Green Innovation as Implementation of Sustainability Development
in Indonesia
Dian Agustia, Tjiptohadi Sawarjuwono and Wiwiek Dianawati
Universitas Airlangga, Indonesia
Keywords: Green Innovation, Sustainability Development, Firm Value.
Abstract: This research is conducted to examine the application of green innovation as implementation of Sustainability
Development in Indonesia and to know the effect of green innovation to firm value. Green innovation will
increase the firm value, increase the economic benefits, and improve the competitiveness of the company
which will ultimately help the company to reach the point of sustainability. The data used are secondary data
that is company's annual report and PROPER report of manufacturing sector and main sector listed on IDX
year 2012-2015. Sample determination was done by sampling technique with certain criteria and was obtained
277 companies. Independent variable in this research is green innovation measured by content analysis. The
dependent variables are firm values measured using Tobins Q. This study also discusses the application of
green innovation as implementation of sustainability development in Indonesia. The result of this study
indicates that green innovation has positive effect on firm value.
1 INTRODUCTION
Sustainability development is a long-term
development and taking into account the interests of
future generations by trying to use resources
adequately and create healthy environment.
Environmentalists are now beginning to change their
lifestyles as an effort to reduce environmental
damage. They are beginning to shift from consuming
unsustainable products to more environmentally
friendly products (green product). This is due to
increased awareness and acknowledgement that one
of contributors to environmental damage is product
that cannot be reused or recycled.
Green innovation is one of the environmental
strategies that can be undertaken to develop a
business without violating government regulations
(Özşahin et al., 2013). An innovative green product
innovation strategy will encourage companies to have
special capabilities that will ultimately be a source of
corporate competitive advantage (Sharma and
Vredenburg, 1998). This competitive advantage will
increase the value of the company in the future (Bech,
2013). High corporate productivity will increase
company's profit margin and will help companies to
grow faster and enhance the competitiveness of
companies that will ultimately help companies to
achieve sustainability.
Based on the description of background above,
problems in this study can be formulated as follows:
 How is application of green innovation as
implementation of Sustainability Development
in Indonesia?
 Does green innovation affect firm value in
public companies in Indonesia?
2 LITERATURE REVIEW
2.1 Sustainability Development
Resources available in nature are limited in number,
while human needs are endless. More effort is needed
to maintain environmental sustainability. There are
four important components in establishing
environmental sustainability namely economic
stability, social stability, environmental stability, and
culture stability (Scrimgeour and Iremonger, 2011).
In running the business process, a company must
be able to generate economic benefits as much as
possible according to its main objectives, but the
company must also be able to provide welfare for the
364
Agustia, D., Sawarjuwono, T. and Dianawati, W.
Green Innovation as Implementation of Sustainability Development in Indonesia.
In Proceedings of the 1st International Conference on Islamic Economics, Business, and Philanthropy (ICIEBP 2017) - Transforming Islamic Economy and Societies, pages 364-369
ISBN: 978-989-758-315-5
Copyright © 2018 by SCITEPRESS – Science and Technology Publications, Lda. All rights reserved

people around the plant and able to maintain
environmental sustainability.
2.2 Green Innovation
Innovation is an important thing for companies to
develop business processes. Innovation can be the
tool that will deliver the company to gain certainty of
sustainability. Green innovation or environmental
innovation is a new or modified technique, practice,
system and production process to reduce the impact
of environmental damage (Rennings and Rammer,
2009). Green innovation is also defined as new
technology (hardware or software) related to products
or production processes that will lead to energy
efficiency, pollution reduction, waste recycling,
green product design, and corporate environmental
management (Ar, 2012). Green innovation not only
aims to improve firm performance economically, but
also to reduce the negative impact on the environment
and create a competitive advantage for the company.
Another advantage of green innovation is to
encourage companies to convert waste production
into a product that is worth selling so that it can
generate additional profits for the company.
2.3 Firm Value
The main objective of the company is to maximize
the company's wealth or value for shareholders or
owners (Ross et al., 2008: 9). Value of company is
investors' perceptions of the company's success rate.
For companies that have gone public, the value of the
company can be reflected through the company's
stock price, while for the company that has not gone
public its value is reflected through the realizable
value of the company's assets at the time the company
will be sold (Margaretha, 2005: 1). High stock prices
make value of the company also high. High value of
the company will make the market believe not only in
company's current performance but also on future
prospects of the company.
In general, company value can be measured by
market value ratio. The market value ratio is the ratio
that correlates the firm's share price with its profit and
with the book value of the company (Margaretha,
2011: 27). This ratio gives an indication to
management relating to investors' opinions about past
corporate achievements and future prospects.
3 RESEARCH METHOD
3.1 Research Approach
The research approach used in this research is
quantitative approach. The method used in this
research is at the level of explanation. This study
identifies the relationship between application of
Green Innovation as implementation of Sustainability
Development in Indonesia and firm value.
