MANAGING THE ENVIRONMENT ACROSS BORDERS …unctad.org/en/docs/iteipcmisc12_en.pdf · environment function at headquarters rather than the local regulatory authorities. In an environmental

MANAGING THE ENVIRONMENTACROSS BORDERS

UNCTAD SECRETARIAT

Geneva 2002

ii

NOTE

Symbols of United Nations documents are composed ofcapital letters combined with figures. Mention of such a symbolindicates a reference to a United Nations document.

The designations employed and the presentation of thematerial in this publication do not imply the expression of anyopinion whatsoever on the part of the Secretariat of the UnitedNations concerning the legal status of any country, territory,city or area, or of its authorities, or concerning the delimitationof its frontiers or boundaries.

Material in this publication may be freely quoted orreprinted, but acknowledgement is requested, together with areference to the document symbol. A copy of the publicationcontaining the quotation or reprint should be sent to theUNCTAD secretariat.

UNCTAD/ITE/IPC/MISC.12

UNITED NATIONS PUBLICATION

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Acknowledgements

This booklet was prepared – under the supervision of KhalilHamdani – by Constantine O. Bartel. Diego Oyarzun-Reyesdesigned the cover and desktop publishing was done by TeresitaSabico.

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Contents

Page

Acknowledgements ............................................................. iii

Preface ......................................................................... vii

I. ENVIRONMENTAL MANAGEMENTACROSS BORDERS ................................................. 1

A. What Is Environmental Management? ................... 11. Main features ................................................... 32. Different types of management systems .......... 43. Managing other entities ................................... 64. Determinants of environmental

management practice ....................................... 8

B. Specific Survey Findings ....................................... 10

C. Environmental Management by Affiliates ............. 11 The influence of headquarters ................................. 13

D. Regulatory Pressure................................................ 15

E. Market Forces......................................................... 17

II. COUNTRY CASE STUDIES .................................... 19

A. Malaysia ................................................................. 14B. India ....................................................................... 23C. China ...................................................................... 28

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Preface

Transnational corporations (TNCs) have a special responsibilitywith regard to sustainable development. They operate in pollution-sensitive industries

. They also possess the technologies and managerial andorganizational techniques necessary to minimize the environmentalimpact of their activities. Thus, responsible environmentalmanagement can yield substantial benefits in developing countries.

Responsible environmental management includes corporatedecisions on company-wide environmental standards, the transferof clean technology between headquarters and affiliates,environmental training programs for employees in developingcountries, environmental outreach activities along the supply chainand marketing of products with environmental significance.

More than 30 provisions of Agenda 21 refer to corporateenvironmental management, including the following:

• TNCs should recognize environmental management asamong the highest corporate priorities and as a key tosustainable development.

• TNCs should be encouraged to establish worldwidecorporate policies on sustainable development.

• TNCs should introduce policies and commitments to adoptstandards of operation at least as stringent as those in thecountry of origin.

• TNCs should establish environmental management systems,including environmental auditing of production ordistribution sites.

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• TNCs should share their environmental management experienceswith local authorities, national governments and internationalorganizations.

Now, 10 years after the Rio Conference, it is appropriate toexamine how TNCs are addressing the environmental managementchallenges of their activities in developing countries. Between 1998and 2000, a team of researchers from the Copenhagen BusinessSchool, in collaboration with UNCTAD, examined theenvironmental practices of more than 160 affiliates of Europeancompanies with operations in China, India and Malaysia. Thisbooklet highlights the key research findings, of this project. Thefindings of the project is also published in its entirety as a book1 .

It is hoped that this work will contribute to an understandingof the corporate response to the challenges posed in Rio.

1 See, Michael W, Hansen (ed), (2002) Managing The EnvironmentAcross Borders: A Study of TNC Affiliates’ Environmental PracticesIn China, Malaysia and India. Copenhagen: Samfundslitteratur, ISBN87-593-0985-7

CHAPTER I 1

Environmental Management Across Borders

CHAPTER I

ENVIRONMENTAL MANAGEMENTACROSS BORDERS

A. What Is Environmental Management?

Environmental management is broadly understood asbeing the objectives, standards, procedures and practices that acompany establishes to manage environmental challenges.

Typically, an environmental management system consistsof various objectives and standards related to environmentalperformance, procedures for control and enforcement, and aformal allocation of responsibilities among employees andfunctions. A company will sometimes prefer to have itsenvironmental management system certified by an externalparty. Usually, such certification will take place according toone of the international environmental management standards(e.g. the BS 7750, the EMAS or the ISO 14000 series).

As firms internationalize through both equity and non-equity means, it becomes increasingly meaningless to confinethe environmental management dimension to nationalboundaries. Thus, cross-border environmental managementrefers to that part of the environmental management systemwhich deals with foreign operations. Such practices are theenvironmental bridge between headquarters and foreignaffiliates.

TNCs with extensive cross-border environmentalmanagement procedures seem to be no less profitable orcompetitive than companies without such procedures. The top

Managing the Environment Across Borders


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10 companies in the “World Competitiveness” rankings all haveelaborate environmental programs in place. It has also beenfound that TNCs adhering to high environmental standards inall economies, including emerging markets, have higher marketvalues than their competitors.

CHAPTER I 3


1. Main features

Although cross-border practices are seldom standardizedand formalized, the following five general features of cross-border environmental management practices have beenidentified.

