Multinationals and public policy - How to cope with environmental standards

II

Abstract

This paper is aimed to shed light on the different attempts of multinational enterprises (MNEs) to cope with environmental regulations which therefore develop strategies. In addi- tion, it is focused on the driving forces and levels of international and country-specific envi- ronmental policies. The roots of environmental policy are pointed out . In this context, the different levels of environmental regulations are identified therewith deducing implications for the compliance-behaviour of firms. This paper also explicates the environmental implica- tions of different economic theories. It is exemplified how different stakeholders might influ- ence the strategic orientation of enterprises towards environmental performance and the vari- ous environmental strategies on firm-level are explicated. It is especially focused on different approaches being developed in order to test the empirical evidence predictions of the “pollu- tion haven hypothesis”. Therefore four studies are reviewed and commented on.

  Contents  

3.3.3.2  Inter-Country FDI Flow Approach  12

3.3.3.3  Single Country FDI Inflow Approach  16

3.3.3.4  Endogenous Pollution Havens  17

IV

  List of Abbreviations  

  CEC Commission on Environmental Cooperation  

  ENGO environmental non-government organization  

  EPA Environmental Protection Agency  

  foreign direct investment FDI  

  FSA firm specific advantage  

  GATT General Agreement on Tariffs and Trade  

  identical Id.  

  LDC less developed country  

  MEA multilateral environmental agreement  

  MNE multinational enterprise  

  NAFTA North American Free Trade Agreement  

  OECD Organization for Economic Co-operation and Development  

  TNC Transnational Corporation  

  UNCED United Nations Conference on Environmental Development  

  WTO World Trade Organization  

1

1 Introduction

Environmental regulations may gain importance on different levels mainly according to their geographical scope and the effectiveness of their enforcement mechanisms. Environmental regulations influence the environmental strategies of multinational enterprises (MNEs), but they are not the only influencing factor of the attitude of enterprises towards environmental conduct. The industrial flight of polluting industries to less developed countries (LDCs) or transition economies due to less stringent environmental regulations is a main issue risen in the globalisation debate. This relocation of polluting industries is predicted in the pollution haven hypothesis. In order to examine the empirical evidence of the pollution haven hypothe- sis, the influence of environmental regulations on foreign direct investment (FDI) is exam- ined. The theoretical background of the pollution haven hypothesis is explicated in the context of the international trade theory in part 2. In order to shed some light on the importance of the end-of-pipe approach and the empirical evidence of the implications of the “pollution haven hypothesis” the “pollution haven hypothesis” is taken up again in part 3. The importance of integrating the potential influence of corruption into an examination of the pollution haven hypothesis is underlined and explicated. The compliance behaviour of firms to environmental regulations as focused at in part 2 directs to the firm-level dimension of environmental regu- lations, but this very broad classification is not sufficient to describe the environmental policy of firms. Therefore part 3 features more specified environmental strategies.

2 Roots of Environmental Policy

2.1 Environmental Standards and their Level of Regulation

The need for regulations concerning environmental protection arose in the 1960´s due to the proceeding environmental degradation in industrialized countries, mainly the US. 1 Today economic integration and economic growth boost the demand for effective environmental policies at the international as well as at the national level. An international cooperation in environmental protection has gained particular importance due to various environmental chal- lenges showing a transboundary character which remove the control from any individual na- tion. 2

1 www.epa.gov.

2 Nordström, Vaughan (1999).

2

One may differentiate between five levels of regulation concerning environmental standards: 3 First, multilateral rules as those established under the General Agreement On Tariffs an Trade (GATT), second, regional level regulations in the context of regional integration efforts as the

EU and the North American Free Trade Agreement (NAFTA), third, national state level rules,

fourthly sub-national rules as state or provincial regulations and fifthly, municipal and local regulations if not under provincial or state jurisdiction.

