The Perceived Relationship between Eco-friendly Business Practices and Firm Performance of SMEs in Vientiane Capital, Lao PDR

This study investigates the impact of environmental performance on firm profitability in Vientiane Capital, Lao PDR. Data from 419 firms were collected using an e-questionnaire distributed through a Google form. The results indicate a need to increase awareness and acknowledgment of clean activities among surveyed firms. While there is a positive trend towards energy-saving practices and the provision of designated smoking areas, more efforts are required to encourage the wider adoption of reusable practices and prioritize proper waste management. Regression analysis reveals significant impacts on firm profitability, with firms having regulations for environmentally friendly practices, acknowledging clean activities, providing free space for waste sorting or disposal, and having designated smoking areas experiencing notable increases in profitability. However, the impact of energy-saving policies on profitability is not significant, potentially due to insufficient implementation. The study recommends implementing and enforcing effective energy-saving policies, strengthening eco-friendly regulations, encouraging waste management and recycling practices, and catering to customer preferences to enhance firm financial performance. These measures can contribute to a more sustainable and environmentally responsible business landscape in Vientiane Capital, Lao PDR.

The microeconomic perspective defines Environmental Performance (EP) at the firm level as the ability to promote environmentally friendly practices, such as energy conservation and pollution prevention, that contribute to a greener way of living. Stakeholders are increasingly interested in a firm's EP and consider it when making investment decisions. While firms aim to maximize profits, with the belief that higher profits can benefit the community to a greater extent, the impact of EP on firm profitability has long been debated. Traditional economic arguments in business suggest that environmental investments by firms only yield partial benefits, leading to a potential underinvestment in environmental initiatives. However, contrasting viewpoints, supported by Porter ME [1] and Porter ME, et al. [2], argue that stricter regulations can actually improve business profitability in the long term. These regulations compel firms to focus on reducing production costs, increasing customer satisfaction, and boosting sales. In other words, environmental investments may lead to a mutually beneficial outcome for both businesses and society, often referred to as a "win-win" solution. Some businesses are increasingly recognizing the importance of reducing their environmental risks; however, the range of environmental actions they can take is extensive [3]. A few companies have already made notable advancements in addressing environmental challenges. While some businesses were motivated by legal compliance and risk mitigation, others struggled to find intrinsic interest in understanding environmental concerns. Nevertheless, there is a growing perception that a firm's EP has a negative impact on its Financial Performance. Moreover, companies engaging in operational activities inevitably influence the surrounding environment. Over the past two decades, only a small portion of firms actively integrated social and environmental principles into their business and operations, indicating support for this organizational strategy [4].

In today's world, there is a growing social interest in EP concerning our living spaces and surroundings. The business sector has emerged as a crucial supporter of environmental protection. Consumers now demand that businesses demonstrate practical intentions and commitment to environmental protection and sustainability. Incorporating EP into Corporate Social Responsibility (CSR) activities, companies strive to manage the environment and create cleaner and greener surroundings. The current state of EP is a matter of concern for various stakeholders, including the general public, stakeholders, and the government. This concern arises due to the increasing number of cases where companies neglect environmental management and prioritize profit maximization. It is essential for companies to recognize that their responsibilities extend beyond shareholders, encompassing the interests of other stakeholders [5]. The size of Small to Medium-sized Enterprises (SMEs) typically results in less formal and complex environments, less structured plans and documented procedures, and less stable knowledge, human, and financial resources than those of large firms, SMEs commonly experience fluid contexts and organizational effectiveness uncertainty, and they must be constantly innovative [6]. Similarly, SMEs environmental performance generally includes risks and uncertainties, and SMEs environmental actions must be creative [7]. Combined with charismatic leadership circumstances, these characteristics provide SMEs leaders with an excellent opportunity to employ charismatic leadership to improve their environmental Performance. However, the SMEs in different countries have various definitions of small and medium-sized enterprises. In addition to the firm's financial turnover, the number of workers is the most typical indicator. According to Prime Minister's Decree 42 on the "Promotion of Small and Medium Enterprises,” Small and Medium Enterprises (SMEs) are private businesses that are legally registered and operate following the laws of the Lao People's Democratic Republic and are categorized as follows: Enterprises in Laos are treated as SMEs if they have an annual average number of employees not exceeding 19 persons or total assets not exceeding fifty million (LAK) or a yearly turnover not exceeding four hundred million (LAK). In addition, medium enterprises have an annual average number of employees not exceeding 99 persons, total assets not exceeding one billion two hundred (LAK), or yearly turnover not exceeding one billion (LAK) [8]. The growth of Laos's society and economy has been significantly aided by the contributions of small and medium-sized businesses. In light of this, the government is now working on formulating a plan to support Small and Medium-sized Enterprises (SMEs) and provide aspiring business owners access various financial and other resources.

The aim of this study is to examine how the SMEs in Lao PDR perceive the connection between incorporating eco-friendly business practices and their firm's performance. Specifically, the research focuses on providing an overview of environmental performance in Lao PDR and investigating the influence of a firm's Environmental Performance on its Financial Performance.

