R E S E A R CH A R T I C L E
The resource-based view, stakeholder capitalism, ESG, and
sustainable competitive advantage: The firm's embeddedness
into ecology, society, and governance
Krishna Raj Bhandari1 | Mikko Ranta2 | Jari Salo1
1Department of Economics and Management,
University of Helsinki, Helsinki, Finland
2School of Accounting and Finance, University
of Vaasa, Vaasa, Finland
Correspondence
Krishna Raj Bhandari, University of Helsinki,
PO Box 27, Latokartanonkaari 5, FI-00014
Helsinki, Finland.
Email: krishna.bhandari@helsinki.fi
Abstract
The main research question of the study is this: Is the firm embedded into ecology,
society, and governance (ESG), or vice versa? Using the resource-based view as a the-
oretical lens, and stakeholder capitalism as a paradigm anchored in the Dashgupat
Review, we demonstrate in a panel data over 26 years that at the firm level, the rela-
tionship between sustained competitive advantage and the ESG footprint is concave
shaped, and the impact inequality multiple gaps of the ESG footprint are 4.75 times
the providing capacity of the natural and business environment. To solve the com-
mon method variance, endogeneity, and unobserved heterogeneity, system GMM is
used as a method in a dataset of US manufacturing firms from 1992 to 2019. At the
end, we argue that extant attributes of a resource base for sustained competitive
advantage have an inherent flaw anchored in the resource-based view, as they ignore
the “environmental, social, and governance (ESG) friendliness” attribute of a
resource. Managers need to rethink the objective of their firms if they want to sur-
vive in the new ESG-friendly economy with stakeholder supremacy.
K E YWORD S
endogeneity, ESG, ESG footprint, objective of the firm, resource-based view, stakeholder
capitalism, sustainable competitive advantage, sustained competitive advantage, system
GMM
1 | INTRODUCTION
The quest to understand the sources of sustained competitive advan-
tage has inspired strategic management researchers to contribute
from a diverse angle. This stream of research assumes the resource
heterogeneity and stability of the strategic resources over time. The
relationship between a firm's resources and sustained competitive
advantage is possible if the resources are valuable, rare, inimitable,
non-sustainable, and organized (VRIN-O) (Bhandari et al., 2020;
Barney, 1991; Barney et al., 2021). The resource-based view (RBV)
focuses on the internal strengths and weaknesses of the firm in
contrast to the external environmental model of competitive advan-
tage where the focus is on the opportunities and threats.
Climate science enthusiasts and environmental economists are
rallying behind The Economics of Biodiversity: The Dasgupta Review
(Dasgupta, 2021) to address the imbalance between our demand and
nature's supply. The review explicitly claims that the economic system
is using 1.6 times the serving capacity of the biosphere—human
mismanagement of the most precious asset, nature, is alarming. The
Abbreviations: ESG, environment, social, and governance; RBV, resource-based view; System
GMM, system generalized methods of moments.
Received: 15 September 2021 Revised: 15 November 2021 Accepted: 30 November 2021
DOI: 10.1002/bse.2967
This is an open access article under the terms of the Creative Commons Attribution‐NonCommercial License, which permits use, distribution and reproduction in any
medium, provided the original work is properly cited and is not used for commercial purposes.
© 2022 The Authors. Business Strategy and The Environment published by ERP Environment and John Wiley & Sons Ltd.
Bus Strat Env. 2022;31:1525–1537. wileyonlinelibrary.com/journal/bse 1525
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ministries of finance and economy need to lead the way to enable the
wider society to conduct proper decision-making with new success
metrics, by reflecting on the premise that “humanity and global econ-
omy are embedded within nature, not vice versa.” This is an alarming
state of affairs if we want to have sustainable development and meet
the UN's sustainable development goals (SDGs) (Guia Arraiano
et al., 2017; Liute & De Giacomo, 2021; Orazalin & Mahmood, 2021).
Scholars have been raising the need for stakeholder governance
(Amis et al., 2020; Barney, 2018; Barney et al., 2021) to correct the
imbalance between supply and demand of depleting resources.
Humanity must be aware of reducing its demands on environmental,
social, and governance-related (ESG) footprints and help sustain its
supply capacity. All four Ps (politicians, plural sector, private sector,
and public sector) must have a strong commitment to conservation
and the restoration of ecosystems with a notion to drive a sustainable
ecological footprint at individual and household levels. While
Dasgupta (2021) provides a macroperspective of ecology, we delve
into social and governance-related impact separate from the ecologi-
cal impact at the firm level; out of the four Ps, our current study poses
two research questions focused on the private sector: (1) What level
of ecological, social, and governance footprint has the US manufactur-
ing sector incurred while reaping good profitable growth? (2) Is the
firm embedded into environment, sociology, and ecology, or vice versa?
Daft (1983) defined firms' resources based on the goal of improving
efficiency and effectiveness. Any “assets, capabilities, organizational
processes, firm attributes, information, knowledge, etc.” that serve the
lofty goal of efficiency and effectiveness of the firm are called
resources. Barney (1991) argued that not all physical capital, human
capital, and organizational capital are important resources that serve the
strategic purpose, and suggested the VRIN-O attributes of resources
as the differentiating mechanism for sustained competitive advantage.
Achieving a competitive advantage is a strategic approach that is
being pursued in parallel by all competitors. Thus, the focus of the
study is not on the structural or environmental changes, such as tech-
nology changes or creative destruction (Schumpeter, 1942), which
may make current resources redundant or not important, and compet-
itive advantage may be over. However, when a firm has a sustained
competitive advantage, the strategic approach is to create value that
is unique to that firm only, where imitation of the same is not possible
(Barney, 1991; Barney et al., 2021; Bhandari et al., 2020). The focus
of our study, thus, is on the firm's VRIN-O attributes and how this can
create sustained competitive advantage.