The rapid growth of international environmental regulations may be explained by the follow- ing: First, the international or even global relevance and implications of environmental chal- lenges created the necessity for consideration of these problems at the same level. Second, even if environmental problems can be handled adequately at the national or sub-national lev- els, differences in regulations may influence the relative competitive position of domestic versus foreign firms. 4 Third, the increase in regional integration has given rise to the integra- tion of environmental issues in regional integration policies. For example, “NAFTA is a ma- jor breakthrough since it is the first international trade agreement (other than international EU regulations) to explicitly incorporate environmental issues, and to establish a bureaucracy to administer trade and environment interaction, primarily through the NAFTA Commission on Environmental Cooperation (CEC). NAFTA and the CEC can be seen as benchmarks for analysis of other environmental organizations and agreements.” 5 Fourthly, there is an incen- tive for governments to bring environmental issues to an international arena since the benefits of efforts being directed to environmental protection may often be experienced only in the far future. International environmental agreements may appear in the form of governmental ac- tions (multilateral and regional environmental regulations as mentioned above) as well as in the form of voluntary agreements among firms and stakeholders as in international institu- tions, environmental non-government organizations (ENGOs,) trade unions and professional organizations. Such voluntary guidelines comprise mainly of behavioural guidelines in form of codes of conduct. In the context of codes of conducts I refer to the global reach school, which pleads for such kind of environmental effort.

“At the level of the firm targeted by international environmental policies, the corporate re- sponse in terms of compliance depends upon its expected economic benefits” 6 On this basis, Rugman and Verbeke developed a framework which allows for the classification of the dif- ferent types of international environmental policy regimes in terms of firm level compliance

3 Rugman, Verbeke (2001), pp. 538-540.

4 Nehrt (1998).

5 Rugman, Verbeke (1998), p. 2.

3

behaviour. 7 Under this framework, four possible managerial responses have been proposed. First, “Performance-driven compliance”: There are high “net economic benefits of compli- ance” which results primarily from improvements in industrial performance due to compli- ance. 8 In the context of this type of compliance behaviour international environmental regula- tion is welcomed since it eases global benchmarking. One of the most notable example of this is the Organization for Economic Co-operation and Development (OECD) non-binding envi- ronmental regulations, policies and principles which are regarded to as leading to such a “Per- formance Driven Compliance”. 9 Second, “Non-Compliance”: In this Situation, compliance yields to low economic benefits, lack of administrative enforcement and a want of contribu- tion to industrial performance attributed to compliance. 10 This is considered to be the case when “regulation is viewed by firms as political lip service to environmental pressure groups, without any serious government commitment to implementation” 11 Cited as falling under the purview of “Non-Compliance” are international agreements with weak enforcement provi- sions such as the United Nations Conference on Environmental Development´s (UNCED´s) Rio Declaration (1992) and the Kyoto Conference (1997) 12 In the context of non-compliance I also refer to part 3.2. Third, “Enforcement Driven Compliance”: This refers to a situation in which compliance is driven mainly by the economic benefits of avoiding costly sanctions . 13 One prominent example of this is it is the environmental standards of the EU and its “eco la- bels”. Eco labelling enables customers to identify products being less detrimental to the envi- ronment than other rivalling goods within the same product category, either because of their composition, the way in which they are produced, or both. 14 Multilateral environmental agreements (MEAs) with strong enforcement provisions such as the Montreal Protocol are another example of regulatory frameworks which induce enforcement-driven compliance. Fourthly, “Conditional Non-Compliance”: “This is in case of environmental regulations for which governments shows a genuine interest in implementation, but the design or operation- alization of an administrative enforcement apparatus is lagging because of a lack of resources or other implementation barriers” 15 NAFTA- and GATT/World trade Organization (WTO)

6 Id., p.3.

7 See Rugman, Verbeke(1998), pp. 3-9.

8 In the following, see Rugman, Verbeke (1998), p.4.

9 see Rugman, Verbeke (1998), p.5.

10 Id., p.4.

11 Rugman, Verbeke (1998), p.4.

12 see Rugman, Verbeke (2001), p. 542.

13 In the following see Rugman, Verbeke (1998), p. 4.

14 Staffin (1996).

15 Rugman, Verbeke (1998), pp. 4-5.