First, such practices may include some general principlescovering the environmental activities of the entire corporation.These overall principles are typically stated in the corporatemission or, as it is sometimes labeled, the environmental policystatement. Such statements may set out overall targets andobjectives for the conduct of foreign affiliates. The targets andobjectives could, for instance, be that the company will complywith the regulations of host countries, that all affiliates willmeet company standards or that the company strives to becomean environmental leader in all locations.

Second, more specific policies and programs that areapplicable throughout the corporation may accompany thegeneral principles outlined in the policy statement. Thesepolicies and programs will characteristically exist in areas towhich the company assigns particular importance, such asenergy conservation, waste minimization or air pollutionreduction.

Third, a cross-border environmental management systemmay consist of various procedures for monitoring andcontrolling whether the environmental conduct of foreignaffiliates is in accordance with regulations and standardsoutlined by headquarters. These procedures can include pre-acquisition assessments, environmental reporting procedures orauditing procedures. In recent years, TNCs have increasingly



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implemented computerized and company-wide environmentalaccounting and reporting databases. The databases enableheadquarters to get an overview of the corporation’s total impacton various types of pollution, to compare the performance ofdifferent units and to keep track – on a daily, weekly, monthlyor yearly basis – of developments concerning environmentalmatters.

Fourth, the company may engage in training, educationand information exchange programs, or activities aimed atproviding environmental guidance and promoting a high levelof awareness and competence at all levels of the corporation.

Fifth, a cross-border environmental management systemis embedded in a formal organization, where responsibilitiesand functions are delineated and allocated between entities andpersons.

2. Different types of management systems

Cross-border environmental management systems rangefrom rudimentary to elaborate. Rudimentary systems includesubsidiaries which are 100 per cent controlled by headquarters.More elaborate systems will include non-controlled affiliatesand even suppliers and subcontractors.

TNCs manage their affiliates differently. In adecentralized system, affiliates are allowed to pursue a stand-alone strategy. There is generally an absence of cross-borderenvironmental policies, programs and procedures.Environmental problems are seen as the responsibility of localmanagers and are to be solved solely at their discretion. Thereis often no liaison between headquarters and affiliates regardingenvironmental matters. However, this is an extreme position;

CHAPTER I 5


most TNCs have established a certain degree of cross-borderenvironmental management.

The headquarters of most larger corporations seek toensure that foreign affiliates comply with existing regulationsand laws no matter where they operate. The managementstrategy behind this practice is to ensure internationalcompliance. The intent is to have all affiliates around the worldtake the necessary precautions to ensure that they operate inaccordance with the laws and regulations of the host country.These measures will typically include pre-acquisitionassessments, compliance auditing, and monitoring and reportingprocedures. Since one of the main problems of environmentalprotection in many host countries is the lack of effectiveenforcement rather than the lack of environmental rules andregulations, a TNC’s commitment to comply with all rules andregulations of the host country is important.

Some corporations strive for a perfect alignment ofenvironmental policies, programs and procedures throughoutthe corporation. Typically, the environmental managementsystem in the home country is used as the basis for themanagement framework of the entire corporation, and companystandards and procedures are implemented regardless of localrequirements. This type of set-up is centralized. Evidently, thesecompanies’ internal standards must meet or exceed the standardsof all major locations that the company operates in. Centralizingthe environmental management function makes it possible tominimize risks, obtain economies –of scale and avoid costlyretrofitting in case of changes in host country regulation. Theenvironmental focal point for local management becomes theenvironment function at headquarters rather than the localregulatory authorities. In an environmental sense, the local



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affiliate insulates itself from local regulatory demands andbecomes a replica of home country operations.

A fourth way of organizing cross-border environmentalmanagement can be termed globally integrated. Where theenvironmental governance system, in the case of a centralizedorganization, is highly hierarchical in that environmentalmanagement of affiliates is integrated vertically, theenvironmental governance system of TNCs pursuing a globallyintegrated strategy is integrated horizontally. Initiatives relatingto new measures can come from any facility in the corporatenetwork. Individual units are allowed a high level of discretionin adapting to local conditions; however, this must be donewithin the boundaries set by the principles and strategy of thecorporation. While there are many examples of TNCs operatingwith integrated and harmonized global environmental strategies,this is not the typical TNC approach.

The cross border environmental organization can beclassified on a continuum spanning from total independence tototal integration of the affiliate in the headquarters’environmental management policies as shown in box 1.

3. Managing other entities

Environmental management procedures and practicescan also relate to non-controlled partners and collaboratorsabroad. A distinction can be made between backward-oriented(supply chain management) and forward-oriented (productstewardship) management procedures.

Supply chain management is a typical tool employedby some of the largest TNCs to screen suppliers by asking them

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Environm

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Box 1. A typology of TNC cross-border environmental organization

Decentralizedenvironmental International Centralized environmental Globally integratedmanagement compliance management environmental management

Environmental Local adaptation Host country Home country legislation/ Company standards/management focus legislation company standards international standards

Typical policy None “Meet and comply “Employ the same standards “Strive to become globalstatement with all standards and criteria worldwide.” environmental leaders”;

nationally and “acknowledges responsibilitiesinternationally.” for the global environment.”