Based on the assumption that resources are heterogeneous and
immobile at the same time, this study follows VRIN-O attributes
which are history-dependent, causally ambiguous, and socially
complex—embedded into the idiosyncrasy of the firm. To achieve the
lofty goal of sustained competitive advantage, the majority of firms
have profit maximization as their objective at the cost of ESG degra-
dation (Freeman et al., 2021).
The firm's sustainability and ESG literature at firm level has been
confronted by Porter and Kramer (2019) through the “shared value”
concept. However, attempts to measure the “shared value” have not
been very successful, even after Porter et al.'s (2011) contribution in
this direction. Extant research applied survey data or archival proxies
in strategic management in general terms, while the latter is predomi-
nant in highly cited contributions. However, according to Ketchen
et al. (2013) such studies are “castles made of sand.” Responding to
the call, to avoid building these “castles made of sand,” we use
computer-aided text analysis (CATA) and a machine learning tech-
nique called natural language processing (NLP) to build our measure
of ecological footprint, our outcome, or criterion variable. To mitigate
the reliability, validity, and generalizability of extant measures, a rigor-
ous methodological approach is taken.
In a panel dataset of the US manufacturing sector between 1992
and 2019, panel regression using system GMM which handles com-
mon method variance, endogeneity, and unobserved heterogeneity
(CEU) shows that as a firm's profit rises over time, the ESG footprint
has a concave-shaped relationship. This finding has major implications
for both theory and practice. First, the current VRIN-O attributes of
the firm's strategic resources are necessary but not sufficient conditions
for the much-required new objective of the firm—together with profit,
a firm needs to respect social development, ecological justice, and
governance compliance. Thus, in the end, a refined version of the
(ESG) resource-based view (ESG-RBV) has been proposed following
the research call from Barney (2018) and Barney et al. (2021). Second,
post-estimation analysis shows that the US manufacturing sector is
overusing the ESG by 4.75 times the level it can serve and regenerate
for sustainable development, as envisioned by the UN's sustainable
development regime (SDG-R). Second, based on the overuse of 4.75
times the providing capacity of the ecological systems, the United
States is on the verge of being at melting point. Thus, as suggested by
Dasgupta (2021), policymakers, conscious CEOs, managers, the plural
sector, and ecological activist must act urgently before it's too late and
the regenerative capacity of the ESG becomes impossible to recover.
In subsequent chapters, we first review the ecological footprint
literature to assess the existing theories, measures, and implications.
Next, we explain the CATA with the NLP approach, and its value in
assessing the ecological footprint through the large corpus of unstruc-
tured texts in the firms' annual reports filed in the US Securities and
Exchange Commission. For the reliability, validity, and generalizability
of the measure, we introduce human judgment as a triangulation. Fur-
ther, using system GMM, we use panel regression to assess the
impact of sustained competitive advantage on the text-based ecologi-
cal footprint. In the end, we discuss major implications for the RBV,
and strategic management at large, to further the use of NLP and
CATA-based techniques.
2 | STAKEHOLDER CAPITALISM AND ESG
FOOTPRINT: A NEW OBJECTIVE OF THE
FIRM
The Barnean and Freemanian schools of thought on stakeholder
capitalism seek to achieve at the firm level that any human activity
that leaves more ecological damage than nature can provide while
regenerating itself is used as an ecological footprint (Dasgupta, 2021;
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Pascual et al., 2021). Following this definition, and based on the
extant literature on the environment, social, and governance (ESG)
aspects of the firm, which is driven by the stakeholder capitalism doc-
trine, the current study assesses the ecological footprint as “1-ESG.”
The detailed measurement of the ESG through computer-aided analy-
sis (CATA) is presented in the measurement section 4.3.1.
2.1 | Value of “priceless” nature, social fabric, and
governance
The traditional objective of the firm was profit maximization—with
ruthless short-term execution, quarterly share price, and related per-
formance reward mechanisms for the CEOs and the top management
alike. In the pursuit of excellence in profit maximization, it has now
finally been realized that we are seeing the major symptoms of the
ecological sickness that the planet is facing. Of course, the inequality
regime (Piketty, 2021) has emerged due to the accumulation of the
majority of the wealth in the Top 1 percentile of the population. While
too much orientation towards public sector-driven economy resulted
in the collapse of the Soviet Union and allied countries, similar symp-
toms of too much liberalization and the free market economy without
the proper control of the public sector have paralyzed the earth—and
increased inequality in all aspects, including the impact inequality as
suggested by Dasgupta (2021).
While the extant understanding of how can we even put a price
tag on nature is equally valid, unless and until, we have objective mea-
sures of the ESG, we will not know what level of effort is needed to
safeguard against irreversible damage to the biodiversity. Similarly,
the impact on a society with a proper ethical governance mechanism
must be assessed, and this assessment must drive the objective of the
firm, rather than the orthodox measure of a single unit of profit
maximization.
Our approach is an improved construct and measurement pur-
pose, based on the preliminary attempts done by Porter et al. (2011)
with a shared focus, sustainability, impact assessment, reputation, and
compliance approach, to create and measure shared value and similar
literature streams. As shown in the last row of Table A1, our focus is
on the ecological footprint in contrast to extant measures for similar
constructs. Porter and Kramer (2019) argued for the shared value cre-
ation, measurement, and validation which furthered the stream of
research related to ESG. When the shared value concept is used, it is
understood that the firm is having economic, societal, and environ-
mental benefits as its objective. However, this approach suffers from
the neglect of governance and compliance.