3.2 Operational Definitions
The independent variable in this research is Green
Innovation (X). In this study, green innovation is a
variable obtained through content analysis in the
company's annual report. Some indicators will be
used to determine whether the company has applied
green innovation. The study was conducted by Ar
(2012) and Qamarullah and Dorina (2015). The
indicators to be used in content analysis are as
follows:
Table 1: Variable assessment indicator.
Dependent variable in this research is firm value.
Firm value is stakeholder perception, especially
investors to company’s success rate which is
associated with stock market price and measured by
percentage. Firm value in this research is measured
by using Tobins'Q ratio. Tobin's Q Ratio is calculated
by the following formula (Chang and Wang, 2007):
Green Innovation as Implementation of Sustainability Development in Indonesia
365

3.3 Population and Sample
The population in this research is companies in the
manufacturing sector and the main sector listed in
Indonesia Stock Exchange (IDX) starting from 2012-
2015 which are as many as 287 companies.
Determination of sample in this research is done by
using certain consideration. The prescribed criteria
are as follows: a. The annual reports of manufacturing
and main sector companies are published on the
Indonesia Stock Exchange from 2012 to 2015 and
register PROPER programs for three consecutive
years. b. Companies in manufacturing sector and
main sector present complete and related data to the
research variables.
Out of 287 companies that publish the financial
statements in IDX since 2012 until 2015, there are
277 companies that meet the criteria set.
3.4 Analysis Technique
This descriptive statistic will be used to describe
statistically the variables in this study. Normality test
in this study is using Kolmogorov-Smirnov test. In
Kolmogorov- Smirnov test if significance > 0.05 then
the data is normally distributed (Ghozali, 2013: 164).
The equation obtained from simple regression
result is:
4 RESULTS AND DISCUSSION
4.1 Model Analysis
This study uses a simple regression model. Normality
test is done by using Kolmogorov-Smirnov test by
looking at the level of significance. The residual is
otherwise normally distributed if the significance
value of Kolmogorov-Smirnov > 0.05. Normality test
result is shown in table 2 below:
Table 2: Normality test result on initial data one-sample
Kolmogorov-Smirnov test.
The result of normality test in table 2 shows that
the value of Kolgomorov-Smirnov is 3,982 and
asymp. Sig. (2-tailed) of 0.000. This indicates that
the distribution of data is not normal. Therefore, it is
necessary to normalize the data by eliminating the
outlier value of the data by doing the elimination of
data that has the highest residual value.
Table 3: Normality test result on final data one-sample
Kolmogorov-Smirnov test.
Normality test results after normalization of data
has been presented in Table 3. The result of normality
test shows that the value of Kolgomorov-Smirnov
was 1,245 and asp. Sig. (2-tailed) of 0.090. Therefore,
it can be concluded that the residual data of both
models has been normally distributed as indicated by
the value of asymp. Sig. (2-tailed)> 0.05 or said to be
significant.
4.2 Hypothesis Proof: Effect of Green
Innovation on Firm Value
Table 4 below is the result of multiple linear
regression for model 1:
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366

Table 4: Results of linear regression analysis coefficients.
ACKNOWLEDGEMENTS
If any, should be placed before the references section
without numbering.
From result of data analysis, hence result of
structural equation is as follows:
Firm Value = 0.619 +0.141 GI +e
Based on the result in Table 4.3, it can be
concluded that green innovation has significant effect
on firm value. It can be seen based on the value of
green innovation significance of 0.019 which is less
than the significance level of 0.05. The positive sign
on the beta coefficient of 0.141 indicates that green
innovation positively affects the firm value. Test of
Coefficient of Determination (R2) generates result of
.313 or 3.13%. With this result, it can be concluded
that is firm value is able to explain independent
variable of green innovation equal to 3.13%.
4.3 Discussion
4.3.1 Green Innovation as Implementation
of Sustainability Development in
Indonesia
Subject of this research is companies in the
manufacturing sector and the main sector listed on the
Indonesia Stock Exchange (IDX) and follow the
Program Performance Rating Company in
Environmental Management (PROPER) in the period
of observation in 2012 until 2015.
According to the Regulation of the Minister of
Environment Number 18 year 2012, PROPER ratings
are grouped into 5 ranking colors with 5 categories,
where each rating reflects the company's
performance. The best structuring performance
sequentially is Gold (PROPER 5) and Green
(PROPER 4); Blue (PROPER 3), given to the
business that have undertaken environmental
management efforts in accordance with the
requirements as stipulated in the regulation. Then Red
(PROPER 2), while the worst environmental
performance is black. Gold (PROPER 5), awarded to
a business that has consistently demonstrated
environmental excellence in the production and/or
serving process, conducting ethical business, and is
responsible to the community.
Based on the results of research in table 4.1, Green
innovation has the lowest value of zero (0) which
means the company has not made innovations or
renewal activities in order to reduce the impact of
environmental damage, both in terms of operational
processes and the final product. There are 117
companies that have not done green innovation or
equal to 42.23% of the total samples. The highest
value of green innovation is 4 which means the
company has fulfilled all criteria in doing green
innovation both for the process and final product. The
company that has done the perfect green innovation
is PT. Semen Indonesia Tbk, PT. Medco Energy Tbk.,
PT. Holcim Indonesia Tbk., PT. Pelat Timah
Nusantara Tbk, PT. Asahamimas Flat Glas Tbk, PT.