Worldwide None None Pollution prevention; waste Green R&D; climate changeenvironmental minimization; energy conser- policies; biodiversitypolicies and vation; safety zones in LDCs; programmes; dialogue withprogrammes toxic education programmes external stakeholders

Cross-border None Procedures to ensure Procedures to ensure vertical Procedures and activities toenvironmental compliance with integration: auditing according ensure horizontal integration:control procedures regulations home and to company internal standards, information exchange, life cycle

abroad: pre-acquisition reporting, green accounting, analysis, third-party auditingassessments, regulatory training programmescompliance auditing,monitoring procedures

Sectors Industries with Chemicals (pre-Bhopal); Chemicals (post-Bhopal) Pharmaceuticalsminor environ- large, diversifiedmental risk; companiesSME TNCs



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to fill out a questionnaire in which they report on variousenvironmental dimensions. In some instances on-site audits cantake place, although these will rarely have the same intensity asauditing of subsidiaries. Subcontractors may also be screened,in particular if they offer environmentally sensitive services suchas waste management. TNCs may set environmental standardsfor suppliers apart from those concerning product quality. TNCsmay offer technical assistance with regarding environmentalproblems to affiliated companies in the network.

Product stewardship is tool that TNCs use to educateconsumers and other users. In the case of transfer of hazardousproducts and technologies to developing host countries, therecould be procedures for prior informed consent (PIC). Anotherpossibility could be training and education programs to promoteappropriate use of the product, such as training programs forthe use of pesticides. Appropriate labelling may also be anessential element in TNC product steward programs, especiallywith regard to the handling of chemicals.

4. Determinants of environmental management practice

The drivers of TNC environmental managementpractices can be consolidated into four categories: regulatoryforces, market forces, industry forces and company-specificforces.

Regulatory forces are the characteristics of a TNC’sregulatory context – for instance, at the levels of host country,home country and international economic and environmentalregulation. Survey results show that environmental managementis driven primarily by regulation. In countries with a litigiousclimate, the risks of huge fines and penalties appear to encourage

CHAPTER I 9


corporate self-policing. However, it is unclear to what extentcross-border environmental management practices are alsoinfluenced by regulation. There are no or very few internationaland extraterritorial binding regulations requiring particularconduct of TNCs in host countries. While developing hostcountry environmental standards may be approaching those ofmost developed home countries, deficiencies in enforcementand infrastructure in many developing countries may providean incentive for businesses to ease environmental standards. Inthe longer run, however, foresighted companies will anticipatemore stringent regulation and enforcement and implement state-of-the-art environmental systems to avoid costly retrofitting ata later stage.

Market forces are those characteristics of the market inwhich the TNC operates – for instance, the strength of greenopinions among consumers, investors or customers – that mayaffect corporate environmental conduct. From a conventionaleconomic perspective, one would expect market forces toencourage an environmental “race to the bottom” in the sensethat the firms capable of operating with the lowestenvironmental costs would gain increasing market shares. Butmarkets may also encourage environmental responsiveness infirms. While consumers may sometimes encourageenvironmental responsiveness in international operations,pressures from financial markets and markets controlled bymajor customers appear to be even more important. Moreover,the quality orientation of the market may encourage improvedenvironmental performance because high environmentalperformance may be a vital ingredient in any market with astrong focus on quality and just-in-time delivery.

Industry forces are those characteristics of an industry



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– such as the level of concentration, collaboration andcompetition in the industry – that may affect cross-borderenvironmental practices. In concentrated industries, firms willbe better positioned to offset environmental costs. Recent yearshave seen notable TNC involvement in the establishment ofenvironmental industry associations and in the development ofguidelines, codes of conduct and standards. This collaborationhas, among other things, resulted in various initiatives aimedat improving TNC cross-border environmental management andperformance.

Company-specific forces are those firm-specificcharacteristics – such as the firm’s resources or history – thatmay influence how it manages the environment. A TNC willtend to follow familiar paths in foreign locations – for instance,by devising environmental management systems similar to thoseof its home country. The size of the TNC may influence cross-border environmental practice; however, a company’s level ofinternationalization may be even more important (e.g. it maybe difficult for a TNC to externalize environmental protectionmeasures that are already internalized in the production process).The level of formal control over a given affiliate is likely to bea central factor affecting cross-border environmental practices;minority ownership will in most cases make such practicesdifficult to establish and implement.

B. Specific Survey Findings

To get an impression of the environmental managementpractices at TNC affiliates in Asia and to shed light on therelative importance of the key determinants, a survey of TNCenvironmental management practices was conducted inMalaysia, China and India between 1998 and 2000. The survey

CHAPTER I 11


included 163 TNC affiliates in those countries and was basedon a questionnaire consisting of approximately 50 questionswhich was mailed to more than 750 TNC affiliates. Therespondents were mainly affiliates of European TNCs, affiliatesof very large TNCs and affiliates in industries with potentialenvironmental problems, mostly the chemical industry.Responses were obtained partly by mail, partly through phoneinterviews and partly through on-site interviews. Althoughgeneralizations based mainly on corporate self-reporting requiregreat caution, the survey nevertheless provides a preliminaryimpression of the environmental management practices of TNCsin developing countries. Following are three major sets offindings.

