Knowledge Management Research & Practice (2016) 111
2016 Operational Research Society Ltd. All rights reserved 1477-8238/16
Knowledge management view of
environmental sustainability in manufacturing
SMEs in the Philippines
Banjo Roxas1 and
Doren Chadee1
1
Department of Management, Deakin Business
School, Deakin University, Melbourne, Australia
Correspondence: Banjo Roxas,
Department of Management, Deakin
Business School, Deakin University,
221 Burwood Highway, Burwood VIC,
Melbourne, Victoria 3125, Australia.
Tel.: +61 03 9244 6926
Received: 16 April 2015
Revised: 7 October 2015
Accepted: 23 December 2015
www.palgrave-journals.com/kmrp/
Abstract
This study highlights the role of knowledge management (KM) in enabling small
and medium enterprises (SMEs) in a manufacturing industry in a developing
country to engage in environmentally sustainable business. Drawing on the
knowledge-based view of the firm, it argues that resource-constrained SMEs rely
on their relational capital to augment their capability to innovate in order to find
better and environmentally sound ways of doing business. However, SMEs need
to harness their KM orientation in order to leverage the knowledge-based
resources emanating from their relational capital towards building their innova-
tion capability. This capability is essential in integrating effective environmental
management practices in business. The findings from our analysis of data from a
survey of 241 manufacturing SMEs in the Philippines support these hypotheses
and underscore the importance of developing an organisational capability to
engage in KM in order to adopt sustainable business practices. The implications
of the findings are also discussed.
Knowledge Management Research & Practice advance online publication, 25 January
2016; doi:10.1057/kmrp.2015.30
Keywords: knowledge management orientation; sustainable business; social capital;
innovation; environmental practices; developing country
Introduction
Although there is already a plethora of studies that examined the drivers,
barriers, and effects of adoption of environmental management system
and practices especially among large multinational companies in developed
countries, there is a dearth of research that examines the key role of
knowledge management (KM) in enabling small and medium enterprises
(SMEs) in developing countries to integrate environmental sustainability in
business. This is so despite the critical role of knowledge as a potent source of
sustainable competitive advantage (Nonaka & Takeuchi, 1995; Grant, 1996;
Kianto et al, 2013). Given the increasing importance of environmental
sustainability in doing business in the twenty-rst century amid issues
surrounding climate change, there is paucity of research in the KM literature
that examines how SMEs (i.e., rms with less than 200 employees) (DTI,
2015) strategically manage their knowledge-based resources in order to
adopt environmental management practices. A few studies (e.g., Pillania,
2008; Mitchell et al, 2011; Spence et al, 2012) have shown that SMEs have
limited resources needed to adopt environmental management systems but
they tend to overcome these resource constraints by harnessing their
relational capital emanating from external networks and managerial ties as
2 KM view of environmental sustainability
they seek for alternative physical and knowledge-based
resources that are essential in building their organisational
capability to innovate in a sustainable manner (Hamann
et al, 2015; Jamali et al, 2015). This capability to innovate is
essential to nd novel, cost effective and productive ways
to support a rms sustainable performance.
However, the mechanisms through which relational
capital leads to the development of innovative capability
that translates to environmental sustainability are less
understood in the literature. In a knowledge-based econ-
omy, a rms knowledge management orientation (KMO)
or the organisational proclivity to engage in astute explo-
ration, identication, reconguration, and exploitation of
knowledge-based resources, is a bedrock of sustainable
competitive advantage (Nonaka & Takeuchi, 1995; Grant,
1996; Salvador & Florin 2013). An important question
arises on whether SMEs with strong KMO are more likely
to benet from their relational capital in order to boost
their capability to innovate and consequently to integrate
sound environmental management practices or those
business practices that are less harmful to the natural
environment (Sindakis et al, 2015).
The current study addresses this research gap by
investigating how SMEs in the manufacturing sector
in a developing country such as the Philippines deploy
their relational capital along with their KMO to augment
their innovative capability towards the adoption of sound
environmental management practices. Drawing on the
knowledge-based view (KBV) of the rm (Nonaka &
Takeuchi, 1995; Grant, 1996), this study posits that
although the relational capital accumulated by a rm over
time is a critical resource-base that supports the innovative
capability of SMEs, it is the KMO of rms that leverages
relational capital towards the development of the rms
innovative capability which is essential to integrate sound
environmental management practices in their business
operation.
This study contributes to the knowledge management
(KM) and sustainability in SME literature in three ways.
