Westfälische Wilhelms-Universität Münster

Determinants of Investment Location and Modes of Entry

The Relevance of the Institutional Environment

International Business Research Seminar

Summer 2005

Topic:

Multinationals and Public Policy: How to Cope with

Environmental Standards

Seminar Paper

in the elective subject "International Management"

Lehrstuhl für BWL, insbesondere internationale Wirtschaft

presented by:

Wolfgang Schröder

course of studies: BWL

Münster, May 2005

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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.

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Contents

List of Abbreviations

IV

1

Introduction

1

2

Roots of Environmental Policy

1

2.1 Environmental Standards and their Level of Regulation

1

2.2 Implications of Economic Theories for Environmental Policy

4

2.2.1 Global Reach School

4

2.2.2 Internationalization Theory

4

2.2.3 Ecological Economics

5

2.2.4 International Trade Theory

5

3

Classification of environmental strategies on firm level

8

3.1 Overview

8

3.2 Non-Compliance

10

3.3 Reactive Strategy

10

3.3.1 Overview

10

3.3.2 End-of-Pipe Approach

10

3.3.3 Empirical Evidence of the Pollution Haven Hypothesis

11

3.3.3.1 Overview

11

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

3.4 Product Stewardship

18

3.5 Pollution Prevention

18

3.6 Environmental Leadership

19

4

Conclusion

20

References

21

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IV

List of Abbreviations

CEC

Commission on Environmental Cooperation

ENGO

environmental non-government organization

EPA

Environmental Protection Agency

FDI

foreign direct investment

FSA

firm specific advantage

GATT

General Agreement on Tariffs and Trade

Id.

identical

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

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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).

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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.

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