While compliance (Birnbaum, 2016) became another small stream
of research, a connected and valid approach similar to ESG has not
existed for long. Arguments for a firm sustainability approach (Delai &
Takahashi, 2011), an impact assessment approach (Social Impact
Assessment, 1995), and a reputation approach (Hall & Lee, 2014) have
been used as a lens to understand the new objective of the firm
anchored in stakeholder capitalism. To cover the governance gap, and
not to leave other smaller streams of research in societal and
environmental approaches, current research assesses the ESG friendli-
ness of a firm through a CATA-based novel measurement approach.
While the extant research used secondary data and the index created
by CSR initiatives, we built a comprehensive measure based on the
annual report discourses. The brief comparison of all of these streams
of research is tabulated in Table A1, with a clear contrast in its presen-
tation. The first part is our unique approach, while the second part
shows that the subsequent assessment methods have their own
approaches and objectives. Porter et al. (2011) have a detailed discus-
sion of these approaches, but our synthesis does not exclude the
extant research in this area.
In all extant constructs and measures, the assumption is that ecol-
ogy and sociology are embedded into business and economics. How-
ever, we have proposed to reverse this assumption with an idea that
the environmental, social, and governance impact assessment and
protection is the main objective of the firm, and the firm is embedded
into the sociology and ecology of the biosphere. We would like to
emphasize that our measurement assesses the net ecological impact
so that the firm can assess the providing or regenerative capacity of
the ESG. This assessment is then helpful for managers, policymakers,
and researchers, alike.
3 | COMPETITIVE ADVANTAGE AND
ECOLOGICAL FOOTPRINT
The unique advantage that cannot be duplicated by competitors is
called sustained competitive advantage (Bhandari et al., 2020;
Barney, 1991). This is possible if a firm has VRIN-O resource attri-
butes when focusing on the internal strengths and weaknesses to
achieve efficiency and effectiveness. The success of the RBV since
1991 triggered an assessment of the contribution to strategic man-
agement from this stream of literature (Barney et al., 2021) which
argues that there are three avenues for further research—creating
synergy effect across theories, a focused approach on the RBV itself,
and developing the strategic resource concept further.
Not only the originator Barney himself, but Freeman et al. (2021)
also urged researchers to merge stakeholder theory and the resource-
based view in their research. Despite its popularity, the RBV seems yet
incomplete, while there is room for bringing sustainability, people,
cooperation, and normativity at the same time. Academy of Manage-
ment Conference has initiated a symposium in building a formal model-
ing approach to the RBV, pointing out the need for formal models that
are reasonably better, and will have a remedial response to the criti-
cisms that the RBV is predominantly verbal in nature, which attracted
further criticism of its formal structure (Boysen et al., 2020). As rightly
demanded by stakeholder theory and the formal modeling approach,
the proponents of the business ecosystem are arguing that a new
approach is needed to understanding the antecedents of the value of
the resource and capability. Thus, RBV must be strengthened from the
business ecosystem perspective where interorganizational cooperation
becomes very important (Gueler & Schneider, 2021). These demand an
understanding not only of the business ecosystem but also the natural
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ecosystem, as the firm is being provided with every resource it needs
by the biosphere, but almost without a price tag.
While the RBV's originator and Freeman et al. are calling for the
revival of the research agenda, the looming crisis of biodiversity deg-
radation (Dasgupta, 2021) raises concerns not only at the macrolevel
but at the firm level as well. Profit maximization as the objective of
the firm (Friedman, 1970) puts the planet in this situation. Therefore,
the current level of providing and regenerative capacity of the ecology
at the macrolevel has been exceeded by 1.6 times. This demands fur-
ther assessment of the ecological footprint at the firm level.
The argument posed by Dasgupta (2021) has generated enough
debate in both aisles of economic thought. Profit maximization as the
objective of the firm argues that using nature as an asset and putting
the “price on the priceless” is improper (Spash & Hache, 2021). How-
ever, the findings have created momentum among governments and
scholars alike, in furthering the debate in different levels of analysis.
The current study takes this granular approach to the US manufactur-
ing firms and argues that their ecological footprint is above the limit
the ecology can provide for. Assessment of the same for theoretical
and practical implications is still needed, and the current study joins in
with this new emerging literature at the firm level.
In a sustainable world, the ratio between sustained competitive
advantage and the providing capacity of the ESG or biodiversity must
not cross “1.” This implies that all the profit growth the firms are
reaping must be thought through from the ecological perspectives with
the 4Ps in mind—people, planet, profit, and the plural sector. If the 4Ps-
based objective of the firm is pursued, the ratio between sustained
competitive advantage and ecological footprint will be 1, in the equilib-
rium condition. Until then, the biosphere and biodiversity keep the
regeneration capacity intact. Beyond that, it will have alarming effects,
as seen in climate change, droughts, floods, degradation of flora and
fauna, and the mass extinction of species (Dasgupta, 2021). However,
the current study expects that the ratio between sustained competitive
advantage and the firm's ecological footprint is way high, mitigating the
same is a must, and this relationship is concave, not linear. Marx's trans-
formation of production value into production price perspective, and
the sustained competitive advantage of the firm based on the VRIN-O
attributes of strategic resources with idiosyncratic resource endow-
ment and deployment, suffer from not accounting for the market fac-
tors (Dassler, 2020). While this is a problematic issue in the RBV,
looking from the demand and supply perspective of biodiversity is still
under-researched at the firm level.