This section aims to review recent research on environmental and financial performance, environmental regulation, and commitment. It utilizes the internal and externalities theory as the theoretical basis for the study. Relevant theories such as the Porter Hypothesis, Environment Regulation, Environment Commitment, Legitimacy Theory, Institutional Theory, and Financial Performance are discussed. The section also reviews international studies on Environmental Performance, Financial Performance, and social performance in corporations. The relationships and findings from these studies are examined, leading to a discussion of the study's conceptual framework.

Theoretical reviews

Environment regulation is a tool designed to reduce the negative externalities of environmental pollution; it's the essence of balancing environmental protection and enterprise cost pressure, and there is no consensus on the relationship between environmental regulation and firm Performance. Environmental regulations, which promote human health and the environment, typically result in higher production costs and lower productivity in firms, leading them to transfer their investment and production to less restrictive locations. According to Barbera AJ, et al. [9], environmental protection regulations require businesses to spend on abatement capital, which crowds out profitable investments. In addition, environmental regulations may have an impact on the industrial technology used. If innovations have specific environmental impacts, companies should use greener (and therefore more costly) innovations at sites subject to more strict regulations. According to several researchers, Environmental regulations are the most important factor in eco-innovation because they may influence the measure and method of competitiveness between firms [2]. The regulations include normative and informational information, converting the demand for a greener environment into specific policies and providing strict guidelines to polluters and eco-innovators. Other individuals believe the relationship can be both beneficial and detrimental, while some researchers believe the relationship between eco-regulation and firm performance and eco-innovation is unclear. Because eco-regulation is the key driver of eco-innovation, it's worth looking at how regulation could affect firm performance. According to Jaffe BA, et al. [10], the traditional view, also known as the cost-based strategy, argues that firms encounter expenses due to severe environmental regulation, lowering their competitiveness and productivity. Followers of this viewpoint say that if environmental innovation were beneficial, profit-maximizing businesses would pursue it themselves. However, environmental policies and regulations are required if enterprises do not freely participate in eco-innovation. Under these policies and regulations, firms transfer their current labor and capital resources to fulfill the new need. As a result, revenues are diverted away from profitable initiatives. As a result, regulations restrict firms' competitiveness, and in many circumstances, this negatively influences their ability to trade. Porter ME, et al. [2] challenged the traditional view, arguing that well-planned environmental regulation may promote innovation and provide "win-win" changes, resulting in improved production and a sustainable environment. However, the current world is far from stable. Innovation and movement from one cost-minimizing stance to the next are required in the actual world, where dynamic competitiveness prevails. As a result, change brought about by eco-innovation may not be detrimental as long as it takes the company from one cost-cutting stance to another.

Environment commitment refers to the environmental management and preservation initiatives of businesses. A high level of environmental responsibility shows that companies are often willing to explore sustainable practices to balance firm growth and environmental conservation [11]. Prior research indicated that environment commitment encouraged companies to take the initiative to participate in environmental management. As a result, firms included environmental responsibility in their plans to enhance environmental performance via proactive environmental management.in addition, prior research has shown the favorable impacts of environmental on corporate performance, innovative capabilities, and competitive advantages. Therefore, environmental commitment will significantly impact environmental and corporate performance by encouraging sustainable practices. Many companies have incorporated sustainability into their business culture and, in the process, are learning some methods for implementing these changes. For example, to monitor and decrease waste in functions like managing diversion planning, composting, removing grease traps and fried oil, and other environmental and sanitary services to become more sustainable and ecologically friendly. No matter how big or small a business is, it must consider its environmental effect and the steps it may take to reduce it. Clearly state the devotion to employees, business partners, customers, and the environment. As a result, both the corporation as a whole and the individual workers become accountable. Working toward this extensive change is advantageous for your business and Profitability because, once you commit to sustainability, a process will start that will lead to three outcomes: strengthening your organization's purpose; simplifying the supply chain, which can lower costs; and stimulating innovation within the company.

The legitimacy hypothesis explains why a link or interaction occurs between an enterprise and its surrounding society. In most cases, the degree to which community members appreciate an organization may provide insight into the longevity of that organization. The community demands that the corporation abides by the regulations established for the social and environmental circumstances that have been found. To put it another way, the idea of legitimacy that remains under the surface is the "social contract" that exists between the community and the organization [12]. Stakeholder theory and legitimacy theory are interconnected. Companies often utilize environmental Performance and disclosure of environmental information to explain or legitimate corporate actions in the eyes of the public because the influence of the larger community may dictate the allocation of financial resources and other economic resources. Legitimacy theory is distinct from stakeholder theory in that it focuses on how businesses engage with society rather than how they behave and report following the desires and authority of various stakeholder groups. There are no sources of institutional authority in a dynamic society, and there is no need for specific services. Therefore, an institution must demonstrate that the community needs the services of certain businesses and organizations that profit from their awards and support the community to satisfy the test of legitimacy and relevance. The firm has several options for the opposition if it thinks its legitimacy is being questioned, including 1) The business could try to notify and educate its stakeholders about improvements. 2) The business may attempt to change stakeholders' perspectives without altering its actions. 3) The business might attempt to influence stakeholders' opinions by diverting their focus from the issue at hand to more intriguing and related problems. 4) The business can try to alter and replace external parties' perceptions of its Performance [13]. According to the legitimacy hypothesis, businesses must consistently show that they have performed in a manner compatible with society's ideals as CSR (Corporate Social Responsibility), which is used as a company strategy. CSR is a firm's commitment to long-term support of a specific social problem or a cleaner environment. The firm will not profit from this effort; instead, a boost to the company's Performance is anticipated. Moreover, CSR promotes the need for businesses to adopt responsible and sustainable methodologies that are beneficial to the economy, society, and environment [12].

