Environmentally sustainable development initiatives in upstream strategic outsourcing relationships: Examining the role of innovative capabilities

Research on the potential impact of environmental sustainable development initiatives such as environmental collaboration with the supplier (ECS) on environmental and manufacturing performance is inconclusive. Specifically, it has overlooked the intermediary role that dynamic capabilities play in the relationship between ECS and performance. This explains why previous research, while correct in theory, found conflicting statistical results between environmental collaboration upstream and various performance outcomes. This study examines the following questions: What is the impact of environmental collaboration on manufacturing and environmental performance in outsourcing relationships? Do capabilities mediate the relationship between environmental collaboration and performance? Further, we propose that one particular mediating factor—innovative capabilities (ICs)—can influence the strength of this relationship and thus explain why previous research found conflicting statistical results. This paper uses structural equation modeling to analyze survey data from 247 North American manufacturers that outsourced their manufacturing. IC fully mediates the relationship between ECS and manufacturing performance and partially mediates the relationship between environmental collaboration and environmental performance. These findings enrich existing knowledge as it views ECS through the lens of resource‐based theory. Further, we shed light on the crucial role of IC in firms that choose to outsource critical capabilities. From a managerial perspective, the empirical results will inform outsourcing managers making strategic and tactical decisions to achieve desired environmental and manufacturing outcomes.