The relationship between environmental management practices and financial performance of Ghanaian SMEs.

Abstract

The main objective of this study is to investigate the impact of environmental management practices (EMPs) (energy efficiency, water, waste, material, pollution and biodiversity management) on financial performance (FP) of Ghanaian small and medium-sized enterprises (SMEs). The study also has two subsidiary objectives as follows: (1) To examine the nature and extent of EMPs among Ghanaian SMEs, (2) To identify the barriers to adopting EMPs by Ghanaian SMEs. This study examines the effect of environmental management practices and its six components on financial performance using the theory of the firm. The findings suggest the need to test the theory more by using all the dimensional constructs since the result differs from that of the aggregated index. The study also employs institutional, stakeholder and legitimacy theories as theoretical lenses to examine environmental management barriers and argues that institutional void, stakeholder distance and lack of threat to legitimacy explain perceived barriers to environmental uptake. The study is based on a survey of 238 SMEs from two industrial sectors. The main tool for data collection was questionnaire designed specifically in line with the existing literature on SMEs’ environmental practices and associated barriers. The collected data was analysed through descriptive statistics, univariate statistics and regression analysis using the Statistical Package for the Social Science (SPSS). The results of the main objective of the study indicate that overall there is a positive and significant relationship between EMPs and SMEs’ financial performance. The findings further suggest that the individual components of EMPs have a different influence on FP. EMPs relating to energy efficiency, water, waste and material management have a significant effect on FP. On the other hand, pollution and biodiversity management are not significantly associated with FP. In respect of subsidiary objective (1), the results suggest that the nature of EMPs among Ghanaian SMEs is more tilted towards resources conservation with most of the instituted measured being “common sense cost-cutting”. The extent of EMPs is generally average and promising. The results of subsidiary objective (2) revealed that barriers perceived as limiting SMEs’ environmental management practices uptake include limited resources, low support services, low level of stakeholder pressure, poor enforcement of regulations and environmental knowledge and ownership attitude challenges. The evidence from the study indicates that in spite of the socio-economic and cultural differences between Ghana as a developing country and those of developed economies from where institutional, stakeholder and legitimacy theories have been developed and tested, these theories provide the general framework to understand perceived barriers of Ghanaian SMEs. This is an indication that the key tenets of these theories are applicable in developing country’s content as they are in developed economies for the proactive adoption of EMPs. Also, the testing of an aggregated variable or single indicator by existing studies might not give a full picture of how good is the theory of the firm since EMP is a multi-dimensional construct. This gives an indication that the support for the holistic testing by the theory may need to be modified based on the evidence of the disaggregated testing. The findings suggest the need to test the theory more by using all the dimensional constructs. Another significance of the findings is that they enhance our understanding of the nature and extent of EMPs, barriers and the effect of EMPs’ on the financial performance of SMEs in Ghana where such knowledge does not exist and to the dearth of literature in developing countries in general. The insights from the findings will help inform policy direction on dealing with environmental challenges associated with the dominant SMEs’ sector in the Ghanaian economy.