According to this theory, the institutional environment creates a set of implicit and explicit rules in domains such as organizational structure and behavior, with conformity to the rules being a requirement for membership within that institutional field [14]. The founding principle of institutional theory is that organizations "tend to become increasingly isomorphic over time as they collectively integrate organizational models from their institutional contexts in quest of legitimacy." According to the theory, three conceptually distinct mechanisms—coercive, mimetic, and normative isomorphism—allow organizations to reflect their institutional environments. The isomorphism is defined as "a constraining process that forces one unit in a population to resemble other units that face the same set of environmental conditions" [15]. To control the organization's strategic decision and require it to agree with an administrative order, "Coercive isomorphism" entails pressures being applied to the organization by entities inside the institutional context. For instance, it is shown in the environmental context by governmental measures such as setting pollution control/prevention objectives for all firms within a certain industry (e.g., mining). "Mimetic isomorphism" includes a company voluntarily imitating the operations of "more legitimate and successful" industry competitors. When an organization is unsure of what is going on around them or what their best course of action should be moving forward, they look at what their more successful competitors are doing and imitate them under the assumption. Organizations often compare several technologies and choose the one their successful peers use when there isn't strong evidence to support one over the other. The institutionalization of an organization within its institutional setting is a component of "normative isomorphism.” Through interactions in groups like industry associations and at the individual level through memberships in professional associations, organizations socialize—they learn to get along with and work with peer organizations [15].

Financial performance is a subjective assessment of how successfully a corporation can utilize assets from its principal operation method and generates revenues, according to Investopedia [16]. This statement compares businesses within the same industry, whole companies, or sectors. For internal users, financial performance was examined to determine the firms' well-being and standing, among other benchmarks. For the external users, the financial Performance is an analyzed tool to dictate potential investment opportunities and to determine whether a firm is worth their while by using an overall indicator of a company's financial Performance during a certain period. There are many different methods to measure financial Performance. However, all measures should be taken in aggregate. At the same time, each of these measures may slightly measure other parts of financial Performance. Vijfvinkel S, et al. [17], emphasize several terms, such as profitability, which analyze return; others, such as sales growth and market share growth, measure the expansion of a business. Others measure stability, while others estimate liquidity (quick ratio, current ratio), Profitability (return on investment, return on equity), and so forth (gearing). Some measurements are indications of commercial success (growth, market share), whereas others are indicators of financial success (Profitability, revenue) (Profitability, income). From this vantage point, it is possible to claim that a single measurement may not adequately represent a satisfactory financial performance.

