preliminary interviews with managers of foreign investment firms to guide the research. .... respect to the role of the environment and firms' strategic development ...
DO FIES ADOPT PRO-ENVIRONMENTAL STRATEGIES IN DEVELOPING COUNTRIES?
By
David Dean Klossner Submitted in Partial Fulfillment of the Requirements for the Conceptual Paper in the Executive Doctor of Management Program at the Weatherhead School of Management Advisors: Sheri Perelli, EDM Rob Hilton, EDM Leonard Lynn, PhD Peter Gerhart, JD
CASE WESTERN RESERVE UNIVERSITY June 2009
DO FIES ADOPT PRO-ENVIRONMENTAL STRATEGIES IN DEVELOPING COUNTRIES?
ABSTRACT This study explores how US manufacturing firms with operations in India construe their roles and responsibilities relative to host country environmental concerns and how they develop environment-related strategies. In particular, we hope to advance understanding of the relative influence of internal versus external factors that influence decision processes and ultimate corporate behaviors. How do managers of FIEs understand the factors that influence the adoption of pro-environmental strategies in developing countries? To what extent are FIE environmental strategies motivated by internal factors versus external factors? How and to what extent do FIE management initiatives involving firm-specific resources and organizational capabilities affect the adoption of eco-friendly strategies versus the influence of critical stakeholders? A conceptual model was inspired by the literature and several preliminary interviews with managers of foreign investment firms to guide the research. Keywords: environment; India; foreign investment;; manufacturing; economy; eco-friendly; natural resource based theory; FIE environmental strategy; haven; halo; developing countries; pollution; sustainable development; stakeholder
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TABLE OF CONTENTS Abstract ..................................................................................................................................... 2 Introduction............................................................................................................................... 4 Research Question and Conceptual Model ............................................................................... 5 Conceptual Framework............................................................................................................. 7 Research Design...................................................................................................................... 28 Appendix: Interview Protocol................................................................................................ 33 References............................................................................................................................... 35 List of Figures Figure 1: Conceptual Model ........................................................................................ 6 Figure 2: A Natural-Resource-Based View: Conceptual Framework ....................... 15 Figure 3: Hart’s Concept of Sustained Competitive Advantage................................ 16 Figure 4: Hart’s Three Strategies – Interconnected ................................................... 17
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INTRODUCTION
Foreign investment enterprises (FIEs) in developing countries have increased exponentially over the last twenty years (Huang, 2001). The total equity position of FIE’s increased from 8% of the world’s GDP in 1990 to 26% in 2006 (Hijzen, 2008). Simultaneously, pollution has increased greatly in developing countries (Sequeira, 2008). Lofdalh (2002) observes the link between these two developments, noting that increased trade and production have resulted in intensified pressure on the environment. Considerable literature has summarized the increase of foreign investment in conjunction with increasing pollution (Copeland & Scott, 2003). This research reflects two points of view: FIEs as culprits of pollution - the “Havens” theory – and, conversely, FIEs as protectors of the environment−the “Halos” theory (Cole & Elliott, 2005). “Havens” describe developing markets with lax environmental regulations that attract polluting industries, sometimes referred to as “environmental renegades” (Zarsky, 1999). “Halos” describe organizations that bring their most advanced and environmentally-friendly technology to developing countries (Albornoz, Cole, Elliott & Ercolani, 2009). As observed by Gentry (1996), foreign direct investment is neither a bane nor a boon – examples can be found to support both arguments, An FIE may choose to operate in a developing country to avoid high regulatory regulations but may still employ relatively cleaner production techniques and fully integrated environmental management systems (EMS) to the subsequent benefit of the host country (Albornoz et al., 2009). Both streams of literature follow two approaches – efforts to determine quantitatively if hypothesized FDI/environment relationships are significant and efforts to measure the environmental impact of specific investment projects in particular countries (Zarsky, 1999).
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We propose qualitative research based on semi-structured interviews with managers of US-based FIEs in one of the world’s fastest developing markets, India, where few empirical inquiries about the FDI/environment relationship have been conducted. Our objective is to better understand how US manufacturing firms with operations in India construe their roles and responsibilities relative to host country environmental concerns and how they develop environment-related strategies. In particular, we hope to advance understanding of the relative influence of internal versus external factors that influence decision processes and ultimate corporate behaviors. RESEARCH QUESTION AND CONCEPTUAL MODEL
How do managers of FIEs understand the factors that influence the adoption of proenvironmental strategies in developing countries? To what extent are FIE environmental strategies motivated by internal factors versus external factors? How and to what extent do FIE management initiatives involving firm-specific resources and organizational capabilities affect the adoption of eco-friendly strategies versus the influence of critical stakeholders? A conceptual model, presented as Figure 1 below, was inspired by the literature and several preliminary interviews with managers of foreign investment firms to guide the research.
