Corporate Environmental Strategies in Transition Economies: Survey of the Literature

Abstract

Twenty-five years ago, an unprecedented economic-political transition began in Central and Eastern Europe and the former Soviet Union. Since then, a meaningful literature has examined businesses’ environmental-management efforts during the transition. Over the same period as the transition, many firms in developed countries were integrating environmental components into their business strategies and finding this integration profitable. A growing body of research explores the topic of corporate environmental strategy. Given the rising importance of this topic in developed economies, its seems highly important to reassess the literature on businesses’ environmental-protection efforts during the transition in order to explore corporate environmental strategies in transition economies where the business benefits may be less clear and domestic consumer pressure for better corporate environmental stewardship is limited. Given the lack of clarity, exploration of corporate environmental strategies in transition economies is important. Guided by a simple conceptual framework, this article reviews and assesses the full body of the empirical literature in order to explore the drivers behind corporate environmental strategies in transition economies. The discussion that follows considers a broad array of drivers: internal factors, market pressures, government, and civil society. The empirical evidence suggests a positive role for foreign ownership and foreign customer pressure, and a stronger role for governmental factors: capacity to monitor, greater enforcement, permit issuance, and higher emission charge rates. The review reveals that many key factors, such as investor pressure, domestic customer pressure, and corporate culture, are weakly explored, if not fully ignored, by empirical studies.

Keywords:

• corporate strategies
• environment
• transition

JEL Classification:

• L21
• P28
• Q01
• Q50

Notes

1. Emission charges had been imposed under central planning in nearly all of the transition countries. However, enterprises’ orientation toward the meeting of output quotas and the strong presence of soft budget constraints, along with low charge rates, undermined policy effectiveness (Vincent and Farrow 1997, 120).

2. The threat of third-party lawsuits should also induce firms to reduce the harm caused by their activities. Under central planning, this factor played no role at all (Earnhart 2000c, 45). During the transition, third-party did not play any meaningful role (OECD 1999, 114). No empirical study of the transition economies explores this factor.

3. See Prakash and Potoski (2006) for details on ISO 14001 certification.

4. In other words, MNCs face a choice between two contrasting options (Earnhart and Leonard 2016, 16). As the first option, MNCs follow local de facto laws, which may be less stringent than their counterparts in developed economies and more weakly monitored and enforced than in developed economies. As the second option, MNCs implement environmental management practices beyond those required to meet local environmental protection laws, instead implementing practices consistent with their home country or the corporate guidelines designed for developed economies. Implementation of the second option implies that the facilities are overcompliant with local de facto laws.

5. From a different perspective, better financial performance may reflect better business management, which may spill over into better environmental management: business success breeds environmental success (Earnhart and Lizal 2010, 319).

6. This article does not assess developing economies, but transition economies and developing economies share common elements. Both aspire to economic growth and integration into the world economy, initially possess underdeveloped legal systems, face financial constraints, possess an abundance of win-win investment opportunities, and face a rapid transformation that should facilitate systemic changes, such as institutional development (Panayotou 1997, 201). Yet strong differences distinguish the two types of economies in the realm of environmental protection, such as the government’s capacity to monitor ambient conditions and pollution and the historical use of emission charges.

7. It may not be surprising that all of the NIS countries—namely, the former Soviet republics with the exception of the Baltic states—reformed more slowly. These countries faced additional complications: disintegration of economic and political links stemming from the break-up of the Soviet Union, greater difficulty of establishing new monetary and fiscal systems, lack of commercial traditions, lack of access to expatriate communities with capital, and greater reliance on the collapsed East European trading bloc (Henriques and Sadorsky 2006, 646; Hughes and Lovei 1999, 10; Uhlenbruck, Meyer, and Hitt 2003, 259).

8. On a scale of 1 to 9, where 1 means “the most important” and 9 means “the least important,” 48% of enterprises reported a value of 7 or higher regarding “expectations of employees” as a “cause for the increasing influence of the environment in business.”

9. Two related studies examine ownership concentration (based on the share owned by the largest shareholder), which serves as a proxy for the owner’s ability to control an enterprise manager; results demonstrate that greater ownership concentration leads to lower air pollutant emissions, indicating that a manager’s improved ability to control costs is more important than an owner’s improved ability to control costs (Earnhart and Lizal 2006a, 2007a).

10. As discussed in the second section, financial performance may directly influence environmental performance. Under central planning, financial performance was not meaningful for nearly all enterprises, given the strong focus on meeting output targets. However, during the transition, enterprises were jointly struggling to revise both their financial management strategies and their environmental management strategies, as the economic and environmental protection landscapes were changing simultaneously (Earnhart and Lizal 2010, 304). Thus, firms may have been able to exploit opportunities for successful financial management to breed successful environmental management. These opportunities remained more prevalent than in mature market economies.

11. For example, the International Network for Environmental Management opened chapters in eight CEE countries in the 1990s, disseminating information and establishing twinning arrangements between CEE and West European businesses (OECD 1999, 157). As another example, the World Business Council for Sustainable Development established several national associations in CEE countries (OECD 1999, 157). Other examples include the Czech Environmental Management Centre, the Slovak Association of Industrial Ecology, and the Chemical Industry Association of Hungary (OECD 1999, 157).

12. At a higher level of interaction, foreign investors could have explicitly or implicitly pressured governments to implement weaker environmental protection efforts. Yet, according to the OECD (1999, 161), this concern did not materialize in the 1990s: advanced reform countries supported both high FDI levels and effective environmental protection (EBRD 1998, 12). There are two prominent reasons: (1) many countries were seeking to enter the EU, which prompted both economic and environmental policy reforms, and (2) many investors established manufacturing facilities in the CEE region to “gain access to the region’s markets rather than to set up ‘export platforms’ ” (OECD 1999, 162).

13. The study reports that the environmental regulatory structure in Hungary is complicated, implying that this set of results need not be generalized.

14. See Bluffstone and Larson (1997) for a thorough assessment of the combined permits with pollution charges systems in ten countries of Central and Eastern Europe and Russia; Vincent and Farrow (1997) provide an excellent summary of the country-specific systems’ key features.

15. The timing of introduction varies across countries. Some countries, such as Czechoslovakia, introduced emission charge systems as early as the 1960s and 1970s; in contrast, Russia did not begin introducing its system until 1989 (Bluffstone and Larson 1997, 17).

16. See endnote 14.

17. For example, the Norwegian Society of Chartered Engineers (NIF), with support from the Norwegian government, trained local clean production experts in four CEE/NIS countries (OECD 1999, 156).

Additional information

Notes on contributors

Dietrich Earnhart

Dietrich Earnhart is in the Department of Economics, Center for Economic Research and Graduate Education–Economic Institute (CERGE-EI), University of Kansas, Lawrence, KS.