The following are some international researches that are linked to the present study. The author emphasized to have discovered a relationship between environmental Performance and Financial Performance, as well as corporate social Performance in consideration of the environment. Therefore, they would be used as references in addition to developing a conceptual model and frameworks, contributing to an important discussion of the research's results. Elsayed K, et al. [18] conducted static and dynamic panel data analysis of the impact of environmental Performance on the firm Performance which the weight of the studied evidence is that environmental Performance has very little effect on financial Performance. There is some evidence of a differential impact of environmental Performance across industries for one measure of financial Performance. Particularly, it shows that environmental Performance has a favourable effect on the return on assets for businesses in the chemical and communications sectors and negatively impacts businesses in the textile, garment, metals, and automotive industries. However, there is no evidence of a differential impact across industries for other financial performance measures. This finding is consistent with theoretical work suggesting that firms invest in environmental initiatives until the point where the marginal cost of such investments equals the marginal benefit [18]. Lefebvre E, et al. [3] examine empirical data from 368 environmentally conscious Small and Medium-sized Businesses (SMEs) in four sectors. The findings show that environmental Performance is not just one principle and that the drivers of environmental Performance depend on which dimension is maintained. The effects of a company's environmental Performance on its innovativeness and competitiveness differ depending on the industry. In all four sectors, however, the impact on product and process innovations, as well as management innovations, are favorable and considerable as the result of the study reveals several important implications for the R&D as it plays an important role in improving the product's environmental Performance. Furthermore, environmental challenges in North America will certainly need to be addressed more forcefully. They will change the competitive dynamics of businesses in various sectors, and they will need more attention from executives and regulators. Environmental conservation will become a demand for new business operations on the global market [3]. Vijfvinkel S, et al. [17] studied the relationship between environmental sustainability and the Financial Performance of small and medium enterprises in profit and revenue growth measures. The study depends on a one-of-a-kind dataset of 337 Dutch and Chinese enterprises. The findings point to a strong connection between environmental sustainability and business performance. However, various environmental sustainability indicators have unique relationships with the two performance indicators. For example, when firms have a policy for material reuse, they perform much better in terms of profit growth. When they have a policy for pollution reduction, they do significantly better in revenue growth. We also discovered that companies that communicate their sustainability initiatives to their workers fare better in terms of profit growth. Finally, there is no evidence for a moderating influence of staff communication on the favorable association between sustainability and profit growth [17]. Lai K, et al. [19] determined the green logistics management component and linked it to environmental and operational Performance in developing countries. In addition, the institutional and operational factors that influenced the adoption of GLM by export-oriented manufacturing companies in China were identified. Furthermore, the impact of environmental regulatory pressure on the Performance of green logistics management has been investigated. The findings of this study are based on a survey of Chinese industrial exporters. It was discovered that although economic incentive does not encourage the adoption of the GLM, the GLM has a beneficial impact on environmental and operational Performance, as well as regulatory pressure, which improves the GLM's relationship. Feng T, et al. [20] aimed to use hierarchical regression analysis to investigate how Environmental Management Systems (EMSs) affect financial Performance via customer satisfaction and loyalty, as well as the moderating impacts of the transaction cost. The study's contribution reveals the "black box" via which a company might gain from EMSs. EMSs have a significant and considerable influence on customer satisfaction, commitment, and financial Performance, according to the empirical evidence. Furthermore, switching costs influence the connection between EMSs and customer satisfaction negatively and substantially, but it does not moderate the relationship between EMSs and customer loyalty. The findings also show that, to some extent, customer happiness and loyalty mitigate the association between EMSs and financial success. Our results show that customer happiness, loyalty, and switching costs are all critical factors in a company's ability to benefit from EMSs. Jayeola O [21] studied the relationship between environmental sustainability and the business's financial performance. Sustainability has been a significant problem in recent decades, with the burden falling on companies due to their operations' effect on the environment, society, and people. Firms are increasingly adopting sustainability in response to this demand, but the financial cost seems to exceed the advantages. The main purpose of the research is to look at the link between environmental sustainability practices and SMEs' Financial Performance. The study used a survey approach to look at 98 SMEs in the manufacturing and industry, business services, wholesale and retail sectors in Sussex, UK. Data was collected using a combination of electronic, email, and hand-to-hand paper questionnaires. The major analytical approaches employed were multiple regression, correlation analysis, and descriptive statistics. Profit is the greatest predictor of SMEs' financial assessment, pollution prevention and control are favourably and substantially associated with profit, and recycling is negatively and significantly related to profit, according to the study's findings. The profit level of sustainable SMEs is influenced by their size favourably and substantially. SME profitability is boosted by communication with internal and external stakeholders. Networking, stricter legislation, innovation, TQM, media usage, consistency, and persistence in sustainable practice may all help to provide significant financial returns. To earn more profit, small businesses should concentrate on pollution prevention and control and persuade the government to subsidize recycling, which eats into their profits. Weiss J, et al. [22] used cross-sectional data from a Swedish chemical and pulp and paper firm to get empirical knowledge of the porter hypothesis. A well-designed environmental policy may enhance a company's ability to innovate. At the same time, innovation offsets may be generated, which balance net compliance costs may while also providing a competitive advantage over enterprises that are not impacted by such restrictions. They also investigate the supposed usefulness of regulatory time tactics in boosting regulated enterprises' innovative activities. They discovered evidence for the efficacy of well-designed regulations: announcing rather than enforcing an existing policy stimulates innovation and some innovation offsets. The findings suggest that empirical testing of the Porter hypothesis that ignores its dynamic character and fails to quantify well-designed rules may lead to false conclusions about its accuracy. Saeidi SP, et al. [23] conducted on the relationship between innovation, Environmental Management Accounting (EMA), and the firm's financial Performance. This research examines the connections between product and process invention and Financial Performance. Furthermore, the moderating function of EMA in the relevant correlations is investigated in this research. A questionnaire was used to gather data from senior managers of SMEs in Iran's manufacturing and consumer goods sectors. A hierarchical regression analysis was used to test each hypothesis. The data demonstrated that product and process innovations had favourable financial performance linkages, with the impact being considerable for product innovation but not process innovation. Furthermore, this research discovered that, contrary to predictions, EMA has a negative moderating influence on the connection between process innovation and Financial Performance. However, there was no evidence of EMA's moderating effect on the relationship between product innovation and financial Performance. Soderholm P, et al. [24] reviewed how environmental regulations have influenced the pulp and paper industry. As the regulations have appeared in different forms and designs which address air and water pollution and climate change, the authors have devoted particular attention to various regulations that affect sustainable technological change, including deep emission reduction, without jeopardizing competitiveness and future investments from the industry. The author managed to draw on experience in key pulp and paper regions, including the Nordic countries, to recommend that continuously tightening performance standards have resulted in significant reductions in emissions, such as chlorine compounds and biological oxygen demanding agents, while imposing minimal compliance costs. This result may be largely credited to how the rules were designed—and implemented—in reality, and established effective and legitimate institutions. Long-term emission reduction goals, lengthy compliance periods, and trustful firm-regulator interactions aided radical technical innovation and allowed for dramatic emission reductions without incurring high compliance costs. Such an example is the development of alternative bleaching processes. Carbon pricing systems, such as the EU emissions trading program, have had little influence on carbon dioxide emissions reductions and associated technical development in the pulp and paper business. Self-regulation, certification, and community pressure have had very little effect on the firm's environmental Performance. De Mendonca TR, et al. [25] have recommended firms concentrate on improving environmental Performance. While firms are developing environmental action to push it to top management commitment, there is also a motivation in contributing to the sustainability of the natural environment to gain stakeholder satisfaction. This research analyses the impact of customer satisfaction in driving the influence of firms' environmental Performance on their long-term orientated Profitability using partial least squares structural equation modelling among a sample of big U.S. publicly traded companies. The findings suggest that customer satisfaction has a beneficial impact on a company's long-term Profitability. Customers are typically dissatisfied with businesses' Environmental Performance. In consequence, there is an opportunity for businesses to take new approaches to their environmental Performance that are less concerned with decreasing the use of natural resources. They also serve as a guide for firms' environmental Performance in terms of improving environmental sustainability. Yang Y, et al. [26] found that in China, firms are involved in the paper industry. The environmental policy supported the data as The Measures for the Administration of Permits for the Discharge of Key Water Pollutants in the Huaihe and Taihu River Basins, MAPD, and the firm's performance measure by the cost and innovation. The result of finding from a firm-level dataset from 1998 to 2007 using different-in-different models shows the positive impact on the small-scale enterprise and non-state-owned. Moreover, the MAPD has increased the firm cost and harmed firm Performance, but on the other hand, it promotes firm Performance by improving innovation ability.