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FIGURE 1: Conceptual Model Environmental Performance
Firm Resources Organizational Capabilities Decisions Related Environment Stakeholders Interests
Financial Performance
It is not clear how foreign investing enterprises develop environmental strategies in the developing countries in which they operate (Hoskisson, Eden, Ming Lau & Wright, 2000). The natural resource view of the firm (NRVF) suggests that firm-specific resources lead to the emergence of organizational capabilities that, in turn, influence environmental strategy formation (Hart, 1997). A recent qualitative study in China (Chan, 2005) concludes that pro-environmental strategy − like all corporate or business strategies − depends on organizational capability to deploy firm-specific resources (financial, human and technological). Chan found that firms that meet or exceed societal environmental expectations integrate environmental issues into the strategy planning process and implement total quality environmental management, and as a result tend to have more firm-specific resources and distinctive capabilities than firms without such strategies. We wonder, however, to what extent firms, despite abundant resources and high organizational capability, may fail to adopt such strategies − and whether some firms lacking abundant resources and capability are able to adopt laudable environmental strategies. We wonder also to what extent the interests of external stakeholders affect FIE environmental strategy adoption in
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developing countries. Under what circumstances do firms implement strategies that respond to government, NGO or community interests, and how do such strategies differ from those internally motivated? Will environmental strategy initiatives generated by the NRVF process be more measurable, sustainable or impactful than externally motivated initiatives? Are US FIEs, which are typically medium to large firms, more sensitive to external stakeholders and, if so, to what extent does this influence their strategy development? CONCEPTUAL FRAMEWORK
We begin this section with a short discussion about the rapid growth of FIEs in developing countries and the literature that supports the link between foreign investment and environmental degradation. Next, we overview the “Haven” and “Halo” theories about foreign investment in emerging markets. With this background in place, we then review the resource-based theory (RBT) of the firm and a derivative of it, the natural resource-based theory of the firm (NRVT), which has been proposed to address deficiencies in RBT with respect to the role of the environment and firms’ strategic development processes. Finally, we examine the influence external stakeholders, (such as NGOs, governments, shareholders, etc.) have on FIE’s strategic decision-making processes as they relate to the environment in developing countries. Foreign Investment in Emerging Markets The global equity position of FIEs as a percent of world GDP more than tripled between 1990 and 2006 (Hijzen, 2008). Most of this investment took place in developed countries; however, the rate of increase in emerging markets was also significant, particularly in the so-called “BRICs” − Brazil, Russia, India and China (OECD, 2008). Equity growth in developing countries grew from 22% in 1990 to 32% in 2005 (Hijzen, 2008).
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Currently, China and India are the largest developing countries in the world, with significant growth since the 1980s. In the last 20 years, China has attracted more foreign investment than India, primarily due to its larger domestic market and greater international relationships with OECD countries (Wei, 2005). Wei, contrasting China and India, identified the strengths and comparative potential of India as: lower cost labor, geographic closeness and cultural similarity to most OECD countries, and lower overall country risk. India, with almost twice the population growth rate as China, is doing better in certain key areas such as banking, an industry where India bests China in stability (Huang & Khanna, 2003). In 1991 the Indian Government initiated economic reforms, including de-licensing, waiving its 35% tax on corporate profits, providing for more privatization and liberal trade agreements and the promotion of foreign investment (Goldar & Banga, 2007). In 2006, foreign investment in India was the highest ever-- $16.9 billion -- the third year in which the rate had increased more than 40%. During the same period, according to a UNCTAD (2008) report, China’s inflow of foreign investment actually declined 3.3 percent. Using survey results, Bevan, Estrin & Meyer (2004), showed that 75% of foreign investors in India planned on supplying the domestic Indian market. A significant portion of the foreign investment in India has been concentrated in the software industry, which by 2004 already employed approximately 500,000 people (Farrell, Remes & Schulz, 2004). India’s skilled labor force is impressive − the number of 4-year engineering students produced per year (approximately 120,000) approximates US output (134,000); in addition, India graduates over 100,000 three-year engineering students per annum. Trade, FDI, imports and exports have all steadily increased in India for more than three decades.
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Environment in Developing Countries During the last 20 years, as investment in developing countries has burgeoned, so has global environmental pollution (Grether & de Melo, 2003), evidenced by increases in annual greenhouse gases (GHG), primarily CO2 emissions (Aliyu, 2005). The problem is predicted to exacerbate with world CO2 emissions increasing 44% from 2010 to 2030 and 106% from 1990 to 2030 (http://www.eia.doe.gov/oiaf/ieo/highlights.html). Lofdalh (2002) observes the link between increased foreign investment and growing pollution in emerging markets, noting that the resulting increase in trade and production has resulted in intensified pressure on the environment. Air pollution has caused a slowdown in rice production, which is an important food staple for India’s 1.2 billion people (Dunham, 2006). In Delhi, India, over 70% of all deaths occur before the age of 65, partly because of the acute exposure to air pollution (Cropper, Simon, Alberini, Arora, & Sharma, 2006). In 2005 the total suspended particulate (TSP) in Delhi was 378 micrograms per cubic meter, which is five times the World Health Organization’s (WHO) standard (Cropper et al., 2006). “Haven” versus “Halo” Theories ”Haven” versus “Halo” theories are contrasting notions about the relationship between FIE and pollution. The “Pollution Havens Hypothesis” (PHH) suggests that intensive pollution industries will move to countries where pollution regulations are less stringent, typically developing countries that provide “havens” for FIEs seeking to avoid pollution control costs and restrictions. The “Halo” theory argues that FIEs introduce best management philosophies and practices to developing countries which reduce pollution not only in their specific industries, but in others located nearby. Much of the literature that focuses on the “Havens” theory uses empirical findings
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that establish relationships between growth and pollution, environmental quality and environmental competitiveness (Eskeland & Harrison, 2003). Some observers suggest that environmental regulation plays an important role in shaping a country’s comparative advantage (Cole & Elliott, 2005). If international competitiveness is influenced by differences in regulation, then multinational firms may be motivated to relocate to countries with weaker environmental standards (Esty & Gerardin 1998). The Sierra Club, for example, argues that “in our global economy, corporations move operations freely around the world, escaping tough pollution control laws, labor standards, and even the taxes that pay for social and environmental needs.” The assertion that countries with relatively weak environmental regulations will attract pollution-intensive production has become the subject of a rapidly growing body of literature (Cole & Fredriksson, 2009). Zarsky (1999) observes two variants of PHH. “Industrial flight” describes pollutionintensive firms that move from higher cost OECD countries to markets where compliance costs are lower. The “pull factor” view of PHH argues that developing countries use lax environmental standards to entice foreign investment. “Whether ‘pushed’ or ‘pulled,’ dirty industries, dirtier production stages, and poorly performing firms will, according to the PHH,” Zarsky concludes, “agglomerate in low-standard developing countries.” The “pull factor” may be heightened when there is competition for foreign direct investment (FDI). Spar & Yoffie (1999) state that FDI causes competition among developing countries, causing them to lower their standards for labor and the environment to attract FDI. According to Grether and de Melo (2003), “environmentalists and ecologicallyoriented academics argue that the political economy of decision-making is stacked up against the environment in that the regulatory gap automatically implies a ‘race to the bottom.’”