The limits to growth suggested by Dasgupta (2021) provide a
strong basis for our theorizing and hypothesizing that when profit
keeps on growing, its ecological footprint takes a concave shape—
suggesting that if the objective of the firm is to maximize only profit,
the cost in terms of social degradation and ecological failure is
increasing rapidly. The reasons for such a phenomenon are obvious,
as the providing capacity of the biosphere and resource base of the
planet is in danger if we focus only on profit maximization. While
Friedman's doctrine argued that the only corporate social responsibil-
ity of the firm is to maximize profit, this notion leads firms to ignore
the social and ecological degradation they are causing.
The emergence of the importance of the role played by multina-
tional enterprises (MNEs) to fight against climate change brings our
attention to the importance of developing a new objective of the
firm to optimize ecological footprint rather than profit maximization
(L
opez et al., 2019). On the other hand, the importance of
biodiversity's providing capacity in sustaining the economy argues
that a balance of views from a pluralistic perspective is needed from
conservation science, policy, and practice (Pascual et al., 2021).
While pricing the priceless argument plagues the assessment of
the resource endowment of nature, it is important to measure the nat-
ural capital (Dasgupta, 2021; Polasky & Daily, 2021) to understand
the gaps and devise an instrument to tackle the degradation of the
same, so that environmental justice at the local and global level is pos-
sible (Martínez-Alier, 1997). Thus, the emergence of a new paradigm
around ESG and its related footprint argues that the objective of the
firm needs to be modified. So far, profit has been the outcome vari-
able, suggesting that ecology and society are embedded into the firm.
Thus, we reiterate the reversal of the equation and suggest that the
firm is embedded in the ecology and society at large, and we must use
an ecological–sociological footprint as an outcome variable. Thus, the
current study argues that at the firm level, sustained competitive
advantage and the ecological footprint have a concave-shaped
relationship.
Hypothesis 1. The relationship between sustainable
competitive advantage and ecological footprint is con-
cave shaped.
4 | METHOD AND SAMPLE
4.1 | Sample
For this study, we collected data from 1992 to 2019, 27 years alto-
gether. Data for hypothesis testing were collected using the following
steps. First, most yearly filings for companies with a SIC code between
3500 and 3600 were obtained from the US Securities and Exchange
Commission's (SEC) database (www.sec.gov), giving us 1208 compa-
nies and 37,690 filings. Next, 10-K405 and 10-KSB filings were
removed from the data, as these are filed by very small companies not
included in our analysis. This decreased the number of companies to
930 and the number of filings to 6148. Next, the financial data were
collected from the Thomson Reuters Eikon service and connected to
the annual reports. The connection was made using a multistep verifi-
cation procedure. The Thomson Reuters database does not recognize
the CIK code the SEC uses for company identification. Thus, we used
the Python programming language (Van Rossum, 1995) to transform
the CIK code to the ticker symbol for each company, which was then
connected to the financial data. In this verification procedure, we used
the SEC database, the Thomson Reuters Database, and the PermID
service (www.permid.org) offered by Thomson Reuters. This process
allowed us to reliably connect the annual reports and the financial
data for 571 companies and 6088 10-K filings.
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Last, the 10-K filings were cleaned of all unnecessary information
following the guidelines of Loughran and McDonald (2016). In this
process, the markup language tags, the ASCII-encoded segments, the
XML-embedded documents, the characters between XBRL tags, and
the HTML tags were removed from the documents. Furthermore, the
tables were not considered necessary for textual analysis and were
thus removed from the documents. After these steps, all of the
remaining markup tags and excess linefeeds were removed from the
reports. The cleaning of the annual reports was done using the Python
programming language and the Pandas data-processing library
(McKinney, 2010).
4.2 | Measures used
4.2.1 | Sustained competitive advantage
Profit per employee above the mean values was used as a measure of
sustained competitive advantage, and it was divided by the number of
employees. To normalize the data, a natural log of this ratio was used
in the calculations as the measure of sustained competitive advantage.
By using employees as the denominator, the measure becomes firm
size agnostic.
4.2.2 | Control variables
Exploration and exploitation-related activities were used as controls
apart from the lagged-dependent variable of the ESG footprint to con-
trol for unobserved heterogeneity. We also included year controls.
4.2.3 | ESG footprint
Deep ESG is an alternative approach that is better than existing mea-
sures such as complaint ESG, selective ESG, and illustrative ESG,
which have a lack of proven approaches and lack of objective mea-
surement standards.1 The deep ESG uses the following approach
(Long & Johnstone, 2021, p. 9):
identification rubric: Footprint and Utility; asset prove-
nance: degrees of freedom; stakeholder controls; sus-
tainability migration plan; and review and correction.
The seed words for our measurement keyword generation through
rigorous machine learning, NLP, and CATA were based on this defini-
tion and approach of deep ESG. Once we measure the ESG coverage
of a firm, we use the following formula to assess the deep ESG impact:
DeepESGfootprint¼1DeepESG:
This approach considers a single firm or strategic business unit
(SBU) or a portfolio of firms and SBUs, taking into consideration that
the objective of the firm is to be embedded too deep in ESG, but not
the traditional approach of ESG embedded into the firm whose sole
objective is to maximize profit.
More than 2000 papers were reviewed by Friede et al. (2015),
and argued that the majority of the firms following ESG performed
well in terms of financial performance, though the level of perfor-
mance outcome has been mixed depending on the geography or vari-
ous context-dependent moderating or mediation mechanisms
(Zumente & Bistrova, 2021). The majority of these studies predomi-
nantly used traditional ESG measures and that is also based on archi-
val proxies which have been criticized a lot (Ketchen et al., 2013).