Data collection

To meet the objective of the study, data from 419 SMEs firms in Vientiane Capital were collected through the e-questionnaire using a Google form and a self-observation. A questionnaire will obtain a characteristic of the firm, the firm's environmental concern, and the firm's opinion on the environmental crisis. The questionnaires divided into three main parts as follows:

Part 1: Questionnaires on the firm's characteristics which include the gender of the operator, their position in that business, firm age, and firm size, by separating the number of labors, income, and the type of business separate by the sector according to Lao National Chamber of Commerce and Industry (LNCCI).

Part 2: A questionnaire on the firm's environmental regulation will ask about the environmental regulation in the business, including that does the firm have any clean activity or provides any acknowledge about cleaning, saving energy, reuse in the firm, having any waste disposal or provide any green zone or smoking space.

Part 3: Questionnaire on the firm opinion by showing through a five-point scale according to Likert Scale, which includes questions about the firm opinion on eco-friendly or concerned.

Model specification

The study aimed to examine the relationship between environmental performance and profitability by analyzing several variables. The analysis utilized a simple regression model, with the dependent variable being financial performance, specifically profits. The study considered twelve independent variables, namely firm regulation, clean activity, energy saving, reusability, waste disposal, smoking space, recycling, firm age, firm size, gender, education, and type. To explore the relationship, the study employed the following regression equation:

ln Profit = β0 + β1(Firmregi) + β2(Cleanacti) + β3(Energysavingi) + β4(Reusablei) + β5(Wastedisi) + β6(Smokingspacei) + β7(Recyclingi) + β8(Genderi) + β9(Educi) + β10(Yeari) + β11(Labori) + β12(Typei) + εi

The coefficients β1, β2, β3, β4, β5, β6, β7, β8, β9, β10, β11, and β12 represent the impact of each independent variable on the financial performance and β0 is the constant term. The regression model allows for an examination of the relationship between these variables and profitability, providing insights into how each factor contributes to financial outcomes.

Profit is an independent variable, it represents the financial performance of the firms and it is measured in million Lao Kip (LAK).

Firmreg is a dummy variable that takes a value of 1 when a firm has eco-friendly policy and 0 when a firm does not have eco-friendly policy.

Cleanact is a dummy variable that takes a value of 1 when a firm acknowledge the clean activities and 0 when a firm does not acknowledge the clean activities.

Energysaving is a dummy variable that takes a value of 1 when a firm has saving energy policy, and 0 when a firm does not have saving energy policy.

Reusable is a dummy variable that takes a value of 1 when a firm has reusing items policy, and 0 when a firm does not have reusing items policy.

Wastedis is a dummy variable that takes a value of 1 when a firm has free space for waste sorting, and 0 when a firm does not have has free space for waste sorting.

Smokingspace is a dummy variable that takes a value of 1 when a firm has smoking space, and 0 when a firm does not have smoking space.

Recycling is a dummy variable that takes a value of 1 when a firm has considered on the import of recycling, and 0 when a firm not have considered on the import of recycling.

Gender is a dummy variable that takes a value of 1 when a firm’s owner is female and 0 when a firm’s owner is male.