Firstly, given the limited literature on the practical
benets of KM to SMEs (Wong & Aspinwall, 2004; Smith
et al, 2010; Durst & Edvardsson, 2012; Siltaoja, 2014), this
study lls the research gap on how KM in general and
KMO in particular enables resource-constrained rms to
engage in sustainable business practices (Massingham &
Massingham, 2014; Sinkadis et al, 2015). Secondly, this
study underscores the importance of relational capital as a
source of knowledge-based resources that can potentially
endow a rm with competitive advantage through inno-
vation. If a rms relational capital forms an integral part
of its intellectual capital (Kianto et al, 2013), then this
study offers a more nuanced explanation on how this
rich intangible resource can be leveraged through KMO
towards innovation-capability development in an SME
context (De Marchi & Grandinetti, 2013; Hamann et al,
2015; Jamali et al, 2015). Thirdly, the study focuses on
environmental management practices of SMEs in a devel-
oping country context which has received less attention in
Knowledge Management Research & Practice
Banjo Roxas and Doren Chadee
the literature (Agan et al, 2013; Hamann et al, 2015; Jamali
et al, 2015). Given the low uptake of environmental
management systems and practices among SMEs that are
considered the backbone of economies of developing
countries (Spence et al, 2012; Jamali et al, 2015), a critical
question arises on whether KMO has a role to play in
explaining how SMEs respond to the challenges associated
with climate change and sustainable development.
The rest of the paper is organised as follows. The next
section presents a discussion of the theoretical base and
hypotheses of this study. This is followed by the section on
empirical study and its results. The last part presents the
discussion of ndings, implications, and limitations of the
study.
Theoretical foundations and hypothesis
development
In a knowledge economy, the sustainable competitive
advantage of rms rests on how well they acquire, recon-
gure, transform and exploit both internal, and external
knowledge-based assets. The KBV of the rm (Nonaka &
Takeuchi, 1995; Grant, 1996) builds on this argument and
posits that rms that have the capacity to search for,
acquire and leverage knowledge-based resources in devel-
oping organisational capabilities critical to the rms
value-creating processes are more likely to demonstrate
sustainable competitive advantage. Knowledge-based
assets especially those that are tacit in nature can be
malleably transformed into intangible strategic assets
that are valuable, rare, inimitable, and non-substitutable.
Strategic assets with these features endow a rm with
long-term competitive advantage over its rivals with infer-
ior resources (Pillania, 2008; Kianto et al, 2013). These
strategic assets can be systematically leveraged by the rm
to pursue strategies, adopt value creating practices, and
develop innovative products or services that enhance the
rms performance outcomes (Moustaghr, 2009).
Relational capital is potentially rich with knowledge-
based resources that are valuable to SMEs in a developing
country context. The extent and nature of organisational
and managerial ties, social networks and linkages that a
rm has built over time form part of the rms sources of
knowledge, which may prove useful to a rms value-
creating activities. Tacit knowledge emanating from rela-
tional capital can be valuable and rare especially when
information exchange is exclusive between the rm and
its external networks and linkages. This type of knowledge
is also inimitable or may take longer to replicate given the
socially causal complex nature of this resource, as well as
the path-dependent nature of the source of knowledge,
which is embedded in external social relationships that are
built over a long period of time. Firms that have developed
the capacity to recongure and harness knowledge assets
from their relational capital can leverage these resources to
creatively respond to the changing needs and pressures of
the rms business environment. One of these strategic
responses is to develop the capability of the rm to
 KM view of environmental sustainability
H4
H1
+
H3
Relational
+ + Environmental
Innovation
Management
Capital Capability
Practices
H2
+
Knowledge Management
Orientation
Figure 1 The conceptual model.
innovate in order to address the pressure on businesses
to become environmentally sustainable (Hamann et al,
2015).
However, leveraging these knowledge-based resources
to augment the innovative capability of SMEs to adopt
environmental sustainability requires a proactive organisa-
tional stance in order to systematically exploit these types
of assets. In this study, a rms KMO or its proactive
and strategic proclivity to engage in KM by engaging in
the systematic process of absorbing, transforming, and
exploiting knowledge emanating from the rms relational
capital will inuence how well rms extract economic
rents from external ties and networks. In other words,
while relational capital has some benets that accrue to
the innovation capability of a rm, a strong KMO is
necessary to augment the process of leveraging a rms
relational capital in order for rms to become more
innovative and in a better position to adopt and pursue
those practices that are aligned with environmentally
sustainable business.
The conceptual model in Figure 1 suggests that rela-
tional capital has positive effects on the development of
innovation capability of SMEs (H1), which in turn has
positive inuence on the adoption of environmental
management practices (H3). However, SMEs need to
harness their KMO in order to leverage their relational
capital in order to further strengthen their innovation
capability (H2). Also shown in the model is the mediating
role of innovation capacity that enables rms to transform
and leverage KMO-enhanced relational capital towards the
adoption of environmentally sound business practices
(H4).
