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...Environmentalists increasing international trade would increase pollution (Low, 1992; OECD, 1995; Sorsa, 1994) and that promoting exports from developing countries would, inevitably, lower environmental standards a time when these countries did not have strict environmental laws or enforcement mechanisms in place. Defenders of free trade feared that concerns about the environment were merely an excuse to continue protectionist policies. Since then, several studies tried to determine whether trade liberalization did, indeed, have a measurable effect on pollution with mixed results (Aroche, 2000; Jenkins, 2000).
This article aims to contribute to this debate and proposes some policy lines of action. The article analyzes the dynamics of environmental spending and changes in company profiles following NAFTA and looks at factors that have negatively or positively affected companies' behavior as stewards of the environment. Until now, there has not been any study, with a broad sampling, that analyzed the evolution and distribution of environmental spending over the course of several years.
In the first years following NAFTA's adoption, our data show that spending for environmental objectives increased. Export-market incentives, government regulation, and innovations in factory operations resulted in new patterns of business conduct. These prevented much of the predicted, negative impact on the environment. Many companies linked their modernization goals with improved environmental performance. The results of the econometric model show that environmental investment is associated with company size, foreign shareholder pressure, technological capabilities, business performance, government regulation, and the need to comply with standards demanded by customers in the international market.
While these positive results hold true for businesses of a certain size, the results show that small companies have been left behind. Modernization has been highly selective. (2) In light of this fact, and the difficulties faced when small manufacturers try to comply with rules applicable to large industry, environmental investment has not been as widespread as expected (Mercado, 1999). Thus, we propose a policy of market incentives to encourage small firms to modernize their operations, for example, self-regulation combined with environmental credits, financial incentives, and technical assistance.
What Determines How Much Business Spends to Improve Environmental Compliance?
Business behavior is usually analyzed with two approaches. The first approach uses case studies. Case studies examine the different environmental activities carried on by companies: the existence or nonexistence of an express policy; environmental management and training programs; the company's investment in environmental equipment and machinery; and, finally, the association of these elements with the company's size, the age of its technology, and whether it is a foreign or exporting enterprise.
The second approach involves the specification of econometric models to examine businesses' environmental stewardship and the factors that determine those policies. This type of analysis has been done for several developing countries, including Thailand, Bangladesh, Malaysia, Indonesia (Hettige, Huq, Pargal, & Wheeler, 1996), Mexico (Dasgupta, Hettige, & Wheeler, 2000), and Korea (Aden, Kyu, & Rock, 1999). Because raw data varies from country to country, dependent variables are not the same in every model, making it hard to compare apples to apples and oranges to oranges. In most cases, authors have tried to develop ad hoc indices. For example, Dasgupta et al. (2000) built an index based on environmental management systems, such as ISO 14001, that tracked whether officers and employees were exclusively dedicated to environmental stewardship, training, and compliance, while Hettige et al. (1996) developed an index of abatement efforts in Thailand, Bangladesh, and Malaysia, and water-pollution intensity in Indonesia. As an example of other dependent variables, Aden et al. (1999) used estimates of environmental spending.
Environmental investment decisions depend on many factors. First are factors arising from outside pressure, the most obvious of which is regulatory pressure. However, as Hettige et al. (1996) show, regulatory change can hardly explain, on its own, reductions in pollution. Their research in Thailand, Bangladesh, and Malaysia, therefore, includes other motives, such as companies' structural characteristics, to explain differences in environmental behavior. As is well known, changes in the environmental law in the aforementioned countries occurred twenty years later than in developed countries. Also, regulations do not always have the same degree of enforcement, or when they do, there is insufficient institutional capacity to enforce them with the same aggressiveness as in the United States. Despite a weaker regulatory climate, there are factors, such as image and community pressure, compelling companies to search for solutions to their environmental problems. The studies above have documented companies that endeavor to abate pollution at the level of developed countries: This willingness to spend on environmental technology does not always correlate with the level of enforcement.
A desire to meet the needs of its customers may be another external factor affecting a company's environmental decision making. Compliance avoids fines, the risk of temporary or permanent closure, and the possibility of adverse publicity. Some customers have strict purchasing policies dictated by the home office, and these customers avoid doing business with suppliers who do not follow acceptable environmental practices. Customer pressure may increase or decrease sales, and this pressure becomes significant when the company competes in the international market, where customers are more demanding. Thus, exporting enterprises may be compelled to comply with environmental rules and invest in cleanup technology. They know that, otherwise, they may be vulnerable to claims of ecological dumping, and because of potential bad publicity, these companies have more incentive to comply than those operating exclusively in the domestic market. However, so far, evidence does not clearly associate proactive environmental behavior with exports. (3)
There are also internal compliance pressures, arising primarily from the company's shareholders. A bad spill, an explosion, or a poor environmental record can have an adverse effect on banks and investors; their decisions may be based on risk assessment. Greater risk implies more expensive lending or business premiums. With multinational companies, a subsidiary's accident may lead to a fall in stock prices. The board of directors has an incentive to authorize environmental investments and their concomitant activities (Henriques & Sadorsky, 1996).
The factors that cause a company to take steps to decrease their impact on the environment are complex, and for a model to be valid, all the variables that lead to a decision need to be included. Because earlier studies pointed to a positive association between foreign ownership and environmental performance, our model incorporated a variable for ownership by foreign capital. Shareholder pressure may be present in any company with publicly traded stock, but the reason we chose this as a variable is that we could easily obtain information about foreign enterprises.
In addition to foreign ownership, important variables include the firm's size, financial strength, and technological capability--whether or not it is savvy enough to purchase and implement new technology. The link between a firm's size and the intensity of its environmental programs turned out to be important. Pollution, for example, exposed the firm to public scrutiny. We found that it was easier for larger firms to solve environmental problems, a scaling effect that became evident when we compared the track records of giant corporations with those of...
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