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Another premise, as described by Zarsky (1999), is the “stuck in the mud hypothesis” in which environmental standards become a collective action problem, resulting in companies taking no action either positive or negative… becoming ”stuck in the mud.” The basic assumptions of the “Havens Hypothesis” and the race-to-the-bottom model are contradicted by a large body of empirical research, Wheeler (2000) observes, called the “Halo” Theory. Free marketers have countered the Havens hypothesis with claims that global market forces diffuse best management practices and foreign companies, typically from the Organizations of Economic Co-operation and Development (OECD) nations, create "pollution halos" in developing countries (Zarsky, 1999). The “Halo Hypothesis” suggests that superior technology and management, as well as demands by “green consumers” at home, make OECD firms the vehicles for better environmental performance (Zarsky, 1999). Some FIEs, for example, insist on implementing the same internal standards used at home in the foreign countries where they operate. Supporting this point of view, Eskeland and Harrison (2003) found that foreign ownership was associated with cleaner and lower levels of energy use in Mexico, Venezuela and Cote d”Ivorie. Similarly, Blackman and Wu (1998) have argued that FDI has focused on advances generating technologies and better management concerned with energy efficiency and reduced emissions. Zarsky (1999) stated, “The quality of the evidence, both statistical and case study is poor compared to the research needs. In terms of location decisions, most of the statistical studies rely on very aggregated data about ‘industry choices’ which shed little light on firms or production stages.” Zarsky’s (1999) reference to the quality of evidence includes statistical studies which rely on incomplete indicators of environmental performance and case studies which suffer from lack of analytical frameworks to link macro and micro ecological impacts.
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Considering both the “Haven” and the “Halo” theories, Strike, Gao & Bansal (2006), argue that firms can be socially responsible in some activities and simultaneously irresponsible in others – being, in their words, “good while being bad.” Strike, Gao & Bansal (2006) tested their hypothesis by examining 222 publicly traded US firms from 1993 to 2003, and found, for example, that some firms have acceptable standards for many workplace issues such as labor conditions in developing countries, but, based on their home-country standards, are irresponsible. Resource-Based Theory of the Firm For decades, researchers in the field of strategic management have argued that competitive advantage depends upon the match between distinctive internal organizational capabilities and continually changing external conditions (Andrews, 1971). Over the years, the relative importance of firms’ internal capabilities (e.g., Galbraith & Kazanjian, 1986) versus the role of exogenous (political, economic, social and technological) factors (e.g., Porter, 1990) in sustaining competitive advantage (Judge & Douglas 1998; Luo, 1999) has been debated. The traditional resource-based theory of the firm (RBT) emphasizes internal factors, capabilities and intangible resources (key among them include inputs into the production process such as employee skill, patents, brands, technology and capital equipment) and contends that competitive advantage can only be sustained by resources that are not easily duplicated by the competition (Rumelt, 1984). Intangible resources, because of their lower tradability, require commitment and enable strategies to persist over longer periods of time (Ghemawat, 1990), which translates into sustainability of competitive advantages for firms. Many CEOs have rated company intangible assets such as reputation, product reputation, and employee know-how as the most important contributors to overall
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success (Hall, 1992). The RBT literature uses different terms, such as “capabilities,” “core competencies,” or “knowledge” to refer to them (Villalonga, 2004: 206). Konar & Cohen (2001) found environmental performance to be correlated with the intangible asset value of certain firms, and reduction of pollution to be associated with greater market value. It has been argued, however, that traditional RBT scholars, have had a “…limited view of what constitutes a firm's external ‘environment,’” which has rendered the theory inadequate “as a basis for identifying important future sources of competitive advantage” (Hart, 1995). Over time many scholars examining RBT began to recognize the importance of external competitive strategy theories along with internal capabilities (Maijoor & Witteloostuijn, 1996). A fuller appreciation of the role of external factors with respect to competitive success has developed over time (Fiegenbaum, Hart & Schendel, 1996; Barney, 1991) – most particularly with respect to the role of the biophysical environment (Hart, 1995). “Any organization operating today that is unprepared to assess environmental changes and threats, or that is unable to respond quickly and thoroughly to fast moving events that command intense public, governmental and media attention, deserves the harvest that such incapacity will yield. The fruits of such shortsightedness can include destruction of organizational reputation and credibility, civil and criminal litigation, ill-conceived governmental regulation and legislation and, most importantly, forfeiture of legitimacy as an acceptable and conscientious institution within organized society” (1995: 156). RBT is the cornerstone of how foreign investing enterprises develop environmental strategies in the developing countries in which they operate (Hoskisson et al., 2000; Strike et al., 2006). More than a decade ago, Hart predicted that the most important driver of new resources and capability development for firms would be the constraints and challenges posed by the environment – a realization that motivated him to introduce an amended notion
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of RBT which he calls the “natural-resource-based view of the firm” or NRVF. Natural-Resource-Based View of the Firm (NRVF) During the last decade, environmental degradation has become the single most significant external condition to impact the corporate agenda (Okafor, Hassan & Hassan, 2008). When establishing and managing their operations, corporations are increasingly constrained by governmental and societal awareness of environmental degradation (Hart, 1995). As a result, firms today, it has been argued, must incorporate consideration of environmental issues − now seen as enhancing competitively valuable organizational capabilities (Banerjee, 2001) − into their strategic planning processes (Shrivastave, 1995) Building upon RBT, which he recognized as failing to identify important emerging sources of competitive advantage, Hart proposed NRVF as a theory of advantage based specifically on the firm's relationship to the natural environment. Hart positioned NRVF not only as a conceptual tool, but as a theoretical framework to be used as a guide for empirical work. The natural-resource-based view, he argued, “…opens a whole new area of inquiry and suggests many productive avenues for research.” The NRVF framework motivated the proposed research and formed our conceptual model. NRVF connects the environmental challenge and firms’ resources operationalized through three interconnected strategic capabilities − pollution prevention, product stewardship, and sustainable development. These three strategies, Hart argues, are rooted in too-costly-to-copy firm resources and capabilities that do not jeopardize competitive advantage and may reinforce and differentiate the firm's position through the positive effects of enhanced reputation. To facilitate discussion about these strategies, we import three figures from Hart’s paper in the text below.
