretical insights pro-

vided by the TCE literature (e.g., Murray and Kotabe 1999;

Lonsdale 2001; Ellram et al. 2008; McIvor 2009).

In our study, we examine existing buyer–supplier relationships

and, thus, do not investigate a firm’s decision to make or buy

products and services. However, our study builds upon and

extends the TCE literature by hypothesizing that the magnitude

of these outsourcing relationships is affected by the extent of a

supplier’s environmental expertise. We argue that, as the buyer

firm increases its purchases of goods and services from a sup-

plier, the buying firm will gain access to and capitalize on the

supplier’s environmental expertise. Relationships with suppliers

of goods and services, thus, offer a mechanism for buyers to

acquire environmental expertise at a lower transaction cost and a

lower level of risk as compared to the internal development of

such expertise. As a result, total transaction costs are lowered by

acquiring environmental expertise externally (i.e., the sum of the

costs associated with the acquisition of goods and services as

well as environmental expertise).

Identifying and leveraging a supplier’s environmental exper-

tise, nevertheless, requires buyer firms to have sufficient financial

resources and absorptive capacity—the ability to identify, assimi-

late, and generate new knowledge (Cohen and Levinthal 1990).

As such, we argue that the buyer’s profitability and its degree of

absorptive capacity moderate the magnitude of the effect of sup-

plier environmental expertise on the buyer’s procurement spend

allocation with the supplier.

We also integrate agency theory into our theoretical model to

further our understanding of the conditions under which a sup-

plier’s environmental expertise affects a buyer’s procurement

spend with the supplier. According to agency theory, a firm is a

bundle of contractual relationships in which a principal delegates

some work to an agent (Jensen and Meckling 1976; Eisenhardt

1989). One of the important assumptions underlying agency the-

ory is that agents may not always act in the principal’s best inter-

est (Eisenhardt 1989; Lassar and Kerr 1996). Indeed, the extant

literature suggests that executives (agents) are typically more

risk-averse than what is desired by their shareholders (principals)

(Sanders and Hambrick 2007). Our premise is that a corporate

manager may, in part, be guided by his or her own preferences

and motivations when it comes to defining strategies to achieve

superior environmental performance. Notably, such strategic

choices include the internal development versus external acquisi-

tion of environmental expertise. We contend that such risk-averse

agents are likely to avoid undertaking the R&D activities neces-

sary to develop environmental expertise internally given the

inherently risky nature of such investments. Indeed, such riski-

ness has been well established in the extant literature (e.g., Teece

2007; Ahuja et al. 2008; Berrone et al. 2013). Instead, agents

will prefer to leverage existing external sources of such knowl-

edge. Grimpe and Kaiser (2010) point out that, “...quality

advantages through R&D outsourcing may be more important

since the contractor can employ specialized know-how, equip-

ment, and infrastructure.”Hoskisson et al. (2002) provides evi-

dence that corporate governance participants such as institutional

owners, boards of directors, and corporate executives exert their

influence in directing a firm’s choice of internal versus external

130 P. S. Mukandwal et al.