Relational capital and innovation capacity
Relational capital is a key component of the rms intellec-
tual assets and acknowledges the value of the external
relationships, managerial ties, and networks that a rm or
its managers have built over time (Martin-de Castro et al,
2013). Relational capital is readily considered as a sum of
the intangible assets mainly in the form of stocks of
knowledge that are accumulated and accessible to a rm
through a complex network of social relationships (see
Tsai, 2005). Given that rms are embedded in a social
context, relational capital when effectively harnessed can
assist rms in identifying new business opportunities,
nding solutions to business problems, obtain resources
Banjo Roxas and Doren Chadee 3
below market price, secure legitimacy from various stake-
holders, and gain privileged access to some forms of
intellectual, nancial, and cultural resources (Tsai, 2005;
Amar & Juneje, 2008; Stam et al, 2014). Sechi et al (2011)
explain that social capital enable rms to have access to
and leverage three types of knowledge, namely: declarative
knowledge (i.e., the know what) including knowledge
of facts and about sources of information; procedural
knowledge (i.e., the know-how) such as procedures and
practical skills which are causally ambiguous; and concep-
tual knowledge (i.e., know why) including those causally
ambiguous and tacit knowledge about laws and principles
underpinning a phenomenon, situation, or action.
These forms of knowledge emanating from a rms
relational capital are critical to the development of a rms
capability to innovate and to nd better ways of doing
business and developing products and services that are
attuned to the demands of the external business environ-
ment. Given the limited nancial and technological
resources, as well as managerial know-how residing in
SMEs, relational capital becomes an effective alternative
source of resources to support its innovative activities. The
capability of SMEs to engage in and manage the complex
process of innovation in order to improve or modify
current or develop new products, services, and business
processes rests on the quality of tacit knowledge that are at
their disposal. Moreover, SMEs that are successful in their
innovation activities tend to build on tacit knowledge
emanating from their external networks (Hamann et al,
2015; Jamali et al, 2015). Kwon & Arenius (2010) suggest
that innovative and entrepreneurial rms value their rela-
tional capital because it is an effective mechanism to
reduce transaction costs associated with searching for
information and monitoring possible malfeasance in busi-
ness transactions. It also facilitates free ow of informa-
tion, which opens up entrepreneurial opportunities, and
allows for social interaction outside ones business circle
and exposes the rms managers to diverse perspectives
and non-redundant information that are critical to inno-
vation (Kwon & Arenius, 2010). Studies have shown that
SMEs are more likely to draw on their relational capital in
order to fuel their capability to engage in both incremental
and radical innovation (Amar & Juneje, 2008; De Marchi &
Grandinetti, 2013; Hamann et al, 2015). Hence we posit in
this study that:
H1: Relational capital is positively and signicantly associated
with higher levels of innovation capability of manufactur-
ing SMEs in a developing country context.
The moderating role of KMO
A major focus of this study is to underscore the positive
moderating effects of KMO between relational capital and
innovation capability of SMEs in a developing country
context. KMO is an organisational-level construct akin to a
strategic KM mindset (Smith et al, 2010; Kianto et al, 2013)
which endows the rm with a distinct viewpoint that
Knowledge Management Research & Practice
4 KM view of environmental sustainability
determines how an organisation engages with knowledge
in order to inuence organisational decisions and actions.
Relational capital in itself will have positive yet limited
effects on innovation capability if SMEs do not possess a
strong KMO that equips them with the capacity to make
sense of and exploit the knowledge-based resources ema-
nating from their relational capital. Knowledge-based
assets from relational capital may have short-term effects
on the competitive advantage of rms especially when
these are publicly available and, therefore, homogeneous
across rms. KMO is the critical capability of the rm that
transforms these knowledge-based resources into sound
bases of long term and sustainable competitive advantage,
particularly, when these enhance the innovation capabil-
ity of the rm. KMO enables SMEs to leverage effectively
the knowledge-based resources emanating from relational
capital in order to strengthen their capability to innovate
in a number of ways. It allows rms to adopt or develop
procedures and techniques that are helpful to get the most
from a rms knowledge assets, thereby maximising their
value to the rm (Teece, 2000). KMO can be considered a
dynamic capability (Alegre et al, 2011) that accelerates the
development of other organisational capabilities, enables
adoption of best practice models, and allows for knowl-
edge sharing that further strengthens the capability of
the rm to engage more on KM (Kianto et al, 2013). In
other words, KMO serves as an organisational capability-
enabling platform that sets the conditions for the rm to
leverage its relational capital to augment its innovative
capability. This is of particular signicance to socially
embedded SMEs in a developing country where relational
capital is one of the key resources that may substitute for
more conventional yet scarce resources such as nance
and technology (Wong and Aspinwall, 2004; Jamali et al,
2015). Inter-rm differences in leveraging this capital rest
on how well SMEs develop and exercise their KMO in order
to assimilate and exploit knowledge-based resources
towards growing and improving its internal capabilities
for value creation amidst scarcity of nancial and techno-
logical resources. Hence, it is argued in this study that:
H2: Knowledge management orientation signicantly enhances
the positive effects of relational capital on the innovation
capability of manufacturing SMEs in a developing country
context.