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As illustrated in Figure 2, Hart conceptualized each of the three strategies as a firm capability 1) driven by an environmental force; 2) requiring a specific resource; and 3) providing a specific competitive advantage (Hart, 1995: 992): FIGURE 2: A Natural-Resource-Based View: Conceptual Framework Strategic Capability Pollution Prevention Product Stewardship Sustainable Development
Environmental Driving Force Minimize emissions, effluents & waste Minimize life-cycle cost of products Minimize environmental burden on firm growth and development
Key Resource Continuous improvement
Competitive Advantage Lower costs
Stakeholder integration
Preempt competitors
Shared vision
Future position
How foreign investing US firms understand these strategies and how and to what extent they are operationalizing them is the focus of our proposed research. A definition of each strategy follows: Pollution prevention. Firms, Hart argues, are driven by the need to minimize emissions, effluents and waste. Doing so, he proposes, will provide both immediate and longer term competitive advantage: firms that adopt pollution-prevention strategies will evidence simultaneous reductions in emissions and capital expenditures for pollution control – and, over time, a pollution-prevention strategy will move from being an exclusively internal (competitive) process to an external (legitimacy-based) activity. Product stewardship. Firms, Hart says, want to minimize the life cycle costs of their projects, a goal they can address by adopting product stewardship strategies. Firms, he argues, with demonstrated capability in cross-functional management (i.e., those with socially complex skills) will be able to accumulate the resources necessary for product stewardship more quickly than firms without such capability. Hart predicts that firms that
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adopt product stewardship strategies will integrate the external stakeholder’s perspectives in product development and planning processes and, over time, a product stewardship strategy will extend beyond the preemption of firm-specific resources and become a stakeholder oriented (legitimacy-based) process. Sustainable development. Firms that are committed to sustainable development, Hart argues, have a strong sense of social-environmental purpose and (1) will have a demonstrated capability in establishing shared vision (rare skills); (2) will be able to accumulate the resources necessary for sustainable development more quickly than firms without such capability; (3) will show evidence of substantial development of new, lowimpact technologies and competencies; and (4) over time, will collaborate with public and private organizations to bring about substantial technological change. Hart’s conjecture that these three strategies can create sustained competitive advantage − evidenced both internally and externally – is demonstrated in Figure 3 below, excerpted from his paper (Hart, 1995: 999): FIGURE 3: Hart’s Concept of Sustained Competitive Advantage Sustained Competitive Advantage Internal [Competitive Advantage]
Pollution Prevention
Tacit [Causally ambiguous] • For example, total quality environmental management (TQEM)
External [Social Legitimacy]
Transparency • Public scrutiny
Product Stewardship
Socially Complex (Process based) • For example, design for environmental (DIE)
Stakeholder Integration • External advisors
Sustainable Development
Rare (Firm specific) • For example, shared vision
Collaboration • Technology cooperation
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The three strategies, Hart argued, are sequentially interconnected as illustrated below by two mechanisms – embeddedness and path dependence (Hart, 1995: 1005). FIGURE 4: Hart’s Three Strategies – Interconnected
Interconnectedness Lower Costs Pollution Prevention
•
Minimize emissions, effluents, and waste
Strategies are path dependent
Minimize life-cycle cost of products
Product Stewardship Sustainable Development
Future Pollution
Preempt Competitors
• Strategies are embedded and overlapping
Minimize environmental burden of firm's growth and development
Hart’s Natural Resource-Based View of the Firm (NRVF) has been cited many times by other authors examining the relationship between corporations, society and the environment. Many of the citations fall within three major categories: corporate strategy, which includes corporate social responsibility and environmental management systems (EMS); the extension of NRVF; and stakeholder management and orientation. We discuss the latter in the next subsection. Hart’s NRVF theory has influenced the examination of corporate strategy as it relates to pollution issues. Two sets of authors frequently cited are Russo & Fouts (1997) and Priem & Buttler (2001). Russo & Fouts (1997) focus on two environmental strategies advanced by Hart: compliance strategy, wherein firms rely on pollution abatement through a short-term, "end-of-pipe," approach, and prevention strategy, wherein the firm develops a systemic approach that emphasizes source reduction and process innovation. Priem & Buttlers’ (2001) whose work is a competent overview of the many research programs in strategic
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management that are related resource-based views (RBV), cite Hart’s work as one element of corporate strategy with respect to social and natural environmental issues. Priem & Buttlers conclude that for RBV to fulfill its potential as a strategic management tool it must incorporate environmental factors such as pollution prevention. Aragón-Correa (1998) examines firms who are considered “compliance-plus,” which covers organizations that not only abide by the law but also have their own natural environmental management systems (EMS). Firms with proactive business strategies who developed EMS have traditional corrective and modern preventive natural environmental approaches which, according to Aragón-Correa’s (1998) findings, support a competitive advantage. Klassen & Whybark (1999) use Hart’s work to explore firms who have developed manufacturing strategies that include an environmental technology portfolio which incorporates EMS and annual environmental performance reports. Klassen & Whybark (1999) found that firms with EMS that focused on pollution prevention had better performance than firms that focus on pollution control. A vast array of scholarly work has extended NRVF. Vachon & Klassen (2008) reviewed the NRVF and the link between environmental activities in the supply chain and internal quality management practices, determining that competitive advantage was directly correlated to the absorptive capacity of organizations to cultivate and transform knowledge within their supply chain. Several studies, most in the United States and Canada, have examined the relationship between NRVF and corporate competitive advantage, but no studies to date involve FIEs in India. Quantitative inquiries have included a study by Russo & Fouts, (1997) who surveyed 243 firms across different classifications, all located in the United States, over a two-year period from 1991 to 1992. Russo and Fouts’ findings of a
