Submission to GIN 2010 Conference: Climate Change & Green Growth: Innovating for Sustainability 13-16 June 2010, Seoul, Korea Strategic Responses of Multinational Corporations to Environmental Protection in Emerging Economies: the Case of the Petroleum and Chemical Sectors in Latin America and the Greater China Region Titus Fossgard-Moser a *, Terence Tsai b** and Yuan Lu c a Titus Fossgard-Moser, Sustainable Development Manager, Shell Venezuela, Caracas, Venezuela. Assistant Professor, Haskayne School of Business, University of Calgary, Calgary, Canada. E-mail address: [email protected]. b **Terence Tsai, Associate Professor of Management, China Europe International Business School, 699 Hongfeng Road, Pudong, Shanghai, P.R. China , Tel: 86 21 28905646, Fax: 86 21 28905650 and E-mail address: [email protected]. c Yuan Lu, Professor, Department of Management, Faculty of Business Administration, The Chinese University of Hong Kong, Shatin, NT, Hong Kong. E-mail address: [email protected]. * The views expressed in this paper represent those of the author and should not be attributed to Shell International Ltd. **All the correspondences should be directed to this author. The work described in this study was partially supported by research grants from the Research Grants Council of the Hong Kong Special Administrative Region (Project No. CUHK 4311/01H), United Kingdom Economic and Social Research Council (ESRC) and China Europe International Business School. 1
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Submission to GIN 2010 Conference: Climate Change & Green Growth: Innovating for Sustainability 13-16 June 2010, Seoul, Korea
Strategic Responses of Multinational Corporations to Environmental Protection
in Emerging Economies: the Case of the Petroleum and Chemical Sectors
in Latin America and the Greater China Region
Titus Fossgard-Mosera*, Terence Tsaib** and Yuan Luc
a Titus Fossgard-Moser, Sustainable Development Manager, Shell Venezuela, Caracas, Venezuela. Assistant Professor, Haskayne School of Business, University of Calgary, Calgary, Canada.
b **Terence Tsai, Associate Professor of Management, China Europe International Business School, 699 Hongfeng Road, Pudong, Shanghai, P.R. China , Tel: 86 21 28905646,
c Yuan Lu, Professor, Department of Management, Faculty of Business Administration, The Chinese University
of Hong Kong, Shatin, NT, Hong Kong. E-mail address: [email protected].
* The views expressed in this paper represent those of the author and should not be attributed to Shell International Ltd. **All the correspondences should be directed to this author. The work described in this study was partially supported by research grants from the Research Grants Council of the Hong Kong Special Administrative Region (Project No. CUHK 4311/01H), United Kingdom Economic and Social Research Council (ESRC) and China Europe International Business School.
When MNCs enter emerging economies, two opposite forces confront them. The first derives
from regulatory control imposed by the local environment. In Yu and Lin (2008)’s study,
they pointed out that there is local responsiveness pressure for MNC subsidiaries and a
positive relationship exists between the level of green management and the level of local
1 In this article a multinational corporation is defined as a foreign enterprise (a) comprising entities in two or more countries, (b) which operates under a system of decision making permitting coherent policies and strategies on environmental issues through one or more decision making centers and (c) in which entities are so linked that one or more of them may be able to exercise a significant influence over the activities of the others, and in particular to share knowledge, resources and responsibilities with others. Overseas independent companies are defined as foreign enterprises (a) comprising entities operating in up to a maximum of four countries, (b) but within which there is no or only a limited system for coherent decision making on policies and strategies on environmental issues throughout the organization and (c) within which individual entities are unable to exert significant influence over the activities of others. The category local company comprises both state owned enterprises, or enterprises that are owned by the national government of the country within which the enterprise operates and any privately owned local enterprise whose headquarters are located in the country of investigation.
3
responsiveness pressure. In addition, Scholars in the study of foreign direct investment (FDI)
argue that MNC’s foreign nationality can become a liability particularly when local
institutions, including governments, non-government organizations (NGOs), and societies in a
given country, use it as a lever to achieve other objectives (e.g. introducing tougher
legislation, lobbying against FDI etc). The process through which a MNC is adaptive to the
requirements of local institutions is termed ‘localization’. The other force stems from internal
standardization within MNCs (Rosenzweig & Singh 1991; Westney 1993). This concerns
the consistency of internal operating procedures and practices among subsidiaries of a MNC.