C. Environmental Management by Affiliates

More than 70 per cent of affiliates included in the surveyreported that they had an environmental policy statementsindicating a commitment to environmental protection.Furthermore, many affiliates set objectives in the areas ofconservation of energy, water, wastewater disposal, air pollutionand compliance with local regulations. In some cases, a plan ofaction is stipulated. In most cases, affiliates reported havingappointed officers responsible for environment, health and safety(EH&S), established environmental procedures and institutedenvironmental training programmes for employees.

The ISO 14000 series of environmental managementstandards is increasingly functioning as a benchmark forcorporate improvement. According to the survey, only very fewTNC affiliates (15 per cent) had actually been certified at thetime of the survey. This number is low considering that it wasprobably the best-performing affiliates that responded to the



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questionnaire. However, approximately half of the TNCs areconsidering ISO 14000 certification, an indication that a surgein certification may be underway in Asia.

Supply chain management and outreach activities to localcommunities are important because a corporation with linkagescan determine whether an affiliate is just an isolated “island ofenvironmental excellence” or contributes to the building ofdomestic environmental management capabilities. TNCs couldassist in building environmental capacity in developingcountries in at least four ways;

• By collaborating with local suppliers and subcontractorson environmental upgrading;

• By contributing to the formulation of industry- andtechnology-specific environmental standards;

• By building environmental infrastructures; and• By supporting local environmental NGOs.

In the three countries examined, environmental supplychain management and outreach activities to local communitiesappear to be in the infant stage. Only a few examples of affiliatesproviding technical assistance to suppliers, vendors andsubcontractors in the environmental field were identified, andthe general impression from all three countries is that outreachto local communities is limited. Fewer than 10 per cent of therespondents reported that they supported local authorities insetting standards and developing infrastructure in support oflocal NGOs.

Institutional factors, such as the local regulatory regimeor the internal corporate governance system, appear to exert amuch stronger influence on affiliate environmental practice than

CHAPTER I 13


do factors associated with local and global markets or NGO andmedia pressures. In fact, 42 per cent of respondents citedheadquarters involvement as the primary motivating factorbehind environmental improvements, followed by regulation(34 per cent), market pressures (4 per cent) and civil society,including NGOs and media (3 per cent).

The influence of headquarters

It thus appears that headquarters plays a pivotal role inshaping the environmental management activities of thesurveyed Asian affiliates. It was observed that corporatemanagement systems in the home country frequently formedthe basis for the management framework of the entirecorporation. In these cases, headquarters aligns theenvironmental management systems with its corporate priorities,inter alia through cross-border standard and target setting or bydevising extensive cross-border monitoring and controlprocedures.

In some TNCs a uniform standard (corporate standard,international standard or home country standard) is applied inall subsidiaries regardless of the location and the local



14

environmental regulations, and a centralized environmentalmanagement strategy or global integrated strategy is adopted.However, most of the surveyed TNCs adopted a differentstrategy focusing more on local standards. Thus, in mostaffiliates, environmental management systems are adapted tolocal conditions. Many TNCs regularly audit the environmentalperformance of affiliates. This way local managers are remindedof the status of their company’s performance compared tospecific corporate standards. Managers can also compare theperformance of their unit with other units in the corporatenetwork. Around 40 per cent of the responding TNCs reportedsuch auditing procedures.

In general, the enforcement of headquartersenvironmental policies depends on elements such as ownership,product features and local environmental infrastructure.

Consistent with the reported importance of headquarters,it was found that the main impetus for companies to acquireenvironmental certification came from headquarters policies,procedures and practices. In several cases, headquarters askedtheir affiliates to follow European standards and encouragedthem to become ISO14001 certified.

However, while in many instances affiliate practicesappeared to be a function of headquarters influences, someenvironmental management systems and technologies ataffiliates were found to be highly advanced and in fact werebeing used as benchmarks throughout the corporation. It seems,therefore, that the environmental management relationshipbetween headquarters and affiliates is not necessarily one-way.Evolution is facilitated by information and communicationtechnology which may be undermining hierarchical management

CHAPTER I 15


systems and encouraging local initiative. In this way environmentalinnovation and initiative can emerge from any part of the corporatenetwork.

D. Regulatory Pressure

Previously, lax regulation and enforcement may havepulled affiliate environmental management in the direction oflaxity. However, it seems that currently, additional and newenvironmental regulation is converging with internal corporatepolicies and programmes in support of improved environmentalmanagement and performance in many TNC affiliates. Thus, athird of the respondents reported regulatory pressures – currentand anticipated – as the main motivating factor behindenvironmental improvements.

According to the responses of managers of localaffiliates, regulatory pressures varied significantly in the threecountries: while regulation appeared to place the strongestpressure on investors in China, this was less the case in Indiaand Malaysia.

Half of the affiliates felt that, being foreign, they weresubject to stricter enforcement than comparable local companies.One explanation is that host countries are adopting stricterregulations or beginning to implement their regulatoryrequirements with regard to TNCs and foreign direct investment(FDI). China, forexample, has stated that itcannot afford to continuewith the “pollute first andcontrol later” approachand has drawn up specific

The survey suggests that the mainenvironmental protection problem inmany host countries is a lack ofenvironmental infrastructures andeffective enforcement rather than a lackof environmental rules and regulations.



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administrative procedures to screen and monitor the environmentaland health impacts of FDI. Another possible explanation is thatbecause TNCs are large businesses, they are automatically andtherefore disproportionately affected by environmental impactassessment procedures and public disclosure requirements.