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connection between environmental and economic performance in high-growth industries supports the notion that "it pays to be green" and that this relationship strengthens with industry growth. Russo and Fouts (1997: 551) found that environmental initiatives driven by industry “benefit the firm not only directly, but also indirectly, by changing the nature of the competition it faces in ways that enhance returns to its resource base.” Prior studies, the authors argued, did not control for other predictors of profitability, relied on self-reported data, used questionable social responsibility measures (industrial classifications) and used single-industry samples. Judge & Douglas (1998), who studied 196 U.S. based firms in 1992, suggest that “managers who instead resist and contest pressures for environmental improvement risk not only a profound loss of productive energy, but also a bottom-line loss of equal proportions.” Judge & Douglas’ quantitative research consisted of 217 responses from randomly selected firms who had shown interest in environmental management by listing an environmental officer in the World Environmental Directory. The study differs from prior work in that it clearly identifies the incorporation of environmental practices as a “win-win” situation with benefits that outweigh costs, even though the exact relationship was not clear. We identified only one qualitative study (by Sharma &Vredenburg, 1998) in which 19 senior and middle management executives of seven companies in the Canadian oil and gas industry were asked to assess the applicability of the resource-based view of the firm within the domain of environmental responsiveness. Sharma & Vrendenburg’s work supports the idea that strategies that incorporate a proactive response to environmental issues are consistent with unique organizational capabilities, which in turn result in a more competitive firm.
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Chan (2005), who examined Hart’s theory in the context of FIEs operating in China, also suggests that a firm that expresses a relationship with the natural environment will have a competitive advantage. Chan’s 2004 quantitative work in China focused on 332 FIEs from two industries, clothing and electronics,. Chan’s study was more comprehensive than those of Sharma, et al., and Russo, et al., because he included all of the firm’s resources in his investigation and considered their effect on both financial and environmental performance. Chan concluded that enterprises operating in China benefit from the practice of NRVF, and found that FIEs were more competent in the adoption of environmental strategies than their wholly foreign-owned companies (WFO). Despite the academic and practical insights that can be drawn from Chan’s study, its confinement to just two FIEs that operate in China, electronics and clothing, hinders extrapolating results to other industries. Additional studies need to be created in other developing countries such as India, and encompass more than one or two industries. A third category of work citing Hart’s NRVF theory focuses on stakeholder influence and management. Hillman & Kiem (2001) found evidence that stakeholder management leads to improved shareholder value, Hillman & Kiem, supporting Hart’s theory of sustaining competitive advantage, found that investing in stakeholders relationships may lead to improved firm reputation, which in turn leads to a positive relationship with stakeholders. Castka & Balzarova (2008) found connections with stakeholder influence and management guidelines, such as ISO 14000 and newly developed ISO 26000. ISO 14000 is an environmental management system developed in 1996, for stakeholders to distinguish and make informed decision on whether a firm has established environmental standards (Terlaak, 2007). ISO 26000 was developed by the Advisory Group on Social Responsibility by
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stakeholders and established a standard to help facilitate and improve business-to-society orientation (Castka & Balzarova, 2007). Wang, Choi & Li (2008) used Hart’s work to help define what range of philanthropic contributions is most likely to be effective based on the firm resources. Stakeholder influence on managers of FIEs as they develop strategies that may include the adoption of pro-environmental decisions in developing countries is an independent variable in our conceptual model. External Stakeholders’ Effect on FIE Environmental Strategy A stakeholder is a party that affects or can be affected by the actions of a corporation (Freeman & McVea, 2001). Stakeholder theory argues that managers should make decisions which take into account the interests of all stakeholders in a firm (Jensen, 2002). Complicating efforts to meet stakeholders’ expectations, managers operating international businesses are challenged with the assessment of a variety of uncertain factors such as politics, government policy, and macroeconomic (particularly foreign) exchange and, more recently, environmental issues (Miller, 1993). Goodpaster (1991), building on Freeman & McVea 's definition of stakeholders, observed two types of stakeholders– strategic and moral. Strategic external stakeholders can affect the firm, whereas moral stakeholders are affected by it. Delams’s 2001 study clearly states that external stakeholders have an important and positive role in helping firms gain competitive advantage. Delams’s work links the adoption of the International Environmental Management Standard ISO 14001 to firms’ competitive advantage if the firms involve their external stakeholders (Delmas, 2001). Welcomer (2001) asserts that the extent that corporations are socially responsible will reflect the extent to which they will attend to external stakeholders’ interests. Gordy (1993), states that firms that
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do not fulfill their responsibilities to social and political stakeholders may be forced out of existence via lawsuits, boycotts, and regulatory changes. Despite this, Porter & van der Linde (1995) describe contentious and costly conflict between governmental regulators and business over environmental rulings. Cobb (1998) notes corporations have often worked to limit governmentally imposed environmental regulations because they find them “foolish or unnecessarily cumbersome.” As testament to the potential conflict between external stakeholders and corporate decisions about the environment, Cobb (1998: 4) notes, “Policies that might be both better for the environment and more profitable in the long run are often rejected by corporations because they do not have the desired immediate effects. CEOs who view matters in terms of a longer time-span are likely to be replaced by those who will take whatever actions are needed for immediate profit.” Our proposed research aims to understand if and how external stakeholders influence US FIE’s environment-related decisions in developing countries. External stakeholders, as we will discuss in this section, include non-governmental organizations (NGOs), governments and civil society. NGO, Government and Civil Society Influence on Environmental Strategy. Influence on corporations is often exerted by non-governmental organizations (NGOs), whose power and influence has risen significantly during the last two decades. NGOs have “proliferated in the latter half of the 20th century” (Clark, 1995: 5) as transnational actors who are influencing world politics. NGOs with potential impact on firms range from local lowbudget organizations to global powerhouses such as United Nations Environment Program (UNEP), the Worldwatch Institute, International Labor Organization (ILO), International Trade Union Confederation (ITUC), World Trade Organization (WTO), International