Innovation capability and environmental management
practices
The uptake of environmental management practices or
those activities in the rm that are designed to reduce the
negative impacts of business operation on the natural
environment has been traditionally low in the SME espe-
cially in developing countries (Spence et al, 2012; Jamali
et al, 2015). Limited access to technology, lack of R&D,
lack of knowledge about the impact of business on the
environment, limited knowledge about the strategic, long-
term benets of environmental management and limited
Knowledge Management Research & Practice
Banjo Roxas and Doren Chadee
knowledge of the different options on how to integrate
environmental sustainability at the shop oor and strate-
gic levels of business are some of the reasons that SMEs
tend to adopt a more compliance-driven approach to
environmental management if at all (Smith et al, 2010;
Mitchell et al, 2011; Spence et al, 2012; Hamann et al,
2015; Jamali et al, 2015). SMEs that engage in environ-
mental management tend to focus on ad hoc, informal,
and unstructured end-of-pipe solutions in order to reduce
waste, pollution, and gas emissions mainly to comply with
relevant government regulatory pressures (Spence et al,
2012; Jamali et al, 2015). Against this background,
Schaltegger & Wagner (2011) suggest that the capability
of SMEs to make incremental modications and improve-
ments it is current product offerings, as well as business
processes is key to adoption and implementation of envir-
onmental management practices. SMEs need to develop
their capability to rethink and evaluate what they do and
how they are doing it in order to integrate sustainability as
part of their everyday business (Hamann et al, 2015). SMEs
need to integrate to their core business some novel solu-
tions to operational problems that have negative impact
on the natural environment and at the same time enhance
the overall performance of the rm. Hall & Wagner (2012)
further suggest that the capability to innovate either
incrementally or radically is essential in order to sustain
even the simple steps undertaken by a rm to demonstrate
its long-term commitment to environmental management
without necessarily eroding a rms nancial motives.
The business as usual mentality has lost its utilitarian
value even in the SME sector and being able to engage in
innovation even in its simple forms is key to the competi-
tiveness of SMEs that are embedded in dramatically chan-
ging business environments in developing countries.
Hence, we posit in this study that:
H3: Innovation capability is positively associated with adop-
tion of environmental management practices of manufac-
turing SMEs in a developing country context.
The mediating role of innovation capability
The conceptual model presented early in this paper
suggests that the organisational capability to innovate
is a mediating variable that links relational capital to the
adoption of environmental management practices among
SMEs. Innovation capability demonstrates one of the
important capabilities of a rm to transform, recongure,
and exploit the knowledge-based resources emanating
from its relational capital. This process is systematically
facilitated by a strategic proclivity to engage in KM.
Innovation capability is central to understanding the KBV
of the rm because it serves as an intermediate dynamic
capability that explains how relational capital matters to a
rm in adopting environmental management practices
(Amar & Juneje, 2008). This innovation capability repre-
sents the capacity of rms to utilise and transform assets
from their relational capital in order to achieve the
 KM view of environmental sustainability
strategic objective of integrating environmental sustain-
ability in business. Hence, we argue in this study that:
H4: Innovation capability fully mediates the positive effects of
relational capital on adoption of environmental manage-
ment practices of manufacturing SMEs in a developing
country context.
Data and methods
The four hypotheses in this study were tested by drawing a
subset of data from a survey of 516 SMEs engaged in
manufacturing in three major cities in the Philippines in
2012. SMEs are considered the engine of economic growth
and development of developing countries all over the
world. They comprise more than 99% of rms in a devel-
oping country such as the Philippines and contribute a
third of the countrys GDP and more than 60% of the
countrys employment (DTI, 2015). In Europe, SMEs oper-
ate more than 23 million businesses, generate more than
250 million jobs and contribute up to 95% of the regions
GDP (Mitchell et al, 2011). More recent estimates show
that SMEs account for approximately 90% of businesses
globally and generate more than 60% of the worlds total
employment (Jamali et al, 2015).
However, SMEs are also responsible for signicant
volumes of pollution all over the world (Agan et al, 2013).