The process through which MNCs use internal standards, policies and procedures to manage
subsidiaries is termed standardization. Recent studies have also paid attention to the internal
standardization process of enacting ecological sustainability in MNCs (Andersson and Blau
2005; Hunter and Bansal 2007).
It is in relation to the debate concerning MNC localization versus standardization, that this
study examines two important questions relating to the responses of MNC subsidiaries to
environmental protection pressures in two emerging economic regions: Latin America
(Colombia an Peru) and Greater China (Mainland and Taiwan):
• What are the responses of MNC subsidiaries to the liability of foreignness in a given
country? This question concerns the differences in environmental performance between
subsidiaries of MNCs and local firms in a given country under the requirements of local
environmental protection policies.
• Do MNCs (through their subsidiary operations) apply uniform environmental practices
world-wide or differentiate practices across countries? This question concerns whether an
MNC has standardized global practices.
MNCs in the petroleum and chemical industries are used as case studies to investigate the
two research questions. The industries considered are two of the most important in the world,
4
and it is within emerging economies that MNCs are expanding most aggressively.2 Evidence
of the growing importance of Latin America and Greater China is highlighted by record levels
of FDI—$90 and $66 billion, respectively, in 1999 (UNCTAD, 2000, pp. xvii, xviii, 49–57,
57–63). Further, both industries have faced recent criticism for their environmental impacts,
particularly in emerging economies.
FDI inflows to South, East and South-East Asia, and Oceania maintained their upward
trend in 2007, reaching a new high of $248 billion, an increase of 18% over 2006… At the
subregional level, China and Hong Kong remained the two largest FDI destinations in the
region. FDI inflows into Latin America and the Caribbean increased by 36%, to a record level
of $126 billion (UNCTAD, 1998:3)
2. Theoretical background and framework
2.1. Global ecological ethics of MNCs and their sustainable development in emerging
economies
MNCs play a significant role in the advancement of global ecological ethics. (Rojsek,
2001) In recent researches, MNCs are found to perform better in business ethics and more
responsible in environmental protection (Jemali, 2008), although few managers see a strong
connection between their environmental investments and a significant upturn in their financial
situations. (Brown, W. B. and N. Karagozoglu, 1998) Since 1998, there have been significant
increases in sustainability reporting among the world’s 250 MNCs. (Kolk, 2003) There are
different perspectives concerning incentive for MNCs to engage in CSR activities and their
2 Of the top 100 MNCs ranked by foreign assets in 2006, 10 were petroleum and 11 were chemical and allied companies. If ranked by sakes, petroleum TNCs would occupy the top five positions in the largest TNC list. (UNCTAD, 2008, pp. 27-30), (UNCTAD, 1998, pp. 36–8).
5
better business ethics behaviours, for example, from a empirical study, sustainable practices
are found to influence corporate performance positively in a long-term (Lopez et al., 2007); In
Cetindamar and Husoy (2007)’s research, the major benefits of participation in GC (Global
Compact) were acquiring better network opportunities and economic values, and reducing the
amount of waste and lowering labour costs. Yu and Lin (2008) point out that the
organizations compete not just for resources and customers, but also for political power and
institutional legitimacy, for social as well as economic leverage in the view of institutional
theory. Other academic researches have focused on understanding the nature of corporate
social behaviours as a part of overall corporate brand image. (Sing et al., 2008)
Jamali (2008), in a research based on stakeholder framework, finds that MNCs and their
subsidiaries are making systematic efforts at managing spectrum of stakeholder relationships.
Abreu et al. (2005) in their exploration of the CSR experience and practice of enterprises in
Portugal, identifies five key stakeholders: consumers, suppliers, the community, the
government and the environment. Organizations, especially MNCs, from the stakeholder
perspective are expected to manage responsibly and extended web of stakeholder interests
across increasingly permeable organization boundaries, and acknowledge a duty of care
towards traditional interest groups as well as silent stakeholder- such as local communities
and the environment. (Simmons, 2004)
Besides the stakeholder perspective, the static taxonomic CSR descriptions are highlighted
in many studies to explain MNCs’ business ethics behaviours. (Carroll, 1979 and Wood, 1991)
For example, Wood (1991) offers a model in which a researcher can consider the principles
that motivate a firm’s social responsibility actions at three levels of analysis: institutional,
organizational and individual. The motivation for a firm’s social responsibility actions may
stem from the principle of legitimacy. Firms’ responsiveness, according to Wood (1991),
6
constitutes an action dimension that is needed to complement the normative and motivational
component of social responsibility and is rooted in knowledge about the external environment
and in rigorous environmental scanning/analysis. This knowledge could then be used to
devise strategies for adapting to the new societal environment.