Educ is the number of years of education completed by a firm’s owner.

Year is number of years of a firm’s operation.

Labor is number of labors working in the firm.

Type is a dummy variable that takes a value of 1 when a firm is in service sectors and 0 when a firm is in other sectors.

This section presents the finding of this study based on the statistical analysis and it was outlined as follows: examine the overall environmental performance in Vientiane Capital, Laos PDR, and determine how SMEs are concerned about environmental performance and assess the impact of the firm's environmental contribution on its financial performance.

Overview of the environmental performance in Lao PDR

In general, environmental performance encompasses a firm's capacity to mitigate adverse effects on the environment and proficiently handle its environmental obligations. It includes the initiatives, strategies, and results associated with environmental sustainability, conservation of resources, prevention of pollution, and compliance with environmental regulations and standards. However, the environmental performance in Lao PDR is still in its initial stages of development, and the current status is as follows:

Based on the analysis of the data presented in table 1, it is evident that a significant portion of the surveyed firms in Vientiane Capital, Lao PDR, lack awareness and acknowledgment of clean activities within their businesses, as almost 69 percent of respondents reported not having any such acknowledgment. This indicates a need for increased emphasis on environmental regulations and awareness campaigns to encourage firms to adopt clean practices. Furthermore, approximately 67.78 percent of respondents reported implementing energy-saving measures in their firms, suggesting a positive trend towards resource conservation. However, there is still room for improvement, as around 32 percent of firms have yet to implement energy-saving practices.

In terms of reusable practices, the majority of firms, accounting for almost 65 percent, expressed concern and implementation of reusable initiatives. This is a positive sign for sustainable practices, although the remaining 35 percent of firms should be encouraged to adopt reusable practices as well. Waste disposal, on the other hand, appears to be of interest to a minority of firms, with only 34.13 percent demonstrating an active interest in this area. Efforts should be made to raise awareness about the importance of proper waste disposal and encourage more firms to prioritize it.

Interestingly, a significant proportion of firms surveyed, comprising 280 out of 419 respondents, have provided green zones for their employees to create a refreshing and relaxing environment. This indicates a recognition of the importance of employee well-being and environmental aesthetics. However, 33 percent of firms have yet to establish such green zones, highlighting an opportunity for improvement in promoting a healthy and sustainable work environment.

Lastly, concerning smoking spaces, the majority of firms, accounting for 59 percent, reported providing designated areas for smoking. However, it is noteworthy that 170 out of 419 firms surveyed do not offer such spaces. To promote a healthier workplace and support individuals in their efforts to quit smoking, firms should consider providing designated smoking areas or implementing smoking cessation programs.

In summary, while there are positive signs of environmental performance in some areas, such as energy-saving practices and the provision of green zones, there are still significant gaps in environmental awareness, waste disposal, and smoking spaces within firms in Lao PDR. To improve overall environmental performance, it is recommended that concerted efforts be made to raise awareness about clean activities, promote reusable practices, encourage proper waste disposal, and create healthier work environments, including designated smoking areas and support for smoking cessation. By addressing these areas, firms can contribute to a more sustainable and environmentally responsible business landscape in Vientiane Capital, Lao PDR.

Impact of environmental performance on firm’s financial performance

Descriptive statistics: The data for this analysis was collected through questionnaires distributed to a total of 419 firms. A descriptive statistic of all variables used to examine the influence of environmental performance on a firm's profitability is presented in table 2.

Regression results and discussion: Before estimating the regression results, this study conducted an examination for the presence of multicollinearity issues by assessing the correlation metrics among all variables. The metric shows a high correlation between recycling and reusable variable with a value of 0.973. Therefore, the author drops reusable variables from the analysis.

The estimation outcomes presented in table 3 indicate that the Frimreg variable has a positive and statistically significant impact on profitability at a 5% significance level. This implies that firms with suitable regulations to promote environmentally friendly practices will likely generate 21% more profit than those lacking regulations to promote environmentally friendly practices. By implementing regulations and policies that promote eco-friendly activities, a firm can gain a higher competitive advantage and enhance its business prospects.

The results from the Cleanact variable demonstrate that when a firm acknowledges clean activities, it has a positive and statistically significant effect on profitability at a 1% significance level. This suggests that firms that actively acknowledge clean activities are likely to generate 48% more profit than those that do not. Acknowledging clean activities is considered a sustainable approach, and companies that provide knowledge about environmental performance or engage in clean activities through their employees exhibit valuable skills and behaviors that prioritize eco-friendliness.

The findings from the Wastedis variable indicate that having free space for waste sorting or waste disposal has a positive and statistically significant impact on profitability at a 5% significance level. This implies that firms with waste disposal facilities are likely to generate 26% more profit compared to those without space for waste sorting. During a phone call interview with the firm’s owner, it was mentioned that waste generated from their business, such as shampoo bottles, cups, paper, and others, can be sold. Some firms included the revenue generated from this aspect as part of their income. This is particularly relevant for micro-businesses, where it may be challenging to track their expenses accurately.