It is frequently debated whether perceived laxenvironmental regulation in developing countries may lureTNCs to invest there. While the issue was not explicitlyaddressed in the survey, the results shed some light on the issue:Overall, the dominant motives behind investment variedsignificantly between the three countries. Whereas more than50 per cent of the affiliates in Malaysia were efficiency-seeking,citing cost advantages such as low labor costs or tax and otherfinancial incentives as the primary motive to invest, this wastrue of just 10 per cent of those operating in India and China.The overwhelming majority of investors in China and India aremarket seeking.

Only one company reported being influenced byenvironmental cost savings in its choice of location within oneof the host countries. This observation raises the question ofwhether state or regional authorities engage in a contest to attractmultinational companies andboost economic development.This assumption is not vindicatedby actual inflows of FDI tovarious states and jurisdictions inIndia and China. In fact, thestates and regions with the best track records of environmentalmanagement and enforcement of legislation attract the highest levelsof FDI.

The costs of environmental mitigation do not

States with the best trackrecords of environmental managementand enforcement of legislation attractthe highest levels of FDI.

CHAPTER I 17


significantly affect corporate investment strategies because otherfactors are more important, such as:

• Market size;• Labour and infrastructure costs; and• The costs of retroffiting when regulation is strengthened.

E. Market Forces

In the three surveyed countries, green consumerism isstill very weak, particularly in the household market segment,and very few household customers are actually prepared to payan environmental premium. Thus, the general impression is thatthe local market as such does not appear to be a dynamic factorin promoting and strengthening environmental managementamong TNC affiliates. This is supported by the fact that only 6per cent of respondents cited consumer pressure as the maindriving force behind environmental improvements.

With regard to global consumer preferences, previousresearch has shown that to access the European market, whereenvironmental consciousness is relatively strong, firms mustcomply with European product standards and that this hasprompted the introduction of better environmental practices byTNCs. However, when the local market and export-orientedaffiliates were compared, there was little evidence to indicatethat global market pressures were a strong factor influencingaffiliates’ environmental management practices; in fact, market-seeking affiliates reported more environmental managementpractices than did efficiency-seeking investors. Moreover,market-seeking investors also reported better performance thandid resource- and efficiency-seeking investors.

One of the more interesting findings with regard to market



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orientation is thatenvironmental performanceand quality orientation arerelated. Among those TNCshaving formalizedenvironmental management

systems in place, most had already made equivalent efforts in termsof quality management, such as BS 5550 or ISO 9000 certification.It thus appears that a culture of quality trickles down intoenvironmental awareness. There are indications that the culture ofquality was driven basically by product orientation, as this ratherdirectly affected market performance.

pared to acquisitions of existing facilities, as the most modern and, there-

The three main drivers ofenvironmental management areinternal company factors, home andhost country regulation, and marketand industry factors.

CHAPTER II 19

Country Case Studies

CHAPTER II

COUNTRY CASE STUDIES

A. Malaysia

The findings in Malaysia are grouped according to thedrivers of TNC environmental management practices in thefollowing order: environmental management practice, specificallythe presence of an environmental policy; environmental standards;regulatory factors; the influence of headquarters and market andindustry factors.

The survey of 59 TNC affiliates targeted the electrical andelectronics, textiles and chemical industries. Half of the companiesuse Malaysia as an export platform. Many were established asgreenfield investments, and most have 100 per cent foreignownership. Interviews were carried out with employees of selectedTNCs both in home and host countries.

Fifty-six per cent of the affiliates surveyed have anenvironmental policy. Twenty-four out of the 59 companies hadtheir environmental policy formulated by headquarters. Despitethe centralization of overall policy-making, the environmentalpolicy is adapted to Malaysian legal requirements and to plant-and site-specific needs. This variance in the influence ofheadquarters on policy formulation reflects a degree of affiliateautonomy.

All companies in the survey reported that they at least metthe local minimum legislative compliance requirements. Forty percent maintained that their environmental performance was abovethe average local standards, and 15 per cent claimed that theirperformance was similar to parent-country standards. Managers



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in the chemical industry were significantly more inclined toreport performance equal to home-country standards than weremanagers in other industries.

Thirty per cent of respondents cited current and futureregulatory pressure was cited as the primary motivating factorbehind environmental improvements.

Seventy-five per cent of the Malaysian affiliatessubscribe to a quality standard suggesting that the ISO 9001and ISO 9002 series have gained a great deal of popularity inMalaysia. Exporters and suppliers to TNCs consider having oneor the other of these standards a necessity in order to be seen asa quality-conscious and quality-minded producer. According tofigures from SIRIM (the standard board of Malaysia), 17,000Malaysian companies have one of these certificates.

Thirty-one per cent of the respondent companies statedthat their company group followed an explicit policy of adoptingthe same standards regardless of location (i.e. having uniformenvironmental standards). Companies may adopt uniformstandards that are independent of, and often go beyond, localregulatory standards because this may contribute to furtheringeconomic and organizational efficiency for the TNC group ofcompanies as a whole.

Thirty-two per cent of the affiliates reported settingenvironmental minimum standards for their suppliers. Again,interviews suggested that these requirements are predominantlyrelated to securing product quality rather than to processes.However, there are exceptions. Sony Electronics, a largeJapanese audio electronics manufacturer, has developed a pilotprogram for ISO 14001 certification of small and medium-sizedenterprise (SME) suppliers and subcontractors. The pilot

CHAPTER II 21


program is designed to involve suppliers and subcontractors inenvironmental management.