In conclusion, environmental protection issues cannot be treated as mere technical
issues, particularly given the serious negative social and health impacts that uncontrolled
pollution can cause (Hoffman & Ventresca eds. 2002). In general, local institutional
authorities, including legislative bodies, governments, and NGOs, require firms to comply
with laws, rules, standards, policies, and public pressures regarding environmental
protection. Although substantial knowledge concerning MNCs’ role in economic
development exists (see, for example, Vernon, 1971; Dixon, Drakakis-Smith & Watts,
1986; Blomstrom, 1989; Lall, 1993; Hansen, 1995), there is only limited empirical study
relating to the environmental contribution of MNCs to emerging economies (Moser, 2001;
Tsai, 2002; Child & Tsai, 2005). Indeed, despite the recognition of the vital role that
MNCs play in the sustainable development of emerging economies (Hunt & Auster, 1990;
The fact that relative to other company types MNCs face a broader range of
institutional duality stemming from external and internal of institutional pressures, combined
with their liability of foreignness assists explain the greater overall environmental
26
responsiveness of MNCs relative to other company types. The institutional duality or the
variance of external versus internal institutional pressures for MNCs calls attention to the
concept of ‘strategic choice’ (cf. Child 1972). Indeed and as Kostova & Zhaheer (1999) note,
rather than being a threat or becoming isomorphism to local organizations under external
regulatory requirements, MNCs can potentially benefit from multiplicity of institutional
environments and pressures within and across direct countries. In this regard the institutional
duality gives rise to distinctive advantages of MNCs as the research findings demonstrate that
in addition to a perhaps more passive/reactive response to institutional pressures, there can
also be a more proactive undercurrent, in particular, as part of MNCs' search for local
legitimacy and competitive advantage. When in their interest, MNCs are more likely to
exploit their own internal standards, policies and experiences to gain competitive advantage.
Similarly MNCs seek to overcome the liability of foreignness in cognitive systems by creating
good corporate reputations through better environmental performance than local firms. In
these instances, the liability of foreignness stemming from local institutionalization
requirements is viewed as a strategic opportunity and not necessarily a threat.
However, as also identified, not all MNC subsidiaries sought to align themselves with
internal MNC headquarter expectations. In particular when MNC corporate headquarters
exercise control over their subsidiaries via a ‘loose-coupling’ system (Meyer & Rowan,
1977), subsidiaries may be more responsive to the local legislation, culture, norms and
stakeholders expectations. The issue of institutional duality and legitimacy thus creates an
interesting dynamic within MNCs. In this regard the underlying need for local legitimacy
within the host country provides an explanation of the importance of local legislation. Unless
MNC subsidiaries align themselves with the local institutions, they risk losing their license to
operate. When the liability of foreignness becomes high due to policy inducement,
subsidiaries of MNCs may opt for short-term profit-maximization and fail to align themselves
27
with the internal standards, depending upon what MNC headquarters will tolerate vis-à-vis
local tailoring. To the contrary the desire to standardize is particularly profound when MNCs
pride themselves as the leaders in environmental management and technology and when host-
to-home country feedback fails to generate adequate financial performance.
6. Conclusions
This study is exploratory but shows that MNCs in petroleum and chemical sectors,
through the activities of their subsidiary operations in selected countries in Latin America and
the Greater China Region, have an important role to play in the environmental protection of
emerging economies. The research shows that, relative to local companies, MNCs are more
environmentally responsive. The greater resources and international experiences of MNCs, as
well as their greater sensitivity to local legislative demands, negative media publicity and
NGO pressures, provide the primary explanation for this. The implication is that FDI, in
general, is beneficial to environmental protection in emerging economies. Through active
engagement with local institutions MNCs play a key role in diffusing more advanced home
country-originated technologies and management know-how. The research, however, suggests
that MNCs are not consistent in their application of environmental policies and practices
world-wide. The environmental performance of MNC subsidiaries is in practice closely linked
to the local context of operation and any accompanying pressures—both formal and informal–
––for environmentally responsible business practice. This moves the debate on globalisation
versus localisation beyond the issue of control to a more cognitive level.
