Latest Briefing in Ecosystems and biodiversity for 2012

Sustainability-oriented innovation for competitive advantage: Does the business environment matter?

Sustainability-oriented innovation within firms, such as the development of eco-friendly production methods, is seen as a route for product differentiation, value creation and as a way for firms to enhance their bargaining power within the supply chain. In addition, such a view assumes that the newly developed products or services will achieve a return high enough to sustain further research and development, as consumers will be willing to pay a premium over conventional product prices. Whilst nobody denies that continuous innovation is a necessary condition for business sustainability, as it offers enduring competitive advantage and compliance with new regulations (e.g., related food safety regulations), one may ask whether it is enough to invest in technological innovation alone for that situation to occur?

The above question has partly been answered by economics (see Alston, Sexton, and Zhang, 1997). From a research manager’s point of view, e.g., where a government body has to evaluate the effects that public research has on the economy, the conclusions were that if the interest is just to evaluate the aggregate benefits of research for the entire economy, departures from perfect competition do not matter much if they are modest. However, if distributional issues are important (as is the case in many supply chains), even modest departures from competition can cause the competitive model to yield seriously misleading results. Furthermore, significant departures from competition, especially the joint presence of oligopoly (few suppliers) and oligopsony power (few buyers), can have important effects on the total benefits and the distribution of benefits from research.

If instead of considering the aggregated case, one explores firms’ incentives for private innovation when there is unbalanced power along the supply chain, this necessarily affects the distribution of returns from innovation and therefore the incentives to innovate and adopt innovative practices. This implies that the business context in which innovation takes place is an important factor in determining its appeal for those involved.  

The purpose of this note is to highlight lessons from a successful case study where a group of producers organise in such a way that they create a business environment (i.e., the market structure) where innovation can have its desired effect, i.e. to provide producers with adequate returns to innovation such that their businesses become sustainable.

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Published on 11 September 2012 in Sustainability and Communities , Ecosystems and biodiversity

Briefings in Ecosystems and biodiversity for 2012