Many companies point to their affiliation with a parentcompany or their position in a TNC as the main determinant ofenvironmental performance. Forty-four per cent say thatheadquarters policies, procedures and standards are the mainfactor motivating them to improve their environmentalperformance.

Twenty-seven per cent of the affiliates stated that theirheadquarters set targets for environmental improvement in suchareas as solid waste reduction, energy consumption, effluentsand occupational safety (e.g.reduction in the occurrence ofindustrial accidents and lost timebecause of injuries and fire).

Fewer than 10 per cent of the affiliates reported thatconsumer pressures were the primary motivating factor behindenvironmental improvements at the affiliate. There is little tosuggest that the export-oriented TNCs have better environmentalmanagement practices than companies oriented towards thedomestic market. Thus, it appears that pressure frominternational consumers is not a strong factor for affiliates,although markets may of course exert a strong influence throughheadquarters environmental policies and programmes.

The only significant exception to the overall conclusionthat market factors are not among the primary motivating factorsbehind environmental improvements is with regard to ISO14000 certification, with a relatively large proportion ofparticipants reporting that pressures from industrial customershad motivated certification.

Leadership at the localmanagement level is crucial forachieving environmental improvements.



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The practice of environmental screening ofsubcontractors’ and suppliers’ products is more common (26per cent) than the practice of screening their processes (19 percent). From interviews, it appears that screening is undertakenmainly to ensure the quality of suppliers’ products.

Fifty-one per cent of respondents reported subcontractingof waste handling. The outsourcing of waste management is tosome degree a matter of letting others outside the organizationhandle one’s environmental problems. The interviews gave theimpression that the TNCs did not always know how their wastewas handled. The foreign subsidiaries were typically contentwith knowing that the waste management companies werecertified to handle industrial waste.

There are, however, companies where wastemanagement is considered critical to the public image. A largeelectronics manufacturer reported that it had reserved a specialplace within the plant for initial recycling of waste. Companiesare subcontracted to work on the premises.

Other driving forcesbehind the program are thecost-effectiveness ofimproved waste management,materials handling, reducedenergy use and bettertransport management. Theprogram suggests that thepotential role of big foreignTNCs as environmentalmentors is far from exhaustedin Malaysia.

FDI plays an important rolein Malaysia. In the 1970s and 1980sthe Government aggressively andsuccessfully sought to attractinvestment in manufacturing tocreate jobs and stimulate growth.Environmental standards were notenforced in the pro-capitalenvironment. However, theconsequent rapid growth placed greatstress on the environment, andregulation improved in the 1990s.

CHAPTER II 23


Interviews with central environment agencies,organizations and resource persons in Malaysia suggest thatTNCs are not the major cause of environmental problems inMalaysia. According to CETEC (an important environmentalNGO), “TNCs generally enjoy a good reputation.” Rather, it isthe large number of domestic SMEs that are the prime concern,many of them backyard industries that operate in the so-calledinformal sector and try to avoid government regulation.

B. India

The findings in India are grouped in the following orderof topics: the presence of an environmental policy;environmental standards; regulatory factors; headquartersinfluence and market and industry factors; the supply chain;outreach activities and ownership.

The survey focused on FDI projects in New Delhi andparticularly Maharashtra, as these states remain the majorrecipients of FDI. Between August 1991 and January 1997, atotal of 458 approvals with a value representing 17.1 per centof total approved FDI were located in New Delhi. The state ofMaharashtra is the largest receiver of manufacturing FDIprojects in India. A significant number of FDI projects are alsolocated in Karnataka (computer firms like IBM), Tamil Nadu(automobile manufactures like Ford) and Gujarat (chemicalsfirms). Concerning the latter, almost all the projects located inGujarat are co-ordinated from national headquarters in Mumbai,the capital of Maharashtra, and most of these TNCs still operateolder chemical plants in Maharashtra.

In terms of size, the majority (53 per cent) of the TNCsstudied are large firms with more than 500 employees. Only 18



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per cent of the benchmarked TNCs have fewer than 250employees.

Most of the surveyed TNCs have establishedenvironmental policies; 83 per cent of all affiliates have anenvironmental policy. Thirty-eight affiliates reported thatheadquarters formulated their environmental policy. However,there is still work to be done when it comes to publicizing suchstatements. One managing director said, “We have beencomplying with the same policy objectives for many years, butit has been done in an informal manner.” During 1997, explicitefforts were made to set out both the environmental policy andobjectives to achieve better and more predictable environmentalcompliance. Interestingly, the abovementioned managingdirector did not refer to these efforts as instrumental inimproving local environmental performance; rather, these effortswere carried out to meet benchmarking and monitoring targets.

A total of 19 areas where TNCs had set specific standardswere identified. All these initiatives reflect a pattern of co-ordination which can be considered an environmentalmanagement system. This system consists of policy, standards,procedures, control, communication and reporting systemsensuring that actual practice is promoted in accordance withpolicy and standards.

The survey examined to what extent the environmentalmanagement system had been verified by a certification agency.Of the 53 TNCs, 19 per cent had their environmentalmanagement system certified in accordance with the ISO 14000series. Thirty-six per cent of the firms are considering applyingfor certification.