They contribute more than 64% of EUs total industrial
pollution and contribute two-third of the regions total
industrial waste (Mitchel et al, 2011). It is, therefore,
alarming to note that despite the signicant economic
and environmental impacts of SMEs, the uptake of formal
and systemic environmental management remains low in
the SME sector largely because of the limited nancial
resources and lack of knowledge about how environmen-
tal sustainability enhances value creation within the rm
(Spence et al, 2012; Jamali et al, 2015). It is critical, there-
fore, to nd out whether KMO makes a difference in
terms of resource generation towards the development
of innovative capability to implement sound environ-
mental management practices in businesses in developing
country SMEs (Pillania, 2008; Smith et al, 2010; Durst &
Edvardsson, 2012; Kianto et al, 2013; Siltaoja, 2014; Jamali
et al, 2015).
Participants to the paper-based survey in this study
are owners or managers of business enterprises that are
currently registered in the business bureaus of the citys
local government unit. SMEs refer to rms with less than
200 employees (DTI, 2015). For purposes of this study, we
identied 241 manufacturing SMEs rms that provided
useful and complete responses to specic sections of the
survey questionnaire that are relevant to the purposes of
this study.
Approximately 85% of the rms in the sample are small
rms (i.e., <100 employees) and the rest (35 rms) are
medium enterprises (i.e., 100199 employees) based on
the Philippine classication of businesses (DTI, 2015). The
average rm size (i.e., number of employees) is 47 and the
Banjo Roxas and Doren Chadee 5
smallest and largest rms in the sample have 10 and
193 employees, respectively. In terms of business experi-
ence, the rms in the sample have an average age of
23.6 years in business operation. The youngest and most
experienced rms reported a year and 63 years of business
operation, respectively. More than half (57%) of rms in
the sample have been in operation for as long as 1030
years while around 8 rms reported that they have been in
business for over 50 years. Majority of the rms (59%) are
engaged in food manufacturing followed by wood proces-
sing (16%), machinery and equipment making (14%), and
metal fabrication, plastics and rubber processing, as well as
garments production (11%). The rms in the sample can
be characterised generally as small and medium sized rms
with substantive business experience that provide a rich
context to investigate the relationships of the focal con-
structs of this study.
Measurement
The development of the measures that were used in this
study followed the guidelines recommended by DeVellis
(2012) and Bagozzi et al (1991). The guidelines include a
systematic review of the literature, academic and industry
expert review, and pilot testing to a small set (n = 10) of
sample rms in order to establish the face, content and
construct validity of the relevant items that form part of
the survey questionnaire.
Relational capital (RC)
Drawing from previous studies (e.g., Tsai, 2005; Kwon &
Arenius, 2010; Sechi et al, 2011), we developed seven items
to describe in a scale of 1 (i.e., not active/involved at all) to
7 (i.e., extensively involved) the extent of involvement of
each rm with other organisations or businesses in their
local communities such as business and trade associations,
voluntary or community organisations, and educational
institutions.
Innovation capability (IC)
We used a 7-point Likert scale (1 = much worse than
competitors 7 = much better than competitors) and four
items to describe the extent of innovation capability
of each rm in terms of the introduction or adoption of
new products, technology, ideas concerning work, process
and method, and marketing strategies. The development
of these items are informed by previous studies (e.g.,
Snowden, 2003; Alegre et al, 2011; Schaltegger & Wagner,
2011) and consistent with the denition of innovation
capability under the Oslo Manual (OECD, 2005).
Knowledge management orientation (KMO)
We described the extent to which rms in the sample
demonstrate a proactive and strategic approach to the
search, acquisition, assimilation, integration, and exploi-
tation of externally available knowledge as part of the
rms core business. The development of eight items to
measure KMO was based on ndings from previous studies
Knowledge Management Research & Practice
6 KM view of environmental sustainability
(e.g., Covin & Slevin, 1989; Teece, 2000; Pillania, 2008;
Smith et al, 2010; Hall & Wagner, 2012). Each item uses
a 7-point Likert scale where 1 = strongly disagree and
7 = strongly agree.
Environmental management practices (EMP)
We draw on previous studies (e.g., Covin & Slevin, 1989;
Pillania, 2008; Alegre et al, 2011; Hall & Wagner, 2012) in
developing and pilot testing a list of nine items to capture
the different business practices as part of the environmen-
tal management system in the context of SMEs in a
developing country context. The respondents were asked
to indicate in a scale of 1 = none at all to 7 = all the time,
the extent of implementation of the relevant environ-
mental management practices
Control variables
The study accounted for the size (i.e., number of employ-
ees) and business experience (i.e., number of years of
doing business) of rms in the sample. Previous studies
(e.g., Agan et al, 2013; Jamali et al, 2015) have noted the
potential variations in the nature and extent of adoption
of environmental management systems because of these
rm-specic characteristics.
