Global Standards and the Environmental Performance of Industry

This chapter draws together the evidence of the last three chapters to consider the emergence of global standards as a driver of improvements in the environmental performance of industry. Our particular focus is the growing importance of firm-based global environmental standards as an alternative to the more widely recognized state-centered approaches to setting and implementing environmental standards. Increasing numbers of multinational firms (MNCs) are adopting uniform approaches to environmental management across all of their facilities worldwide, including in some cases process and performance-based environmental standards. Such intra-firm standards have even broader reach when they are also applied to the suppliers of the MNCs as part of standardized supply chain management. In this chapter we examine the rationale behind the adoption of firm-based approaches to global environmental standards, and whether such firm-based approaches add value to traditional state-centered environmental regulation and governance. Why are firm-based global standards being adopted by MNCs, and do these standards constitute a novel and effective approach to improving the environmental performance of industry? The chapter addresses the issue of global standards and the environment from the perspective of recent research within economic geography on issues of economic globalization. We take this starting point precisely because much of the recent interest in global environmental standards among politicians and policy makers is a reaction to economic globalization and to the likely environmental and social consequences of intensified flows of capital, technology, and information on a global scale. The growing force of neoliberal trade and investment regimes, and the rapid growth in foreign direct investment and international trade within the world economy, has led many to call for a new global governance of economic processes that will ensure more positive development outcomes (Rodrik et al. 2002; UNDP 2003). What Rodrik and others have in mind in this regard is some combination of supra-national institutional capability and strengthened state-based regulation to match the growing global reach of MNCs.

The Role of Environmental Regulatory Agencies in Sustainability: Korea and Indonesia

The first step, but by no means the last, in the process of improving the environmental performance of manufacturing plants, firms, and industries in East Asia requires the building and strengthening of traditional environmental regulatory systems. Without this, policy integration is not likely to work and without effective policy integration, governments in East Asia are not likely to be able to link environmental intensities reduction policies to the technological capabilities policies of economic and industrial development agencies. Because most governments in East Asia pursued ‘grow first, clean up later’ environmental strategies and because traditional economic and industrial development agencies are so closely linked to their counterparts in private industry, many (Lee and So 1999; Lohani 1998; Smil 1997; Eder 1996; Bello and Rosenfeld 1992) are skeptical of the ability of governments in this region to build and sustain traditional environmental regulatory agencies. But there is growing evidence that numerous governments in this region, including in Singapore, Malaysia, and Indonesia in Southeast Asia and Taiwan Province of China, China, and Korea in Northeast Asia have made significant progress in building traditional command and control regulatory agencies (Rock 2002a; Aden et al. 1999). Everywhere in East Asia, this was and is a lengthy, costly, difficult, contentious, and time-consuming process. The speed and alacrity with which governments succeed depends on an intricate interplay of international pressures, the nature of domestic politics, the capacity and capabilities of the state, and the rapidity with which new ideas about the environment spread (Rock 2002a). Sometimes, as in Taiwan Province of China, international pressures associated with the loss of diplomatic recognition and citizen pressures associated with democratization have exerted powerful influences on the ruling party, the KMT, to build a strong and capable environmental regulatory agency as a way of demonstrating to the world and Taiwan’s citizens that the government was environmentally responsible (Rock 2002a). Other times, as in Singapore, a benevolent despot committed to creating a clean and green Singapore used the powers of government and a highly capable bureaucracy to create a credible environmental agency (Rock 2002a).

Globalization, Openness to Trade and Investment, Technology Transfer, and the Environment: The Cement Industry in East Asia

Neo-liberal orthodoxy asserts the positive benefits of open trade and investment regimes and of the efficacy of market processes in shaping development outcomes. Among the benefits claimed for openness are access to capital and access to leading-edge technologies. Through trade and foreign direct investment, it is asserted, firms gain access to the best-available technology and production know-how that results in improved economic and environmental performance. To the extent that the leading-edge technologies are also less energy, materials, and pollution intensive, new investment under conditions of open trade and investment regimes can also lead to improved environmental performance (Low 1992). By this account, pollution-intensive and energy-intensive production processes are replaced by more energy and materials-efficient production, based on technologies sourced on a global basis. Over time, the increasing integration of industrializing economies into the global economy results in improved aggregate economic and environmental performance of industry. These claims as to the benefits of openness are disputed, however, by other researchers who suggest that the impact of openness on the environmental performance of industry is largely contingent upon the incentives that exist for adopting technologies that are less polluting and less energy and materials intensive, and more generally, upon effective governance structures at the national and local scale (Chapters 2 and 3; Brandon and Ramankutty 1993; Rock 2002a). Under conditions of openness firms have a range of technology choices and may well choose technologies that are below international standards of environmental performance, particularly when technologies that achieve higher environmental performance are more costly or more capital intensive than older, more pollution-intensive technologies. In addition, countries with weak environmental regulations may emerge as ‘pollution havens’ for pollution-intensive industries (Baumol and Oates 1988; Neumayer 2000), particularly when new foreign investment actually involves older ‘dirty’ technologies, as appears to have happened in some parts of the textiles and electro-plating industries (Rock 2002a). In this view, improved environmental performance within particular industries depends inter alia upon the coexistence of two conditions: access to technologies that are less energy, materials, and pollution intensive, and incentives to select these technologies (whether in the form of environmental regulation, resource pricing, or other tools of environmental policy, such as policy integration) and to adapt them to local conditions.