Thus, our approach is not to repeat the similar measurement
approach, as has been done in the past, but to take the recent devel-
opment in machine learning, NLP, and CATA, to open a new frontier
of research in extracting real meaning in company discourses such as
annual reports.
4.3 | Machine learning and natural language
processing
As the context and corpus of our research are based on the annual
reports of the US manufacturing sector, we could not readily adapt
the extant keywords developed from news reports by Borms
et al. (2021b, p. 226). However, we used the keywords identified by
them as our seed words, and extended them using machine learning,
NLP, and CATA, at large. Then we repeated the process given by
Borms et al. (2021a) in detail, such as embedding text mining
techniques.
4.3.1 | Computer-aided text analysis
The manually chosen keyword collection was augmented using the
GloVe language model (Pennington et al., 2014). The GloVe is a learn-
ing algorithm for obtaining vector representations for words. It works
on an aggregate global level to obtain word–word co-occurrence sta-
tistics from a corpus, acquiring word representations with interesting
structures in the word vector space.
For example, in the vector space of a GloVe model, semantically
similar words are close. Thus, the GloVe vector space has exactly the
structure we needed in our application. We calculated the Euclidean
distance of words in the GloVe vector space and selected words
whose distance from the manually chosen keywords was smallest to
search for similar words. We used the Gensim library in Python to
construct our language model (Řehu˚řek & Sojka, 2011). Specifically,
we implemented the GloVe 300-dimensional word vector model in
our application. It is trained using the Wikipedia 2014 dump, which
includes all the articles on Wikipedia in 2014, and the Gigaword 5 cor-
pus, a comprehensive archive of newswire text data. Together, these
two corpora have approximately 6 billion tokens (words) for training.
The GloVe-300 model encodes 400,000 tokens as unique vectors,
with all tokens outside the vocabulary encoded as the zero vector.
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We added those 300-dimensional word vectors that are closest
(by Euclidean distance) to the manually chosen seed words to our dic-
tionary. By augmenting the manually chosen keyword collection with
semantically similar words, we added an objective layer to our subjec-
tively chosen keywords, thus improving the efficiency of our
dictionary.
Such measures are flexible, have wider applicability, and enable
longitudinal studies which are not possible in survey-based design or
other methods.
4.4 | Reliability and validity: Human interpretation
of the CATA model
For every measurement technique, reliability and validity are of
utmost importance. If the reliability and validity cannot be established,
the linkage between the construct and the measures is broken. To
avoid this pitfall, we did manual coding for 15 randomly selected com-
panies (Uotila et al., 2009). The definition of ESG was given to the
coders rather than the keywords used in the CATA analysis. The
inter-rater reliability measured by Cohen's kappa (Cohen, 1960) of the
classification, with two coders resulted at 0.62. The correlation
between CATA-based measurement and manual coding was 0.54.
Thus, CATA and manual coding can be inferred to have similar indica-
tion and reliability, and validity with the CATA model. As suggested by
Krippendorff (1980, p. 122) a keyword in context (KWIC) analysis was
conducted to improve the CATA measures and their validity. Spurious
words were blocked from the analysis.
4.5 | Analysis method
The novelty of the GMM lies in its capacity to handle common
method variance (CMV), endogeneity (E), and unobserved heteroge-
neity (U), the CEU problem (Bhandari et al., 2020). First, to tackle
CMV, the independent and dependent variables were measured from
different sources combined with the lagging of the independent vari-
able by 1 year; this year's impact of the independent variable is real-
ized only the following year. Second, endogeneity was handled
through the lagged values of predetermined variables and year
dummies as instruments. Third, to cater to the unobserved heteroge-
neity, a lagged-dependent variable (ecological footprint per employee)
was used as a control in the system generalized method of moments
(GMM) and the specification (Wooldridge, 2009). This approach fulfills
the basic reasoning for causal claims.
Researchers and editors are also demanding endogeneity-free
research (Reeb et al., 2012) and result without common method vari-
ance (Podsakoff et al., 2003). A very popular approach called system
GMM (Arellano & Bond, 1991; Roodman, 2009) in econometrics and
economic research handles these problems through the inherent
nature of the specification. Following the multiple arguments of key
benefits (Keil et al., 2017), we also argue that system GMM handles
not only endogeneity and common method variance problems but
also unobserved heterogeneity (Wooldridge, 2009) by using a lagged-
dependent variable as a control.
5 | FINDINGS
A summary of the construct means, standard deviations, minimum
and maximum values, and correlations matrix is shown in the
Table A2. Winsorization at 1% level for all continuous variables was
used. The ecological footprint per employee has a mean value of 0.69
with a standard deviation of 0.64. Similarly, another key variable of
interest is profit per employee with a mean value of 1.42 and standard
deviation of 0.37. Explorative innovation and exploitative innovation
have a mean value of 0.18 and 1.99, respectively, and standard devia-
tion of 0.13 and 1.27. Apart from these important data, the minimum
and maximum range of each variables is reported in Table A2. Simi-
larly, the correlation table shows reasonably low correlations. The
highest correlation between the two innovation measures does not
make the model multicollinear, as none of the parameters were
dropped in running the Stata. Therefore, VIF assessment is not
needed.
Autocorrelation AR1 (significant p values) and AR2 (insignificant
p values) from the system GMM allow us to use the model for testing,
as shown in Table A3. Similarly, a lagged-dependent variable as con-
trol is also significant, and the absolute value of the estimate is less
than 1. Hansen J statistics with nonsignificant p values also support
the key assumptions in assuring the model is ready for hypothesis
testing. Similarly, the number of groups in instruments is higher than
the number of instruments, to avoid overfitting of instruments. Chi-
squared values are also significant to demonstrate the overall model
fit. All hypothesized relationships are found to be significant at the
.000 level of p values, with strong effect sizes, as shown in Models
2 and 3 in Table A3. Model 1 serves as the control model.