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Monetary Fund (IMF), The World Bank, and many universities and colleges (Clark, 1995). In recent years transnational NGO networks have increased “informal” pressures, particularly on FIEs, who, in response, have purposely adopted higher environmental standards for their subsidiaries than comparable indigenously owned firms (Clark, 1995). ENGOs (NGOs with a specific focus on the environment) serve not only to monitor and motivate businesses to be environmentally responsible, but also as watchdogs of local governments’ implementation of national environmental policies (Economy, 2006). ENGOs have worked energetically in support of regional and international accords such as the Montreal and Kyoto Protocols and have significant influence on how domestic and international businesses operate. ENGOs have successfully used litigation to pursue higher corporate environmental standards and in some cases have been able to delay, or scrap, project proposals by raising objections at public hearings (Perkins, 2007). Perkins cites a case where foreign independent power producers (IPPs) voluntarily adopted environmental performance standards and codes after pressure from NGOs (Perkins, 2007). In many cases government subsidies or tax incentives for alternative energy technologies influence the environment-related decisions in developing countries (AragonCorrea & Sharma, 2003). Many investors make investment decisions in developing countries based on government regulation, some of which are environmentally related (Harrison & Freeman, 1999). Some governments in developing countries have encouraged private sector investment to meet the growing demand for infrastructure as well as certain regulatory environment requirements (Banerjee, Oetzel & Ranganathan, 2006). Developing countries addressing environmental issues may require a different strategic approach, and the organizations with the most expertise in serving these challenges are government and civil
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society (London & Hart, 2004). Reviewing some of the influential factors of civil society, DiMaggio & Powell (1983) first outlined three mechanisms that provide explanation of civil actors’ behavior: coercive, mimetic, and normative. Perkins (2007) elaborated on DiMaggio & Powell’s work and defined coercive behavior as exhibited by civil actors who have been persuaded to adhere to certain practices either directly or indirectly by different countries’ societal stakeholder groups. The mimetic process crosses borders, as state actors follow more advanced environmental standards previously adopted by other countries (Perkins, 2007). The third mechanism, normative, is the influence of environmentally motivated political groups and informed communities who successfully diffuse norms or legitimate practice (Perkins, 2007). External Stakeholder Influence in India. Ruud (2002), examining forces that influence FIEs environmental procedures and practices in India, found that 50% of transnational corporations consider the standards set by their parent company as the most influential factor driving local environmental practices, while 23% referenced government regulation, 13% decisions by local management and 6% pressures from NGOs. The Bhopal disaster of 1984, caused by a gas leak at a pesticide plant, resulted in the deaths of nearly 4000 Indians and the passage of the National Environment Act of 1986 (Qadir & Gorman, 2008). This legislation delegated powers to the executive branch of the central government but enforcement generally remained with the State Pollution Control Boards (SPCBs). However, according to Qadir & Gorman (2008), the State Pollution Control Boards remain ineffective in enforcing environmental regulations due to lack of power to impose fines on violators, understaffed and underfinanced operations, and incomplete listing of all factories located in their respective states. As a result, compliance
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with applicable laws is low, and air and water quality monitoring is infrequent and inconsistent (Qadir & Gorman, 2008). An example of the ineffectiveness of the SPCB is offered by Ruud (2002), who describes a US-based company that despite serious environmental problems at a Delhi plant was allowed to continue to operate with only continued requests for improved performance. To make the situation worse, India relaxed its controls on foreign investment to increase capital flows and, in the process, a number of environmental regulations were rolled back as foreign investment grew (Broughton, 2005). Lakshmi (2009) reports a member of the India delegation at the U.N. conference in Bonn, Germany admitted that, “If the question is whether India will take on binding emission reduction commitments, the answer is ‘no.’ It is morally wrong for us to agree to reduce when 40 percent of Indians do not have access to electricity." Heavy reliance on coal-fired power plants and poor enforcement of vehicle emission laws are other consequences of economic concern that have taken precedence over environmental protection in India (http://www.eia.doe.gov). For coal-fired power plants, India’s regulations focus only on particulate emissions, although the enforcement of these regulations has been weak, and sulfur oxide, nitrogen oxide and carbon dioxide emissions are not regulated (Chikkatur, 2008). Indian governmental regulations on vehicle emissions are relatively new; in 1991 the first-stage emission standards were enacted for gas vehicles and in 1992 for diesel vehicles (http://www.siamindia.com). In 1995 catalytic converters for new cars were required in the four metros of Delhi, Calcutta, Mumbai and Chennai, along with a supply of Unleaded Petrol (ULP). According to Sengupta (2001), over 70% of the air pollution in the major urban cities can be attributed to vehicular traffic. By 2013 India will become the fastest-growing car market in the world, according to JD Power (2009). On
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October 6, 2003, the National Auto Fuel Policy announced a phased program for introducing Euro 2 - 4 emission and fuel regulations by 2010, which will bring Indian vehicle emission standards very close to the emission standards of the United States and Europe (http://www.siamindia.com). With the introduction of more stringent emissions regulations, domestic manufacturers are forced to abandon this low-tech strategy and upgrade their engine designs; for example, foreign firms such as Ford Motor Company can be influential in India by introducing their environmentally advanced products (Perkins, 2007). Prior to this, domestic manufacturers, with their competitive advantage rooted in manufacturing cheap, “low-tech” cars, sought to compete based on cost. In practice, this meant continuing with the production of established carburetor-based gasoline engines, rather than challenging transnationals by upgrading to more environmentally-sound direct injection equivalents. Although less advanced, such engines were cheaper to manufacture, allowing indigenous firms to undercut the Indian subsidiaries of transnational vehicle manufacturers. India’s water pollution has many sources. The most significant sources are city sewage, industrial waste and agricultural run-offs. Only about 10% of the waste water is treated (Maria, 2003); the rest is discharged into groundwater, rivers and other water bodies. According to the Central Pollution Control Board (CPCB, 2007), untreated sewage is responsible for 80% of the total water pollution in the country, and 40% of this sewage is generated by India’s most polluting industries - small size industries (SSIs). Pollution from SSIs puts the Indian regulators in front of a difficult arbitrage between economic development and environmental sustainability (Maria, 2003). Many of the laws that are in place to protect the water supply in India came into force soon after the Bhopal gas tragedy, but, unfortunately, compliance with applicable laws is low, and water quality monitoring is