Policy Integration: From Technology Upgrading to Industrial Environmental Improvement

How might governments in East Asia take advantage of their technological capabilities building policies to lower the environmental burden of high speed industrial growth within the region? Our answer to this question draws heavily on the increasing dissatisfaction within the OECD economies in the traditional way, through command and control environmental regulatory agencies, in which governments in the OECD have pursued improvements in the environmental performance of industry (Davies and Mazurek 1998; NAPA 1995). As some (Hausker 1999) have argued, command and control regulatory approaches fail to capitalize fully on the innovative capabilities of Wrms and industries and as a result generate costs of abatement that are unnecessarily high. Because of this, others (Chertow and Esty 1997; Gunningham and Grabowsky 1998) have urged greater flexibility and innovation in how environmental goals are met. Various alternatives have been proposed, including greater use of information-based policy tools, devolution of policy implementation to regions and localities, and increased cooperation between government and industry in seeking cost-effective solutions to environmental concerns. Critics of these proposed reforms suggest that ceding discretionary decision-making authority to firms and industries amounts to a weakening of regulatory enforcement that will undermine future gains in environmental performance. Our purpose in this chapter is to build on the calls for environmental regulatory reform by demonstrating that there are approaches to improving the environmental performance of industry that are emerging in East Asia that take greater advantage of the capabilities building activities of firms in developing economies without sacrificing the ability of regulators to hold these firms to tough performance standards. We do so by examining the contribution of a broad array of government institutions in such reform initiatives in the rapidly industrializing economies of East Asia. Within the United States, environmental regulatory reform initiatives are focused primarily upon the environmental regulatory agency, the US Environmental Protection Agency (US EPA). Various European countries have explored different approaches to environmental protection, such as the creation of ‘environmental covenants’ between government and industry in the Netherlands.

Prospects for Policy Integration in Low Income Economies

In the final chapter of the book, we turn to the question of the prospects for policy integration in the low income countries, or the poorest of the rest of the industrializing economies in Africa, Asia, and elsewhere. Is there any evidence that these low income countries can or have practiced policy integration? Does policy integration offer opportunities for low income countries to pursue industry-led growth strategies in ways that balance concerns with the environment and those of poverty reduction? Answering these questions is a difficult challenge in that far less is known about the institutions and strategies of industrial capabilities building in low income countries than is known about industrial capabilities building in the East Asian NIEs. To partially address this concern, we have conducted a questionnaire survey of the effectiveness of industrial capability building strategies and institutions in a sample of 27 low income countries in Asia, Africa, Latin America and the Caribbean, and in the former Soviet Union. We then combine these survey data with the published measures on country industrial competitiveness and on macro-institutional conditions, as used in Chapter 2, to provide an initial assessment of the effectiveness of industrial capability building strategies in these countries, as well as the macro- and meso-level institutional obstacles to effective policy integration. Building on the analyses of industrial upgrading presented in Chapter 2 and of policy integration in Chapter 3, we need to consider three broad domains of institutional effectiveness. First, we need to examine the extent to which the basic enabling conditions identified in Chapter 2 are, or are not, being met in low income countries. In Chapter 2 we argued that openness to trade and investment, macroeconomic stability, political stability, development of a substantial physical and human infrastructure base, and bureaucratic capability in government are critical to industrial competitiveness and industrial capability building. These variables, along with better resource pricing policies and the development of an effective environmental regulatory agency embedded in the institutions of industrial policy, are also critical for improving the environmental performance of industry (Chapters 3 and 9).

