Do Corporate Global Environmental Standards in Emerging Markets Create or Destroy
Market Value?
Summary of WDI Working Paper 259, forthcoming in Management Science (August 2000).

Global companies have become major players on the world stage. More than 40,000 multinational enterprises, with some 250,000 foreign affiliates, invest more than $200 billion abroad each year. About 40 percent of world trade consists of intra-firm transfers of materials and components within multinational enterprises. The 10 largest multinational enterprises have annual sales that exceed the gross national products of the 100 smallest countries in the world. Foreign direct investment (FDI) now exceeds official development assistance by a factor of five—up from just 50 percent of development assistance five years ago.

Multinational enterprises create, leverage, and engage in arbitrage of capabilities on a world scale. They make positive contributions to economic efficiency and serve as a conduit for the globalization of economies. But they have also proven able to elude public policy controls because of their economic power and ability to shift resources and production across borders. Questions have been raised about their social and environmental performance. Social critics have argued that in seeking to reduce costs, these enterprises play employees and countries against one another, creating downward pressure on wages and social standards throughout the world.

Our focus is on the environmental impact of multinational enterprises. Environmentalists contend that multinationals create pollution havens by moving dirty operations to countries in which regulatory standards are less stringent. Through flight to pollution havens, these companies avoid expensive pollution controls, cut costs by recapitalizing old equipment, and continue to produce products that are no longer considered environmentally acceptable in the more highly regulated markets of the industrial world. Over time, it is claimed, these practices lead to a "race to the bottom," as nations and localities vie for plants and facilities that seek only to minimize costs and externalize environmental responsibility.

While some multinational enterprises clearly engage in such practices, it is unclear whether there is systematic advantage in racing to the bottom. There appear to be forces that encourage multinationals to integrate and standardize their environmental practices globally. Indeed, it may make business sense in some cases to adopt global standards that exceed those required by some local laws or regulations, especially when environmental laws and regulations become more stringent as an economy grows.

By investing in state-of-the-art technology and processes in developing countries, multinational facilities may be able to simultaneously achieve world-class cost, quality, and environmental performance. In addition, multinationals may reap standardization benefits and other intangible advantages, such as positive reputation effects.

In this article, we seek an empirical answer to an intriguing and important question: is firm value linked to a multinational’s environmental standard? We analyze the corporate environmental standards and market performance of a large sample of U.S.–based multinational enterprises. Specifically, we examine whether adopting a single, stringent, corporate environmental standard enhances firm value relative to that of multinational enterprises that adopt less stringent, or poorly enforced, host country standards.

We find that firms adopting a stringent global environmental standard have higher market values, as measured by Tobin’s q (market value over replacement costs of tangible assets). We thus refute the idea that adoption of global environmental standards by multinational enterprises constitutes a liability that depresses market value. On the contrary, our results suggest that poorer-performing multinational enterprises tend to default to less stringent environment standards. Thus developing countries that use lax environmental regulations to attract foreign direct investment end up attracting poorer-quality—and perhaps less competitive—firms.

The notion that multinational enterprises as a group pursue the lowest environmental standards and create a "race to the bottom" among developing countries desperate for foreign investments is not substantiated by the data. The most common corporate environmental practice in our sample is the opposite: multinationals adopt a stringent internal standard globally. We do not, however, suggest that the race to the bottom does not exist. In fact, our findings suggest that companies with lower market values tend to pursue lower environmental standards. Perhaps these companies opt to default to host country standards because they lack the means to make the investment in environmentally superior technology worldwide. They may also be less well-run companies, focusing on short-term cost savings. This strategy might include, but is certainly not limited to, recapitalizing old production assets, extending obsolete product life cycles, and exploiting low labor costs.

From a public policy standpoint, then, there are clear implications regarding these results. Developing countries may indeed attract foreign investment by lowering environmental standards, but the type of companies they attract by doing so will be weaker firms not investing in state-of-the-art plant and equipment. After a temporary presence marked by the exploitation of the lower or poorly enforced host country standards, these companies may well end up as fodder for those globally competitive firms that have adopted worldwide environmental standards and are reaping the competitive and market benefits of that policy. Thus developing countries may be best served by promoting aggressive environmental objectives combined with a willingness to work collaboratively with the world’s leading multinational enterprises to define and implement policies that facilitate "win-win" environmental solutions.

Glen Dowell is a Ph.D. student in corporate strategy at the University of Michigan Business School. Stuart Hart is professor of strategic management and director of the Sustainable Enterprise Initiative and the Sarah Graham Kenan Scholar at the Kenan-Flager Business School at the University of North Carolina. Bernard Yeung is the Krasnoff Professor of International Business at the Stern School of Business, New York University, and area research director for foreign investment at the William Davidson Institute. Sarah Graham is the Kenan Scholar at the Kenan-Flagler Business School at the University of North Carolina.