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proactive environmental innovation strategies (Zenget al., 2005; Albornoz et al., 2009). Therefore,
in the light of the above analysis, it is hypothesized that:
Hypothesis 3a:Foreign direct investment (FDI) has positive influence on the adoption of
horizontale green product diversification.
Hypothesis 3b: FDI has positive influence on the adoption of vertical green product
diversification.
2.6. Regulations
Societal concerns over the negative environmental impacts offirms’production process and
their products have led to a sharp increase in environmental regulations throughout the world
(Rugman and Verbeke, 1998). Environmental regulations are an important element in understanding
the dynamics of eco-innovations (Pickman, 1998). Regulatory stakeholders play an important
role in influencing firms’ adoption of environmental management practices (Christmann, 2004;
Delmas and Toffel, 2004; Earnhart, 2004; Backer, 2007; Etzion, 2007; Zhu and Sarkis, 2007;
Darnallet al., 2009). Governments can mandate firms to use pollution control technology and
reduce their environmental impact (Darnall et al., 2008; Darnall, 2009). They can also encourage
firms to implement proactive green process innovation to control the environmental impact of their
production process (Johnstone and Labonne, 2009). Failure to meet with the demand of regulatory
stakeholders leads companies to penalties,fine, lawsuits, and even loss of operating permits (Kassinis
and Vafeas, 2006; Sarkis et al., 2010). As a result, firms responding to the demands of regulatory
stakeholders may need to commit resources and manpower to control their environmental impacts
of the production process. Environmental investments can also benefit firms’ own interests. On
one hand, proactive environmental production, such as implementation of ISO 14001, can signal
to the government their cooperative intents, can improve government’s credit to firms, and can
ease regulatory burdens (Prakash and Kollman, 2003; Potoski and Prakash, 2004, 2005; Darnall
et al., 2008; Delmas and Montiel, 2008). On the other hand, green innovation can also reduce
their production costs and/or help expand the markets for their eco-products (Porter and Van der
Linde, 1995). Environmental regulations have also been considered a significant determinant of
green product diversification (Cleff and Rennings, 2000; Rennings, 2000) as previous studies
have identified regulatory pressures as the main determinant offirms’ green innovation (Henriques
and Sadorsky, 1996; Cleff and Rennings, 2000; Kassinis and Vafeas, 2006; Frondelet al., 2008;
Triebswetter and Wackerbauer, 2008; Johnstone and Labonne, 2009). In view of the above, we
hypothesize that:
Hypothesis 4a:Firms faced with stronger regulatory pressure are more likely to adopt
horizontal green product diversification.
Hypothesis 4b:Firms faced with stronger regulatory pressure are more likely to adopt vertical
green product diversification.
2.7. Community
Local communities are concerned about firms’ ecological and social impacts (Henriques and
Sadorsky, 1999; Sharma and Henriques, 2005). Community stakeholders can implement direct
or indirect influence on firms’environment strategy (Sharma and Henriques, 2005; Pavlovich
and Akoorie, 2010). They can mobilize public sentiment in favor of or against a company’s
environmental approach (Bennet al., 2009). Firms that fail to yield to this stakeholder pressure risk
enduring possible public protests (Hoffman, 2000). In other instances, community stakeholders
may publicize information which could persuade consumers to favor the products of competitors