Common method variance analysis
We conducted a common factor analysis as recom-
mended by Harman (1976) as a post-hoc test for mono-
methodological bias. As expected, no single factor
accounted for more than 50% of the variance among the
relevant items that were used in this study. This result
suggests that common-method bias is not a signicant
issue for purposes of data analysis.
Model estimation and results
We follow a two-step approach to data analysis in order to
test the validity of the measures used in this study, as well
as the structural model that shows the nature and extent of
the relationships of the variables as posited in the four
hypotheses discussed above. We use the partial least
squares (PLS) based-structural equation modelling (SEM)
aided by WarPLS v.5 (Kock, 2014), which is an efcient and
robust data analytic approach for model estimation when
the sample is not large enough for a covariance-based SEM
(Marcoulides & Saunders, 2006; Hair et al, 2014).
The rst step that involves conrmatory factor analysis
shows that the items loaded highly and signicantly
(P<0.05) to their pre-determined constructs as shown in
Table 1. The values of the average variance extracted for all
constructs are above the acceptable minimum value of
0.50, which suggest that more than 50% of the variance is
accounted for by the relevant constructs rather than by
measurement error. The full-collinearity variance ination
factors (FC-VIF) are below the maximum acceptable value
of 5, which suggest that the predictive quality of the
measurement model is not weakened by multicollinearity.
The constructs also have acceptable levels of item
Knowledge Management Research & Practice
Banjo Roxas and Doren Chadee
homogeneity and consistency, scale reliability, and con-
struct validity as suggested by the acceptable values of
Cronbachs , composite reliability coefcient and Coef-
cient H (Fornell & Larcker, 1981; Hancock & Mueller,
2006; Hair et al, 2014).
The descriptive statistics and bivariate correlations of the
four constructs and two variables that are used in the
succeeding stages of data analysis are shown in Table 2.
The square root values of the AVEs of the constructs that
are shown in diagonal pattern are much larger than the
correlation coefcients which further suggest that the
constructs have discriminant validity (Hair et al, 2014).
The results of the rst stage of PLS-SEM demonstrate
that the measurement model is robust and that the
constructs are valid enough to proceed to hypothesis
testing via SEM.
In order to test H1 to H4, we developed three structural
models, a non-mediated and non-moderated model
(Model A), a full mediated and moderated model (Model B),
and a partial mediated and moderated model (Model C) to
determine the model with the best predictive quality as
shown in Figure 2. Model A shows only the direct effects of
both RC and IC on EMP along with the control variables.
Model B shows the direct effects of RC on IC which is
moderated by KMO and the direct effects of IC on EMP.
This model suggests that the effects of RC on EMP are
through the full mediating role of IC. Model C is similar to
Model B with the addition of direct effects of RC on EMP,
which suggests that IC is a partial mediator only and that
there are other confounding factors unaccounted for by
the model that explains the direct effects of RC on EMP.
We compared the predictive quality of these models in
order to determine which model explains the data well,
consistent with the four hypotheses. On the basis of the
indicators of predictive quality at the bottom of Figure 2,
Model C has the highest ARS value (0.445) and TGOF
(0.67) which suggest that this model has the greatest
explanatory power relative to others (Tenenhaus et al,
2005; Kock, 2014), even though it has lower APC com-
pared with Model B. APC tends to decrease in value with
the addition of predictors to the endogenous variables as
in the case of EMP. Model Cs AVIF is also lower than
the maximum acceptable value of 5 which eliminates
multicollinearity as a potential issue in the model.
Its r2 contribution ratio, statistical suppression ratio and
nonlinear bivariate causality ratio are all equal to 1.00
(i.e., above the minimum acceptable thresholds) which
suggest that the model is free from negative r-squared
contribution, statistical suppression instances, and a weak-
ness associated with reversed causality (of the hypothe-
sised relationships), accordingly (Kock, 2014).