The conceptual framework illustrates the applicability of institutional theory to a better
understanding of the role of MNCs in the environmental protection of emerging economies.
The article shows that MNCs’ responsiveness can be understood in terms of a combination of
(external) regulative and cognitive and (internal) normative institutional pressures. The
28
dominance of the former in the environmental performance of MNC subsidiaries illustrates
how important it is for emerging economy governments to actively to manage the
environmental impacts caused by MNCs and other company types operating within their
jurisdiction.
29
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Table 1 Corporate Environmental Behaviour by Company Types and Country
All companies (n= 28)
%
MNCs (n= 12)
%
Overseas Independent (n= 10)
%
Local (n= 6)
%
Colombia (n= 16)
%
Peru (n= 12)
%
Attitudinal variables
Companies identifying environmental issues of critical or high importance
79 100 50 83 88 68
Belief that good environmental management offers business opportunity
46 50 40 50 38 59
Organisational variables
Presence of an environment department 64 83 50 50 81 42 Presence of in-house environmental specialists
39 58 30 17 50 25
Head of environment department reporting to company president
33 40 20 33 39 20
Senior management involvement in environmental issues
71 84 70 50 81 58
Estimated funding for environmental issues (% of CAPEX)
10 12.1 6.9 13.5 13.4 6.2
Presence of annual funding for environmental issues
71 75 50 100 81 58
Internal training on environmental issues 64 75 70 33 68 58 Policy and procedural variables
Internal corporate environmental policy 82 100 60 83 88 75 Published external environmental policy 29 50 0 33 31 25 External reporting on environment 54 67 40 50 56 50 Inclusion of environmental costs in initial project feasibility assessments
68 83 50 66 69 66
Use of environmental criteria in contractor selection
32 58 10 17 35 33
Monitoring of contractor environmental performance
14 17 10 17 19 8
Presence of complementary environmental social investment projects
61 75 50 50 81 33
Source: Based on Moser, 1998 & 2001with new data added
36
Fig. 1. Explanation for MNC response to environmental impacts: Colombia and Peru combined
L e g i s la t i o n M N O C p o l i c y
S e n i o r m g m t . s u p p o r tP r e v i o u s e x p e r ie n c e
I n t e r n a l p o l i c yI n t l . p r o f i l e
F u t u r e le g i s l a t i o n L o c a l p r o f i l e
S h a r e h o l d e r p r e s s u r eC o m p a n y e m p l o y e e sC o m m u n i t y p r e s s u r e
I n t l . q u a l i t y s t d s .L o c a l N G O p r e s s u r e
I n t l . in d . a s s o c s .L o c a l in d . a s s o c s .
C o m p e t i t o r p o l i c i e sI n t l . N G O p r e s s u r eG u e r r i l l a p r e s s u r e
B a n k l o a n r e q m t .
1 2 3 4 5 6 N o t I n f lu e n t i a l
V e r y I n f lu e n t i a l
M N O C s , n = 1 2
Source: Based on Moser, 1998 &2001 with new information added
Fig. 2 Explanation for all company response to environmental impacts: Colombia and Peru separate
Colombia Peru
Legislation
Senior mgmt. supportFuture legislation
Previous experienceOverseas HQ policy
Internal policyShareholder pressure
Community pressureCompany employees
Intl. quality stds.
Local profileCompetitor policies
Intl. profileLocal NGO pressure
Guerrilla pressureLocal ind. assocs.
Intl. ind. assocs.Intl. NGO pressure
Bank loan reqmt.
1 2 3 4 5 6NotInfluential
VeryInfluential
n =16
n = 13
Environmental impactsLegislation
Senior mgmt. support
Internal policy
Local profile
Company employees
Intl. ind. assocs.
Intl. quality stds.
Shareholder pressure
Overseas HQ policy
Community pressure
Local ind. assocs.
Intl. profile
Previous experience
Local NGO pressure
Future legislation
Competitor policies
Intl. NGO pressure
Bank loan reqmt.
Guerrilla pressure
1 2 3 4 5 6NotInfluential
VeryInfluential
n =12
n = 8
n = 11
Environmental impacts
Source: Based on Moser 1998 & 2001 with new information added Source: Based on Moser 1998 & 2001 with new information added