Project Manager:
Mehmet Ali Soytaş, Damla Durak Uşar
Research Areas:
econometrics, business economics, applied microeconomics
Project Start Year:
0 216 564 94 38
About the Project:
This project aims to form a theoretical model, in order to understand the effects of strategic interaction between companies on sustainability investments, based on the game theory, and to estimate competitiveness and spillover effects on sustainability investments by means of a discrete choice model and a comprehensive data set. The studies which empirically analyze the relationship between sustainability and financial performance have produced contradicting findings in the international literature. While companies' characteristics are considered, the effect of competitiveness on the relationship between sustainability and financial performance has been ignored in the investigation of this relationship. Companies, indeed, consider such factors as demand, cost and competitiveness while taking strategic decisions. Decisions about sustainability should be regarded as strategic ones as well. The effects of strategic interactions between companies on sustainability investments have not been studied yet whereas similar problems such as market-access decision or new-tech adaptation have been broadly investigated in literature. By using different studies carried out in different fields, a Stackelberg oligopoly model has been developed for sustainability decisions, and sustainability investments and the net profit they provide have been calculated by using the reaction functions of leader and follower companies at the equilibrium point. A simulation has displayed that companies modify their sustainability investments based on the degrees of competitiveness and spillover effects in the sustainability market. It is observed that the leader companies reduce sustainability investments in order to stop followers to benefit from it when the spillover effect increases. Only when the spillover effect is minor, the leader company can keep its first-mover advantage. An increased spillover effect provides first-follower second-entry advantage. However, it has been observed that the follower who enters last with high spillover effect provides the most advantage. It has also been noticed that increasing competition rates have reduced sustainability investments for all players. In the light of the above information, it has been figured out that it is necessary to estimate the parameters in the model by doing an empirical study.
Project Finding:
The companies listed in MSCI KLD 400 Social Index and the Wharton Research Data Services’ COMPUSTAT data set have been matched and a data set including the sustainability and financial performances of 419 industrial firms between the years 1999 and 2014 has been generated. A two-stage model has been applied for estimation. In the first stage, sustainability decisions are defined as a function of observable state variables such as firm age, firm size, debt to equity ratio. Thus, in the first stage, the firm's likelihood to make sustainability decisions has been consistently estimated. In the second stage, a model considering the strategic interaction is estimated with the help of the probabilities estimated in the first stage. Although interdependence in the discrete choice model makes diagnosis and prediction difficult, it has been revealed that the adverse effect of competition is more dominant than the positive effect of diffusion in terms of taking sustainability decisions. Furthermore, for the companies that have made a decision to invest in sustainability for the first time, the adverse effect of competition has been observed to be more severe.