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infrequent and inconsistent (Qadir & Gorman, 2008). India’s economic development is rooted in its social organization, and addressing inequities requires not only economic changes but also societal transformation (Stiglitz, 1998). India has highly public participation and awareness regarding environmental issues, and in many cases, protests, demonstrations and mediated actives are commonly used to influence politicians and business (Chakkatur, 2007). Indian society has witnessed movements of many types, including farmers’ civil rights, pressure from middle-class environmentalists and other environmental protection movements which are described as “Civil Regulation” (Swain, 1997, Newell, 2001). The influence these external stakeholders have on environmental decisions by US firms in India is exemplified by the case of US-based FIE Monsanto’s seed sterilization technology. When introducing genetically modified seeds in India, Monsanto responded to the concerns of many relevant and apparently important stakeholders and even received governmental approval, but did not consider the reaction of millions of small farmers who protested in the streets, forcing the firm to abandon the new technology (Clement, 2005). Goyal & Sidhartha (2003) note that Indian citizens are more actively asserting their rights and positioning themselves within the democratic framework to protect their interests and the environment. Gupta & Goldar (2005), using the results of a corporate environmental performance rating developed by India’s leading ENGO, found that capital markets in developing economies reflect the perception of weak environmental performance by dirty industries who are penalized by negative returns. Additionally, Makins (2003) found that many proposals and programs to improve air quality while reducing poverty through rural development and electrification are being presented by many Indian NGOs
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Examining Indian NGO influences, Perkins (2007: 292) states, “Indian NGOs have been able to delay, or scuttle altogether, proposals for new projects by raising objections at the public hearing stage.” Another example of the potential influence that NGOs are exhibiting is the relatively high number of petitions filed by NGOs regarding the environment that the Supreme Court and High Court in India have on their hearing schedule (Singh, 2007). Additionally, NGOs have performed a monitoring role, particularly in relation to foreign operations in some of the dirtiest industries (Perkins, 2007). Perkins (2007) also found that some transnational activist networks, which have increased “informal” regulatory pressures on FIEs, have found themselves the subject of scrutiny by domestic and foreign NGOs. Not all NGO actions are positively embraced by governments and some have been hostile to the idea of NGO participation with planned environmental legislation (Williams & Mawdsley, 2006). Undermining NGO’s influence, Makins (2003) suggests that a not-forprofit institution be established in India to provide unbiased and objective oversight of the proposals and programs being presented by numerous NGOs. Understanding to what extent FIEs are concerned about NGO pressure and how NGOs influence FIE environment related behavior in India are goals of our proposed research. RESEARCH DESIGN
Methodology A qualitative study will be conducted using semi-structured interviews to generate a grounded theory from narrative accounts of observations and experiences related to environment related strategy development by firms operating manufacturing facilities in Ohio and India. Qualitative research helps us understand the world in which we live and the
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reasons why things are they way they are (Hancock, 1998). A grounded theory approach seeks to generate a theory from recognizing patterns in the data (Huberman & Miles, 2002). Different from the other methods of qualitative research, grounded theory evolves from continually comparing emerging themes (Silverman, 2006). Grounded theory is an interactive and evolutionary process that involves “tacking” back and forth between the components of design, theories, research questions, methods, contribution, and validity threats (Maxwell, 2006). Grounding concepts in the reality of data may help us to develop a well integrated set of concepts that provides a theoretical explanation for why businesses choose environmentally friendly technology. The two key concepts of grounded theory are comparative analysis in which data is collected and analyzed, and theoretical sampling in which decisions about what data should be collected next time are determined by the theory that is being constructed (Glaser & Strauss,1967). Comparative analysis is a critical evaluation of the emerging constructs, which is achieved by constant interaction between the data that is collected and the analysis of the data (Subbaby, 2006). Theoretical sampling should not be in terms of specific groups of individuals, but in terms of the variations, properties and dimensions of concepts (Strauss & Corbin , 1998). “In grounded theory” as Corbin & Strauss (1990: 9) state, “representativeness of concepts, not of persons, is crucial. The aim is ultimately to build a theoretical explanation by specifying phenomena in terms of conditions that give rise to them, how they are expressed through action/interaction, the consequences that result from them, and variations of these qualifiers.” Sample Our sample will consist of fifteen US based FIEs who have manufacturing facilities in both Ohio and India. The firm pool from which these organizations will be selected will be
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derived from three sources: Fortune 1000 magazine’s annual list of the 1,000 largest American companies, the Ohio Department of Development web site, and Inc. Magazine’s 2002 annual list of private companies, located in Ohio. The Fortune 1000 list includes the 1,000 largest American companies ranked by revenues. The Ohio Department of Development web site, (http://www.odod.state.oh.us/research/), identifies publicly traded companies generating revenues of $1.2b to $40b, and $500m to $1b.. Inc. Magazine identifies private companies with revenues of $400m to $2.5b. We determined that only 23 of the companies compiled from the above sources are Ohio based with manufacturing facilities in India. From these 23 we hope to identify 15 willing to participate in our research The type of manufacturing facilities operated by the 23 firms described above range from clothing, chemicals, steel, glass, electronics, food, rubber, and banking equipment. We will approach these companies through our personal network and referrals from others. We will send letters to the CEO or President of each firm to describe our study and invite their participation. We will follow-up and contact these individuals by email or telephone to ascertain their willingness to participate. We expect to interview at least two people in each organization including one upper echelon executive responsible for firm strategy and one manufacturing and/or operations executive. The upper echelon executive will be located in Ohio and the manufacturing and/or operations executive manager will be located in India. In accordance with grounded theory principles, the ultimate number of firms in the sample will depend on theoretical situation. While our original design calls for no fewer than fifteen firms, a decision about expanding the sample will be made as data is collected and analyzed. Data Collection The research process will involve semi-structured interviews with FIE managers