CHAPTER II 25


Another category of mandatory TNC standards set byheadquarters is related to environmental impact assessments(EIA). At one particular plant, specific environmentalassessments must take into account, but need not be limited to,solid, liquid and gaseous wastes produced. Measures for theirdisposal are specified in the waste management guidelines.Further, assessments must also take into account any landcontamination issues and/or any unplanned releases of materialsor energy.

Thirty-eight per cent of respondents cited lack ofenforcement of environmental rules, weak or non-existentregulation or absent infrastructures as the primary barrier toimproved environmental performance, which means that localenvironmental administration affects affiliate performance.

Historically, Indian authorities have imposed strictregulatory requirements on TNC ownership, preventing manyindustries from holding majority ownership. Nevertheless, only12 per cent of the benchmarked TNCs currently hold minorityequity shares in the affiliated Indian units. This phenomenon isdirectly related to radical changes in economic policies that tookplace in the early 1990s. TNCs responded quickly, not only byincreasing FDI inflows to India but also by increasing ownershipshares in existing projects. Currently, half of the TNCs have aslight majority share of 50–60 per cent. Still, only 22 per centhave equity shares of 60–99 per cent. Only 16 per cent havewholly owned subsidiaries; however, 50 per cent of thoseestablished after 1993 do.

Around 50 per cent of the affiliates report thatheadquarters sets specific environmental standards for theaffiliate. According to specified guidelines developed by one



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of the TNCs, all units must have arrangements for propermanagement and disposal of wastes and for the maintenance ofrecords of all solid, liquid and gaseous wastes. To comply withthis requirement, more specific guidelines are developed. It isacceptable for the unit to comply with the standards by othermeans; however, in cases of local deviations below mandatorycorporate standards, guidelines become compulsory.

Seventy-four per cent of affiliates have systems wherecorporate headquarters perform environmental auditing ofIndian affiliated units on a regular basis. A similar number haveformalized environmental reporting systems betweenheadquarters and affiliates.

The dominant motive driving the benchmarked TNCsto locate FDI projects in India is the perceived commercialopportunities of potential and actual Indian markets; 88 per centcited this as the primary investment motive. None of the firmssaid it had chosen to locate in India to get access to rawmaterials, and only 12 per cent reported that the essentialinvestment motive was to reduce costs and increase efficiency.However, it should also be noted that such efficiency-seekinginvestment has risen sharply in recent years.

Some affiliates stated that weak patent protection wasan impediment to transferring cleaner technologies. In India,intellectual property issues had deterred several foreign investorsfrom transferring their top-of-the-line, and presumably cleaner,technologies. However, India has embarked on ambitious plansto liberalize its market (as, incidentally, has China). Manyrestrictions on FDI have been removed and import restrictionson machinery, materials and intermediate inputs have beengradually abolished.

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In one case, a TNC operated with two completelydifferent environmental auditing procedures depending onwhether the Indian activities were organized under regional orglobal business units. The regional activities were subject toaudits co-ordinated by local corporate headquarters located inNew Delhi, while the regional office in Singapore audited thoseactivities organized by the global business group. When theenvironmental manager was asked how this functioned inpractice, he admitted that he felt “informed” about rather than“involved” in those activities controlled by the global businessdivisions. His primary orientation was toward the regionalactivities.

Environmental control of suppliers appeared to be moredeveloped, especially for suppliers providing raw materials,equipment and services. Thirty-eight per cent of affiliatesreported efforts to screen the environmental performance ofsuppliers or subcontractors. According to specified guidelinesdeveloped by one TNC, these externally oriented activities mustbe monitored to ensure that environmental requirements set inthe corporate standards are met. However, only rarely did TNCstake the effort to conduct on-site inspections of suppliers.

The survey found that a designated environmental, safetyand health (ES&H) officer was appointed in 74 per cent of theaffiliates. Seventy-seven per cent of the TNCs have publicizedpolicy statements indicating a commitment to promoteenvironmental protection and natural resource conservation.

A quarter of the TNCs reported having continuousdialogue with local state pollution control boards, mainly to setstandards, and 13 per cent reported that they were assisting localauthorities in environmental infrastructure development. Therelatively limited extent of involvement in local environmental



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affairs is also evident with respect to civic groups and non-governmental organizations (NGOs).

Only 17 per cent of participants stated that they co-operate actively with local environmental NGOs. Even amongthese, the collaboration was often limited to areas such asfinancial support of local welfare projects, help with safetymeasures, technical help to a local fire brigade and provisionof general information on environmental issues to adjacentcommunities. Very few appeared to establish any active dialoguewith local or national environmental NGOs.

All the TNCs acknowledge that there is limited dialoguewith environmental NGOs, and that the general dialogue withcivil society is mostly related to community groups and otherstakeholders living in the vicinity of the plant. Issues of concernare less related to the environment than to financial support ofprimary education and vocational training, fire safety measures,and health information.

Another factor influencing environmental managementprocedures is ownership control vis-à-vis Indian partners. Evenif almost all TNCs included in the survey are majority-controlledforeign entities, there are still 12 per cent having a minorityequity share. For those, environmental procedures appear notto be integrated on a cross-border scale to the same extent as inTNCs having majority interests.

