Investing Up: FDI and the Cross-Country Diffusion of ISO 14001 Management Systems

Research question How does FDI influence the cross-country diffusion of ISO 14001, the most widely adopted voluntary environmental program in the world?

Voluntary programs Important instrument of CSR Adoption not mandated by the law Beyond compliance, seeking to create positive social externalities Sponsored by a variety of actors Across issue areas and scales

Beyond-Compliance

Voluntary program research Emergence (how, where) Diffusion (facility, firm, country levels) Efficacy (social, regulatory, economic performance)

Theoretical motivation Debates on economic integration regulatory races convergence to a global model Does FDI lead host country institutions to converge to a world model? Does FDI replicate home countries’ “varieties of capitalism”?

Specifically How do ISO 14001 adoption rates in FDI’s home country influence ISO 14001 adoption rates in FDI’s host countries?

Example Japanese ISO adoption levels are 4 times US while the economy is one-third of the US economy. Per GDP dollar, Japan has 12 times ISO registered facilities vs. the US. In host economies, would Japanese MNEs encourage ISO 14001 adoption more than American MNEs?

Diffusion Mechanisms MNEs can require their subsidiaries to adopt ISO 14001 Subsidiaries, in turn, can influence the domestic supply chain Domestic firms might imitate superior practices of MNEs Movement of labor and managers from MNEs to domestic firms

ISO Geneva-based, non-governmental body Over 15,000 standards to date

ISO members National standard bodies

How ISO 14001 Works Management system based Written environmental policy Senior management approval Designated manager Internal audit Employee training External audit

ISO 14001 adoption

Key hypotheses Hypothesis 1 (Country-of-origin): ISO 14001 adoption levels will be higher in host economies which receive FDI from home countries that themselves have high levels of ISO 14001 adoption

Key hypotheses Hypothesis 2 (race-to-the bottom): More FDI in host economy is associated with lower levels of ISO 14001 adoption

Key independent variables Overall FDI = FDI/GDP Bilateral FDI it: = ∑ISOjt x (FDI ijt / FDIit )2

Model FDI International Economy World Society Domestic Economy # of ISO certifications World Society Domestic Economy Other Controls Domestic Politics

Model FDI International Economy - Bilateral exports - Exports # of ISO certifications World Society Domestic Economy Other Controls Domestic Politics

Model FDI International Economy World Society - IGO - INGO - Language - Neighbors # of ISO certifications Domestic Economy Other Controls Domestic Politics

Model FDI International Economy World Society # of ISO certifications Domestic Economy - GDP (in PPP) - GDP per capita - (GDP per capita)2 Domestic Politics Other Controls

Model FDI International Economy World Society # of ISO certifications Domestic Economy Domestic Politics - SO2 - Regulations Other Controls

Model FDI International Economy # of ISO certifications World Society Domestic Economy Other Controls - ISO 9000 - country fixed effects Domestic Politics

Methods DV: # of ISO 14001 certificates per country per year Negative binomial event count Serial correlation Spatial dependencies Robust standard errors Country fixed effects Lagged covariates N= 686 (98 countries, 1996-2002)

Results Full Non-OECD Non-Japan Non-EU Bilateral FDI √ Overall FDI Exports Bilateral exports Language Neighbor IGO INGO GDP Per capita GDP Per capita GDP 2 SO2 Regulations ISO 9000

Conclusions FDI could lead to investing up, not a race to the bottom FDI might replicate home countries’ “varieties of capitalism” in host economies

Policy implications For host economies, what matters is not “how much FDI” but “from where” Home countries exercise “soft power” via FDI

Leverage globalization? Globalization creates opportunities for NGOs to leverage MNEs’ supply chains to spread preferred norms?

Future work Scope conditions: would “investing up” hold when: - activists oppose a program - the program leads to distributional conflicts Look at disaggregated FDI Would Chinese or Indian FDI transmit similar norms as British or American FDI?

New projects Look at the role of FDI and trade in the diffusion of human rights, labor rights, and women rights Institutional foundations of CSR

Interpretation H1: Bilateral FDI significant +/- 1 SD: 23 (median overall = 4; median in 2002 = 38)