The results presented in table 3 for the Smokingspace variable demonstrate that firms with designated smoking areas have a positive and statistically significant effect on profitability at a 1% significance level. This suggests that businesses that provide smoking spaces will likely generate 35% more profit than those without such facilities. In a phone call interview, the owner mentioned that offering a free space for smoking attracts customers who smoke, particularly since most SMEs operate in the service sector.

The findings from the Recycling variable show that firms that consider the import of recycling have a positive and statistically significant impact on profitability at a 5% significance level. This indicates that businesses that consider importing recycling materials will likely generate 26% more profit than those that do not. During a phone call interview, the owner mentioned that reusing paper and other recyclable materials can significantly reduce the operational costs of the firm, directly impacting its profits.

The regression results presented in table 3 reveal that among the environmental performance variables, only one, which is the Energysaving variable, does not have a significant impact on firm profitability. It shows insignificant statistical results. The firm’s owner mentioned during a phone interview that this lack of impact could be attributed to insufficient implementation of the energy-saving (electric) policy. While the firm may have the policy in place, it fails to execute and enforce it across the firm effectively. Consequently, the policy exists on paper but lacks proper implementation, leading to minimal or no discernible effect on the firm's financial performance.

Regarding the control variables representing firm characteristics, the variables such as the Gender of the firm owner, the educational level of the firm owner, the number of workers in the firm, and the type of business all exhibit statistically significant results. However, the variable representing the year of firm establishment shows insignificant statistical results.

Heteroskedasticity occurs when there is variation in the standard deviation of a predicted variable across different values of independent variables or over different time periods. To determine if heteroskedasticity exists, the Breusch-Pagan test was conducted. The results displayed in table 2 indicate that the probability (Prob > Chi2) is 0.4837. This means that the null hypothesis (H_0: Constant Variance) is accepted, indicating the absence of heteroskedasticity. In other words, there was no evidence of a heteroskedasticity problem based on the test results.

In summary, the findings from examining the impact of environmental performance on business profitability, focusing on SMEs in Vientiane Capital, are presented in table 3. Based on a study conducted on 419 businesses in Vientiane Capital, the independent factors were able to explain the dependent variables in 47% of the cases, with a statistically significant F-statistic at the 1% level of significance.

This study aimed to investigate the impact of environmental performance on firm profitability. The research employed descriptive and quantitative analysis, utilizing an e-questionnaire distributed through a Google form to collect data from 419 firms in Vientiane Capital, Lao PDR. The results obtained from the descriptive statistics and regression analysis allow the following conclusions to be drawn:

Regarding the overview of environmental performance, there is a pressing need to increase awareness and acknowledgment of clean activities among firms in Vientiane Capital. The majority of surveyed firms lack such acknowledgment, indicating a gap in environmental regulations and awareness campaigns. However, there is a positive trend towards energy-saving practices, with many firms implementing measures to conserve resources. While reusable practices show promise, more efforts are required to encourage wider adoption. Proper waste management also requires greater attention and prioritization. The presence of green zones in firms suggests an understanding of the importance of employee well-being and environmental aesthetics, although further improvements are needed. Additionally, providing designated smoking areas is common, but there is an opportunity to promote healthier workplaces and support smoking cessation efforts by ensuring all firms provide such spaces.

The regression results demonstrate the impact of various environmental performance variables on firm profitability. Firms with suitable regulations to promote environmentally friendly practices (Frimreg) are found to generate 21% more profit compared to those without such regulations. Acknowledging clean activities (Cleanact) leads to a significant 48% increase in profit while having free space for waste sorting or disposal (Wastedis) results in a 26% profit boost. Businesses with designated smoking areas (Smokingspace) experience a notable 35% increase in profitability and considering the import of recycling (Recycling) contributes to a 26% profit increase.

However, the variable related to energy-saving policies (Energysaving) does not exhibit a significant impact on firm profitability, potentially due to insufficient implementation. The control variables, including the gender of the firm owner, education level, number of workers, and type of business, exhibit statistically significant results, while the year of firm establishment does not show a significant effect.

Based on these findings, several suggestions can be made to enhance firm financial performance:

• Implement and enforce effective energy-saving policies: Firms should focus on consistent implementation of energy-saving measures throughout the organization. Providing training, setting clear guidelines, and monitoring compliance can maximize the potential financial benefits.

• Strengthen and expand eco-friendly regulations: Firms should strive to develop and enforce regulations that promote environmentally friendly practices. Incentivizing sustainable actions and providing support and guidance to businesses in adopting and implementing eco-friendly initiatives can drive positive financial outcomes.

• Encourage waste management and recycling practices: Creating free spaces for waste sorting and disposal can lead to cost savings and revenue generation. Firms can explore partnerships with recycling facilities and educate employees on the benefits of waste reduction and recycling.

• Cater to customer preferences: Businesses operating in the service sector, such as those providing designated smoking areas, should continue to meet customer preferences and needs. Understanding and accommodating customer demands can result in increased patronage and profitability.