C. China

The findings in China are grouped under the topics ofenvironmental standards; regulatory factors; the influence ofheadquarters and market and industry factors (or company-specific factors); the supply chain and ownership.

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34 per cent of the companies are in the chemical industryand 12 per cent in the pharmaceutical industry. These companiesare frequently involved in the manufacturing or handling ofhazardous chemical compounds such as alkali, acids andinorganic pigments representing significant environmentalhazards if released untreated. For the other manufacturing firmsin the sample, the electroplating, incision, heating and washingprocesses may have harmful environmental impacts.

80 per cent of the TNC affiliates have a designated EH&Sofficer and 74 per cent have a health and safety committee,which indicates that some institutional steps have been takento manage the environment. 18 per cent have taken the furtherstep of having their environmental management system certifiedaccording to an environmental management standard. ISO 14001is increasingly functioning as a benchmark for corporatecollaboration. Two-thirds of the 51 affiliates in China had areconsidering becoming certified according to an environmentalmanagement standard.

None of the sample firms cited differences inenvironmental controls or standards between China andEuropean countries as a factor motivating investment. Only apaint factory indicated that it had originally considered locatingits plant in one region but chose another region instead becauseof the stricter environmental regulation. This implies thatenvironmental control may influence the choice of investmentlocation within China.

29 per cent of firms cited current environmentalregulation as the primary motivating factor behindenvironmental improvements, and 20 per cent cited anticipatedfuture regulation. In one case, it was reported that the company



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was forced to upgrade its environmental performance to meetEuropean standards. Namely, in the near future a Europeanstandard will be adopted in some Chinese cities to measureautomobile polution. To maintain market access, the companyplans to adjust its production process and inputs to conform tofuture standards.

Often the standards and targets are further reinforced bymore specific guidelines formulated by headquarters. Forexample, an inventory of hazardous materials must be compiled,emissions must be measured and the results of the measurementsmust be documented. The emissions must be ecologically andtoxicologically analyzed, and, if necessary, programs forimprovement must be designed and applied.

The survey suggests that headquarters environmentalmanagement systems have a significant impact on subsidiariesin China. First, the affiliates’ environmental policy is usuallyduplicated from headquarters’s environmental policy statement.Of the surveyed firms, 84 per cent have their own environmentalpolicy. Of those, 70 per cent reported that headquartersformulated the environmental policy.

Headquarters pressures followed by regulatoryrequirements are the most significant drivers of environmentalimprovements at affiliates. However, in China, current andanticipated government regulation are more frequently cited thanthe influence of headquarters. The relatively strong influenceof regulatory pressures reflects China’s significant strengtheningof environmental regulation and its enforcement in recent years.Two-thirds of the Chinese affiliates, compared to 50 per cent ofall respondents, reported that they were subject to significantlygreater scrutiny by local environmental authorities than werecomparable local firms.

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In one case, headquarters has established anenvironmental network that sets out overall principles andenvironmental objectives for affiliates in China. The targets arethe same for every affiliate and are used as indicators to evaluateaffiliates’ environmental performance. The purpose of theevaluation is to encourage managers to improve environmentalperformance, rather than to perform a policing function. Theevaluation system and the environmental network are not meantto force employees to attain objectives, but rather to encourageemployees to improve their performance.

Twenty-two per cent of the headquarters set specificenvironmental standards for their affiliates in China. Accordingto one firm, 15 corporate EH&S standards were defined. Inaddition, 30 per cent set certain environmental targets for theiraffiliates, mainly in the areas of waste water reduction andresources conservation. For example, one company was requiredto reduce its wastewater by 8 per cent (relative to 1998) in 1999.

By far the majority of those questioned (84 per cent)cited market access as the primary investment motive. Morethan 10 per cent reported efficiency seeking, and three firms (6per cent) reported access to raw materials (resource seeking) asthe primary investment motive. The decision to invest is usuallybased on more than one motive. Thus, 68 per cent cited morethan one motive. However, efficiency seeking was mentionedby 51 per cent.

Long-lasting relationships between affiliates and localsuppliers are established through various forms of supply-chainquality management. 50 per cent of the affiliates reportedconducting environmental screening of suppliers’ products orprocesses. 57 per cent set environmental minimum requirements



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for their suppliers and contractors. A fifth of the affiliatesimplied that they were providing environmental technicalassistance to the suppliers/subcontractors.

Two-thirds of the affiliates were greenfield investments.All projects with 100 per cent foreign equity were greenfieldprojects. From an environmental perspective, it is probable thatgreenfield investment will face relatively minor environmentalchallenges compared to acquisitions of existing facilities, asthe most modern and, therefore, environmentally friendlyproduction technology is likely to be (but not necessarily)transferred to such plants. In comparison, acquisitions ofexisting facilities may entail a long and arduous process ofbringing the facility up to acceptable environmental standardsthrough training, investment in pollution abatement equipment,and retrofitting of the production process.

85 per cent of the affiliates surveyed are majority owned,and 29 per cent are wholly foreign-owned firms. The ownershipconfiguration of the affiliate may also have implications forenvironmental management practice. TNCs tend to increasetheir equity shares when the market is promising, and there is atendency suggesting that foreign equity increases over time.

Documents

MANAGING THE ENVIRONMENT ACROSS BORDERS …unctad.org/en/docs/iteipcmisc12_en.pdf · environment function at headquarters rather than the local regulatory authorities. In an environmental