Kalbe Farma Tbk, PT. Ultrajaya Milk Industri Tbk,
PT. Sampoerna agro Tbk, PT. Indofood Sukses
Makmur Tbk.
Overall, the average value of green innovation in
the sample company is 1.34 with a standard deviation
of 1.41. This shows that the spread of green
innovation data has a variation rate of 105%.
Figure 1: Graph of PROPER 1, 2, 3, 4, 5 on green
innovation.
Source: Processed data, 2017.
Based on Figure 1 and table 5 above, the
Company PROPER 1 (black) does not exist due to not
entering sample research. Company PROPER 2 (red)
consists of 31 companies. The result of the company
PROPER 2 (red) is linear that the lower the PROPER
rank, the lower the green innovation level the
company performs.
Company PROPER 3 (blue) is the majority
consisting of 193 companies. Companies rated
PROPER 4 (green) consists 32 companies.
Companies incorporated in the PROPER 4 (green)
rankings proved quite concerned about the use of
environmentally friendly products and production
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processes. It can be seen from the number of
companies. Most are found in number 3 which is the
company has made 3 of 4 criteria of green innovation.
Companies that are ranked PROPER 5 (gold) are
21 companies. This indicates that the number of
companies listed in PROPER 5 (gold) has been
concerned deeply for green innovation as proven by
the most number of companies that do all the green
innovation criteria in which there are 8 companies.
Green Innovation is one strategy that can be used
to achieve corporate goals by considering
environmental aspects and social responsibility. By
bringing together the company's goals by taking
environmental aspects into business strategy, the
company will remain and continue in the future.
Table 5: Relation PROPER with green innovation score.
Source: Processed data, 2017.
4.3.2 Effect of Green Innovation on Firm
Value
Green innovation variable influences firm value,
shows t test significance value equal to 0,019 (<
0.05). This is in accordance with the theory of
stakeholders proposed by Freeman (2010) that the
company's goal is not only to create value to
stockholders, but to create value for all stakeholders.
Creating value for all stakeholders require managers
to improve their financial performance, social
performance and environmental performance also
ensuring that the company remains sustainable in the
future. The company can continue to survive
(sustainable) if the company is able to adapt its
business processes to the rules or norms in the
community (O'Donovan, 2002). This also
corresponds to the theory of competitive advantage
proposed by Porter (1985: 1) which states that
competitive advantage aims to form a sustainable
position in order to survive in industrial competition.
Strategy is a very important tool to achieve
competitive advantage.
Green innovation has a positive impact. For the
environment, green innovation can reduce CO2,
increase biodiversity and reduce pollution. For the
company, green innovation improves productivity,
expands market share, creates an image that the
company cares about the environment, improves
efficiency. Low production cost and high competitive
advantage will lead the company to get high
profitability.
The result of this study supports the result of
research conducted by Salvadó, et al., (2015),
Küçükoğlu and Pınar (2015) and Ar (2012). The
innovation can create value for the company, both
new companies and old companies. Innovation
requires high initial investment and is a high-risk
activity.
This study does not support research conducted by
Özşahin et al., (2013) which concluded that green
product innovation has no effect on firm
performance. This is due to the company's low ability
to innovate. The low ability to innovate will
undermine the company's competitiveness.
4.4 Limitations of Research
Based on the research discussion, limitations of
research are as follows:
 The study was limited to manufacturing firms
only for a period of 3 years.
 Variables used in this study also consist only
green innovation and firm value. The low level
adjusted R square indicates that there are many
other variables that can affect the relationship
between these variables.
5 CONCLUSIONS
5.1 Conclusions
Based on the research discussion, the conclusions are
as follows:
 The result of the company PROPER 2 (red) is
linear that the lower the PROPER rank, the
lower the green innovation level the company
performs. Company PROPER 3 (blue) is the
majority consisting of 193 companies.
Companies incorporated in PROPER 4 (green)
rankings proved to be quite concerned about the
use of environmentally friendly products and
production processes. Companies listed in
PROPER 5 (gold) are already deeply concerned
about green innovation.
 Green innovation has significant effect on firm
value. This is in line with the stakeholder theory
proposed by Freeman (2010) that the company's
goal is not only to create the value of its
stockholders, but to create value for all its
stakeholders. Value creation for all stakeholders
requires managers to improve their financial
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368

performance, social performance, and
environmental performance and ensure that the
company remains sustainable in the future.
5.2 Suggestions
Based on the research that has been done, the
researchers provide some suggestions for the next
researchers as follows:
 The next researcher can use the data for more
than 3 years in the hope that the results obtained
will be more accurate and significant.
 Taking into account other independent variables
that affect firm value, such as environmental
management accounting.
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