Ecological footprint per employee is used as a dependent variable
in all three models. The independent variable is profit per employee.
Model 2 reports the first-order model result, while the Model 3 reports
the second-order, or quadratic model's, result. Model 3 clearly demon-
strates a concave-shaped relationship where the first-order slope is
slightly negative, and the second order slope is highly positive.
The longitudinal study of the US manufacturing sector's firm prof-
itability per employee shows a concave relationship with an ecological
footprint as shown in Figure A1. The findings imply that at the current
level of resource consumption for the growth of the firm, profitability
is unsustainable as it is rising with a rising slope.
The marginsplot command output from the Stata shows the con-
cave shape of the relationship between sustained competitive advan-
tage and ESG footprint in Figure A1. During the early stage of profit-
making, it seems that the firm's ESG footprint is low, but as and when
the profit performance goes higher and higher, the ESG footprint sky-
rockets. This demands a proper reflection of the firm's underlying
assumptions behind the resource attributes, and the traditional
assumption that ecology and society are embedded into the firm must
be reversed—that is, the firm is embedded into society and ecology.
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6 | DISCUSSION AND CONCLUSION
6.1 | Theoretical implications: Moving from
sustained and sustainable competitive advantage
By pursuing his own interest [an individual] frequently
promotes that of the society more effectually than
when he really intends to promote it. I have never
known much good done by those who affected to
trade for the public good. (Adam Smith, The Wealth of
Nations)
With high respect to Adam Smith, the father of economics, we
beg to differ on this notion of a deliberate, self-interest, maximization
approach by a firm, as demonstrated by our findings that the narrow
self-interest of a firm degenerated the ecological and social fabrics
alike. Extant research argues that the VRIN-O attributes of a resource
give a firm a sustainable2 competitive advantage.
Sustainability in extant research revolved around the profit maxi-
mization (Friedman, 1970) doctrine as the key objective of the firm.
However, our study's arguments are proposing to change the objec-
tive of the firm towards economic, societal, and ecological impact
(ESE), as shown in Figure A2. However, before achieving this objec-
tive, the firm must go through the mediation role of optimum ecologi-
cal footprint (OEF) as an intervening mechanism. To arrive at this
intermediating objective, and the ESE objective at the end, the extant
resource attributes for ESE impact must be augmented with eco-
friendly attributes apart from the extant VRIN-O attribute. Thus, in
the currently improved conceptualization of the new eco-RBV
VREINO, resource attributes are recommended for true sustainability
of the firm with optimum ecological footprint and economic, societal,
and ecological impact, as shown in Figure A2.
The reflection from Groom and Turk (2021) on the Dasgupta
Review (Dasgupta, 2021) praises the contribution to humanity's sur-
vival, existence, and clear guidelines, given the action-driven metrics
for the CBD COP15. While Dasgupta (2021) approached the econom-
ics of biodiversity in an “orthodox” approach in its assessment of the
dire condition the planet earth is facing, the perspective is “unortho-
dox” (Groom & Turk, 2021).
It is “orthodox” in the use of extant language, such as
“externalities,” “natural capital,” “shadow pricing,” and “asset returns”
in the literature, but the analysis, findings, juxtaposition with the
extant literature, and simple models that a layman can understand are
“unorthodox” in many senses. While the traditional objective function
of the economist's perspective (Friedman, 1970) has been “environ-
ment embedded in the economy,” the “unorthodox” perspective
taken by Dasgupta (2021) is that the objective function of the econo-
mists must be anchored in “economy embedded in the environment”;
with the latter approach, we give proper respect that the biodiversity
demands and it is a bounded rational approach to growth, endorsing
the “limits to growth” (Williamson, 1981).
Conscious firms are taking a step ahead of others in respecting
the environment and social fabric, and they comply with government
regulations such as the Sarbanes Oxley Act (Zhang, 2007). However,
the ESG footprint's concave relationship with the “profit maximization
only” objective of the firm triggers an alarm for the firms' CEOs and
boards, including policymakers. Thus, our proposition to tackle this
issue at the resource base selection by the firm seems to mitigate its
cause at the root level, as shown in Figure A2. Thus, in the currently
improved conceptualization, the new eco-RBV VREINO (vs. VRIO) are
recommended as resource attributes for true sustainability of the firm
with optimum ecological footprint and economic, societal, and ecolog-
ical impact, as shown in Figure A2.
6.2 | Reflections on the Dasgupta Review at the
firm level based on the findings of our study
When we calculated the current profit to ESG ratio at the mean level,
and compared it with the similar ratio of current profit to ecological
(implies ESG) service providing capacity ratio, the impact inequality
multiple is 4.75, as shown in Figure A3. To save the planet, the call is
to the CEOs and managers to build sustainable development as the
main agenda, in contrast to maximizing profit. Otherwise, the planet,
society, and governance will face a disaster unseen so far.
The interesting debate on the traditional divide on the objective
of the firm (Fama, 2021) will be reinvigorated between both aisles of
the scholars, in the media, and with the public policy think tanks. Simi-
larly, a reasonable debate on “pricing the priceless” will trigger the
majority of contributions and constructive debate.
The findings of our study at the firm level from the US
manufacturing sector concurs with the call from Dasgupta (2021)
that at the macrolevel, the traditional conceptualization of the
VRIN-O attributes of the firm resources for the sustainable competi-
tive advantage should be implemented at the firm level
(Barney, 1991; Bhandari et al., 2020) is necessary but not a sufficient
condition for the sustainability of the firm, having an economic, soci-
etal, and ecological impact.