By implementing these suggestions, firms can enhance their financial performance while contributing to a more sustainable and environmentally responsible business landscape in Vientiane Capital, Lao PDR

1. Porter ME. Towards a dynamic theory of strategy. Strategic Management. 1991;12(S2):95-117. doi: 10.1002/smj.4250121008.
2. Porter ME, van der Linde C. Towards a new conception of the environment-competitiveness relationship. The Journal of Economics Perspectives. 1995;9(4):97-118. doi: 10.1257/jep.9.4.97.
3. Lefebvre E, Lefebvre AL, Talbot S. Determinants and impact of environmental performance in SMEs. R& D Management. 2003;33(3):263-283. doi: 10.1111/1467-9310.00297.
4. Eccles RG, Ioannou I, Serafeim G. The Impact of corporate sustainability on organizational processes and performance. Management Science. 2014;60(11):2835-2857. doi: 10.1287/mnsc.2014.1984.
5. Hadi N. Corporate social responsibility/Nor Hadi. Yogyakarta: Graha Ilmu. 2011.
6. Bos-Brouwers HEJ. Corporate sustainability and innovation in SMEs: Evidence of themes and activities in practice. Business Strategy and the Environment. 2009;417-435. doi: 10.1002/bse.652.
7. Cordano M, Marshall RS, Silverman M. How do small and medium enterprises go "Green"? A study of environmental management programs in the US. Wine industry. Journal of Business Ethics. 2010;92:463-478. doi: 10.1007/s10551-009-0168-z.
8. LNCCI. SMEs in Laos. Retrieved from Lao National Chamber of Commerce and Industry. 2020.
9. Barbera AJ, McConnell D. The impact of environmental regulations on industry productivity: Direct and indirect effects. Journal of Environmental Economics and Management. 1990;18(1):50-65. doi: 10.1016/0095-0696(90)90051-Y.
10. Jaffe BA, Peterson RS, Portney RP, Stavins NR. Environmental regulation and competitiveness of US. Manufacturing: What does the evidence tell us? Journal of Economics Literature. 1995;33(1):132-163.
11. Carrillo-Higueras F, Prajogo D, Smith L. Environmental commitment and its drivers in the Australian wine industry: A behavioural approach. Australasian Journal of Environmental Management. 2018;439-458. doi: 10.1080/14486563.2018.1460630.
12. Dewiyanti S. Legitimacy theory and its relationship to CSR. 2021.
13. Dowling J, Pfeffer J. Organizational legitimacy: Social values and organizational behavior. The Pacific Sociological Review. 1975;11(1):122-136. doi: 10.2307/1388226.
14. Meyer JW, Rowan B. Institutionalized organizations: Formal structure as myth and ceremony. American Journal of Sociology. 1977;83(2):340-363.
15. DiMaggio PJ, Powell WW. The iron cage revisited: Institutional isomorphism and collective rationality in organizational fields. American Sociological Review. 1983;48(2):147-160. doi: 10.2307/2095101.
16. Kenton W. Financial performance. 2022.
17. Vijfvinkel S, Bouman N, Hessels J. Environmental sustainability and financial performance of SMEs. Zoetermeer: Scientific Analysis of Entrepreneurship and SMEs. 2011;47.
18. Elsayed K, Paton D. The impact of environmental performance on firm. Structural Change and Economic Dynamics. 2004;16(3):395-412. doi: 10.1016/j.strueco.2004.04.004.
19. Lai K, Wong CWY. Green logistics management and performance: Some empirical evidence from Chinese manufacturing exporters. Omgea. 2012;40(3):267-282. doi: 10.1016/j.omega.2011.07.002.
20. Feng T, Wang D. The influence of environmental managemnet systems on financial performance: A moderated-mediation analysis. Business Ethics. 2014;135:265-278. doi: 10.1007/s10551-014-2486-z.
21. Jayeola O. The impact of environmental sustainability practice on the financial performance of SMEs: A study of some selected SMEs in sussex. International Journal of Business Management and Economic Research. 2015;6(4):214-230.
22. Weiss J, Stephan A, Anisimova T. Well-designed environmental regulation and firm performance: Swedish evidence on the Porter hypothesis and the effect of regulatory time strategies. Journal of Environmental Planning and Management. 2018;1-23. doi: 10.1080/09640568.2017.1419940.
23. Saeidi SP, Othman MSH. The moderating role of environmental management accounting between environmental innovation and firm financial performance. Business Performance Management. 2018;19(3):326-347. doi: 10.1504/IJBPM.2018.092759.
24. Soderholm P, Bergquist AK, Soderholm K. Environmental regulation in the pulp and paper industry: Imapcts and challenges. Forest Policy, Economics and Social Research. 2019;5:185-198. doi: 10.1007/s40725-019-00097-0.
25. Renatta De Mendonca T, Zhou Y. Environmental performance, customer satisfaction and profitability: A study among large US. Companies. Sustainability. 2019;11(19):5418. doi: 10.3390/su11195418.
26. Yang Y, Ding L, Li Y. Environmental regulation improves the firm performance in the paper industry in China. The Singapore Economic Review. 2021. doi: 10.1142/S0217590821500788.