Win–Win Environmental Intensity or Technique Effects and Technological Learning: Evidence from Siam City Cement

As we demonstrated in Chapter 5 and as a small, but rapidly growing, body of research suggests, developing countries appear to be able to achieve win–win technique effects—reductions in the energy, materials, water, and pollution intensities of industrial production—simply by opening their economies to trade, foreign investment, and foreign technology (Copeland and Taylor 2003; Dean 2002; Reppelin-Hill 1999; Hettige et al. 1997; Wheeler and Martin 1992; Birdsall and Wheeler 1992; Lucas et al. 1992). While extremely promising, none of this body of work allows for in-depth analysis of the strategies and processes used by individual firms that import newer, more efficient, and cleaner technologies to reduce environmental intensities. In effect, this literature tells us much about win–win outcomes, but it says little about how these outcomes are achieved. If the import, adoption, and use of technologies that reduce environmental intensities were a simple and relatively costless process, this would not be a major source of concern. But, as we demonstrated in Chapter 2, there is a large literature suggesting that, on the contrary, technological learning and upgrading is a complex, difficult, and lengthy process, often marked by failure, that requires firms to make heavy investments in learning and upgrading (Amsden 2003, 1989; Bell and Pavitt 1992; Dahlman et al. 1987; Hobday 1997; Kim 1997; Lall 1992; Nelson 1993; Kim and Nelson 2001; Wade 1990; and UNIDO 2002b) before they can reap the economic and environmental gains associated with shifts to more effcient technologies. The core research question to be addressed in this chapter then is the importance of firm-level learning for achieving the win–win technique effects—improvements in environmental intensities associated with the import and adoption of energy and pollution-efficient technologies. Because firm-level learning is industry specific, path dependent, and influenced by the openness of an economy to trade, investment, and foreign technology, we focus on the learning effects of intensities reduction in one firm, Siam City Cement Public Company Ltd. (SCCC), in one particularly ‘dirty’ and rapidly expanding developing country industry (cement) that is undergoing substantial technological modernization, global consolidation, and greening, in an economy, Thailand, that has historically been very open to trade, investment, and foreign technology (Pongpaichit 1980).

Late Industrialization and Technological Capabilities Building

How can governments and indigenous manufacturing firms in the rapidly industrializing economies of developing Asia take advantage of the opportunities afforded by the region’s openness to trade and investment and its late industrialization to insure that urban industfrial development is more environmentally sustainable? As was argued in Chapter 1, our initial entry point for addressing this question is an understanding of the dynamics of technological upgrading and industrial capability building within the region. We begin here in large part because improvements in the energy, materials, and pollution intensity of industrial activity are fundamentally (though clearly not exclusively) an issue of technological change, of developing, deploying, and using product and process technologies that are less polluting. In addition, we anticipate that lessons learned from the ways in which the East Asian NIEs achieved rapid technological catch-up will be transferable to the problem of improving the environmental performance of industries within the region and within other developing economies. Specifically, we consider the institutional conditions and types of policy interventions that supported technological upgrading of firms and industries among the East Asian NIEs. We begin with a review of what is known about industrial upgrading and technological catch-up as a development strategy, especially as practiced by the East Asian NIEs from the 1960s onwards. Our central conclusion is that institutions mattered. Through a review of existing studies, and through statistical analysis, we demonstrate that institutional effectiveness is a critical determinant of industrial competitiveness of developing economies. We also demonstrate that while there was no standard blueprint through which governmental institutions supported the work of firms, the institutional frameworks put in place within the East Asia NIEs were critical to their success in achieving rapid technology catch-up and industrial upgrading, and through these processes improved industrial competitiveness and industry-led economic growth. We begin, however, with the work of firms. Because most technological capabilities building requires effort, trial and error, and gaining tacit experience with particular technologies, it is primarily a task that only firms can undertake (Lall 1992: 166). As is now known, there are significant differences in the willingness of firms to undertake and succeed in these tasks.

East Asia’s Sustainability Challenge

Since the 1960s, developing Asia has been going through a historically unprecedented process of urbanization and industrialization. This process, which began in East Asia with Japan after World War II (Johnson 1982), then spread first to Korea (Amsden 1989; Rock 1992; Westphal 1978), Taiwan Province of China (Wade 1990), Hong Kong, China (Haggard 1990), and Singapore (Huff 1999) and subsequently to Indonesia (Hill 1996), Malaysia (Jomo 2001), Thailand (Pongpaichit 1980; Rock 1994), and China has spawned enormous interest. While most of the debate surrounding the East Asian development experience has centered on the proximate causes of its development trajectory and the economic and political consequences of this trajectory for the East Asian newly industrializing economies (NIEs), because Asia looms so large in the global economy and ecology, interest has belatedly turned to the environmental consequences of East Asia’s development path and to the political economy of governmental responses to deteriorating environmental conditions in the region (Brandon and Ramankutty 1993; Rock 2002a). The focus on the environment came none too soon. Rapid urbanization, industrialization, and globalization in the East Asian NIEs, when combined with ‘grow first, clean up later’ environmental policies, have resulted in average levels of air particulates approximately five times higher than in OECD countries and twice the world average (Asian Development Bank 1997). Not surprisingly, of the 60 developing country cities on which the World Bank (2004: 164–5) reports urban air quality, 62% (10 of 16) are in developing East Asia, all but one of the rest are in South Asia. Measures of water pollution in East Asia, such as biological oxygen demand (BOD) and levels of suspended solids are also substantially above world averages (Lohani 1998). With the prospect for further rapid urban-industrial growth rooted in the attraction of foreign direct investment and the export of manufactures in East Asia, the rest of Asia, and the rest of the developing world as the East Asian ‘model of development’ spreads, local, regional, and global environmental conditions may well get worse before they get better (Rock et al. 2000). At the core of this environmental challenge in East Asia is rapid urban industrial growth.