While Dasgupta (2021) provided macrolevel analysis, our study
focused at the firm level, and in one country, but is of the highest
importance from the ecological footprint-related issues. As done by
Dasgupta (2021), our approach at the firm level was to assess the
“impact inequality,” and the multiple is 4.75 (Figure A3), implying that
the policymakers, CEOs, and managers must limit growth and make it
sustainable within the VREINO approach where “eco-friendly” attri-
butes of the firms' resource use and consumption must be taken seri-
ously. The goods and service providing capacity of the biodiversity in
the US manufacturing sector is already suffering 4.75 times the over-
load, which will trigger many changes in biodiversity and biosphere
alike.
Thus, the private sector can take the lead role in recognizing this
as a major crisis in biodiversity, and reorient the objective function of
the firm from a traditional profit-only perspective to one which
involves the new “profit, societal impact, and ecological impact.” In
the latter approach, “the firm is embedded in the biodiversity or ESG,”
not vice versa, as assumed by the traditional RBV.
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6.3 | Empirical and methodological contribution
In this study, we examined the relationship between sustained com-
petitive advantage and ecological footprint using computer-aided text
analysis (CATA) and a machine learning technique called natural lan-
guage processing (NLP). We developed a new measure of ecological
footprint at the firm level by leveraging a widely used CATA and NLP
technique to unstructured text from annual reports of the US
manufacturing sector from 1992 to 2019. To validate the measure
created by us, we followed a novel method to utilize human interpre-
tation of CATA-based outputs. For better causal insights by handling
common method variance, endogeneity, and unobserved heterogene-
ity (CEU), we demonstrated how this new measure is related with a
sustained competitive advantage from the resource-based view lens.
A refined (ecological) resource-based view (eco-RBV) is proposed as a
theoretical contribution, while the new approach to measuring ecolog-
ical footprint is our empirical and methodological contribution.
6.4 | Pathway for adapting CATA and NLP into
strategy
Social science has adapted machine learning, NLP, and CATA success-
fully, and a recent contribution in Strategic Management Journal (Choi
et al., 2021) suggests that the modern methods are better predictors
with accuracy and efficiency. While topic modeling is also gaining gro-
und, CATA has been established since 2009 (Uotila et al., 2009) in
strategic management discourse. The predominant research method
in social science surveys and suffers from common method variance
problems. Similarly, cross-sectional studies are normally pursued due
to retrospective bias and role changes in the firm over time. However,
with the CATA model, we can run longitudinal analysis which helps in
avoiding unobserved heterogeneity and endogeneity. Analytical
methods like system GMM handle these methodological black holes
in its specification itself, with a lagged-dependent variable as control
and use of instruments in the GMM function. Thus, the future of
CATA and NLP-based measurement models seems promising.
6.5 | Managerial implications
The findings have major implications for sustainable economic growth
and firm-level sustainability. Managers are urged to rethink their cur-
rent paradigm of VRIN-O resource attributes towards a new bundle
of resources with VRINEO attributes where E stands for ESG friendli-
ness of a resource. Policymakers may benefit from taking UN sustain-
able development goals seriously, and start implementing rules and
regulations that make firms environmentally and socially responsible
in their very DNA.
For corporate entrepreneurship, or for that matter sustainable
corporate entrepreneurship (Provasnek et al., 2017), and new interna-
tional ventures or born-global research, a new call to come up with
business model disruptions is an open challenge (De Giacomo &
Bleischwitz, 2020). While the traditional business model solely
focused on profit maximization, the sustainability paradigm based on
stakeholder capitalism demands the management of conflicting objec-
tives of societal impact and environmental impact, separate from
profit-making, without complying with the governance rules and regu-
lations. Otherwise, Adam Smiths's Moral Sentiments would not feel
like justice. This is an audacious goal for humanity, to anchor future
generations based on sound environmental policies, no matter
whether pricing the priceless (nature) is justified or not. Shall we face
mass extinction or take corrective action? Such research questions
will trigger new debate and new discourses.
At this point in human civilization, firms are confronting the inher-
ent challenge of eco-friendliness, as consumer awareness and govern-
ment intervention to mitigate the ecological footprint and pollution in
the biodiversity are increasing. The causal relationship between
sustained competitive advantage and ecological footprint is not
always clear at the firm level. Silo thinking in research streams in envi-
ronmental economics, and extant thinking in strategic management,
are using orthodox measures with inconclusive findings. Thus, this
study introduces a novel methodology to address that problem: a
machine learning-based technique to quantify ecological footprint
from unstructured corporate annual report texts, and it proposes the
(ecological) resource-based view (eco-RBV) as a new theoretical lens
that helps managers to make a conscious choice in defining the attri-
butes of the resources in use. If a firm's resource attributes do not
include “eco-friendliness,” that resource is of no value for the firm.
6.6 | Policy implications
While we are reviewing the current trend in ecological, social, and
governance-related policy changes, BBC (2021) broadcasts headline
news on major climate change-related policy changes by the EU for
the whole bloc, with an audacious goal of reaching carbon neutral sta-
tus by 2050. Based on the 4.75 multiple of overuse of the ecological,
social, and governance footprint, achieving this goal within the time-
frame needs sweeping changes in R&D, innovation, competition, and
financial and economic instruments and investments. While
Dasgupta (2021) argued for efficient use of technology and innova-
tion to serve this transformation, we are yet hesitant to quantify and
assess the same at the firm level, as development of the measurement
instrument and its validation is further due.