The results shown in Model C highlight the signicant
and positive explanatory power of RC on IC that supports
H1. KMO signicantly and positively moderates this link
by enhancing the effects of RC on IC which lends support
to H2. RC and its interaction with KMO explain approxi-
mately 53% of the variations in the level of IC of the rms
in the sample. RC accounts for 75% of the variations of IC
 KM view of environmental sustainability Banjo Roxas and Doren Chadee 7

Table 1 Reliability and Validity of the Constructs

Constructs Factor loadings

Relational Capital (RC) (AVE = 0.70, FC-VIF = 2.75) = 0.87 CRC = 0.90 Coefficient H = 0.92
Local business, trade or trade association 0.70
Voluntary civic or community associations 0.81
Customers or end-users of our products 0.77
Suppliers and/or distributors 0.85
Local community where you do business 0.78
Financial institutions such as banks 0.80
Educational institutions 0.81
Innovation Capability (IC) (AVE = 0.81, FC-VIF = 1.387 ) = 0.92 CRC = 0.94 Coefficient H = 0.94
Introduction of new products or services 0.89
Adoption of new technology or new ways of doing things 0.91
Adoption of innovative ideas concerning work, process and method 0.92
Adoption of innovative marketing strategies 0.82
Environmental Management Performance (EMP) (AVE = 0.61, FC-VIF = 2.175) = 0.80 CRC = 0.86 Coefficient H = 0.94
Waste management and pollution control 0.75
Water and electricity conservation 0.77
Training on environmental awareness 0.72
Participation in environmental programs 0.70
Low impact manufacturing technology 0.86
Communicate with customers/buyers 0.78
Sustainability is an integral part of our business plans and operations 0.76
Environmental protection is part of business 0.81
Practices are good for my business 0.79
Knowledge Management Orientation (KMO) (AVE = 0.86, FC-VIF = 1.687) = 0.92 CRC = 0.95 Coefficient H = 0.97
Our company encourages employees to see out new ideas and better ways of doing things on the job 0.92
Our company seeks out new ways to do things 0.92
Our company excels at identifying new business opportunities 0.91
Our company values learning as key to improvement of our business 0.94
Our company invests on training and development 0.95
Our company encourages everyone to take calculated risks with new ides 0.96
Our company encourages managers and employees to experiment with solutions to work-related problems 0.93
Our company actively introduces improvements and innovations 0.91
na not applicable.
AVE = average variance extracted.
FC-VIF = full-collinearity variance inflated factor, good if<5.
= Cronbachs alpha.

Table 2 Descriptive Statistics and Inter-correlations of Variables

Variables Mean SD MinMax EMP IC RC KMO Age Size

EMP 4.17 1.07 1.506.20 0.78

IC 4.26 1.16 1.257.00 0.52** 0.90
RC 4.39 1.80 1.007.00 0.25** 0.25** 0.84
KMO 4.35 1.25 1.006.80 0.65** 0.79** 0.13** 0.93
Age 23.6 12.26 163 0.07 0.05 0.11 0.07 1
Size 47.70 25.51 13193 0.03 0.01 0.01 0.01 0.46** 1
Significant at *P<0.05; **P<0.01.
SD: Standard deviation.
Square root values of average variance extracted (AVE) in diagonal.
Minmax: Minimum and maximum values.

while its interaction with KMO accounts for approxi-
mately 25% of ICs r 2 value.
IC on the other hand has signicant and positive
relationship with EMP as it explains, along with IC and
rm size, 36% of the variations of the sample rms
adoption of EMP. This particular result supports H3. How-
ever, there is a slight indication of partial mediation given
the signicant direct and positive effects of RC on EMP
although the effect size is rather small (f 2 = 0.06) and the
r 2 contribution is relatively smaller (10%). The results are

Knowledge Management Research & Practice

8 KM view of environmental sustainability Banjo Roxas and Doren Chadee

Model A: No Mediation No moderation

Figure 2 Alternative structural models.

Knowledge Management Research & Practice

 KM view of environmental sustainability
Table 3
Linkages Direct effects
Number of effect size
RCEMP 0.10* 0.06
RCICEMP 0.10* 0.06
leaning more towards supporting the presence of an
almost fully mediated relationship in the RC-IC-EMP
nexus which is consistent with H4. This result suggests
that there are confounding and unaccounted variables
other than IC that may, as well explain the direct effects
of RC on EMP. The effect sizes for the hypothesised
relationships are considered medium to large effect sizes
which according to Cohen (1992) are an indication that
the predicted relationships are substantively meaningful
from which inferences can be drawn. We further tested
the signicance of the indirect effects suggested by
Model C following Preacher & Hayes (2008). The results
show that the indirect effects (i.e., path passing through
RC IC EMP), as shown in Table 3 are signicant
and have acceptable explanatory power as indicated by
the medium to large effect sizes (Cohen, 1992). Finally,
the Stone-Geisser Q2 values are all non-zero which
indicate the acceptable level of predictive validity of
Model C (Geisser, 1974).
Discussion, conclusion, and directions for future
research
This study examines the key role of KMO in enabling
SMEs in a developing country to transform and leverage
their relational capital in order to augment their innova-
tive capability towards environmental sustainability.
It draws on the KBV of the rm in explaining that
relational capital is a source of knowledge-based resources
that can potentially augment the capability of rms to
innovate. However, SMEs need a strong KMO to facilitate
the transformation of relational capital and the knowl-
edge-based resources that it brings into strategic assets that
can strengthen a rms innovative capability. Innovation
capability is essential in the adoption and implementation
of rm-wide environmental management practices that
are less inimical to the natural environment in local
communities where they do business.