Implications for Other Industrializing Economies

In previous chapters we have demonstrated how the practice of policy integration—the linking of environmental regulatory policies with resource pricing policies, trade and investment policies, and technological capabilities building policies—in the East Asian NIEs has driven down the energy and pollution intensity of industrial activity in these economies. As we have shown, each East Asian NIE used a somewhat different strategy for driving down environmental intensities. Singapore did it by effectively linking its tough environmental agency, the Ministry of the Environment, to the country’s premier institutions of industrial policy—the Economic Development Board and the Jurong Town Corporation—charged with attracting OECD multinationals and providing them with factories and OECD-like infrastructure facilities. Taiwan Province of China took a decidedly different path. Following the decision of the central government to create a tough regulatory agency in the face of strong opposition from the country’s institutions of industrial policy, the government, by building a capable regulatory agency and allowing it to get tough with polluters, demonstrated to those who managed the institutions of industrial policy that they would have to adapt to a crackdown on polluters. They did so by using the institutions of industrial policy to craft an approach to industrial environmental improvement that linked Taiwanese firms and the Taiwan Environmental Protection Administration to the technology-upgrading policies of the Industrial Development Bureau in the Ministry of Economic Affairs and the technological research activities of the Industrial Technology Research Institute. Where governments had less capable environmental regulatory agencies, they used several other pathways to policy integration. The government of Malaysia followed two different pathways to policy integration. On the one hand, it adopted an industry-specific approach to de-link palm oil production and the export of processed palm oil products from palm oil pollution by integrating palm oil processors with a quasi-public, quasi-private palm oil research institute, the Palm Oil Research Institute of Malaysia, and the Department of the Environment in a search for a cost-effective palm oil waste treatment technology. Once a viable solution to pollution emerged, the Department of the Environment used its embedded autonomy with producers in this sector to ratchet up emissions standards and de-link palm oil processing from palm oil pollution.

Impact of Multinational Corporations’ Firm-Based Environmental Standards on Subsidiaries and their Suppliers: Evidence from Motorola-Penang

How successful are multinational corporations (MNCs) in extending their firm-based environmental standards to their wholly owned subsidiaries and local suppliers, particularly the small and medium sized firm suppliers in developing economies who operate as part of the global production networks of MNCs? Three developments suggest this is not an idle question. To begin with, the economic influence of MNCs is simply staggering. As Dowell et al. (1999: 4) state, the intra-firm transactions of the more than 40,000 MNCs with approximately 250,000 affiliates worldwide account for about 40% of world trade; foreign direct investment is roughly five times official development assistance, and the sales of the ten largest MNCs are larger than the GNP of the 100 poorest countries. This suggests that MNCs along with their affiliates and their suppliers have the potential for exerting substantial influences on local, national, regional, and global environments. Because most of the value added and employment in industry in most developing countries, including the developing economies of East Asia, is accounted for by small and medium sized firms that lie beyond the reach of most governments’ environmental regulatory agencies and because we suspect that the most viable path to technological upgrading and environmental improvement in the low income economies lies in finding ways to increase the participation of indigenous small and medium sized enterprises (SMEs) in the global value chains of multinationals, it is important to ask whether an upgrading strategy based on linking indigenous SMEs to the global value chains of MNCs can also be used to affect the environmental performance of SMEs. While not all the SMEs in any one developing economy are ever likely to be reached through the supply chains of MNCs, there is substantial evidence that governments working in concert with MNCs in vendor development programs linking SMEs to MNCs in some places such as Taiwan Province of China, Malaysia, and Singapore have affected the technological upgrading activities of indigenous small and medium sized firms. To date, there is little rigorous evidence to suggest that these vendor development programs have affected the environmental behavior of small and medium sized firms in the East Asian newly industrializing economies.