6.7 | Conclusion and further research
The major research question we asked at the beginning was how to
enhance our understanding of the gap between the current level of
ESG awareness and the providing capacity of the ESG and biosphere.
Using the resource-based view as the theoretical lens, we argued that
VRIN-O attributes of a resource base have an inherent flaw, as they
ignore “eco-friendliness.” For this, we proposed the revised RBV
framework where eco-friendliness becomes one of the major
1532 BHANDARI ET AL.
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attributes of a resource base. Following the Dasgupta (2021)
approach at the firm level, we were able to assess this gap to be in the
range of 4.75. Similarly, the sustained competitive advantage has a
concave-shaped relationship with the ecological footprint. Departing
from the traditional measurement techniques, we used machine learn-
ing, NLP, and CATA approaches to count keywords from the annual
reports to understand the ESG discourse. To solve the common
method variance, endogeneity, and unobserved heterogeneity, system
GMM was used as an analysis method. Managers and policymakers
may have the first assessment of the gaps in the ecological footprint
in order for their firms to become environmentally friendly.
Further research in understanding the impact of technology in
solving the current ecological breakdown is due, as measures to assess
this impact have not yet been developed. Also, Spash and
Hache (2021) critiqued Dasgupta's (2021) approach which could be a
good research agenda at the firm level. While RBV argued for
resource endowment and deployment angle (Barney, 1991; Bhandari
et al., 2020), further research in understanding the impact of such a
resource base, and the market factors at the same time, would make
the model more comprehensive, through Marx's transformation of
production value into production prices (Dassler, 2020).
ORCID
Krishna Raj Bhandari https://orcid.org/0000-0003-4064-1905
Mikko Ranta https://orcid.org/0000-0002-9096-1635
ENDNOTES
1 For detailed review and definition, please refer to Long and
Johnstone (2021, pp. 1–9).
2 In the original conceptualization of sustainable competitive advantage, it
just meant long-lasting in terms of profit-making as the objective of the
firm. It does not have an ecological or social impact on this
conceptualization.
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APPENDIX A
TABLE A1 Understanding the purpose of measurement
Measurement focus What to measure? Why measure? For whom?
Author's approach
Ecological footprint (author's
contribution)
What is the level of net impact in the
ESG?
To ensure that the providing or
regenerative capacity of the ESG is
sustained
Management
Policymakers
Researchers
Extant research's approach adapted from2011
Shared value (Porter &
Kramer, 2019)
Joint business and social value
creation
To grow the total shared value
created
Primarily for management
• Targeted communication to
external stakeholders
Sustainability (Delai &
Takahashi, 2011)
Efficiency in the use of input
factors (e.g., natural resources
and labor) and improved product
and community impacts
To minimize negative externalities
and augment positive impacts
To maintain a license to operate
Management
• Communication to external
stakeholders
Impact assessment (Social Impact
Assessment, 1995)
The long-term social and economic
development impacts of
operations and/or philanthropy
To track progress on social and
economic development impact
To maintain a license to operate
Communication to external
stakeholders
Reputation (Hall & Lee, 2014) How societal impacts contribute to
company reputation
To manage reputation Primarily for management
Compliance (Birnbaum, 2016) Compliance with laws and
voluntary policies, standards, and
codes
To ensure adoption and compliance
To maintain a license to operate
Management
• Communication to external
stakeholders
Source: Author's augmentation of Porter et al. (2011, p. 12).
TABLE A2 Descriptive statistics and correlation table
Descriptive statistics Correlation tables
Variable Obs Mean Std. dev. Min Max 1 2 3 4
Ecological footprint per employee 6088 0.6887993 0.6446971 2.00373 7.377127 1.0000
Profit per employee 3205 1.421963 0.3743028 0.203795 12.06306 .0157 1.0000
Explorative innovation 8148 0.1776482 0.1332894 0.0011667 0.6784403 .0664 .0064 1.0000
Exploitative innovation 8148 1.9931 1.268829 0 6.356655 .0665 .0450 .8409 1.0000
BHANDARI ET AL. 1535
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TABLE A3 System GMM panel regression with ecological footprint per employee as dependent variable
Variables
Control Model 1 Model 2 Model 3
Ecological footprint per
employee
Ecological footprint per
employee
Ecological footprint per
employee
Profit per employee 0.0761 (0.0681) 0.232*** (0.0754)
(Profit per employee)2 0.0418*** (0.00746)
Control variables
Eco footprint lagged 0.518*** (0.0171) 0.384*** (0.0146) 0.360*** (0.0102)
Explorative innovation 225.7*** (87.56) 5.069* (2.587) 7.150*** (2.132)
Exploitative innovation 32.29** (12.55) 0.301 (0.251) 0.414** (0.182)
Constant 24.80** (10.76) 0.407 (0.273) 0.845*** (0.211)
Wald χ2(29) 1547.89*** 2246.08*** 2337.08***
Observations 5870 5870 5870
Number of groups 218 196 196
Number of instruments 106 106 133
First-order autocorrelation (AR1) (p values) .000 .000 .000
Second-order autocorrelation (AR2) (p
values)
.50 .190 .201
Hansen J statistics (p values) .702 .643 .638
Note: Year dummies are excluded in the reporting, available upon request. Standard errors in parentheses.
*p < .1. **p < .05. ***p < .01.
F IGURE A1 Relationship between profit per
employee and ecological, social, and governance
footprint per employee
1536 BHANDARI ET AL.
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F IGURE A2 Author's articulation of eco-resource-based view (eco-RBV) (conceptualized and modified from Barney, 1991)
F IGURE A3 Author's assessment of the
impact inequality multiple at the firm level in
US manufacturing firms
BHANDARI ET AL. 1537
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