The ndings of the study based on a survey of 241 SMEs
in the Philippines demonstrate the positive role relational
capital plays in augmenting a rms innovation capability.
Social capital can effectively compensate for SMEs lack of
or limited nancial, technological, and know-how type of
resources that are essential to innovation towards environ-
mental management. Relative to large rms which are
endowed with more resources such as nance, professional
managerial know-how, and technology (Pillania, 2008;
Stam et al, 2014), SMEs tend to rely on their external
networks to overcome the so-called liability of smallness
(Wong & Aspinwall, 2004).
Banjo Roxas and Doren Chadee 9
Testing for Indirect Effects
Indirect effects Total effects
Number of effect size Number of effect size
none none 0.10* 0.06
0.29** 0.11 0.39** 0.15
However, this relational capital-innovation capability
nexus is confounded afrmatively by the rms exercise
of KMO. The results suggest that while relational capital
matters to rms in the sample, it is only when rms take a
more proactive stance on KM that relational capital exerts
substantive positive impacts on the development of inno-
vation capability. This particular nding highlights the
importance of dynamic capabilities such as KMO in the
debate in the literature on the role of knowledge-based
resources as enshrined in the KBV of the rm (Grant,
1996). The results suggests that gaining access to knowledge-
based resources from the rms external social networks
and managerial ties is important to SMEs. However, orga-
nising, transforming, and leveraging these resources that
are key functions of KM (Pillania, 2008; Massingham and
Massingham, 2014) are even more important if these
resources are relied upon to augment the sustainable
competitive advantage of SMEs. Relational capital may be
rather homogenous across rms. Performance differences
across rms can, therefore, be attributed to how well each
rm has strategically managed this capital and its knowl-
edge-based derivatives. These ndings extend that of pre-
vious studies (e.g., McElroy et al, 2006; Kianto et al, 2013)
about how social capital as part of a rms intellectual
capital improves rm performance. This study extends
that argument by providing a theoretically grounded and
empirically sound justications on the linkages between
relational capital, innovative capability and environmen-
tal sustainability underscored by the moderating role of
KMO. A key nding that extends Kianto et als (2013)
results is that relational capital has more strategic perfor-
mance benets beyond that of augmenting a rms nan-
cial performance. This particular nding also enriches
current understanding about KM in small vs large rms.
This studys nding suggests that although small rms
such as SMEs may have less structured, less sophisticated
KM systems relative to large multinational rms, it is KMO
or the rms strategic proclivity to engage in KM that
makes a signicant difference in extracting economic rents
from relational capital to augment some organisational
capabilities.
The ndings about the signicant confounding role of
KMO in the relational capital-innovation capability link-
age extend Smith et als (2010) propositions about the
role of developing a KM mindset, which is an individual-
level construct. SMEs will benet more from KM if an
organisation-wide, strategic, and systemic stance towards
KM is nurtured within the organisation beyond that of
managerial-level competence. Such strategic proclivity to
manage knowledge within the rm is more likely to
Knowledge Management Research & Practice
10 KM view of environmental sustainability
enable rms to engage in more radical and transformative
process of developing organisational strategies and capabil-
ities to address the ever-increasing pressures to demonstrate
the capability and commitment of the rm to become
environmentally sustainable. Hence, SMEs need to develop
their capability to institutionalise KM that ts the nature of
its business operation and aligns with their strategic agenda
such as the pursuit social and environmental goals as integral
to doing business towards a more sustainable business.
The results also underscore the importance of innova-
tion capability in enabling SMEs to integrate environmen-
tal management practices designed to reduce the negative
impacts of business on the local natural environment. This
particular nding highlights the importance of knowl-
edge-based resources and associated capabilities in under-
standing how SMEs pursue environmental sustainability.
It addresses a major research gap in the KM literature on
how knowledge in general and its strategic management in
particular facilitates sustainable business especially in a
small rm context. This particular nding extends the
work of De Marchi & Grandinetti (2013) on how innova-
tion enables a rm to adopt environmental sustainability
in business. The study offers a more robust conceptual and
structural model that articulate the strategic linkages
between relational capital, which according to De Marchi
& Grandinetti (2013) is a potent source of external knowl-
edge, innovation, and environmental practices.
There is a growing body of literature on the antece-
dents and effects of adoption and implementation of
environmental management practices across a wide range
of businesses in different industries. The current study
focuses on manufacturing SMEs in a developing country
context to highlight the importance of less conventional
sources of resources that may explain why SMEs integrate
environmental sustainability in business. The study posits
that relational capital is an important knowledge resource
About the Author
Banjo Roxas is a Senior Lecturer in Management at Deakin
Business School, Deakin University. His teaching and
research interests are in Strategy and International
Business.
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