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using an interview protocol. We will conduct the interviews, when possible, face-to-face, during the period May to August, 2009. All interviews will be digitally recorded. We will choose a location to conduct the interviews that is convenient, comfortable, and confidential from the perspective of the participant. The interviewees will be informed that they can exit the interview at any time and that all data shared will be confidential. The nature and form of the interview, the reason for audio recording and participant confidentiality will be discussed with the interviewee before the interview commences and a participation agreement form will be signed by the interviewee. Shortly after the completion of each interview, the recording will be downloaded to a personal computer and identified with an identity secured file name which will include the interviewee’s abbreviated last name and date; the recording will then be deleted from the recording device. A trustworthy commercial transcription service that understands and follows the precautions required for human subjects’ research will transcribe the recordings. All interview documents, audio recordings, transcribed word processing files, cross-referencing documents, and any printed transcriptions related to interviews will be destroyed no later than three years after completion of this study (expected completion May 2011). The interview protocol (Appendix X) was influenced by several exploratory interviews and may be further refined during early interviews. Four open-ended questions will be asked. First, we will invite the interviewee to provide an overview of his/her role in the organization and background information on the firm and its operations. Subsequent questions will explore how respondents’ firms develop strategies (in general as well as, specifically, environment related strategies) and interact with external stakeholders. We will also elicit managers’ perceptions of initiatives involving firm specific resources and
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organizational capabilities. Closing questions will focus on respondents’ understandings about globalization and the environment. The interview protocol will guide the interviews, however new questions may evolve spontaneously during the interview process. Data Analysis Line-by-line readings of the interview transcripts using coding techniques as outlined by Strauss and Corbin (1998) will be conducted. “Codable moments” (Boyatzis, 1998) will be categorized into themes and subthemes which represent the observations and experiences of the participants and will be compared to themes emerging from other transcripts for similarities and variations. Three phases of coding will be undertaken: open, axial and selective (Corbin & Strauss, 1990). During open coding the data is broken down analytically and events, actions and interactions are compared with others for similarities and differences. Categories and subcategories of codes will be continually refined during the axial coding phase. From selective coding, in which all categories are unified around a core category, key analytic ideas will emerge from the data. The coding software package (HyperResearch 2.7) will be used to facilitate the coding process (Boyatzis, 1998). Data collection and analysis are an interrelated process in grounded theory; analysis begins as soon as the first piece of data is collected and directs the next interview (Corbin & Strauss, 1990). Our analysis will involve constant comparison of data to identify similarities and differences in themes. Such comparisons will help achieve greater precision and greater consistency (Maxwell, 2005) in overall results.
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APPENDIX: Interview Protocol Prior to interview background review and category assignment: We will attempt to gather all relevant information about the organization where the interviewee works, such as external projections, mission statements, and press releases. We will attempt to understand the organization’s general terminology as it relates to factors of the environment. We will investigate the interviewee’s background and gather as much information as possible about decisions they have made that directly or indirectly influence the environment. From these investigations we will assign each company, on the basis of their own verbiage, a strong, moderate or weak/none environmentally concise rating (ECR). We will compare our pre-interview ECR to the impressions we develop during the interview and attempt to determine any differences between the two. Interview Design: We will conduct our interviews from two different perspectives. First, we will conduct interviews with upper echelon executives who set policy. These individuals will typically have titles such as CEO or president. The objective of these interviews will be to establish the environmental orientation of the corporation (EOC) by listening to the senior executives’ narratives about EOC. Our definition of environmental orientation includes many factors such as awareness, the degree of corporate social responsibility (CSR) and company strategies as they relate to theories of the Natural Resource-Based View of the Firm (NRVF). The second round of interviews will be conducted with operationally focused executives who typically have titles such as plant manager, operations manager or VP of operations. The objective of the second round of interviews will be to establish the operational environmental orientation of the corporation by listening to the operations executives’ narratives about EOC. Interview Questions – Upper echelon executive – policy maker: (1) Please tell me about you - both personally and professionally. (2) Think back when your company was considering to expand internationally, during that time, tell me about that (Specific Company). Potential probing questions: a. Why was (Specific Company) motivated to consider this expansion? b. Why was the decisions made? c. Who was involved with the decision? d. Who was not directly involved in the decision but still influenced the decision? e. Tell me about the leadership and culture at that time f. How long did it take? g. How was the decision made? h. Was there any one critical incident that influenced the decision? i. Was the same criteria used for other countries? j. What country was first and why?
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k. What process was involved? l. What was the criterion? m. What factors influenced the process? (3) Now, since the decision have been made to expanding international, please tell me about circumstances that have affected (Specific Company). Potential probing questions: a. Tell me about the leadership and culture? b. What External factors have become more prevalent? c. How does one geographical area compare to other? i. Who has the lowest cost and why? ii. What about Europe verses Asia? d. How has (Specific Company)’s corporate identity changed? e. Tell me about conversation you have had recently about (Specific Company)’s environmental position?
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